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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended September 30, 1997
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________ to _________
Commission File Number: 0-16128
BIODYNAMICS INTERNATIONAL, INC.
(Name of Small Business Issuer in Its Charter)
FLORIDA 59-3100165
(State of Incorporation) (IRS Employer
Identification No.)
1719 ROUTE 10, PARSIPPANY, NEW JERSEY 07054
(Address of Principal Executive Offices, Zip Code)
(973) 359-8444
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 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 year ended September 30, 1997 were
$8,691,000.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates (approximately 1,664,374 shares), computed by reference to the
average bid and asked prices of such common equity, was approximately
$1,880,743.00 as of January 30, 1998.
As of January 30, 1998, there were approximately 5,313,810 shares outstanding
of the issuer's Common Stock, par value $.01 per share.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
DOCUMENTS INCORPORATED BY REFERENCE
None.
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The discussion contained in this annual report under Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
for the issuer's fiscal year ended September 30, 1997 (this "Report"), contains
forward-looking statements that involve risks and uncertainties. The issuer's
actual results could differ significantly from those discussed herein. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in "Description of Business" and "Management's Discussion
and Analysis or Plan of Operation" as well as those discussed elsewhere in this
Report. Statements contained in this Report that are not historical facts are
forward-looking statements that are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995. A number of important
factors could cause the issuer's actual results for 1998 and beyond to differ
materially from those expressed in any forward-looking statement made by or on
behalf of the issuer.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Biodynamics International, Inc., a Florida corporation, was
formed in 1985, and with its consolidated subsidiaries (collectively, the
"Company" or "Biodynamics"), the Company is engaged in the business of tissue
processing and distributing worldwide, specialty surgical products for neuro,
orthopedic, reconstructive and general surgical applications. The Company's
core business is processing human donor tissue ("allografts"), utilizing its
patented Tutoplast(R) process of tissue preservation, for distribution to
hospitals and surgeons. The Company also manufactured and distributed surgical
sutures internationally. That business was discontinued as of September 30,
1997, due to unsatisfactory profitability.
The Company's wholly-owned subsidiary, Biodynamics International
(Deutschland) GmbH, designs, develops, processes, manufactures, markets,
distributes and sells specialty surgical products and services to over 40
countries through a worldwide distribution network. Biodynamics International
(United States), Inc. was formed in 1994 and processes allografts for the U.S.
market. In addition to its core business, the Company has a 50% joint venture
interest in Advanced Haemotechnologies ("AHT"), a manufacturer of blood
transfusion and filtration equipment and, until August 15, 1995, had a 51%
interest in Corin Orthopedic Products, a Florida general partnership and a
domestic distributor of orthopedic equipment ("Corin"). The interest in Corin
was sold to the joint venture partner in order to raise working capital for the
Company's allograft business.
The Company's corporate headquarters are in Parsippany, New
Jersey, with international executive offices in Erlangen, Germany and
processing and manufacturing facilities in Alachua, Florida and Neunkirchen,
Germany.
The Company contracts with independent Tissue Banks and procurement
organizations to provide donated human tissue for processing under the
Company's patented Tutoplast(R) process. The Tutoplast(R) process utilizes
solvent dehydration and chemical inactivation which is applied to two types of
preserved allografts: soft tissue; consisting of dura mater, fascia lata,
fascia temporalis, pericardium, ligaments, tendons and cartilage, and hard
tissue; consisting of various configurations of cancellous and cortical bone
material. Processed dura mater, pericardium, and fascia lata are collagenous
tissue, used to repair, replace or line native connective tissue primarily in
neurosurgery, ophthalmology, otorhinolaryngology, plastic and reconstructive
surgeries, while ligaments, tendons and cartilage are used primarily in
orthopedic surgeries. In the U.S. market, dura mater is used in neurosurgeries
only. Processed bone material is used in a wide variety of applications in
neuro and orthopedic surgeries. All processed tissues have a shelf life of
several years and require minimal time for rehydration. In Germany, the
Company processes both hard and soft tissues. In the U.S., the Company
currently processes only soft tissues.
Management is not aware of any documented cases of disease
transmission, tissue rejection or infection attributable to Tutoplast(R)
processed allografts in over 750,000 implants performed in the past 25 years.
The Tutoplast(R) process utilizes a technique which dehydrates
the tissue and treats it with agents shown to inactivate viruses such as
hepatitis and HIV, the virus which causes AIDS, to render the allografts safe
for the recipient. Dehydrating the tissue gently is important to keep the
tissue's structure intact. Methods used by other processors of human tissue
include freeze-drying, deep freezing or
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cryopreservation. Soft tissue is also treated with chemicals shown to be
effective against the organism responsible for Creutzfeldt-Jakob Disease (CJD)
and other slow viruses. Over a period of several weeks, tissues are soaked and
washed in a series of aqueous solutions and solvents, removing water and
substances that could cause rejection or allergic reaction. Once packaged,
tissues are terminally sterilized by low dosage radiation.
The 1997 Recapitalization
Major Events Affecting 1997 Results
The most important tissue processed and distributed by the
Company is human dura mater. In March 1997, the World Health Organization
issued a press release on the results of a Consultation on Spongiform
Encephalopathy (the "March 1997 Consultation"), recommending that dura mater no
longer be used for neurosurgery. Following this press release, Japan elected to
ban the use of all dura mater tissues. Japan was the Company's largest market.
Italy also banned the use of dura mater. This action was with neither
scientific base nor incident related to the Company's Tutoplast(R) implants, and
the Company is taking steps to have the ban rescinded. The March 1997
Consultation, and the Italian and Japanese bans on the use of dura mater, had a
material adverse effect on the 1997 financial results of the Company. For the
nine months ended June 30, 1997, the Company experienced a net loss of
$3,175,000 or $0.38 per share, compared to a net loss for the same period a
year ago of $1,995,000 or $0.25 per share, negative working capital of
$249,000, and total negative stockholders equity of $716,000. Based upon
current operations, the Company projected in July 1997 that its working capital
would be exhausted by the end of August.
In September 1997, the World Health Organization qualified its
recommendation of the March 1997 Consultation, stating that if dura mater is
used, only material which is from non-pooled sources, originating from
carefully screened donors, and subjected to validated inactivation treatment
should be considered. All processed dura mater provided by Biodynamics meets
these safety requirements. Subsequent to the March 1997 Consultation, the
German Ministry of Health and the United States ("U.S.") Food and Drug
Administration ("FDA") assessed the safety of dura mater for use in
neurosurgery and both concluded that such tissue could be used, if appropriate
safety measures are observed.
The Recapitalization Agreement
In the past, the Company has relied upon its available lines
of credit and institutional investors to fund operational cash flow, when
needed. However, to overcome the financial difficulties resulting from the
loss of business that resulted from the March 1997 Consultation and the
resulting bans of dura mater in Japan and Italy, the Board of Directors of the
Company (the "Board of Directors" or "Board") initiated a significant
restructuring of the Company's capitalization, to address not only the
immediate working capital shortage, but as a long term approach to secure also
the financial position of the Company (the "Recapitalization").
The Company sought the cooperation of its institutional
investors to provide immediate capital, and to convert the Company's existing
preferred stock and debt into equity. On August 29, 1997, the Company reached
such an agreement (the "Recapitalization Agreement") with several of its
institutional investors, including Renaissance Capital Partners II, Ltd.
("Renaissance"), NatWest Ventures (Investments) Ltd. ("NatWest"), and Kleinwort
Benson European Mezzanine Fund L.P. ("Kleinwort Benson"), (NatWest and
Kleinwort Benson collectively referred to as the "Mezzanine Lenders"), (these
named institutional investors are collectively referred to herein as, the
"Institutional Investors").
Pursuant to the Recapitalization Agreement, the Institutional
Investors, holding a majority of the Company's Series C Preferred Stock (the
"Series C Stock"), agreed to approve certain amendments to the
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terms of such stock, which would allow the Company to immediately convert the
Series C Stock into shares of the Company's common stock, par value $.01 per
share (the "Common Stock"). The operative changes to the terms of the Series C
Stock were the deletion of its anti-dilution provisions, and the authorization
of the Board of Directors to mandatorily convert all of the Series C Stock
into Common Stock (the "Amendments"). On September 16, 1997, the Amendments
were duly approved at a special meeting of the holders of the Series C Stock,
and on September 22, 1997 the Board of Directors took action to convert all of
the outstanding shares of Series C Stock, in the aggregate, into (i) 18,484,200
shares of Common Stock, and (ii) three-year warrants to purchase an additional
18,484,200 shares of Common Stock for $4,621,050 (the "Series C Warrants"),
(the conversion described in this paragraph hereinafter referred to as the
"Series C Conversion").
In the Series C Conversion, Renaissance received 5,475,600 shares of
Common Stock, and a Series C Warrant to purchase approximately 5,475,600
additional shares of Common Stock for $1,368,900. The Mezzanine Lenders
received, in exchange for their Series C Stock, an aggregate of 3,436,500
shares of Common Stock, and Series C Warrants to purchase 3,436,500 additional
shares of Common Stock for $859,125. The remaining holders of Series C Stock,
in the aggregate, received 9,572,100 shares of Common Stock, and Series C
Warrants to purchase 9,572,100 additional shares of Common Stock for
$2,393,000.
In addition to the Series C Conversion, the Recapitalization Agreement
contained agreements relating to the conversion of certain loans from the
Mezzanine Lenders into equity. Specifically, the Mezzanine Lenders agreed to
exchange their loans to the Company's German subsidiary, totaling, in the
aggregate, approximately $4,100,000 in principal and accrued interest as of
August 1997, (the "Mezzanine Loans"), for 26,263,010 shares of Common Stock,
which exchange occurred in December 1997.
Also pursuant to the Recapitalization Agreement, Renaissance agreed to
lend the Company additional funds, for working capital purposes, which
additional funds were provided on September 16, 1997 (the September 1997 loan,
together with a June 1997 loan to the Company from Renaissance, is hereinafter
referred to as the "Bridge Loan"). The original principal amount of the Bridge
Loan totaled approximately $2,035,928, with interest on the principal balance
at the rate of 12% per annum, and a maturity date of December 31, 1997.
Renaissance further agreed to reduce the interest on the Bridge Loan, and to
extend its maturity date, in exchange for (i) a five-year debenture,
convertible into 44,132,309 shares of Common Stock, and (ii) a warrant,
exercisable at $2,015,991, to purchase 8,063,963 shares of Common Stock (the
"Bridge Loan Warrant").
On November 11, 1997, the Bridge Loan was replaced with a Convertible
Debenture Loan Agreement by and between the Company and Renaissance (the "Loan
Agreement"). Pursuant to the Loan Agreement, Renaissance reduced the interest
rate of the former Bridge Loan (totaling $2,074,081 in principal and earned
interest as of November 11, 1997) to 9% per annum, and extended the maturity
date to November 11, 2002 (the "Loan"). Overdue principal and interest due
under the Loan Agreement will bear interest at a rate of 12% per annum. The
Loan is convertible, at Renaissance's option, in whole or in part, into
$2,074,081 of Common Stock, at a conversion price of $0.4699688 per share
(subject to adjustment and a maximum rate), pursuant to the terms of the Loan
Agreement and the 9% Convertible Debenture issued to Renaissance on November
11, 1997 (the "Debenture"). Under the Loan Agreement, Renaissance has certain
demand and piggy-back rights for the registration of shares issued upon
conversion of the Debenture with the Securities & Exchange Commission. Under
certain conditions, the Company may redeem the Debenture, in whole, at 120% of
the then outstanding principal amount of the Loan. If the Debenture is not
redeemed or converted by July 1, 1999, the Company shall pay Renaissance
mandatory monthly principal redemption installments in the amount of Ten
Dollars ($10) per Thousand Dollars ($1000) of the then remaining principal
amount of the Debenture Loan. The Company's obligations under the Loan
Agreement and the Debenture are secured by all of the assets of the Company
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pursuant to amendments to the security agreements and a stock pledge agreement
executed in connection with the former Bridge Loan.
As a result of the Recapitalization Agreement, and assuming the
exercise of all of the Series C Warrants, the Bridge Warrant and the Debenture,
Renaissance, NatWest, and Kleinwort Benson acquired beneficial ownership of
approximately 51.0%, 15.5% and 11.3% of the outstanding Common Stock of the
Company, respectively. Similarly, assuming the exercise of all of the Series C
Warrants, the Bridge Warrant and the Debenture, the Company's non-affiliated
public shareholders hold, in the aggregate, approximately 21.1% of the
outstanding Common Stock of the Company.
The Reverse Stock Split
Assuming the exercise of all of the Series C Warrants, the Bridge
Warrant and the Debenture, there could have been 123,818,572 issued and
outstanding shares of the Company's Common Stock. It would have been necessary
to increase the number of shares authorized in the Company's Articles of
Incorporation. However, the Board of Directors believed that 123,818,572
outstanding shares of Common Stock would be disproportionately large relative to
the Company's present market capitalization. If such a great volume of shares
were outstanding, the Company's earnings per share could only be affected by
significant changes in its net earnings. Given a smaller number of outstanding
shares, management would be more likely to see its efforts reflected in any
future earnings per share of the Company. In addition, the Board of Directors
considered the market price for the Common Stock, which ranged from $0.50 to
$1.22 per share during the first six months of the calendar year 1997. On
October 15, 1997, the closing bid and asked price for the shares of Common Stock
was $0.28 and $0.37, respectively. The Board concluded that current per share
market prices of the Common Stock may be impairing its acceptability by the
investment community. Accordingly, the Board of Directors did not propose to
the shareholders an increase in the number of authorized shares of Common Stock.
Instead, it recommended that shareholders approve a one-for-ten reverse stock
split (the "Reverse Split"). At a special meeting of the Company's shareholders
on November 10, 1997, the Reverse Split was duly approved.
The following table illustrates the principal effects of the Reverse
Split on the number of shares of Common Stock in each of the following
categories:
<TABLE>
<CAPTION>
Prior to Reverse Split After Reverse Split
---------------------- -------------------
<S> <C> <C>
Authorized . . . . . . . . . . . . . . . . . . . . . . . . . 30,000,000 30,000,000
Outstanding (as of November 10, 1997) . . . . . . . . . . . . 26,875,090 2,687,509
Reserved for future issuance under Option Plans . . . . . . . 2,000,000 2,000,000*
Reserved for issuance under Management
Compensation Plan . . . . . . . . . . . . . . . . . . . 500,000 500,000*
Reserved for issuance upon exercise of
Series C Warrants . . . . . . . . . . . . . . . . . . . 18,484,200 1,848,420
Reserved for issuance upon conversion of Debenture
and exercise of Bridge Warrant . . . . . . . . . . . . . 52,196,272 5,219,628
Available for future issuance (after giving effect
to the above reservations) 17,744,443
</TABLE>
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* Shareholders approved increases in the number of shares subject to the
Company's stock option plan and Management Compensation Plan to
2,000,000 shares and 500,000 shares, respectively.
Effects of the Recapitalization
Taking into consideration the dilutive effects of the Recapitalization
Agreement on the Company's public shareholders, the Board of Directors
concluded that the Recapitalization, through the conversion
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of $15,711,570 of preferred stock into common in the Series C Conversion, the
conversion of more than $6,000,000 of mezzanine and bridge loan debt into
equity, and reduction in the number of outstanding common shares by operation of
the Reverse Split, was necessary, and in the best interests of the Company and
all of its shareholders. The Company has emerged from the Recapitalization with
a stronger balance sheet, and a very significantly reduced interest burden. The
Board believes that the Recapitalization has positively positioned Biodynamics
for the future. While the Company continues in its efforts to reverse the bans
on dura mater tissue in Japan and Italy, and further believes that it can
successfully recover from the loss of business that resulted from the damaging
statements made by the World Health Organization in March, there can be no
assurances that other countries will not invoke a ban on dura mater in the
future.
Manufacturing and Processing
All of the Company's allografts are prepared, preserved and processed
utilizing Biodynamics' proprietary manufacturing process, Tutoplast(R), which is
applied to donor tissue that has been obtained from approved tissue procurement
organizations and institutions. Although several operations are automated,
most of the process is manual and relies on trained, highly skilled personnel.
The entire process, including packaging and sterilization, takes place under
controlled conditions. All incoming, untreated tissue is cross-checked with
the appropriate donor protocol and stored in special cold-storage rooms or
refrigerators until released for processing. To prevent possible cross-
contamination and ensure constant tissue identification, all tissue is marked
and strictly maintained in individual containers. Reference samples are taken
from each tissue for test purposes and are retained for seven years.
Documentation allows reverse traceability of tissue implants to the donor and
the retrieving institution. All processed implants have a batch number and a
donor number printed on each single package. Processed tissue may be safely
stored for up to five years.
Quality Assurance - All tissues are accompanied by specific medical
and donor documentation, including blood serum testing results from independent
laboratories. Tissues which do not meet regulatory standards are rejected and
destroyed. Biodynamics' products and processed tissue are subject to a series
of biological, physical and chemical tests, from incoming raw materials to
sterile, finished goods. As a result of the combination of initial donor
testing/screening and the Tutoplast(R) process, management is not aware of any
cross-infection with any of its allografts or surgical sutures worldwide.
Marketing and Distribution
Biodynamics' products and processing services are provided through
direct representatives in Germany, with the Company billing the hospital or
end-user directly. Elsewhere abroad, the Company distributes and bills direct
to a network of over 40 stocking distributors representing over 40 countries.
Biodynamics' personnel, with distributors and their representatives, conduct
product training sessions, make joint customer calls, set objectives and
evaluate their representatives= performance. Personnel also call on selected
physicians and key hospital accounts in order to provide needed clinical and
technical information services.
Some 87% of the Company's revenues come from outside the United
States. As a result of its foreign sales and facilities, the Company's
operations are subject to risks of doing business abroad. However, a major
effort is underway to increase penetration in the U.S. market, which accounts
for some 55% of the world market for biomaterials. The Company's marketing
efforts in the U.S., in recent years, have focused on creating a market for the
pericardium and fascia lata tissues, from donor tissues sourced in the U.S. In
addition, to offset the loss of business that resulted from the March 1997
Consultation and the resulting bans of dura mater in Japan and Italy, the
strategic decision was made to re-open the U.S. market for tissues obtained
from abroad, because the Company's foreign donor qualification standards had
progressed to the extent of full compliance with FDA standards.
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U.S. marketing efforts are concentrating on rebuilding the distributor
organization and re-entering the dura mater and bone markets. Presently,
allografts are provided to hospitals in the U.S. through approximately ten (10)
independent distribution companies. These distributors employ, in the
aggregate, over 80 field representatives who call on hospital and office-based
medical practitioners, primarily surgeons. Biodynamics supports their
activities with various types of technical allograft literature, informational
programs, reference materials, and training sessions and programs designed to
increase distributor call volume. Plans are being made to re-establish a field
organization to support the distributor network. In addition, the Company is
entering into exclusive distribution agreements with other medical device
companies, under the Tutoplast(R) label, for specialized niche indications. One
such distribution agreement, which has been in effect since 1995, is for
Tutoplast(R) implants for ophthalmic use. A second niche project, for use of
Tutoplast(R) fascia lata in urological indications, was concluded in January
1998.
Internationally, the Company has implemented a marketing and sales
restructuring plan, getting away from maximizing the number of countries with a
representation, to concentrating on in-depth penetration of markets with major
needs, i.e., the German speaking countries of Europe, and "focus" countries
such as France, Italy, Spain, and the U.K. The additional personnel needed to
complete the implementation are currently being identified and will be brought
on board in the second and third quarters of fiscal 1998.
Sources of Tissue and Products
The Company receives donor tissue from multiple sites and countries
in Europe and the United States. This tissue is procured by independent
procurement organizations and the Company reimburses these organizations for
the costs of their procurement (recovery fees). The Company believes it
currently complies with existing laws and regulations in these countries,
including regulations related to procurement, donor screening, testing, storage
and transportation. It is anticipated that government laws and regulations
involving human donor tissues will continue to change in the countries
presently serviced by the Company (see Government Regulations). Accordingly,
the Company continues to seek additional contacts with authorized health care
agencies, accredited tissue banks, organ procurement organizations, and
governments. The Company expects that, in most markets, demand for its
Tutoplast(R) processed allografts will continue to exceed the current donor
tissues available to the Company for processing.
Tissue recoveries, both domestically and internationally, continue to
improve. The export program from Europe to the U.S. has been given high
priority, and the levels of shipments are increasing steadily. The
international tissue recovery base will be expanded to include Tissue Services
Coordinators. Domestic and European tissue recoveries are on track to meet
plan for fiscal 1998. While the Company continues to emphasize expanding its
supply base, there can be no assurance that changing laws or donation trends,
in the countries from which it presently obtains tissues, will not have a
material adverse affect on the Company's operations.
Back Order
While Biodynamics, worldwide, has back orders on certain allograft
tissue types and tissue sizes, the allograft demand is the most significant in
the U.S. market. The U.S. is the largest market in the world for allografts
and has historically represented the Company's largest market. The Company
currently is unable to meet the demand for the majority of its allograft sizes.
The Company has defined its back order as those orders which are expected to be
filled within the next six months, however, the Company cannot predict with
absolute certainty its ability to fill specific orders in this time frame. At
September 30, 1997, the Company's back order was approximately $1,200,000.
Because orders may be canceled or rescheduled, the Company believes that
backlog is not always an accurate indicator of results of operations for
specific future periods.
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Other Business
The Company's filtration technology is developed and marketed by AHT.
The filtration technology currently has three applications: cellular
separation, blood deglycerolization and autotransfusion. At its Texas
facility, AHT manufactures rotating-disc filter equipment and related supplies.
The Company supplies the Pall Corporation (NYSE:PLL) with such equipment and
other supplies for use in its biotech field for cell separation. The current
contract to supply Pall Corporation with equipment and supplies has been
suspended by Pall in January 1998, until further notice. A potential
application for the Company's filtration technology is the deglycerolization of
thawed blood for the purpose of extending the storage time of the blood. In
1994 and 1995, AHT was awarded approximately $700,000 from the U.S. Department
of Defense, Small Business Innovative Research, for use in determining the
feasibility of utilizing the Company's filter technology to deglycerolize
thawed blood. This project, while meeting its development targets, was halted
in 1997 due to the non-availability of further government funding for projects
of this type. The other potential application for the Company's filtration
technology is autotransfusion, which is the collection, treatment and
reinfusion of an individual's own blood lost during surgery or trauma.
Although AHT has completed the initial development of this application, further
investments are needed to perfect the device. While the Company believes that
its patent on the autotransfusion technology provides protection for this
application, the Company is without the funding necessary to launch the
commercial development of this application. In view of the foregoing, the
Company and its joint venture partner entered negotiations to wind up the
affairs of the joint venture.
Competition
Biodynamics is a world leader in safe bioimplants for tissue repair.
Biodynamics' competitive advantage is based on its patented Tutoplast(R) process
of tissue preservation. In the U.S., most allograft processing is
lyophilized/freeze-dried, and to a lesser extent, cryopreservation. The
Tutoplast(R) process, however, is based upon solvent dehydration, which
preserves the tissue's integrity, and the implants are remodeled in the course
of normal healing. The Tutoplast(R) process has an outstanding safety record,
including viral inactivation and protection against the transmission of CJD.
Since its introduction more than twenty-five (25) years ago, more than 750,000
procedures have been performed, using Tutoplast(R) processed tissues, with no
known complications from disease transmission or tissue rejection attributable
to the implants. Tutoplast(R) processed implants have been described in more
than 100 published scientific papers. Tutoplast(R) implants meet FDA
requirements for marketing in the U.S. and they are recognized for their
outstanding safety.
The majority of the medical procedures suitable for allografts are
currently being performed with autografts. Autografts are tissues derived from
the patient requiring the surgical procedure ("autografts"). The advantages of
autografts include the absence of the possibility of tissue rejection and
disease transmission. The disadvantages are the dual surgical procedures, pain
and increased recovery time. Allograft advantages include the elimination of a
second surgical site resulting in lower infection rates, shorter recovery
times, and lower costs, while its disadvantages include availability, possible
rejection and disease transmission. Availability and safety are the primary
factors in the ability of allograft to compete with autografts for use by the
surgical community.
The industry in which the Company operates is highly competitive. The
1996 departure of a major German competitor from the business of soft tissue
allografts left Biodynamics as the largest factor in the international market.
Processors of allograft tissue for transplantation in the U.S. include
commercial processors such as Osteotech and Cryolife, companies which are well
established in the fields of bones and heart valves, respectively, and which
have substantially greater financial resources than the Company.
Not-for-profit tissue banks that procure and process tissue for distribution
are considered competitors, in some cases, for certain applications and in
certain markets. Management believes that its Tutoplast(R) process, with its
extensive record for safety in the surgical community, gives the Company a
competitive
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advantage over its competitors. However, due to government regulation,
disrupted sources of availability and increasing competition, there can be no
assurance that the Company will be able to continue to compete successfully. In
addition, there can be no assurance that in the future the Company's allografts
will be able to compete successfully with newly developed tissue substitutes
which are being developed by other companies.
AHT has several competitors in the blood transfusion and
deglycerolization fields that have greater resources and manufacturing
capabilities than the Company. Moreover, AHT must successfully complete its
development work before any commercialization of either of these applications
can occur.
Growth Strategy
The present market potential for bioimplants is approximately $1.2
billion worldwide. The broader market of biomaterials for tissue repair is
approximately $6 billion, with 55% in the United States. The Company's
strategy for growth is to leverage its Tutoplast(R) technology, its existing
allograft business, the two tissue processing facilities and the worldwide
distribution organization into a major franchise in biomaterials for tissue
repair.
Product development strategy, in the short run, will focus on
maximizing the potential of its allograft business through niche products in
soft tissues and specialty products in hard tissues (bones). In the medium
term, growth is to come from the expansion of the Company's technology to
Tutoplast(R) xenografts (animal tissues), and TriAplast(TM) engineered grafts.
The Company sees an opportunity for major growth in both areas, based on
expected regulatory and efficacy advantages.
TriAplast(TM) is an allogenous bone growth factor substrate, with the
competitive advantage of having both osteoconductive and superior osteoinductive
activity. It is being developed under an exclusive worldwide license from the
University of Wurzburg in Germany, backed by a clinical history of over 850
cases in maxillofacial surgery over more than six (6) years. A 1998 product
launch in select European countries is being pursued. The product will be
launched in two forms, a powder and pre-cut bone block. TriAplast(TM) will
compete in the bone repair and oral surgery markets, and has a potential of
approximately $160 million in the U.S. and $290 million worldwide.
In xenografts, the products being pursued are bovine bone and bovine
pericardium. The competitive advantage the Company anticipates is that
Tutoplast(R) processed xenografts are expected to be equivalent to Tutoplast(R)
processed allografts, based on evidence in animal experiments. In comparison
to xenografts already on the market, the Tutoplast(R) process eliminates
antigenicity, keeps the natural mineral and collagenous structure of the
tissue, and preserves its potential for complete remodeling. The products will
compete in markets valued at $250 million in the U.S. and $450 million
worldwide.
Additional specialty products in the hard tissue area will come from
bone fixation technology under development with the University of Marburg in
Germany, and the Clinic for Maxillofacial Surgery of the University of Bern in
Switzerland. Both products are a series of splints, nails, screws and anchors
for the treatment of complex bone fractures. The Marburg products will be for
fractures of the extremities and will be made of bovine bone. The Swiss
products will be for maxillofacial surgery and will be made of human bone.
Both products should be available by the end of 1998 for full launch in Europe
in 1999. The market in Europe is estimated to be approximately $220 million.
The U.S. market potential is approximately $300 million. The allograft bone
product should be available for launch in the U.S. in early 1999 as banked
human tissue. The bovine product approval will take longer.
In the longer run, the Tutoplast(R) technology is expected to be
suitable for the development of tissue engineered products with major market
potential, inasmuch as Tutoplast(R) processed tissues are expected to represent
ideal biological origin carriers (as distinguished from synthetic origin
carriers) for
8
<PAGE> 10
tissue engineered products. Major unfilled needs are in the field of cartilage
repair and vascular grafts for coronary bypass and peripheral vascular surgery.
No project has as yet been identified in the field of vascular grafts. In the
field of cartilage repair, two projects have been identified with mesenchymal
stem cells. In both cases, the Company is pursuing research and licensing
agreements for combinations with Tutoplast(R) processed tissue as
carriers/matrices. The projects are in very early stages and are not being
pursued actively pending the availability of the necessary financial resources.
Research and Development
Biodynamics continues to engage in research and development ("R&D").
The Company's scientific personnel and university level consultants collaborate
on research activities related to allograft and non-allograft development. An
internal Product Development Committee plans and organizes all R&D activities.
In allograft-related areas, R&D activities focus primarily on implant
safety through viral inactivation and tissue sterilization. Continuing progress
on application of the Company's proprietary Tutoplast(R) process to various
other tissues has met with success. The Company continues to independently
review its processing technology to improve tissue safety and efficacy.
Non-allograft activities relate to explorations into the use of xenografts, bone
substitutes and tissue engineered grafts. Clinical studies, evaluation and
follow-up as necessary are conducted on these activities. The Company spent
approximately $314,000 in 1977 as compared with $254,000 in 1996. These
activities will be expanded substantially pending the availability of the
necessary financial resources.
Customers
The Company is not dependent upon one or a few principal customers. No
customer accounted for 10% or more of the Company's net sales for the year ended
September 30, 1997.
Patents, Licenses and Trademarks
Wherever possible, Biodynamics seeks to protect its proprietary
information, products, methods and technology by obtaining patents and license
protection. The Company holds patents and has registered trademarks in many of
the countries where it distributes.
Biodynamics holds three (3) patents and has registered trademarks
covering fourteen (14) countries worldwide. In the United States, the Company
has four (4) FDA accepted 510(k) applications for its various products or
processes. The Company's patents relating to its Tutoplast(R) process have a
duration of two years remaining. The Company believes that it has established
itself through the Tutoplast(R) trademark identity and a record of safety and
quality assurance which will survive the life of the patents.
Government Regulation
Biodynamics has contracts to receive, process and provide tissues
worldwide. Every country has it own regulatory requirements that are constantly
under review and subject to change. The Company believes it currently complies
with all appropriate governmental requirements and standards in each country
where it does business. There can be no assurance that changing governmental
administration or laws will not negatively impact the Company.
For distribution in countries outside the U.S., the Company must
comply with the laws in the respective countries. In Germany, allografts are
classified as drugs and the German government regulates Biodynamics' tissue
processing and distribution under a pharmaceutical license within Germany. The
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<PAGE> 11
European Commission has proposed regulating allografts as medical devices. At
present, Biodynamics' German facility is licensed and in compliance with German
law.
In the United States, the Food and Drug Administration ("FDA") has
determined that dura mater is subject to all provisions of the Food, Drug and
Cosmetic Act and is regulated as a medical device. For distribution in the
United States, dura mater is required to be processed in accordance with FDA
Good Manufacturing Practices. All other tissues processed currently by the
Company are regulated by the FDA as "Banked Human Tissue" under provisions of
the 1993 Interim Rule. Similarly, tissue banks and procurement organizations
which provide the tissues to the Company for processing, also must comply with
the same regulations.
Inspections of processing facilities are conducted by both the FDA and
German regulatory agencies. The Company believes that worldwide regulation of
allografts is likely to intensify as governments increase their focus on the
growing demand for this type of tissue and the need to ensure the health and
welfare of its citizenry. Management believes that the Company and its
industry will always be subject to changing regulations that could have a
material adverse effect on its financial condition and results of operations.
Management further believes that they can reduce this exposure by continuing to
work closely with government regulators in understanding the industry and
drafting reasonable and proper legislation. While the Company believes that it
is in compliance with all existing regulations, there can be no assurance that
changing laws or interpretations of existing laws will not have a material
adverse effect on the results of operations and cash flow.
Environmental Regulations
The Company uses chemicals and radiation in its processing of
allografts. The Company must comply with country-specific, federal, state and
local regulations pertaining to the storage and discharge of hazardous waste
involved in the Tutoplast(R) process. Since 1995, the Company elected to use
outside third parties to perform all sterilization.
In view of the engagement of outside third parties to perform all
sterilization, the requirements for compliance with environmental regulations
do not, and the Company anticipates will not, have any material adverse effect
upon its capital expenditures, results of operations or financial condition.
Although the Company believes it is in compliance with all applicable
environmental regulations, the failure to fully comply with any such
regulations could result in the imposition of penalties, fines and/or sanctions
which could have a material adverse effect on the Company's business.
Employees
As of September 30, 1997, the Company employed a total of seventy (70)
full-time people, of whom ten (10) were employed in the United States and sixty
(60) in Germany. Management believes its relations with its employees are
good.
ITEM 2. DESCRIPTION OF PROPERTY.
United States. The Company's domestic facilities are located in New
Jersey and Florida. In Parsippany, New Jersey, the Company leases
approximately 4,400 square feet of office space where its administrative and
sales functions are performed. The lease expires in April 2002 and has a base
rent of approximately $6,000 per month. The Company's processing plant in
Alachua, Florida is being expanded from approximately 2,500 square feet of
leased space to 4,900 square feet. The Florida lease expires in 2002 and rents
for approximately $5,500 per month. The Company believes it is adequate in
space and condition for its current needs and has made provisions for expansion
if necessary.
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<PAGE> 12
Germany. In Erlangen, Germany, the Company leases 8,000 square feet
where its German administrative and sales functions are performed. The lease
expires in the year 2000. In addition, Biodynamics has a processing plant in
Neunkirchen, Germany consisting of six buildings totaling some 26,000 square
feet on approximately two acres of land. This property is owned by the Company
and should be sufficient in size and condition to handle anticipated production
levels for international markets into the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
On July 1, 1997, the Company settled certain outstanding litigation
with the former owner of its German subsidiary resulting from the Company's
request for arbitration alleging that the previous owner had breached the
purchase agreement. The terms of the settlement provided for the cancellation
of approximately $1.6 million of debt, including accrued interest, based upon
then-current exchange rates, owed to the former owner.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
After the close of the fourth quarter of the fiscal year covered by
this Report, a special meeting of the holders of the Company's Series C Stock
was held on September 16, 1997 for the purpose of (i) amending Section 5(a) of
the Company's Articles of Incorporation to authorize the Board of Directors to
convert the Series C Stock into Common Stock at any time after September 1,
1996, (ii) amending Section 5(b) of the Articles of Incorporation to provide
that at the time of any such conversion, all cumulated but unpaid dividends on
the Series C Stock shall be valued at $127.50 per share, which shall be
converted into Common Stock at the stated Conversion Rate, (iii) to delete in
its entirety the provision of Section 5(d) relating to adjustments in the
conversion price in the event of stock issuances at a price less than the
Conversion Price as then in effect, and (iv) to authorize and take any such
other actions as necessary to effectuate the immediate conversion of the Series
C Stock and cumulated but unpaid dividends thereon into Common Stock at the
Conversion Price of $.85 per share. Each proposal was duly adopted at the
special meeting on September 16, 1997.
