U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[ X ] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended October 31, 1998
----------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
----------------- ----------------
Commission file number Securities Act Registration No. 33-75276
Creative Medical Development, Inc.
---------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 68-0281098
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification NO.)
975 SE Sandy Blvd. Portland, Oregon 97214
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(Address of Principal Executive Offices)
(503)230-8034
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(Issuer's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 5,109,152 Common Shares and
586,858 Series B Preferred Shares all at $.01 par value were outstanding as of
August 31, 1998
<PAGE>
CREATIVE MEDICAL DEVELOPMENT, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1998
INDEX
PART I. FINANCIAL
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets..............1
Unaudited Consolidated Statements of Operations..............2
Unaudited Consolidated Statements of Cash Flows..............3
Notes to Unaudited Consolidated Financial
Statements...................................................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................8
PART II. OTHER INFORMATION.................................................12
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES.................................................................13
<PAGE>
CREATIVE MEDICAL DEVELOPMENT, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
October 31, 1998 April 30, 1998
(Unaudited)
----------- --------------
Current Assets:
Cash $ 125,765 $ 393,877
Accounts receivable, net 1,190,509 1,853,280
Inventories, net 870,745 1,423,800
Prepaid expenses and deposits 203,263 52,158
----------- -----------
Total current assets 2,390,282 3,723,115
Real estate held for sale 1,840,958 1,618,275
Property, plant and equipment, net 1,748,335 2,272,214
----------- -----------
$ 5,979,575 $ 7,613,604
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current Liabilities:
Accounts Payable $ 1,809,840 $ 1,884,679
Accrued Liabilities 872,551 1,459,092
Notes Payable 1,658,747 3,305,283
Current portion of long-term debt 2,037,610 2,136,376
----------- -----------
6,378,748 8,785,430
Long-term debt, less current portion 923,756 522,342
Stockholders' deficit:
Common Stock 51,092 55,246
Preferred stock 5,869 6,221
Additional paid in capital 2,331,906 2,413,651
Retained earnings (deficit) (3,711,796) (4,169,286)
----------- -----------
Total stockholders' deficit (1,322,929) (1,694,168)
----------- -----------
$ 5,979,575 $ 7,613,604
=========== ===========
1
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<TABLE>
<CAPTION>
CREATIVE MEDICAL DEVELOPMENT, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
October 31 October 31 October 31 October 31
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 3,182,869 $ 4,762,624 $ 6,825,107 $ 8,589,007
Cost of sales 2,315,735 3,722,379 5,013,587 6,559,742
----------- ----------- ----------- -----------
Gross profit 867,134 1,040,245 1,811,520 2,029,265
Selling expenses 212,474 470,223 532,172 806,024
Administrative expenses 283,520 339,781 550,150 709,127
Research and development 37,827 37,421 73,177 63,595
----------- ----------- ----------- -----------
533,821 847,425 1,155,499 1,578,746
Earnings from operations 333,313 192,820 656,021 450,519
Other income (expense):
Interest expense (114,066) (160,289) (241,355) (327,818)
Miscellaneous income (expense) 18,065 (30,016) 42,824 (64,058)
----------- ----------- ----------- -----------
Total other expense (96,001) (190,305) (198,531) (391,876)
Earnings before income taxes 237,312 2,515 457,490 58,643
Income taxes -- -- -- --
----------- ----------- ----------- -----------
Net earnings $ 237,312 $ 2,515 $ 457,490 $ 58,643
=========== =========== =========== ===========
Net earnings per share $ 0.05 $ 0.00 $ 0.09 $ 0.01
=========== =========== =========== ===========
Weighted average common
shares outstanding 5,109,152 5,530,563 5,302,098 5,538,486
2
</TABLE>
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<TABLE>
<CAPTION>
CREATIVE MEDICAL DEVELOPMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
Six Months Six Months
Ended Ended
October 31 October 31
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities
Net Income $ 457,490 $ 58,643
Adjustments to reconcile net income to
net cash provided (used) by change in assets and liabilities:
Depreciation 79,105 165,157
Amortization 59,488
Cash provided (used) by current assets and liabilities:
Accounts receivable 662,771 (848,947)
Inventories 553,055 96,348
Prepaid expenses and deposits (151,105) (178,322)
Accounts payable (74,839) 387,764
Accrued liabilities (586,541) 12,496
Deferred gain -- 74,923
----------- -----------
Net cash provided (used) by operating activities 939,936 (172,450)
Cash Flow from Investing Activities
Proceeds from sale of plant, property & equipment 226,672 380,471
Purchase of plant, property & equipment (4,581) (165,292)
Proceeds from sale of investment securities -- 755,123
----------- -----------
Net cash provided by investing activities 222,091 970,302
Cash Flows from Financing Activities
Common stock redemption (18,752) (25,003)
Net payments on notes payable (1,411,387) (2,162)
Net payments on long term debt -- (795,689)
----------- -----------
Net cash used by financing activities (1,430,139) (822,854)
----------- -----------
Net decrease in cash and cash equivalents (268,112) (25,002)
Cash and cash equivalents at beginning of period 393,877 139,636
----------- -----------
Cash and Cash equivalents at end of period $ 125,765 $ 114,633
=========== ===========
Supplemental schedule of non-cash financing activities
Exchange of 64,192 common shares for debt $ 67,500 --
Conversion of unsecured current debt to long-term 262,712 --
3
</TABLE>
<PAGE>
CREATIVE MEDICAL DEVELOPMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) INTERIM FINANCIAL INFORMATION
The Company pursuant to the rules and regulations of the Securities and
Exchange Commission has prepared the accompanying unaudited consolidated
financial statements of Creative Medical Development, Inc.. Certain
information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and
regulations. In the opinion of Management, the consolidated financial
statements include all adjustments necessary in order to make the
consolidated financial statements not misleading. Results for the period
ended October 31, 1998 are not necessarily indicative of the results that
may be expected for the fiscal year ending April 30, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto, for the fiscal year ended April 30, 1998, included in the
Company's Form 10-KSB.
(2) DESCRIPTION OF THE COMPANY, BASIS OF PRESENTATION AND CHANGE IN REPORTING
ENTITY
Creative Medical Development, Inc. (CMD), incorporated in California on
July 20, 1992, designed, developed, manufactured and marketed propriety
ambulatory infusion therapy products for alternate site patient care. On
September 13, 1995, CMD sold substantially all of its operating assets and
technology and until May 1, 1997, did not have significant operating
results.
Effective April 30, 1997, CMD and OMNI International Rail Products, Inc.
(OMNI), completed an agreement and plan of merger which provided for the
merger of OMNI with and into a wholly-owned subsidiary of CMD
(collectively, the Company). Upon consummation of the merger, OMNI's name
changed to OMNI Products, Inc. Just prior to the closing of the merger,
OMNI and CMD each completed a recapitalization under approval of each
company's Board of Directors.
Under the terms of the merger agreement, the shareholders and stock option
holders of OMNI exchanged all of their common stock and common stock
options for common stock and Series B preferred stock and common and
preferred stock options ("Substitute Options") of the Company. OMNI's
common stock and common stock options were converted into CMD common stock
and common stock options at a ratio of 3.091 to 1.0. In addition, OMNI
shareholders and stock option holders received shares of Series B preferred
stock and options to purchase Series B preferred stock, respectively.
Upon completion of the transaction, former OMNI security holders owned
approximately 67% of the total outstanding shares of the Company on a fully
diluted basis. Ten percent of the Company's shares given in the transaction
were placed in escrow ("Escrow Shares") pending final valuation and
4
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settlement. The final ownership ratio was adjusted pursuant to the Merger
Agreement to reflect differences that resulted from changes in assets of
both companies between the date of acquisition and the settlement date of
April 30, 1998. The determination of final asset values was not resolved
until August 1, 1998, at which time the Escrow Shares were canceled to
reflect the final ownership ratio. In addition, the Substitute Options were
adjusted down by 10%.
