SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM ____ to ____
Commission file number 0-25852
THE MED-DESIGN CORPORATION
(Name of small business issuer in its charter)
Delaware 23-2771475
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2810 Bunsen Avenue, Ventura, CA. 93003
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (805) 339-0375
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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 pursuant to Item 405 of
Regulation S-B contained herein, 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 December 31, 1998 was $4,500,000
The aggregate market value of voting stock held by non-affiliates of the
registrant (computed by reference to the last reported sale price of such stock
on March 15, 1999) was $27,085,035. The number of common shares outstanding as
of March 15, 1999 was 7,951,570.
Documents incorporated by reference:
Certain portions of the registrant's definitive Proxy Statement for the 1999
Annual Meeting of Stockholders (which is expected to be filed with the
Commission not later than 120 days after the end of the registrant's last fiscal
year)
1
<PAGE>
are incorporated by reference into Part III of this Form 10-KSB.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements relating to such matters as anticipated business
performance, business prospects, technological developments, product
development, new products, research and development activities and similar
matters. Words such as "may," "should," "anticipate," "believe," "plan,"
"estimate," "expect, and "intend" and other similar expressions are intended to
identify forward-looking statements. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, The Med-Design Corporation
("Med-Design") notes that these forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the sections of this Annual Report entitled "Business - Products
Under Development," "Business - Research and Development," "Business -
Competition," "Business Marketing and Sales," " Business - Manufacturing,"
"Business - Patents and Proprietary Rights," " Business - Government
Regulation," "Management's Discussion and Analysis or Plan of Operation -
Results of Operation," "Management's Discussion and Analysis or Plan of
Operation - Plan of Operation," "Management's Discussion and Analysis or Plan of
Operation - Year 2000 Issues," "Management's Discussion and Analysis or Plan of
Operation - Liquidity and Capital Resources." Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. Med-Design undertakes no obligation to
publicly revise these forward-looking statements, to reflect events or
circumstances that arise after the date hereof. Readers should carefully review
the risk factors described in other documents that Med-Design files from time to
time with the Securities and Exchange Commission and in public communications
made by Med-Design.
PART I
ITEM 1. BUSINESS
General Developments of Med-Design
Med-Design was incorporated in Delaware on November 14, 1994. On February
28, 1995, The Med-Design Corporation, a Pennsylvania corporation, incorporated
on December 13, 1993, was merged with and into Med-Design.
Med-Design was formed to acquire Med-Design, Inc., a California corporation
("MDI") incorporated on October 26, 1990, which owned patent and proprietary
rights to certain safety medical devices, including the Safety Syringe, the
Safety Blood Collection Needle and the Safety Catheter (as hereinafter defined).
On March 14, 1995, Med-Design organized a wholly-owned subsidiary, MDC
Investment Holdings, Inc. ("MDC Holdings"), under the laws of the State of
Delaware. Med-Design entered into an Agreement of Merger on April 5, 1995 with
MDC Holdings and MDI, pursuant to which MDI merged with and into MDC Holdings,
the surviving corporation, and Med-Design issued and delivered 1,219,742 shares
of Common Stock to the MDI shareholders in exchange for their shares of MDI
common stock. In addition, Med-Design issued a non-interest bearing promissory
note in the principal amount of $1,000,000 payable to the former MDI
shareholders, which was collateralized by all of the issued and outstanding
shares of the common stock, $0.01 par value per share, of MDC Holdings. In
connection with the merger, Med-Design issued and delivered 3,572 shares of
Common Stock to a former noteholder of MDI to satisfy an obligation of MDI.
Med-Design paid the promissory note in full from the net proceeds of
Med-Design's initial public offering (as defined below).
As a result of MDI's merger with MDC Holdings, MDC Holdings became the sole
owner of all of the worldwide intellectual property rights of MDI including
patents, patent applications, trademarks and trademark applications relating to
the Safety Syringe, Safety Blood Collection Needle and Safety Catheter.
Immediately following the consummation of the merger, MDC Holdings
transferred all of the assets it
2
<PAGE>
acquired in the Merger, other than its patents and other intellectual property,
and all of its liabilities to MDC Research Ltd., a California corporation and
wholly-owned subsidiary of MDC Holdings.
In June 1995, Med-Design completed an initial public offering of 3,450,000
shares of Common Stock, par value $0.01 per share. The net proceeds to
Med-Design from the initial public offering were approximately $9,526,000.
On January 23, 1997, Med-Design completed a private placement of 1,000,000
shares of Common Stock at a price of $5.00 per share pursuant to an offering to
certain "accredited investors" (pursuant to Regulation D of the Securities Act
of 1933, as amended). Med-Design received proceeds of approximately $4,617,000,
net of expenses incurred in connection with the private placement.
On July 22, 1998 Med-Design completed a $1,550,000 private placement of
convertible debentures collateralized by Med-Design's intellectual properties.
The net proceeds to Med-Design was $1,474,000.
On December 11, 1998, The Med-Design Corporation signed a multi-product
licensing agreement, an option licensing agreement and an equity agreement with
Becton, Dickinson and Company, ("Becton Dickinson"), a New Jersey based global
medical technology company. Med-Design granted Becton Dickinson the exclusive
worldwide rights to manufacture and sell Med-Design's Safety Blood Collection
Needle, Safety Winged Set Blood Collection Needle, Safety I.V. Catheter, Safety
Wing Needle Set/Catheter and Safety PICC Introducer Catheter Insertion Device
and a one year option, with terms and conditions to be negotiated, to license
the Safety Hypodermic Syringe for a period of one year (fixed or stake needle
type), the Safety Hypodermic Syringe (luer type), the Safety Arterial Blood Gas
Syringe (add-on type), the Safety Pre-Filled Glass Syringe (luer type), and the
Safety Pre-Filled Glass Syringe (fixed or stake needle type). Under the terms of
the agreements, Med-Design received an initial, non-refundable payment of $4.5
million, an equity investment of $1.5 million and continuing royalty payments
for the life of the patents payable on Becton Dickinson's net sales of licensed
products. Becton Dickinson invested $1.5 million in Med-Design through the
purchase of 300,000 shares of Series A Convertible Preferred Stock, convertible
into Med-Design's common shares at $5.00 per share. Becton Dickinson is entitled
to designate one member on Med-Design's Board of Directors. Med-Design
previously signed a development and licensing agreement for its proprietary
Safety I.V. Cathheter with Graphic Controls Corporation, which was canceled by
mutual agreement with no obligation to either party.
Description of the Business of Med-Design
Med-Design designs and develops safety medical devices intended to reduce
the incidence of accidental needlesticks. Med-Design has three core products:
the Retractable Needle Hypodermic Syringe (the "Safety Syringe"), the
Retractable Blood Collection Needle (the "Safety Blood Collection Needle") and
the Retractable Needle Intravenous Catheter Insertion Device (the "Safety
Catheter"). These products are similar in appearance and size to the standard
non safety devices in use. Med-Design believes that its safety medical devices
can assist employers in meeting standards promulgated by Occupational Safety and
Health Administration ("OSHA") to help eliminate or minimize occupational
exposure to bloodborne pathogen. Each of these products incorporate Med-Design's
novel proprietary retraction technology that enables a health care professional,
with no substantial change in operating technique and using one hand, to
permanently retract the needle into the body of the device which can then be
safely discarded. Med-Design has several U.S. and foreign patents and many
patent applications pending.
Med-Design has designed several additional products which are in various
stages of development which also incorporate Med-Design's proprietary retraction
technology and are designed to reduce the incidence of accidental needlesticks.
As part of the Company's strategy of maximizing its investments in device design
and development, Med-Design has developed various sizes and designs of these
products to accommodate the specific requirements of both current and potential
strategic partners for a wide range of medical and dental applications. These
additional product developments include the Safety PICC Introducer Catheter
Insertion Device, Safety Guidewire Introducer, Safety Winged Set Blood
Collection Needle, Safety Arterial Blood Gas Syringe, Safety Pre-Filled Vial
Injector, Safety Pre-Filled Glass Syringe, Safety Wing Needle Set/Catheter,
Safety Blood Donor Needle, Safety Y-Port Infusion Needle, and Safety Winged
Fistula Needle, and a number of additional products in early stages of
development.
In December 1998, Med-Design entered into licensing agreements with Becton
Dickinson that included
3
<PAGE>
several of the Company's products. With these agreements, Becton Dickinson will
become the worldwide exclusive manufacturer and seller of five of Med-Design's
safety needle products. These include the Safety Blood Collection Needle, Safety
IV Catheter, Safety PICC Introducer Catheter, Safety Winged Set Blood Collection
Needle and Safety Wing Needle Set/Catheter. Certain versions of the Safety
Syringe are also the subject of an option agreement with Becton Dickinson,
giving Becton Dickinson the right to negotiate for the licensing of these
additional products. These optioned products include the Safety Hypodermic
Syringe, Safety Pre-Filled Glass Syringe, and Safety Arterial Blood Gas Syringe.
Med-Design's headquarters are located at 2810 Bunsen Ave., Ventura,
California 93003. Med-Design's telephone number is (805) 339-0375.
Industry
Accidental Needlesticks
Needles for hypodermic syringes, blood collection and intravenous catheters
are used for introducing drugs and other fluids into the body and drawing out
blood and other bodily fluids. Among the applications for needles are the
injection of drugs (hypodermic syringes), the drawing of blood (blood collection
needles) and the infusion of drugs and nutrients (catheters). There is an
increasing awareness of the potential danger of infections and illness that can
result from accidental needlesticks as well as the need for safer needle devices
which reduce the number of accidental needlesticks that occur each year. Needles
can be broadly categorized as standard needles and safety needles. Safety
needles are designed to perform the same functions as standard needles, but also
to reduce the risk of accidental needlesticks and the potential danger of
infections and illnesses resulting therefrom.
Infections contracted as a result of accidental needlesticks are a major
concern to healthcare institutions, healthcare workers, sanitation and
environmental services workers and the regulatory agencies charged with the task
of making their working environment safe. Accidental needlesticks may result in
the spread of infectious diseases such as Hepatitis B, HIV, which may lead to
AIDS, diphtheria, gonorrhea, typhus, herpes, malaria, rocky mountain spotted
fever, syphilis and tuberculosis. According to the International Health Care
Worker Safety Center, an estimated 1 million occupational needlesticks occur
nationwide each year. This estimate is based on data from 70 hospitals around
the nation. Higher rates have been reported by the Center for Disease Control
and medical journals.
Estimates of the number of medical workers annually infected by the
Hepatitis B virus from needle sticks, which range from a high of 12,000 in the
1980s to the current figure of 1,000, have been reported by the Center for
Disease Control, the Occupational Safety and Health Administration and medical
researchers. Death estimates of 200 to 300 a year are also reported from the CDC
and OSHA. The number of workers contracting HIV from needle sticks - 50 to 60 a
year - is an estimate by the International Health Care Worker Safety Center. The
Hepatitis C needle sticks cases have been poorly tracked, but most experts
estimate the numbers to be in the thousands each year.
The possibility of healthcare workers becoming infected from contaminated
needles has caused, and continues to cause concern in the healthcare field and
among the agencies regulating the area. OSHA has adopted regulations requiring
employers to institute universal precautions to prevent contact with blood and
other potentially infectious material. OSHA's regulations also require employers
to establish engineering controls (e.g., sharps disposal containers and
self-sheathing needles) and safe work practices to ensure compliance with these
universal precautions. OSHA does not mandate specific technologies; rather,
employers are permitted to choose the most appropriate and effective safety
control devices to meet their specific institutional needs. OSHA guidelines, do
not require employers to institute the most sophisticated engineering controls,
but they must evaluate the effectiveness of existing controls and evaluate the
feasibility of instituting more advanced engineering controls. OSHA specifically
prohibits the recapping, bending or removal of needles, unless there is no
feasible alternative or if these processes are required for a specific medical
procedure. If recapping, bending or removal is necessary, workers must use
either a mechanical device or a one-handed technique.
In April 1992, the United States Food and Drug Administration ("FDA")
issued a safety alert to hospitals warning of the risks of needlestick injuries
from the use of hypodermic needles with intravenous equipment.
4
<PAGE>
Among other things, the safety alert stated that although the FDA could not
recommend specific products, it urged the use of needleless systems or recessed
needle system devices with a fixed safety feature. According to the alert, (1) a
fixed safety feature should provide a barrier between the hands and needle after
use; (2) the safety feature should allow or require the worker's hand to remain
behind the needle at all times; (3) the safety feature should be an integral
part of the device, and not an accessory; (4) the safety feature should be in
effect before disassembly and remain in effect after disposal to protect the
users and trash haulers and for environmental safety; and (5) the safety feature
should be as simple as possible, and require little or no training to use
effectively. Unlike some safety needle products currently on the market,
Med-Design's safety needle products meet all 5 of the FDA requirements.
In addition, the U.S. government's Centers for Disease Control and the
National Institute of Health have published guidelines that specify that needles
should not be re-sheathed, bent, broken, removed from disposable syringes or
otherwise manipulated by hand because of the potential for needle stick injury,
with the associated risk of blood-related infection.
Recent Legislation
In September 1998, the State of California passed legislation that requires
the Division of Occupational Safety and Health ("Cal/OSHA") to revise the
Bloodborne Pathogens standard by July 1, 1999. The revised standard will require
California healthcare providers to use needles with engineered sharps injury
protection and needleless systems to reduce the risk of sharps injury and
resultant transmission of bloodborne diseases.
Since the passing of the California legislation, 10 additional states have
introduced and are considering safety legislation. These additional states
include Iowa, Illinois, Indiana, Maryland, Minnesota, Montana, New Jersey,
Texas, and Washington. Additionally the District of Columbia, Connecticut,
Florida, Georgia, Maine, Michigan, New York, Oregon, Pennsylvania, and Wisconsin
are in the process of drafting safety needle legislation.
Recently the Service Employees International Union launched an effort in 18
state legislatures and the District of Columbia to enact laws to require that
hospitals use needles designed to shield workers from sticks during use and
disposal. This effort has now been joined by the California Healthcare
Association and is encouraged by the American Hospital Association.
As a result of the above mentioned regulations and guidelines, healthcare
institutions utilize or will be utilizing equipment, including safety needles,
and work practices that offer greater protection for healthcare workers than
previously provided. Med-Design believes that, as a result of the above, the use
of safety needle products is likely to increase significantly.
Market for Needles and Safety Needles
Safety Needle Syringes. Several versions of the Safety Syringe are subject
to Becton Dickinson's option to license. During this one year option period,
Med-Design will be working with Becton Dickinson with the intention of
negotiating a licensing agreement for such versions of the Safety Syringe.