Also subsequent to the close of the fourth quarter of the fiscal year
covered by this Report, a special meeting of the holders of the Company's
Common Stock was held on November 10, 1997. At this special meeting,
shareholders were asked to act upon (i) a proposal to reduce the number of
outstanding shares of the Company's Common Stock through a one-for-ten reverse
split of the shares, and if the proposal to reverse split the outstanding
shares of Common Stock was approved, to consider and vote upon (ii) a proposal
to amend the Company's 1996 Incentive and Non-Statutory Stock Option Plan to
increase the shares of Common Stock covered by such plan from 200,000 to
2,000,000 shares, (iii) a proposal to grant a Special Stock Option to purchase
300,000 shares of Common Stock to the President and Chief Executive Officer,
and (iv) a proposal to amend the Company's 1996 Management Compensation Plan to
increase the shares of Common Stock subject thereto from 50,000 to 500,000
shares. Each proposal was duly adopted at the special meeting on November 10,
1997.
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<PAGE> 13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
The Company's Common Stock was traded on NASDAQ under the symbol
"BDYN". As of September 26, 1997, the Company's Common Stock was delisted from
NASDAQ for failure to meet the capital, surplus, and bid price requirements for
continued listing. The Company will seek reinstatement of the listing. The
following table sets forth the range of high and low bid information for the
Company's Common Stock for each quarter within the last two fiscal years.
<TABLE>
<CAPTION>
Fiscal 1996 High Low
------------ ---- ---
<S> <C> <C>
First Quarter $ 1.16 $ 0.59
Second Quarter 1.13 0.56
Third Quarter 1.72 0.75
Fourth Quarter 1.56 0.72
<CAPTION>
Fiscal 1997
------------
First Quarter $ 1.50 $ 0.94
Second Quarter 1.22 0.75
Third Quarter 0.88 0.50
Fourth Quarter 0.66 0.06
</TABLE>
The market information above is derived from over-the-counter
quotations on the Small Cap Marketsm System of NASDAQ. Such market quotations
reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions
and may not necessarily represent actual transactions.
Holders
As of December 31, 1997, the approximate number of holders of record
of the Company's Common Stock was 415.
Dividends
The Company has not paid any cash dividends to date and does not
anticipate or contemplate paying cash dividends in the foreseeable future until
earnings would generate funds in excess of those required to provide for the
growth needs of the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
REVENUE AND COST OF REVENUE - Revenue in 1997 decreased 30% from
$12,344,000 in 1996 to $8,691,000 in 1997. Revenues of the International
Operations decreased 31% as a result of the loss of business in Japan and
Italy. Revenue from U.S. Operations decreased by 17% primarily due to a
reduced availability of tissues from U.S. Tissue Banks. Due to the March 1997
Consultation of the World Health Organization, and the resulting ban on dura
mater in Italy and Japan, the Company's largest market, by the fiscal year end,
the Company had lost almost fifty percent (50%) of its planned revenues and
profits. As a percentage of revenue, cost of revenue increased from 62% in
1996 to 83% in 1997, due to the
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<PAGE> 14
greater than planned share of the unprofitable suture business, and the
inability to carry out significant headcount reductions on short notice due to
German laws which limit and restrict a company's ability to effect timely
lay-offs.
GENERAL AND ADMINISTRATIVE - General and Administrative expenses
decreased by 4% in 1997 to $2,424,000 primarily as a result of settlement of
the claim against the previous owner of the German operation and the
elimination of associated legal costs. As a percentage of total revenue,
General and Administrative expenses increased from 20% in 1996 to 28% in 1997.
See explanation under Revenue and Cost of Revenue.
DISTRIBUTION AND MARKETING - The 2% reduction in Distribution and
Marketing expenses in 1997 to $2,218,000 is attributable to the lower level of
operating revenue. As a percentage of total revenue, Distribution and
Marketing expenses increased from 18% in 1996 to 26% in 1997. See explanation
under Revenue and Cost of Revenue.
RESEARCH AND DEVELOPMENT - Research and Development expenses as a
percentage of total Revenue increased from 2% in 1996 to 4% in 1997 and totaled
$314,000, an increase of 24% as compared to 1996. This increase reflects the
Company's intensified efforts to expand its product base.
DEPRECIATION AND AMORTIZATION - The 42% increase in Depreciation and
Amortization to $2,174,000 for 1997 resulted mainly from write-offs
attributable to the discontinuation of the Company's suture business and
adjustments related to the remaining life of patents.
LOSS ON CONVERSION OF SENIOR B DEBT - The $353,000 loss on conversion
of Senior B Debt resulted from the DM exchange rate differential between the
rate fixed in the instrument and the rate at the time of conversion.
OTHER INCOME/EXPENSE - Other Income for 1997 totaled $2,051,000 and is
primarily the result of the settlement of the claim against the previous owner
of the German operation.
INTEREST EXPENSE - A reduction of 12% in Interest expense for the year
to $934,000 reflects the conversion of the Senior B debt and the forgiveness of
the loan from the former owner of the Company's German subsidiary.
Liquidity and Capital Resources
While the Company has incurred net losses over the 1997 and 1996
periods, a significant amount of these losses are non-cash. These non-cash
expenditures relate primarily to depreciation and amortization on patents and
trademarks, deferred non-cash interest which is payable in cash only when
specific financial conditions are met, and loss on impairment of assets. These
non-cash expenditures totaled $3,746,000 and $2,157,000 for 1997 and 1996,
respectively.
As a result of the net loss incurred in 1997 and the write-offs
attributable to the sale of the sutures business, working capital decreased by
$6,186,000 to a deficit of $4,182,000. On a pro forma basis, however, after
giving effect to the Recapitalization, working capital increased to $2,063,000
at September 30, 1997.
The Company's ability to generate operational cash flow is dependent
upon increasing processing revenue through increased recoveries by tissue banks
in the U.S. and in Europe, and the development of additional markets and
surgical applications worldwide. While the Company believes it continues to
make progress in both these areas, there can be no assurances that changing
governmental regulations will not have a material adverse effect on results of
operations and cash flow.
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<PAGE> 15
ITEM 7. FINANCIAL STATEMENTS
The information required by this Item is found immediately following
the signature page of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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<PAGE> 16
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth the names and ages of the directors
and executive officers of the Company (each, a "Director" and/or "Officer"),
the positions and offices that each Director and Officer held with the Company,
and the period during which each served in such positions and offices. Each
Director serves for a term of one year, until his successor is duly elected and
qualified. Karl H. Meister, in his capacities as President and Chief Executive
Officer, serves for a term of three (3) years, until his successor is duly
elected and qualified.
TABLE OF DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITIONS/OFFICES PERIOD SERVED IN OFFICE/POSITION
---- --- ----------------- --------------------------------
<S> <C> <C> <C>
G. Russell Cleveland 59 Director 1997 - present
Charles C. Dragone 60 Chairman of the Board 1996 - present
Director 1992 - present
Chief Executive Officer April 1995 - March 1996
Chief Financial Officer October 1992 - September 1994
J. Harold Helderman, MD 52 Director 1997 - present
Karl H. Meister 62 Director 1996 - present
Chief Executive Officer 1996 - present
President 1996 - present
Elroy G. Roelke 67 Director 1995 - present
(1) Acting Secretary January 1998
</TABLE>
- --------------
1 On January 12, 1998, Mr. Roelke was appointed to serve as Acting
Secretary, until the next election of Officers, following the
resignation of the Company's Secretary.
The following is a summary of the business experience of each of the
Company's Officers and Directors listed in the above-referenced table, and of
certain other significant employees of the Company, during the past five (5)
years.
Officers and Directors
G. Russell Cleveland is the principal founder and the majority
shareholder of Renaissance Capital Group, Inc. ("Renaissance"). Renaissance
specializes in providing capital to growing emerging publicly owned companies.
He is a Chartered Financial Analyst with over 30 years experience in financial
planning and analysis. He has served as President of the Dallas Association of
Investment Analysts. For over 10 years he was a contributing editor of Texas
Business Magazine. Mr. Cleveland currently serves as the Managing General
Partner of Renaissance Capital Partners, Ltd., Renaissance Capital Partners II,
Ltd., Renaissance Capital Growth & Income Fund III, Inc. (NASDAQ), and
Renaissance U.S. Growth & Income Trust PLC, which is traded on the London
exchange. Mr. Cleveland also currently serves as director of Global
Environmental Corp. and Biopharmaceutics, Inc.
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<PAGE> 17
Charles C. Dragone is the current Chairman of the Board and has served
at various times during the past five years as the Company's Chief Executive
Officer and as its Chief Financial Officer. Mr. Dragone is a director of KiMed
Corporation, a medical products and services company (1992 to present).
Formerly, he was a Partner of Financial Associates, a Sarasota, Florida
consulting firm specializing in corporate finance (1986 to 1992), a private
consultant in corporate finance matters (1982 to 1986), and a Vice President,
Chief Financial Officer and director of K-Tron International, a manufacturer of
process control equipment used by the chemical, pharmaceutical, plastics and
food industries (1965 - 1981).
J. Harold Helderman, MD is a Professor of Medicine, Microbiology and
Immunology at Vanderbilt University, Nashville, Tennessee, and the Medical
Director of the Vanderbilt Transplant Center. Dr. Helderman received his MD
from the State University of New York, Downstate Medical Center in 1971, Summa
Cum Laude. In addition to book and monograph writings, he has authored more
than 125 publications in his field of transplant medicine. Dr. Helderman is
President of the American Society of Transplant Physicians.
Karl H. Meister has more than 30 years international and U.S.
management experience in the pharmaceutical and medical device industries.
Before being appointed President and Chief Executive Officer of the Company in
March, 1996, Mr. Meister was President and Chief Executive Officer of
Carrington Laboratories, Inc., a pharmaceutical company (1990- 1995). He also
held executive management positions with Schering-Plough Corporation
(1976-1988), and Pfizer, Inc. (1965-1976). Mr. Meister received a B.A. Magna
Cum Laude from Georgetown University and an M.B.A. from the University of
Chicago.
Elroy G. Roelke is a practicing attorney and, for more than forty (40)
years, has specialized in corporate finance and business law. In addition,
since 1985, he served as Chairman of Knollwood Mercantile Company, a family-
owned retail liquor and convenience store business. In March 1989, Mr. Roelke
joined Renaissance Capital Group, Inc. and served as Vice President, General
Counsel and director until he retired in December 1996. Mr. Roelke currently
serves as sole director of Microlytics, Inc. and as a director of Appoint
Technologies, Inc., which companies are prior Renaissance Capital investments
that discontinued business pending reorganization. In addition, Mr. Roelke
serves as a director of several privately-held companies that retain him for
corporate legal services. Mr. Roelke received B.A. and J.D. degrees from
Valparaiso University.
Key Employees
Manfred Krueger is the Company's Managing Director for International
Operations. Prior to joining the Company in June 1997, Mr. Krueger was
Executive Vice President of Fresenius Critical Care International, a division
of Fresenius Medical Care, AG. The division was founded in 1991 under his
leadership and grew into a substantial business with an average annual growth
of about 40%. Prior to Fresenius, Mr. Krueger held management positions in
Squibb Medical Systems and American Hospital Supply.
Dr. Karl Koschatzky is the Technical Director for International
Operations. Dr. Koschatzky has been with the Company since 1982, having
responsibility for tissue procurement, and product development. He holds a
doctoral degree in Chemistry from the University of Erlangen, Germany.
Russell A. Hoon is the Company's Director of Marketing & Sales, U.S.
He attended Bowling Green State University, and has over twenty (20) years of
successful experience at all levels of sales and marketing management with ten
(10) years in the healthcare industry. Prior to joining the Company, he was
the Director of Marketing for Integra LifeSciences Corporation (NASDAQ: IART),
a biotechnology company involved in regenerative medicine. During his tenure
at Integra, he was responsible for growing revenue from $2.3 million to over
$15 million. Mr. Hoon was responsible for launching products into
16
<PAGE> 18
the tissue engineering field, such as Integra Artificial Skin(TM) and
Biomend(TM) Guided Tissue Regeneration Template. Prior to Integra LifeSciences,
he has held managerial positions with Surgical Laser Technologies and Survivair
Division of U.S. Divers Corporation.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Under Section 16(a) of the Exchange Act, all executive officers,
directors, and each person who is the beneficial owner of more than 10% of the
common stock of a company that files reports pursuant to Section 12 of the
Exchange Act, are required to report the ownership of such common stock,
options, and stock appreciation rights (other than certain cash-only rights)
and any changes in that ownership with the Securities and Exchange Commission
(the "SEC"). Specific due dates for these reports have been established, and
the Company is required to report, in this Form 10-KSB, any failure to comply
therewith during the fiscal year ended September 30,1997. The Company believes
that all of these filing requirements were satisfied by its executive officers,
directors and by the beneficial owners of more than 10% of the Common Stock,
except for Mr. Cleveland and Dr. Helderman's inadvertent late filing of a Form
3 (Initial Statement of Beneficial Ownership of Securities) upon becoming a
director or officer of the Company. In making this statement, the Company has
relied on copies of the reporting forms received by it, and upon the written
representations from certain reporting persons that no Form 5 (Annual Statement
of Changes in Beneficial Ownership) were required to be filed under applicable
rules of the SEC.
ITEM 10. EXECUTIVE COMPENSATION.
Compensation of Directors
The Company's outside Directors receive a $2,000 annual retainer,
$1,000 per meeting for attendance at Board meetings, $250 per telephonic
meeting, plus reimbursement of out-of-pocket expenses. Beginning January 1998,
the Chairman of the Board will receive $1,000 per month for his services as
Chairman.
Stock Option Plans
The Company has utilized its 1992 Stock Option Plan (the "1992 Plan")
and its 1996 Incentive and Non-Statutory Stock Option Plan (the "1996 Plan"),
and wishes in the future to continue to utilize the 1996 Plan, to attract,
maintain and develop management by encouraging ownership of the Company's
Common Stock by Directors, Officers, and other key employees. The following is
a summary of the provisions of the 1996 Plan. This summary is qualified in its
entirety by reference to the 1996 Plan, a copy of which may be obtained from
the Company.
The 1996 Plan authorizes the granting both incentive stock options, as
defined under Section 422 of the Internal Revenue Code of 1986 ("ISO"), and
non-statutory stock options ("NSSO") to purchase Common Stock. All employees
of the Company and its affiliates are eligible to participate in the 1996 Plan.
The 1996 Plan also authorizes the granting of NSSOs to non-employee Directors
and consultants of the Company. Pursuant to the 1996 Plan, an option to
purchase 10,000 shares of Common Stock shall be granted automatically to each
outside Director who is newly elected to the Board. In addition, an option to
purchase 2,500 shares of Common Stock shall be granted automatically, on the
date of each annual meeting of shareholders of the Company, to each outside
Director who has served in that capacity for the past six months and continues
to serve following such meeting. Any outside Director may decline to accept
any option granted to him under the 1996 Plan.
The Board of Directors or the Compensation and Stock Option Committee
is responsible for the administration of the 1996 Plan and determines the
employees to be granted options, the period during
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<PAGE> 19
which each option will be exercisable, exercise price, the number of shares of
the Common Stock covered by each option, and whether an option will be a
non-qualified or an incentive stock option. However, the exercise price for the
purchase of shares subject to such an option cannot be less than 100% of the
fair market value of the Common Stock on the date the option is granted. The
Stock Option Committee has no authority to administer or interpret the
provisions of the 1996 Plan relating to the grant of options to outside
Directors. The current members of the Compensation and Stock Option committee
are G. Russell Cleveland and Dr. J. Harold Helderman.
No option granted pursuant to the 1996 Plan is transferable otherwise
than by will or the laws of descent and distribution. The term of each option
granted to an employee under the 1996 Plan is determined by the Board of
Directors or the Compensation and Stock Option Committee, but in no event may
such term exceed ten (10) years from the date of grant. Each option granted to
an outside Director under the 1996 Plan shall be exercisable in whole or in
part during the four (4)-year period commencing on the date of the grant of
such option. Any option granted to an outside Director shall remain effective
during its entire term, regardless of whether such Director continues to serve
as a Director. The purchase price per share of Common Stock under each option
granted to a Director will be the fair market value of such share on the date
of grant.
The vesting period for options granted under the 1996 Plan is set
forth in an option agreement entered into with the optionee. ISOs granted to
an optionee terminate 90 days after retirement. In the event of death or
disability, all vested options expire 180 days from the date of death or
termination of employment due to disability. Upon the occurrence of a "change
in control" of the Company, the maturity of all options then outstanding under
the 1996 Plan will be accelerated automatically, so that all such options will
become exercisable in full with respect to all shares that have not been
previously exercised or become exercisable. A "change in control" includes
certain mergers, consolidation, reorganization, sales of assets, or a
dissolution of the Company.
In the event that the Company effects a split of the outstanding
shares of Common Stock or a dividend payable in Common Stock, or the
outstanding Common Stock is combined into a smaller number of shares, the
maximum number of shares subject to outstanding options and the purchase price
per share of such options will be increased or decreased proportionately. The
effect of the Reverse Split was to reduce the number of shares subject to the
1996 Plan from 2,000,000 shares to 200,000 shares. At the Special Meeting of
Shareholders on November 10, 1997, the Shareholders approved an amendment to
the 1996 Plan to increase the number of shares of Common Stock subject to the
1996 Plan from 200,000 shares after the Reverse Split, to 2,000,000 shares.
Except for such amendment, the 1996 Plan remained unchanged. The 1996 Plan
presently reserves 2,000,000 shares of the Company's Common Stock for issuance
thereunder. As of January 30, 1998, options have been issued for 791,700
shares and 1,208,300 shares remain available under the 1996 Plan. Unless
sooner terminated, the 1996 Plan will expire on February 27, 2006.
1996 Management Compensation Plan
The Company also maintains a 1996 Management Compensation Plan (the
"Compensation Plan") pursuant to which shares of Common Stock may be awarded to
management employees. The purpose of the Compensation Plan is to reward
management employees for superior results obtained by the Company and by such
employees individually. The Company wishes in the future to utilize the
Compensation Plan to attract and retain superior executive talent and to obtain
a commitment to the long-term success of the Company. The following is a
summary of the provisions of the Compensation Plan. This summary is qualified
in its entirety by reference to the Compensation Plan, a copy of which may be
obtained from the Company.
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<PAGE> 20
The Compensation Plan authorizes the granting to management employees of the
Company and its subsidiaries incentive compensation in the form of bonuses,
payable 50% in cash and 50% in Common Stock based on the fair market value of
the stock on the date of certification of the payment thereof (each such
payment, a "Bonus"). Management employees of the Company or one or more of its
subsidiaries who are selected to participate in the Compensation Plan by the
Compensation and Stock Option Committee of the Board of Directors are eligible
to receive Bonuses.
The Compensation and Stock Option Committee is responsible for the
administration of the Compensation Plan. The Compensation and Stock Option
Committee shall have full authority to interpret the Compensation Plan, to
establish rules and regulations relating to the operation of the Compensation
Plan, to determine the management employees eligible to receive Bonuses
thereunder, to set Bonus criteria, to determine whether and to what extent the
Bonus criteria or other results have been met, and to make all other
determinations and take all other actions as the Compensation and Stock Option
Committee deems necessary, advisable or appropriate for the proper
administration of the Compensation Plan.
The criteria for incentive compensation under the Compensation Plan
consists of two parts - corporate results and individual results. Corporate
results means exceeding budgeted sales and profits and meeting certain annual
Bonus criteria. Individual results are measured by whether an employee
achieves certain goals set for his or her position. The amount of potential
Bonus for an employee consists of a target Bonus multiplied by a performance
component. The target Bonus is determined as a percentage of salary and ranges
from 20% to 35% depending on the individual's position. The performance
component is a percentage rate measuring results achieved in comparison to the
Company's annual operating budget. The performance component can be adjusted
upward or downward based on individual performance, upon approval by the
Compensation and Stock Option Committee.
In the event the Company effects a split of the outstanding shares of
Common Stock or a dividend payable in Common Stock, or in the event the
outstanding Common Stock is combined into a smaller number of shares, the
maximum number of shares that may be issued under the Compensation Plan will be
decreased or increased proportionately. The effect of the Reverse Split, was
to automatically reduce the number of shares subject to the Compensation Plan
to 50,000. At the November 10, 1997 Special Meeting of Shareholders, the
Shareholders approved an amendment to the Compensation Plan to increase the
number of shares subject to the Compensation Plan as a result of the Reverse
Split from 50,000 to 500,000. Except for such increase in the number of
shares, the Compensation Plan remained unchanged. The Compensation Plan
currently reserves 500,000 shares of Common Stock for issuance thereunder, and
there are no shares outstanding under the Compensation Plan. The Compensation
Plan shall terminate on February 27, 2001.
Employment Agreement
The Company has an employment agreement with Karl H. Meister, its
President and Chief Executive Officer. Pursuant to that agreement, the term of
Mr. Meister's employment with the Company commenced on March 1, 1996 and shall
terminate on February 28, 1999, subject to automatic extensions for additional
one-year periods, unless the Company or Mr. Meister delivers a written notice of
his or its election to terminate, or the Company terminates his employment for
cause. Mr. Meister's annual base salary is $160,000 per year. In addition, the
employment agreement provides for: (i) an annual cash bonus in an amount
approximately equal to 35% of his annual base salary, subject to the
satisfaction of reasonable performance goals, (ii) five-year, non-qualified,
stock options for 75,000 shares of Common Stock, granted annually under the 1996
Plan ("Annual Stock Options"), and (iii) a five-year special stock option for
750,000 shares of Common Stock, at an exercise price of $0.85 per share, 40%
vested upon grant, 30% vested in twelve (12) months, and 30% vested in
twenty-four (24) months (the "Special Stock Option"). All options granted to
Mr. Meister pursuant to his employment contract were subject to the one-for-ten
Reverse Split, and were subsequently repriced. See "Repriced Options" below.
19
<PAGE> 21
The following table sets forth the compensation awarded to, earned
by, or paid to Karl H. Meister, the Company's Chief Executive Officer, for the
period of this Report. There are no other Officers or individuals whose
compensation exceeded $100,000 for this period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------------------- ----------------------------------
Awards Payouts
------------------------ -------
Securities
Name And Other Restricted Underlying
Principal Fiscal Annual Stock Options/ LTIP All Other
Position Year Salary Bonus Compensation Award(s) SARs Payouts Compensation
($) ($) ($) ($) (#)(1) ($) ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Karl H.
Meister 1997 160,000 0 0 0 360,000 0 0
</TABLE>
- ---------
1 Represents an option repricing transaction subsequent to the fiscal
year end covered by this Report. See Footnote 2 to the table below.
Repriced Options
Subsequent to the 1997 fiscal year end, on November 10, 1997, the
Company canceled all of the outstanding stock options previously issued under
its stock option plans (the "Old Options"), to current employees and directors
and replaced them with new options (the "New Options"), to remedy the negative
effect of the Reverse Split on the exercise prices of Old Options which had
ranged from $0.4375 per share to $1.10 per share before the Reverse Split, and
$4.375 per share to $11.00 per share after the Reverse Split. Generally, New
Options were issued for a new number of shares of Common Stock, which new
number of shares is 40% of the former number of shares into which the Old
Options were exercisable before the Reverse Split. The exercise price of the
New Options is equivalent to the market price of the Common Stock on the date
of the grant of the New Options, $1.57.
The following table sets forth certain information regarding
replacement stock options granted to Karl H. Meister, Chief Executive Officer
on November 10, 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR (1)
(Individual Grants)
<TABLE>
<CAPTION>
Number of Securities
Underlying Percent of Total Exercise or
Options/SARs Granted Options/SARs Granted To Base Price Expiration
Name (#) Employees ($/Sh) Date
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Karl H. Meister 300,000(2) 32.9% $1.57 November 9, 2002
President and Chief
Executive Officer 60,000(3) 6.6% $1.57 November 9, 2002
</TABLE>
20
<PAGE> 22
____________
1 Events recorded in the above table occurred after the fiscal year end
covered in this Report.
2 Represents a replacement grant for Mr. Meister's Old Option (Special
Stock Option) to purchase 750,000 shares of Common Stock at $0.85 per
share. Pursuant to the provisions of Mr. Meister's employment
agreement and the terms and conditions of the Non-Statutory Stock
Option Agreement dated November 10, 1997, the Company granted Mr.
Meister a Non-Statutory Stock Option to purchase 300,000 shares of
Common Stock for $1.57 per share, which New Option shall vest as
follows: (i) November 10, 1997 - 120,000 shares, (ii) November 10,
1998 - 90,00 shares, and November 10, 1999 - 90,000 shares.
3 Represents replacement grant for Mr. Meister's Old Options (Annual
Stock Options) to purchase, in the aggregate, 150,000 shares of Common
Stock. Pursuant to the provisions of Mr. Meister's employment
agreement, the 1996 Plan, and the terms and conditions of the
Non-Statutory Stock Option Agreement dated November 10, 1997, the
Company granted Mr. Meister a Non-Statutory Stock Option to purchase
60,000 shares of Common Stock for $1.57 per share, which New Option
was fully-vested as of the date of grant.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Giving effect to the Recapitalization described in Part I of this
Report, the following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of January 30, 1998, by
(i) each person known to the Company to own beneficially more than 5% of its
Common Stock, (ii) each director and executive officer of the Company, and
(iii) all directors and executive officers as a group. As of January 30, 1998,
there were approximately 5,313,810 shares of Common Stock issued and
outstanding.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENTAGE
OF BENEFICIAL OWNER OF BENEFICIAL OWNER (1)(2) OF CLASS (3)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Renaissance Capital Partners II, Ltd. (4) . . . . . . . . . . . . . . 6,314,748 56.98%
8080 N. Central Expressway
Suite 210-LB 59
Dallas, TX 75206
Renaissance Capital Group, Inc. (5) . . . . . . . . . . . . . . . . . 6,314,748 56.98%
Kleinwort Benson European Mezzanine Fund, L.P. (6). . . . . . . . . . 1,395,193 24.75%
Westbourne
The Grange
St. Peter Port
Guernsey, CI
GY1 3BG
NatWest Ventures (Investments) Ltd. (7) . . . . . . . . . . . . . . . 1,918,409 35.95%
Fenchurch Exchange
8 Fenchurch Place
London, England
EC3M4TE
</TABLE>
21
<PAGE> 23
<TABLE>
<S> <C> <C>
G. Russell Cleveland (8) . . . . . . . . . . . . . . . . . . . . . . 6,314,748 56.98%
Charles Dragone (9) . . . . . . . . . . . . . . . . . . . . . . . . . 153,109 2.80%
Dr. J. Harold Helderman (10) . . . . . . . . . . . . . . . . . . . . 40,000 *
Karl H. Meister (11) . . . . . . . . . . . . . . . . . . . . . . . . 423,308 7.54%
Elroy G. Roelke (10) . . . . . . . . . . . . . . . . . . . . . . . . 42,000 *
All directors and officers as a group (5 persons) . . . . . . . . . . 6,973,165 60.12%
</TABLE>
- -----------
* Less than 1%
1 In accordance with Rule 13d-3 promulgated pursuant to the Exchange Act, a
person is deemed to be the beneficial owner of the security for purposes
of the rule if he or she has or shares voting power or dispositive power
with respect to such security or has the right to acquire such ownership
within sixty days. As used herein, "voting power" is the power to vote
or direct the voting of shares, and "dispositive power" is the power to
dispose or direct the disposition of shares, irrespective of any economic
interest therein.
2 Except as otherwise indicated by footnote, the persons named in the table
have sole voting and investment power with respect to all of the Common
Stock beneficially owned by them.
3 In calculating the percentage ownership for a given individual or group,
the number of shares of Common Stock outstanding includes unissued shares
subject to options, warrants, rights or conversion privileges exercisable
within sixty days held by such individual or group.
4 Includes 5,767,188 shares of Common Stock which Renaissance Capital
Partners II, Ltd. has the right to acquire within sixty (60) days.
5 Represents all of the shares of Common Stock beneficially owned by
Renaissance Capital Partners II Ltd. Renaissance Capital Group, Inc. is
the Managing General Partner of Renaissance Capital Partners II, and its
business address is the same as that provided for Renaissance Capital
Partners II.
6 Includes 322,035 shares of Common Stock which Kleinwort Benson has the
right to acquire within sixty (60) days.
7 Includes 21,615 shares of Common Stock which NatWest has the right to
acquire within sixty (60) days.
8 Represents all of the shares of Common Stock beneficially owned by
Renaissance Capital Partners II Ltd. and Renaissance Capital Group, Inc.
Mr. Cleveland is the President and 66.6% majority shareholder of
Renaissance Capital Group, Inc. His business address is that of
Renaissance Capital Partners II Ltd.
9 Includes 136,520 shares of Common Stock which Mr. Dragone has the right
to acquire within sixty (60) days, and 16,589 shares which Mr. Dragone
shares voting and investment power with his spouse.
10 All of the shares of Common Stock beneficially owned by Messrs.
Helderman and Roelke are derivative securities which the beneficial
owner has the right to acquire within sixty (60) days.
11 Includes 297,651 shares of Common Stock which Mr. Meister has the
right to acquire within sixty (60) days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
G. Russell Cleveland, a director of the Company, is also the President
and 66.6% majority shareholder of Renaissance Capital Group ("Renaissance
Group"), which is the Managing General Partner of Renaissance. As described
in greater detail elsewhere in this Report, Renaissance is an Institutional
22
<PAGE> 24
Investor in the Company. Prior to the Recapitalization, Renaissance held
Series C Stock and provided the Bridge Loan. In the Recapitalization, the
Series C Stock was converted into Common Stock, and the Bridge Loan was
converted into the Debenture Loan, the Debenture, and the Bridge Warrant. See,
Part I, Item 1. "Description of Business - 1997 Recapitalization." Mr.
Cleveland is a beneficial owner of the Company's Common Stock that Renaissance
acquired in the Recapitalization, and of those shares that Renaissance has the
right to acquire within sixty (60) days pursuant to the Bridge Warrant and the
Debenture. See, "Beneficial Ownership Table" above. He is also the indirect
beneficiary of Renaissance in the Loan Agreement, the Security Agreements and
the Stock Pledge Agreement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Index to Exhibits
<TABLE>
<S> <C>
3.2 Articles of Incorporation of Registrant.**
3.3 Articles of Amendment to Articles of Incorporation
Establishing Series A Preferred Stock.*
3.4 Articles of Amendment to Articles of Incorporation
Establishing Series B Preferred Stock.*
3.5 Articles of Amendment to Articles of Incorporation
Establishing Series C Preferred Stock.*
3.6 Articles of Amendment to Articles of Incorporation
Increasing the Number of Authorized Shares.
3.7 Articles of Amendment to Articles of Incorporation
Amending the Terms of the Series C Preferred Stock.
3.8 Articles of Amendment to Articles of Incorporation
Effecting the Reverse Stock Split.
10.1 Convertible Debenture Loan Agreement, dated November 11, 1997,
by and between Biodynamics International, Inc., and its Wholly-Owned Subsidiaries,
and Renaissance Capital Partners II, Ltd.
10.2 Nine Percent (9%) Convertible Debenture of Biodynamics International, Inc.,
Issued to Renaissance Capital Partners II, Ltd., dated November 11, 1997.
10.3 Second Amendment to Security Agreement, dated December 31, 1997,
by Biodynamics International, Inc., for the benefit of Renaissance Capital Partners II, Ltd.
10.4 Second Amendment to Security Agreement (Stock Pledge Agreement),
dated December 31, 1997, by Biodynamics International, Inc., for the benefit of
Renaissance Capital Partners II, Ltd.
</TABLE>
23
<PAGE> 25
<TABLE>
<S> <C>
10.5 Joint Venture Agreement between Biodynamics International, Inc.
and Texas Medical Products dated November 1, 1990.*
10.6 Employment Agreement between Biodynamics International, Inc. and
Karl H. Meister, dated June 12, 1996.
21 Subsidiaries of Registrant.
27 Financial Data Schedule.
- ----------------
</TABLE>
* Document incorporated by reference from previous Form 10-KSB
filings.
** Document incorporated by reference from Exhibit 2 of Registration
Statement, on Form 20-F, of American Biodynamics, Inc.,
effective October 2, 1987.
(b) Reports on 8-K
Report on (i) Japanese Ministry of Health Bans Use of Human Dura Mater
Tissue, and (ii) Execution of Dura Mater Recovery Agreement with
Musculoskeletal Transplant Foundation - Filed April 9, 1997.
Report on Working Capital Negotiations - Filed August 5, 1997.
Report on Working Capital Negotiations - Filed September 2, 1997.
Mr. Laurie Rostron resigns from Board - Filed September 2, 1997.
Report on Recapitalization Agreement - Filed September 16, 1997.
24
<PAGE> 26
SIGNATURES
In accordance with the Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on behalf by the undersigned,
thereunto duly authorized.
Date: February 10, 1998
BIODYNAMICS INTERNATIONAL, INC.
/s/ Karl H. Meister
-----------------------------------
Karl H. Meister
President, Chief Executive
and Financial Officer
In accordance with the Exchange Act, this report has been signed by
the following persons on behalf of the registrant and in the capacities
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ G. Russell Cleveland Director January 30, 1998
- -----------------------------------------
G. Russell Cleveland
/s/ Charles C. Dragone Director January 30, 1998
- -----------------------------------------
Charles C. Dragone
/s/ J. Harold Helderman Director January 20, 1998
- ------------------------------------------
Dr. J. Harold Helderman
/s/ Karl H. Meister Director February 10, 1998
- --------------------------------------
Karl H. Meister
/s/ Elroy G. Roelke Director January 30, 1998
- --------------------------------------
Elroy G. Roelke
</TABLE>
<PAGE> 27
BIODYNAMICS
INTERNATIONAL, INC.
Financial Statements for the
Years Ended September 30, 1997 and 1996, and
Independent Auditors' Report
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Biodynamics International, Inc.
Parsippany, New Jersey
We have audited the accompanying consolidated balance sheets of Biodynamics
International, Inc. and subsidiaries (the "Company") as of September 30, 1997
and 1996, and the related consolidated statements of operations, cash flows and
shareholders' equity for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at September 30, 1997
and 1996, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
January 30, 1998
F-1
<PAGE> 28
BIODYNAMICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 777 $ 531
Accounts receivable 1,738 2,373
Inventories 2,391 3,341
Other current assets 94 126
------- -------
Total current assets 5,000 6,371
PROPERTY, PLANT AND EQUIPMENT, NET 2,996 3,824
INTANGIBLE AND OTHER ASSETS, NET 1,106 4,107
------- -------
TOTAL ASSETS $ 9,102 $14,302
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 980 $ 666
Accrued interest 267 442
Accrued salaries 174 383
Accrued legal and professional fees 139 335
Other accrued expenses 802 963
Current portion of long-term debt 6,820 1,578
------- -------
Total current liabilities 9,182 4,367
------- -------
OTHER LIABILITIES:
Long-term debt 1,175 7,423
Other long-term obligations 10 --
------- -------
Total other liabilities 1,185 7,423
COMMITMENTS AND CONTINGENCIES (NOTE 13)
SHAREHOLDERS' (DEFICIENCY) EQUITY (1,265) 2,512
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,102 $14,302
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-2
<PAGE> 29
BIODYNAMICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
OPERATING REVENUES:
Revenue $ 8,691 $ 12,344
Cost of revenue 7,232 7,641
--------- ---------
Gross margin 1,459 4,703
OPERATING EXPENSES:
General and administrative 2,424 2,515
Distribution and marketing 2,218 2,269
Research and development 314 254
Depreciation and amortization 2,174 1,526
--------- ---------
Total operating expenses 7,130 6,564
--------- ---------
OPERATING LOSS (5,671) (1,861)
--------- ---------
LOSS IN EQUITY OF JOINT VENTURE 315 208
LOSS ON CONVERSION OF SENIOR B DEBT 353 --
OTHER (INCOME) EXPENSE (2,051) (344)
INTEREST EXPENSE 934 1,061
--------- ---------
(449) 925
--------- ---------
LOSS BEFORE INCOME TAXES
(5,222) (2,786)
INCOME TAXES -- --
NET LOSS $ (5,222) $ (2,786)
========= =========
AVERAGE COMMON SHARES OUTSTANDING 845,972 816,194
========= =========
NET LOSS PER SHARE $ (6.17) $ (3.41)
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these financial statements.