As a result of the adjustments under the Merger Agreement and reduction of
stock options held by the Company's former CEO, discussed in Note (3)
below, the ratio of the Company's outstanding stock held by the former OMNI
shareholders, assuming exercise of all the Substitute Options and exercise
of all options and warrants of the Company outstanding at the time of the
merger which were exercisable at $1.00 or less, was reduced from
approximately 67% to approximately 61%. As of the first quarter ended July
31, 1998, prior to the adjustments, there were 5,442,596 shares of common
stock and 622,065 shares of Series B Preferred stock outstanding.
The transaction between CMD and OMNI is considered a reverse acquisition
for financial reporting purposes and has been accounted for under the
purchase method of accounting. As a result, for financial statement
purposes, i) the historical values of OMNI's net assets have been retained;
ii) the net assets of CMD immediately prior to the merger have been
recorded at their fair value on the date of the transaction, iii) the
results of the operations of CMD are included in the results of the Company
beginning on the effective date of the transaction, iv) the dollar balance
of OMNI's accumulated deficit has been retained, and the balance of OMNI's
common stock and additional paid-in capital have been reallocated to be
consistent with the ratio of CMD's preferred and common stock. Assets
acquired consisted of investment securities and a building, while
liabilities assumed consisted of the mortgage associated with the building
acquired. The fair value of assets acquired exceeded the fair value of
liabilities assumed by approximately $1,025,000; such excess was attributed
to the shares issued in the merger. OMNI's costs associated with the
transaction, totaling approximately $185,000, were also attributed to the
shares issued in the merger.
(3) COMPANY RESTRUCTURING
During Fiscal 1998, the Company began a restructuring plan to reduce the
over-capacity in its recycled rubber manufacturing operations and to
increase its concrete production capabilities. The refocus of business
stems from changes in industry demand away from rubber and more toward
concrete crossings. The Company has ceased production of recycled rubber at
its Portland, Oregon, and Lancaster, Pennsylvania, plants and has
liquidated all of its related real estate, and almost all of its recycled
rubber manufacturing equipment at both locations. Some equipment, primarily
concrete forms, were transferred to the Company's remaining facilities. At
the same time the Company has extended an agreement with a pre-cast
concrete company to produce the Company's proprietary concrete and rubber
grade crossings.
The Company in conjunction with its restructuring recorded certain charges
as of fiscal year ended April 30, 1998. These include a write down of
assets to be liquidated, a write-off of excess and obsolete recycled rubber
5
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inventory and accrual of expected shutdown and liquidation costs. The asset
write-down and inventory write-off did not have an impact on the Company's
liquidity. Other charges were recorded as liabilities and are being paid
out during fiscal year 1999. All of the accrual made at fiscal year ended
1998 has been applied to disbursements of the Company as of the second
quarter ended October 31, 1998.
The Company entered into an agreement with its former CEO, Michael L.
DeBonney, for his resignation as an officer and director of the Company
effective April 30, 1998, and full settlement of any claims against the
Company in connection with his employment as an officer of the Company. The
agreement continues in effect certain provisions of the employment
agreement related to noncompetition, restricted use of proprietary
information and confidentiality. Also, pursuant to the terms of his
severance agreement, Mr. DeBonny has relinquished additional options for
556,330 common shares and 56,835 Series B preferred shares.
(4) DEBT
During the 1999 fiscal first quarter, the Company entered into a
Forbearance Agreement with its Senior lender Finova Capital Corporation,
("Finova") that defers Finova from taking any action against the Company by
reason of any existing defaults. In addition, under the terms of the
Forbearance Agreement, the Company is permitted an Overadvance of up to
$400,000 beyond the normal terms of the line of credit. The Forbearance
Agreement also eliminates the monthly principal payment requirements on
Finova's term debt, and subjects the Company to additional covenants that,
among other things, require the Company to raise an additional $250,000 in
equity capital or subordinated debt, requires the disposal of certain
assets (proceeds must go to pay down various loans with Finova) and
requires the Company meet certain projected financial goals.
At the end of October, the Company and Finova amended the Forbearance
agreement reducing the subordinated debt financing to two tranches of
$61,290 each making available $100,000 of Overadvance. The Company may
provide up to the original $250,000 of subordinated financing in exchange
for up to $400,000 of Overadvance financing. The Amendment also extended
the payoff of the Term Debt owed by the Company to Finova. The first
tranche was invested in November 1998 and the second in December.
At the End of October 1998, the Company owed two lenders approximately
$2,000,000 on notes secured by first mortgages on the Company's owned
facilities. Both notes were originally due in December 1998. The Company
negotiated extension of these notes for periods of six and twelve months.
All current terms of the notes remain in effect including monthly
installments payments. On November 30, 1998, the Company completed the sale
of its Lancaster, Pennsylvania Facility generating a pretax gain of
approximately $160,000. Net proceeds from the sale of approximately
$605,000 were used to reduce the mortgage notes payable.
6
<PAGE>
As part of the Forbearance Agreement, and as part of the Company's
restructuring plan, the Company entered into Modification Agreements and,
in some cases, Subordination and Standstill Agreements with certain
unsecured creditors. These agreements place each creditor into a
subordinate position with Finova and extend payoff of any obligation over a
five-year period. In some cases the Modification Agreements defer payment
of current and future accruals on certain royalty and services fees.
(5) BASIC AND DILUTED NET EARNINGS PER COMMOM SHARE
Net (loss) earnings per share ("EPS") is computed based on the provisions
of Statement of Financial Accounting Standards No. 128, Earnings per Share
("SFAS 128"). Under SFAS 128, Basic EPS is computed by dividing income
available to common shareholders by the weighted-average number of common
shares outstanding during the period. Contingently issuable shares, that
are issuable for little or no cash consideration are considered outstanding
common shares and included in the computation of basic EPS as of the date
that all necessary conditions have been satisfied. The computation of
diluted EPS is similar to the computation of basic EPS except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the dilutive potential common shares
had been issued. However, the computation of diluted EPS shall not assume
conversion, exercise, or contingent issuance of securities that would have
antidilutive effect on earnings per share. The calculation of diluted
earnings (loss) per share excludes any potentially dilutive shares as such
shares would have an antidilutive effect.
7
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations Background
------------------------
Creative Medical Development, Inc. (the "Company") was incorporated in the
state of California on July 20, 1992, and reincorporated in the state of
Delaware on June 1, 1993. The Company designed, developed, manufactured and
marketed ambulatory infusion therapy products under the "EZ Flow" trade
name.
On September 13, 1995, the Company entered into an Asset Purchase Agreement
with Gish Biomedical, Inc. ("Gish") for sale of the EZ Flow Pump technology
and product line. Under its terms, substantially all of the Company's
manufacturing related assets (with a net book value of $680,957) were sold
for $600,000 cash and $2,000,000 of Gish Stock (240,240 shares). Pursuant
to the terms of the agreement, operation of the EZ Flow business was
transferred to Gish as of September 13, 1995, and the sale closed April 17,
1996.
On April 17, 1997, the Company entered into an agreement for merger and
reorganization with OMNI International Rail Products, Inc., ("OMNI") a
privately held company in the business of manufacturing and distributing
premium rail crossing surface products in the United States and
internationally. The agreement provided for the merger of OMNI with a
wholly owned subsidiary of the Company formed for purposes of the
transaction. The Final ownership ratio, after valuation adjustment
completed on August 1, 1998, gave 61% ownership in the Company to the
former OMNI shareholders.
OMNI was an Oregon corporation formed in 1994 to acquire the OMNI premium
crossing business from Reidel Environmental Technologies, Inc. That
business was operated by OMNI until the merger with the Company and its
operations continue under the Company's wholly owned subsidiary corporation
OMNI Products, Inc. At the time of the merger, the OMNI executive officers
became the executive officers of the Company and the subsidiary and all but
one of the OMNI directors became directors of the Company and the
subsidiary.