Med-Design's marketing strategy for those versions of the Safety Syringe not
currently subject to the option agreement will be directed at markets in the
United States, Western Europe, Japan, and elsewhere. The August 1998 Theta
Report #850 on disposable medical supplies estimates that there were 6.6 billion
syringes sold in the U.S. in 1997. Theta forecasts a growth rate for the U.S.
market of between 6.80% and 7.27% annually for the 4 years following 1997, with
total syringe unit sales reaching 8.7 billion in 2001. The report indicates that
there was a 6% conversion to safety in the U.S. in 1997. The report further
forecasts that safety will represent 10% of the market in 1998; 30% in 1999; 50%
in 2000 and 75% in year 2001. The report indicates that the standard/safety
prices were $0.11/$0.30, in 1997. Theta forecasts that this price differential
will be $0.10/$0.22 in 1998; $0.10/$0.18 in 1999 $0.10/$0.16 in 2000 and
$0.09/$0.15 in 2001. This would imply that in 2001, while having a 75% market
share, safety syringes would command more than a 66% selling price premium over
non-safety syringes. Theta further reports that Becton Dickinson is currently
the dominant market leader with a 71% share of the U.S. syringe market in 1997.
Safety Blood Collection Needle. Med-Design's Safety Blood Collection
Devices were licensed to Becton Dickinson in December of 1998. Med-Design
believes that Becton Dickinson dominates the blood collection market with 73% of
the U.S. market per Theta's August 1998 report. Theta predicts a 15% yearly U.S.
growth rate
5
<PAGE>
in safety blood collection devices. It is Med-Design's belief that unit sales
for blood collection devices are in excess of one billion devices per year in
the U.S. and it is our belief that the worldwide unit sales number is in excess
of two billion devices. Theta concludes that "Growth in the blood collection
market will be fueled by increased sales of safety product systems, in response
to needle stick issues".
Safety IV and PICC Introducer. The Theta Corporation, in its latest report
on the Catheter market (report No. 722), indicated that sales for IV catheters
in 1997 was 233 million units in the U.S. amounting to $232 million and 420
million units internationally or $378.3 million. Of total international sales
Theta estimates 189 million units (45%) or $170 million was from the European
Economic Community, 147 million units (35%) or $132 million from Japan and 84
million units (20%) or $76 million from the rest of the world. Theta indicated
that in 1997 safety catheters represented 21.5% of the total IV catheter market
in U.S. and 14% internationally. In its analysis of competition in this market,
Theta reports that Becton Dickinson is the market leader with a 45% market
share. In its forecast for the five year period following 1997, Theta is
estimating total worldwide unit sales growth for IV Catheters to reach 699.5
million in 1998, 754.1 million in 1999, 825.2 million in 2000, 907.6 million in
2001 and 992.8 million in 2002.
Med-Design believes that its totally passive safety IV Catheter Insertion
device, recently licensed by Becton Dickinson, significantly addresses the
safety and functional needs of the user.
Theta reports that in 1997 sales for peripherally inserted central
catheters (PICC), another product market which Med-Design believes would benefit
from safety, was 974,000 units or $36.7 million in the U.S. and 225,000 or $8.2
million internationally. Med-Design believes this market lacks safety devices
and that its safety PICC Introducer, recently licensed by Becton Dickinson, can
address such deficiency.
Theta forecasts growth in the worldwide sales of peripherally inserted
central catheters (PICC) to grow between 13% and 20% over the next five years
for unit sales of 1.3 million units/$47.9 million in 1998, 1.5 million
units/$55.7 million in 1999, 1.8 million units/$63.9 million in 2000, 2.0
million units/$72.3 million in 2001 and 2.3 million units/$80.1 million in 2002.
Products Under Development
Med-Design continues to modify and improve its product design where
necessary in order to optimize ergonomic performance, improve manufacturability
and reduce manufacturing costs. Med-Design has developed prototypes for such
products, and continues to develop additional generations of prototypes to
represent any additional modification to their design. These products are in
various stages of development ranging from early concept to those products that
have been licensed and are in the technology transfer stage.
Safety Syringe. The Safety Syringe is similar in appearance, size and
performance to a standard non-safety disposable syringe and requires similar
operation technique. The operation of the Safety Syringe and standard disposable
syringe are the same to the point where the plunger has reached its full travel,
and the medication has been delivered. At this point, when operating the
Med-Design Safety Syringe, the needle automatically and fully retracts into the
body of the syringe as the user simply applies slight additional pressure to
move the plunger slightly beyond the normal stop. The needle is sealed in place,
having been made harmless and inoperable. The syringe and needle cannot
thereafter be used again. The Safety Syringe may then be safely disposed of,
posing no additional health risk. The Safety Syringe is easy to use and provides
visual and audible confirmation that the needle has been safely retracted after
injection. The Safety Syringe can be manufactured with needles of various gauges
and sizes, and barrels with various sizes.
Safety Blood Collection Needle. Blood Collection Needles are used to obtain
a sufficient volume of blood for a variety of diagnostic procedures.
Med-Design's Safety Blood Collection Needle works with substantially all
standard blood collection needle accessories, and is similar in appearance,
size, and performance to a standard non-safety disposable device, except that it
can be rendered safe by activating the proprietary needle retraction mechanism.
The operation of the Safety Blood Collection Needle is conventional up to the
point where sufficient fluids have been extracted. Then, by depressing a
conveniently located button on the barrel, the needle automatically and fully
retracts into the device, where it is then held in place and is rendered
harmless and inoperable. The Safety Blood Collection Needle cannot thereafter be
used again. The entire retraction procedure
6
<PAGE>
takes only a fraction of a second to complete. The Safety Blood Collection
Needle may then be safely disposed of, posing no additional health risk. The
Safety Blood Collection Needle is easy to use and provides visual and audible
confirmation that the needle has been safely retracted after use.
Safety Catheter. An intravenous catheter includes a flexible tube that is
used to inject or continuously deliver fluids into a patient. Intravenous
catheters are inserted into a patient by catheter insertion devices using a
needle within the flexible catheter tube. The Med-Design Safety Catheter is
similar in appearance, size and performance, to a standard non-safety disposable
device, except that it can be rendered safe by activating the proprietary needle
retraction mechanism. The operation of the Safety Catheter is conventional until
after the insertion needle is partially removed from the flexible catheter.
Then, upon further removal from the catheter, the needle automatically and fully
retracts into the body of the Insertion Device. This actuation method is totally
passive and insures that the safety feature (needle retraction) is deployed. The
needle is held in place and is rendered harmless and inoperable. The Safety
Catheter and needle cannot thereafter be used again. The entire retraction
procedure takes only a fraction of a second to complete. The Safety Catheter may
then be safely disposed of, posing no additional health risk. The Safety
Catheter is easy to use and provides visual and tactile confirmation that the
needle has been safely retracted after use.
In addition, Med-Design has focused on a number of new products for
development. Ten of these products have been designated for priority
development, including the Safety PICC Introducer Catheter Insertion Device, the
Safety Guidewire Introducer, the Safety Winged Set Blood Collection Needle, the
Safety Arterial Blood Gas Syringe Needle, the Safety Pre-Filled Vial Injector,
the Safety Pre-Filled Glass Syringe, the Safety Wing Needle Set/Catheter, the
Safety Blood Donor Needle, the Safety Y-Port Infusion Needle, and the Safety
Winged Fistula Needle (collectively, the "New Products"). These products are in
various stages of development, and prototyping.
Safety PICC Introducer Catheter Insertion Device. The Safety PICC
("Peripherally Inserted Central Catheter") Introducer Catheter Insertion Device
is used to place an axially splitable flexible introducer catheter. The
introducer is used to place a PICC for long term venous access to deliver fluids
into a patient. The splitable introducer catheter is inserted into patients by
using an insertion device with a needle within the splitable flexible catheter.
Once placed, a PICC is inserted within the splitable catheter and into the
patient's vein. The splitable catheter is withdrawn from the patient and peeled
apart for removal from the PICC. The Safety PICC Introducer Catheter Insertion
Device is similar in appearance, size and performance to a standard disposable
device, except that it can be rendered safe by activating the proprietary needle
retraction mechanism. The operation of the device is conventional until after
the insertion needle is partially removed from the splitable flexible catheter.
Then, with activation of the proprietary retraction, the needle automatically
and fully retracts into the body of the device, where the needle is held in
place and is rendered harmless and inoperable. The Safety PICC Introducer
Catheter Insertion Device cannot thereafter be used again. The entire retraction
procedure takes only a fraction of a second to complete. The device may then be
safely disposed of, posing no additional health risk. The Safety PICC Introducer
Catheter Insertion Device is easy to use and provides visual and audible
confirmation that the needle has been safely retracted after use.
Safety Guidewire Introducer. The Safety Guidewire Introducer includes a
thin stainless steel guidewire attached in a slidable fashion to the back end of
the barrel. The guidewire slides through the needle of the Introducer which is
used to place the guidewire in the patient's vein. Once the guidewire is placed,
a mid-line or other long term type of indwelling catheter is slid over the wire,
and the guidewire is removed. The Safety Guidewire Introducer needle is
withdrawn from the patient's vein once the guidewire is advanced to the desired
position. When the Safety Guidewire Introducer is pulled rearward completely off
the guidewire, the introducer needle is safely and easily retracted within the
device. The operation of the device is conventional until after the insertion
needle is removed from the guidewire. Then, by the simple action of removing the
guidewire from the needle, the needle automatically and fully retracts into the
body of the device, where the needle is held in place and is rendered harmless
and inoperable. The Safety Guidewire Introducer cannot thereafter be used again.
The entire retraction procedure takes only a fraction of a second to complete.
The device may then be safely disposed of, posing no additional health risk. The
Safety Guidewire Introducer is easy to use and provides visual and audible
confirmation that the needle has been safely retracted after use.
Safety Winged Set Blood Collection Needle. The Safety Winged Set Blood
Collection Needle is used to obtain a sufficient volume of blood for a variety
of diagnostic procedures. Med-Design's Safety Winged Set Blood Collection Needle
is similar in appearance, size and performance to a standard non-safety winged
set, except that it
7
<PAGE>
can be rendered safe by activating the proprietary needle retraction mechanism.
The device works with substantially all standard blood collection needle
accessories. The operation of the Safety Winged Set Blood Collection Needle is
conventional up to the point where sufficient fluids have been extracted. Then,
by depressing a conveniently located button on the side of the barrel, the
needle automatically and fully retracts into the device, where the needle is
held in place and is rendered harmless and inoperable. The Safety Winged Set
Blood Collection Needle cannot thereafter be used again. The entire retraction
procedure takes only a fraction of a second to complete. The Safety Winged Set
Blood Collection Needle may then be safely disposed of, posing no additional
health risk. The Safety Winged Set Blood Collection Needle is easy to use and
provides visual and audible confirmation that the needle has been safely
retracted after use.
Safety Arterial Blood Gas Syringe Needle. The Safety Arterial Blood Gas
Syringe Needle is used to obtain a small (0.5 - 3.0 ml) sample of arterial
blood, as opposed to venous blood. This type of blood sampling requires a unique
procedure that insures accurate blood analyzing. The Safety Arterial Blood Gas
Syringe Needle is designed to be attached to any standard non-safety blood gas
syringe as you would attach a non safety needle. The Safety Arterial Blood Gas
Syringe Needle is used in the same way as a standard non-safety device needle,
except that it can be rendered safe by activating the proprietary needle
retraction mechanism. Essentially, the syringe plunger is preset to the desired
fill level by pulling the plunger rearward. Then arterial access is made and the
syringe fills due to blood pressure, allowing the trapped air to escape through
a hydrophobic vent located on the plunger seal. Once full, the flow of blood
stops upon contact with the vent and the needle is withdrawn. Immediately, while
still holding the syringe somewhat like a pencil, the conveniently located
actuator button is pushed and the needle retracts within the needle housing. The
sealed needle housing can then be safely discarded into an appropriate sharps
container. A venting or sealing cap is attached to the syringe which is then
placed in an ice tray for delivery to the laboratory. Processing at the
laboratory is conventional, since the front of the syringe barrel is fitted with
a standard Luer taper. This design eliminates the requirement of removing a
contaminated sharp needle before mounting a vent or cap to the syringe.
Safety Pre-Filled Vial Injector. The Safety Pre-Filled Vial Injector is a
syringe type device, which allows medication to be injected into the patient
directly from a pre-filled vial. The pre-filled vial containing fluid medication
is an existing component used by many pharmaceutical manufacturers. These
pre-filled vials have an elastomeric piston comprising a slidable fluid seal
within the forward end of the vial to allow for injection directly from the
vial. The slidable piston is threaded onto the rear end of the stationary
plunger and becomes integrated as a functional part of the plunger. Upon
initiating injection, the seal is moved rearward into the vial as the vial moves
forward into the main housing and delivers the fluid through a tubular needle
extending from the forward end of the main housing. The operation of the Safety
Pre-Filled Vial Injector is identical to the operation of a conventional syringe
up the point where the vial has reached its full travel, and all the medication
has been delivered. The safety retraction is actuated as the vial has reached
its full forward travel, causing the needle to automatically and fully retract
into the body of the device. Upon retraction, the Safety Pre-Filled Vial
Injector cannot be used again, as the needle is held in place and rendered
harmless and inoperable. The Safety Pre-Filled Vial Injector may then be safely
disposed of, posing no additional health risk. The Safety Pre-Filled Vial
Injector is easy to use and provides visual and audible confirmation that the
needle has been safely retracted after injection, and can be manufactured for
vials and needles of various sizes.
Safety Pre-Filled Glass Syringe. The Safety Pre-Filled Glass Syringe is
similar in appearance, size and performance to a standard non-safety pre-filled
disposable syringe, and can be rendered safe, using one hand, with no
substantial change in operation technique. The operation of the Safety Syringe
is conventional up to the point where the plunger has reached its full travel,
and all the medication has been delivered. Then, by removing the thumb from the
rear of the plunger, the needle automatically and fully retracts into the body
of the syringe. The needle is sealed in place and is rendered harmless and
inoperable. The syringe and needle cannot thereafter be used again. The entire
retraction procedure takes only a fraction of a second to complete. The Safety
Syringe may then be safely disposed of, posing no additional health risk. The
Safety Syringe is easy to use and provides visual and audible confirmation that
the needle has been safely retracted after injection.
Safety Wing Needle Set/Catheter. The Safety Wing Needle Set/Catheter is
used to continuously deliver fluids into a patients's vein, and is similar to a
Winged Infusion Set with the exception of the flexible catheter over the needle
for long-term therapy. The flexible catheter is inserted into the patient's vein
by a steel needle within the flexible catheter, in the same manner as a standard
non-safety Winged Infusion Set. Med-Design's Safety Wing Needle Set/Catheter
works with substantially all standard blood collection needle accessories, and
is similar in
8
<PAGE>
appearance, size and performance to a standard non-safety disposable device,
except that it can be rendered safe by activating the proprietary needle
retraction mechanism. When the venous access has been successfully completed and
verified by the visibility of blood within the flash-back area, the conveniently
located button on the side of the device is pushed and the needle retracts into
the body of the device. The sharp end of the insertion needle is completely
shielded within the hub portion of the wings, and the catheter wings can be
taped to the patient in a conventional manner. The intravenous fluid from a
gravity bag or infusion pump flows through the retracted steel needle because of
a slidable sealing feature within the flexible wings. Upon completion of the
infusion therapy procedure, the Safety Wing Needle Set/Catheter is removed from
the patient, and since the needle is fully retracted there is no possibility of
an accidental needle stick injury. The Safety Wing Needle Set/Catheter may then
be safely disposed of, posing no additional health risk.