F-3
<PAGE> 30
BIODYNAMICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,222) $(2,786)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,020 1,881
Equity in loss of joint venture 315 208
Stock issued for services 20 68
Deferred convertible interest expense 38 --
Foreign currency transaction (gain) loss (186) (83)
Loss on conversion of Senior B Debt 353 --
Gain from conversion of debt related to litigation settlement (2,160) --
Changes in assets and liabilities net of effect of
contributions to joint venture:
Accounts receivable 635 (1,088)
Inventories 1,064 1,288
Other current assets 32 (52)
Accounts payable and accrued expenses 113 529
Other long-term liabilities 10 --
------- -------
Net cash used in operating activities (1,968) (35)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (95) (74)
Acquisition of intangibles and other assets -- 20
Contributions to joint venture -- (33)
------- -------
Net cash used in investing activities (95) (87)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Series C issued for stock options exercised 22 --
Bridge loan proceeds 2,036 --
Issuance of stock -- 4,885
Proceeds (repayments) from short-term borrowings - net 719 (889)
Repayment of long-term debt (1,161) (4,186)
Proceeds from long term debt -- 1,470
Capital lease payments (5) --
Preferred dividends paid -- (791)
------- -------
Net cash provided by financing activities 1,611 489
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 698 (20)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 246 347
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 531 184
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 777 $ 531
======= =======
</TABLE>
F-4
<PAGE> 31
BIODYNAMICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS,
YEARS ENDED SEPTEMBER 30, 1997 AND 1996 (CONTINUED)
(IN THOUSANDS)
Supplemental information on cash flows and non-cash transactions is as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
SUPPLEMENTAL CASH FLOW DISCLOSURES -
Interest paid $ 758 $ 588
======= =======
SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Issuance of Series C Preferred Stock in exchange for:
Senior B Debt $ 1,609 $ --
Deferred Interest -- 838
Convertible Investor Loans -- 3,257
Accumulated dividends -- 479
Series A Preferred Stock -- 3,344
Series B Preferred Stock -- 6,184
Conversion of Series C Preferred Stock in exchange
for Common Stock 1 --
------- -------
$ 1,610 $14,102
======= =======
Series A dividends paid in common stock $ -- $ 312
======= =======
Series B dividends paid in preferred stock $ -- $ 479
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-5
<PAGE> 32
BIODYNAMICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS' EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
Preferred Stock
------------------------------------ Common Cumulative
Series A Series B Series C Stock Paid in Translation
($.01 par) ($.01 par) ($.01 par) ($.01 par) Capital Adjustment
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1995 $ 3 $ 6 $ 0 $ 80 $ 17,091 $ 282
Dividends - Series A -- -- -- 3 (3) --
Dividends - Series B -- -- -- (479) --
Stock issued for services -- -- -- -- 68 --
Series C Issued -- -- 1 -- 14,101 --
Series A and B Retired (3) (6) -- -- (9,519) --
Net Loss -- -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- (335)
-------- -------- -------- -------- -------- --------
BALANCE, SEPTEMBER 30, 1996 -- -- 1 83 21,259 (53)
Dividends - Series A -- -- -- -- -- --
Dividends - Series B -- -- -- -- -- --
Stock options issued for services -- -- -- -- 20 --
Series C issued for stock options
exercised -- -- -- -- 22 --
Series C Issued on conversion of debt -- -- -- -- 1,609 --
Common stock issued on conversion of
Series C -- -- (1) 1 -- --
Net Loss -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- (206)
-------- -------- -------- -------- -------- --------
BALANCE, SEPTEMBER 30, 1997 $ -- $ -- $ -- $ 84 $ 22,910 $ (259)
======== ======== ======== ======== ======== ========
<CAPTION>
Common Preferred
Accumulated Shares Shares
Deficit Dividends Total O/S O/S
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1995 $ (15,861) $ (131) $ 1,470 7,987,109 866,221
Dividends - Series A -- -- -- 249,685 --
Dividends - Series B -- -- (479) -- --
Stock issued for services -- -- 68 101,446 --
Series C Issued -- -- 14,102 -- 110,603
Series A and B Retired -- -- (9,528) -- (866,221)
Net Loss (2,786) -- (2,786) -- --
Foreign currency translation
adjustment -- -- (335) -- --
---------- ---------- ---------- ---------- --------
BALANCE, SEPTEMBER 30, 1996 (18,647) (131) 2,512 8,338,240 110,603
Dividends - Series A -- -- -- -- --
Dividends - Series B -- -- --
Stock options issued for services -- -- 20 -- --
Series C issued for stock options
exercised -- -- 22 52,650 --
Series C Issued on conversion of debt -- -- 1,609 -- 12,625
Common stock issued on conversion of
Series C -- -- -- 18,484,200 (123,228)
Net Loss (5,222) -- (5,222) -- --
Foreign currency translation adjustment -- -- (206) -- --
---------- ---------- ---------- ---------- --------
BALANCE, SEPTEMBER 30, 1997 $ (23,869) $ (131) $ (1,265) 26,875,090 --
========== ========== ========== ========== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-6
<PAGE> 33
BIODYNAMICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
1. OPERATIONS AND ORGANIZATION
In 1997, the ban on the use of human dura mater in two of the Company's
important markets had a material adverse affect on the Company's
results of operations and financial position. The Company experienced a
net loss of $5,222 compared to a net loss of $2,786 in 1996, net cash
used in operations of $1,968 compared to $35 in 1996 and a working
capital deficiency at September 30, 1997 of $4,182 and a shareholders'
deficiency of $1,265. As a result of the financial difficulties the
Company initiated a significant restructuring of their capitalization
for both short-term and long-term capital requirements. The
recapitalization consisted of:
- the securing of additional working capital financing
in June and September provided through bridge loans
that totaled approximately $2,036 (see Note 8);
- the conversion of all outstanding Series C preferred
stock on September 22, 1997 into common stock and
warrants (see Note 9);
- the subsequent replacement of the bridge loans with a
convertible debenture loan on November 11, 1997 (see
Note 8);
- the conversion in December 1997 of certain loans by
the mezzanine lenders to the Company's German
subsidiary into common stock (see Note 8);
- and approval and implementation of a one-for-ten
reverse stock split on November 11, 1997 to
accommodate the various recapitalization transactions
(see Note 14).
The result of the recapitalization has been an improved financial
position and significantly reduced interest burden. While the Company
continues in its efforts to reverse the ban on human dura mater and
further believes it can recover from the resultant loss of business,
there can be no assurances that it will be able to do so and that bans
in other countries might not be invoked. Further, the Company has
forecasted positive cash flows from operations in 1998, however, there
can be no assurances that these forecasts will materialize. Management
of the Company believes that the changes instituted during fiscal 1997
and 1998 via the securing of additional working capital, the conversion
of the Series C preferred stock, the conversion of the mezzanine debt,
and the implementation of a one-for-ten stock split will result in
increased profitability and cash flow necessary to fund operations.
Biodynamics International, Inc. with its consolidated subsidiaries (the
"Company") processes, manufactures and distributes worldwide, specialty
surgical products and tissue processing services for neuro, orthopedic,
reconstructive and general surgical applications. The Company's core
business is processing human donor tissue utilizing its patented
Tutoplast(R) process, for distribution to hospitals and surgeons.
Through September 30, 1997, the Company also manufactured and
distributed surgical sutures internationally; that business ceased
operations as of September 30, 1997.
F-7
<PAGE> 34
The Company processes at its two manufacturing facilities in Germany
and the United States and distributes its products and services to over
40 countries worldwide.
Biodynamics has a 50% joint venture interest in Advanced
Haemotechnologies, a manufacturer of blood transfusion and filtration
equipment. As of January 1998, the Company and its joint venture
partner have begun negotiations to dissolve the joint venture.
2. SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies of the Company are presented below.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries.
All intercompany transactions and balances are eliminated in
consolidation.
FOREIGN CURRENCY TRANSLATION - The functional currency of the Company's
German subsidiary is the Deutsche Mark ("DM"). Assets and liabilities
of foreign subsidiaries are translated at the period end exchange rate
while revenues and expenses are translated at the average exchange rate
for the year. The resulting translation adjustments are made directly
to a separate component of shareholders' equity. Gains and losses
resulting from transactions of the Company and its subsidiaries which
are made in currencies different from their own are included in income
as they occur. The Company recognized currency gains of $180 and $86
for 1997 and 1996, respectively. The exchange rates at September 30,
1997 and 1996 were DM 1.76/U.S. Dollar and DM 1.48/U.S. Dollar,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair value of
amounts reported in the consolidated financial statements have been
determined by using available market information and appropriate
valuation methodologies. The carrying value of all current assets and
current liabilities approximates fair value because of their short-term
nature.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with a remaining maturity of three months or less
to be cash equivalents. For cash and cash equivalents, the carrying
amount approximates fair value due to the short maturity of those
instruments.
INVENTORIES - Inventories are valued at the lower of cost (weighted
average basis) or market. Work in process and finished goods include
costs attributable to direct labor and overhead.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
stated at cost. Periodically, the Company evaluates the recoverability
of the net carrying value of its property, plant and equipment by
estimating its fair value. The fair value is compared to the carrying
amount. Depreciation is computed by using the straight line method over
the following estimated useful lives of the assets:
Building and improvements 40 years
Machinery, equipment, furniture and fixtures 3-10 years
INTANGIBLE AND OTHER ASSETS - Intangible assets consist of patents and
trademarks which are stated at acquired cost less accumulated
amortization. Patents are amortized on a straight line basis over a
weighted average of the remaining patent protection periods of all
existing worldwide patents and do not exceed thirteen years. Trademarks
and organization costs are amortized straight line over the expected
benefit period of five years. The Company periodically reviews the
carrying values of
F-8
<PAGE> 35
goodwill and other intangible assets to assess recoverability, and
permanent impairments, if any, would be recognized in current year
operations.
INVESTMENT IN JOINT VENTURE - The Company uses the equity method of
accounting for its investment in Advanced Haemotechnologies. Earnings
and losses are proportionately allocated after giving effect to special
allocations in the Joint Venture Agreement.
REVENUE AND COST OF REVENUE - Revenue reflected is gross revenue, with
net cash discounts and shipping included in cost of revenue. Cost of
revenue includes depreciation of $349 and $355 for the years ended
September 30, 1997 and 1996, respectively. Revenue for the sale of
goods or services is recognized upon the shipment of the processed
tissues or sutures.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are
charged to operations as incurred.
NET LOSS PER COMMON SHARE - Primary per share amounts are computed
utilizing the weighted average number of common shares outstanding.
Common stock equivalents and fully diluted per share calculations have
been excluded due to their antidilutive effect in the periods
presented. Primary per share amounts have been affected by the
one-for-ten reverse stock split (Note 14) for all periods presented.
RECLASSIFICATIONS - Certain prior year financial statement balances
have been reclassified to conform with the current year presentation.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. CONCENTRATION OF CREDIT RISK
In the normal course of business, the Company has no financial
instruments with off-balance sheet risk. The exposure to risk related
to foreign currency exchange rate changes is limited primarily to
intercompany transactions. The Company currently does not utilize
forward exchange contracts or any other type of hedging instruments.
The Company's principal concentration of credit risk consists of trade
receivables. Distribution of products and revenues are provided through
a broad base of independent distributors. One customer accounted for 8%
and 30% in 1997 and 1996, respectively, of consolidated revenue. The
Company does not believe that this concentration of sales and credit
risks represent a material risk of loss with respect to financial
position as of September 30, 1997.
F-9
<PAGE> 36
4. INVENTORIES
Major classes of inventory at September 30, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Raw materials $1,021 $1,592
Work in process 1,002 1,009
Finished goods 1,106 1,341
------ ------
3,129 3,942
Less reserves for obsolescence (738) (601)
------ ------
$2,391 $3,341
====== ======
</TABLE>
During 1997, the Company reversed an accrual related to a certain
product line of which the Company ceased production. This amounted to
$114 which is reflected in the inventory balance at September 30, 1997.
5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets at September 30, 1997 and 1996 consisted of
the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Patents $ 6,241 $ 8,062
Trademarks 1,478 3,459
------- -------
7,719 11,521
Less accumulated amortization (6,613) (7,414)
------ ------
$1,106 $4,107
====== ======
</TABLE>
At September 30, 1997 and 1996, the Company has assessed the carrying
values of all intangible assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for
Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed of". In 1997 and 1996, the Company wrote off patents and
trademarks associated with the Company's sutures business and revalued
patents to coincide with their remaining lives. The amortization
expense for the years ended September 30, 1997 and 1996 was
approximately $2,554 and $1,304, respectively. As of September 30, 1997
and 1996, the effect of exchange rates on cash related to intangibles
and other assets amounted to $445 and $328, respectively.
F-10
<PAGE> 37
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 1997 and 1996 consisted
of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 460 $ 528
Buildings and improvements 2,187 2,505
Machinery and equipment 657 780
Office furniture and equipment 1,294 1,434
------- -------
4,598 5,247
Less accumulated depreciation (1,602) (1,423)
------- -------
$ 2,996 $ 3,824
======= =======
</TABLE>
The Company's property held under capital leases of approximately $58
is included in machinery and office equipment at September 30, 1997 and
1996, respectively. The depreciation expense for the years ended
September 30, 1997 and 1996 was approximately $466 and $870,
respectively. As of September 30, 1997 and 1996, the effect of exchange
rates on cash related to property, plant, and equipment amounted to
$457 and $235, respectively.
F-11
<PAGE> 38
7. INVESTMENT IN JOINT VENTURE
Summarized financial information (in thousands) for Advanced
Haemotechnologies (the "Joint Venture") is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 1996
(UNAUDITED)
<S> <C> <C>
Assets:
Current assets $ 134 $ 487
Equipment, net 97 58
Intangible assets, net 24 38
------- -------
Total assets $ 255 $ 583
======= =======
Liabilities and Partners' Deficiency:
Current liabilities $ 11 $ 75
Notes payable to partner 833 1,473
Partners' deficiency (589) (965)
------- -------
Total liabilities and partners' deficiency $ 255 $ 583
======= =======
Statement of Operations:
Product sales $ 89 $ 517
Research and development grants 184 357
Cost of product sales (58) (286)
Research and development costs (189) (365)
Selling, general and administrative expenses (98) (116)
Interest expense (66) (105)
------- -------
Net Income (loss) $ (138) $ 2
======= =======
</TABLE>
The Company has cumulative unrecognized losses from the Joint Venture
of $136 and $261 at September 30, 1997 and 1996, respectively. At
September 30, 1997 and September 30, 1996, the Company's investment was
reduced to zero as its share of losses in the Joint Venture exceeded
its investment. In August 1996, the Company committed to capital
contributions of $200 for the period from August 1996 to March 1997.
This entire commitment has been recorded as a loss in equity investment
and an accrued liability in 1996. Future generation of income by the
Joint Venture will be recognized by the Company only after its share of
that income exceeds its share of net losses not recognized. As a result
of the negotiations to dissolve the joint venture (Note 1), the Company
has decided to provide for the potential liabilities in connection with
the dissolution as of September 30, 1997. An amount of $315 has been
included in Loss in Equity of Joint Venture in the Company's results of
operations.
F-12
<PAGE> 39
8. LONG-TERM DEBT
Long-term debt at September 30, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Revolving credit facilities, interest ranging from 7.75% to 8.5% $ 719 $ --
Bridge loans, 12% interest, due December 31, 1997 2,036 --
Senior debt, 7.75% interest until March 30, 1998
when terms are renegotiable, due 2008 1,215 1,482
Senior B debt, 10% due December 31, 1999 -- 1,394
Mezzanine debt, LIBOR plus 4% interest (7.3125% and 9.625%
at September 30, 1997 and 1996, respectively); due 1999 3,978 4,590
Notes payable, unsecured, 7% interest -- 1,438
Obligation under Non-Compete, 7% interest, due 1996 -- 45
Capital lease obligations, 8.5% interest, due 2000 (see Note 6) 47 52
------- -------
7,995 9,001
Less current portion (6,820) (1,578)
------- -------
$ 1,175 $ 7,423
======= =======
</TABLE>
Aggregate maturities of long-term debt are: $6,820 - 1998; $101 - 1999;
$104 - 2000; $95 - 2001; $103 - 2002 and $772 thereafter.
Under terms of revolving credit facilities with three banks, the
Company may borrow up to DM 1.5 million for working capital needs. The
amounts outstanding at September 30, 1997 and 1996 were $719 and $0,
respectively. Except as noted below, these borrowings are unsecured.
In June 1997, the Company received a $1 million short-term loan for
working capital purposes from an institutional investor in the Company.
In September 1997, the same lender provided an additional loan of $1
million. The loans are collectively known as the "Bridge loans," with
12% interest per annum. On November 11, 1997, the Bridge loans were
replaced with a Convertible Debenture Loan which reduced the interest
rate to 9% per annum and extended the maturity date to November 11,
2002.
The Senior debt and one of the revolving credit facilities are with a
German bank and secured by a mortgage on the Company's German facility.
The Senior debt is repayable in monthly installments through 2008, and
the credit facility is repayable as working capital dictates. The debt
has been incurred by the Company's German subsidiary but is guaranteed
by the parent company.
The Senior B debt accrues interest which, at the Company's discretion,
can be paid either annually or at maturity. This debt is directly
convertible into Series C Preferred Stock, can be prepaid at any time,
and any amounts not repaid by March 22, 1997 accrue an additional 10%
interest. On July 31, 1997,
F-13
<PAGE> 40
approximately $1,609 of Senior B Debt including accrued interest was
converted into 12,625 shares of Series C preferred stock. The Company
realized a foreign exchange loss on conversion of $353 which is
included in other income/expense in the Company's results of
operations.
The mezzanine debt is repayable in equal installments in 1998 and 1999
and is secured by inventory and a pledge of shares in the German
subsidiary. Pursuant to a recapitalization agreement, and in addition
to the mezzanine lenders' agreement to participate in the Series C
conversion as of year end, the mezzanine lenders agreed to exchange
such loans and accrued interest into 26,263,010 shares of common stock
subject to the completion of a 1-for-10 reverse stock split occurring
on November 10, 1997. On December 24, 1997, all of the Mezzanine debt
and accrued interest (approximately $4.1 million) was exchanged for
2,626,301 of the Company's common stock (Note 9).
Notes payable represent balances due to the previous owner of the
Company's German subsidiary. In fiscal year 1995, the Company ceased
making payments under this obligation based upon alleged breaches by
the previous owner under the Asset Purchase Agreement. On July 1, 1997,
the Company settled the litigation with the former owner of its German
subsidiary, the settlement cancels approximately $1.6 million of debt,
based on current exchange rates, including accrued interest. This gain
on settlement is included in other income/expense in the Company's
results of operations.
Obligations under Non-compete relates to the remaining payments due a
former director of the Company under a Non-Compete Agreement. Prior to
the expiration of the Non-Compete in 1996, both parties agreed to a
settlement concerning outstanding obligations. The remaining balance
reflects the Company's obligations under the settlement which was paid
in 1997.
9. SHAREHOLDERS' (DEFICIENCY) EQUITY
Shareholders' (Deficiency) Equity at September 30, 1997 and 1996
consisted of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Shareholders' Equity:
Preferred Stock, par value $.01 per share, Series C,
-0- and 110,603 shares issued and outstanding $ -- $ 1
at September 30, 1997 and 1996, respectively
Common Stock, par value $.01 per share, with
26,875,090 and 8,338,240 issued and outstanding
at September 30, 1997 and 1996, respectively 84 83
Paid in capital 22,910 22,050
Cumulative Foreign Currency Translation Adjustment (259) (53)
Accumulated deficit (24,000) (19,569)
-------- --------
$ (1,265) $ 2,512
======== ========
</TABLE>
CAPITAL STOCK - The authorized capital stock of the Company consists of
30,000,000 shares of Common Stock and 1,000,000 shares of Preferred
Stock.
F-14
<PAGE> 41
On April 12, 1996, the Company executed an exchange agreement amongst
the holders of its Convertible Investor Loans and Series A and B
Preferred Stock, in which all the outstanding loans and Series A and B
Preferred Stock, including accrued interest and dividends thereon, were
exchanged for Series C Preferred Stock. As a result of the exchange,
the institutional investors relinquished their rights to acquire an
ownership interest in the Company's German subsidiary.
Each share of the Series C Preferred Stock entitles its holder to
receive, effective December 1, 1995, 8% cumulative dividends, payable
in cash or Series C Preferred Stock; to receive $127.50 per share of
liquidation preference; to convert into 150 common shares, as adjusted
in the event of future dilution; and, subject to certain conditions
related to earnings, share price and notice to shareholders, may be
redeemed after April, 1999 at the option of the Company at a price of
$127.50 per preferred share. The Series C Convertible Preferred
Stockholders are not entitled to any voting rights except on any
matters related to amending the terms of the Series C Preferred Stock
or the authorization of any stock ranking senior thereto. The Series C
Stockholders can also elect up to two additional directors to the
Board.
The following represents the value of the debt and equity exchanged for
the Series C Preferred Stock:
<TABLE>
<S> <C>
Deferred interest $ 838
Convertible investor loans 3,257
Accumulated dividends 479
Series A Preferred stock 3,344
Series B Preferred stock 6,184
-------
$14,102
=======
</TABLE>
On July 31, 1997, 12,625 shares of Series C Preferred stock was
exchanged for all of the Senior B debt ($1,244) and accrued interest
($365) as discussed in Note 8.
The Company sought the cooperation of its institutional investors to
provide immediate capital, and to convert the Company's existing
preferred stock and debt into equity. On August 29, 1997, the Company
reached such an agreement (the "Recapitalization Agreement") with
several of its institutional investors.
Pursuant to the Recapitalization Agreement, the institutional
investors, holding a majority of the Company's Series C Preferred Stock
(the "Series C Stock"), agreed to approve certain amendments to the
terms of such stock, which would allow the Company to immediately
convert the Series C Stock into shares of the Company's common stock,
par value $.01 per share (the "Common Stock"). The operative changes to
the terms of the Series C Stock were the deletion of its anti-dilution
provisions, and the authorization of the Board of Directors to
mandatorily convert all of the Series C Stock into Common Stock (the
"Amendments"). On September 16, 1997, the Amendments were duly approved
at a special meeting of the holders of the Series C Stock, and the
Board of Directors took action on September 22, 1997 to convert all of
the outstanding shares of Series C Stock, in the aggregate, into (i)
18,484,200 shares of Common Stock, and (ii) three-year warrants to
purchase an additional 18,484,200 shares of Common Stock for $4,621,050
(the "Series C Warrants"), (the conversion described in this paragraph
hereinafter referred to as the "Series C Conversion").
In the Series C Conversion, one of the institutional investors received
5,475,600 shares of Common Stock, and a Series C Warrant to purchase
approximately 5,475,600 additional shares of Common Stock for
$1,368,900. The mezzanine lenders received, in exchange for their
Series C Stock, an aggregate of
F-15
<PAGE> 42
3,436,500 shares of Common Stock, and Series C Warrants to purchase
3,436,500 additional shares of Common Stock for $859,125. The remaining
holders of Series C Stock, in the aggregate, received 9,572,100 shares
of Common Stock, and Series C Warrants to purchase 9,572,100 additional
shares of Common Stock for $2,393,000.
One of the institutional investors further agreed to exchange the
Bridge Loans for (i) a five-year convertible debenture (the
"Debenture"), convertible into 44,132,309 shares of Common Stock, and
(ii) warrants, exercisable at $2,015,991, for 8,063,963 shares of
Common Stock (the "Bridge Loan Warrant"). Similarly, each of the
mezzanine lenders agreed to exchange its loans to the Company's German
subsidiary, totaling, in the aggregate, approximately $4,100,000 in
principal and accrued interest as of August 1997, (the "Mezzanine
Loans"), for 2,626,301 shares of Common Stock. The Mezzanine Loans were
converted in December 1997.
STOCK OPTIONS - The Company maintains two stock option plans, the 1996
Stock Option Plan (2,000,000 shares authorized) and the 1992 Stock
Option Plan (1,400,000 shares authorized), under which incentive and
non-qualified options have been granted to employees, directors and
certain key affiliates. Under the Plans, options may be granted at not
less than the fair market value on the date of grant. Options may be
subject to a vesting schedule and expire either five or ten years from
grant.
Changes in outstanding options for both Plans were as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE
COMMON SHARES PER SHARE
<S> <C> <C>
September 30, 1995 Outstanding 1,335,000 $1.00 - $1.10
Granted 150,000 $1.10 - $1.19
Exercised -- --
Canceled (7,000) $1.10
--------- -------------
September 30, 1996 Outstanding 1,478,000 $1.00 - $1.19
Granted 1,697,500 $0.44 - $0.78
Exercised (200,000) $1.10
Canceled (733,500) $0.78 - $1.19
--------- -------------
September 30, 1997 Outstanding 2,242,000 $0.44 - $1.19
========= =============
</TABLE>
Of the outstanding options, a total of 1,214,500 are vested as of
September 30, 1997.
On June 13, 1996, the Company's shareholders approved 750,000
non-qualified options to be granted to its Chief Executive Officer
outside of the above-mentioned Stock Option Plans. These options vest
with 40% in 1996, 30% in 1997 and 30% in 1998. The option exercise
price is $0.85/share and the options expire in 2001.
Under Statement of Financial Accounting Standard No. 123 ("SFAS 123")
(Accounting for Stock-based Compensation), the pro-forma impact of
stock options granted as of September 30, 1997 is $0. None of the
outstanding options are "in-the-money" as of September 30, 1997 since
the market price of the common stock is less than the exercise price of
the stock options.
F-16
<PAGE> 43
WARRANTS ISSUED PRIOR TO 1997 - As of September 30, 1997 and 1996,
there were outstanding warrants to purchase 165,000 shares of Common
Stock at a price of $3.33 and expiring from 1997 - 1998.
MANAGEMENT INCENTIVE COMPENSATION PLAN - On June 13, 1996, the
Company's shareholders approved a 1996 Management Incentive
Compensation Plan which authorized 500,000 shares to be issued under
this Plan. As of September 30, 1997, no shares have been issued under
this Plan.
10. RELATED PARTY TRANSACTIONS
The Company has incurred professional fees of $27 in 1996 for investor
relations and other services payable to a corporation of which a
Company director is a director and minority shareholder.
One of the Company's five directors is an officer in a company which
manages a fund which owns 36,504 shares of the Company's Series C
Preferred Stock. In addition, the Company has issued $0 and $34 in 1997
and 1996, respectively, for investor services fees payable to this
management company.
In connection with the financial restructuring of the Company, two of
the Company's directors were paid consulting fees of $34 and $43 in
1997.
11. SEGMENT DATA
The Company operates principally in one business segment. A summary of
the operations and assets by geographical area is as follows:
<TABLE>
<CAPTION>
NET OPERATING IDENTIFIABLE
REVENUE LOSS ASSETS
<S> <C> <C> <C>
For year ended September 30, 1996:
International $ 11,026 $ (853) $ 13,269
United States 1,318 (1,008) 1,033
-------- -------- --------
$ 12,344 $ (1,861) $ 14,302
======== ======== ========
For year ended September 30, 1997:
International $ 7,593 $ (3,993) $ 7,316
United States 1,098 (1,678) 1,786
-------- -------- --------
$ 8,691 $ (5,671) $ 9,102
======== ======== ========
</TABLE>
Included in International Operations is revenue related to distribution
in Germany and Japan. Distribution in Japan represents one customer and
accounted for 8% and 30% of consolidated revenue for 1997 and 1996,
respectively. Distribution in Germany is not concentrated to any
significant customer and accounted for 31% and 20% of consolidated
revenue for 1997 and 1996, respectively.
F-17
<PAGE> 44
12. INCOME TAXES
The Company has recognized a deferred tax asset of $2,827 and $2,477,
and a corresponding valuation allowance of $2,827 and $2,477,
respectively, at September 30, 1997 and 1996. The principal components
of the deferred tax asset for 1997 and 1996, relate to net operating
loss carry forwards. Since the Company has generated taxable losses,
there is no recognition of the benefit of the deferred tax asset on
either a cumulative or current basis.
As a result of net losses, there was no provision for income taxes for
the years ended September 30, 1997 and 1996. Included in each period's
net loss is a foreign component of losses of $3,940 in 1997 and $1,660
in 1996, respectively, attributable to the Company's German subsidiary.
The statutory federal tax rate was 34% for fiscal years 1997 and 1996.
The effective tax rate was 0% in fiscal years 1997 and 1996 due to the
Company incurring a net operating loss in those years.
The Company has net operating loss carry forwards ("NOL's") for German
income tax purposes of approximately $12,281 [DM 21,610,000] which can
be carried forward indefinitely. A valuation allowance has been
provided for the full amount of these NOL's in the accompanying
statements. Recent rulings by German tax authorities could
significantly reduce the amount of NOL's available.
Under Section 382 of the Internal Revenue Code, as amended by the Tax
Reform Act of 1986, a corporation's ability to carry forward its net
operating loss and built-in losses following an "ownership change" is
limited on an annual basis to an amount equal to the product of the
fair market value of the corporation's outstanding stock (including
preferred stock) immediately before the ownership change and the
long-term tax-exempt interest rate, subject to certain adjustments for
built-in gains of the corporation. As a result of the issuance of the
Series B Preferred Stock in 1994 and Series C Preferred Stock in 1996,
the Company may have experienced an ownership change under Section 382
for fiscal years 1997 and 1996. No determination has been made at this
time as to whether an ownership change occurred for income tax purposes
since it would have no effect on the financial statements in the
current year.
13. COMMITMENT AND CONTINGENCIES
GOVERNMENT REGULATION - Effective November, 1996, the French government
has prohibited the transplantation of processed dura mater by any
company, following a two-year moratorium. All other bioimplants will
require governmental approval. The Company generated $60 in fees for
distribution to France in 1996. No fees were generated in 1997 in
France.
In March 1997, the World Health Organization ("WHO") issued a press
release recommending that dura mater no longer be used for
neurosurgery. Following this press release, Japan and Italy elected to
ban the use of dura mater. The ban had a material adverse effect on the
1997 financial results of the Company. The final September 1997 WHO
report qualified the March recommendation stating that if dura mater is
used, only material which is from non-pooled sources, originating from
carefully screened donors, and subjected to validated inactivation
treatment should be considered. All dura mater provided by the Company
meets these requirements.
Subsequent to the WHO recommendation, the German Ministry of Health and
the U.S. FDA undertook thorough assessments of the safety of dura mater
for neurosurgery and concluded that the tissue could be used, if safety
measures such as the aforementioned ones are observed. Since
Tutoplast(TM) processed
F-18
<PAGE> 45
dura mater meets these safety measures, it continues to be accepted by
both the U.S. FDA and the German Ministry of Health.
While the Company continues in its efforts to reverse the dura mater
ban in Japan and Italy, and further believes that it can successfully
recover from the loss of business in these territories, there can be no
assurances that other countries will not invoke a similar ban.
OPERATING LEASES - The Company currently has operating leases for its
corporate offices in the U.S. and Germany, as well as several leases
related to office equipment and automobiles. Total rental expense was
$364 and $343 per year for the years ending September 30, 1997 and
1996, respectively.
Future minimum rental payments required under these leases that have
initial or remaining non-cancelable lease terms in excess of one year
as of September 30, 1997 are as follows:
<TABLE>
<S> <C>
1998 $337,625
1999 238,425
2000 173,008
2001 153,580
2002 42,427
Thereafter --
--------
$945,065
========
</TABLE>
14. SUBSEQUENT EVENTS
On November 10, 1997, the Board of Directors approved a 1-for-10
reverse stock split (the "Reverse Split"). The Reverse Split reduced
the number of common shares outstanding at October 10, 1997 (herein
"effective date") from approximately 26,875,000 shares to 2,687,500
shares. As of the effective date, there were outstanding options to
purchase an aggregate 2,492,000 shares of common stock. The Reverse
Split agreement provides for an automatic adjustment of the number of
shares and the price per share of common stock shares that may be
purchased under the 1996 Stock Option Plan and 1992 Stock Option Plan
(herein the "Plans") (see Note 9). The Company subsequently canceled
all of the outstanding stock options previously issued under its stock
option plans (the "Old Options"), (to current employees and directors)
and replaced them with new options (the "New Options"), to remedy the
negative effect of the Reverse Split on the exercise prices of Old
Options which had ranged from $0.4375 per share to $1.10 per share
before the Reverse Split, and $4.375 per share to $11.00 per share
after the Reverse Split. Generally, New Options were issued for a new
number of shares of Common Stock which new number of shares is 40% of
the former number of shares into which the Old Options were exercisable
before the Reverse Split. The exercise price of the New Options is
equivalent to the market price of the Common Stock on the date of the
grant of the New Options, $1.57.
F-19
<PAGE> 46
The following table illustrates the principal effects of the Reverse
Split as discussed in the preceding paragraphs:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES OF SHARES OF
COMMON STOCK COMMON STOCK
PRIOR TO AFTER
REVERSE SPLIT REVERSE SPLIT
<S> <C> <C>
Authorized 30,000,000 30,000,000
Outstanding 26,875,090 2,687,509
Reserved for future issuance under Option Plan 2,000,000 2,000,000*
Reserved for issuance under Management
Compensation Plan 500,000 500,000*
Subject to issuance upon exercise of all
outstanding Warrants 18,484,200 1,848,420
Subject to issuance upon conversion of
Renaissance's Debenture and Debenture/Warrant 52,196,272 5,219,628
Available for future issuance by action of the Board
of Directors (after giving effect to the above
reservations) -- 19,994,443
</TABLE>
* Shareholders approved increases in the number of shares subject to
the Company's stock option plan and Management Compensation Plan to
2,000,000 and 500,000, respectively.
The impact of the 1-for-10 Reverse Split and conversion of the
mezzanine debt is presented below as if it had occurred as of September
30, 1997, on a pro forma basis.
<TABLE>
<CAPTION>
AS
REPORTED PRO FORMA
<S> <C> <C>
Current portion of long-term debt $6,820 $ 806
Long-term debt 1,175 3,249
Stockholder's equity (deficiency) (1,265) 2,907
</TABLE>
F-20
<PAGE> 1
EXHIBIT 3.6
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
BIODYNAMICS INTERNATIONAL, INC.