The Company's transaction with OMNI closed April 30, 1997. Subsequently,
the Company changed its fiscal year to April 30 consistent with OMNI's
fiscal year to facilitate accounting and reporting financial results.
Results of Operations
---------------------
The following Selected Financial Data for the periods ended October 31,
1998 and 1997 have been derived from the unaudited financial statements of
the Company. This Selected Financial Data should be read in conjunction
with, and is qualified in its entirety by reference to, the financial
statements and related notes thereto included elsewhere in this Report.
8
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Except for the historical information contained herein, the matters set
forth in this Report include forward-looking statements within the meaning
of the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are subject to risks and
uncertainties that may cause actual results to differ materially. These
risks and uncertainties are detailed throughout this Report and are
discussed from time to time in the Company's periodic reports filed with
the Securities and Exchange Commission. The forward-looking statements
included in this Report speak only as of the date hereof.
Results of Operations -- Quarter and six months ended October 31, 1998
compared with the quarter and six months ended October 31, 1997
Quarters Ended Six Months Ended
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Revenue 3,182,869 4,762,624 6,825,107 8,589,007
Gross Profit 27.2% 21.8% 26.5% 23.6%
Earnings from Operations 10.5% 4.0% 9.6% 5.2%
Net earnings 7.5% 0.1% 6.7% 0.7%
Net earnings per share $0.05 $0.00 $0.09 $0.01
REVENUE
The Company derives its revenues from sales of both virgin rubber and concrete
and rubber premium highway-rail grade crossings to railroads, general
contractors and municipalities. Revenues for the quarter ended October 31, 1998,
decreased from the same quarter last year by $1,579,755 or a decrease of 33.2%.
The reduction in sales is mainly attributed to a change in sales mix and
elimination of all recycled rubber products in the current year. Total concrete
crossing sales were down 15.5% over the same period last year, and virgin rubber
crossing sales were down 28%. Declines in these product areas were mainly the
result of lower demand by the Company's major railroad customers. At the same
time sales of recycled rubber products accounted for $667,264 of second quarter
sales last year, where as no recycled rubber sales occurred in the second
quarter of fiscal 1999. For the six-month period, sales decreased $1,763,900 or
20.5% over last year with most of the decline coming in the second quarter.
Again, the Company's lower current year sales are due to a change in the mix of
product sold and from eliminating sales of recycled product (recycled rubber
sales were $1,558,092 lower for the first six months of fiscal 1999 versus
fiscal 1998).
The Company has now liquidated all of its recycled rubber product line and
closed two recycled rubber operations. The Company has increased its concrete
production capacity by refocusing its production to this part of the premium
grade crossing market. Virgin rubber products are produced at the Company's
processing facility in McHenry, Illinois, and are also purchased through an out
source provider of virgin rubber product.
COST OF SALES & GROSS MARGIN
Cost of sales decreased from $3,722,379 in the quarter ended October 31, 1997,
to $2,315,735 in the quarter ended October 31, 1998, or a decrease of 37.8%. The
greatest part of this decrease is directly related to lower sales. At the same
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time part of the decrease is due to operating efficiencies achieved by the
Company in realigning its operations and products and from higher profit margin
from the Company's current product line. Cost of sales for the six months ended
October 31, 1998 declined by $1,546,155 or 23.6% with most of the decline coming
in the second quarter.
Gross margins improved in the second quarter of fiscal 1999 to 27.2% compared to
21.8% last year. Much of the improvement came from elimination of low profit
margin recycled rubber products and increased sales of higher margin virgin
rubber products.
SELLING EXPENSES
Selling expenses for the quarter ended October 31, 1998, were $212,474 (6.7% of
sales) compared to $470,223 (9.9% of sales) for the quarter ended October 31,
1997. For the six months, selling expenses were $532,172 (7.8% of sales)
compared to the prior year's same period selling costs of $806,024 (9.4% of
sales). Lower selling expenses are due to overall reduced selling costs as a
result of eliminating two sales offices, eliminating several positions within
the sales department and establishing a lower commission rate structure.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the quarter ended October 31, 1998,
decreased to $56,261 representing a 16.6% decrease over the same quarter last
year. For the six months General and administrative expenses were $550,150 (8.1%
of sales) compared to $709,127 (8.3%) or a 22.4% decline. General and
administrative salaries were dramatically reduced with the termination of the
Company's Chief Executive Officer and Vice President of Operations and with the
resignation of its Chief Financial Officer, as well as the elimination of
several other positions. Consulting fees paid for the Company's interim Chief
Executive and Chief Financial Officers offset some of these savings for the six
month period. In addition, new management has reduced other operating expenses
as part of the Company's overall restructuring.
INTEREST EXPENSE
Interest expense for the quarter ended October 31, 1998, was $114,066 as
compared to $160,289 for the quarter ended October 31, 1997, a 28.8% reduction.
The decrease reflects the Company's continued repayment of long-term debt and
lower borrowing on the Company's revolving line of credit. Interest rates were
also reduced on certain unsecured borrowings as part of the Company's
modification of various debt agreements (done in conjunction with the Finova
Forbearance Agreement).
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998, the Company had a cash balance of $125,765. The Company's
operating activities generated cash of $939,936 during the first six months.
Approximately half of these proceeds came from operating income and the
remainder from better management of the Company's working capital.
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The Company's net working capital deficit at October 31, 1998, amounted to
$3,988,466 (an improvement over the first quarter of fiscal 1999 by
approximately $510,000). The Company's current debt maturities and other
short-term commitments exceed the Company's liquid assets available to pay such
obligations. This includes two mortgages originally due in December 1998. One
note was extended for an additional six months, and the other was substantially
reduced by proceeds from sale of the Company's Lancaster, Pennsylvania facility
and subsequently extended for 12 months. The Company is actively trying to sell
its remaining properties that secure these mortgages.
During fiscal 1999 first quarter the Company entered into a Forbearance
Agreement with its Senior Lender, Finova, that defers Finova taking any action
against the Company by reason of the existing defaults. In addition, under the
terms of the Forbearance Agreement, the Company is permitted an Overadvance of
up to $400,000 beyond the normal terms of the line of credit. The Forbearance
Agreement also eliminates the monthly principal payment requirements on Finova's
term debt. As part of the Forbearance Agreement, as amended, the Company is
subject to additional covenants that, among other things, requires the Company
to raise an additional $122,580 (making available up to $200,000 of Finova's
Overadvance) in equity capital or subordinated debt, requires the disposal of
certain assets (proceeds must go to pay down various loans with Finova) and
requires the Company to meet certain projected financial goals. The Company may
raise up to $250,000 of subordinated debt that will make the entire $400,000
Overadvance available.
The Company's capital expenditures for the six months were $4,581. The Company
has liquidated almost all of its recycled rubber production manufacturing
assets. Sales of assets generated $226,672 of proceeds in the first six months
of fiscal 1999. Further liquidation of assets, including the recent sale of the
Company's Lancaster, Pennsylvania facility (approximately $600,000 in net
proceeds) could generate up to an estimated $2,000,000 in gross proceeds during
the remainder of fiscal 1999. Proceeds from these sales must payoff the
Company's mortgage obligations that come due during the next twelve months.
The Company's primary source of funds is from its operations. The Company is
restricted as to the amount it can borrow from Finova based on a percent of
eligible accounts receivable and inventory. Additionally, the Company likely
will need replacement debt or equity financing after the end of the Finova
agreement on August 31, 1999. The Company's debt will require restructuring or
additional financing must be found in the event sufficient funds
are not available to payoff certain debt that comes due during fiscal 1999 and
2000. There can be no assurance the Company will be able to complete the real
estate and equipment sales noted above prior to the mortgage maturity dates, nor
can there be any assurance that the Company will be able to raise the
subordinated funds required pursuant to the Forbearance Agreement.