Safety Blood Donor Needle. The Safety Blood Donor Needle is used to access
a blood donor's vein to draw blood in an amount equivalent to the volume of a
donor blood bag. The Safety Blood Donor Needle is similar in appearance to a
standard non-safety blood donor needle, and is used in an identical fashion,
except that it can be rendered safe by activating the proprietary needle
retraction mechanism. The Needle is compatible with substantially all standard
blood bag tubing sets. The operation of the Safety Blood Donor Needle is
conventional up to the point where sufficient blood has been extracted into the
donor bag. Then, after withdrawing the needle from the patient, needle
retraction is actuated by depressing a conveniently button on the side of the
barrel. The needle automatically and fully retracts into the device, where the
needle is held in place and is rendered harmless and inoperable. The Safety
Blood Donor Needle cannot thereafter be used again. The entire retraction
procedure takes only a fraction of a second to complete. The Needle may then be
safely disposed of, posing no additional health risk. The Safety Blood Donor
Needle is easy to use and provides visual and audible confirmation that the
needle has been safely retracted after use.
Safety Y-Port Infusion Needle. Y-Ports are devices used in intravenous
therapy as a means to deliver secondary fluids into a primary intravenous fluid
line for delivery into a patient's vein. The Safety Y-Port Infusion Needle
consists of a cylindrical barrel, holding an injection needle which can be
automatically and safely retracted within a specially designed barrel. The
barrel of the Safety Y-Port Infusion Needle is fitted with a tube fitting, which
protrudes from the barrel at an angle allowing connection of a tubing line for
delivery of the secondary fluid. A needle assembly is fixed to the from end of
the barrel, and is inserted into an injection port on the primary intravenous
line for delivery of the secondary fluid. After completion of the delivery of
the secondary fluid, safety needle retraction of the Safety Y-Port Infusion
Needle is actuated to cause the needle to automatically and fully retract into
the barrel. The needle is held in place and is rendered harmless and inoperable,
and the device cannot be used again. The Safety Y-Port Infusion Needle is easy
to use and provides visual and audible confirmation that the needle has been
safely retracted after use. The Safety Y-Port Infusion Needle may then be safely
disposed of, posing no additional health risk.
Safety Winged Fistula Needle. Safety Winged Fistula Needles are used to
access a vein and an artery to perform a hemodialysis procedure. Hemodialysis is
performed to remove toxic wastes from the blood of patients in renal failure.
Two Safety Winged Fistula Needles are used to access the vein and the artery at
the arteriovenous fistula site. The Safety Winged Fistula Needle is similar to
the Safety Winged Set Blood Collection Needle except that a larger gauge needle
is used and the flexible extension tube terminates with a simple female Luer
fitting. The Safety Winged Fistula Needle is used in the same way as a standard
non-safety device needle, except that it can be rendered safe by activating the
proprietary needle retraction mechanism. The operation of the Safety Winged
Fistula Needles is conventional up to the point where the hemodialysis procedure
is complete. Then, after withdrawing the needles from the arteriovenous fistula
site, needle retraction is activated by depressing a conveniently located button
on the side of the barrel. The needle automatically and fully retracts into the
device, where the needle is held in place and is rendered harmless and
inoperable. The Safety Winged Fistula Needles cannot thereafter be used again.
The entire retraction procedure takes only a fraction of a second to complete,
and the needles may then be safely disposed of, posing no additional health
risk. The Safety Winged Fistula Needles are easy to use and provide visual and
audible confirmation that the needles have been safely retracted after use.
In addition to Med-Design's three core products and the early stage
products described above, Med-Design has identified several additional product
applications for its proprietary retraction technology and Med-Design plans to
devote available resources in 1999 to research and develop such products.
9
<PAGE>
Research and Development
Med-Design has devoted substantially all of its research and development
efforts since its formation to safety needles and equipment necessary to
assemble the safety needle devices. Research and development expenses amounted
to $1,106,501 in 1998 and $1,605,668 in 1997.
In 1995, Med-Design completed a research and development laboratory at its
facility in Ventura, California which is equipped with assembly and test
equipment for product development and feasibility testing. In addition,
Med-Design completed a machine shop equipped with machine tools for fabrication
of new product parts for concept modeling and assembly and test fixtures.
Med-Design also installed a Class 100,000 clean room at the Ventura facility
which is currently used for the hand assembly of prototypes of Med-Design's
products and will ultimately be used in connection with the pilot manufacturing
of various Med-Design products on a semi-automated assembly system or a fully
automated robotic assembly system, if Med-Design installs such a system.
Med-Design intends to continue to modify and improve the design of its
products driven by additional market research and in response to needs developed
in discussions with potential strategic partners. In addition, Med-Design
intends to devote resources to the research and development of additional safety
needle devices and products which incorporate Med-Design's proprietary
retraction technology for use in the healthcare industry.
Marketing and Sales
Med-Design's core strategy continues to be the commercialization of its
products through strategic alliances and licenses with third parties to market
and sell its products in the United States, Western Europe, Japan and elsewhere.
In addition to the products which are the subject of the licensing and
option agreement with Becton Dickinson, Med-Design is currently investigating
additional licensing agreements or other forms of joint venture with third
parties, including Becton Dickinson, in the United States and abroad to
manufacture, market and distribute its other products. Med-Design has entered
into several confidentiality agreements with other companies for the purpose of
exploring such opportunities. Med-Design anticipates that entering into
alliances and licensing arrangements with third parties such as those agreements
recently entered into with Becton Dickinson, will enable Med-Design to increase
the market penetration of its products more quickly than Med-Design could
achieve on its own.
Med-Design, its licensee and strategic partners are not permitted to sell
any of Med-Design's products for commercial use in the United States until, and
only if, such products are cleared for marketing by the FDA. While Med-Design
has applied for and received 510(k) pre-market notification from the FDA for
early versions of its Safety Catheter, and Safety Blood Collection Needle,
Med-Design has no current plans to file for any additional 510(k) pre-market
notification on its own behalf. Instead, Med-Design intends to assist its
licensors or other strategic partners in such filings, if requested.
In addition to being subject to the U.S. government's Food, Drug and
Cosmetic Act (the "FD&C Act") and the regulations promulgated thereunder,
Med-Design, its licensors, or strategic partners must comply with the laws and
regulations of the various foreign countries in which Med-Design or its
licensors, or strategic partners plans to sell or license the Safety Catheter,
Safety Blood Collection Needle, Safety Syringe and other products prior to
selling such products in such foreign countries. Certain foreign countries may
only require Med-Design or its licensors, or strategic partners to submit
evidence of the FDA's pre-market clearance of Med-Design's products, prior to
selling in such countries. However, some foreign countries may have more
stringent requirements and require additional testing and approvals.
Med-Design's agreement on with Graphic Controls Corporation for the
development and licensing of its proprietary Safety Intravenous Catheter
Insertion Device, which was terminated by mutual agreement in December, 1998.
The Safety Intravenous Catheter Insertion Device was ultimately included in the
licensing agreement with Becton Dickinson.
Med-Design has provided a limited quantity of its Safety Syringes, Safety
Catheters, Safety Blood Collection Needles, and certain of its early development
products to third parties in the United States and selected
10
<PAGE>
foreign countries under confidentiality agreements for market research purposes.
Manufacturing
In 1995, Med-Design leased approximately 26,000 square feet of space in
Ventura, California. In addition to administrative offices, the Ventura facility
contains a research and development laboratory equipped with assembly and test
equipment for concept modeling and product development and a machine shop
equipped with machine tools for fabrication of new product parts for concept
modeling and assembly, and the fabrication of prototype molds and test fixtures.
Med-Design also installed a 3,120 square foot Class 100,000 clean room at the
Ventura facility, which is currently being used for the assembly of prototypes
and products. Med-Design installed a semi-automated assembly system to pilot
manufacture its products which is capable of being used for the assembly of both
prototypes and products intended for sale.
The semi-automated assembly system, which consists of a series of manual
and semi-automatic stations, with additions and modifications, is capable of
producing up to 6,000,000 units per year. The assembly system can produce one or
more of Med-Design's products at a time, and has the capability of being
converted at a reasonable cost with minimal delay to pilot manufacture a
different product at such time as Med-Design may decide. Med-Design completed
installation of the system during the third quarter of 1997. Med-Design is
currently utilizing these manufacturing facilities to produce limited quantities
of one or more of its products to demonstrate the economic feasibility of the
commercial production of Med-Design's products to potential third party
manufacturers.
Med-Design is currently in negotiations with third parties to provide the
manufacturing of certain of its licensed products in furtherance of the
commercialization of these products. Med-Design has sufficient facilities to
perform these tasks, and if successful in these negotiations, intends to perform
certain product manufacturing for both prototype and product intended for sale.
Although Med-Design continues to envision the use of these facilities to
perform "product for sale" manufacturing of one or more of its currently
non-licensed products, Med-Design may ultimately contract with third parties for
all or a portion of the needed production of such products through contract
manufacturing licensing agreements or other form of joint venture.
Med-Design has established a quality control and quality assurance program
designed to assure that Med-Design's products are manufactured in accordance
with the FDA's regulations related to current Good Manufacturing Practices and
other applicable domestic and foreign regulations; however, Med-Design will be
dependent upon any third party manufacturers to comply with such procedures and
regulations.
Patents and Proprietary Rights
Med-Design's success will depend in part on its ability to obtain and
maintain patent protection for its products, to preserve its trade secrets and
to operate without infringing the proprietary rights of third parties.
Med-Design's policy is to attempt to protect its intellectual property and
maintain the proprietary nature of its technology by, among other things, filing
patent applications for technology that it considers important to the
development of its business and requiring certain employees and key consultants
to execute non-disclosure and non-compete agreements. Furthermore, on occasion,
Med-Design enters into discussions with third parties, such as potential
customers or licensees, and when proprietary information of Med-Design will be
disclosed, Med-Design enters into confidential disclosure agreements with such
parties.
Med-Design's U.S. patent rights currently consist of eight United States
patents, covering various aspects of the Safety Syringe, the Safety Blood
Collection Needle, the Safety Catheter, the Y-Port Intravenous access device,
and the pre-filled vial injector. Med-Design has been granted patents relating
to the Safety Syringe in Europe, Japan, Australia, Bulgaria, Hungary, and in
Romania. The issued European patent has been validated in Austria, Switzerland,
Germany, Denmark, France, Spain, the United Kingdom, Greece, Italy, the
Netherlands, and Sweden. Corresponding regional and national patent applications
relating to the Safety Syringe are pending in six other member countries of the
Patent Cooperation Treaty. A further European patent application was allowed in
1998, and will cover additional aspects of the device covered in the previously
issued European patent.
Med-Design has also been granted three patents in Taiwan relating
respectively to the Safety Catheter, the
11
<PAGE>
pre-filled vial injector, and the Y-Port Intravenous access device.
Foreign patent applications relating to the Safety Catheter are now pending
in Canada, China, Europe, Japan, Mexico, and Singapore. Applications for the
Pre-Filled Vial Injector System are pending in Indonesia, Canada, Europe, Japan,
Mexico and Singapore.
A total of seventeen U.S. applications, eight international applications,
and twenty foreign national/regional patent applications are pending to cover
Med-Design's retractable needle technology and specific products based on
Med-Design's technology.
There can be no assurance that Med-Design's current patent applications and
provisional patent applications will result in patents being issued.
On December 11, 1998, Med-Design entered into a licensing agreement, an
option licensing agreement and an equity agreement with Becton Dickinson. Under
the terms of the licensing agreement, Med-Design granted Becton Dickinson
exclusive worldwide rights under Med-Design's patents to make, sell, or
sublicense the Safety Blood Collection Needle, the Safety Winged Set Blood
Collection Needle, the Safety Wing Needle Set/Catheter, the Safety PICC Catheter
System, and the Safety I.V. Catheter Systems. Med-Design also granted Becton
Dickinson an option to the exclusive worldwide rights under Med-Design's patent
rights to make, use, sell, or sublicense certain other products, including the
Safety Hypodermic Syringe (fixed or stake needle-type), the Safety Hypodermic
Syringe (luer-type), the Safety Arterial Blood Gas Syringe (add-on type), the
Safety Pre-Filled Glass Syringe (fixed or stake needle-type) and the Safety
Pre-Filled Glass Syringe (luer-type). Additionally, Med-Design assigned U.S.
Patent No. 4,900,307 for the Safety Retracting Needle For Use With Syringe to
Becton Dickinson. Pursuant to the Agreement, Becton Dickinson granted back to
Med-Design a license under U.S. Patent No. 4,900,307 to make, use, sell or
sublicense certain products.
As Med-Design proceeds toward final designs for its Safety Syringe, Safety
Blood Collection Needle and Safety Catheter devices, Med-Design is having
searches conducted in the United States for unexpired patents owned by others
that may conflict with such final product designs. Med-Design, however, has not
conducted infringement searches in any foreign country for the purpose of
finding unexpired patents or pending patent applications that may raise a
possibility of infringement or conflict with Med-Design's planned activities.
Furthermore, Med-Design is considering appropriate modifications to the product
designs to optimize the final products and to avoid conflicts with the patents
of others. To the extent that such final product designs may not be protected by
Med-Design's existing patents and patent applications, Med-Design will file new
patent applications relative to its final products. There can be no assurance
that all of the potentially relevant patents of others have been identified or
that Med-Design will be able to obtain patent protection for its products.
There can also be no assurance that any patents owned by or issued to
Med-Design, or that may be issued to Med-Design in the future, will provide a
competitive advantage or will afford protection against competitors with similar
technology, or that competitors of Med-Design will not circumvent, or challenge
the validity of any patents issued to Med-Design. There also can be no assurance
that any patents issued to or licensed by Med-Design will not be infringed upon
or designed around by others, that others do not have or will not obtain patents
that Med-Design will need to license or design around, that Med-Design's
products will not inadvertently infringe upon the patents of others, or that
others will not make Med-Design's patented devices upon expiration of such
patents. Moreover, although Med-Design utilizes non-disclosure agreements and
other safeguards to protect its proprietary information and trade secrets, there
can be no assurance that they will protect such information or provide adequate
remedies for Med-Design in the event of unauthorized use or disclosure of such
information, or that others will not be able to independently develop such
information. As is the case with Med-Design's patent rights, the enforcement by
Med-Design of its non-disclosure agreements can be lengthy and costly, with no
guarantee of success.