Pursuant to the provisions of Section 607.181 of the Florida General
Corporation Act, the undersigned corporation does hereby adopt these Articles
of Amendment to the Articles of Incorporation, and the undersigned officer does
hereby certify individually and on behalf of the undersigned corporation as
follows:
1. The name of the corporation is Biodynamics International, Inc.
(the "Company"). The Articles of Incorporation of this
Corporation were filed by the Department of State of the
State of Florida and became effective on December 6, 1991.
The document number of this Corporation is S98512.
2. A new Article III to the Articles of Incorporation of this
Corporation shall be as follows:
ARTICLE III - CAPITAL STOCK
Shares Authorized. The aggregate number of shares of stock which this
corporation shall have authority to issue shall be thirty-one million
(31,000,000) shares of which thirty million (30,000,000) shares shall be of
Common Stock (each with a par value of $0.1) and one million (1,000,000) shares
of Preferred Stock (each with a par value of $.01).
3. This Amendment was recommended by the Board of Directors of the
Corporation's shareholders on December 29, 1995.
4. On June 13, 1996, the holders of a majority of the
outstanding shares of Common Stock of the Corporation's
Articles of Incorporation at a special, duly called and
convened meeting of such shareholders. The number of votes
cast for the amendment by the shareholders was sufficient for
approval.
IN WITNESS WHEREOF, the Company has caused these Articles of Amendment to the
Articles of Incorporation to be executed this 27th day of September, 1997.
BIODYNAMICS INTERNATIONAL, INC.
By: _______________________________
Karl Meister, President
<PAGE> 1
EXHIBIT 3.7
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF BIODYNAMICS INTERNATIONAL, INC.
Biodynamics International, Inc. (the "Company"), is a corporation
which has been duly incorporated and organized under the Florida Business
Corporations Act ("FBCA"). The articles of incorporation of the Company (the
"Articles of Incorporation"), were filed by the Department of State of the
State of Florida and became effective on December 6, 1991. The document number
of the Company is S98512. The Company hereby amends its Articles of
Incorporation pursuant to the provisions of Sections 607.1001 - 607.1006 of the
FBCA. The undersigned director does hereby certify individually and on behalf
of the Company as follows:
At the August 29, 1997 meeting of the board of directors of the
Company (the "Board"), the following amendments to Article III of the Articles
of Incorporation (the "Amendments") were proposed and recommended by the Board
for submission to the shareholders of the Company's Series C Preferred Stock
(the "Series C Shareholders," and the "Series C Shares," respectively). On
September 16, 1997, a special meeting of the Series C Shareholders (the
"Special Meeting"), was held to consider and vote upon the Amendments. All of
the outstanding Series C Shares were present by proxy and voted at the Special
Meeting. The Amendments were approved and adopted at the Special Meeting by a
vote of 86% of the Series C Shares cast in favor, and 14% of the Series C
Shares cast in opposition to the Amendments. The number of votes cast for the
Amendments by the Series C Shareholders was sufficient for approval of the
Amendments. Approval by the holders of the Company's Common Stock was not
required.
Set forth below is the text of each Amendment adopted at the Special
Meeting:
1. Section 5(a) of Article III shall be deleted in its entirety,
and in its place and stead shall be substituted the following:
"(a)Conversion Date. The Series C Shares shall be convertible
into shares of Common Stock of the Corporation at any time
subsequent to September 1, 1996 by action of the Board of
Directors of the Corporation."
2. The last sentence of Section 5(b) of Article III shall be
deleted and in its place and stead shall be substituted the
following:
(b)"...At the time of any such conversion, the Corporation
shall pay all cumulated but unpaid dividends on such shares of
the Series C Preferred Stock by issuance of additional shares
of such Preferred Stock which shall be valued at $127.50 per
share, which such shares shall therewith be converted into
Common Stock at the stated Conversion Rate."
<PAGE> 2
3. Section 5(d) of Article III shall be deleted in its entirety.
IN WITNESS WHEREOF, the Company has caused these Articles of Amendment
to the Articles of Incorporation to be executed this 17th day of September,
1997.
BIODYNAMICS INTERNATIONAL, INC.
Charles Dragone, Chairman of the Board
<PAGE> 1
EXHIBIT 3.8
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
BIODYNAMICS INTERNATIONAL, INC.
Pursuant to the provisions of Section 607.181 of the Florida General
Corporation Act, the undersigned corporation does hereby adopt these Articles
of Amendment to the Articles of Incorporation, and the undersigned officer does
hereby certify individually and on behalf of the undersigned corporation as
follows:
1. The name of the corporation is Biodynamics International, Inc.
(the "Company"). The Articles of Incorporation of this
Corporation were filed by the Department of State of the
State of Florida and became effective on December 6, 1991.
The document number of this Corporation is S98512.
2. A new Article VII to the Articles of Incorporation of this
Corporation shall be as follows:
ARTICLE VII
The 26,875,090 shares of common stock of the Corporation, par value $0.01 per
share, either issued and outstanding or held by the Corporation as treasury
stock, immediately prior to the time this amendment becomes effective shall be
and are automatically reclassified and changed (without any further act) into
2,687,509 fully-paid and non-assessable shares of common stock of the
Corporation, par value $0.01 per share (subject to adjustment due to rounding
of fractional shares), without increasing or decreasing the amount of stated
capital or paid-in surplus of the Corporation, provided that no fractional
shares shall be issued. The fractional share shall be rounded up to the next
whole number.
3. This Amendment was recommended by the Board of Directors of the
Corporation's shareholders on September 22, 1997.
4. On November 10, 1997, the holders of a majority of the
outstanding shares of Common Stock of the Corporation's
Articles of Incorporation at a special, duly called and
convened meeting of such shareholders. The number of votes
cast for the amendment by the shareholders was sufficient for
approval.
IN WITNESS WHEREOF, the Company has caused these Articles of Amendment to the
Articles of Incorporation to be executed this 10th day of November, 1997.
BIODYNAMICS INTERNATIONAL, INC.
By: _______________________________
Karl Meister, President
<PAGE> 1
EXHIBIT 10.1
CONVERTIBLE DEBENTURE LOAN AGREEMENT
BY AND BETWEEN
BIODYNAMICS INTERNATIONAL, INC.
AND ITS WHOLLY-OWNED SUBSIDIARIES:
BIODYNAMICS INTERNATIONAL (UNITED STATES), INC.
BIODYNAMICS INTERNATIONAL (DEUTSCHLAND), GMBH
BIODYNAMICS FOR PARTNERSHIPS, INC.
ALL AS CO-BORROWERS
AND
RENAISSANCE CAPITAL PARTNERS II, LTD.
AS LENDER
This Convertible Debenture Loan Agreement (the "Loan Agreement') is
entered into as of NOVEMBER 11, 1997, by and between BIODYNAMICS INTERNATIONAL,
INC. (a Florida corporation) and its Subsidiaries Biodynamics International
(United States), Inc., (a Florida corporation), Biodynamics International
(Deutschland), GmbH, (a German corporation), and Biodynamics For Partnerships,
Inc. (a Florida corporation), all as co-borrowers (collectively hereinafter
referred to as "BORROWER") and RENAISSANCE CAPITAL PARTNERS II, LTD. (a Texas
limited partnership), together with any assignees or successors in interest
(collectively referred to as 'LENDER').
WITNESSETH:
WHEREAS, Borrower is indebted to Lender pursuant to certain promissory
note dated September 15, 1997, in the original principal amount of TWO MILLION
THIRTY-FIVE THOUSAND NINE HUNDRED TWENTY-EIGHT and 32/100 DOLLARS
($2,035,928.32), with interest on the principal balance from time to time
remaining at the rate of twelve percent (12%) per annum, computed on the basis
of a 365-day year (the "Note");
WHEREAS, the Note Matures pursuant to its terms on December 31, 1997;
WHEREAS, Borrower has requested that Lender modify the terms of the
indebtedness represented by the Note to extend the maturity date, to reduce the
interest rate from 12% per annum to 9% per annum, and to convert the
indebtedness into a loan which is convertible into the common stock of the
Borrower as herein provided and Lender is willing to furnish such to Borrower
upon the terms and subject to the conditions and for the considerations
hereinafter set forth;
-1-
<PAGE> 2
NOW, THEREFORE, in consideration of the mutual promises herein
contained and for other valuable consideration, receipt and sufficiency of
which is acknowledged, the parties hereto agree as follows:
ARTICLE I - DEFINITION OF TERMS
SECTION 1.01 DEFINITIONS
For the purposes of this Loan Agreement, unless the context otherwise requires,
the following terms shall have the respective meanings assigned to them in this
Article I or in the section or recital referred to below:
"AFFILIATE" with respect to any Person shall mean (i) any person
directly or indirectly owning, controlling or holding power to vote 10% or more
of the outstanding voting securities of any Person; (ii) any person, 10% or
more of whose outstanding voting securities are directly or indirectly owned,
controlled or held with power to vote by any Person; (iii) any person directly
or indirectly controlling, controlled by or under common control with any
Person; (iv) any officer, director or partner of any Person; and (v) if a
Person is an officer, director or partner, any company for which any Person
acts in such capacity. For purposes of this Agreement, any partnership of
which any Person is a general partner, or any joint venture in which any Person
is a joint venturer, is an Affiliate of each Person.
"CAPITAL EXPENDITURE" shall mean an expenditure for assets that will
be used in years subsequent to the year in which the purchase is made and which
asset is properly classifiable in financial statements as equipment, real
property or improvements, or similar type of capitalized asset.
"CAPITAL LEASE" shall mean any lease of property, real or personal,
which is in substance a financing lease and which would be capitalized on a
balance sheet of the lessee, including without limitation, any lease under
which (i) such lessee will have an obligation to purchase the property for a
fixed sum; (ii) an option to purchase the property at an amount less than a
reasonable estimate of the fair market value of such property as of the date
such lease is executed; or (iii) the term of the lease approximates or exceeds
the expected useful life of the property leased thereunder.
"CONSOLIDATED SUBSIDIARIES" shall mean those corporations of which 50%
or more of the voting stock is owned by Borrower and their financial statements
are consolidated with those of the Borrower.
"CONVERSION" or "CONVERSION RIGHTS" shall mean exchange of, or the
rights to exchange, the Principal Amount of the loan, or any part thereof, for
Borrower's fully paid and non-assessable common stock on the terms and
conditions as provided in the Debenture.
"COMMON STOCK" shall mean Biodynamics International, Inc., common
stock, $0.01 par value.
"DEBENTURES" shall mean the Debentures executed by Borrower and
delivered pursuant to the terms of this Loan Agreement, together with any
renewals, extensions or modifications thereof
"DEBTOR LAWS" shall mean all applicable liquidation, conservatorship,
bankruptcy, moratorium, arrangement, receivership, insolvency, reorganization
or similar laws from time to time in effect affecting the rights of creditors
generally.
"DEFAULT" shall mean any of the events specified in Article VIII.
-2-
<PAGE> 3
"DIVIDENDS", in respect of any corporation, shall mean (i) cash
distributions or any other distributions on, or in respect of, any class of
capital stock of such corporation, except for distributions made solely in
shares of stock of the same class; and (ii) any and all funds, cash and other
payments made in respect of the redemption, repurchase or acquisition of such
stock, unless such stock shall be redeemed or acquired through the exchange of
such stock with stock of the same class.
"ERISA" shall mean the Employee Retirement Income Security Act, as
amended, together with all regulations issued pursuant thereto.
"GAAP" shall mean generally accepted accounting principles applied on
a consistent basis, set forth in the Opinions of the Accounting Principles
Board of the American Institute of Certified Public Accountants, or their
successors, which are applicable in the circumstances as of the date in
question. The requisite that such principles be applied on a consistent basis
shall mean that the accounting principles observed in a current period are
comparable in all material respects to those applied in a preceding period.
"GOVERNMENTAL AUTHORITY" shall mean any government (or any political
subdivision or jurisdiction thereof), court, bureau, agency or other
governmental authority having jurisdiction over Borrower or a Subsidiary or any
of its or their business, operations or properties.
"GUARANTY" of any Person shall mean any contract, agreement or
understanding of such Person pursuant to which such Person in effect guarantees
the payment of any Indebtedness of any other Person (the "Primary Obligor') in
any manner, whether directly or indirectly, including without limitation
agreements: (i) to purchase such Indebtedness or any property constituting
security therefor; (ii) to advance or supply funds primarily for the purpose of
assuring the holder of such Indebtedness of the ability of the Primary Obligor
to make payment; or (iii) otherwise to assure the holder of the Indebtedness of
the Primary Obligor against loss in respect thereof, except that "Guaranty"
shall not include the endorsement by Borrower or a Subsidiary in the ordinary
course of business of negotiable instruments or documents for deposit or
collection.
"HOLDER" shall mean the owner of Registerable Securities.
"INDEBTEDNESS" shall mean, with respect to any Person, the following
indebtedness, obligations and-liabilities of such Person: (i) all "liabilities"
that would be reflected on a balance sheet of such Person; (ii) all obligations
of such Person in respect of any Guaranty; (iii) all obligations of such Person
in respect of any Capital Lease, (iv) all obligations, indebtedness and
liabilities secured by any lien or any security interest on any property or
assets of such Person; and (v) all preferred stock of such Person which is
subject to a mandatory redemption requirement, valued at the greater of its
involuntary redemption price or liquidation preference plus accrued and unpaid
dividends.
"INVESTMENT" in any Person shall mean any investment, whether by means
of share purchase, loan, advance, extension of credit, capital contribution or
otherwise, in or to such Person, the Guaranty of any Indebtedness of such
Person, or the subordination of any claim against such Person to other
Indebtedness of such Person; provided however, that "Investment" shall not
include (i) any demand deposits in a duly chartered state or national bank or
other cash equivalent investments (ii) any loans permitted by Section 6.12, or
(iii) any acquisitions of equity in any other Person.
"IRS CODE" shall mean the Internal Revenue Code of 1986, as amended,
together with all regulations issued thereunder.
-3-
<PAGE> 4
"LIEN" shall mean any lien, mortgage, security interest, tax lien,
pledge, encumbrance, conditional sale or title retention arrangement, or any
other interest in property designed to secure the repayment of Indebtedness,
whether arising by agreement or under any statute or law, or otherwise.
"LOAN" shall mean the money lent to Borrower pursuant to this Loan
Agreement, along with any accrued interest thereon.
"LOAN CLOSING" or "LOAN CLOSING DATE" shall mean the initial
disbursement of Loan funds which shall occur on a date 30 days from the date
hereof or such earlier date on which Borrower requests, and Lender approves, as
the date at which the initial advance of the Loan funds shall be consummated,
provided that such date may be mutually extended beyond 30 days, but only by
written agreement of the parties hereto.
"LOAN DOCUMENTS" shall mean this Loan Agreement, the Debentures
(including any renewals, extensions and refundings thereof), and any other
agreements or documents (and with respect to this Loan Agreement, and such
other agreements and documents, any amendments or supplements thereto or
modifications thereof) executed or delivered pursuant to the terms of this Loan
Agreement.
"MATERIAL ADVERSE EFFECT" or "MATERIAL ADVERSE CHANGE" shall mean any
change, factor or event that shall (i) have a material adverse effect upon the
validity, performance or enforceability of any Loan Documents, (ii) have a
material adverse effect upon the financial condition or business operations of
Borrower or any Subsidiaries, (iii) have a material adverse effect upon the
ability of the Borrower to fulfill its obligations under the Loan Documents, or
(iv) any event that causes an Event of Default or which, with notice or lapse
of time or both, could become an Event of Default.
"OBLIGATION" shall mean: (i) all present and future indebtedness,
obligations and liabilities of Borrower to Lender arising pursuant to this Loan
Agreement, regardless of whether such indebtedness, obligations and liabilities
are direct indirect, fixed, contingent, joint, several or joint and several;
(ii) all present and future indebtedness, are direct, indirect, fixed,
contingent, joint, several, or joint and several obligations and liabilities of
Borrower to Lender arising pursuant to or represented by the Debentures and all
interest accruing thereon, and reasonable attorneys' fees incurred in the
enforcement or collection thereof; (iii) all present and future indebtedness,
obligations and liabilities of Borrower and any Subsidiary evidenced by or
arising pursuant to any of the Loan Documents; (iv) all costs incurred by
Lender, including but not limited to reasonable attorneys' fees and legal
expenses related to this transaction; and (v) all renewals, extensions and
modifications of the indebtedness referred to in the foregoing clauses, or any
part thereof
"PERMITTED LIENS" shall mean: (i) Liens (if any) granted to Lender to
secure the Obligation; (ii) pledges or deposits made to secure payment of
worker's compensation insurance (or to participate in any fund in connection
with worker's compensation insurance), unemployment insurance, pensions or
social security programs; (iii) Liens imposed by mandatory provisions of law
such as for landlord's, materialmen's, mechanics', warehousemen's and other
like Liens arising in the ordinary course of business, securing Indebtedness
whose payment is not yet due; (iv) Liens for taxes, assessments and
governmental charges or levies imposed upon a Person or upon such Person's
income or profits or property, if the same are not yet due and payable or if
the same are being contested in good faith and as to which adequate cash
reserves have been provided or if an extension is obtained with respect
thereto; (v) Liens arising from good faith deposits in connection with tenders,
leases, real estate bids or contracts (other than contracts involving the
borrowing of money), pledges or deposits to secure public or statutory
obligations and deposits to secure (or in lieu of) surety, stay, appeal or
customs bonds and deposits to secure the payment of taxes, assessments, customs
duties or other similar charges; (vi) encumbrances consisting of zoning
restrictions, easements, or other restrictions on the use of real property,
-4-
<PAGE> 5
provided that such items do not materially impair the use of such property for
the purposes intended, and none of which is violated by existing or proposed
structures or land use; (vii) mortgages, financing statements, equipment leases
or other encumbrances incurred in connection with the acquisition of property
or equipment or the replacement of existing property or equipment, provided
that such liens shall be limited to the property or equipment then being
acquired; and (viii) Liens arising from standard bank revolving working capital
financing secured by inventory, receivables, or general assets of the Borrower,
provided any such lien arose prior to the date of this Agreement.
"PERSON" shall include an individual, a corporation, a joint venture,
a general or limited partnership, a trust, an unincorporated organization or a
government or any agency or political subdivision thereof.
"PLAN" shall mean an employee benefit plan or other plan maintained by
Borrower for employees of Borrower and/or any Subsidiaries and covered by Title
IV of ERISA, or subject to the minimum funding standards under Section 412 of
the Internal Revenue Code of 1986, as amended.
"PRINCIPAL AMOUNT" shall mean, as of any time, the then aggregate
outstanding face amount of the Debentures after any conversions or redemptions
and after giving effect to any installment payments received by Lender.
"REGISTERABLE SECURITIES" shall mean (i) the Common Stock issued upon
Conversion of the Debentures, or (ii) any Common Stock issued upon Conversion
of the Debentures or exercise of any warrant, right or other security which is
issued with respect to the Common Stock referred to in clause (i) and (ii)
above by way of stock dividend; any other distribution with respect to or in
exchange for, or in replacement of Common Stock; stock split; or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganization; excluding in all cases, however, any Registerable Security that
is not a Restricted Security and any Registerable Securities sold or
transferred by a person in a transaction in which the rights under this Loan
Agreement are not assigned.
"REGISTERABLE SECURITIES THEN OUTSTANDING" shall mean an amount equal
to the number of Registerable Securities outstanding which have been issued
pursuant to the Conversion of the Debentures.
"RENTALS" of any Person shall mean, as of any date, the aggregate
amount of the obligations and liabilities (including future obligations and
liabilities not yet due and payable) of such Person to make payments under all
leases, subleases and similar arrangements for the use of real, personal or
mixed property, other than leases which are Capital Leases.
"RESTRICTED SECURITY" shall mean a security that has not been (i)
registered under the 1933 Act or (ii) distributed to the public pursuant to
Rule 144 (or any similar provisions that are in force) under the 1933 Act.
"SEC" shall mean the Securities and Exchange Commission.
"1933 ACT" shall refer to the Securities Act of 1933, as amended.
"1934 ACT" shall refer to the Securities Exchange Act of 1934, as
amended.
"SOLVENT" shall mean, with respect to any Person on a particular date,
that on such date: (i) the fair value of the property of such Person is greater
than the total amount of liabilities, including, without limitation, contingent
liabilities, of such Person; (ii) the present fair salable value, in the
ordinary course of business, of
-5-
<PAGE> 6
the assets of such Person is not less than the amount that will be required to
pay the probable liability of such Person on its debts as they become absolute
and matured; (iii) such Person is able to realize upon its assets and pay its
debts and other liabilities, contingent obligations and other commitments as
they mature in the normal course of business; (iv) such Person does not intend
to, and does not believe that it will, incur debts or liabilities beyond such
Person's ability to pay as such debts and liabilities mature; and (v) such
Person is not engaged in business or a transaction, and is not about to engage
in business or a transaction, for which such Person's property would constitute
unreasonably small capital after giving due consideration to the prevailing
practice in the industry in which such Person is engaged. In computing the
amount of contingent liabilities at any time, it is intended that such
liabilities will be computed at the amount which, in light of all the facts and
circumstances existing at such time, represents the amount that can reasonably
be expected to become an actual or matured liability.
"SUBORDINATED DEBT" shall mean any indebtedness of the Borrower or any
Subsidiaries, now existing or hereafter incurred, which indebtedness is, by its
terms, junior in right of repayment to the payment of the Debentures.
"SUBSIDIARY" shall mean any corporation whether now existing or
hereafter acquired of which fifty percent (50%) or more of the Voting Shares
are owned, directly or indirectly, by Borrower.
"VOTING SHARES" of any corporation shall mean shares of any class or
classes (however designated) having ordinary voting power for the election of
at least a majority of the members of the Board of Directors (or other
governing bodies) of such corporation, other than shares having such power only
by reason of the happening of a contingency.
SECTION 1.02 OTHER DEFINITION PROVISIONS
(a) All terms defined in this Loan Agreement shall have the
above-defined meanings when used in the Debentures or any other Loan Documents,
certificate, report or other document made or delivered pursuant to this Loan
Agreement, unless the context therein shall otherwise require.
(b) Defined terms used herein in the singular shall import the
plural and vice versa.
(c) The words "hereof," "herein," "hereunder" and similar terms
when used in this Loan Agreement shall refer to this Loan Agreement as a whole
and not to any particular provision of this Loan Agreement.
(d) References to financial statements and reports shall be deemed
to be a reference to such statements and reports prepared in accordance with
GAAP recognized as such by the American Institute of Certified Public
Accountants acting through its Accounting Principles Board or by the Financial
Accounting Standards Board which principles are consistently applied, on the
basis used by Borrower in prior years, for all periods after the date hereof so
as to property reflect the financial condition, and the results of operations
and statement of cash flows, of Borrower and its Consolidated Subsidiaries, if
any.
(e) Accounting terms not specifically defined above, or not
defined in the Loan Agreement, shall be construed in accordance with GAAP as
recognized as of this date by the American Institute of Certified Public
Accountants.
ARTICLE II - LOAN PROVISIONS
-6-
<PAGE> 7
SECTION 2.01 LOAN CLOSING
(a) Subject to the terms and conditions of this Loan Agreement,
and the compliance with such terms and conditions by all parties, Lender agrees
to an extension of the payment term on The Note including principal and
interest earned thereon until November 11, 1997, which amount equals the sum of
$2,074,081.06 and to reduce the interest provided for in the Note from 12% per
annum to 9% per annum effective November II, 1997.
(b) Such borrowing shall be evidenced by Borrower's duly executed
Debenture (in one or more counterparts) in the aggregate sum of the Principal
Amount advanced substantially in the form of Exhibit 2.01(b) attached hereto
and made a part hereof, with appropriate insertion of names, dates and amounts.
In the event of any differences in terms between the Loan Agreement and the
Debenture, the Debenture will be controlling; provided, however, that the
holder of the Debenture shall be entitled to all the rights and benefits of the
Lender provided in this Agreement.
(c) Unless otherwise mutually agreed, the Loan Closing shall be at
the offices of Renaissance Capital Group, Inc. in Dallas, Texas.
SECTION 2.02 USE OF PROCEEDS
Biodynamics International, Inc., Biodynamics International (United States),
Inc., Biodynamics International (Deutschland), GmbH, and Biodynamics For
Partnerships, Inc. all hereby acknowledge that the proceeds from the Loan shall
be used by each company individually for the growth of their respective
businesses by providing working capital and capital for acquisitions and the
repayment of debt.
SECTION 2.03 INTEREST RATE AND INTEREST PAYMENTS
Interest on the Principal Amount outstanding from time to time shall accrue at
the rate of 9.00% per annum, with the first installment payable on JANUARY 1,
1998 and subsequent payments at the first day of each month thereafter.
Overdue principal and interest on the Debentures shall bear interest, to the
extent permitted by applicable law, at a rate of 12.00% per annum. Interest on
the Principal Amount of each Debenture shall be calculated, from time to time,
on the basis of the actual days elapsed in a year consisting of 365 days.
SECTION 2.04 MATURITY
If not sooner redeemed or converted, the Debentures shall mature on NOVEMBER
11, 2002, at which time all the remaining unpaid principal, interest and any
other charges then due under the Debentures and the Loan Agreement shall be due
and payable in full.
SECTION 2.05 MANDATORY PRINCIPAL REDEMPTION INSTALLMENTS
Mandatory principal redemption installments on each Debenture shall be as
provided for in the Debentures.
SECTION 2.06 OPTIONAL REDEMPTION
Optional principal redemption on each Debenture shall be as provided for in the
Debentures.
SECTION 2.07 TAXES
(a) Payments by Borrower hereunder shall be made without deduction
for any present or future taxes, duties, charges or withholdings, (excluding,
in the case of the Lender, any foreign taxes, any federal,
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state or local income taxes and any franchise taxes or taxes imposed upon it by
the jurisdiction, or any political subdivision thereof, under which the Lender
is organized or is qualified to do business) and all liabilities with respect
thereto (herein "Taxes") shall be paid by Borrower. If Borrower shall be
required by law to deduct any Taxes for which Borrower is responsible under the
preceding sentence from any sum payable hereunder to any Lender: (i) the sum
payable shall be increased so that after making all required deductions, such
Lender receives an amount equal to the sum it would have received had no such
deductions been made; (ii) Borrower shall make such deductions; and (iii)
Borrower shall pay the full amount deducted to the relevant taxing authority or
other authority in accordance with applicable law.
(b) Except as otherwise set forth in this Loan Agreement or the
other Loan Documents, Borrower shall pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies which arise from any payment made hereunder or under the Loan Documents
or from the execution, delivery or registration of, or otherwise with respect
to, this Loan Agreement or the other Loan Documents (hereinafter referred to as
"Other Taxes").
(c) Borrower shall indemnify Lender for the full amount of Taxes
and Other Taxes reasonably paid by Lender or any liability (including any
penalties or interest assessed because of Borrower's defaults) arising
therefrom or with respect thereto, whether or not such Taxes or Other Taxes
were correctly or legally asserted. This indemnification shall be made within
thirty (30) days from the date Lender makes written demand therefor. Lender
shall subrogate any and all rights and claims relating to such Taxes and Other
Taxes to Borrower upon payment of said indemnification.
(d) Without prejudice to the survival of any other agreement of
Borrower hereunder, the agreements and obligations of Borrower in this Section
2.09 shall survive the payment in full of the Obligation.
SECTION 2.08 STOCK CONVERSION RIGHTS AND REGISTRATION RIGHTS AGREEMENT
(a) Each Debenture shall be exchangeable for shares of Borrower's
common stock on such terms and in such amounts as shall be stated in the
Debenture. The holders of the stock issued upon exercise of the right of
conversion as provided in said Debenture shall be entitled to all the rights of
the Lender as stated in this Loan Agreement or the other Loan Documents to the
extent such rights are specifically stated to survive the surrender of the
Debenture for conversion as therein provided.
(b) The holder of shares of common stock of Borrower issued upon
conversion shall be entitled to the rights as provided in Article IX of this
Loan Agreement.
SECTION 2.09 COLLATERAL SECURITY AGREEMENTS AND STOCK PLEDGE AGREEMENTS
The due and prompt performance of the obligations of Borrower to Lender under
the Loan Agreement and the Debentures shall be secured by all of the assets of
the Borrowers and such collateral shall be evidenced by the Security Agreements
previously executed on June 13, 1997 by and between the Lender and Borrowers
and previously amended on September 12, 1997, and as may be amended hereafter
from time to time, the Stock Pledge Agreements previously executed on June 13,
1997, by Borrowers, as previously amended on September 12, 1997, and as amended
hereafter from time to time, and any all UCC- I Financing Statements previously
executed by Borrowers, together with any amended UCC Financing Statements
required to be filed by Lender.
ARTICLE III - CONDITIONS PRECEDENT
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SECTION 3.01 DOCUMENT REQUIREMENTS
(a) The obligations of Lender hereunder are subject to the
condition precedent that, on or before the closing date, Lender shall have
received the following in form and substance satisfactory to Lender:
(i) One or more duly executed Debentures aggregating the
Principal Amount of Loan funds then advanced, each in amounts as
requested by Lender, in the form of Exhibit 2.01(b) with appropriate
insertions of date, amount and conversion features.
(ii) This Section Intentionally Left Blank.
(iii) A true and correct certificate signed by a duly
authorized officer of the Borrower and dated as of the Loan Closing
Date stating that, to the best knowledge and belief of such officer,
after reasonable and due investigation and review of matters pertinent
to the subject matter of such certificate: (A) all of the
representations and warranties contained in Article IV hereof and the
other Loan Documents are true and correct as of the Loan Closing Date
and (B) no event has occurred and is continuing, or would result from
the Loan, which constitutes a Default or an Event of Default.
(iv) Such other information and documents as may
reasonably be required by Lender and Lender's counsel to substantiate
Borrower's compliance with the requirements of this Loan Agreement.
ARTICLE IV - REPRESENTATIONS AND WARRANTIES
To induce Lender to make the Loan hereunder, Borrower represents and
warrants to Lender that:
SECTION 4.01 ORGANIZATION AND GOOD STANDING
Borrower is duly organized and existing in good standing under the laws of the
state or country of its incorporation, is duly qualified as a foreign
corporation and in good standing in all states in which failure to qualify
would have a Material Adverse Effect, and has the corporate power and authority
to own its properties and assets and to transact the business in which it is
engaged and is or will be qualified in those states wherein it proposes to
transact material business operations in the future.
SECTION 4.02 AUTHORIZATION AND POWER
Borrower has the corporate power and requisite authority to execute, deliver
and perform the Loan Documents to be executed by Borrower. The Borrower is
duly authorized to, and has taken all corporate action necessary to authorize,
execute, deliver and perform the Loan Documents executed by Borrower. The
Borrower is and will continue to be duly authorized to perform the Loan
Documents executed by Borrower.
SECTION 4.03 NO CONFLICTS OR CONSENTS
To the best of Borrower's knowledge and belief, after prudent investigation,
neither the execution and delivery of the Loan Documents, nor the consummation
of any of the transactions therein contemplated, nor compliance with the terms
and provisions thereof, will contravene or materially conflict with any
judgment, license, order or permit applicable to Borrower, or any indenture,
loan agreement, mortgage, deed of trust, or other agreement or instrument to
which Borrower is a party or by which Borrower is or becomes bound, or to which
Borrower is or becomes subject, or violate any provision of the charter or
bylaws of Borrower. No consent, approval, authorization or order of any court
or governmental authority or third party is required in connection with the
execution and delivery by Borrower of the Loan Documents; or to consummate the
transactions contemplated hereby or thereby except those that have been
obtained.
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SECTION 4.04 ENFORCEABLE OBLIGATIONS
The Loan Documents have been duly executed and delivered by the Borrower and
are the legal and binding obligations of the Borrower, enforceable in
accordance with their respective terms, except as limited by any applicable
bankruptcy, insolvency or similar laws now or hereafter in effect affecting
creditors rights and debtor's obligations.
SECTION 4.05 NO LIENS
Except for Permitted Liens, all of the properties and assets owned by the
Borrower are free and clear of all Liens and other adverse claims of any
nature, and Borrower has good and marketable title to such properties and
assets. A true and complete list of all liens for borrowed money is disclosed
to Lender pursuant to Exhibit 4.05.
SECTION 4.06 FINANCIAL CONDITION
Borrower has delivered to Lender copies of the balance sheet of Borrower as of
September 30, 1996, and the related statements of income, stockholders' equity
and statement of cash flow for the year ended audited by its independent
Certified Public Accountant. Borrower has also delivered to Lender copies of
the balance sheet of Borrower as of September 30, 1997 and the related
statements of income, stockholders' equity and statement of cash flow for the
period ended such date, which financial statements have not been certified by
its independent Certified Public Accountant. Such financial statements are
true and correct in all material respects, fairly represent the financial
condition of Borrower as of such dates and have been prepared in accordance
with GAAP (except unaudited financial statements omit certain footnotes); and
as of the date hereof, there are no obligations, liabilities or Indebtedness
(including contingent and indirect liabilities and obligations) of Borrower
which are (separately or in the aggregate) material and are not reflected in
such financial statements or otherwise disclosed herein. Since the date of the
above referenced year end financial statements and quarterly financial
statements, there have not been, except as disclosed in Exhibit 4.06 and that
certain Information Statement for Special Meeting of Shareholders dated October
20, 1997 (the "Information Statement"): (i) any Material Adverse Change in the
financial condition, results of operations, business, prospects, assets or
liabilities (contingent or otherwise, whether due or to become due, known or
unknown), of the Borrower; (ii) any dividend declared or paid or distribution
made on the capital stock of the Borrower or any capital stock thereof redeemed
or repurchased; (iii) any incurrence of long-term debt by the Borrower; (iv)
any salary, bonus or compensation increases to any officers, key employees or
agents of the Borrower or; (v) any other transaction entered into by the
Borrower except in the ordinary course of business and consistent with past
practice.
SECTION 4.07 FULL DISCLOSURE
To the best of Borrower's knowledge and belief after current investigation,
there is no material fact that Borrower has not disclosed to Lender which could
reasonably be expected to have a Material Adverse Effect on the properties,
business, prospects or condition (financial or otherwise) of Borrower. Neither
the financial statements referenced in Section 4.06 hereof, nor any business
plan, offering memorandum or prospectus, certificate or statement delivered
herewith or heretofore by Borrower to Lender in connection with the negotiations
of this Loan Agreement, contained any untrue statement of a material fact or
omitted to state any material fact necessary to keep the statements contained
herein or therein from being misleading.
SECTION 4.08 NO DEFAULT
No event has occurred and is continuing which constitutes a Default or an Event
of Default under this Loan Agreement.
SECTION 4.09 MATERIAL AGREEMENTS
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To the best of Borrower's knowledge and belief after prudent investigation, the
Borrower is not in default in any material respect under any contract, lease,
loan agreement, indenture, mortgage, security agreement or other material
agreement or obligation to which it is a party or by which any of its
properties is bound.