The Company's stock is traded on the OTC Electronic Bulletin Board.
11
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OTHER INFORMATION - PART II
Item 1. Legal Proceedings
- -------------------------
Not applicable
Item 2. Changes in Securities
- -----------------------------
Not applicable
Item 3. Defaults on Senior Securities
- -------------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Not applicable
Item 5. Other Information
- -------------------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
--------
10.13 Eight Percent Secured Convertible Subordinated Note
Agreement ("Subordinated Note") between the Company and
William E. Cook, the Company's Board Chairman.
10.14 Registration Rights Agreement, establishing Note Holder's
rights and Company requirements for conversion of the
Subordinated Note.
10.15 Subordinated Security Agreement granting William E. Cook a
security interest in all assets of the Company, subordinated
to certain Senior lenders.
27 Financial Data Schedule October 31, 1998.
(b) Reports on Form 8-K
-------------------
A report on Form 8-K was filed November 25, 1998, pursuant to Item 5,
Other Events, covering the report of the fiscal second quarter ended
October 31, 1998 operating results, appointment of Robert E. Tuzik as
President and Chief Operating Officer and appointment of William E.
Cook as Chairman of the Board of Directors.
12
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Creative Medical Development, Inc.
- ----------------------------------
Registrant
December 15, 1998 /s/ Robert E. Tuzik
- ----------------- --------------------
Date Robert E. Tuzik
Chief Operating Officer
December 15, 1998 /s/ M. Charles Van Rossen
- ----------------- ------------------------------
Date M. Charles Van Rossen
Chief Financial Officer
13
EXHIBIT 10.13
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SUCH ACT AND APPLICABLE STATE SECURITIES LAWS.
THIS NOTE IS SUBORDINATED TO THE LOAN OBLIGATIONS DUE TO FINOVA CAPITAL
CORPORATION PURSUANT TO A SUBORDINATION AND STANDSTILL AGREEMENT EXECUTED AND
DELIVERED BY LENDER.
CREATIVE MEDICAL DEVELOPMENT, INC.
Eight Percent Secured Convertible Subordinated Note
Due October 24, 2003
CREATIVE MEDICAL DEVELOPMENT, INC., hereinafter referred to as the
"Company," for value received, hereby promises to pay to William E. Cook
("Lender"), at 1413 Loniker Drive, Raleigh, North Carolina 27615, or such other
place as the holder of this Note may designate in writing from time to time, in
lawful money of the United States of America the principal sum of One Hundred
Twenty-Five Thousand Dollars ($125,000.00), or so much as may be outstanding,
together with interest on the outstanding principal balance at the rate of eight
percent (8%) per annum.
1. Loan Advances. The initial advance made by Lender on the date of this
Note is Sixty-One Thousand Two Hundred Ninety Dollars ($61,290.00). From the
date of this Note through April30, 1999, Lender, at its option, may advance, in
increments of not less than $20,000.00, up to the additional sum of $63,710.00
(the "Advance Limit") in one or more advances. All additional loan advances
shall be subject to all of the terms and conditions of this Note. After April30,
1999, Lender may not, at its option and without Company's written consent,
advance any additional amounts under this Note. Notwithstanding anything to the
contrary set forth herein, the Company may issue additional Notes to others on
the same economic terms as this Note in any amount up to $125,000.00 and, in the
event that the Company's Nevada City, California property has been sold on or
before January 5, 1999 and the Company is operating in accordance with the
operating plan presented to the board of directors of the Company at its October
15, 1998 meeting, require Lender, on ten days written notice, to advance
additional loan funds in increments of not less than $20,000.00 up to the
Advance Limit.
2. Payments. Company shall pay to Lender monthly payments of interest
beginning on November 24, 1998 and continuing on the 24th day of each month
thereafter until the principal balance has been either paid in full or converted
to Common Stock and Series B Preferred Stock pursuant to Section 4 hereof Except
as otherwise set forth herein, the entire principal balance is due and payable
on October 24, 2003. Company shall have no right to prepay this Note unless
Lender in its sole discretion consents thereto or, on or after the third
Page 1 - NOTE
<PAGE>
EXHIBIT 10.13
anniversary of this Note, Company has Given Lender written notice of its intent
to prepay all or any portion of the principal balance of this Note which has not
been converted pursuant to Section 4 of this Note at least sixty (60) days prior
to the prepayment. If Lender notifies Company in writing at least sixty (60)
days prior to the second anniversary of this Note of the exercise of this option
to accelerate repayment of this Note, Company shall pay to Lender the principal
and interest due under this Note, amortized over a one year period, in twelve
(12) equal monthly payments beginning on November 24,2000, and continuing on the
24th day of each month thereafter until October 24, 2001, when the remaining
principal and interest due under this Note shall be paid in full.
3. Subordination. The indebtedness evidenced by this Note is subordinated
and junior in right of payment to the prior payment of the secured senior
indebtedness of the Company. "Senior indebtedness" means all indebtedness of the
Company due and owing to Finova Capital Corporation (the "Senior Indebtedness").
The term "Senior Indebtedness" also means any lender who provides an operating
line of credit loan to the Company to pay off the loan due and owing to Finova
Capital Corporation. Upon occurrence of an event of default under the Senior
Indebtedness, Company shall suspend making any payments to Lender, and Company
shall not resume making payments to the holder of this Note until the Senior
Indebtedness has been paid in full. Concurrently with the execution and delivery
of this Note, Lender shall execute and deliver to Finova Capital Corporation its
form of Subordination and Standstill Agreement.
4. Conversion. Lender shall have the right, exercisable at any time prior
to maturity upon written notice to Company, to convert the principal amount
hereof into (a) shares of the Common Stock of the Company, at the conversion
price of $0.0644 (the "Conversion Price") of principal due under this Note for
one (1) fully paid and nonassessable share of Common Stock; and (b) .1041 shares
of Series B Preferred Stock for each share of Common Stock received in this
conversion. If after the date of this Note and prior to Lender's exercise of its
conversion rights, the Company issues any class of Common or Preferred Stock or
securities convertible into or carrying a right to acquire Common Stock of the
Company ("Shares"), excluding any shares of Common Stock or Series B Preferred
Stock issued pursuant to any options, conversion rights, warrants or other
agreements in effect prior to the date of this Note, which are exercisable at a
price of $89 per share or less, then Lender is granted a preemptive right to
purchase additional shares of Common Stock of the Company equal to its Pro Rata
Share of such Shares, which must be exercised concurrently with Lender's
conversion of the principal amount of this Note to Common Stock and Series B
Preferred Stock of the Company. The term "Pro Rata Share" means twenty percent
(20%), based on the assumption that Lender will advance to Company the entire
principal amount of$125,000.00 during the term of this Note, and in the event
Lender advances less than $125,000.00, the Pro Rata Share shall be reduced
proportionately. Lender shall pay the Conversion Price for the Common Stock
issued to Lender as its Pro Rata Share of the Shares concurrently with
conversion of the principal amount of this Note to Common Stock and Series B
Preferred Stock of the Company. As a condition to issuance of the Common Stock
and Series B Preferred Stock to Lender pursuant to this Section 3, Lender and
Company shall execute and deliver a Registration Rights Agreement in the form
delivered to Lender prior to or concurrently with delivery of this Note.
Page 2 - NOTE
<PAGE>
EXHIBIT 10.13
5. Collateral. The indebtedness due under this Note is secured by the
Subordinated Security Agreement executed and delivered by Company
contemporaneously herewith.