If Med-Design becomes involved with patent infringement litigation, either
to enforce Med-Design's patents or defend against patent infringement suits,
such litigation would be lengthy and expensive, and if it occurs, would divert
Company resources from planned uses. Further, any adverse outcome in such
litigation could have a material adverse effect on Med-Design. If any of
Med-Design's products are found to infringe upon the patents or proprietary
rights of another party, Med-Design may be required to obtain licenses under
such patents or proprietary rights. No assurance can be given that any such
licenses would be made available on terms acceptable to Med-Design,
12
<PAGE>
if at all. In addition, patent applications filed in foreign countries and
patents granted in such countries are subject to laws, rules and procedures
which differ from those in the United States. Patent protection in such
countries may be different from patent protection provided by United States laws
and may not be as favorable to Med-Design. There can be no assurance that
Med-Design's program of patent protection and non-disclosure agreements will be
sufficient to protect Med-Design's proprietary technology from competitors.
With respect to trademarks, Med-Design has obtained a U.S. registration for
the mark "Safe Step". Med-Design may apply for other trademarks in the future.
Competition
The safety medical device market is highly competitive. Med-Design will
compete in the United States and abroad with medical product companies,
including Tyco, Kendall, Sherwood Davis and Geck, Terumo Medical, Johnson &
Johnson, and Bio-Plexus, Inc. Several of these companies also manufacture safety
needles. Med-Design's products would compete with the standard and safety
products manufactured by these and other companies in the United States and in
certain foreign countries. Many of Med-Design's competitors have better name
recognition in the market, longer operating histories, and are substantially
larger and better financed than Med-Design. Such competitors may use their
economic strength to influence the market to continue to buy their existing
products or new products developed by them. One or more of these competitors
also could use such resources to improve their current products or develop
additional products which may compete more effectively with Med-Design's
products. New competitors may arise and may develop products which compete with
Med-Design's products. In addition, new technologies may arise which could lower
or eliminate the demand for Med-Design's products. Med-Design cannot predict the
development of future competitive products or companies.
Historically, the needle market has been price competitive with little
differentiation between products. In addition to price, safety needles compete
for market share based on operating features and safety. In recent years, the
medical industry has adopted infection control practices which encourage the use
of safe medical devices due principally to the high cost of treating infection
and potential liability resulting from accidental needlesticks, and in 1998 the
State of California enacted safety needle legislation mandating full compliance
of all health care facilities within the state by July 1, 1999. Since the
passing of the California legislation, 18 additional states plus the District of
Columbia are either considering or drafting similar legislation as of the
writing of this filing.
The AHA report and other authorities have stated that the benefit resulting
from the prevention of accidental needlesticks cannot be measured solely by
savings in costs of medical treatment, because of the costs of treating persons
who contract an illness or infection from an accidental needlestick, the time
lost from work and death. Although Med-Design cannot predict with certainty the
prices of its products, currently available safety needle devices are priced at
approximately two to three time times that of standard devices. Notwithstanding
the price differential, Med-Design believes that, based upon estimated costs
associated with accidental needlesticks, its products should be considered cost
effective by the marketplace.
Med-Design believes, that unlike its products, many of the current safety
needles use an external sheath design or require manual retraction of the
needle. The external sheath design generally requires the operator to move a
protective sheath over the needle after removing the needle from the patient (a
sliding sleeve) or manipulate the device to cover the used needle tip (a
disappearing needle). The methods of use and disposal of the Safety Syringe,
Safety Blood Collection Needle and Safety Catheter are virtually identical to
the present methods of use and disposal for standard syringes, blood collection
needle and intravenous catheter insertion devices.
Government Regulation
Med-Design's products are subject to regulation by the FDA under the U.S.
government's Food, Drug and Cosmetic Act ("FD&C Act") and implementing
regulations. Pursuant to the FD&C Act, the FDA regulates, among other things,
the manufacture, labeling, distribution, and promotion of Med-Design's products
in the United States. The FD&C Act requires that a medical device must (unless
exempted by regulations) be cleared or approved by the FDA before being
commercially distributed in the United States. The FD&C Act also requires
manufacturers of medical devices to, among other things, comply with labeling
and promotion requirements and to manufacture devices in accordance with Good
Manufacturing Practices ("GMPs"), which require that companies manufacture their
products and maintain related documentation in a prescribed manner with respect
to manufacturing, testing and
13
<PAGE>
quality control activities. The FDA inspects medical device manufacturers and
distributors, to enjoin and/or impose civil penalties on manufacturers and
distributors marketing noncomplying medical devices, and to criminally prosecute
violators.
Pursuant to the FD&C Act, the FDA classifies medical devices intended for
human use into three classes, Class I, Class II, and Class III. In general,
Class I devices are products the safety and effectiveness of which the FDA
determines can be reasonably assured by general controls under the FD&C Act
relating to such matters as adulteration, misbranding, registration,
notification, records and reports, and GMPs. Class II devices are products for
which FDA determines that these general controls are insufficient to provide
reasonable assurance of safety and effectiveness, and that require special
controls such as the promulgation of performance standards, post-market
surveillance, patient registries, or such other actions as FDA deems necessary.
Class III devices are devices for which FDA has insufficient information to
conclude that either general controls or special controls would be sufficient to
assure safety and effectiveness, and which are life-supporting, life-sustaining,
or substantial importance in preventing impairment of human health (e.g., a
diagnostic device to detect a life-threatening illness), or present a potential
unreasonable risk of illness or injury. Devices in this case require pre-market
approval, as described below.
The FD&C Act further provides that, unless exempted by regulation, medical
devices may not be commercially distributed in the United States unless they
have been approved or cleared by the FDA. There are two review procedures by
which medical devices can receive such approval or clearance. Some products may
qualify for clearance under a Section 510(k) procedure, in which the
manufacturer submits to the FDA a pre-market notification that it intends to
begin marketing the product, and shows that the product is substantially
equivalent to another legally marketed product (i.e., that it has the same
intended use and that it is as safe and effective as legally marketed device,
and does not raise different questions of safety and effectiveness than does a
legally marketed device). In some cases, the 510(k) notification must include
data from human clinical studies. In March 1995, the FDA issued a draft guidance
document on 510(k) notifications for medical devices with sharps injury
prevention features, a category that would cover all of Med-Design's existing
and new products. The draft guidance provisionally placed this category of
products into Tier 3 for purposes of 510(k) review, meaning that such products
will be subject to the FDA's most comprehensive and rigorous review for 510(k)
products. The draft guidance also states that in most cases, the FDA will
accept, in support of a 510(k) notification, data from tests involving simulated
use of such a product by health care professionals, although in some cases the
agency might require actual clinical data.
Marketing may commence when the FDA issues a clearance letter finding such
substantial equivalence. According to FDA regulations, the agency has 90 days to
respond to a 510(k) notification. There can be no assurance, however, that the
FDA will provide a response within that time, or that the agency will reach a
finding of substantial equivalence.
If a product does not qualify for the 510(k) procedure (either because it
is not substantially equivalent to a legally marketed device or because it is a
Class III device), the FDA must approve a pre-market approval ("PMA")
application before marketing can begin. PMA applications must demonstrate, among
other matters, that the medical device is safe and effective. A PMA application
is typically a complex submission, usually including the results of clinical
studies, and preparing an application is a detailed and time-consuming process.
Once a PMA application has been submitted, the FDA's review may be lengthy and
may include requests for additional data. By statute and regulation, the FDA may
take 180 days to review a PMA application although such time may be extended.
Furthermore, there can be no assurance that a PMA application will be reviewed
within 180 days or that a PMA application will be approved by the FDA.
Although the 510(k) pre-market clearance process is ordinarily simpler and
faster than the PMA application process, there can be no assurance that
Med-Design, its licensee, or strategic partners will obtain 510(k) pre-market
clearance to market Safety Syringe or other new products, or that such products
will be classified as Class II devices, or that, in order to obtain 510(k)
clearance, Med-Design will not be required to submit additional data or meet
additional FDA requirements that may substantially delay the 510(k) process and
add to Med-Design's expenses. Moreover, such 510(k) pre-market clearance, if
obtained, may be subject to conditions on the marketing or manufacturing of the
corresponding products that may impede Med-Design's ability to market and/or
manufacture such products.
14
<PAGE>
In addition to the requirements described above, the FD&C Act requires that
all medical device manufacturers and distributors register with the FDA annually
and provide the FDA with a list of those medical devices which they distribute
commercially. The FD&C Act also requires that all manufacturers of medical
devices comply with labeling requirements and manufacture devices in accordance
with GMPs, which require that companies manufacture their products and maintain
their documents in a prescribed manner with respect to manufacturing, testing,
and quality control activities. The FDA's Medical Device Reporting regulation
requires that companies provide information to the FDA on death or serious
injuries alleged to have been associated with the use of their products, as well
as product malfunctions that would likely cause or contribute to death or
serious injury if the malfunction were to recur. The FDA further requires that
certain medical devices not cleared for marketing in the United States have FDA
approval before they are exported.
The FDA inspects medical device manufactures and distributors, and has
broad authority to order recalls of medical devices, to seize noncomplying
medical devices, to enjoin and/or to impose civil penalties on manufacturers and
distributions marketing non-complying medical devices, and to criminally
prosecute violators.
Med-Design will be required under FDA regulations to register the pilot
manufacturing facility with the FDA before engaging in the commercial
distribution of any of its products. As such, the facilities will be subject to
inspection on a routine basis to assure compliance with the FDA's GMP
regulations.
In addition to laws and regulations enforced by the FDA, Med-Design is
subject to government regulations applicable to all businesses, including, among
others, regulations related to occupational health and safety, workers' benefits
and environmental protection.
Distribution of Med-Design's products in countries other than the United
States may be subject to regulation in those countries. There can be no
assurance that Med-Design, its licensors, or strategic partners will be able to
obtain the approvals necessary to market its needle devices or any other product
outside the United States.
Employees
As of March 15, 1999, Med-Design employed 17 people on a full-time basis
and one person on a part-time basis. Med-Design believes its employee relations
are satisfactory. Med-Design anticipates increasing employees in certain
strategic areas pending the outcome of continued discussions and negotiations
with third parties regarding the licensing or joint venture of its early
development stage products.
Environmental Matters
Med-Design believes its operations are currently in compliance in all
material respects with applicable Federal, state, and local laws, rules,
regulations, and ordinances regarding the discharge of material into the
environment. Such compliance has no material impact upon Med-Design's capital
expenditures, earnings or competitive position, and no capital expenditures for
environmental control facilities are planned.
ITEM 2. PROPERTIES
Med-Design leases approximately 26,000 square feet of space in Ventura,
California for Med-Design's corporate headquarters, pilot manufacturing plant,
research and development facilities and offices for a base rent of $12,476 per
month. Currently, approximately 8,700 square feet of the space is being used by
Med-Design for research and development, engineering and administrative offices,
approximately 2,200 square feet is being used exclusively for research and
development and approximately 3,120 square feet is being used as a clean room
for the assembly of prototypes of Med-Design's products and ultimately will be
used to pilot manufacture its products. The remaining space is being used for
shipping and handling, quality control inspection, parts storage, finished
products and equipment. Med-Design has installed a semi-automated assembly
system to pilot manufacture certain of its products in the clean room. The lease
expires on October 31, 2000, although Med-Design has the option to extend the
term for two additional 36 month periods as well as the option to purchase this
facility.
Med-Design leased approximately 3,236 square feet of office space in
Philadelphia, PA., which until recently, was the corporate headquarters for
Med-Design. In March 1998, Med-Design completed the relocation of its corporate
headquarters to Ventura, California, although it still maintains an office in
Philadelphia. The balance
15
<PAGE>
of the office space previously used by Med-Design in Philadelphia was subleased.
Med-Design believes that its facilities are adequate for its current needs
and that suitable additional or substitute space will be available as well as
needed.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending or, to the knowledge of management,
threatened against Med-Design.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1998 through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Med-Design's common stock has been approved for trading in the NASDAQ
SmallCap Market under the symbol ("MEDC") since Med-Design's Initial Public
Offering on June 7, 1995. The following table sets forth for the fiscal quarters
indicated since the date of the Initial Public Offering, the range of high and
low bid information for Med-Design's Common Stock in the NASADAQ SmallCap
Market:
Market Information
Fiscal year ended December 31, 1997 High Low
----------------------------------- ---- ---
First Quarter ............................................. $10 1/4 $ 5 1/8
Second Quarter ............................................ 9 3/8 6
Third Quarter ............................................. 7 1/2 3 5/8
Fourth Quarter ............................................ 6 3/4 2 3/4
Fiscal year ended December 31, 1998 High Low
------------------------------------ ---- ---
First Quarter ............................................. $ 5 1/2 2 7/16
Second Quarter ............................................ 3 19/32 3/4
Third Quarter ............................................. 2 1
Fourth Quarter ............................................ 6 3/4 1 1/2
Holders
As of March 14, 1999, Med-Design had 142 holders of record of the Common
Stock. Since a portion of Med-Design's Common Stock is held in "street" or
nominee name, Med-Design is unable to determine the exact number of beneficial
holders.
16
<PAGE>
Dividends
Med-Design has never declared or paid a cash dividend on its Common Stock.
Med-Design currently anticipates that it will retain any earnings to finance the
operation and expansion of its business, and therefore does not intend to pay
dividends on its Common Stock in the foreseeable future. Any determination to
pay dividends in the future on common stock is at the discretion of Med-Design's
Board of Directors and will depend upon Med-Design's financial conditions,
results of operations, capital requirements, limitations contained in loan
agreements and such other factors as the Board of Directors deems relevant.
On December 11, 1998, Becton Dickinson made an equity investment in Series
A Preferred Stock of Med-Design. Dividends are payable at a rate of 8% per
annum, on a cumulation basis, in cash or in additional preferred stock at the
discretion of Med-Design.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto of Med-Design which
appear elsewhere herein.
To date, Med-Design has earned no revenues from product sales, however,
Med-Design granted revenues in 1998 from licensing activities and anticipates
that revenues will be recorded during the next twelve months from licensing of
additional products to Beckon, Dickinson and Company and/or other strategic
partners.
Plan of Operation
Med-Design plans to focus on the following four areas of activity in 1999:
technology transfer of the recently licensed products; the licensing and final
development of those products currently under option to Becton, Dickinson and
Company; the further development and licensing of additional products; the
development of incremental revenues related to design and development and
manufacturing agreements with licensing partners.
Technology Transfer
The transfer technology of the Safety Blood Collection Needle, Safety
Winged Set Blood Collection Needle, Safety Catheter, Safety Wing Needle
Set/Catheter and Safety PICC Introducer Catheter Insertion Device to Becton
Dickinson under the terms of a license agreement is currently underway and is
expected to be completed during April, 1999.
Optional Products
Med-Design also plans to complete concept development of the Safety
Hypodermic Syringe (fixed or stake needle type), the Safety Hypodermic Syringe
(luer type), the Safety Arterial Blood Gas Syringe (add-on type), the Safety
Pre-Filled Glass Syringe (luer type), and the Safety Pre-Filled Glass Syringe
(fixed or stake needle type), each of which is subject to Becton Dickinson's
option to license. Med-Design is obligated, at Becton Dickinson's request, to
negotiate for the licensing of such products during the one year term of the
option agreement.