SECTION 4.10 NO LITIGATION
There are no actions, suits, investigations, arbitrations or administrative
proceedings pending, or to the knowledge of Borrower threatened, against
Borrower, and there has been no change in the status of any of the actions,
suits, investigations, litigation or proceedings disclosed to Lender which
could have a materially adverse effect on Borrower Ir on any transactions
contemplated by any Loan Document.
SECTION 4.11 BURDENSOME CONTRACTS
To the best knowledge of the Borrower, it is not a party to, or bound by, any
contract or agreement, the faithful performance of which is so onerous so as to
create or to likely create a Material Adverse Effect on the business,
operations or financial condition of the Borrower.
SECTION 4.12 TAXES
All tax returns required to be filed by Borrower in any jurisdiction have been
filed and all taxes (including mortgage recording taxes), assessments, fees and
other governmental charges upon Borrower or upon any of its properties, income
or franchises have been paid. To the best knowledge of Borrower, there is no
proposed tax assessment against Borrower and there is no basis for such
assessment.
SECTION 4.13 PRINCIPAL OFFICE, ETC.
(a) The principal office and principal place of business of the
Borrower and each of its Subsidiaries is as follows:
Biodynamics International, Inc.
1719 Route 10, Suite 314
Parsippany, NJ 07054
SECTION 4.14 EMPLOYEE BENEFIT AND INCENTIVE PLANS; ERISA
(a) Borrower is not obligated under any Plans.
(b) Borrower is not a party to any collective bargaining agreement
and is not aware of any activities of any labor union that is currently seeking
to represent or organize its employees. Borrower has not experienced any labor
problems, including work stoppages, disputes or slowdowns with respect to its
employees.
SECTION 4.15 COMPLIANCE WITH LAW
To the best of Borrower's knowledge and belief after prudent investigation,
Borrower is in compliance with all laws, rules, regulations, orders and decrees
which are applicable to Borrower or its properties by reason of any
Governmental Authority which are material to the conduct of the business of
Borrower or any of its properties.
SECTION 4.16 COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS
To the best knowledge of Borrower, all properties of Borrower are in compliance
with all federal, state or local environmental protection laws, statutes and
regulations which are material to the conduct of the business of Borrower, or
its properties, and the Borrower is currently in compliance with all material
reporting
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<PAGE> 12
requirements, rules, and regulations which are applicable to Borrower
or its properties by reason of such governmental environmental protective
agencies.
SECTION 4.17 SCHEDULE OF CAPITAL STOCK AND SEC REQUIREMENTS
(a) Set forth on Exhibit 4.17, Schedule of Capital Stock, is a
true and correct schedule of all classes of authorized, issued, and outstanding
Capital Stock of the Borrower, all stock options, warrants, conversion rights,
subscription rights and other rights or agreements to acquire securities of
Borrower and any shares held in treasury or reserved for issue upon exercise of
such stock options, warrants or conversion rights, subscription rights and
other rights or agreements to acquire securities including date of termination
of such right and the consideration therefor.
(b) Except as provided in Exhibit 4.17, Schedule of Capital Stock,
to the best of the Borrower's ledge, all securities of Borrower have been
issued in compliance with the requirements of the 1933 Act, and the Zoe's and
regulation promulgated thereunder, or pursuant to an exemption therefrom.
(c) The shares of common stock of the Borrower when issued to
Lender upon conversion of the Debentures will be duly and validly issued, fully
paid and non-assessable and in compliance with all applicable securities laws.
Such issuance will not give rise to preemptive rights or similar rights by any
other security holder of Borrower. Borrower shall at all times reserve and
keep available sufficient authorized and unissued shares of common stock to
effectuate the conversion of the Debentures.
SECTION 4.18 INSIDER
(a) Except as set forth in filings made by Borrower to the
Securities Exchange Commission, neither the Borrower, nor any Person having
"control" (as that term is defined in the Investment Company Act of 1940, as
amended, or in regulations promulgated pursuant thereto (herein the "1940
Act")) of the Borrower is, an "executive officer," "director," or "principal
shareholder" (as those terms are defined in the 1940 Act) of Lender.
(b) Except as set forth in the Borrower's Form 10-K and 10-Q
reports, there are no transactions between the Borrower and any affiliates of
Borrower.
SECTION 4.19 SUBSIDIARIES
(a) As of the date hereof, the Borrower has the following
Subsidiaries: Biodynamics International (United States), Inc., Biodynamics
International (Deutschland), GmbH, and Biodynamics For Partnerships, Inc.
(b) Except as disclosed in the Financial Statements and except for
Subsidiaries, the Borrower does not own any equity or debt interest or any form
of proprietary interest in any entity, or any right or option to acquire any
such interest in any such entity.
SECTION 4.20 CASUALTIES
Neither the business nor the properties of Borrower is currently affected by
any environmental hazard, fire, explosion, accident, strike, lockout or other
labor dispute, drought, storm, hail, earthquake, embargo, act of God or other
casualty (whether or not covered by insurance), which could have a Material
Adverse Effect.
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SECTION 4.21 INVESTMENT COMPANY ACT
Borrower is not an "investment company" as defined in Section 3 of the 1940 Act
nor a company that would be an investment company except for the exclusions
from the definition of an investment company in Section 3(C) of the 1940 Act,
and Borrower is not controlled by such a company.
SECTION 4.22 SUFFICIENCY OF CAPITAL
Borrower is, and after consummation of this Loan Agreement and giving effect to
all Indebtedness incurred and transactions contemplated in connection herewith
will be, Solvent.
SECTION 4.23
[This Section 4.23 intentionally left blank.]
SECTION 4.24 MARGIN REGULATION
As of the Loan Closing Date, the Borrower does not have class of securities
with respect to which a member of a national securities exchange, broker, or
dealer may extend or maintain credit to or for a customer pursuant to rules or
regulation adopted by the Board of Governors of the Federal Reserve System
under Section 7 of the 1934 Act.
SECTION 4.25 INSURANCE
All f the insurable properties of the Borrower are insured for its benefit
under valid and enforceable policies, issued X insurers of recognized
responsibility in amounts and against such risks and losses as is customary in
such industry.
SECTION 4.26 PATENTS, TRADEMARKS AND COPYRIGHTS
To the best of Borrower's knowledge and belief after current investigation,
Borrower owns all patents, trademarks and copyrights, if any, necessary to
conduct its business or possesses licenses or other rights, if any, therefor.
All intangible property rights are listed in Exhibit 4.26, Schedule of Patents,
Trademarks and Copyrights. Borrower has the right to use such proprietary
rights without infringing or violating the rights of any third parties. No
claim has been asserted by any person to the ownership of or right to use any
such proprietary right or challenging or questioning the validity or
effectiveness of any such license or agreement. Each of the proprietary rights
is valid and subsisting, and has not been canceled, abandoned or otherwise
terminated.
SECTION 4.27 SURVIVAL OF REPRESENTATIONS AND WARRANTIES
All representations and warranties by Borrower herein shall survive the Loan
Closing and any subsequent Loan Closings and the delivery of the Debentures, and
any investigation at any time made by or on behalf of Lender shall not diminish
Lender's right to rely on Borrower's' representations and warranties as herein
set forth.
ARTICLE V - AFFIRMATIVE COVENANTS
So long as any part of the Debentures remains unpaid or has not been
redeemed or converted hereunder, and until such payment, redemption or
conversion in full, unless the Lender shall otherwise consent in writing, which
consent shall not be unreasonably withheld, Borrower agrees that:
SECTION 5.01 FINANCIAL STATEMENTS, REPORTS AND DOCUMENTS
(a) The Borrower shall accurately and fairly maintain its books of
account in accordance with GAAP, employ a firm of independent certified public
accountants, which firm is one of the six largest national
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accounting firms or which is approved by the Lender, to make annual audits of
its accounts in accordance with generally accepted auditing standards; permit
the Lender and its representatives to have access to and to examine its
properties, books and records (and to copy and make extracts therefrom) at such
reasonable times and intervals as the Lender may request; and to discuss its
affairs, finances and accounts with its officers and auditors, all to such
reasonable extent and at such reasonable times and intervals as the Lender may
request.
(b) The Borrower shall provide the following reports and
information to the Lender and/or the Lender's designee:
(i) As soon as available, and in any event within
forty-five (45) days after the close of each quarter, the Company's
report on Form 10-Q with exhibits for said period. In addition, the
Lender may at its sole discretion request internal monthly reports for
specific periods.
(ii) As soon as available, and in any event within ninety
(90) days after the close of each year, the Company's report on Form
10-K with exhibits for said period.
(iii) Each quarter, concurrent with the periodic report
required above, a certificate executed by the Chief Financial Officer
or Chief Executive Officer of the Borrower, (A) stating that a review
of the activities of the Borrower during such fiscal period has been
made under his supervision and that the Borrower has observed,
performed and fulfilled each and every obligation and covenant
contained herein and is not in default under any of the same or, if
any such default shall have occurred, specifying the nature and status
thereof, and (B) setting forth a computation in reasonable detail as
of the end of the period covered by such statements, of compliance
with the Agreed Minimum Financial Standards in Exhibit 7.01 as
provided therein.
(iv) So long as any Debenture remains outstanding,
promptly (but in any event within five (5) business days) upon
learning of the occurrence of a Default or an Event of Default deliver
a certificate signed by the Chief Executive Officer or Chief Financial
Officer of the Borrower describing such Default, Event of Default and
stating what steps are being taken to remedy or cure the same.
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(v) Promptly (but in any event within five (5) business
days) upon the receipt thereof by the Borrower or the Board of
Directors of the Borrower, copies of all reports, all management
letters and other detailed information submitted to the Borrower or
the Board by independent accountants in connection with each annual or
interim audit or review of the accounts or affairs of the Borrower
made by such accountants.
(vi) With reasonable promptness, such other information
relating to the finances, properties, business and affairs of the
Borrower and each Subsidiary, as Lender may reasonably request from
time to time.
(vii) Promptly upon its becoming available, one copy of
each financial statement, report, press release, notice or proxy
statement sent by Borrower to stockholders generally and of each
regular or periodic report, registration statement or prospectus filed
by Borrower with any securities exchange or the SEC or any successor
agency, and of any order issued by any Governmental Authority in any
proceeding to which the Borrower is a party.
SECTION 5.02 PREPARATION OF A BUDGET
At least thirty (30) days prior to the beginning of Borrower's fiscal year,
Borrower agrees to prepare and submit to the Board, and furnish to the Lender a
copy of, an annual plan for such year which shall include, without limitation,
plans for expansion, if any, plans for incurrences of Indebtedness and
projections regarding other sources of funds, quarterly projected capital and
operating expense budgets, cash flow statements, profit and loss statements and
balance sheet projections, itemized in such detail as the Board and/or the
Lender may request.
SECTION 5.03 OPERATION REVIEW
Borrower agrees that it will review its operations with Lender. Such
operations reviews will be in such depth and detail as. Lender shall reasonably
request. Operations reviews, which usually will require a day or less to
complete, will be held as reasonably necessary, generally once a fiscal
quarter.
SECTION 5.04 PAYMENT OF TAXES AND OTHER INDEBTEDNESS
Borrower shall, and shall cause its Subsidiaries, if any, to pay and discharge
(i) all taxes, assessments and governmental charges or levies imposed upon it
or upon its income or profits, or upon any property belonging to it, before
delinquent; (ii) all lawful claims (including claims for labor, materials and
supplies), which, if unpaid, might give rise to a Lien upon any of its
property; and (iii) all of its other Indebtedness, except as prohibited
hereunder; provided, however, that Borrower and its Subsidiaries, if any, shall
not be required to pay any such tax, assessment, charge or levy if and so long
as the amount, applicability or validity thereof shall currently be contested
in good faith by appropriate proceedings and appropriate accruals and reserves
therefor have been established in accordance with GAAP.
SECTION 5.05 MAINTENANCE OF EXISTENCE AND RIGHTS; CONDUCT OF BUSINESS
Borrower shall, and shall cause its Subsidiaries, if any, to preserve and
maintain its corporate existence and all of its rights, privileges and
franchises necessary or desirable in the normal conduct of its business, and
conduct its business in an orderly and efficient manner consistent with good
business practices and in accordance with all valid regulations and orders of
any Governmental Authority. Borrower shall keep its principal place of
business within the United States.
SECTION 5.06 SEC FILING AND MAINTENANCE OF SEC REPORTING REQUIREMENTS
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So long as Borrower has a class of securities registered pursuant to Section 12
of the 1934 Act, Borrower shall duly file, when due, all reports and statements
required of a company whose securities are registered for public trading under
and pursuant to the 1934 Act, as amended, and any rules and regulations issued
thereunder, and to preserve and maintain its registration thereunder and all of
the rights of its security holders normally associated with a publicly traded
stock company.
SECTION 5.07 NOTICE OF DEFAULT
Borrower shall furnish to Lender, immediately upon becoming aware of the
existence of any condition or event which constitutes a Default or would with
the passage of time become a Default or an Event of Default, written notice
specifying the nature and period of existence thereof and the action which
Borrower is taking or proposes to take with respect thereto.
SECTION 5.08 OTHER NOTICES
Borrower shall promptly notify Lender of (i) any Material Adverse Change in its
financial condition or its business; (ii) any default under any material
agreement, contract or other instrument to which it is a party or by which any
of its properties are bound, or any acceleration of the maturity of any
Indebtedness owing by Borrower or its Subsidiaries, if any; (iii) any material
adverse claim against or affecting Borrower or its Subsidiaries, if any, or any
of its properties; and (iv) the commencement of, and any material determination
in, any litigation with any third party or any proceeding before any
Governmental Authority, the negative result of which has a Material Adverse
Effect on Borrower and its Subsidiaries, taken as a whole.
SECTION 5.09 COMPLIANCE WITH LOAN DOCUMENTS
Borrower shall, and shall cause each of its Subsidiaries, if any, to promptly
comply with any and all covenants and provisions of the Loan Documents.
SECTION 5.10 COMPLIANCE WITH MATERIAL AGREEMENTS
Borrower shall, and shall cause each of its Subsidiaries, if any to comply in
all material respects with all material agreements, indentures, mortgages or
documents binding on it or affecting its properties or business.
SECTION 5.11 OPERATIONS AND PROPERTIES
Borrower shall, and shall cause each of its Subsidiaries, if any, to act
prudently and in accordance with customary industry standards in managing or
operating its assets, properties, business and investments. Borrower shall,
and shall cause each of its Subsidiaries, if any, to keep in good working order
and condition, ordinary wear and tear excepted, all of its assets and
properties which are necessary to the conduct of its business.
SECTION 5.12 BOOKS AND RECORDS: ACCESS
Borrower shall, and shall cause each of its Subsidiaries, if any, to, maintain
complete and accurate books and records of its transactions in accordance with
good accounting practices. Borrower shall give each duly authorized
representative of Lender access during all normal business hours and shall
permit such representative to examine, copy or make excerpts from, any and all
books, records and documents in the possession of Borrower and its Subsidiaries
and relating to its affairs, and to inspect any of the properties of Borrower
and its Subsidiaries, if any. Borrower shall make a copy of this Loan
Agreement, along with any waivers, consents, modifications or amendments,
available for review at its principal office by Lender or Lender's
representatives.
SECTION 5.13 COMPLIANCE WITH LAW
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<PAGE> 17
Borrower shall, and shall cause each of its Subsidiaries, if any, to comply
with all applicable laws, rules, regulations, and all orders of any
Governmental Authority applicable to it or any of its property, business
operations or transactions, a breach of which could reasonably be expected to
have a Material Adverse Effect.
SECTION 5.14 INSURANCE
Borrower shall, and shall cause each of its Subsidiaries, if any, to maintain
such worker's compensation insurance, liability insurance and insurance on its
properties, assets and business, now owned or hereafter acquired, against such
casualties, risks and contingencies, and in such types and amounts, as are
consistent with customary practices and standards of companies engaged in
similar businesses.
SECTION 5.15 AUTHORIZATIONS AND APPROVALS
Borrower shall, and shall cause each of its Subsidiaries, if any, to promptly
obtain, from time to time at its own expense, all such governmental licenses,
authorizations, consents, permits and approvals as may be required to enable it
to comply with its obligations hereunder and under the other Loan Documents.
SECTION 5.16 ERISA COMPLIANCE
Borrower shall (i) at all times, make prompt payment of all contributions
required under all Plans, if any, and required o meet the minimum funding
standards set forth in ERISA with respect to its Plans subject to ERISA, if
any; (ii) notify Lender immediately of any fact in connection with any of its
Plans, which might constitute grounds for termination. thereof or for the
appointment by the appropriate United States District Court of a trustee to
administer such Plan, together with a statement, if requested by Lender as to
the reason therefor and the action, if any, proposed to be taken with respect
thereto; and (iii) furnish to Lender upon its request such additional
information concerning any of its Plans as may be reasonably requested.
SECTION 5.17 FURTHER ASSURANCES
Borrower shall, and shall cause each of its Subsidiaries, if any, to, make,
execute or endorse, and acknowledge and deliver or file or cause the same to be
done, all such notices, certifications and additional agreements, undertakings,
transfers, assignments, or other assurances, and take any and all such other
action, as Lender may, from time to time, deem reasonably necessary or proper
in connection with any of the Loan Documents, or the obligations of Borrower or
its Subsidiaries, if any, thereunder, which Lender may request from time to
time.
SECTION 5.18 INDEMNITY BY BORROWER
Borrower shall indemnify, save, and hold harmless, Lender and its directors,
officers, agents, attorneys, and employees (collectively, the "indemnitees")
from and against: (i) any and all claims, demands, actions or causes of action
that are asserted against any indemnitee if the claim, demand, action or cause
of action directly or indirectly relates to the Loan Agreement and the other
Loan Documents issued pursuant thereto, the use of proceeds of the Loans, or
the relationship of Borrower and Lender under this Loan Agreement or any
transaction contemplated pursuant to this Loan Agreement; (ii) any
administrative or investigative proceeding by any Governmental Authority
directly or indirectly related to a claim, demand, action or cause of action
described in clause (i) above; and (iii) any and all liabilities, losses,
costs, or expenses (including reasonable attorneys' fees and disbursements)
that any indemnitee suffers or incurs as a result of any of the foregoing;
provided, however, that Borrower shall have no obligation under this Section
5.18 to Lender with respect to any of the foregoing arising out of the
negligence or willful misconduct of Lender or its assignees or the breach by
the Lender or its assignees of this Loan Agreement or any other Loan Document
or other document executed in connection with any of the aforesaid, the breach
by Lender or its assignees of any agreement or commitment with other parties,
the violation or alleged violation of any law, rule or regulation by Lender or
its assignees, or from the transfer or disposition by Lender of any Debenture
or the Common Stock issued upon conversion.
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If any claim, demand, action or cause of action is asserted against any
indemnitee, such indemnitee shall promptly notify Borrower, but the failure to
so promptly notify Borrower shall not affect Borrower's obligations under this
Section unless such failure materially prejudices Borrower's right to
participate in the contest of such claim, demand, action or cause of action, as
hereinafter provided. In the event that such indemnitee's failure to properly
notify the Borrower materially prejudices Borrower's right to participate in
the contest of such claim, demand, action, or cause of action, then said
indemnitees shall have no right to receive, and Borrower shall have no
obligation to pay, any indemnification amounts hereunder. Borrower may elect
to defend any such claim, demand, action or cause of action (at its own
expense) asserted against said indemnitee and, if requested by Borrower in
writing and so long as no Default or Event of Default shall have occurred and
be continuing, such indemnitee (at Borrower's expense) shall in good faith
contest the validity, applicability and amount of such claim, demand, action or
cause of action and shall permit Borrower to participate in such contest. Any
indemnitee that proposes to settle or compromise any claim or proceeding for
which Borrower may be liable for payment to or on behalf of an indemnitee
hereunder shall give Borrower written notice of the terms of such proposed
settlement or compromise reasonably in advance of settling or compromising such
claim or proceeding and shall obtain Borrower's written concurrence thereto.
In the event that said indemnitee fails to obtain Borrower's prior written
consent to any such settlement or compromise, said indemnitee shall have no
right to receive and Borrower shall have no obligation to pay any
indemnification amounts hereunder. Each indemnitee may employ counsel in
enforcing its rights hereunder and in defending against any claim, demand,
action, or cause of action covered by this Section 5.18; provided, however,
that each indemnitee shall endeavor, but shall not be obligated, in connection
with any matter covered by this Section which also involves other indemnitees,
to use reasonable efforts to avoid unnecessary duplication of effort by counsel
for all indemnitees, including by allowing Borrower to select one lawyer for
all parties, such selection to be subject to the approval of such parties,
which approval shall not be unreasonably withheld. Any ligation or liability
of Borrower to any indemnitee under this Section 5.18 shall survive the
expiration or termination rf this Loan Agreement and the repayment of the
Debentures.
ARTICLE VI - NEGATIVE COVENANTS
So long as any part of the Debentures have not been redeemed or
converted hereunder, and until such redemption or conversion in full, unless
the Lender shall otherwise consent in writing, which consent shall not be
unreasonably withheld, Borrower agrees that, unless permitted otherwise:
SECTION 6.01 LIMITATION ON INDEBTEDNESS
Borrower and its Subsidiaries shall not incur, create, contract, waive, assume,
have outstanding, guarantee or otherwise be or become, directly or indirectly,
liable in respect of any Indebtedness, except:
(a) Indebtedness arising out of this Loan Agreement or otherwise
contemplated herein;
(b) Indebtedness secured by the Permitted Liens;
(c) Current liabilities for accounts payable or obligations
accrued (other than for borrowed funds or purchase money obligations) and
incurred in the ordinary course of business, and for taxes and assessments; or
(d) Indebtedness as listed on Exhibit 4.05.
SECTION 6.02 NEGATIVE PLEDGE
Borrower shall note and shall not permit its Subsidiaries, if any, to, create,
incur, permit or suffer to exist any Lien upon any of its property or assets
other than Permitted Liens, or payments upon any Subordinated Debt
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other than regularly scheduled installments of principal and interest and shall
not directly or indirectly make any payment of any Subordinated Debt which
would violate the terms of the Loan Agreement or of such Subordinated Debt or
any subordination agreement applicable to such Subordinated Debt.
SECTION 6.03 LIMITATION ON INVESTMENTS
Borrower shall not, and shall not permit its Subsidiaries, if any, to make or
have outstanding any Investments in any Person, except for Borrower's (and any
Subsidiary's) ownership of stock of Subsidiaries, loans and other transactions
between the Borrower and any Subsidiaries, short term bank deposits or money
market investments, and such other "cash equivalent" investments as Lender may
from time to time approve.
SECTION 6.04 ALTERATION OF MATERIAL AGREEMENTS
Borrower shall not, and shall not permit its Subsidiaries, if any, to, consent
to or permit any alteration, amendment, modification, release, waiver or
termination of any material agreement to which it is a party other than in the
ordinary course of business.
SECTION 6.05 CERTAIN TRANSACTIONS
Except as permitted by Section 6.12, Borrower shall not, and shall not permit
its Subsidiaries, if any, to, enter into any transaction with, or pay any
management fees to, any Affiliate; provided, however, that Borrower and any
Subsidiary may enter into transactions with Affiliates upon terms not less
favorable to Borrower and any Subsidiary than would be obtainable at the time
in comparable transactions of Borrower and any Subsidiaries in arms-length
dealings with Persons other than Affiliates.
SECTION 6.06
[This section 6.06 intentionally left blank.]
SECTION 6.07 LIMITATION ON SALE OF PROPERTIES
Borrower shall note and shall not permit its Subsidiaries, if any, to (i) sell,
assign, convey, exchange, lease or otherwise dispose of any of its properties,
rights, assets or business, whether now owned or hereafter acquired, except in
the ordinary course of its business and for a fair consideration; or (ii) sell,
assign or discount any accounts receivable except for the ordinary course of
business or to secure bank or commercial working capital loans in the ordinary
course of business.
SECTION 6.08 FISCAL YEAR AND ACCOUNTING METHOD
Borrower shall not, and shall not permit its Subsidiaries, if any, to change
its method of accounting except as permitted by GAAP.
SECTION 6.09 LIQUIDATION AND DISPOSITIONS OF SUBSTANTIAL ASSETS
Borrower shall not permit its Subsidiaries to (i) dissolve or liquidate; (ii)
sell, transfer, lease or otherwise dispose of all or any substantial part of
its property or assets or business; or (iii) enter into any other transaction
that has a similar effect.
SECTION 6.10 NO AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS
Borrower shall not, and shall not permit its Subsidiaries, if any, to
materially amend its Articles of Incorporation or bylaws except as is necessary
to fulfill the conditions of this Loan Agreement.
SECTION 6.11 LIMITATION ON INCREASED EXECUTIVE COMPENSATION AND BONUS.
PROFIT SHARING OR OTHER INCENTIVE PAYMENTS
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(a) Borrower will not increase the salary, bonus, or other
compensation programs (whether in cash, securities, or other property, and
whether payment is deferred or current) of its top five executive officers
unless such compensation increase is approved by a majority of the Board or a
Compensation Committee of the Board of Directors, a majority of whom shall
non-employee Directors.
(b) Borrower shall not pay any Bonus, Profit Sharing or Other
Incentive Payments until such plans are formally adopted by the majority of the
Board or a Compensation Committee of the Board of Directors, a majority of
which shall be non-employee Directors.
SECTION 6.12 RESTRICTED PAYMENTS
So long as any Debentures are outstanding, Borrower shall not declare or pay
any dividend (other than stock dividends) (i) on any Common Stock, or purchase,
redeem, decrease, or otherwise acquire any shares of Common Stock, or (ii) on
any Preferred Stock issued after the date hereof if such dividend or purchase
in the aggregate exceeds 1.25 times the cumulative earnings of the Borrower for
the previous twelve months.
ARTICLE VII - COVENANTS OF MAINTENANCE OF FINANCIAL STANDARDS
SECTION 7.01 FINANCIAL RATIOS
So long as any part of the Debentures has not been redeemed or converted
hereunder, and until such redemption or conversion in full, or unless the
Lender (or if any portion of the Debentures has been assigned, the holders of a
majority in amount of the outstanding Principal Amount) shall otherwise consent
in writing, the Borrower will at all times maintain a ratio of current assets
to current liabilities of 1:1 and a ratio of debt to equity of 1:1.5. Borrower
shall deliver to Lender a compliance certificate covering these ratios as
required in Section 5.01(b)(iii).
ARTICLE VIII - EVENTS OF DEFAULT
SECTION 8.01 EVENTS OF DEFAULT
An "Event of Default" shall exist if any one or more of the following events
(herein collectively called "Events of Default") shall occur and be continuing:
(a) Borrower shall fail to pay (or shall state in writing an
intention not to pay or its inability to pay), not later than ten (10) days
after the due date, any installment of interest on or principal of, any
Debenture or any fee, expense or other payment required hereunder;
(b) Any representation or warranty made under this Loan Agreement,
or any of the other Loan Documents, or in any certificate or statement
furnished or made to Lender pursuant hereto or in connection herewith or with
the Loans hereunder, shall prove to be untrue or inaccurate in any material
respect as of the date on which such representation or warranty was made;
(c) Default shall occur in the performance of any of the covenants
or agreements of Borrower or of its Subsidiaries, if any, contained herein, or
in any of the other Loan Documents, which is not remedied within thirty (30)
days after written notice thereof to Borrower from Lender;
(d) Default shall occur in the payment of any material
indebtedness (other than the Obligation) of the Borrower or its Subsidiaries,
if any, or default shall occur in respect of any note, loan agreement or credit
agreement relating to any such indebtedness and such default shall continue for
more than the period of grace,
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if any, specified therein and any such indebtedness shall become due before its
stated maturity by acceleration of the maturity thereof or shall become due by
its terms and shall not be promptly paid or extended;
(e) Any of the Loan Documents shall cease to be legal, valid and
binding agreements enforceable against the Borrower in accordance with the
respective terms thereof or shall in any way be terminated or become or be
declared ineffective or inoperative or shall in any way whatsoever cease to
give or provide the respective rights, titles, interests, remedies, powers or
privileges intended to be created thereby;
(f) Borrower or its Subsidiaries, if any, shall (i) apply for or
consent to the appointment of a receiver, trustee, custodian, intervenor or
liquidator of itself, or of all or substantially all of such Person's assets;
(ii) file a voluntary petition in bankruptcy, admit in writing that such Person
is unable to pay such Person's debts as they become due or generally not pay
such Person's debts as they become due; (iii) make a general assignment for the
benefit of creditors (iv) file a petition or answer seeking reorganization or
an arrangement with creditors or to take advantage of any bankruptcy or
insolvency laws; (v) file an answer admitting the material allegations of, or
consent to, or default in answering, a petition filed against such Person in
any bankruptcy, reorganization or insolvency proceeding; or (vi) take corporate
action for the purpose of effecting any of the foregoing;
(g) An involuntary petition or complaint shall be filed against
Borrower or any of its Subsidiaries, if any, seeking bankruptcy or
reorganization of such Person or the appointment of a receiver, custodian,
trustee, intervenor or liquidator of such Person, or all or substantially all
of such Person's assets, and such petition or complaint shall not have been
dismissed within sixty (60) days of the filing thereof or an order, order for
relief, judgment or decree shall be entered by any court of competent
jurisdiction or other competent authority approving a petition or complaint
seeking reorganization of Borrower or its subsidiary, if any, or appointing a
receiver, custodian, trustee, intervenor or liquidator of such Person, or of
all or substantially all of such Person's assets;
(h) Any final judgment(s) for the payment of money in excess of
the sum of $250,000 in the aggregate shall be rendered against Borrower or any
subsidiary and such judgment or judgments shall not be satisfied or discharged
at least ten (10) days prior to the date on which any of its assets could be
lawfully sold to satisfy such judgment;
(i) The Borrower shall fail to issue and deliver shares of Common
Stock as provided herein upon conversion of the Debenture; or
(j) The Borrower shall fail to submit Lender's nominee, if any,
for election to the Board of Directors of the Borrower or shall remove Lender's
nominee from the Board of Directors of Borrower other than for cause.
SECTION 8.02 REMEDIES UPON EVENT OF DEFAULT
If an Event of Default shall have occurred and be continuing for a period of
thirty (30) days, then Lender may exercise any one or more of the following
rights and remedies, and any other remedies provided in any of the Loan
Documents, as Lender in its sole discretion may deem necessary or appropriate:
(a) declare the unpaid Principal Amount (after application of any
payments or installments received by Lender) of, and all interest then accrued
but unpaid on, the Debentures and any other liabilities hereunder to be
forthwith due and payable, whereupon the same shall forthwith become due and
payable without presentment, demand, protest, notice of default, notice of
acceleration or of intention to accelerate or
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other notice of any kind, all of which Borrower hereby expressly waives,
anything contained herein or in the Debentures to the contrary notwithstanding;
(b) reduce any claim to judgment; and
(c) without notice of default or demand, pursue and enforce any of
Lender's rights and remedies under the Loan Documents, or otherwise provided
under or pursuant to any applicable law or agreement, all of which rights may
be specifically enforced.
SECTION 8.03 PERFORMANCE BY LENDER
Should Borrower fail to perform any covenant, duty or agreement contained
herein or in any of the other Loan Documents, Lender may perform or attempt to
perform such covenant, duty or agreement on behalf of Borrower. In such event,
Borrower shall, at the request of Lender, promptly pay any amount reasonably
expended by Lender in such performance or attempted performance to Lender at
its principal office in Dallas, Texas, together with interest thereon, at the
interest rate specified in the Debenture, from the date of such expenditure
until paid. Notwithstanding the foregoing, it is expressly understood that
Lender assumes no liability or responsibility for the performance of any duties
of Borrower hereunder or under any of the other Loan Documents.
SECTION 8.04 PAYMENT OF EXPENSES INCURRED BY LENDER
Upon the occurrence of a Default or an Event of Default, which occurrence is
not cured within the notice provisions, if any, provided herein, Borrower
agrees to pay and shall pay all costs and expenses (including Lender's
attorney's fees and expenses) reasonably incurred by Lender in connection with
the preservation and enforcement of Lender's rights under the Loan Agreement,
the Debentures, or any other Loan Document.
ARTICLE IX - REGISTRATION RIGHTS
SECTION 9.01 DEMAND FOR REGISTRATION
(a) Subject to the Holder's right to convert the Debenture under
the Loan Agreement, the Borrower hereby agrees to register, subject to the
terms and conditions set forth herein, all or any portion of the Registerable
Securities at any time it shall receive a written request from the Holders of
at least fifty percent (50%) of the Registerable Securities Then Outstanding
(or a lesser percent if the anticipated aggregate offering price, net of
underwriting discounts and commissions, would exceed $1,000,000) that the
Borrower file a registration statement under the 1933 Act covering the
registration of at least a majority of the Registerable Securities Then
Outstanding. The Borrower shall, within 20 days of its receipt thereof, give
written notice of such request to all Holders of record of Registerable
Securities. The Holders of said Registerable Securities shall then have 15
days from the date of mailing of such notice by the Borrower to request that
all or a portion of their respective Registerable Securities be included in
said registration. The Borrower hereby agrees, subject to the limitations
hereof, to use its best lawful efforts to effect as soon as reasonably
possible, and in any event (if legally possible, and as allowed by the SEC, and
if no factor outside the Borrower's reasonable control prevents it) within 150
days of the receipt of the initial written registration request, to effect the
registration under the 1933 Act of all Registerable Securities which the
Holders thereof (the "Initiating Holders") have requested.
(b) If the Initiating Holders intend to distribute the
Registerable Securities covered by their request by means of an underwriting,
they shall so advise the Borrower as a part of their request made pursuant to
this Loan Agreement and the Borrower shall include such information in the
written notice to the other Holders of
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Registerable Securities referred to in Section 9.01(a). In such event, the
right of any Holder to include his/her Registerable Securities in such
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registerable Securities in the
underwriting (unless otherwise mutually agreed by the Borrower, the
underwriter, a majority in interest of the Initiating Holders and such Holder)
is limited to the extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall (together with the Borrower as
provided in Section 9.03(e)) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting by
mutual agreement of the Borrower and a majority in interest of the Initiating
Holders, which agreement shall not be unreasonably withheld. Notwithstanding
any other provision of this Section 9.01, if the underwriter advises the
Initiating Holders and the Borrower in writing that marketing factors require a
limitation of the number of shares to be underwritten, then the Initiating
Holder(s) shall so advise all Holders of Registerable Securities which would
otherwise be underwritten pursuant hereto, and the number of shares of
Registerable Securities that may be included in the underwriting shall be
allocated on a pro rata basis among all Holders that have requested to
participate in such registration.
(c) Borrower shall utilize Rule 144 if said exemption, in the
Borrower's sole determination, meets its distribution requirements.
(d) Notwithstanding the foregoing, if the Borrower shall furnish
to the Initiating Holders a certificate signed by the President of the Borrower
stating that in the good faith judgment of the Board of Directors of the
Borrower, it would be materially detrimental to the Borrower and its
shareholders for such registration statement to be filed at that time, and it
is therefore essential to defer the filing of such registration statement, the
Borrower shall have the right to defer the commencement of such a filing for a
period of not more than 180 days after receipt of the request of the Initiating
Holders; provided, however, that at least 12 months must elapse between any two
such deferrals.