6. Default. Each of the following shall constitute an event of default
under this Note:
(a) Failure of the Company to pay any installment of interest or
principal when due or payable, which is not cured within twenty (20) days after
written notice to Company;
(b) Levy or execution against any material property of Company, which
levy or execution is not released or discharged within thirty (30) days;
(c) Appointment of a receiver for any material part of the property of
Company, assignment for the benefit of creditors by Company, commencement of any
proceeding under any bankruptcy or insolvency laws, or any laws relating to the
relief of debtors, readjustment of indebtedness, reorganization, composition or
extension, by or against Company; or
(d) The occurrence of any event of default under the promissory
note(s) and related loan documents for the Senior Indebtedness.
7. Remedies. Upon the occurrence of any event of default, Lender shall have
the rights and remedies of a secured party under the Uniform Commercial Code of
Oregon. In addition, Lender may declare the entire outstanding principal balance
and accrued interest to be immediately due and payable by giving written notice
to the Company specifying such default. In the event this Note is declared to be
due and payable in full, Lender shall be entitled to payment under this Note
after payment in full of principal and interest on any Senior Indebtedness
outstanding at such time has been made.
8. Waiver. No recourse shall be had for payment of the principal of or the
interest upon, this Note or for any claim based hereon, or otherwise, against
any incorporator, shareholder, officer, director or attorney, either directly by
reason of any matter prior to delivery of this Note, or otherwise, all such
liability, by the acceptance hereof as a part of the consideration of the issue
hereof being expressly waived.
9. Notices. Any and all notices, demands or other communications required
or desired to be given hereunder by any party shall be in writing and shall be
validly given or made to the other party if it is served personally; deposited
in the United States mail, certified or registered, postage prepaid, return
receipt requested; sent by facsimile (with verbal verification of complete
receipt); or sent by a nationally recognized overnight courier. If such notice,
demand or other communication is served personally or by facsimile (with verbal
verification of complete receipt), notice shall be conclusively deemed made at
the time of such personal service or facsimile transmission. If such notice,
demand or other communication is given by mail, such notice shall be
conclusively deemed given seventy4wo (72) hours after the deposit thereof in the
United States mail addressed to the party to whom such notice, demand or other
communication is to be given as hereinafter set forth. If such notice, demand
Page 3 - NOTE
<PAGE>
EXHIBIT 10.13
or communication is given by courier, such notice shall be conclusively deemed
given on the date of delivery according to the records of such courier. All
notices shall be sent to the parties' address set forth as follows:
If to Lender: William E. Cook
1413 Loniker Drive
Raleigh, NC 27615
If to Company: Creative Medical Development, Inc.
975 SE Sandy Blvd.
Portland, OR 97214
Facsimile: (503) 230-9002
With a copy to: Mark R. Wada
Farleigh, Wada & Witt, P.C.
121 S.W. Morrison Street, Suite 600
Portland, Oregon 97204
Facsimile: (503) 228-1741
Any party hereto may change its address for the purpose of receiving notices,
demands and other communications as herein provided by a written notice given in
the manner provided hereby to the other party or parties hereto.
10. Governing Law. The issuance, validity, interpretation, and enforcement
of this Note shall be governed by the laws of the State of Oregon.
11. Attorney's Fees. If any arbitration or legal proceeding is brought to
enforce or interpret any of the provisions of this Note or to recover any monies
due hereunder, the prevailing party shall be entitled to recover from the losing
party reasonable attorney's fees and costs incurred in such arbitration, at
trial and in any appeal.
12. Arbitration. The binding arbitration agreement of the parties contained
in the Security Agreement is hereby incorporated by this reference and shall
apply in all respects to all disputes, controversies or claims relating to or
arising out of this Note.
Page 4 - NOTE
<PAGE>
EXHIBIT 10.13
IN WITNESS WHBREOF, the Company has caused this Note to be duly executed
the 24th day of October, 1998.
COMPANY: CREATIVE MEDICAL DEVELOPMENT, INC.
By: /s/ M. Charles Van Rossen
----------------------------------------
Title: Vice President-Finance & Treasurer
-------------------------------------
LENDER:
Name: /s/William E. Cook
--------------------------------------
William E. Cook
Page 5 - NOTE
EXHIBIT 10.14
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT ("Agreement") is made and entered into
this __ day of October, 1998, by and among CREATIVE MEDICAL DEVELOPMENT, INC., a
Delaware corporation ("CMDI"), and WILLIAM B. COOK (the "Note Holder").
RECITALS
WHEREAS, CMDI is issuing to the Note Holder a Secured Convertible
Subordinated Note ("Note") and desires to grant to the Note Holder certain
registration rights for CMDI's Common Stock which may be issued upon conversion
of the Note. The Note is being issued to the Note Holder pursuant to an
Agreement (the "Agreement") and Affidavit and Agreement of Prospective Investor
("Affidavit"), between CMDI and the Note Holder.
AGREEMENT
NOW, THEREFORE, in consideration of the premises set forth herein, the
agreements herein expressed, and for other good and valuable consideration, the
parties hereto hereby agree as follows:
1 Registration Rights. CMDI covenants and agrees as follows:
1.1 Definitions. For purposes of this Section 1:
(a) The term "register", "registered,"and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"Act"), and the declaration or ordering of effectiveness of such registration
statement or document.
(b) The term "Registrable Securities" means CMDI Common Stock to be issued
upon conversion of the shares of the Note, and any other shares of CMDI Common
Stock issued solely in respect of such Note (because of conversion rights under
the Series 13 Preferred Stock, stock splits, stock dividends, reclassifications,
recapitalizations or similar events).
(c) The number of shares of "Registrable Securities then outstanding" shall
be determined by the number of shares of Common Stock outstanding that are, and
the number of shares of Common Stock issuable pursuant to then exercisable or
convertible securities that upon issuance would be, Registrable Securities.
(d) The term "Holder" means any person owning or having the right to
acquire Registrable Securities, and each of such party's respective successors
and assigns who has delivered to CMDI a signed counterpart of this Agreement.
Page 1 - REGISTRATION RIGHTS AGREEMENT
<PAGE>
EXHIBIT 10.14
1.2 Company Registration. If (but without any obligation to do so) CMDI
proposes to register any of its Common Stock under the Act in connection with a
public offering of such securities (other than a registration relating solely to
the sale of securities to participants in a Company stock plan, or a
registration for the issuance of securities in the acquisition of another entity
or its assets, or for any other limited purpose), CMDI shall give the Holder
written notice (the "Notice") of such registration at least 45 days prior to the
effectiveness of the registration statement covering the Common Stock being
offered. Upon the written request of the Holder given to CMDI within twenty (20)
days after the mailing of such Notice by CMDI, CMDI shall, subject to the
provisions of Section 1.6 hereof, use its best efforts to cause to be registered
under the Act all of the Registrable Securities that such Holder has requested
to be registered. The Holder's rights under this Section 1.2 may be exercised an
unlimited number of times.
1.3 Obligations of CMDI. Whenever required under this Section 1 to effect
the registration of any Registrable Securities, CMDI shall, as expeditiously as
reasonably possible:
(a) Prepare and file with the United States Securities and Exchange
Commission ("SEC") a registration statement with respect to such Registrable
Securities and use its best efforts to cause such registration statement to
become effective, and, upon the request of the Holders of a majority of the
Registrable Securities registered thereunder, keep such registration statement
effective for up to one hundred twenty (120) days.
(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 keep the registration statement
effective for the period stated in Section 1.3(a) above, and to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(c) Furnish to the Holder such numbers of copies of a prospectus, including
a preliminary prospectus, in conformity with the requirements of the Act, and
such other documents as he may reasonably request in order to facilitate the
public sale or other disposition of Registrable Securities owned by him.
(d) Use its best 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 Holder, provided that CMDI
shall not be required in connection therewith or as a condition thereto to
qualify 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, in usual and customary
form, with the managing underwriter of such offering. Holder shall also enter
into and perform its obligations under such an agreement.