Additional Products
Med-Design also plans to advance concept development and modeling of
certain other products that are not currently under licensing or option
agreements, such as the Safety Pre-Filled Vial Injector. Med-Design also plans
to continue discussions and negotiations with third parties regarding the
licensing or joint venture of these products. Med-Design plans to support such
product development programs, discussions, and negotiations, including the
building of necessary prototypes with currently available funds.
Med-Design is also investigating opportunities with third parties to
manufacture, market and distribute Med-Design's products. Med-Design anticipates
that entering into alliances and licensing arrangements with third parties would
enable Med-Design to increase market penetration of its products more quickly
than Med-Design could achieve on its own. Med-Design has entered into such
arrangements with Beckon Dickinson as mentioned.
17
<PAGE>
Other Business
Med-Design is currently in negotiations with third parties to provide
additional design, development and manufacturing in furtherance of the
commercialization of the products. Med-Design has sufficient facilities to
perform these tasks. Med-Design's facility in Ventura, California contains a
research and development laboratory equipped with assembly and test equipment
for concept modeling and product development and a machine shop equipped with
machine tools for fabrication of new product parts for concept modeling and
assembly, and fabrication of prototype molds and test fixtures. Med-Design also
installed a 3,120 square foot Class 100,000 clean room at the facility, which is
capable of being used for the semi-automated assembly of both prototypes and
products intended for sale.
As a result of discussions with third parties, Med-Design has installed a
semi-automated assembly system at the facility to pilot manufacture its
products. The objective of Med-Design in installing the assembly system is to
demonstrate to potential third party manufacturers the economic feasibility of
the commercial production of its products. The semi-automated assembly system,
which consists of a series of manual and semi-automatic stations, with additions
and modifications, is capable of producing up to 6,000,000 units of commercial
products per year. The assembly system will produce one or more of Med-Design's
products at a time, and has the capability of being converted at a reasonable
cost with minimal delay to manufacture a different product at such time as
Med-Design may decide. Med-Design completed the system during the third quarter
of 1997.
Med-Design anticipates earning revenues in 1999/2000 from one or more of
the following: licensing or optioning of additional products; third party
manufacturing agreement, third party development agreements and royalty payments
in association with licensed products.
As of March 15, 1999, Med-Design employed 17 people on a full-time basis
and one person on a part-time basis. Med-Design anticipates increasing employees
in certain strategic areas pending the outcome of continued discussions and
negotiations with third parties regarding the licensing or joint venture of its
early stage development products. Med-Design will however reassess its personnel
requirements as business activity dictates.
Year 2000 Issues
The "Year 2000 Issue" describes the use of two digits rather than four
digits to define the applicable year in certain computer programs. In the Year
2000, any of Med-Design's computer programs that have two digit date-sensitive
software may interpret a date of "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
discrepancies of operations. Med-Design's business operations are dependent upon
internal software, suppliers and Becton Dickinson, Med-Design's licensee.
Med-Design has reviewed its internal program and has determined that there
are no material Year 2000 issues within Med-Design's systems. Med-Design has
engaged its network service provider to examine all software utilized in
Med-Design's operations to ensure Year 2000 compliance. Additionally, Med-Design
is working with its suppliers and its licensee to determine the extent to which
such third parties' systems (insofar as they relate to Med-Design's business)
are subject to the Year 2000 issue, and expects to complete such inquiries, and
remedy any material issues before the end of 1999. Med-Design estimates that the
total costs of the Year 2000 project will be approximately $10,000, $4,000 of
which represents capital costs and approximately $6,000 represents costs to
outside vendors. As of December 31, 1998, Med-Design had incurred approximately
$2,000 of Year 2000 costs. Due to the uncertainty inherent in the Year 2000
process, Med-Design is unable to determine a reasonable worst case scenario at
this time. The costs of the Year 2000 project and the date on which Med-Design
plans to complete the Year 2000 project tasks are based on management's best
estimates which were determined utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification factors and other factors. As a result, there can be no assurance
that these forward looking estimates will be achieved, and the actual costs and
compliance by vendors, licensees and other third parties could differ materially
from Med-Design's current expectations, resulting in material financial risk.
Liquidity and Capital Resources
At December 31, 1998, Med-Design had an accumulated deficit
$18,084,352, which includes a one-time, nonrecurring write-off of $5,932,770 for
purchase research and development incurred in connection with the acquisition of
MDI by Med-Design. Med-Design has financed its activities through December 31,
1998 principally
18
<PAGE>
through debt, the private placement of equity securities, and its initial public
offering.
As of December 31, 1998, Med-Design's working capital was $5,664,894
including cash and cash equivalents of $32,883, and available-for-sale
securities of $6,111,620, as compared to working capital of $1,181,513, at
December 31, 1997, including cash and cash equivalents of $ 114,079 short-term
investments of $546,591, and available-for-sale securities of $5,617,284, an
increase of $4,475,381.
The current ratio of current assets to current liabilities was 9.68 to 1 at
December 31, 1998, as compared to 1.23 to 1 December 31, 1997. Med-Design's
primary source of cash in 1998 consisted of: (1) proceeds from licensing,
option, and equity agreements with Becton Dickinson, $6,000,000; (2) proceeds of
private placement of convertible debentures, $1,550,000. Med-Design's primary
uses of cash in 1998 consisted of (1) cash used in operations, $1,699,791; (2)
payments on debt obligations, $4,927,046; (3) payments to acquire and develop
patents, $144,183.
At December 31, 1998, Med-Design was party to a revolving line of credit
totaling $3,000,000 with its principal lending institution. This facility can be
used to fund working capital needs and finance capital equipment purchases;
provided, however, that advances for capital equipment financing cannot exceed
$600,000. Borrowings to meet working capital needs bear interest at LIBOR plus
2.25 basis points (7.88% at December 31, 1998), while borrowings to finance
capital equipment purchases bear interest at prime plus 2.5%. Pursuant to the
terms of the facility, all borrowings must be fully collateralized by
available-for-sale securities, cash, cash equivalents, equipment financed, and
general intangibles of Med-Design. There was no obligation outstanding under the
agreement at December 31, 1998. The facility expires on June 30,1999 and there
is no assurance that Med-Design will be successful in negotiating a continuation
of the availability of the Loan Agreement and what terms will be made available
to Med-Design.
Med-Design's debt to equity ratio was .29:1 and 1.73:1 at December 31, 1998
and 1997 respectively.
There were no capital expenditures for the year ended December 31, 1998 and
$115,195 for the year ended December 31, 1997. Med-Design does not anticipate
any significant capital expenditure in 1999.
Management believes that Med-Design has sufficient funds to support its
planned operations and capital expenditures for the next eighteen months.
Thereafter Med-Design will rely on negotiating licensing and royalty agreements
with its current and future strategic partners. Becton Dickinson, as part of the
option licensing agreement, was granted an option to license several products.
No assurance, however, can be given that Med-Design will be able to conclude
final negotiations on these option products. If Med-Design is unsuccessful in
negotiating future agreements, Med-Design may be required to reduce
substantially, or eliminate certain areas of its product development activities,
limit its operations significantly, or otherwise modify its business strategy.
Med-Design's capital requirements will depend on many factors, including
but not limited to, the progress of its research and development programs, the
development of regulatory submissions and approvals, pilot manufacturing
capability, and the costs associated with protecting its patents and other
proprietary rights.
New Accounting Pronouncements
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5 "Reporting on Costs of Start-Up Activities" ("SOP
98-5"), which is effective for fiscal year beginning after December 15, 1998. In
June 1998, the Financial Accounting Standards ("FASB") issued Statements of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivatives
Instruments and Hedging Activities ("SFAS 133") which is effective for quarters
of fiscal years beginning after June 15, 1999. Management has reviewed the
provisions of SOP 98-5 and SFAS No. 133 and the implementation of these
standards is not expected to have a significant impact on its consolidated
financial statements.
ITEM 7. FINANCIAL STATEMENTS
Incorporated by reference from the consolidated financial statements and
notes thereto of Med-Design which are attached hereto beginning on page F-1
19
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9 through 12. Incorporated by Reference
The information called for by Item 9 "Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(a) of the Exchange
Act"; Item 10 "Executive Compensation"; Item 11 "Security Ownership of Certain
Beneficial Owners and Management"; and Item 12 "Certain Relationships and
Related Transactions" is incorporated herein by reference to Med-Design's
definitive proxy statement for its Annual Meeting of Stockholders, which
definitive proxy statement is expected to be filed with the Commission not later
than 120 days after the end of the fiscal year to which this report relates.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. List of Consolidated Financial Statements. The following financial
statements and notes thereto of Med-Design which are attached hereto beginning
on page F-1, have been incorporated by reference into Item 8 of this Report on
Form 10-KSB:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for years ended December 31, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998 F-5
and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
2. List of Exhibits. The following exhibits are listed in the Exhibits
appearing below and are followed herewith or are incorporated by reference to
exhibits previously filed with the Commission.
Exhibit
Number Description
------ -----------
2.1 (1) Agreement of Merger dated as of April 5, 1995 by and among
Med-Design, MDC Investment Holdings, Inc. ("Holdings") and
Med-Design, Inc. ("MDI").
2.2 (1) Joinder dated April 5, 1995 by John A. Botich , Michael J.
Botich, Thor R. Halseth and Rita F. Botich
2.3 (1) Secured Promissory Note dated April 5, 1995 from Med-Design
to Anker & Hymes, a Law Corporation ("Anker & Hymes"),
Client Trust Account for the benefit of all of he former
shareholders of MDI.
20
<PAGE>
2.4 (1) Security and Pledge Agreement dated April 5, 1995 between
the Corporation and Anker & Hymes for the benefit of all of
the former shareholders of MDI.
3.1 (1) Certificate of Incorporation of Med-Design.
3.2 (1) Amendment to Certificate of Incorporation of Med-Design.
3.3 (1) Bylaws of Med-Design.
4.1 (1) Specimen of Common Stock Certificate of Med-Design.
Exhibit
Number Description
------ -----------
10.1 (1) Employment Agreement dated as of April 5, 1995 between
Med-Design and James M. Donegan.
10.2 (1) Employment Agreement dated as of April 5, 1995 between
Med-Design and John A. Botich.
10.3 (1) Employment Agreement dated as of April 5, 1995 between
Med-Design and Michael J. Botich.
10.4 (1) Employment Agreement dated as of April 5, 1995 between
Med-Design and Thor R. Halseth.
10.5 (2) Non-Qualified Stock Option Plan.
10.5 Amended and Restated Non-Qualified Stock Option Plan.
10.6 (2) Warrant dated August 15, 1995 from Med-Design and J.E.
Sheehan & Company.
10.7 (2) Warrant dated August 15, 1995 from Med-Design to Dominque A.
Bodevin.
10.8 (2) Warrant dated August 15, 1995 from Med-Design to Roger
Favale.
10.9 (1) Underwriters Warrant Agreement dated June 6, 1995 between
Med-Design and Gilford Securities Incorporated.
10.10 (3) Placement Agent Agreement dated as of January 8, 1997 by and
between Med-Design and Fine Equities, Inc. ("Fine").
10.11 (3) Form of Subscription Agreement between Med-Design dated as
of January 23, 1997, and each of the purchasers of the
1,000,000 shares of Common Stock.
10.12 (3) Placement Agent's Warrant Agreement dated as of January 23,
1997 by and between the Company and Fine.
21
<PAGE>
10.13 (6) Warrant dated January 23, 1997 from Med-Design for N. Scott
Fine.
10.14 (6) Warrant dated January 23, 1997 from Med-Design for M. Troy
Duncan.
10.15 (6) Warrant dated January 23, 1997 from Med-Design to Sharon
Bronte.
10.16 (6) Warrant dated January 23, 1997 from Med-Design to William A.
Jolly.
10.17 (2) Business Loan Agreement dated July 26, 1995 between MDC
Investment Holdings, Inc. ("MDC Holdings") and Meridian
Bank.
10.18 (2) Demand Promissory Note dated July 26, 1995 from MDC Holdings
in favor of Meridian Bank.
Exhibit
Number Description
------ -----------
10.19 (2) Security Agreement dated July 26, 1995 between MDC Holdings
and Meridian Bank.
10.20 (2) Surety Agreement dated July 26, 1995 between Med-Design and
Meridian Bank
10.21 (2) Security Agreement dated July 26, 1995 between Med-Design
and Meridian Bank.
10.22 (2) Pledge Agreement dated July 26, 1995 between MDC Holdings
and Meridian Bank.
10.23 (2) Judgment Note dated July 26, 1995 from Med-Design in favor
of MDC Holdings.
10.24 (2) Business Loan Agreement dated December 29, 1995 between MDC
Research Ltd. and Meridian Bank
10.25 (2) Business Loan Agreement dated December 29, 1995 between MDC
Holdings and Meridian Bank.
10.26 (2) Demand Promissory Note dated December 29, 1995 from MDC
Research Ltd. in favor of Meridian Bank.
10.27 (2) Demand Promissory Note dated December 29, 1995 from MDC
Holdings in favor of Meridian Bank.
10.28 (2) Security Agreement dated December 29, 1995 between MDC
Research Ltd. and Meridian Bank.
10.29 (2) Pledge Agreement dated December 29, 1995 between MDC
Holdings and Meridian Bank.
10.30 (2) Assignment of Agency of Fiduciary Account dated December 29,
1995 from MDC Holdings to Meridian Bank.
10.31 (2) Surety Agreement dated December 29, 1995 between Med-Design
and Meridian Bank.
22
<PAGE>
10.32 (2) Surety Agreement dated December 29, 1995 between MDC
Holdings and Meridian Bank.
10.33 (2) Amendment to Loan Agreement dated February 16, 1996 among
Meridian Bank, MDC Holdings and MDC Research Ltd.
10.34 (4) Second Amendment to Loan Agreement dated April 4, 1996 among
Meridian Bank, MDC Holdings, The Med-Design Corporation, and
MDC Research Ltd.
10.35 (4) Judgement Note dated April 12, 1996 from Med-Design in favor
of MDC Holdings.
10.36 (4) Amendment to Security Agreement dated April 4, 1996 between
Med-Design and Meridian Bank.
Exhibit
Number Description
------ -----------
10.37 (4) Demand Promissory Note dated April 4, 1996 from MDC Holdings
in favor of Meridian Bank.
10.38 (5) Third Amendment to Loan Agreement dated July 11, 1996 among
Meridian Bank, MDC Holdings, The Med-Design Corporation, and
MDC Research Ltd.
10.39 (5) Judgement Note date July 11, 1996 from MDC Holdings in favor
of Meridian Bank.
10.40 (5) Demand Promissory Note dated July 11, 1996 from MDC Holdings
in favor of Meridian Bank.
10.41 (6) Fourth Amendment to Loan Agreement dated November 14, 1996
among CoreStates Bank, N.A. ("CoreStates") successor by
merger to Meridian Bank, MDC Holdings, The Med-Design
Corporation, and MDC Research Ltd.
10.42 (6) Judgement Note dated November 14, 1996 from Med-Design in
favor of MDC Holdings.