SECTION 9.02 "PIGGY-BACK" REGISTRATION
If, but without any obligation to do so, the Borrower proposes to register any
of its capital stock under the 1933 Act in connection with the public offering
of such securities for its own account or for the account of its security
holders, other than Holders of Registerable Securities pursuant hereto (a
"Piggy-Back Registration Statement"), (except for (i) a registration relating
solely to the sale of securities to participants in the Borrower's stock plans
or employee benefit plans; or (ii) a registration relating solely to an SEC
Rule 145 transaction or any rule adopted by the SEC in substitution thereof or
in amendment thereto), then:
(a) The Borrower shall give written notice of such determination
to each Holder of Registerable Securities, and each such Holder shall have the
right to request, by written notice given to the Borrower within 15 days of the
date that such written notice was mailed by the Borrower to such Holder, that a
specific number of Registerable Securities held by such Holder be included in
the Piggy-Back Registration Statement (and related underwritten offering, if
any);
(b) If the Piggy-Back Registration Statement relates to an
underwritten offering, the notice given to each Holder shall specify the name
or names of the managing underwriter or underwriters for such offering. In
addition such notice shall also specify the number of securities to be
registered for the account of the Borrower and for the account of its
shareholders (other than the Holders of Registerable Securities), if any;
(c) If the Piggy-Back Registration Statement relates to an
underwritten offering, each Holder of Registerable Securities to be included
therein must agree (i) to sell such Holder's Registerable Securities on the
same basis as provided in the underwriting arrangement approved by the
Borrower; and (ii) to timely complete
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and execute all questionnaires, powers of attorney, indemnities, hold-back
agreements, underwriting agreements and other documents required under the
terms of such underwriting arrangements or by the SEC or by any state
securities regulatory body;
(d) If the managing underwriter or underwriters for the
underwritten offering under the Piggy-Back Registration Statement determines
that inclusion of all or any portion of the Registerable Securities in such
offering would adversely affect the ability of the underwriters for such
offering to sell all of the securities requested to be included for sale in
such offering at the best price obtainable therefor, the aggregate number of
Registerable Securities that may be sold by the Holders shall be limited to
such number of Registerable Securities, if any, that the managing underwriter
or underwriters determine may be included therein without such adverse effect
as provided below. If the number of securities proposed to be sold in such
underwritten offering exceeds the number of securities that may be sold in such
offering, there shall be included in the offering, first, up to the maximum
number of securities to be sold by the Borrower for its own account and for the
account of other stockholders (other than Holders of Registerable Securities),
as they may agree among themselves, and second, as to the balance, if any,
Registerable Securities requested to be included therein by the Holders thereof
(pro rata as between such Holders based upon the number of Registerable
Securities initially proposed to be registered by each), or in such other
proportions as the managing underwriter or underwriters for the offering may
require; provided, however, that in the event that the number of securities
proposed to be sold in such underwritten offering exceeds the number of
securities that may be sold in such offering pursuant to the terms and
conditions set forth above and the Piggy-Back Registration Statement is a
result of public offering by the Borrower of its securities for its own
account, there shall be included in the offering, first, up to the maximum
number of securities to be sold by the Borrower for its own account and second,
as to the balance, if any, securities to be sold for the account of the
Borrower's stockholders (both the Holders of Registerable Securities requested
and such other stockholders of the Borrower requested to be included therein)
on a pro rata basis;
(e) Holders of Registerable Securities shall have the right to
withdraw their Registerable Securities from the Piggy-Back Registration
Statement, but if the same relates to an underwritten offering, they may only
do so during the time period and on the terms agreed upon among the
underwriters for such underwritten offering and the Holders of Registerable
Securities.
SECTION 9.03 OBLIGATIONS OF THE BORROWER
Whenever required to effect the registration of any Registerable Securities
pursuant to this Loan Agreement, the Borrower shall, as expeditiously as
reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registerable Securities and use its best lawful efforts to
cause such registration statement to become effective, and keep such
registration statement effective until the sooner of all such Registerable
Securities having been distributed, or until 120 days have elapsed since such
registration statement became effective (subject to extension of this period as
provided below);
(b) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
1933 Act with respect to the disposition of all securities covered by such
registration statement, or 120 days have elapsed since such registration
statement became effective (subject to the extension of this period as provided
below);
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(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
1933 Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registerable Securities owned by them;
(d) Use its best lawful efforts to register and qualify the
securities covered by such registration statement under such other securities
or Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Borrower shall not be required in connection
therewith or as a condition thereto to qualify as a broker-dealer in any states
or jurisdictions or to do business or to file a general consent to service of
process in any such states or jurisdictions;
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement with the managing
underwriter of such offering, in usual and customary form reasonably
satisfactory to the Borrower and the Holders of a majority of the Registerable
Securities to be included in such offering. Each Holder participating in such
underwriting shall also enter into and perform its obligations under such an
agreement;
(f) Notify each Holder of Registerable Securities covered by such
registration statement, at any time when a prospectus relating thereto and
covered by such registration statement is required to be delivered under the
1933 Act, of the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing; and
(g) In the event of the notification provided for in Section
9.03(f) above, the Borrower shall use its best efforts to prepare and file with
the SEC (and to provide copies thereof to the Holders) as soon as reasonably
possible an amended prospectus complying with the 1933 Act, and the period
during which the prospectus referred to in the notice provided for in Section
9.03(f) above cannot be used and the time period prior to the use of the
amended prospectus referred to in this Section 9.03(g) shall not be counted in
the 120 day period of this Section 9.03.
SECTION 9.04 FURNISH INFORMATION
(a) It shall be a condition precedent to the obligations of the
Borrower to take any action pursuant to this Article IX that the selling
Holders shall furnish to the Borrower any and all information reasonably
requested by the Borrower, its officers, directors, employees, counsel, agents
or representatives, the underwriter or underwriters, if any, and the SEC or any
other Governmental Authority, including but not limited to (i) such information
regarding themselves, the Registerable Securities held by them, and the
intended method of disposition of such securities, as shall be required to
effect the registration of their Registerable Securities, and (ii) the identity
of and compensation to be paid to any proposed underwriter or broker-dealer to
be employed in connection therewith.
(b) In connection with the preparation and filing of each
registration statement registering Registerable Securities under the 1933 Act,
the Borrower shall give the Holders of Registerable Securities on whose behalf
such Registerable Securities are to be registered and their underwriters, if
any, and their respective counsel and accountants, at such Holders' sole cost
and expense (except as otherwise set forth herein), such access to copies of
the Borrower's records and documents and such opportunities to discuss the
business of the Borrower with its officers and the independent public
accountants who have certified its
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financial statements as shall be reasonably necessary in the opinion of such
Holders and such underwriters or their respective counsel, to conduct a
reasonable investigation within the meaning of the 1933 Act.
SECTION 9.05 EXPENSES OF DEMAND REGISTRATION
Except as set forth below, all expenses, other than underwriting discounts and
commissions incurred in connection with not more than two demand registrations
pursuant to Section 9.01 above, including, without limitation, all
registration, filing and qualification fees, printers' and accounting fees,
fees and disbursements of counsel for the Borrower, and the reasonable fees and
disbursements of one counsel for the selling Holders, shall be borne by the
Borrower; provided, however, that the Borrower shall not be required to pay for
any expenses of any registration proceeding which was commenced prior to July
12, 1998, pursuant to Section 9.01, or if the registration request is
subsequently withdrawn at the written request of the Holders of the majority of
the Registerable Securities subject to such registration.
SECTION 9.06 EXPENSES OF PIGGY-BACK REGISTRATION
Each Holder shall bear and pay all commissions and discounts attributable to
the inclusion of such Holder's Registerable Securities in any registration,
filing or qualification of Registerable Securities pursuant to Section 9.02 and
the reasonable fees and disbursements of the counsel for the selling Holders.
SECTION 9.07 INDEMNIFICATION REGARDING REGISTRATION RIGHTS
If any Registerable Securities are included in a registration statement under
this Article IX:
(a) To the extent permitted by law, the Borrower will indemnify
and hold harmless each Holder, the officers and directors of each Holder, any
underwriter (as defined in the 1933 Act) for such Holder and each person, if
any, who controls such Holder or underwriter within the meaning of the 1933 Act
or the 1934 Act, against any losses, claims, damages, liabilities joint or
several) or any legal or other costs and expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action to which they may become subject under the 1933 Act, the
1934 Act or other federal or state law, insofar as such losses, claims,
damages, costs, expenses or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact with respect to the Borrower or its
securities contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements therein; (ii) the omission or alleged omission to state therein a
material fact with respect to the Borrower or its securities required to be
stated therein or necessary to make the statements therein not misleading; or
(iii) any violation or alleged violation by the Borrower of the 1933 Act, the
1934 Act, any federal or state securities law or any rule or regulation
promulgated under the 1933 Act, the 1934 Act or any state securities law.
Notwithstanding the foregoing, the indemnity agreement contained in this
Section 9.07(a) shall not apply and the Borrower shall not be liable (i) in any
such case for any such loss, claim, damage, costs, expenses, liability or
action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by any such Holder,
underwriter or controlling person; or (ii) for amounts paid in settlement of
any such loss, claim, damage, liability or action if such settlement is
effected without the prior written consent of the Borrower, which consent shall
not be unreasonably withheld.
(b) To the extent permitted by law, each Holder who participates
in a registration pursuant to the terms and conditions of this Loan Agreement
shall indemnify and hold harmless the Borrower, each of its directors and
officers who have signed the registration statement, each Person, if any, who
controls the Borrower within the meaning of the 1933 Act or the 1934 Act, each
of the Borrower's employees, agents, counsel and representatives, any
underwriter and any other Holder selling securities in such registration
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statement, or any of its directors or officers, or any person who controls such
Holder, against any losses, claims, damages, costs, expenses, liabilities
(joint or several) to which the Borrower or any such director, officer,
controlling person, employee, agent, representative, underwriter, or other such
Holder, or director, officer or controlling person thereof, may become subject,
under the 1933 Act, the 1934 Act or other federal or state law, only insofar as
such losses, claims, damages, costs, expenses or liabilities or actions in
respect thereto arise out of or are based upon any Violation, in each case to
the extent and only to the extent that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in connection with such. Each such Holder will indemnify any legal or
other expenses reasonably incurred by the Borrower or any such director,
officer, employee, agent representative, controlling person, underwriter or
other Holder, or officer, director or of any controlling person thereof, in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this Section 9.07(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, costs, expenses, liability or action if such
settlement is effected without the prior written consent of the Holder, which
consent shall not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under this
Section 9.07 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 9.07,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the reasonable fees and expenses
of such counsel to be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential conflict of interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action shall not
relieve the indemnifying party of its obligations under this Section 9.07,
except to the extent that the failure results in a failure of actual notice to
the indemnifying party and such indemnifying party is materially prejudiced in
its ability to defend such action solely as a result of the failure to
give such notice.
(d) If the indemnification provided for in this Section 9.07 is
unavailable to an indemnified party under this Section in respect of any
losses, claims, damages, costs, expenses, liabilities or actions referred to
herein, then each indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, costs, expenses, liabilities or
actions in such proportion as is appropriate to reflect the relative fault of
the Borrower, on the one hand and of the Holder, on the other, in connection
with the Violation that resulted in such losses, claims, damages, costs,
expenses, liabilities or actions. The relative fault of the Borrower, on the
one hand, and of the Holder, on the other, shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of the
material fact or the omission to state a material fact relates to information
supplied by the Borrower or by the Holder, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
(e) The Borrower, on the one hand, and the Holders, on the other
hand, agree that it would not be just and equitable if contribution pursuant to
this Section 9.07 were determined by a pro rata allocation or by any other
method of allocation which does not take account of tile equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an indemnified party as a result of losses, claims, damages,
costs, expenses, liabilities and actions referred to in the immediately
preceding
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paragraph shall be deemed to include, subject to the limitations set forth
above, any reasonable legal or other expenses incurred by such indemnified party
in connection with defending any such action or claim. Notwithstanding the
provisions of this Section 9.07, neither the Borrower nor the Holders shall be
required to contribute any amount in excess of the amount by which the total
price at which the securities were offered to the public exceeds the amount of
any damages which the Borrower or each such Holder has otherwise been required
to pay by reason of such Violation. No person guilty of fraudulent
misrepresentations (within the meaning of Section 11(f) of the 1933 Act) shall
be entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation.
SECTION 9.08 REPORTS UNDER THE 1934 ACT
So long as the Borrower has a class of securities registered pursuant to
Section 12 of the 1934 Act, with a view to making available to the Holders the
benefits of Rule 144 promulgated under the 1933 Act ("Rule 144") and any other
rule or regulation of the SEC that may at any time permit a Holder to sell
securities of the Borrower to the public without registration or pursuant to a
registration on Form S-3, if applicable, the Borrower agrees to use its best
lawful efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times;
(b) File with the SEC in a timely manner all reports and other
documents required of the Borrower under the 1933 Act and the 1934 Act;
(c) Use its best efforts to include all Common Stock covered by
such registration statement on NASDAQ if the Common Stock is then quoted on
NASDAQ, or list all Common Stock covered by such registration statement on such
securities exchange on which any of the Common Stock is then listed; or, if the
Common Stock is not then quoted on NASDAQ or listed on any national securities
exchange, use its best efforts to have such Common Stock covered by such
registration statement quoted on NASDAQ or, at the option of the Borrower,
listed on a national securities exchange; and
(d) Furnish to any Holder, so long as the Holder owns any
Registerable Securities, forthwith upon request (i) a copy of the most recent
annual or quarterly report of the Borrower and such other SEC reports and
documents so filed by the Borrower; and (ii) such other information (but not
any opinion of counsel) as may be reasonably requested by any Holder seeking to
avail himself of any rule or regulation of the SEC which permits the selling of
any such securities without registration or pursuant to such form.
SECTION 9.09 ASSIGNMENT OF REGISTRATION RIGHTS
Subject to the terms and conditions of the Loan Agreement and the Debentures,
the right to cause the Borrower to register Registerable Securities pursuant to
this Loan Agreement may be assigned by Holder to any transferee or assignee of
such securities; provided that said transferee or assignee is a transferee or
assignee of at least ten percent (10%) of the Registerable Securities and
provided that the Borrower is, within a reasonable time after such transfer,
furnished with written notice of the name and address of such transferee or
assignee and the securities with respect to which such registration rights are
being assigned; and provided, further, that such assignment shall be effective
only if immediately following such transfer the further disposition of such
securities by the transferee or assignee is restricted under the 1933 Act, it
being the intention that so long as Holder holds any Registerable Securities
hereunder, either Holder or its transferee or assignee of at least ten percent
may exercise the demand right to registration and piggyback registration rights
hereunder. Other than as set forth above, the parties hereto hereby agree that
the registration rights hereunder shall not be
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transferable or assigned and any contemplated transfer or assignment in
contravention of this Loan Agreement shall be deemed null and void and of no
effect whatsoever.
SECTION 9.10 OTHER MATTERS
(a) Each Holder of Registerable Securities hereby agrees by
acquisition of such Registerable Securities that, with respect to each offering
of the Registerable Securities, whether each Holder is offering such
Registerable Securities in an underwritten or non-underwritten offering, such
Holder will comply with Rules 10b-2, 10b-6 and 10b-7 of the 1934 Act and such
other or additional anti-manipulation rules then in effect until such offering
has been completed, and in respect of any non-underwritten offering, in writing
will inform the Borrower, any other Holders who are selling shareholders, and
any national securities exchange upon which the securities of the Borrower are
listed, that the Registerable Securities have been sold and will, upon the
Borrower's request, furnish the distribution list of the Registerable
Securities. In addition, upon the request of the Borrower, each Holder will
supply the Borrower with such documents and information as the Borrower may
reasonably request with respect to the subject matter set forth and described
in this Section 9.10.
(b) Each Holder of Registerable Securities hereby agrees by
acquisition of such Registerable Securities that, upon receipt of any notice
from the Borrower of the happening of any event which makes any statement made
in the registration statement, the prospectus or any document incorporated
therein by reference, untrue in any material respect or which requires the
making of any changes in the registration statement, the prospectus or any
document incorporated therein by reference, in order to make the statements
therein not misleading in any material respect, such Holder will forthwith
discontinue disposition of Registerable Securities under the prospectus related
to the applicable registration statement until such Holder's receipt of the
copies of the supplemented or amended prospectus, or until it is advised in
writing by the Borrower that the use of the prospectus may be resumed, and has
received copies of any additional or supplemental filings which are
incorporated by reference in the prospectus.
(c) The Borrower hereby agrees not to effect any public sale or
other distribution of its equity securities, or any securities convertible into
or exchangeable or exercisable for such equity securities, during the period
commencing on the 7th day prior to, and ending on the 120th day (subject to
extension as provided in Section 9.03 hereof) following the effective date of
any underwritten demand registration, other than pursuant to Form S-8.
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SECTION 9.11 TERMINATION OF RIGHTS
(a) The Holders' right to demand registration and to participate
in a Piggy-Back Registration, as granted to Holders under this Article IX,
shall terminate on June 30, 2006, or after the Holder has exercised two demand
registration rights at the expense of the Borrower as provided in Article IX of
this Loan Agreement, whichever is first to occur.
ARTICLE X - DIRECTORS AND BOARD MEETING ATTENDANCE
SECTION 10.01 BOARD REPRESENTATION OR ATTENDANCE BY LENDER DESIGNEE
(a) Borrower herewith agrees that Lender shall have the right from
time to time, at Lender's option and so long as there is $100,000 face value of
Debentures that have not been fully converted or redeemed, to designate a
nominee to the Board of Directors of the Borrower, which designee is subject to
the written approval of Borrower which approval shall not be unreasonably
withheld. Borrower will, at all times, use its reasonable best efforts to
secure the election of such designee as a Director of the Borrower, provided
that such designee may, at his or her option, elect to serve only as an
"Advisory Director" with all the rights of the Directors in regards to notice
and attendance at meetings of the Board of Directors, or committees thereof,
but without voting rights. All reasonable costs and expenses incurred by such
Designee as a Director or Advisory Director, or by Lender on behalf of such
Designee, shall be reimbursed by Borrower, consistent with payment policies
accorded to other independent directors.
(b) Further, though Lender may waive, from time to time, its right
to require a Board Designee, in such event it shall be entitled, at its own
expense, to have a representative of the Lender attend meetings of the Board of
Directors of the Borrower or of its Subsidiaries and such representative may
serve as an observer but without voice in matters under discussion except as
requested.
(c) Any such Designee or representative of the Lender shall, if
requested to do so, absent himself or herself from the meeting in the event of,
and so long as, the Directors are considering and acting on matters pertaining
to any rights or obligations of the Borrower or the Lender under the Loan
Agreement, the Debenture, or the other Loan Documents. Borrower will provide
Lender's designated representative with the same notice of Board meetings and
information as the Borrower shall provide to its duly elected Directors.
SECTION 10.02 BORROWER'S RIGHT TO REQUEST LENDER TO PROVIDE AN ADVISOR AND A
DIRECTOR NOMINEE
(a) Lender herewith agrees that, so long as no Default or Event of
Default exists under the Loan Agreement and so long as the Debentures have not
been fully converted or redeemed, Lender will, at the written request of
Borrower, use its reasonable best efforts to provide, from time to time, a
person or persons, reasonably believed knowledgeable in investor relations,
such person or persons to be available to consult with, and serve as advisor
to, the Borrower about its communications with its shareholders and with the
general investment public. Further, if requested by Borrower, at least one
such person will be available to serve as a nominee to the Board of Directors
of the Borrower provided that such nominee may, at his or her option, elect to
serve only as an "Advisory Director" with all the rights of the Directors in
regards to notice and attendance at meetings of the Board of Directors, or
committees thereof, but without voting rights. All reasonable costs and
expenses incurred by such person or persons, or by Lender on behalf of such
persons, shall be reimbursed by Borrower, consistent with payment policies
accorded to other independent directors.
SECTION 10.03 LIMITATION OF AUTHORITY OF PERSONS DESIGNATED AS A DIRECTOR
NOMINEE
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It is provided and agreed that the actions and advice of any person while
serving pursuant to Section 10.01 or 10.02 as an advisor to the Borrower or as
a member of Borrower's Board of Directors, or while serving solely as a
representative of Lender in attendance at meetings of the Board of Directors,
shall be construed to be the actions and advice of that person alone and not be
construed as actions of the Lender as to any notice of requirements or rights
of Lender under this Loan Agreement, the Debenture or the other Loan Documents;
nor as actions of the Lender to approve modifications, consents, amendments or
waivers thereof; and all such actions or notices shall be deemed actions or
notices of the Lender only when duly provided in writing and given in
accordance with the provisions of this Loan Agreement.
SECTION 10.04 NON-LIABILITY OF LENDER
The provisions of Section 10.01 and 10.02 notwithstanding, the relationship
between Borrower and Lender is, and shall at all times remain, solely that of
borrower and lender, and except for the agreement to use its best efforts to
provide a knowledgeable advisor (whose actions and advice shall be deemed to be
solely advised by such person in an individual capacity and not advice by
Lender), Lender neither undertakes nor assumes any responsibility or duty to
the Borrower to review, inspect, supervise, pass judgment upon, or inform
Borrower of any matter in connection with any phase of Borrower's business,
operations, or condition, financial or otherwise. Borrower shall rely entirely
upon its own judgment with respect to such matters, and any review, inspection,
supervision, exercise of judgment, or information supplied to Borrower by
Lender, or any representative or agent of Lender, in connection with any such
matter is for the protection of Lender, and neither Borrower nor any third
party is entitled to rely thereon.
ARTICLE XI - AGENCY
SECTION 11.03 AGENCY
(a) Renaissance Capital Partners II, Ltd. hereby designates and
appoints Renaissance Capital Group, Inc. ("Renaissance Group") as its Agent
under this Agreement and authorizes the Agent to take such action on its behalf
under the provisions of this Agreement and the other Loan Documents and to
exercise such powers as are set forth herein or therein, together with such
other powers as are reasonable incidental thereto. In performing its functions
and duties under this Agreement, the Agent shall act solely as agent of the
Lenders and does not assume and shall not be deemed to have assumed any
obligation toward or relationship of agency or trust with or for any of the
Borrowers. The Agent may perform any of its duties under this Agreement, or
under the other Loan Documents, by or through its agents or employees.
(b) The Agent shall have no duties or responsibilities except
those expressly set forth in this Agreement or in the other Loan Documents.
Except as expressly provided herein, the duties of the Agent shall be
mechanical and administrative in nature. The Agent shall have and may use its
sole discretion with respect to exercising or refraining from taking any
actions which the Agent is expressly entitled to take or assert under this
Agreement and the other Loan Documents. The Agent shall not have by reason of
this Agreement a fiduciary relationship in respect of any Lender. Nothing in
this Agreement or any of the other Loan Documents, express or implied, is
intended to or shall be construed to impose upon the Agent any obligations in
respect of this Agreement or any of the other Loan Documents except as
expressly set forth herein or therein. If the Agent seeks the consent or
approval of the Majority in Interest to the taking or refraining from taking
any action hereunder, the Agent shall send notice thereof to each Lender. The
Agent shall promptly notify each Lender any time that the Majority in Interest
have instructed the Agent to act or refrain from acting pursuant hereto. The
Agent may employ agents, co-agents and attorneys-in-fact and shall not be
responsible to the Lenders or the Borrower, except as to money or securities
received by it or its authorized agents, for the negligence or misconduct of
any such agents or attorneys-in-fact selected by it with reasonable care.
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ARTICLE XII - MISCELLANEOUS
SECTION 12.01 STRICT COMPLIANCE
Any waiver by Lender of any breach or any term or condition of this Loan
Agreement or the other Loan Documents shall not be deemed a waiver of any other
breach, nor shall any failure to enforce any provision of this Loan Agreement
or the other Loan Documents operate as a waiver of such provision or of any,
other provision, nor constitute nor be deemed a waiver or release of the
Borrower for anything arising out of, connected with or based upon this Loan
Agreement or the other Loan Documents.
SECTION 12.02 WAIVERS AND MODIFICATIONS
All modifications, consents, amendments or waivers (herein "Waivers") of any
provision of this Loan Agreement, the Debentures or any other Loan Documents,
and any consent to departure therefrom, shall be effective only if the same
shall be in writing by Lender and then shall be effective only in the specific
instance and for the purpose for which given. No notice or demand given in any
case shall constitute a waiver of the right to take other action in the same,
similar or other instances without such notice or demand. No failure to
exercise, and no delay in exercising, on the part of Lender, any right
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any other right. The rights of Lender hereunder and under the other Loan
Documents shall be in addition to all other rights provided by law.
SECTION 12.03 NOTICES
(a) Any notices or other communications required or permitted to
be given by this Loan Agreement or any other documents and instruments referred
to herein must be (i) given in writing and personally delivered, mailed by
prepaid certified, registered mail or sent by overnight service such as Federal
Express; or (ii) made by telex or facsimile transmission delivered or
transmitted to the party to whom such notice or communication is directed, with
confirmation thereupon given in writing and personally delivered or mailed by
prepaid certified or registered mail.
(b) Any notice to be mailed, sent or personally delivered shall be
mailed or delivered to the principal offices of the party to whom such notice
is addressed, as that address is specified herein on the signature page hereof.
Any such notice or other communication shall be deemed to have been given
(whether actually received or not) on the day it is mailed, postage prepaid, or
sent by overnight service or personally delivered or, if transmitted by telex
or facsimile transmission, on the day that such notice is transmitted;
provided, however, that any notice by telex or facsimile transmission, received
by any Borrower or Lender after 4:00 p.m., Standard Time at the recipient's
address, on any day, shall be deemed to have been given on the next succeeding
day. Any party may change its address for purposes of this Loan Agreement by
giving notice of such change to the other parties pursuant to this Section
12.03.
SECTION 12.04 CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS AND JURISDICTION
Any suit, action or proceeding against the Borrower with respect to this Loan
Agreement, the Debentures or any judgment entered by any court in respect
thereof, may be brought in the courts of the State of Texas, County of Dallas,
or in the United States courts located in the State of Texas as Lender in its
sole discretion may elect, and Borrower hereby submits to the non-exclusive
jurisdiction of such courts for the purpose of any such suit, action or
proceeding. Borrower hereby agrees that service of all writs, process and
summonses in any such suit, action or proceeding brought in the State of Texas
may be brought upon, and Borrower hereby irrevocably appoints, the CT
Corporation, Dallas, Texas, as its true and lawful attorney-in-fact in the
name, place and stead of Borrower to accept such service of any and all such
writs, process and summonses.
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Borrower hereby irrevocably waives any objections which it may now or hereafter
have to the laying of venue of any suit, action or proceeding arising out of or
relating to this Loan Agreement or any Debenture brought in the courts located
in the State of Texas, County of Dallas, and hereby further irrevocably waives
any claim that any such suit, action or proceeding brought in any such court
has been brought in any inconvenient forum.
SECTION 12.05 ARBITRATION
(a) Upon the demand of the Lender or Borrower (collectively the
"parties"), made before the institution of any judicial proceeding or not more
than 60 days after service of a complaint, third party complaint, cross-claim
or counterclaim or any answer thereto or any amendment to any of the above, any
Dispute (as defined below) shall be resolved by binding arbitration in
accordance with the terms of this arbitration clause. A "Dispute" shall
include any action, dispute, claim, or controversy of any kind, whether founded
in contract, tort, statutory or common law, equity, or otherwise, now existing
or hereafter occurring between the parties arising out of, pertaining to or in
connection with this Agreement, any document evidencing, creating, governing,
or securing any indebtedness guaranteed pursuant to the ten-ns hereof, or any
related agreements, documents, or instruments (the "Documents"). The parties
understand that by this Agreement they have decided that the Disputes may be
submitted to arbitration rather that being decided through litigation in court
before a judge or jury and that once decided by an arbitrator the claims
involved cannot later be brought filed, or pursued in court. IF BORROWER SHALL
FAIL TO PAY (OR SHALL STATE IN WRITING AN INTENTION NOT TO PAY OR ITS INABILITY
TO PAY), NOT LATER THAN TEN (10) DAYS AFTER THE DUE DATE, ANY INSTALLMENT OF
INTEREST ON OR PRINCIPAL OF, ANY DEBENTURE OR ANY FEE, EXPENSE OR OTHER PAYMENT
REQUIRED HEREUNDER, LENDER MAY, AT ITS SOLE OPTION, ENFORCE ITS RIGHT OUTSIDE
THE ARBITRATION PROVISION FOUND IN THIS SECTION 12.05 OR ANY DEBENTURE.
(b) Arbitrations conducted pursuant to this Agreement, including
selection of arbitrators, shall be administered by the American Arbitration
Association ("Administrator") pursuant to the Commercial Arbitration rules of
the Administrator. Arbitrations conducted pursuant to the terms hereof shall
be governed by the provisions of the Federal Arbitration Act (Title 9 of the
United States Code), and to the extent the foregoing are inapplicable,
unenforceable or invalid, the laws of the State of Texas. Judgment upon any
award rendered hereunder may be entered in any court having jurisdiction;
provided, however, that nothing contained herein shall be deemed to be a waiver
by any party that is a bank of the protections afforded to it under 12 U.S.C.
91 or similar governing state law. Any party who fails to submit to binding
arbitration following a lawful demand by the opposing party shall bear all
costs and expenses, including reasonable attorney's fees, incurred by the
opposing party in compelling arbitration of any Dispute.
(c) No provision of, nor the exercise of any rights under, this
arbitration clause shall limit the right of any party to (i) foreclose against
any real or personal property collateral or other security; (ii) exercise
self-help remedies (including repossession and setoff rights); or (iii) obtain
provisional or ancillary remedies such as injunctive relief, sequestration,
attachment, replevin, garnishment, or the appointment of a receiver from a
court having jurisdiction. Such rights can be exercised at any time except to
the extent such action is contrary to a final award or decision in any
arbitration proceeding. The institution and maintenance of an action as
described above shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the Dispute to arbitration, nor render
inapplicable the compulsory arbitration provisions hereof. Any claim or
Dispute related to exercise of any self-help, auxiliary or other exercise of
rights under this section shall be a Dispute hereunder.
(d) Arbitrator(s) shall resolve all Disputes in accordance with
the applicable substantive law of the State of Texas. Arbitrator(s) may make
an award of attorneys' fees and expenses if permitted by law or
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the agreement of the parties. All statutes of limitation applicable to any
Dispute shall apply to any proceeding in accordance with this arbitration
clause. Any arbitrator selected to act as the only arbitrator in a Dispute
shall be required to be a practicing attorney with not less than 5 years
practice in commercial law in the State of Texas. With respect to a Dispute in
which the claims or amounts in controversy do not exceed five hundred thousand
dollars ($500,000), a single arbitrator shall be chosen and shall resolve the
Dispute. In such case the arbitrator shall have authority to render an award up
to but not to exceed five hundred thousand dollars ($500,000) including all
damages of any kind whatsoever, costs, fees and expenses. Submission to a
single arbitrator shall be a waiver of all parties' claims to recover more than
five hundred thousand dollars ($500,000). A Dispute involving claims or
amounts in controversy exceeding five hundred thousand dollars ($500,000) shall
be decided by a majority vote of a panel of three arbitrators ("Arbitration
Panel"), one of whom must possess the qualifications to sit as a single
arbitrator in a Dispute decided by one arbitrator. If the arbitration is
consolidated with one conducted pursuant to the terms of an agreement between
the Lender and the Borrower related to the indebtedness guaranteed, then the
Arbitration Panel shall be one which meets the criteria set forth between the
Lender and Borrower. Arbitrator(s) may, in the exercise of their discretion,
at the written request of a party (i) consolidate in a single proceeding any
multiple party claims that are substantially identical and all claims arising
out of a single loan or series of loans including claims by or against
borrower(s), guarantors, sureties and/or owners of collateral if different from
the Borrower; and (ii) administer multiple arbitration claims as class actions
in accordance with Rule 23 of the Federal Rules of Civil Procedure. The
arbitrator(s) shall be empowered to resolve any dispute regarding the terms of
this Agreement or the arbitrability of any Dispute or any claim that all or any
part (including this provision) is void or voidable but shall have no power to
change or alter the terms of this Agreement. The award of the arbitrator(s)
shall be in writing and shall specify the factual and legal basis for the
award.
(e) To the maximum extent practicable, the Administrator, the
arbitrator(s) and the parties shall take any action necessary to require that
an arbitration proceeding hereunder be concluded within 180 days of the filing
of the Dispute with the Administrator. The arbitrator(s) shall be empowered to
impose sanctions for any party's failure to proceed within the times
established herein. Arbitration proceedings hereunder shall be conducted in
Texas at a location determined by the Administrator. In any such proceeding a
party shall state as a counterclaim any claim which arises out of the
transaction or occurrence or is in any way related to the Documents which does
not require the presence of a third party which could not be joined as a party
in the proceeding, The provisions of this arbitration clause shall survive any
termination, amendment, or expiration of the Documents and repayment in full of
sums owed to Lender by Borrower unless the parties otherwise expressly agree in
writing. Each party agrees to keep all Disputes and arbitration proceedings
strictly confidential, except for disclosures of information required in the
ordinary course of business of the parties or as required by applicable law or
regulation.
SECTION 12.06 INVALID PROVISIONS
If any provision of any Loan Document is held to be illegal, invalid or
unenforceable under present or future laws during the term of this Loan
Agreement, such provision shall be fully severable, such Loan Document shall be
construed and enforced as if such illegal, invalid or unenforceable provision
had never comprised a part of such Loan Document, and the remaining provisions
of such Loan Document shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provision or by its severance
from such Loan Document. Furthermore, in lieu of each such illegal, invalid or
unenforceable provision shall be added as part of such Loan Document a
provision mutually agreeable to Borrower and Lender as similar in terms to such
illegal, invalid or unenforceable provision as may be possible and be legal,
valid and enforceable. In the event Borrower and Lender are unable to agree
upon a provision to be added to the Loan Document within a period of ten (10)
business days after a provision of the Loan Document is held to be illegal,
invalid or unenforceable, then a provision acceptable to independent
arbitrators, such to be selected in accordance with
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the provisions of the American Arbitration Association, as similar in terms to
the illegal, invalid or unenforceable provision as is possible and be legal,
valid and enforceable shall be added automatically to such Loan Document. In
either case, the effective date of the added provision shall be the date upon
which the prior provision was held to be illegal, invalid or unenforceable.