Page 2 - REGISTRATION RIGHTS AGREEMENT
<PAGE>
EXHIBIT 10.14
(f) Notify the Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto covered by
such registration statement is required to be delivered under the 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
circumstances then existing.
(g) Promptly notify the Holder of the issuance by the SEC of any stop order
suspending the effectiveness of the registration statement (or the initiation of
any formal proceeding for that purpose) or of the receipt by CMDI of any
notification with respect to suspension of the qualification of Registrable
Securities for sale in any jurisdiction (or the initiation of any formal
proceeding for that purpose) or of the receipt by CMDI of any notification with
respect to the suspension of the qualification of Registrable Securities for
sale in any jurisdiction (or the initiation of any formal proceeding for that
purpose). CMDI shall make reasonable efforts to obtain the withdrawal of any
order suspending the effectiveness of a registration statement hereunder or any
post-effective amendment thereto at the earliest practicable date.
1.4 Furnish Information. It shall be a condition precedent to the
obligations of CMDI to take any action pursuant to this Section 1 with respect
to the Registrable Securities of any selling Holder, that such Holder shall
furnish to CMDI such information regarding it, the Registrable Securities held
by it, and the intended method of disposition of such securities as shall be
required to effect the registration of such Holder's Registrable Securities and
to execute such documents in connection with such registration as CMDI may
reasonably request.
1.5 Expenses of Company Registration. All expenses (other than underwriting
discounts, commissions and stock transfer taxes relating to Registrable
Securities, and any fees and expenses of special counsel for the selling
shareholders in the registration, which expenses shall be borne by the selling
shareholders in proportion to the number of shares sold by each selling Holder
or as shall otherwise be agreed to by such selling Holders) incurred in
connection with registrations, filings or qualifications pursuant to this
Section 1, including without limitation all registration, filing and
qualification fees, printers and accounting fees, fees and disbursements of
counsel for CMDI, shall be borne by CMDI.
1.6 Underwriting Requirements. In connection with any offering involving an
underwriting of shares of capital stock being issued by CMDI, CMDI shall not be
required under this Section 1 to include any of the Holder's securities in such
underwriting unless the Holder agrees to sell such Holder's Registrable
Securities on the basis provided in the underwriting agreement approved by CMDI
and the underwriters selected by it (or by other persons entitled to select the
underwriters), and then only in such quantity as the underwriters determine in
their sole discretion will not jeopardize the success of the offering by CMDI.
If the managing underwriter of the offering shall advise CMDI that inclusion in
the registration statement of the Registrable Securities would, in such managing
underwriter's opinion, interfere with CMDI's proposed distribution of its Common
Page 3 - REGISTRATION RIGRTS AGREEMENT
<PAGE>
EXHIBIT 10.14
Stock or other securities which are not owned by the Holder, then the
underwriters may exclude all or a portion of the Registrable Securities so
requested to be included in such registration.
1.7 Delay of Registration. No Holder shall have any right to obtain or seek
an injunction restraining or otherwise delaying any such registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of this Section 1.
1.8 Indemnification. In the event any Registrable Securities are included
in a registration statement under this Section 1:
(a) To the extent permitted by law, CMDI will indemnify and hold harmless
the Holder, any underwriter (as defined in the Act) for such Holder and each
person, if any, who controls such Holder or underwriter within the meaning of
the Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"),
against any losses, claims damages, or liabilities (joint or several) to which
they may become subject under the Act, the 1934 Act or other federal or state
law, insofar as such losses, claims, damages, 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 contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, but excluding any untrue
statement or alleged untrue statement in any preliminary prospectus which is
cured by a later amendment or supplement thereto, or in the final prospectus
related thereto, or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading; and CMDI will pay to the Holder, underwriter or
controlling person, as incurred, any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the indemnity agreement
contained in this subsection 1.8(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of CMDI (which consent shall not be
unreasonably withheld), nor shall CMDI be liable in any such case for any such
loss, claim, damage, liability, or action to the extent that it arises out of or
is based upon a Violation that 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.
(b) To the extent permitted by law, Holder will indemnify and hold harmless
CMDI, each of its directors, each of its officers who has signed the
registration statement, each person, if any, who controls CMDI within the
meaning of the Act, each agent and any underwriter and any officer, director, or
controlling person of any such underwriter against any losses, claims, damages,
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 the Holder or its agents expressly or used in connection with such
registration; and Holder will pay, as incurred, any legal or other expenses
reasonably incurred by any person intended to be indemnified pursuant to this
subsection 1.8(b), in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the indemnity
Page 4-REGISTRATION RIGHTS AGREEMENT
<PAGE>
EXHIBIT 10.14
agreement contained in this subsection 1.8(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld; and provided further, that, in no event shall any
indemnity under this subsection 1.8(b) exceed the gross proceeds from the
offering received by Holder.
(c) Promptly after receipt by an indemnified party under this Section 1.8
of notice of the commencement of any action (including governmental action),
such indemnified party will, if a claim in respect thereof is to be made against
any indemnifying party under this Section 1.8, 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 (together with all other indemnified parties
that may be represented without conflict by one counsel) shall have the right to
retain one separate counsel, with reasonable fees and expenses 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 differing 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, prejudicial to its ability to defend such action, shall relieve
such indemnifying party of any liability to the indemnified party under this
Section 1.8, but the omission so to deliver written notice to the indemnifying
party will not relieve it of any liability that it may have to any indemnified
party otherwise than under this Section 1.8. No indemnifying party, in the
defense of any claim or litigation shall, except with the consent of each
indemnified party, consent to the entry of judgment or enter into any settlement
which does not include as an unconditional term thereof a release from all
liability with respect to such claim or litigation.
(d) The obligations of CMDI and Holder under this Section 1.8 shall survive
the completion of any offering of Registrable Securities in a registration
statement under this Section 1, and otherwise.
1.9 Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holder the benefits of Rule 144 promulgated under the Act any
other rule or regulation of the SEC that may at any time permit a Holder to sell
securities of CMDI to the public without registration, CMDI agrees to do the
following:
(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 CMDI under the Act and the 1934 Act; and
Page 5 - REGISTRATION RIGRTS AGREEMENT
<PAGE>
EXHIBIT 10.14
(c) furnish to Holder forthwith upon request, so long as the Holder
owns any Registrable Securities, (i) a written statement by CMDI that it has
complied with the reporting requirements of SEC Rule 144, (ii) a copy of the
most recent annual or quarterly report of CMDI and such other reports and
documents filed by CMDI with the SEC, and (iii) such other information as may be
reasonably requested in availing Holder of any rule or regulation of the SEC
that permits the selling of any such securities without registration.
1.10 "Market Stand-Off' Agreement. Holder hereby agrees that, during the
period specified by CMDI and an underwriter of common stock or other securities
of CMDI (such period not to exceed 180 days), from the 14-day period preceding
or the period following the effective date of a registration statement of CMDI
filed under the Act, it shall not, to the extent reasonably requested by CMDI
and such underwriter, directly or indirectly sell, offer to sell, contract to
sell, grant any option to purchase or otherwise transfer or dispose of (other
than to donees who agree to be similarly bound) any securities of CMDI held by
it at any time during such period except common stock included in such
registration. In order to enforce the foregoing covenant, CMDI may impose
stop-transfer instructions with respect to the Registrable Securities of Holder
(and the shares or securities of every other person subject to the foregoing
restriction) until the end of such period. The restrictions set forth above
shall not apply to registration statements relating solely to the issuance of
securities to participants in a CMDI stock plan or a registration for the
issuance of securities in the acquisition of another entity or its assets.
1.11 Assignment of Registration Rights. The right to cause CMI)I to
register Registrable Securities pursuant to this Section 1 may be assigned to
any permitted transferee of the Note or Registrable Securities.