10.43 (6) Demand Promissory Note dated November 14, 1996 from MDC
Holdings in favor of CoreStates.
10.44 (2) Form of Business Loan Agreement dated July 12, 1995 between
Med-Design and Eagle National Bank ("Eagle Bank").
10.45 (2) Form of Promissory Note dated July 12, 1995 from Med-Design
in favor of Eagle Bank.
10.46 (2) Form of Security Agreement dated July 12, 1995 between
Med-Design and Eagle Bank.
10.47 (2) Form of Assignment of Deposit Account dated July 12, 1995
from Med-Design to Eagle Bank.
10.48 (2) Lease Agreement dated June 15, 1995 between Moen Development
and MDC Research Ltd. And guaranteed by Med-Design.
23
<PAGE>
10.49 (2) Lease Agreement dated October 1, 1993 between Arden North
American Partners, L.P. and the Company, as well as amended
by the First Amendment dated November 2, 1995.
10.50 Warrant dated September 9, 1998 from Med-Design to John F.
Kelley.
Exhibit
Number Description
------ -----------
10.50 (2) Employment Agreement dated as of August 1, 1995 between
Med-Design and Donald Shea.
10.51 (2) Employment Agreement June 1995 between Med-Design and
Patrick E. Rodgers.
10.52 (2) Employment Agreement June 1995 between Med-Design and John
Osborne.
10.53 (2) Employment Agreement between Med-Design and Gilbert White.
10.54 Warrant dated March 19, 1997 from Med-Design to John F.
Kelley.
10.55 (9) Warrant dated October 10, 1997 from Med-Design to John F.
Kelley.
10.56 (9) Warrant dated January 14, 1998 from Med-Design to John F.
Kelley.
10.57 (9) Warrant dated January 14, 1998 from Med-Design to Gilbert
White.
10.58 (9) Repriced option agreement October 10, 1997 from Med-Design
to John Kelley.
10.59 (9) Repriced option agreement October 10, 1997 from Med-Design
to John Marr.
10.60 (9) Consulting agreement between Med-Design and John Botich.
10.61 (9) Revised warrant agreement between Med-Design and John
Kelley.
10.62 (9) Revised warrant agreement January 14, 1998 between
Med-Design and John Kelley.
10.63 Licensing and Option Agreement December 11, 1998 with
Becton, Dickinson and Company.
10.64 Equity agreement December 11, 1998 with Becton, Dickinson
and Company.
10.65 Registration Rights Agreement with the Pennsylvania Merchant
Group.
10.66 Debenture Purchase Agreement with the Pennsylvania Merchant
Group.
24
<PAGE>
10.67 Form of Debentures with the Pennsylvania Merchant Group
10.68 Warrant dated September 10, 1998 from Med-Design to John F.
Kelley
21 (1) List of Subsidiaries of Med-Design.
27 (7) Financial Data Schedule.
(b No Reports on Form 8-K were filed in the quarter ended December 31, 1998.
- -----------------------
(1) Incorporated by reference to Form SB-2 filed April 7, 1995 and Amendment
Nos. 1, 2 and 3 thereto (File No. 33-901014).
(2) Incorporated by reference to Form 10-QSB filed on March 31, 1997.
(3) Incorporated by reference to Form 10-QSB filed on May 15, 1998.
(4) Incorporated by reference to Form 10-QSB filed on August 14, 1998.
(5) Incorporated by reference to Form 10-QSB filed on November 9, 1998.
(6) Incorporated by reference to Form 8-K filed January 8, 1999.
(7) Electronic filing only.
(8) Confidential Treatment Requested. The entire agreement will be filed with
the Securities and Exchange Commission.
(9) Incorporated by reference to Form 10-KSB December 31, 1998.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE MED-DESIGN CORPORATION
Date: March 29, 1999 By: /s/ James M. Donegan
----------------------------------------
James M. Donegan
President and Chief Executive Officer
Each person whose signature appears below hereby authorizes and constitutes
James M. Donegan and Lawrence D. Ellis and each of them singly, his true and
lawful attorneys-in-fact with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities to sign and file
any and all amendments to this report with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
and he hereby ratifies and confirms all that said attorneys-in-fact or any of
them, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James M. Donegan Chairman of the Board, President and Chief March 29, 1999
- ------------------------------- Executive Officer (Principal Executive Officer)
James M. Donegan
/s/ Lawrence D. Ellis Vice President, Finance and Chief Financial March 29, 1999
- ------------------------------- Officer (Principal Financial Officer and
Lawrence D. Ellis Principal Accounting Officer)
/s/ Joseph N. Bongiovanni, III Director March 29, 1999
- -------------------------------
Joseph N. Bongiovanni, III
/s/ John A. Botich Director March 29, 1999
- -------------------------------
John A. Botich
/s/ John F. Kelley Director March 29, 1999
- -------------------------------
John F. Kelley
/s/ Pasquale L. Vallone Director March 29, 1999
- -------------------------------
Pasquale L. Vallone
/s/ Glibert M. White Director March 29, 1999
- -------------------------------
Gilbert M. White
/s/ William A. Jolly Director March 29, 1999
- -------------------------------
William A. Jolly
/s/ Vincent J. Papa Director March 29, 1999
- -------------------------------
Vincent J. Papa
</TABLE>
<PAGE>
Index to Consolidated Financial Statements
Page
Report of Independent Accountants ...........................................F-2
Consolidated Balance Sheets as of December 31, 1998
and 1997 ...............................................................F-3
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997 .............................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998 and 1997 .............................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997 .............................................F-6
Notes to Consolidated Financial Statements ..........................F-7 to F-19
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders of
The Med-Design Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of The
Med-Design Corporation and subsidiaries (the "Company") at December 31, 1998 and
1997, and the results of their operations and their cash flows for the years
ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, PA
March 12, 1999
F-2
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
---------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $32,883 $114,079
Short-term investments -- 546,591
Available-for-sale securities 6,111,620 5,617,284
Prepaid expenses and other current assets 173,006 152,547
---------------------------------
Total current assets 6,317,509 6,430,501
Property, plant, and equipment, net 865,267 1,181,481
Patents, net of accumulated amortization of $80,766 in 1998
and $44,164 in 1997 788,629 681,048
Debt issue costs, net of accumulated amortization of $53,720
at December 31, 1998 511,480 --
---------------------------------
Total Assets $8,482,885 $8,293,030
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $250,000 $4,630,500
Current maturities of long-term debt and capital lease obligations 10,492 199,821
Accounts payable 215,426 205,625
Accrued expenses 176,697 213,042
---------------------------------
Total current liabilities 652,615 5,248,988
---------------------------------
Long-term debt and capital lease obligations, less current maturities 1,579,824 154,674
Total liabilities 2,232,439 5,403,662
---------------------------------
Commitments and Contingencies
Stockholders' equity
Preferred stock, $.01 par value, 5,000,000 shares authorized;
300,000 shares issued and outstanding 3,000 --
Common stock, $.01 par value, 20,000,000 shares authorized;
7,951,570 shares issued and outstanding 79,516 79,516
Additional paid-in capital 24,244,554 21,764,194
Accumulated deficit (18,084,352)
(18,967,241)
Accumulated other comprehensive income 7,728 12,899
---------------------------------
Total stockholders' equity 6,250,446 2,889,368
---------------------------------
Total Liabilities and Stockholders Equity $8,482,885 $8,293,030
=================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------
1998 1997
------------ ------------
Revenue:
Licensing revenue $ 4,500,000 --
----------- -----------
Total Revenue 4,500,000 --
----------- -----------
Operating expense:
Marketing 82,335 $ 192,201
General and administrative 2,447,866 3,410,569
Research and development 1,106,501 1,605,668
----------- -----------
Total operating expenses 3,636,702 5,208,438
----------- -----------
Income (loss) from operations 863,298 (5,208,438)
Interest expense (242,521) (421,967)
Investment income 262,112 410,572
----------- -----------
Net income (loss) $ 882,889 $(5,219,833)
=========== ===========
Basic and diluted earnings (loss) per common share $ 0.11 $ (0.66)
=========== ===========
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In
Preferred Stock Amount Shares Amount Capital
Shares
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 -- -- 6,899,570 $68,996 $ 15,718,504
Issuance of shares of common
stock in connection with the
private placement (net) 1,000,000 10,000 4,607,497
Issuance of warrants for services 821,000
Repricing of stock option 62,080
Issuance of shares of common
stock in connection with exercise
of warrants 52,000 520 254,280
Issuance of warrants in
partial payment of patents 300,833
Change in unrealized gains on
available-for-sale securities
Net Loss
---------------------------------------------------------------------------
Balance, December 31, 1997 -- -- 7,951,570 79,516 21,764,194
Debt issue costs in connection
with private placement
Debt issue costs in connection
with private investor loan
Issuance of warrants for services
Repricing of warrants issued
Issuance of Series A preferred
stock 300,000 $3,000
Change in unrealized gains on
available-for-sale-securities
Net income
---------------------------------------------------------------------------
Balance, December 31, 1998 300,000 $3,000 7,951,570 $79,516 $ 24,244,554
===========================================================================
<CAPTION>
Accumulated
Other
Accumulated Comprehensive Stockholders'
Deficit Income Equity
---------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1997 ($13,747,408) $23,495 $ 2,063,587
Issuance of shares of common
stock in connection with the 4,617,497
private placement (net)
Issuance of warrants for services 821,000
Repricing of stock option 62,080
Issuance of shares of common
stock in connection with exercise
of warrants 254,800
Issuance of warrants in
partial payment of patents 300,833
Change in unrealized gains on
available-for-sale securities (10,596) (10,596)
Net Loss (5,219,833) (5,219,833)
---------------------------------------------
Balance, December 31, 1997 (18,967,241) 12,899 2,889,368
Debt issue costs in connection
with private placement 489,200 489,200
Debt issue costs in connection
with private investor loan 28,158 28,158
Issuance of warrants for services 380,802 380,802
Repricing of warrants issued 85,200 85,200
Issuance of Series A preferred 1,497,000 1,500,000
stock
Change in unrealized gains on
available-for-sale-securities (5,171) (5,171)
Net income 882,889 882,889
---------------------------------------------
Balance, December 31, 1998 ($18,084,352) $ 7,728 $6,250,446
=============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 882,889 $(5,219,833)
Adjustments to reconcile net income (loss) to operating
cash flows:
Depreciation and amortization 289,022 233,111
Issuance of warrants for services 380,802 821,000
Repricing of stock options 85,200 62,080
Amortization of debt issue costs 53,720
Debt issue cost in connection with
private investor loan 28,158 --
Loss on sale of available-for-sale securities -- 7,046
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 6,545 (55,086)
Accounts payable 9,801 32,714
Accrued expenses (36,346) 84,896
----------- -----------
Net cash provided by (used in) operating activities 1,699,791 (4,034,072)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment -- (115,195)
Sale of property and equipment 36,791 --
Additions to patents (144,183) (215,432)
Investments in available-for-sale securities, net (499,507) 3,572
Sale (purchase) of short-term investment 546,591 (11,343)
----------- -----------
Net cash used in investing activities (60,308) (338,398)
----------- -----------
Cash flows from financing activities:
Capital lease payments (17,633) (11,508)
Proceeds from long-term borrowings -- 14,410
Repayment of long-term borrowings (296,546) (235,425)
Proceeds from issuance of common stock
in connection with exercise of warrants -- 254,800
Proceeds from short-term borrowing 250,000 184,000
Repayment of short-term borrowing (4,630,500) (2,000,000)
Other -- 14,136
Proceeds of private placement, debenture bonds 1,550,000 --
Debt issue costs (76,000) --
Proceeds of private placement, net of offering costs -- 4,617,497
Proceeds from issuance of Series A preferred stock 1,500,000 --
----------- -----------
Net cash provided by (used in) financing activities (1,720,679) 2,837,910
----------- -----------
Decrease in cash (81,196) (1,534,560)
Cash and cash equivalents, beginning of period 114,079 1,648,639
----------- -----------
Cash and cash equivalents, end of period $ 32,883 $ 114,079
----------- -----------
Cash paid during the period:
Interest $ 219,176 $ 396,144
----------- -----------
Noncash investing and financing activities:
Issuance of warrants in partial payment of patents -- $ 300,833
----------- -----------
Capital lease obligation incurred -- $ 49,000
----------- -----------
Change in unrealized gain (loss) on
available-for-sale securities $ (5,171) $ (10,596)
Debt issue costs $ 489,200 --
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
The Med-Design Corporation ("Med-Design") designs and develops safety
medical devices intended to reduce the incidence of accidental needlesticks.
Accordingly, Med-Design and its products are subject to various regulatory
processes and approvals. Med-Design has three core products under development
and several new products which are in the beginning stages of development.
Med-Design was previously a development stage enterprise, as defined by
Financial Accounting ("FAS") No. 7 "Accounting and Reporting by Development
Stage Enterprise." On December 11, 1998, Med-Design signed a licensing
agreement, an option agreement and an equity agreement with Becton, Dickinson
and Company ("Becton Dickinson"). Under the terms of the agreement, Med-Design
received an initial, non-refundable payment of $4.5 million and an equity
investment of $1.5 million in Series A preferred stock.
2. Significant Accounting Policies
Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
The Med-Design Corporation and its wholly-owned subsidiaries, MDC Investment
Holdings, Inc. and MDC Research Ltd. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and cash equivalents:
Med-Design considers all bank depository cash accounts to be cash
equivalents.
Concentrations of Credit Risk
Financial instruments which potentially subject Med-Design to concentration
of credit risk consist principally of cash and available-for-sale-securities. At
December 31, 1998, none of Med-Design's cash balances exceeded FDIC insurance
limits.
Med-Design invests in high credit quality financial instruments and through
diversification, attempts to limit the extent of credit exposure on
available-for-sale-securities.
Short-term investments:
Short-term investments represent an investment in a certificate of deposit.
This investment is stated at cost plus accrued interest which equals market
value. The short-term investment is restricted as collateral for an equipment
financing facility.
Available-for-sale-securities:
Med-Design's investments are classified as available-for-sale securities
and accordingly any unrealized holding gains or losses, net of taxes, are
excluded from income and recognized as a separate component of stockholders'
equity until realized.
Investments in marketable securities are made consistent with Med-Design's
investment guidelines as developed by management and approved by the Board of
Directors.
Property, plant and equipment:
Property, plant and equipment are carried at cost. Assets held under capital
lease are recorded at the lower of the net present value of the minimum lease
payments or the fair value of the leased assets at the inception of the lease.
Significant additions or improvements extending the asset's useful lives are
capitalized.
(Continued)
F-7
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. Significant Accounting Policies, continued
When property, plant and equipment are sold, retired or otherwise disposed of,
the applicable costs and accumulated depreciation are removed from the accounts
and the resulting gain or loss recognized.
Depreciation is computed by the straight-line method utilizing rates based
upon the estimated service life of the various classes of assets (5 to 10
years). Leasehold improvements are depreciated over the remaining lease term or
asset life if shorter.