SECTION 12.07 MAXIMUM INTEREST RATE
(a) Regardless of any provision contained in any of the Loan
Documents, Lender shall never be entitled receive, collect or apply as interest
on the Debentures any amount in excess of interest calculated at the Maximum
Rate, and, in the event that any Lender ever receives, collects or applies as
interest any such excess, the amount which would be excessive interest shall be
deemed to be a partial prepayment of principal and treated hereunder as such;
and, if the principal amount of the Obligation is paid in full, any remaining
excess shall forthwith be paid to Borrower. In determining whether or not the
interest paid or payable under any specific contingency exceeds interest
calculated at the Maximum Rate, Borrower and Lender shall, to the maximum
extent permitted under applicable law (i) characterize any non-principal
payment as an expense, fee or premium rather than as interest; (ii) exclude
voluntary prepayments and the effects thereof; and (iii) amortize, pro rate,
allocate and spread, in equal parts, the total amount of interest throughout
the entire contemplated term of the Debentures; provided that, if the
Debentures are paid and performed in full prior to the end of the full
contemplated term thereof, and if the interest received for the actual period
of existence thereof exceeds interest calculated at the Maximum Rate, Lender
shall refund to Borrower the amount of such excess or credit the amount of such
excess against the principal amount of the Debentures and, in such event,
Lender shall not be subject to any penalties provided by any laws for
contracting for, charging, taking, reserving or receiving interest in excess of
interest calculated at the Maximum Rate.
(b) "Maximum Rate" shall mean, on any day, the highest
non-usurious rate of interest (if any) permitted by applicable law on such day
that at any time, or from time to time, may be contracted for, taken, reserved,
charged or received on the Indebtedness evidenced by the Debentures under the
laws which are presently in effect of the United States of America and the
State of Texas or by the laws of any other jurisdiction which are or may be
applicable to the holders of the Debentures and such Indebtedness or, to the
extent permitted by law, under such applicable laws of the United States of
America and the State of Texas or by the laws of any other jurisdiction which
are or may be applicable to the holder of the Debentures and which may
hereafter be in effect and which allow a higher maximum non-usurious interest
rate than applicable laws now allow.
SECTION 12.08 PARTICIPATIONS AND ASSIGNMENTS OF THE DEBENTURES
(a) The Lender shall have the right to enter into a participation
agreement with any other Lender with respect to the Debentures, or to sell all
or any part of the Debentures, but any participation or sale shall not affect
the rights and duties of such Lender hereunder vis-a-vis Borrower. In the
event that all or any portion of this Loan shall be, at any time, assigned,
transferred or conveyed to other parties, any action, consent or waiver (except
for compromise or extension of maturity), to be given or taken by Lender
hereunder (herein "Action"), shall be such action as taken by the holders of a
majority in amount of the Principal Amount of the Debentures then outstanding,
as such holders are recorded on the books of the Borrower and represented by
Lender's Agent as described in subsection (b) below.
(b) Assignment or sale shall be effective, on the books of the
Borrower, only upon (i) endorsement of the Debenture, or part thereof, to the
proposed new holder, along with a current notation of the amount of payments or
installments received and net Principal Amount yet unfunded or unpaid, and
presentment of such
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<PAGE> 36
Debenture to the Borrower for issue of a replacement Debenture, or Debentures,
in the name of the new holder; (ii) a designation by the holders of a single
Lender's Agent for Notice, such agent to be the sole party to whom Borrower
shall be required to provide notice when notice to Lender is required hereunder
and who shall be the sole party authorized to represent Lender in regard to
modification or waivers under the Debenture, the Loan Agreement or other Loan
Documents; and (iii) delivery of an opinion of counsel, reasonably satisfactory
to Borrower, that transfer shall not require registration or qualification
under applicable state or federal securities laws.
(c) So long as the Borrower is not in default hereunder, the
Lender shall not sell or assign an interest in the Debentures or rights under
the Loan Agreement to any Person that the Borrower reasonably identifies to
Lender as being engaged as a competitor.
SECTION 12.09 CONFIDENTIALITY
(a) All financial reports or information which are furnished to
Lender, or its director designee or other representatives, pursuant to this
Loan Agreement or pursuant to the Debentures or other Loan Documents shall be
treated as confidential unless and to the extent that such information has been
otherwise disclosed by the Borrower, but nothing herein contained shall limit
or impair Lender's right to disclose such reports to any appropriate
Governmental Authority, or to use such information to the extent pertinent to
an evaluation of the Obligation or to enforce compliance with the terms and
conditions of this Loan Agreement, or to take any lawful action which Lender
deems necessary to protect its interests under this Loan Agreement.
(b) Lender, its director designees, and agents shall use their
reasonable best efforts to protect and preserve the confidentiality of such
information except for such disclosure as shall be required for compliance by
Lender or its director designees with SEC reporting requirements or otherwise
as a matter of law. The provisions of Section 5.01 (a)(1) and (6)
notwithstanding, Borrower may refuse to provide information as required
pursuant thereto to an assignee or successor in interest to the Lender unless
and until such assignee or successor shall have executed an agreement to
maintain the confidentiality of the information as provided herein.
SECTION 12.10 BINDING EFFECT
The Loan Documents shall be binding upon and inure to the benefit of Borrower
and Lender and their respective successors, assigns and legal representatives;
provided, however, that Borrower may not, without the prior written consent of
Lender, assign any rights, powers, duties or obligations thereunder.
SECTION 12.11 NO THIRD PARTY BENEFICIARY
The parties do not intend the benefits of this Loan Agreement to inure to any
third party, nor shall this Loan Agreement be construed to make or render
Lender liable to any materialman, supplier, contractor, subcontractor,
purchaser or lessee of any property owned by Borrower, or for debts or claims
accruing to any such persons against Borrower. Notwithstanding anything
contained herein or in the Debentures, or in any other Loan Document no conduct
by any or all of the parties hereto, before or after signing this Loan
Agreement nor any other Loan Document shall be construed as creating any right,
claim or cause of action against Lender, or any of its officers, directors,
agents or employees, in favor of any materialman, supplier, contractor,
subcontractor, purchaser or lessee of any property owned by Borrower, nor to
any other person or entity other than Borrower.
SECTION 12.12 ENTIRELY
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<PAGE> 37
This Loan Agreement and the Debentures and the other Loan Documents issued
pursuant thereto contain the entire agreement between the parties and supersede
all prior agreements and understandings, if any, relating to the subject matter
hereof and thereof.
SECTION 12.13 HEADINGS
Section headings are for convenience of reference only and, except as a means
of identification of reference, shall in no way affect the interpretation of
this Loan Agreement.
SECTION 12.14 SURVIVAL
All representations and warranties made by Borrower herein shall survive
delivery of the Debentures and the making of the Loans.
SECTION 12.15 MULTIPLE COUNTERPARTS
This Loan Agreement may be executed in any number of counterparts, all of which
taken together shall constitute one and the same agreement, and any of the
parties hereto may execute this Loan Agreement by signing any such counterpart.
SECTION 12.16 GOVERNANCE LAW
THIS LOAN AGREEMENT HAS BEEN PREPARED, IS BEING EXECUTED AND DELIVERED, AND IS
INTENDED TO BE PERFORMED IN THE STATE OF TEXAS, AND THE SUBSTANTIVE LAWS OF
SUCH STATE AND THE APPLICABLE FEDERAL LAWS OF THE UNITED STATES OF AMERICA
SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS
LOAN AGREEMENT AND ALL OF THE OTHER LOAN DOCUMENTS.
SECTION 12.17 REFERENCE TO BORROWER
The term Borrower shall mean Biodynamics International, Inc., Biodynamics
International (United States), Inc., Biodynamics International (Deutschland),
GmbH, and Biodynamics For Partnerships, Inc. where the context of the agreement
makes such other reference appropriate. (signature page follows)
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<PAGE> 38
IN WITNESS WHEREOF, the undersigned has caused this Loan Agreement to
be executed, sealed, and delivered, as of the day and year first above written.
Address for Notice: CO-BORROWER
Biodynamics International, Inc. Biodynamics International, Inc.
1719 Route 10, Suite 314
Parsippany, NJ 07054 By: By:
------------------------------
Attest by:
-----------------------
Address for Notice: CO-BORROWER
Biodynamics International, Inc. Biodynamics International
1719 Route 10, Suite 314 (United States), Inc.
Parsippany NJ 07054 By:
By:
----------------------------
Title:
---------------------------
Attest by:
-----------------------
Address for Notice: CO-BORROWER
Biodynamics International, Inc. Biodynamics International
1719 Route 10, Suite 314 (Deutschland), GmbH
Parsippany NJ 07054 By:
By:
------------------------------
Attest by:
-------------------------
Address for Notice: CO-BORROWER
Biodynamics International, Inc. Biodynamics For Partnerships
1719 Route 10, Suite 314
Parsippany, NJ 07054 By:
------------------------------
Attest by:
-----------------------
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<PAGE> 39
Address for Notice: LENDER
8080 North Central Expressway, Renaissance Capital Partners II, Ltd.
Suite 210, LB 59
Dallas, Texas 75206
(214) 891 8294 (telephone) By:
(214) 891-8200 (fax) ---------------------------------
Renaissance Capital Group, Inc.
Managing General Partner
Russell Cleveland, President
Attest by:
-------------------------
Title: Secretary
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<PAGE> 1
EXHIBIT 10.2
Neither the Debentures nor the shares of common stock into which this
Debenture is convertible have been registered under the Securities Act of
1933, as amended ("Act"), or applicable state securities laws ("State Acts")
and shall not be sold, hypothecated, donated or otherwise transferred unless
the Company shall have received an opinion of Legal Counsel for the Company,
or such other evidence as may be satisfactory to Legal Counsel for the
Company, to the effect that any such transfer shall not require registration
under the Act and the State Acts.
BIODYNAMICS INTERNATIONAL, INC.
Its wholly-owned subsidiaries:
BIODYNAMICS INTERNATIONAL (UNITED STATES), INC.
BIODYNAMICS INTERNATIONAL (DEUTSCHLAND) GMBH
BIODYNAMICS FOR PARTNERSHIPS, INC.
9.00% CONVERTIBLE DEBENTURE
$2,074,081.06 No: 1
Effective Date of issue: November 11, 1997
BIODYNAMICS INTERNATIONAL, INC. (a Florida corporation) and its
subsidiaries, Biodynamics International (United States), Inc. (a Florida
corporation), Biodynamics International (Deutschland) GmbH (a German
corporation), and Biodynamics For Partnerships, Inc. (a Florida corporation)
(collectively hereinafter referred to as the "Company" or "Borrower") are
indebted to and, for value received, herewith promise to pay to:
RENAISSANCE CAPITAL PARTNERS II, LTD.
or to its order, (together with any assignee, jointly or severally, the
"Holder", or "Lender") on or before November 11, 2002 (the "Due Date") (unless
this Debenture shall have been sooner called for redemption or presented for
conversion as herein provided), the sum of Two Million, Seventy-four Thousand,
Eighty-one and 06/100 Dollars ($2,074,081.06) (the "Principal Amount") and to
pay interest on the Principal Amount at the rate of nine percent (9.00%) per
annum as provided herein. In furtherance thereof, and in consideration of the
premises, the Borrower covenants, promises and agrees as follows:
1. INTEREST: Interest on the Principal Amount outstanding from
time to time shall accrue at the rate of 9.00% per annum and be payable in
monthly installments commencing January 1, 1998, and subsequent payments shall
be made on the first day of each month thereafter until the Principal Amount
and all accrued and unpaid interest shall have been paid in full. Overdue
principal and interest on the Debenture shall, to the extent permitted by
applicable law, bear interest at the rate of 12.00% per annum. All payments of
both principal and interest shall be made at the address of the Holder hereof
as it appears in the books and records of the Borrower, or at such other place
as may be designated by the Holder hereof.
2. MATURITY: If not sooner redeemed or converted, this Debenture
shall mature on November 11, 2002 at which time all then remaining unpaid
principal, interest and any other charges then due under the Loan Agreement
shall be due and payable in full.
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<PAGE> 2
3. MANDATORY PRINCIPAL INSTALLMENTS: If this Debenture
is not sooner redeemed or converted, Borrower shall, pay to Holder, commencing
on July 1, 1999, and the first day of each successive month thereafter prior to
maturity, mandatory principal redemption installments, each of such
installments to be in the amount of Ten Dollars ($10) per Thousand Dollars
($1,000) of the then remaining principal amount of the Debenture and further,
at maturity, shall make a final installment of all of the remaining unpaid
Principal Amount balance due plus the amount of any unpaid interest and other
charges then due. Each of such installments shall be applied in partial
redemption of the Debenture when received by Holder.
4. THIS SECTION INTENTIONALLY LEFT BLANK.
5. REDEMPTION:
(a) On any interest payment date, and after prior
irrevocable notice as provided for below, this Debenture is redeemable, in
whole but not in part, at 120% of the then outstanding principal amount if the
following conditions are satisfied: (i) The closing bid price for the common
stock averages at least $6.00 per share for the 21 consecutive trading days
prior to the irrevocable notice and the common stock is listed or quoted on the
National Market, the Small Cap System, AMEX or NYSE; (ii) the $6.00 bid price
is supported by a minimum of $0.34 in net earnings per share of Common Stock in
the aggregate for the last four consecutive fiscal quarters preceding the date
of irrevocable notice, excluding any extraordinary gains of the Borrower; and
(iii) the Borrower will have already begun, and will continue to use its
absolute best efforts to register the shares of common stock issuable upon
conversion of the Debentures and shall complete such registration no later than
90 days after the Conversion Date. The foregoing earnings per share and bid
price tests shall be duly adjusted for share splits, stock dividends, mergers,
consolidations, and other recapitalizations.
(b) The Borrower may exercise this right to redeem prior to
maturity by giving notice (the "Redemption Notice") thereof to the holder of
this Debenture as such name appears on the books of the Borrower, which notice
shall specify the terms of redemption (including the place at which the holder
may obtain payment), the total principal amount to be redeemed (such principal
amount plus the premium thereon herein called the "Redemption Amount") and the
date for redemption (the "Redemption Date"), which date shall not be less than
90 days nor more than 120 days after the date of the notice. On the Redemption
Date, the Borrower shall pay all accrued unpaid interest on the Debenture up to
and including the Redemption Date, and shall pay to the holder a dollar amount
equal to the Redemption Amount. In the case of Debentures called for
redemption, the conversion rights will expire at the close of business on the
Redemption Date.
6. CONVERSION RIGHT: The holder of this Debenture shall have the
right, at holder's option, at any time, to convert all, or, in multiples of
$100,000, any part of this Debenture into such number of fully paid and non-
assessable shares of common stock, $0.01 par value, of Biodynamics
International, Inc. (the "Common Stock") as shall be provided herein. The
holder of this Debenture may exercise the conversion right by giving written
notice (the "Conversion Notice") to Biodynamics International, Inc., the
exercise of such right and stating the name or names in which the stock
certificate or stock certificates for the shares of Common Stock are to be
issued and the address to which such certificates shall be delivered. The
Conversion Notice shall be accompanied by the Debenture. The number of shares
of Common Stock that shall be issuable upon conversion of the Debenture shall
equal the Principal Amount of the Debenture then outstanding divided by the
Conversion Price as defined below and in effect on the date the Conversion
Notice is given; provided, however, that in the event that this Debenture shall
have been partially redeemed, converted, or repaid, shares of Common Stock
shall be issued pro rata, rounded to the nearest whole share. Conversion
shall be deemed
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<PAGE> 3
to have been effected on the date the Conversion Notice, in the form attached,
is received (the "Conversion Date"). Within 20 business days after receipt of
the Conversion Notice, Borrower shall issue and deliver by hand against a
signed receipt therefor or by United States registered mail, return receipt
requested, to the address designated in the Conversion Notice, a stock
certificate or stock certificates of Borrower representing the number of shares
of Common Stock to which Holder is entitled and a check or cash in payment of
all interest accrued and unpaid on the Debenture up to and including the
Conversion Date. The conversion rights will be governed by the following
provisions:
(a) Conversion Price: On the issue date hereof and until such time
as an adjustment shall occur, the Conversion Price shall be $0.4699688 per
share; provided, however, that the Conversion Price shall be subject to
adjustment at the times, and in accordance with the following provisions:
(i) Adjustment for Issuance of Shares at less than the
Conversion Price: If and whenever any Additional Common Stock shares
shall be issued by Biodynamics International, Inc. (the "Stock Issue
Date") for a consideration per share less than the Conversion Price,
then in each such case the initial Conversion Price shall be reduced
to a new Conversion Price in an amount equal to the consideration per
share received by Biodynamics International, Inc.,the additional
shares of Common Stock then issued and the number of shares issuable
to Holder upon conversion shall be proportionately increased; and, in
the case of shares issued without consideration, the initial
Conversion Price shall be reduced in amount and the number of shares
issued upon conversion shall be increased in an amount so as to
maintain for the Holder the right to convert the Debenture into shares
equal in amount to the same percentage interest in the Common Stock of
Biodynamics International, Inc. existed for the Holder immediately
preceding the Stock Issue Date.
(ii) Sale of Shares: In case of the issuance of Additional
Common Stock for a consideration part or all of which shall be cash,
the amount of the cash consideration therefor shall be deemed to be
the amount of the cash received by Borrower for such shares, after any
compensation or discount in the sale, underwriting or purchase thereof
by underwriters or dealers or others performing similar services or
for any expenses incurred in connection therewith. In case of the
issuance of any shares of Additional Common Stock for a consideration
part or all of which shall be other than cash, the amount of the
consideration therefor, other than cash, shall be deemed to be the
then Fair Market Value of the property received.
(iii) Reclassification of Securities: In case of the
reclassification of securities into shares of Common Stock, the shares
of Common Stock issued in such reclassification shall be deemed to
have been issued for a consideration other than cash. Shares of
Additional Common Stock issued by way of dividend or other
distribution on any class of stock of Borrower shall be deemed to have
been issued without consideration.
(iv) Split up or Combination of Shares: In case issued and
outstanding shares of Common Stock shall be subdivided or split up
into a greater number of shares of the Common Stock, the Conversion
Price shall be proportionately decreased, and in case issued and
outstanding shares of Common Stock shall be combined into a smaller
number of shares of Common Stock, the Conversion Price shall be
proportionately increased, such increase or decrease, as the case may
be, becoming effective at the time of record of the split-up or
combination, as the case may be.
(v) Exceptions: The term "Additional Common Stock" herein
shall mean all shares of Common Stock hereafter issued by Biodynamics
International, Inc. (including Common Stock held in
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<PAGE> 4
the treasury of Borrower), except (A) Common Stock issued upon the
conversion of any of the Debentures; (B) Common Stock issued upon
exercise of any warrants or stock purchase options issued and
outstanding as of the date of this Debenture; (C) Common Stock issued
pursuant to exercise of authorized or outstanding options under any
currently existing stock option plans for the officers, directors, and
certain other key personnel as defined in said stock option plans of
Borrower as currently established.
(vi) The term "Fair Market Value," as used herein, is the
value ascribed to consideration other than cash as determined by the
Board of Directors of Biodynamics International, Inc. in good faith,
which determination shall be final, conclusive and binding. If the
Board of Directors shall be unable to agree as to such fair market
value, then the issue of fair market value shall be submitted to
arbitration under and pursuant to the rules and regulations of the
American Arbitration Association, and the decision of the arbitrators
shall be final, conclusive and binding, and a final judgment may be
entered thereon; provided, however, that such arbitration shall be
limited to determination of the fair market value of assets tendered
in consideration for the issue of Common Stock.
(b) Adjustment for Mergers, Consolidations, Etc.:
(i) In the event of distribution to all Common Stock
holders of any stock, indebtedness of Borrower or assets (excluding
cash dividends or distributions from retained earnings) or other
rights to purchase securities or assets, then, after such event, the
Debentures will be convertible into the kind and amount of securities,
cash and other property which the holder of the Debentures would have
been entitled to receive if the holder owned the Common Stock issuable
upon conversion of the Debentures immediately prior to the occurrence
of such event.
(ii) In case of any capital reorganization,
reclassification of the stock of Biodynamics International, Inc.
(other than a change in par value or as a result of a stock dividend,
subdivision, split up or combination of shares), this Debenture shall
be convertible into the kind and number of shares of stock or other
securities or property of Biodynamics International, Inc. which the
holder of the Debenture would have been entitled to receive if the
holder owned the Common Stock issuable upon conversion of the
Debenture immediately prior to the occurrence of such event. The
provisions of the immediately foregoing sentence shall similarly apply
to successive reorganizations, reclassifications, consolidations,
exchanges, leases, transfers or other dispositions or other share
exchanges.
(iii) Notice of Adjustment: (A) In the event Borrower shall
propose to take any action which shall result in an adjustment in the
Conversion Price, Biodynamics International, Inc. shall give notice to
the holder of this Debenture, which notice shall specify the record
date, if any, with respect to such action and the date on which such
action is to take place. Such notice shall be given on or before the
earlier of 10 days before the record date or the date which such
action shall be taken. Such notice shall also set forth all facts (to
the extent known) material to the effect of such action on the
Conversion Price and the number, kind or class of shares or other
securities or property which shall be deliverable or purchasable upon
the occurrence of such action or deliverable upon conversion of this
Debenture; (B) Following completion of an event wherein the Conversion
Price shall be adjusted, Biodynamics International, Inc. shall furnish
to the holder of this Debenture a statement, signed by the Chief
Executive Officer of the Borrower of the facts creating such
adjustment and specifying the resultant adjusted Conversion Price then
in effect.
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<PAGE> 5
(c) Conditions to Acquisition of Common Stock: The Borrower's
obligation to issue Common Stock to the Holder upon conversion of this
Debenture is subject to the conditions that (i) no preliminary or permanent
injunction or other order against the acquisition, purchase, issuance or
delivery of the Common Stock issued by an federal, state or foreign court of
competent jurisdiction shall be in effect; and (ii) if the Holder is required
by law, rule, or regulation promulgated by any governmental entity to comply
with or seek approvals from any governmental entity prior to purchasing the
Common Stock, such compliance or approvals must have been achieved or obtained
by the Holder and proof thereof furnished to the Borrower, provided, however,
that any failure by the Borrower to issue Common Stock to the Holder as a
result of any of the foregoing conditions shall not affect or prejudice the
Holder's right to acquire such Common Stock upon the subsequent satisfaction of
such conditions.
7. THIS SECTION INTENTIONALLY LEFT BLANK.
8. RESERVATION OF SHARES: Borrower warrants and agrees that it
shall at all times reserve and keep available, free from preemptive rights,
sufficient authorized and unissued shares of Common Stock to effect conversion
of this Debenture.
9. REGISTRATION RIGHTS:
(a) Shares issued upon conversion of this Debenture shall be
restricted from transfer by the holder except if and unless the shares are duly
registered for sale pursuant to the Securities Act of 1933, as amended, or the
transfer is duly exempt from registration. The Holder has certain rights with
respect to the registration of shares of Common Stock issued upon the
conversion of this Debenture pursuant to the terms of the Loan Agreement.
Borrower agrees that a copy of the Loan Agreement with all amendments,
additions or substitutions therefor shall be available to the Holder at the
offices of Borrower.
(b) The Borrower may cause the following legend, or its
equivalent, to be set forth on each certificate represent the Common Stock or
any other security issued or issuable upon conversion of this Debenture, not
theretofore distributed to the public or sold to underwriters, as defined by
the Securities Act, for distribution to the public pursuant to Section 9(a)
above:
"The shares represented by this Certificate may not be offered for
sale, sold or otherwise transferred, except pursuant to an effective
registration statement under the Securities Act of 1933, "the
Securities Act.") or pursuant to an exemption from registration under
the Securities Act, the availability of which is to be established to
the satisfaction of the Company."
(c) The Holder agrees that, prior to the disposition of any Common
Stock or other security acquired or acquirable upon the conversion hereof under
circumstances that might require registration of such Common Stock or such
other security under the Securities Act, or any similar federal or state
statute, the Holder shall give written notice to the Borrower, expressing his
intentions as to the disposition to be made of such Common Stock of other
security issued or issuable upon conversion of the Debenture, except, that such
notice shall not be required for a sale of the Common Stock of other security
issued or issuable upon conversion of the Debenture made pursuant to the of
Rule 144 promulgated under the Securities Act. Promptly upon receiving such
notice, the Borrower shall present copies them its counsel. If, in the opinion
of the Borrower's counsel, the proposed disposition does not require
registration of the Common Stock of other security issued or issuable upon
conversion of the Debenture under the Securities Act, or any similar federal or
state statute, the Borrower shall, as promptly as practicable, notify the
Holder of such opinion, whereupon the Holder shall
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<PAGE> 6
be entitled to dispose of such Common Stock of other security issued
or issuable upon conversion of the Debenture all in accordance with
the terms of the notice delivered by the Holder to the Borrower.
10. TAXES: The Borrower shall pay any documentary or other
transactional taxes attributable to the issuance or delivery of this Debenture
or the shares of Common Stock issued upon conversion by the Holder (excluding
any federal, state or local income taxes and any franchise taxes or taxes
imposed upon the Holder by the jurisdiction, or any political subdivision
thereof, under which such Holder is organized or is qualified to do business.)
11. DEFAULT:
(a) Event of Default: An "Event of Default" shall exist if any one
or more of the following events (herein, Collectively called "Events of
Default") shall occur and be continuing:
(i) Borrower shall fail to pay (or shall state in writing
an intention not to pay or its inability to pay), not later than 10
days after the due date, any installment of interest on or principal
of, any Debenture or any fee, expense or other payment required
hereunder;
(ii) Any representation or warranty made under the Loan
Agreement, or any of the other Loan Documents, or in any certificate
or statement furnished or made to Lender pursuant hereto or in
connection herewith or with the Loans hereunder, shall prove to be
untrue or inaccurate in any material respect as of the date on which
such representation or warranty is made;
(iii) Default in the performance of any of the covenants or
agreements of Borrower or its Subsidiaries, if any, contained under
the Loan Agreement, Security Agreement, Pledge Agreement, or in any of
the other Loan Documents, which default is not remedied within thirty
(30) days after written notice thereof to Borrower from Lender,
provided that such 30 day grace period shall not apply to default of
any payment requirement or notice covenant made by Borrower;
(iv) Default shall occur in the payment of any material
Indebtedness (other than the Obligation) of the Borrower or its
Subsidiaries, if any, or default shall occur in respect of any note,
loan agreement or credit agreement relating to any such Indebtedness,
and such default shall continue for more than the period of grace, if
any, specified therein and any such Indebtedness shall become due
before its stated maturity by acceleration of the maturity thereof or
shall become due by its terms and shall not be promptly paid or
extended;
(v) Any of the Loan Documents shall cease to be legal,
valid and binding agreements enforceable against the Borrower in
accordance with the respective terms thereof or shall in any way be
terminated or become or be declared ineffective or inoperative or
shall in any way whatsoever cease to give or provide the respective
rights, titles, interests, remedies, powers or privileges intended to
be created thereby;
(vi) Borrower or its Subsidiaries, if any, shall (A) apply
for or consent to the appointment of a receiver, trustee, custodian,
intervenor or liquidator of itself, or of all or substantially all of
such Person's assets; (B) file a voluntary petition in bankruptcy,
admit in writing that such Person is unable to pay such Person's debts
as they become due or generally not pay such Person's debts as they
become due; (C) make a general assignment for the benefit of
creditors; (D) file a petition or answer seeking reorganization or an
arrangement with creditors or to take advantage of any bankruptcy or
insolvency
-6-
<PAGE> 7
laws; (E) file an answer admitting the material allegations of, or
consent to, or default in answering, a petition filed against such
Person in any bankruptcy, reorganization or insolvency proceeding; or
(F) take corporate action for the purpose of effecting any of the
foregoing;
(vii) An involuntary petition or complaint shall be filed
against Borrower or any of its Subsidiaries seeking bankruptcy or
reorganization of such Person or the appointment of a receiver,
custodian, trustee, intervenor or liquidator of such Person, or all or
substantially all of such Person's assets, and such petition or
complaint shall not have been dismissed within sixty (60) days of the
filing thereof or an order, order for relief, judgment or decree shall
be entered by any court of competent jurisdiction or other competent
authority approving a petition or complaint seeking reorganization of
Borrower or its Subsidiary, if any, or appointing a receiver,
custodian, trustee, intervenor or liquidator of such Person, or of all
or substantially all of such Person's assets;
(viii) Any final judgment(s) for the payment of money in
excess of the sum of $1,000,000 in the aggregate shall be rendered
against Borrower or any Subsidiary and such judgment or judgments
shall not be satisfied or discharged at least ten (10) days prior to
the date on which any of its assets could be lawfully sold to satisfy
such judgment;
(ix) The failure of Borrower to issue and deliver shares
of Common Stock as provided herein upon conversion of the Debenture;
or
(x) The failure to submit Lender's nominee, if any, for
election to the Board of Directors of Borrower for any reason other
than good cause.
(b) Remedies Upon Event of Default: If an Event of Default shall
have occurred and be continuing, then Lender may exercise any one or more of
the following rights and remedies, and any other remedies provided in any of
the Loan Documents, as Lender in its sole discretion, may deem necessary or
appropriate:
(i) declare the unpaid Principal Amount (after
application of any payments or installments received by Lender) of,
and all interest then accrued but unpaid on, the Debentures and any
other liabilities hereunder to be forthwith due and payable, whereupon
the same shall forthwith become due and payable without presentment,
demand, protest, notice of default, notice of acceleration or of
intention to accelerate or other notice of any kind, all of which
Borrower hereby expressly waives;
(ii) reduce any claim to judgment; and/or
(iii) without notice of default or demand, pursue and
enforce any of Lender's rights and remedies under the Loan Documents,
or otherwise provided under or pursuant to any applicable law or
agreement, all of which rights may be specifically enforced.
(c) Remedies Nonexclusive: Each right, power or remedy of the
holder hereof upon the occurrence of any Event of Default as provided for in
this Debenture or now or hereafter existing at law or in equity or by statute
shall be cumulative and concurrent and shall be in addition to every other
right, power or remedy provided for in this, Debenture or now or hereafter
existing at law or in equity or by statute, and the exercise or beginning of
the exercise by the holder or transferee hereof of any one or more of such
rights, powers or
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<PAGE> 8
remedies shall not preclude the simultaneous or later exercise by the holder of
any or all such other rights, powers or remedies.
(d) Expenses: Upon the occurrence of a Default or an Event of
Default, which occurrence is not cured within the notice provisions, if any
provided therefore, Borrower agrees to pay and shall pay all costs and expenses
(including Lender's attorney's fees and expenses) reasonably incurred by Lender
in connection with the preservation and enforcement of Lender's rights under
the Loan Agreement, the Debentures, or any other Loan Document.
12. FAILURE TO ACT AND WAIVER: No failure or delay by the holder
hereof to require the performance of any term or terms of this Debenture or not
to exercise any right or any remedy shaft constitute a waiver of any such term
or of any right or of any default, nor shall such delay or failure preclude the
holder hereof from exercising any such right, power or remedy at any later time
or times. By accepting payment after the due date of any amount payable under
this Debenture, the holder hereof shall not be deemed to waive the right either
to require payment when due of all other amounts payable, or to later declare a
default for failure to effect such payment of any such other amount. The
failure of the holder of this Debenture to give notice of any failure or breach
of the Borrower under this Debenture shall not constitute a waiver of any right
or remedy in respect of such continuing failure or breach or any subsequent
failure or breach.
13. CONSENT TO JURISDICTION: The Borrower hereby agrees and
consents that any action, suit or proceeding arising out of this Debenture may
be brought in any appropriate court in the State of Texas including the United
States District Court for the Northern District of Texas, or in any other court
having jurisdiction over the subject matter, all at, the sole election of the
holder hereof, and by the issuance and execution of this Debenture the Borrower
irrevocably consents to the jurisdiction of each such court. The Borrower
hereby irrevocably appoints CT Corporation, Dallas, Texas, as agent for the
Borrower to accept service of process for and on behalf of the Borrower in any
action, suit or proceeding arising out of this Debenture. Except for default
in payment of interest or principal when and as they become due, and except as
otherwise specifically set forth herein or otherwise agreed to in writing by
the parties, any action dispute, claim or controversy (all such herein called
"Dispute") between or among the parties as to the facts or the interpretation
of the Debenture shall be resolved by arbitration as set forth in Section 1
1.05 of the Loan Agreement.
14. HOLDERS RIGHT TO REQUEST MULTIPLE DEBENTURES: The Holder
shall, upon written request and presentation of the Debenture, have the right,
at any interest payment date, to request division of this Debenture into two or
more units, each of such to be in such amounts as shall be requested; provided
however that no Debentures shall be issued in denominations of face amount less
than $100,000.00.
15. TRANSFER: This Debenture may be transferred on the books of
the Borrower by the registered Holder hereof, or by Holder's attorney duly
authorized in writing, only upon (i) delivery to the Borrower of a duly
executed assignment, in the form attached hereto, of the Debenture, or part
thereof, to the proposed new Holder, along with a current notation of the
amount of payments received and net Principal Amount yet unfunded, and
presentment of such Debenture to the Borrower for issue of a replacement
Debenture, or Debentures, in the name of the new Holder; (ii) the designation
by the new Holder of the Lender's agent for notice, such agent to be the sole
party to whom Borrower shall be required to provide notice when notice to
Lender is required hereunder and who shall be the sole parry authorized to
represent Lender in regard to modification or waivers under the Debenture, the
Loan Agreement, or other Loan Documents; and any action, consent or waiver,
(other than a compromise of principal and interest), when given or taken by
Lender's agent for notice, shall be deemed to be the action of the holders of a
majority in amount of the Principal Amount of
-8-
<PAGE> 9
the Debentures, as such holders are recorded on the books of the Borrower; and
(iii) in compliance with the legend to read "The Securities represented by this
Debenture have not been registered under the Securities Act of 1933, as amended
("Act"), or applicable state securities laws ("State Acts") and shall not be
sold, hypothecated, donated or otherwise transferred unless the Company shall
have received an opinion of Legal Counsel for the Company, or such other
evidence as may be satisfactory to Legal Counsel for the Company, to the effect
that any such transfer shall not require registration under the Act and the
State Acts."
The Borrower shall be entitled to treat any holder of record of the
Debenture as the Holder in fact thereof and of the Debenture and shall not be
bound to recognize any equitable or other claim to or interest in this
Debenture in the name of any other person, whether or not it shall have express
or other notice thereof, save as expressly provided by the laws of Texas.
16. NOTICES: All notices and communications under this Debenture
shall be in writing and shall be either delivered in person or by overnight
service such as FedEx and accompanied by a signed receipt therefor; or mailed
first-class United States certified mail, return receipt requested, postage
prepaid, and addressed as follows: (i) if to the Borrower at its address for
notice as stated in the Loan Agreement; and, (ii) if to the holder of this
Debenture, to the address (a) of such holder as it appears on the books of the
Borrower, or (b) in the case of a partial assignment to one or more holders, to
the Lender's agent for notice, as the case may be. Any notice of communication
shall be deemed given and received as of the date of such delivery if
delivered; or if mailed, then three days after the date of mailing.