1.12 Other Registration Rights. CMDI shall not grant to any party any
rights, which are pari passu or superior to the rights contained in this
Agreement, to require CMDI to register any equity securities of CMDI or any
securities convertible or exchangeable into or exercisable for equity securities
of CMDI, without the written consent of Holder and the other holders of the same
series of notes issued to Holder representing in the aggregate more than fifty
percent (50%) of the Registrable Securities then outstanding.
2. Term. CMDI's obligations to register the Registrable Securities in
accordance with the terms and conditions of this Agreement shall terminate
twenty (20) years from the date of this Agreement unless extended by mutual
agreement of CMDI and the Holder.
3. Miscellaneous.
3.1 Successors and Assigns. Subject to Section 1.11 hereof the terms and
conditions of this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their permitted successors and assigns
(including without limitation the administrators, executors, representatives,
heirs, legatees and devisees of the Note Holders), and any reference to such a
party hereto shall also be a reference to permitted successors or assigns.
Nothing in this Agreement, express or implied, is intended to confer upon any
Page 6 - REGISTRATION RIGHTS AGREEMENT
<PAGE>
EXHIBIT 10.14
party other than the parties hereto or their respective successors and assigns
any rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement. No assignment or
transfer by CMDI or the Note Holder of their respective rights and obligations
hereunder shall be made, except to the limited extent permitted by Section 1.11
hereof. Notwithstanding the foregoing, this Agreement shall be binding, in
accordance with its terms, upon any successor of CMDI, by virtue of a merger,
consolidation, sale of assets or otherwise, of CMDI.
3.2 Governing Law. The laws of the State of Oregon (irrespective of its
choice of law principles) shall govern the validity of this Agreement, the
construction of its terms, and the interpretation and enforcement of the rights
and duties of the parties.
3.3 Notices. Whenever any party hereto desires or is required to give any
notice, demand, or request with respect to this Agreement, each such
communication shall be in writing and shall be effective only if it is delivered
by personal service or mailed, United States registered or certified mail,
postage prepaid, or sent by prepaid overnight courier or confirmed telecopier,
addressed as follows:
If to CMDI:
Creative Medical Development, Inc.
975 SE Sandy Blvd.
Portland, OR 97214
Telecopier Number (503) 230-9002
Attention: William B. Cook
With a copy to:
Mark R. Wada, Esq.
Farleigh, Wada & Witt, P.C.
121 S.W. Morrison, Suite 600
Portland, Oregon 97204
Telecopier Number: (503) 228-1741
If to the Note Holder:
William B. Cook
1413 Loniker Drive
Raleigh, NC 27615
Such communications shall be effective when they are received by the addressee
thereof. Any party may change its address or telecopier number for such
communications by giving notice thereof to the other parties in conformity with
this Section.
Page 7 - REGISTRATION RIGHTS AGREEMENT
<PAGE>
EXHIBIT 10.14
3.4 Severability. If any provisions of this Agreement, or the application
thereof, shall for any reason or to any extent be invalid or unenforceable, the
remainder of this Agreement and application of such provision to other persons
or circumstances shall continue in full force and effect and in no way be
affected, impaired, or invalidated.
3.5 Amendments and Waivers. Any term or provision of this Agreement may be
amended, and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or prospectively)
only by a writing signed by CMDI and the holders of a majority of the
Registrable Securities then outstanding. Any amendment or waiver effected in
accordance with this Section 3.5 shall be binding on Holder at the time
outstanding, each future Holder of such Registrable Securities, and CMDI. The
waiver by a party of any breach hereof or default in the performance hereof
shall not be deemed to constitute a waiver of any other default or any
succeeding breach or default. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
3.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above.
CMDI: NOTE HOLDER:
CREATIVE MEDICAL DEVELOPMENT, INC.
By: /s/ M. Charles Van Rossen /s/ William E. Cook
-------------------------------------- -----------------------------
Title: Vice President-Finance & Treasurer William E. Cook
----------------------------------- -----------------------------
Page 8 - REGISTRATION RIGHTS AGREEMENT
EXHIBIT 10.15
SUBORDINATED SECURITY AGREEMENT
-------------------------------
October 24, 1998
1. CREATIVE MEDICAL DEVELOPMENT, INC., a Delaware corporation ("Debtor"),
hereby grants to William E. Cook, the holder of the Secured Convertible
Subordinated Note dated October24, 1998 ("Secured Party"), to secure payment and
performance of all Liabilities of Debtor to Secured Party, a security interest
in the following described personal property, whether now owned or hereafter
acquired:
All property of Debtor, whether now owned or hereafter acquired, together
with all additions thereto and accessions thereof including, without
limitation, each of the following: (i) accounts, (ii) Debtor's books, (iii)
equipment, (iv) general intangibles, (v) goods, (vi) inventory, (vii)
instruments, (viii) chattel paper, and the proceeds and products, whether
tangible or intangible, of any of the foregoing,
2. Definitions. As herein used:
2.1 "Collateral" means all property of Debtor which Secured Party now
has, by this agreement acquires or hereafter acquires a security interest in,
lien upon or assignment of
2.2 "Liabilities" mean all obligations of Debtor under the Secured
Convertible Subordinated Note dated October 24, 1998.
2.3 Terms used in this Subordinated Security Agreement ("Agreement")
which are not herein defined and which are defined in the Uniform Commercial
Code of Oregon shall have the meaning therein set forth.
3. Debtor's Representations and Warranties. Debtor represents and warrants:
3.1 Debtor is a corporation, duly organized and existing under the
laws of the state of its incorporation and is duly qualified in every state in
which it is doing business.
3.2 The execution, delivery and performance hereof are within Debtor's
corporate powers, and have been duly authorized and are not in contravention of
law or the terms of Debtor's charter, by laws or other incorporation papers, or
of any undertaking to which Debtor is a party or by which it is bound.
3.3 Except for the security interest of Secured Party therein, and the
prior security interest in favor of Finova Capital Corporation (fka Greyhound
Financial Corporation, and hereinafter referred to as "Finova") pursuant to a
Loan and Security Agreement dated April 26, 1994, as amended from time to time
Page 1 - Security AGREEMENT
<PAGE>
EXHIBIT 10.15
(the "Finova Agreement"), Debtor is, and as to Collateral acquired after the
date hereof Debtor shall and will be the owner of such Collateral free from any
lien, security interest, encumbrance or other right, title or interest of any
other person, firm or corporation, and Debtor shall defend the Collateral
against all claims and demands of all persons at any time claiming the same or
any interest therein adverse to Secured Party.
3.4 Except for financing statements relating to the security interest
granted pursuant to the Finova Agreement, there is no financing statement now on
file in any public office covering any Collateral subject to the security of
Secured Party herein, or intended so to be, or in which Debtor is named as or
signs as a debtor or consignee, and so long as Debtor has any Liabilities to
Secured Party, Debtor will not execute and there will not be on file in any
public office any financing statements, except the financing statement filed or
to be filed with respect to the security interest hereby granted to Secured
Party, and except as expressly agreed in writing by Secured Party.
3.5 Debtor shall give Secured Party written notice of the location of
each place of business it has, and of its chief executive office if it has more
than one place of business. Except as such notice is given, Debtor's chief
executive office and only place of business shall be at Debtor's address as it
appears at the beginning of this agreement.
4. Uniform Commercial Code. To the extent applicable, the Uniform
Commercial Code of Oregon shall govern security interests provided for herein
and the construction, validity, and performance of this agreement shall be
governed by the law of Oregon. If by reason of location of Collateral or
otherwise, the creation, validity or perfection of security interests provided
for herein are governed by the law or a jurisdiction other than Oregon, Debtor
agrees to take such action and execute and deliver such papers as Secured Party
may from time to time request to comply with such law. Debtor agrees to execute
and deliver financing statements, and other papers to Secured Party, deliver
instruments, documents, securities and other Collateral to Secured Party and
take all other actions requested by Secured Party to enable Secured Party to
perfect or otherwise protect and enforce its security interest in or lien on
Collateral. Debtor agrees that a photocopy or other reproduction of the security
agreement or any financing statement executed by Debtor pursuant to this
agreement is sufficient as a financing statement.