Recoverability of long-lived assets:
Med-Design's assets are reviewed for impairment whenever events or
circumstances provide evidence that suggest that the carrying amount may not be
recoverable. Med-Design assesses the recoverability of its assets by determining
whether the carrying value can be recovered through projected undiscounted
future cash flows.
Patents:
Patents, patent applications, and rights are stated at acquisition costs.
Amortization of patents is recorded by using the straight-line method over the
legal lives of the patents. Amortization expense from the years ended December
31, 1998 and 1997 was $36,602 and $9,840, respectively.
Debt Issue Cost:
Debt issue costs consist of fees and other costs incurred in obtaining debt
and are being amortized on a straight line basis over the life of the debt.
Revenue Recognition:
License fee revenues from proprietary products are recognized upon the
signing of a contract when Med-Design has no further obligation under the
contract and when collectibility of the license fee is probable.
Income taxes:
Med-Design accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Research and development:
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred.
Basic and Dilutive Earnings Per Share:
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed by dividing net income by the weighted average number of
shares outstanding during the period adjusted for the number of shares that
would have been outstanding if the dilutive potential common shares had been
issued.
(Continued)
F-8
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. Significant Account Policies, continued
Estimates utilized in the preparation of financial statements;
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of expenses during the reporting period. Actual results could differ
from those estimates.
Comprehensive Income:
Med-Design adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income" effective January 1, 1998. The new rules
establish standards for the reporting of comprehensive income and its components
in the financial statements. Comprehensive income consists of net income and
other gains and losses affecting shareholders' equity that, under generally
accepted accounting principles, are excluded from net income. Such items consist
primarily of unrealized gains and losses on marketable equity investments for
Med-Design.
New Accounting Pronouncements
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-5 "Reporting on Costs of Start-Up Activities" ("SOP 98-5"), which
is effective for fiscal year beginning after December 15, 1998. In June 1998,
the Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivatives
Instruments and Hedging Activities ("SFAS 133") which is effective for quarters
of fiscal years beginning after June 15, 1999. Managements has reviewed the
provisions of SOP 98-5 and SFAS No. 133 and the implementation of these
standards is not expected to have any significant impact on its consolidated
financial statements
3. Available-for-Sale Securities
Gross unrealized gains for the years ended December 31, 1998 and 1997 are as
follows:
Gross
Unrealized
Gains
Cost (Losses) Fair Value
---- -------- ----------
At December 31, 1998:
Corporate Debt Securities $6,103,892 $ 7,728 $6,111,620
---------- ------- ----------
At December 31, 1997:
U.S. Government Obligations $3,657,275 $12,476 $3,669,750
Corporate Debt Securities 1,947,111 423 1,947,534
---------- ------- ----------
Total $5,604,386 $12,899 $5,617,284
========== ======= ==========
(Continued)
F-9
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. Available-for-Sale Securities, continued
Investment income for the years ended December 31, 1998 and 1997 consisted
of the following:
1998 1997
---- ----
Realized gain on sale of
available-for-sale securities $62 $817
Realized loss on sale of
available-for-sale securities -- (7,863)
Interest income 262,050 409,361
Dividend income -- 8,257
----------------------------
Total $262,112 $410,572
============================
4. Property, Plant And Equipment
Balances of major classes of assets and accumulated depreciation at December 31,
1998 and 1997 are as follows:
1998 1997
---- ----
Leasehold improvements $160,127 $160,127
Machinery and equipment 657,371 668,280
Office furniture & fixtures 329,114 422,087
Computer equipment & software 337,768 337,768
------------------------------
$1,484,380 $1,588,262
Accumulated depreciation 619,113 406,781
------------------------------
$865,267 $1,181,481
==============================
Depreciation expense was $252,420 and $223,271 for the years ended December
31, 1998 and 1997, respectively.
(Continued)
F-10
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. Short-Term Borrowings
In July 1995, Med-Design entered into a $3,000,000 revolving line of credit
("Loan Agreement") with its principal lending institution (the "Bank"). In 1996,
the credit facility of the Loan Agreement was amended to $6,750,000, and
Med-Design's equipment financing facility ("Equipment Loans") with the Bank was
consolidated into the Loan Agreement. In August 1998 the bank initiated a fee
for the unused amount of a loan facility. Med-Design amended its facility to
$3,000,000, for which the amended Loan Agreement provides that advances under
Equipment Loans will not exceed $600,000 of the $3,000,000. Borrowings to meet
working capital needs bear interest at LIBOR plus 2.25 basis points (7.88% at
December 31, 1998). Under the terms of the Loan Agreement, all borrowings must
be fully collateralized by available-for-sale securities, cash equivalents,
equipment financed, and general intangibles of Med-Design. Med-Design had no
obligations under the line of credit at December 31, 1998 and $4,630,500 at
December 31, 1997.
On May 29, 1998, Med-Design obtained a loan from a private investor in the
amount of $250,000 The loan is callable at the option of the holder upon change
of control of Med-Design, upon any significant licensing or joint venture
agreement or any refinancing in excess of $500,000. The loan bears interest at
prime and includes an agreement to issue the holder 33,000 shares of common
stock.
6. Debt
Debt at December 31, 1998 and 1997 consisted of the following:
1998 1997
---- ----
Convertible debenture bonds $1,550,000
Bank term note, under equipment
financing facility, interest at prime plus
.25%; fully collateralized $ 55,472
Bank term note, under financing facility
interest at the Bank's prime rate,
fully collateralized by applicable
equipment and the short-term
investment 241,068
Capital lease obligations, at interest rates
ranging from 4.4% to 9.3%, with monthly
payments ranging from $182 to $987;
lease obligations are due through 2002 40,316 57,955
---------- ----------
1,590,316 354,495
Less: current maturities 10,492 199,821
---------- ----------
$1,579,824 $ 154,674
========== ==========
(Continued)
F-11
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. Debt, continued
The aggregated amount of debt and capital lease obligations maturing in each
of the next five years, is as follows:
Debt Capital Lease
------------------ ------------------
1999 $ 10,492
2000 17,337
2001 11,842
2002 645
2003 1,550,000
------------------ ------------------
$1,550,000 $ 40,316
================== ==================
Med-Design issued convertible debentures on June 29, 1998 and July 22, 1998
in the amount of $1,000,000 and $550,000 respectively. The debentures bear
interest at 4% per annum payable quarterly in cash or stock at Med-Design's
option, mature in five years, are convertible into 1,240,000 shares of common
stock and are collateralized by a first lien on all patents pending and issued.
7. Commitments and Contingencies
Med-Design leases a building, office space, and other office equipment under
noncancellable operating leases expiring at various times through December 31,
2000. The building lease provides an option to renew the lease for two
additional thirty-six month periods.
The following is a schedule of future minimum payments, by year and in the
aggregate, of noncancellable operating leases with initial or remaining terms of
greater than one year at December 31, 1998:
1999 $196,411
2000 134,776
--------
Total minimum
lease payments $331,187
========
In April 1998, Med-Design moved its Corporate Headquarters to its Ventura
Ca. facility. The properties formerly located in Philadelphia Pa. were sublet
but remain the obligation of Med-Design.
Total rent expense under all operating leases for year ended December 31,
1998 and 1997 was $178,318 and $187,709 respectively.
Med-Design has employment agreements renewable annually with the Chief
Executive Officer, and certain other executives providing for salary to be paid
over the term of their agreements which expire in the year 2000 and 1998,
respectively. At December 31, 1998, the payments remaining under employment
contracts total approximately $330,833.
(Continued)
F-12
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. Basic and Diluted Earnings Per Share
The following table sets forth the computation of basic and diluted net income
(loss) per share:
<TABLE>
<CAPTION>
1998
- ----
Basic Earnings Per Share
Numerator Denominator EPS
----------- ----------- --------
<S> <C> <C> <C>
Net Income $ 882,889
Less preferred dividends earned (2,581)
----------- ----------- --------
Basic Earnings Per Share $ 880,308 7,951,570 $ 0.11
Diluted Earnings Per Share
Preferred dividends earned 2,581
Interest on 4% convertible debenture 29,990
Stock issued in connection with
loan agreement 19,250
Convertible debentures 431,290
Stock options and warrants 133,290
----------- ----------- --------
Diluted Earnings Per Share 912,879 8,535,400 $ 0.11
1997
- ----
Basic and diluted EPS
- ---------------------
----------- ----------- --------
Net loss to common shareholders $(5,219,833) 7,850,756 $(0.66)
</TABLE>
Options and warrants to purchase 1,580,000 shares of common stock as of December
31, 1998 and 1,504,000 as of December 31, 1997, together with Med-Design's
Series A Convertible Preferred Stock of 300,000 shares, were not included in
computing diluted earnings per share as the effect is antidilutive.
9. Stockholders' Equity
Preferred Stock
In December 1998, as part of the licensing agreement with Med-Design issued
300,000 shares of Series A Convertible Preferred Stock for $1.5 million to
Becton Dickinson. Dividends are payable semi-annually at the rate of 8% per
annum on the Preferred Stock in cash or in additional shares of Preferred Stock
(at the option of Med-Design). The Preferred Stock is convertible at the holders
option, at the conversion price of $5.00 per share. At its option, Med-Design
may convert the Preferred Stock into Common Stock at a conversion price ranging
from $3.25 to $5.00 per share depending on the price of Med-Design's Common
Stock during the 20 trading days prior to the date Med-Design gives notice of
the conversion.
(Continued)
F-13
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. Stockholders' Equity, continued
Common Stock
Stock Option Plan
In 1995, Med-Design created a Non-Qualified Stock Option Plan ("Stock Option
Plan") which provides for the granting of 500,000 options to directors,
officers, and other employees of Med-Design. Under the Stock Option Plan, the
exercise price of each option may not be less than the fair market value (as of
the date of grant) of Common Stock subject thereto and the term of each option
may be no more than 10 years from the date of grant. Additionally, the Stock
Option Plan provides for the issuance of options for the purchase of 16,000
shares of Common Stock annually to each non-employee director.
Options granted to employees expire in five years and vest at a rate of 20% per
year. Options granted to directors expire in five years and vest one year from
date of grant.
Activity under the Stock Option Plan during the years ended December 31,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Shares Price Shares Price
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year 442,000 $5.53 289,000 $8.48
Granted 121,000 $1.56 186,500 $7.78
Exercised -- -- -- --
Canceled (82,000) $6.69 (33,500) $11.79
-----------------------------------------------------------------
Outstanding at end of year 481,000 $4.59 442,000 $9.35
=================================================================
Options exercisable at
year-end 191,400 135,400
=============== ==================
Option price range at end
of year $1.56 to $8.00 $3.50 to $8.00
=============== ==================
Weighted-average fair
value of options granted
during year $1.56 $5.52
=============== ==================
</TABLE>
(Continued)
F-14
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Stock Option Plan, continued
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- ---------------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at December 31, 1998 Life Price at December 31, 1998 Price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.56 to $3.50 153,000 4.1 $1.97 32,000 $ 3.50
$4.50 to $8.00 328,000 2.6 $7.13 159,400 $ 6.65
---------------------------------------------------------------------------------------------------------
$1.56 to $8.00 481,000 3.4 $4.55 191,400 $ 5.08
=========================================================================================================
</TABLE>
On October 10, 1997, Med-Design repriced previously issued stock options on
32,000 shares of Common Stock for two directors. The options were issued on June
3, 1996 at an exercise price of $20.50 a share and were repriced to $4.50 a
share. In connection with the repricing of these stock options Med-Design
recorded compensation expense of $62,080.
Med-Design has adopted the disclosure only provisions of FAS No. 123,
"Accounting for Stock-based Compensation." Accordingly, no compensation cost has
been recognized for Med-Design's Stock Option Plan. Had compensation cost for
Med-Design's Stock Option Plan been determined based on the fair value at the
grant date for awards in 1998 and 1997 consistent with the provisions of FAS No.
123, Med-Design's net loss and net income (loss) per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income (loss) - as reported $882,889 ($5,219,833)
Net income (loss) - pro forma $479,735 ($5,581,813)
Basic net income (loss) per share -as reported $0.11 ($0.66)
Fully diluted income (loss) per share - as reported $0.11 --
Basic net income (loss) per share - pro forma $0.06 ($0.68)
Fully diluted income (loss) per share - pro forma $0.06 --
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumption used for grants in 1998: dividend yield of 0.00%; expected volatility
of 84.45% to 92.98%; range of risk free interest rate of 5.13% to 5.5%. In
1997: dividend yield of 0.00%; expected volatility of .92%; risk free interest
rate of 6.29%. Expected lives are based on actual terms of options granted.
Warrants
In connection with the initial public offering, Med-Design issued warrants
to the Underwriter to purchase 300,000 shares of Common Stock, of which warrants
to purchase 111,000 were exercised in 1996 and 52,000 were exercised in 1997. In
addition, on August 15, 1995 Med-Design issued warrants to purchase from
Med-Design 100,000 shares of Common Stock at $7.50 per share, in consideration
for the execution of an agreement for consulting services. The warrants were
exercisable upon issuance and expired on August 15, 1998.
(Continued)
F-15
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Warrants, continued
On January 23, 1997, Med-Design completed the sale of 1,000,000 shares of
Common Stock. In connection with the sale, Med-Design also sold to the placement
agent, for nominal consideration, warrants to purchase 100,000 shares of Common
Stock. These warrants are exercisable at a price of $5.50 per share of Common
Stock for a period of four years commencing January 22, 1998.
On March 19, 1997, Med-Design issued warrants to purchase 100,000 shares of
Common Stock at an exercise price of $7.50 per share to a director of
Med-Design, who was engaged to perform certain consulting services on behalf of
Med-Design. The warrants are exercisable upon issuance and expire on March 19,
2000. In connection with the issuance of these warrants, Med-Design recorded
consulting expense in the amount of $436,000 for the year ended December 31,
1997.
On August 6, 1997, in connection with the acquisition of two patents,
Med-Design issued warrants to purchase 75,000 shares of Common Stock at an
exercise price of $5.75 per share. These warrants are exercisable on or before
August 6, 2002.
On October 10, 1997, Med-Design issued warrants to purchase 100,000 share of
Common Stock at an exercise price of $5.44 to a director of Med-Design who was
engaged to perform certain consulting services on behalf of Med-Design. These
warrants are exercisable upon issuance and expire on October 10, 2000. In
connection with the issuance of these warrants, Med-Design recorded consulting
expense in the amount of $385,000 for the year ended December 31, 1997.
On January 14, 1998, Med-Design issued warrants to purchase 50,000 shares of
Common Stock at an exercise price of $2.88 per share to a director. The warrants
are exercisable upon issuance and expire January 14, 2001.
On January 14, 1998 Med-Design issued warrants to purchase 100,000 shares of
common stock at an exercise price of $2.88 per share to a director of Med-Design
who was engaged to perform certain consulting services. The warrants are
exercisable upon issuance and expire on January 14, 2003. Med-Design recorded
consulting expense of $194,000 in relation to these warrants.