17. MAXIMUM INTEREST RATE: Regardless of any provision contained
in this Debenture, Lender shall never be entitled to receive, collect or apply
as interest on the Debenture any amount in excess of interest calculated at the
Maximum Rate, and, in the event that Lender ever receives, collects or applies
as interest any such excess, the amount which would be excessive interest shall
be deemed to be a partial prepayment of principal and treated hereunder as
such, and, if the principal amount of the Debenture is paid in full, any
remaining excess shall forthwith be paid to Borrower. In determining whether
or not the interest paid or payable under any specific contingency exceeds
interest calculated at the Maximum Rate, Borrower and Lender shall, to the
maximum extent permitted under applicable law, (i) characterize any non
principal payment as an expense, fee or premium rather than as interest; (ii)
exclude voluntary prepayments and the effects thereof, and (iii) amortize, pro
rate, allocate and spread, in equal parts, the total amount of interest
throughout the entire contemplated term of the Debenture; provided that, if the
Debenture is paid and performed in full prior to the end of the full
contemplated term thereof, and if the interest received for the actual period
of existence thereof exceeds interest calculated at the Maximum Rate, Lender
shall refund to Borrower the amount of such excess or credit the amount of such
excess against the principal amount of the Debenture and, in such event, Lender
shall not be subject to any penalties provided by any laws for contracting for,
charging, taking, reserving or receiving interest in excess of interest
calculated at the Maximum Rate.
(a) "Maximum Rate" shall mean, on any day, the highest
non-usurious rate of interest (if any) permitted by applicable law on such day
that at any time, or from time to time, may be contracted for, taken, reserved,
charged or received on the Indebtedness evidenced by the Debenture under the
laws which are presently in effect of the United States of America and the
State of Texas or by the laws of any other jurisdiction which are or may be
applicable to the holders of the Debenture and such Indebtedness or, to the
extent permitted by law, under such applicable laws of the United States of
America and the State of Texas or by the laws of any other jurisdiction which
are or may be applicable to the holder of the Debenture and which may hereafter
be in effect and which allow a higher maximum non-usurious interest rate than
applicable laws now allow.
-9-
<PAGE> 10
18. RIGHTS UNDER LOAN AGREEMENT: This Debenture is issued
pursuant to that certain Convertible Debenture Loan Agreement dated as of
November 11, 1997 by and between Biodynamics International, Inc. and its
subsidiaries as co-borrower and Renaissance Capital Partners II, Ltd. as
Lender, (the "Loan Agreement'), and the holder hereof is entitled to all the
rights and benefits, and is subject to all the obligations of Lender under said
agreement, including the maximum interest rates limitations as specified in
Section 11.07 thereof. Both Borrower and Lender have participated in the
negotiation and preparation of the Loan Agreement and of this Debenture.
Borrower agrees that a copy of the Loan Agreement with all amendments,
additions and substitutions therefor shall be available to the Holder at the
offices of Borrower.
19. DEFINED TERMS: Capitalized Terms used but not defined herein
shall have the meaning given them in the Loan Agreement.
20. GOVERNING LAW: This Debenture shall be governed by and
construed and enforced in accordance with the laws of the State of Texas, or,
where applicable, the laws of the United States.
(Signature Page Follows)
-10-
<PAGE> 11
IN WITNESS WHEREOF, the undersigned Borrowers have caused this
Debenture to be duly issued and executed on the 30th day of December, 1997, to
be effective as of November 11, 1997.
BIODYNAMICS INTERNATIONAL, INC.
By:________________________________
Attest by:_________________________
CO-BORROWER
BIODYNAMICS INTERNATIONAL (UNITED
STATES), INC.
By: ________________________________
Attest by: _________________________
CO-BORROWER
BIODYNAMICS INTERNATIONAL
(DEUTSCHLAND), GMBH
By: ________________________________
Attest by: _________________________
CO-BORROWER
BIODYNAMICS FOR PARTNERSHIPS, INC.
By: ________________________________
Attest by: _________________________
-11-
<PAGE> 12
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned ______________________________
hereby sell(s), assign(s), and transfer(s) unto____________________________
the following right represented by the within Debenture pursuant to the terms
and conditions of this Debenture held by the undersigned:
The undersigned hereby authorizes and directs BIODYNAMICS
INTERNATIONAL, INC. to (i) issue and deliver to the above-named assignee a new
Debenture pursuant to which the rights being assigned may be exercised, and
(ii) if there are rights remaining pursuant to the undersigned's Debenture
after the assignment contemplated herein, to issue and deliver to the
undersigned a new Debenture evidencing such remaining rights after issuance and
delivery of this Debenture to the above-named assignee. Except for the face
value of the Debenture, and the number of shares of Common Stock that may be
purchased, the new Debentures to be issued and delivered by the Borrower are to
contain the same terms and conditions as the undersigned's Debenture. To
complete the assignment contemplated by this Agreement, the undersigned
irrevocably appoints _____________________________ as the undersigned's
attorney-in-fact to transfer this Debenture and the rights thereunder on the
books to the Borrower with the full power of substitution for these purposes.
________________________________________
Printed Name of the Holder
________________________________________
Signature
________________________________________
Date
_____________________________________________________________________________
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the within Debenture, in every particular, without
alteration or enlargement, or any change whatsoever, and must be guaranteed by
a bank, other than a savings bank, or trust company having an office or
correspondent in the State of Texas or Florida or by a firm having membership
on a registered national securities exchange and an office in the State of
Texas or Florida.
<PAGE> 13
CONVERSION NOTICE
(To be executed by the Holder desiring to exercise the right to acquire shares
of Common Stock of BIODYNAMICS INTERNATIONAL, INC. pursuant to this Debenture.)
THE UNDERSIGNED HOLDER of a Debenture convertible into shares of
Common Stock ("Shares") of BIODYNAMICS INTERNATIONAL, INC., a Florida
corporation, hereby elects to convert, pursuant to the provisions of the
Holder's Debenture dated _______________ held by the undersigned, to the extent
of purchasing the following number of such Shares __________________ ( );
and requests that a stock certificate for such Shares be issued in the
name of, and delivered to ___________________________, whose address is
___________________________________________, and further requests, if the
number of Shares purchased are not all the Shares that may be acquired pursuant
to the unconverted portion of this Debenture, that a new Debenture of like
tenor for the remaining Shares that may be acquired pursuant to this Debenture
be issued and delivered to the undersigned.
_______________________________________
Printed Name
_______________________________________
Signature
_____________________________________
_____________________________________
_____________________________________
Address
_______________________________________
Date
(Signature must conform in all respects to the name of the Holder as specified
on the face of this Debenture.)
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<PAGE> 1
EXHIBIT 10.3
SECOND AMENDMENT TO SECURITY AGREEMENT
THIS SECOND AMENDMENT TO SECURITY AGREEMENT is executed as of December
31, 1997, by BIODYNAMICS INTERNATIONAL, INC. (the "Debtor"), for the benefit of
RENAISSANCE CAPITAL PARTNERS, II, LTD. ("Secured Party").
W I T N E S S E T H:
WHEREAS, Debtor and Secured Party are party to a Security Agreement
dated as of June 30, 1997 (the "Security Agreement") as amended by the First
Amendment to Security Agreement dated as of September 15, 1997;
WHEREAS, Debtor has requested that Secured Party provide (i)
additional financing to Pledgor, and (ii) modify the terms of the indebtedness
represented by the Note to extend the maturity date, to reduce the interest
rate from 12% per annum to 9% per annum, and to convert the indebtedness into a
loan which is convertible into the common stock of the Debtor and Secured Party
has agreed to provide the requested accommodations to Debtor;
NOW, THEREFORE, for valuable consideration hereby acknowledged, the
parties agree as follows:
1. AMENDMENT OF SECTION 1 OF SECURITY AGREEMENT.
Section 1 is deleted and the following is inserted in its place as new
Section 1:
REFERENCE TO NOTE. This security agreement is being executed and
delivered in connection with, and to secure all obligations and
liabilities of Debtor to Secured Party pursuant to the terms of (i)
Convertible Debenture Loan Agreement by between Biodynamics
International, Inc. its wholly owned subsidiaries Biodynamics
International (Deutschland) GmbH, Biodynamics International (United
States), Biodynamics for Partnerships, Inc. and Renaissance Capital
Partners II, Ltd.; and (ii) 9% Convertible in the principal amount of
$2,074,081.06 by and between Biodynamics International, Inc. its wholly
owned subsidiaries Biodynamics International (Deutschland) GmbH,
Biodynamics International (United States), Biodynamics for
Partnerships, Inc. and Renaissance Capital Partners II, Ltd.
2. ADDITIONAL REPRESENTATIONS AND WARRANTIES.
Debtor represents and warrants to Secured Party that Debtor has full
power and authority to execute and deliver this Amendment, and this Amendment
constitutes Debtor's valid, binding and enforceable obligation.
3. MISCELLANEOUS.
This Amendment, the Security Agreement, and all related instruments
and agreements shall be governed by the laws of the State of Texas. This
Amendment may be executed in any number of counterparts, each of which shall be
deemed an original.
<PAGE> 2
4. ENTIRE AGREEMENT.
This Security Agreement, as amended hereby, is ratified and continues
in full force and effect.
THIS AGREEMENT, TOGETHER WITH THE SECURITY AGREEMENT, FIRST AMENDMENT
TO SECURITY AGREEMENT, CONVERTIBLE DEBENTURE LOAN AGREEMENT AND CONVERTIBLE
DEBENTURE, CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES AND SUPERSEDES
ALL PRIOR AGREEMENTS AND UNDERSTANDINGS RELATING TO THE SUBJECT MATTER THEREOF.
THERE ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, this Second Amendment to Security Agreement has
been duly executed as of the date set forth above.
FOR VALUABLE CONSIDERATION, the receipt and adequacy of which are
hereby acknowledged, Debtor hereby covenants and agrees with Secured Party as
follows:
EXECUTED as of the day and year first herein set forth.
BIODYNAMICS INTERNATIONAL, INC.
1719 Route 10, Suite 34
Parsippany, New Jersey 07054
By: _______________________________
Name: Karl Meister
Title: Chief Executive Officer
<PAGE> 1
EXHIBIT 10.4
SECOND AMENDED SECURITY AGREEMENT
(STOCK PLEDGE)
This Second Amended Security Agreement is executed as of December 31,
1997, by and between Biodynamics International, Inc., a Florida Corporation
("Pledgor") and Renaissance Capital Partners II, Ltd., a Texas limited
partnership ("Pledgee").
BACKGROUND STATEMENT
Pledgor beneficially owns 100% of the shares of the capital of
Biodynamics International (Duetschland) GmbH, a German corporation, 100% of the
shares of the Common Stock of Biodynamics International (United States), Inc.,
a Florida Corporation, and 100% of the shares of the Common Stock of
Biodynamics for Partnerships, Inc., a Florida Corporation (collectively the
"Shares");
Pledgor executed that certain Security Agreement dated as of June 30,
1997, in connection with that certain Promissory Note in the original principal
amount of $1,010,027.40 made payable to the order of Pledgee, pursuant to which
the Shares were pledged to Pledgee as security for the obligations of Pledgor;
Pledgor executed that certain First Amended Security Agreement dated
as of September 15, 1997, in connection with that certain Promissory Note in
the original principal amount of $2,035,928.32 (the "Note") made payable to the
order of Pledgee pursuant to which the Shares were pledged to Pledgee as
security for the obligations of Pledgor;
Pledgor has requested that Pledgee: (i) provide additional financing
to Pledgor, and (ii) modify the terms of the indebtedness represented by the
Note to extend the maturity date, to reduce the interest rate from 12% per
annum to 9% per annum, and to convert the indebtedness into a loan which is
convertible into the common stock of the Pledgor and Pledgee has agreed to
provide the requested accommodations to Pledgor.
NOW, THEREFORE, for valuable consideration hereby acknowledged, the
parties agree as follows:
1. AMENDMENT OF SECURITY AGREEMENT.
The Security Agreement is hereby amended to change the description of
the Note for which the shares were pledged as collateral. For all purposes
hereafter the Note shall refer to the following:
All obligations of Pledgor to Pledgee pursuant to the terms of (i)
Convertible Debenture Loan Agreement by between Biodynamics International, Inc.
its wholly owned subsidiaries Biodynamics International (Deutschland) GmbH,
Biodynamics International (United States), Biodynamics for Partnerships, Inc.
and Renaissance Capital Partners II, Ltd.; and (ii) 9% Convertible in the
principal amount of $2,074,081.06 by and between Biodynamics International,
Inc. its wholly owned subsidiaries Biodynamics International (Deutschland)
GmbH, Biodynamics International (United States), Biodynamics for Partnerships,
Inc. and Renaissance Capital Partners II, Ltd.
2. ADDITIONAL REPRESENTATIONS AND WARRANTIES.
Debtor represents and warrants to Secured Party that Debtor has full
power and authority to execute and deliver this Amendment, and this Amendment
constitutes Debtor's valid, binding and enforceable obligation.
<PAGE> 2
3. MISCELLANEOUS.
This Amendment, the Security Agreement, and all related instruments
and agreements shall be governed by the laws of the State of Texas. This
Amendment may be executed in any number of counterparts, each of which shall be
deemed an original.
4. ENTIRE AGREEMENT.
The Security Agreement, as amended hereby, is ratified and continues
in full force and effect.
THIS AGREEMENT, TOGETHER WITH THE SECURITY AGREEMENT, FIRST AMENDMENT
TO SECURITY AGREEMENT, CONVERTIBLE DEBENTURE LOAN AGREEMENT AND CONVERTIBLE
DEBENTURE, CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES AND SUPERSEDES
ALL PRIOR AGREEMENTS AND UNDERSTANDINGS RELATING TO THE SUBJECT MATTER THEREOF.
THERE ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, this Second Amendment to Security Agreement has
been duly executed as of the date set forth above.
FOR VALUABLE CONSIDERATION, the receipt and adequacy of which are
hereby acknowledged, Debtor hereby covenants and agrees with Secured Party as
follows:
EXECUTED as of the day and year first herein set forth.
BIODYNAMICS INTERNATIONAL, INC.
1719 Route 10, Suite 34
Parsippany, New Jersey 07054
By: ________________________________
Name: Karl Meister
Title: Chief Executive Officer
<PAGE> 1
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made and entered into
as of June 12, 1996 between Biodynamics International, Inc. (the "Company") and
Karl H. Meister (the "Employee") (collectively "the Parties").
W I T N E S S E T H:
WHEREAS, the Employee is currently serving as President and Chief
Executive Officer of the Company, and the Company desires to secure the
continuing employment of the Employee in accordance with the terms of this
Agreement;
WHEREAS, the Company will compensate the Employee according to the
terms of this Agreement in order to retain his employment for the term of this
Agreement;
WHEREFORE, in consideration of the premises and the mutual covenants
contained herein, and for the good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties agree as follows:
1. DEFINITIONS.
In addition to the terms elsewhere defined in this Agreement, the
following terms as used herein shall have the following meanings, unless the
context or use indicates a different meaning.
"Cause" for termination of employment means (a) any act by the
Employee taken otherwise than in good faith that is materially adverse to the
best interests of the Company or which, if the subject of a criminal
proceeding, could result in a criminal conviction for a felony, or (b) the
willful failure by the Employee to substantially perform his duties under this
Agreement, which duties are reasonably within the control of the Employee
(other than the failure resulting from the Employee's incapacity due to
physical or mental illness). Employee shall not be deemed to be terminated for
Cause under subparagraph (b) of this definition unless and until (i) the
Employee receives written notice from the Board of Directors of the Company
specifying with reasonable particularity the actions of the Employee which
constitute a violation of this Agreement, and (ii) within a period of 30 days
after receipt of such notice (and during which the violation is reasonably
within the control of the Employee), the Employee fails to reasonably ad
prospectively cure such violation.
"Common Stock" means the common stock of the Company.
"Good Reason" for resignation from employment means (a) without his
prior concurrence, the Employee is assigned duties or responsibilities that are
inconsistent with his position, duties, responsibilities or status at the
commencement of the term of this Agreement, or his reporting responsibilities
or titles in effect at the time of such commencement are changed, excluding for
this purpose an isolated, insubstantial and inadvertent action not taken in bd
faith and which is remedied by the Company promptly after receipt of notice
thereof given by the Employee, or (b) the Employee's Annual Base Salary is
reduced or there occurs any other failure by the Company to comply in any
respect with the provisions of Section 4 hereof, excluding for this purpose an
isolated, insubstantial and inadvertent action not taken in bad faith and which
is remedied by the Company promptly after receipt of notice thereof given by
the Employee, or (c) there occurs any change in any employee benefit plans or
arrangements of the Company in which the Employee participates (including
without
<PAGE> 2
limitation any pension or retirement plan, savings or profit sharing plan,
stock ownership or purchase plan, stock option plan of life, medical or
disability insurance plan), which would materially and adversely affect the
Employee's rights or benefits thereunder, unless such change occurs pursuant to
a program applicable to all executive officers of the Company and does not
result in a proportionately greater reduction in the rights of or benefits to
the Employee as compared with any other executive officer of the Company, or
(d) the Employee is required to relocate his residence away from New Vernon,
New Jersey because of the Company's business, or (e) the Company fails to
obtain the additional financing and the restructuring of certain debt and
equity per the November 23, 1995 Commitment Letter as described on p. 6 of the
SEC Form 10-QSB for the period ended December 31, 1995, attached to this
Agreement as Exhibit A, or (g) the Company fails to remedy its current
deficiency in meeting the listing criteria on the NASDAQ Small Cap Market or
(h) the Company fails to obtain an Updated Opinion from Hogan & Hartson (or
other law firm with specialization in FDA law and regulations), within one
month following execution and delivery of this Agreement, stating the Company
is in compliance with the National Organ Transplant Act of 1984, or (i) the
Company fails to obtain shareholder approval for stock options as required by
Sections 4(c) and 4(d) of this Agreement, or (i) the Company fails to obtain
Directors' and Officers' Liability Insurance as specified in Section 4(i).
"Stock Options" means either Annual Stock Options or Special Stock
Options as defined in Section 4(c) or 4(d) of this Agreement.
2. EMPLOYMENT.
The Company hereby employs the Employee, and the Employee hereby
accepts employment with the Company, on the terms and conditions set forth
herein.
3. TERM.
The term of the Employee's employment with the Company hereunder
commenced on March 1, 1996 ("Date of Employment") and shall terminate at the
close of business on February 28, 1999, provided, however, that unless on or
before January 1 immediately preceding each February 28 on which the term of
the Employee's employment with the Company would otherwise terminate, either
party delivers to the other party a written notice of his or its election to
terminate such employment on February 28, the term of the Employee's employment
with the Company shall be automatically extended for additional one year
periods commencing on the day immediately following such February 28 and ending
on the close of business on the following February 28, unless the term of the
Employee's employment hereunder shall sooner terminate in accordance with the
provisions of Section 7 hereof.
4. SALARY AND OTHER BENEFITS.
(a) Annual Base Salary. The Company shall pay the Employee an
annual base salary ("Annual Base Salary") at the rate of not less than $160,000
per year, payable in substantially equal monthly installments in accordance
with the customary payroll policies of the Company in effect at the time such
payment is made, or as otherwise mutually agreed upon. The Board of Directors
of the Company may from time to time direct such upward adjustments to the
Employee's Annual Base Salary as the Board deems to be necessary or desirable,
however, the Employee's Annual Base Salary shall not be reduced after any
increase thereof. Any increase in the Employee's Annual Base Salary shall not
serve to limit or reduce any other obligation of the Company under this
Agreement.
(b) Annual Cash Incentive Bonus. Commencing with the fiscal year
ending on September 30, 1997 and so long as the Employee is employed by the
Company, he shall be eligible to receive from the
<PAGE> 3
Company, in respect of each fiscal year of the Company during which he is
employed, an annual cash incentive bonus ("Annual Cash Incentive Bonus"),
payable in cash within 60 days following the end of such fiscal year, in an
amount approximately equal to 35% of the Employee's Annual Base Salary for that
year, subject to the satisfaction of the Employee's reasonable performance
goals for that year, subject to the satisfaction of the Employees's reasonable
performance goals for that year which are agreed to by the Board of Directors
and the Employee not later than 45 days after the commencement of such year.
The determination as to whether the Employee's performance goals or any of them
have been met for a fiscal year shall be made by the Board of Directors of the
Company based on reasonable business standards and in the exercise of good
faith. As a member of the Board of Directors of the Company, the Employee
shall not vote on matters presented to the Board of Directors of the Company
pursuant to this Section 4(b).
(c) Annual Stock Options. The Employee shall be eligible to
receive from the Company, for each fiscal year of the Company during which he
is employed hereunder, commencing with the fiscal year ending on September 30,
1996, non-qualified stock options ("Annual Stock Options") to be granted
within 60 days following the end of such fiscal year, for 75,000 shares
available for purchase at the market price on the day of the grant. These
Annual Stock Options will be granted under the general provisions of the
Company's 1996 Stock Option Plan for which the Company is to employ its est
efforts to obtain approval by the shareholders at the 1996 Annual Meeting of
shareholders. The Company agrees to use its best efforts to cause shares of
Common Stock issuable upon exercise of such Stock Options to be and remain
registered on an effective Registration Statement on Form S-8 and to prepare
and file with the United States Securities and Exchange Commission any
prospectuses that may be reasonably necessary to permit the Employee to resell
the shares of Common Stock issuable upon exercise of such Stock Options under
the Securities Act of 1933, as amended. The Company also agrees that the 1996
Stock Option Plan will comply with Rule 16b-3 under the Securities Exchange Act
of 1934, as amended. The Employee shall maintain the right to all Annual Stock
Options obtained under Section 4(c) for five (5) years following the date of
grant of such Annual Stock Option, regardless of whether the Employee continues
to be employed by the Company and regardless of whether this Agreement expired
by its own terms or has been terminated, unless the Company terminates te
Employee for Cause or unless the Employee terminates this Agreement without
Good Reason.
(d) Special Stock Options. In consideration of the Employee's
execution and delivery of this Agreement, the Company shall use best efforts to
obtain shareholder approval for a Special Stock Option Bonus and upon such
approval shall issue and deliver to the Employee, as promptly as practicable
following the execution and delivery of this Agreement, non-qualified stock
options ("Special Stock Options") which shall entitle the Employee to purchase
750,000 cents per share. Forty percent (40%) of the Special Stock Options
shall vest immediately with the Employee, thirty percent (30%) of the Special
Stock Options shall vest twelve (12) months following the Employee's Date of
Employment, and thirty percent (30%) of the Special Stock Options shall vest
twenty-four (24) months following the Employee's Date of Employment. The
Company agrees to use its best efforts to cause shares of Common Stock issuable
upon exercise of such Stock Options to be and remain registered on an effective
Registration Statement on Form S-8 and to prepare and file with the United
States Securities and Exchange Commission any prospectuses that may be
reasonably necessary to permit the Employee to resell the shares issuable upon
exercise of such Stock Options under the Securities Act of 1933, as amended.
The Company also agrees that the Special Stock Options will comply with Rule
16b-3 under the Securities Exchange Act of 1934, as amended. The Employee
shall maintain the right to all Special Stock Options obtained under Section
4(d) for five (5) years following the date of grant of such Special Stock
Option, regardless of whether the Employee continues to be employed by the
Company and regardless of whether this Agreement expired by its own terms or
has been terminated, unless the Company terminates the Employee for Cause or
unless the Employee terminates this Agreement without Good Reason.
<PAGE> 4
(e) Employee Benefits. The Employee shall be entitled to
participate in or receive benefits under any and all employee benefit plans and
arrangements made available by the Company at any time and from time to time
during the term of this Agreement to its executive officers and key management
personnel, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans or arrangements. Except for any such
salary that the Employee defers pursuant to any plan under 26 U.S.C.A.
Section 401(k) (West Supp. 1995) ("Section 401(k)"), nothing paid to the
Employee under any such plan or arrangement presently in effect or made
available in the future shall be deemed to be payable to the Employee pursuant
to Sections 4(a) and 4(b).
(f) Business Expenses. Upon receipt of itemized vouchers, expense
account reports and supporting documents submitted to the Company in accordance
with the Company's procedures from time to time in effect, the Company shall
reimburse the Employee for all reasonable and necessary travel, entertainment
and other reasonable and necessary business expenses incurred ordinarily and
necessarily by the Employee in connection with the performance of his duties
hereunder.
(g) Vacation. So long as the Employee is employed hereunder, the
Employee shall be entitled to three weeks of paid vacation during each 12-month
period commencing on the Date of Employment, at the reasonable and mutual
convenience of the Company and the Employee.
(h) Office. As soon as reasonably possible, but not later than
December 31, 1996, the Company will provide an office for the employees in the
Morristown, New Jersey area which will be the principal office of the Employee.
The Employee will also be provided offices at the Company's locations in Tampa,
Florida and in Germany.
(i) Insurance and Indemnification. The Company shall purchase and
maintain Directors' and Officers' Liability Insurance from an insurance company
with a Best rating of A- or higher in amounts and covering matters customary
for companies of similar size in the same industry. This Directors' and
Officers' Liability Insurance shall provide defense of any lawsuit brought
against the Employee in connection with his employment by the Company, and
indemnification for any damages therefrom. The Company further agrees that it
will (i) indemnify and hold harmless the Employee from any and all damages that
he may incur as a result of his employment with the Company and (ii) advance
expenses in connection with any lawsuit, action, investigation or proceeding to
the maximum extent permitted by law. The Company further agrees that it will
not amend the indemnification and advancement of expenses provisions contained
in its certificate of incorporation and by-laws unless required by law.
(j) Board of Directors. Commencing with the 1996 Annual Meeting
of shareholders, and so long as the Employee is employed hereunder, the Company
shall cause the Board of Directors of the Company to nominate and to solicit
proxies from the shareholders of the Company for the purpose of electing at
each annual meeting (or special meeting in lieu thereof) of the Company's
shareholders a Board of Directors which includes the Employee as a director.
5. POSITION AND DUTIES.
The Employee shall serve as the President and Chief Executive Officer
of the Company, accountable only to the Board of Directors of the Company, and,
subject to the authority of such Board, shall have supervision and control
over, and responsibility for, the general management and operation of the
Company and shall have such other powers and duties as may from time to time be
prescribed by such Board, provided that such duties are reasonable and
customary for a President and Chief Executive Officer.
<PAGE> 5
6. DEATH.
The Employee's employment with the Company under this Agreement shall
terminate upon his death. The Company shall pay the Employee's Annual Base
Salary, Annual Cash Incentive Bonus, and Annual Stock Options due to the
Employee through the effective date of termination of this Agreement by death
to the extent not theretofore paid. The estate of the Employee shall retain
all Stock Options granted to the Employee as of the day of his death per
Section 4(c) and 4(d) for a period of three (3) years following the Employee's
death.
7. TERMINATION OF THIS AGREEMENT.
(a) The Company may terminate the Employee's employment with the
Company under this Agreement for Cause. Except for the obligation to pay the
Employee's Annual Base Salary through the effective date of termination, and
except for the rights and obligations of the Company under Sections 4(i), 22
and 23 hereof, all obligations of the Company hereunder shall cease upon such
termination, subject to the terms and provisions of any employee benefit plans
or arrangements maintained by the Company in which the Employee was
participating at the time of such termination. The Company may effect a
termination pursuant to this Section 7(a) only by the affirmative vote of not
less than two-thirds (2/3) of the total number of directors of the Company then
in office, not counting the Employee. In voting upon such termination, if the
Employee is also a member of the Board of Directors of the Company, then he
shall not vote on, and will not be considered present for any purpose with
respect to, a matter presented to the Board of Directors of the Company
pursuant to this Section 7(a).
(b) The Employee may, in his sole and absolute discretion,
terminate his employment with the Company under this Agreement for any reason
whatsoever by giving at least 30 days' prior written notice of his desire to do
so (which notice shall, if the termination is for Good Reason, specify with
reasonable particularity the reason or reasons therefore) to the Board of
Directors of the Company. Except for the obligation to pay the Employee's
Annual Base Salary through the effective date of termination, and any Annual
Cash Incentive Bonus or Annual Stock Options Bonus due to the Employee to the
extent not theretofore paid, and except for the obligations of the Company
under Sections 4(d), 4(i), 8, 22 and 23 hereof, all obligations of the Company
hereunder shall cease upon such termination, subject to the terms and
provisions of any employee benefit plans or arrangements maintained by the
Company in which the Employee was participating at the time of such
termination.
8. COMPENSATION AFTER CERTAIN TERMINATIONS.
If the Employee's employment with the Company under this Agreement is
terminated (whether such termination is by the Employee or by the Company) at
any time for any reason whatsoever other than (a) termination by the Company
for Cause, or (b) the Employee's death, or (c) termination at the election of
the Employee without Good Reason, then the Company shall pay the Employee his
full annual salary through February 28, 1999.
9. ADJUSTMENTS UPON CHANGES IN COMMON STOCK.
In the event the Company shall effect a split of the Common Stock or a
dividend payable in Common Stock, or in the event the outstanding Common Stock
shall be combined into a smaller number of shares, the Stock Options of the
Employee granted under Sections 4(c) or 4(d) shall be decreased or increased
proportionately. In the event that, before delivery by the Company of all of
the shares of Common Stock for which the Stock Option has been granted, the
Company shall have effected a stock split, reverse stock split, stock dividend,
reclassification or combination of the Common Stock, the number of shares still
subject to such
<PAGE> 6
Stock Option shall be increased or decreased proportionately and the purchase
price per share shall be decreased or increased proportionately so that the
aggregate purchase price and ownership percentage of the Company for all of the
shares then subject to such Stock Option shall remain the same as immediately
prior to such stock split, reverse stock split, stock dividend,
reclassification or combination.
In the event of a reclassification of Common Stock not covered by the
foregoing, or in the event of a liquidation or reorganization (including a
merger, consolidation or sale of all or substantially all assets of the
Company) of the Company, the Board of Directors shall make such adjustments as
appropriate in the number, purchase price and kind of shares covered by the
unexercised Stock Options so that the aggregate purchase price of the Stock
Options and the ownership percentage of the Company provided by those Stock
Options shall remain the same as immediately prior to such reclassification,
liquidation or reorganization.
10. MITIGATION.
The Employee shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this Agreement
be reduced by any compensation earned by the Employee as the result of
employment by another employer after the date of termination of the Employee's
employment with the Company, or otherwise.
11. ENTIRE AGREEMENT.
This Agreement embodies the entire agreement and understanding between
the Parties hereto with respect to the subject matter hereof and supersedes al
prior negotiations, agreements and understandings between the Parties relating
to such subject matter. This Agreement may be modified or amended only by an
instrument in writing signed by the Parties hereto.
12. LAW TO GOVERN.
This Agreement is executed and delivered in the State of Delaware and
shall be governed construed and enforced in accordance with the laws of the
State of Delaware.
13. ASSIGNMENT.
This Agreement is personal to the Parties, and neither this Agreement
nor any interest herein may be assigned (other than by will or pursuant to the
laws of descent and distribution) without prior written consent of the Parties
hereto nor be subject to alienation, anticipation, sale, pledge, encumbrance,
execution, levy or other legal process of any kind against the Employee or any
of his beneficiaries or any other person.
14. REFERENCES.
All references to "Sections", "subsections" and other subdivisions
contained herein are, unless specifically indicated otherwise, references to
Sections, subsections and other subdivisions of this Agreement. Whenever
herein the singular number is used, the same shall include the plural where
appropriate.
15. WAIVER.
No waiver of any right under this Agreement shall be deemed effective
unless the same is set forth in writing and signed by the party giving such
waiver.
<PAGE> 7
16. NOTICES.
All notices required or permitted hereunder shall be in writing and
shall be deemed to be delivered when deposited in the United States mail,
postage prepaid, registered or certified mail, return receipt requested,
addressed to the Parties at the respective addresses set forth opposite their
names on the signature page hereof, or at such other addresses as may have
theretofore been specified by written notice delivered in accordance herewith.
17. OTHER INSTRUMENTS.
The Parties hereto covenant and agree that they will execute such
other and further instruments and documents as are or may become necessary or
convenient to effectuate and carry out the terms of this Agreement.
18. HEADINGS.
The headings used in this Agreement are used for reference purposes
only and do not constitute substantive matter to be considered in construing
the terms of this Agreement.
19. INVALID PROVISION.
Any clause, sentence, provision, section, subsection or paragraph of
this Agreement held by a court of competent jurisdiction to be invalid, illegal
or ineffective shall not impair, invalidate or nullify the remainder of this
Agreement, but the effect thereof shall be confined to the clause, sentence,
provision, section, subsection or paragraph so held to be invalid.
20. RIGHTS UNDER PLANS AND PROGRAMS.
Anything in this Agreement to the contrary notwithstanding, no
provision of this Agreement is intended, nor shall it be construed, to reduce
or in any way restrict any benefit to which the Employee may be entitled under
any other agreement, plan, arrangement or program of the Company providing
benefits for its Employees.
21. MULTIPLE COPIES.
This Agreement may be executed simultaneously in one or more
counterparts, each of which shall be deemed an original and all of which shall
together constitute one and the same instrument.
22. WITHHOLDING OF TAXES.
The Company shall withhold from any amounts payable under this
Agreement all federal, state, city or other taxes as shall be required pursuant
to any law or government regulation or ruling.
23. LEGAL FEES AND EXPENSES.
The Company shall pay and be responsible for all legal fees and
expenses which the Employee may incur as a result of disputes originated by the
Company under this Agreement or as a result of the Company's
<PAGE> 8
failure to perform under this Agreement, or as a result of the Company or any
successor contesting the validity or enforceability of this Agreement.
24. SET OFF OR COUNTERCLAIM.
Except with respect to any claim against or debt or other obligation
of the Employee properly recorded on the books and records of the Company,
there shall be no right of set off or counterclaim against, or delay in, any
payment by the Company to the Employee or his beneficiaries provided for in
this Agreement in respect of any claim against or debt or other obligation of
the Employee, whether arising hereunder or otherwise.
25. THIRD PARTY BENEFICIARY.
Any successor-in-interest to the Company, whether the successorship
arises through sale of stock or assets, merger, or any manner of change in
control of the Company, will be a third-party beneficiary to this Agreement and
shall be obligated to the Employee to fulfill each of the terms of this
Agreement. The Company agrees that no sale, merger or change in control will
occur without securing the agreement of the purchaser, successor, or new
control party to assume this Agreement and responsibility for all obligations
of the Company under this Agreement.
26. CONTRA PROFERENTUM.
The principle of contra proferentum shall not apply and terms of this
Agreement shall not be construed against its drafter.
BIODYNAMICS INTERNATIONAL, INC.
By: ---------------------------------
Charles Dragone
Chairman of the Board of Directors
Address:
P.O. Box 601 ---------------------------------
Fawn Hill Drive Karl H. Meister
New Vernon, NJ 07976
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
Biodynamics International (United States), Inc.
Biodynamics International (Duetschland) GmbH
Biodynamics For Partnerships, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 777
<SECURITIES> 0
<RECEIVABLES> 1,738
<ALLOWANCES> 0
<INVENTORY> 2,391
<CURRENT-ASSETS> 5,000
<PP&E> 4,598
<DEPRECIATION> 1,602
<TOTAL-ASSETS> 9,338
<CURRENT-LIABILITIES> 9,182
<BONDS> 7,995
0
0
<COMMON> 84
<OTHER-SE> (1,349)
<TOTAL-LIABILITY-AND-EQUITY> 9,338
<SALES> 8,691
<TOTAL-REVENUES> 8,691
<CGS> 7,232
<TOTAL-COSTS> 7,232
<OTHER-EXPENSES> 7,798
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 934
<INCOME-PRETAX> (5,222)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,222)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,222)
<EPS-PRIMARY> .62
<EPS-DILUTED> .62
</TABLE>