5. Default. Any or all of the Liabilities shall, at Secured Party's option,
be immediately due and payable upon the occurrence of any of the following
events of default: (a) default in the payment or performance, when due or
payable, of any Liabilities which is not cured within twenty (20) days after
written notice to Debtor; (b) levy or execution against any material property of
Debtor, which levy or execution is not released or discharged within thirty (30)
days; or (c) appointment of a receiver for any material part of the property of
Debtor, assignment for the benefit of creditors by Debtor, commencement of any
proceeding under any bankruptcy or insolvency laws, or any laws relating to the
relief of debtors, readjustment of indebtedness, reorganization, composition or
extension, by or against Debtor.
Page 2 - SECURITY AGREEMENT
<PAGE>
EXHIBIT 10.15
6. Remedies. Upon the occurrence of any of the above events of default and
at any time thereafter (such default not having previously been cured), Secured
Party shall have the rights and remedies of a secured party under the Uniform
Commercial Code of Oregon.
7. Waivers. Debtor waives demand, notice, protest, notice of acceptance of
this agreement, notice of loans made, credit extended, Collateral received or
delivered or other action taken in reliance hereon and all other demands and
notices of any description. With respect both to Liabilities and Collateral,
Debtor assents to any extension or postponement of the time of payment or any
other indulgence, to any substitution, exchange or release of Collateral, to the
addition or release of any party or person primarily or secondarily liable, to
the acceptance of partial payments thereon and the settlement, compromising or
adjusting of any thereof all in such manner and at such time or times as Secured
Party may deem advisable. Secured Party shall have no duty as to the collection
or protection of Collateral or any income thereon, nor as to the preservation of
rights pertaining thereto beyond the safe custody thereof Secured Party may
exercise its rights with respect to Collateral without resorting to or regard to
other Collateral or sources of reimbursement for Liabilities. Secured Party
shall not be deemed to have waived any of its rights upon or under Liabilities
or Collateral unless such waiver be in writing and signed by Secured Party. No
delay or omission on the part of Secured Party in exercising any right shall
operate as a waiver of such right or any other right. A waiver on any one
occasion shall not be construed as a bar to or waiver of any right on any future
occasion. All rights and remedies of Secured Party on Liabilities or Collateral
whether evidenced hereby or by any other instrument or papers shall be
cumulative and may be exercised singularly or concurrently.
8. Attorneys' Fees and Costs. The Secured Party shall be entitled to
recover reasonable expenses of every kind and description, including reasonable
attorney fees, in connection with suit or action or arbitration in both trial
and appellate courts, paid or incurred by Secured Party under or with respect to
Liabilities or Collateral, collection or realization of Liabilities or in
protecting or enforcing its rights upon or under Liabilities or Collateral or
this agreement, or in taking, holding, preparing for sale and selling any of the
Collateral. Payment thereof is secured by Collateral. After deducting all of
said expenses, the residue of any proceeds of collection or sale of Collateral
shall be applied to the payment of principal or interest on Liabilities in such
order of preference as Secured Party may determine.
9. Notices. Any demand upon or notice to Debtor that Secured Party may
elect to give shall be effective when deposited in the United States mail or
sent by facsimile or delivered to an air courier company addressed to Debtor at
the address shown at the beginning of this agreement, or, if Debtor has notified
Secured Party in writing of a change of address, to Debtor's last address so
notified. Demands or notices addressed to Debtor's address at which Secured
Party customarily communicates with Debtor shall also be effective.
10. Binding Arbitration. Upon the demand of any party any controversy or
claim arising out of or relating to this Agreement, including, without
limitation, the making, performance, or interpretation of this Agreement, shall
be settled by arbitration. Unless otherwise agreed, the arbitration shall be
Page 3 - SECURITY AGREEMENT
<PAGE>
EXHIBIT 10.15
conducted in Portland, Oregon, in accordance with the then-current Commercial
Arbitration Rules of the American Arbitration Association. The arbitration shall
be held before a single arbitrator (unless otherwise agreed by the parties). The
arbitrator shall be chosen from a panel of attorneys knowledgeable in the field
of business law in accordance with the then-current Commercial Arbitration Rules
of the American Arbitration Association. If the arbitration is commenced, the
parties agree to permit discovery proceedings of the type provided by the Oregon
Rules of Civil Procedure both in advance of and during recesses of the
arbitration hearings. The parties agree that the arbitrator shall have no
jurisdiction to consider evidence with respect to or render an award or judgment
for punitive damages (or any other amount awarded for the purpose of imposing a
penalty). The parties agree that all facts and other information relating to any
arbitration arising under this Agreement shall be kept confidential to the
fullest extent permitted by law. The prevailing Party in any Dispute shall be
entitled to recover its reasonable attorneys' fees in any arbitration, and the
arbitrator shall have the power to award such fees. The award of the arbitrator
shall be in writing and shall set forth the factual and legal basis for the
award. All statutes of limitation applicable to any dispute shall apply to any
proceeding in accordance with this arbitration clause. The parties agree, to the
maximum extent practicable, to take any action necessary to conclude an
arbitration hereunder within 180 days of the filing of a dispute. The arbitrator
shall be empowered to impose sanctions for any party's failure to proceed within
the times established herein. The provisions of this arbitration provision shall
survive any termination, amendment, or expiration hereof or of this Agreement
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. If any provision of this
arbitration provision is declared invalid by any court, the remaining provisions
shall not be affected thereby and shall remain fully enforceable. THE PARTIES
UNDERSTAND THAT BY THIS AGREEMENT THEY HAVE DECIDED THAT THEIR DISPUTES SHALL BE
RESOLVED BY BINDING ARBITRATION RATHER THAN IN COURT, AND ONCE DECIDED BY
ARBITRATION NO DISPUTE CAN LATER BE BROUGHT, FILED OR PURSUED IN COURT.
11. Equal Priority of Security Interest. After the date of this Agreement,
Debtor may obtain additional loans from other parties ("Additional Lenders") on
terms substantially similar to the terms between Secured Party and Debtor in the
maximum amount of $250,000.00, including the amounts loaned by Secured Party.
The security interest granted by this Agreement is intended to secure the
Liabilities to the Secured Party and the loans of the Additional Lenders on an
equal, or pari passu, basis, such that the Secured Party's and Additional
Lenders' security interests in the Collateral shall rank equally with each
other's security interest in the Collateral regardless of the date of filing of
each party's financing statement.
12. Subordination to Finova and its Successor. The security interest
granted to each Secured Party hereunder is subordinate and junior in priority to
the first priority security interest granted to Finova Capital Corporation.
Concurrently with the execution and delivery of this Agreement, each Secured
Party shall execute and deliver to Finova Capital Corporation its form of
Subordination and Standstill Agreement. Each Secured Party agrees that the
Page 4 - SECURITY AGREEMENT
<PAGE>
EXHIBIT 10.15
security interest granted by this Agreement shall also be subordinate and junior
to any security interest in favor of a lender who provides an operating line of
credit loan to the Debtor to pay off or refinance the loan due and owing to
Finova Capital Corporation. Secured Party shall, at the request of Debtor, take
all reasonable actions requested by Debtor to evidence such subordination,
including, without limitation, execution of a subordination agreement
substantially similar to the Subordination and Standstill Agreement.
Debtor and Secured Party hereby acknowledge receipt of a copy of this
Agreement.
DEBTOR:
CREATIVE MEDICAL DEVELOPMENT, INC.
By: /s/ M. Charles Van Rossen
--------------------------------------
Title: Vice-President Finance & Treasurer
-----------------------------------
SECURED PARTY:
/s/ William E. Cook
- -------------------
William E. Cook
Page 5 - SECURITY AGREEMENT
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