Med-Design also repriced 200,000 previously issued warrants to a director on
January 14, 1998. The warrants were issued on March 19, 1997 and October 10,
1997 at an exercise price of $7.50 per share and $5.44 per share respectively
and were repriced to $2.88. In connection with the repricing of these warrants
Med-Design recorded consulting expense of $85,200.
On September 9, 1998 Med-Design issued warrants to purchase 200,000 shares
of common stock at a price of $1.25 per share to a director of Med-Design who
was engaged to perform certain consulting services. The warrants vest upon
completion of performance which was completed on December 23, 1998. The warrants
expire on September 9, 2003. Med-Design recorded consulting expense of $186,802.
10. Defined Contribution Benefit Plan
Med-Design sponsors a 401K defined contribution benefit plan. Participation
in the plan is available to substantially all employees. There have been no
Company contributions to this plan to date.
(Continued)
F-16
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. Income Taxes
The following is a summary of the components of income taxes from operations:
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
<S> <C> <C>
Current Provision
- -------------------------------------------
Federal -- --
State -- --
-------------------------------------
-- --
Deferred Tax Benefit
- -------------------------------------------
Federal 309,012 --
State 83,875 --
-------------------------------------
Total provision for income taxes 392,887 --
Less: Reduction in valuation allowance (392,887)
-------------------------------------
--
=====================================
</TABLE>
The deferred income tax assets and liablilites recorded in the consolidated
balance sheets at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
Assets
- ------------------------------------------
<S> <C> <C>
Loss carryforwards 2,672,376 3,765,025
Research and developement tax credit 225,549 192,175
Amortization 2,000,856 1,541,838
Deferred compensation expense 207,371 --
-------------------------------------
Total deferred tax assets 5,106,151 5,499,038
Valuation allowance (5,106,151) (5,499,038)
-------------------------------------
Net deferred tax assets (liabilities) -- --
-------------------------------------
</TABLE>
F-17
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. Income Taxes, continued
At December 31, 1998, the Company has federal net operating loss carryforwards
of approximately $6.5 million and for state tax purposes of approximately $4.2
million respectively. These NOL's start to expire in 2010 for federal tax
purposes. A valuation allowance has been provided for the deferred tax asset.
Other temporary differences are insignificant. The utilization of federal net
operating loss may be limited by Section 382 of the Internal Revenue Code.
A reconciliation of the Federal statutory rate to the effective tax rate is as
follows:
1998 1997
---------------- ----------------
U.S. statutory federal income tax rate 309,011 --
State tax rate 83,854 --
Research and Development expenses 492,392 --
Deferred compensation 207,391 --
Utilization of net operating losses (1,092,648) --
---------------- ----------------
-- --
---------------- ----------------
0 0
================ ================
F-18
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. Related Party Transactions
During 1998 and 1997, Med-Design paid $81,737 and $31,830 respectively, for
legal services to a firm, of which a partner is a director, officer and
stockholder of Med-Design
13. Fair Value of Financial Statements
The following methods and assumptions were considered by Med-Design in
determining its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet
approximates fair value.
Marketable securities: Available-for-sale securities consist of corporate bonds
and U.S. Government Obligations. Fair value is based on quoted market prices.
Debt: Med-Design's debt is primarily a convertible debenture bond at 4% interest
with a common stock conversion feature of $1.25 per share. The fair value of the
convertible debenture at December 31, 1998 is approximately $4,340,100, based on
the bid price of similar securities.
Convertible Preferred Stock: Convertible preferred stock at 8% interest with a
common stock conversion feature of $5.00 per share. The fair value of
convertible preferred stock at December 31, 1998 is approximately $1,200,000
based on the bid price of similar securities.
F-19
THE MED-DESIGN CORPORATION
AMENDED AND RESTATED NON-QUALIFIED STOCK OPTION PLAN
Amended and Restated as of November 1, 1996
<PAGE>
ARTICLE I
---------
DEFINITIONS
-----------
1.1. In this Stock option Plan (hereinafter referred to as the "Plan")
unless the context otherwise requires, references to the following words shall
have the following meanings:
"Board of Directors" shall mean the Board of Directors of the Company as
constituted from time to time.
"Business Day" shall mean a day (other than a Saturday or Sunday) on which
the principal office of the Company in Philadelphia, Pennsylvania, is open for
the conduct of normal business.
"Change in Control" shall mean a change in control of the Company of a
nature that would be required to be reported (assuming such event has not been
"previously reported") in response to Item 1(a) of the Current Report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Exchange Act; provided that, without limiting the foregoing, a "Change in
Control" shall be deemed to have occurred at such time as (a) any Person (as
defined in the Exchange Act) after the date hereof becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of 10% or more of the combined voting power of the Company's
outstanding securities ordinarily having the right to vote at elections of
directors ("Voting Securities"), or (b) during any period of two consecutive
years after the date of the initial acquisition by such Person of Voting
Securities of the Company, individuals who constitute the members of the Board
of Directors of the Company
-1-
<PAGE>
on the date of such acquisition, or at the commencement of any two year period
thereafter (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date of such acquisition whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least eighty percent (80%)
of the directors comprising the Incumbent Board (either by a specific vote or by
approval of the proxy statement of the Company in which such person is named as
a nominee for director, without objection to such nomination) shall be
considered as though such person were a member of the Incumbent Board, or (c)
the shareholders of the Company approve a merger or consolidation of the Company
with any other entity other than (i) a merger or consolidation that would result
in the Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or being converted into
Voting Securities of the entity surviving such merger or consolidation), in
combination with Voting Securities of the Company or such surviving entity held
by a trustee or other fiduciary pursuant to any employee benefit plan of the
Company or such surviving entity or any Subsidiary of the Company or such
surviving entity, at least 75% of the combined voting power of the Voting
Securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation or (ii) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
Person becomes the beneficial owner of securities of the
-2-
<PAGE>
Company or the entity surviving such merger or consolidation representing more
of the combined voting power of the securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation than such
Person was the beneficial owner of immediately prior to such recapitalization or
(d) the shareholders of the Company approve an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets.
"Company" shall mean The Med-Design Corporation.
"Date of Grant" shall mean the date on which an Option is granted to a
Qualified Person by the Company pursuant to Article V hereof.
"Disability" means permanent and total disability as defined in Section
422(c)(6) of the Internal Revenue Code of 1986, as amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as it may be
amended from time to time, or any successor act or statute.
"Expiration Date" for each Option, shall mean the date fixed by the Board
of Directors pursuant to section 7.1 of the Plan.
"Independent Director" shall mean any director of the Company who is not an
employee or officer of the Company or any Subsidiary.
"Market Value," on the Date of Grant of any Option, shall mean (i) the last
sale price (regular way) of the Shares on the Date of Grant or, if no such sale
takes place on such day,
-3-
<PAGE>
the average of the closing bid and asked prices on the New York Stock Exchange
Composite Tape or, if the Shares are not listed or admitted to trading on the
New York Stock Exchange on the Date of Grant, on the national securities
exchange in or nearest the City of New York on which the Shares are listed or
admitted to trading, or (ii) if on the Date of Grant the Shares are not listed
or admitted to trading on any national securities exchange, the last sale price
(regular way) of the Shares on the Date of Grant or, if no such sale takes place
on such day, the average of the highest reported bid and lowest reported asked
prices as furnished by the National Association of Securities Dealers, Inc.
through the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") or a similar organization if NASDAQ is no longer reporting
such information, or (iii) if on the Date of Grant the Shares are not quoted by
any such organization, the fair market value of the Shares on the Date of Grant
as determined by the Committee.
"Option" shall mean a right to subscribe for Shares granted to a Qualified
Person pursuant to the Plan.
"Option Holder" shall mean a Qualified Person or former Qualified Person
who holds an Option.
"Option Shares" shall mean unissued Shares in respect of which Options are
granted.
"Plan" shall mean The Med-Design Corporation Non-Qualified Stock Option
Plan.
-4-
<PAGE>
"Qualified Person" shall mean any employee or officer of, or consultant to,
the Company or any Subsidiary or any Independent Director.
"Retirement" means retirement from active employment with the Company or
any Subsidiary at or after the age established by the Committee from time to
time for purposes of the Plan, or earlier in any particular case with the
consent of the Committee.
"Shares" shall mean the authorized shares of common stock of the Company.
"Stock Option Agreement" shall mean the Stock Option Agreement
substantially in the form set out in Appendix A to the Plan, as such agreement
may be amended by the Committee from time to time.
"Subscription Price" shall mean the price payable for a Share on the
exercise of an Option, as determined in accordance with Article VI herein and as
it may be adjusted pursuant to section 4.2 hereof.
"Subsidiary" shall mean any corporation which at the time qualifies as
subsidiary of the Company under the definition of "subsidiary corporation" in
Section 424(f) of the Internal Revenue of Code of 1986, as amended.
"Termination Date" shall mean the first to occur of the dates described in
Article VIII hereof.
-5-
<PAGE>
ARTICLE II
----------
GENERAL
-------
2.1. The purpose of the Plan is to advance the interest of the Company and
its shareholders by affording to Qualified Persons an opportunity to acquire or
increase their proprietary interest in the Company by the grant to such
Qualified Persons of Options. By thus encouraging such Qualified Persons to
become owners of the common stock of the Company, the Company seeks to motivate,
retain, and attract those highly competent individuals upon whose judgment,
initiative, leadership, and continued efforts the success of the Company in
large measure depends.
2.2. The Company shall pay any and all fees and expenses incurred in
connection with the exercise of any Options hereunder, other than the
Subscription Price, and federal, state or local taxes incident to the exercise
of Options and any professional fees incurred by Option Holders in connection
with the exercise of Options.
ARTICLE III
-----------
ADMINISTRATION OF PLAN
----------------------
3.1. The Plan shall be administered by the Board of Directors. The Board of
Directors may at its discretion grant an Option to any Qualified Person (other
than an Independent Director) on the terms set forth herein in respect of the
number of Option Shares that the Board of Directors shall specify.
3.2. Subject to the limitations contained in Article IV hereof and except
as provided in Section 5.1 hereof, the total
-6-
<PAGE>
number of Option Shares for which any Options may be granted shall be such
number as determined by the Committee.
3.3. Subject to the express provisions of the Plan, the Board of Directors
shall also have complete authority to interpret the Plan, to prescribe, amend,
and rescind rules and regulations relating to it, to determine the details and
provisions of each Option, and to make all other determinations necessary or
advisable in the administration of the Plan.
ARTICLE IV
----------
LIMITATIONS
-----------
4.1. Subject to adjustment pursuant to the provisions of Section 4.2
hereof, the total number of Shares which may be issued and sold hereunder shall
not exceed five hundred thousand (500,000) Shares.
4.2. If and to the extent that the Shares shall be increased or reduced by
reason of a recapitalization, a reclassification, a distribution or a dividend
payable in stock, a rights issue, a sub-division or consolidation of Shares or
an increase or reduction of capital, then the number of Shares subject to
Options, the Subscription Price per Share and the number of Shares subject to
the Plan shall be proportionately adjusted. If the Company is reorganized or
consolidated or merged with another entity, each Option Holder shall be entitled
to receive an Option in exchange for each Option then held by such Option
Holder, but only if such Option has not terminated pursuant to Section 8.1 or
8.2 of the Plan and only to the extent such Option has not theretofore been
-7-
<PAGE>
exercised, covering Shares or such other ownership interest of such reorganized,
consolidated, or merged entity in the same proportion, at an equivalent price
and subject to the same terms and conditions; provided, however, that the
issuance of securities by the Company as consideration for the acquisition by
the Company of securities of another corporation or any other asset shall not be
regarded as a circumstance requiring adjustment.
ARTICLE V
---------
GRANT OF OPTIONS
----------------
5.1. (a) (i) Effective as of March 15, 1995, each Independent Director
shall be granted an Option for eight thousand (8,000) Option Shares at a
Subscription Price of seven dollars ($7.00). Such Options shall be fully vested
and exercisable upon grant and expire on March 15, 2000.
(ii) On June 3, 1996, and on June 1 (or if such day is not a
Business Day, the Business Day immediately following such day) in each calendar
year thereafter, each Independent Director shall be granted an Option for
sixteen thousand (16,000) Option Shares. Each Option shall automatically be
vested and exercisable in full (subject to termination pursuant to Section 8.2)
one year after the Date of Grant.
(b) Subject to the express provisions of the Plan and the rules of
the Plan, the form, manner of exercise and timing of grants and vesting of
options and the number of Shares comprised in an Option shall be at the absolute
discretion of the Committee.
-8-
<PAGE>
(c) Each Option granted hereunder (with the exception of the grant
of Options to the Independent Directors pursuant to Section 5.1(a)) shall be
recorded in the minutes of a meeting of or the written consent of the Board of
Directors and evidenced by a Stock Option Agreement dated as of the Date of the
Grant and executed by the Company and the Option Holder, which Stock Option
Agreement shall set forth such terms and conditions as may be determined by the
Board of Directors in its sole discretion consistent with the Plan.
5.2. The terms of any Option granted under the Plan shall include a
provision making such Option nontransferable by the Option Holder (other than by
will or the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Internal Revenue Code of 1986, as amended, or
Title I of the Employee Retirement Income Security Act, or the rules
thereunder).
ARTICLE VI
----------
SUBSCRIPTION PRICE
------------------
6.1. The Subscription Price for a Share subject to an Option granted
hereunder shall not be less than the Market Value of the Share on the Date of
Grant of the Option. The Subscription Price shall be adjusted pursuant to
Section 4.2 of the Plan. At the time of exercise of the Option by the Option
Holder, the Subscription Price for such Shares shall be paid in full in United
States dollars.
-9-
<PAGE>
ARTICLE VII
-----------
RIGHT TO EXERCISE AN OPTION
---------------------------
7.1. Each Option granted pursuant to the Plan shall contain provisions,
established by the Board of Directors (unless established by the Plan), setting
forth the manner of exercise of such Option, the date or dates on which and the
number of Shares for which such Option becomes vested and exercisable, and the
Expiration Date of such Option. In no event, however, shall any Option granted
hereunder be exercisable by its terms after the expiration of ten (10) years
from the Date of Grant thereof.
7.2. With respect to any Option Holder other than an Independent Director,
if the employment of an Option Holder by the Company or any Subsidiary is
terminated (other than by reason of Retirement, death or Disability), each
Option of such Option Holder shall be exercisable prior to its Expiration Date
(subject to Section 8.1 hereof) only if, and only to the extent that, such
Option, in accordance with its terms, is vested and exercisable on the date on
which the employment of such Option Holder by the Company or such Subsidiary is
terminated. Each Option shall automatically be vested and exercisable in full
(subject to termination pursuant to Section 8.1) if the employment of the Option
Holder by the Company or any Subsidiary is terminated by the Company or such
Subsidiary (other than by reason of death or Disability) within six (6) months
after the occurrence of any Change in Control.
7.3. With respect to any Option Holder who is an Independent Director, each
Option shall automatically be vested
-10-
<PAGE>
and exercisable in full (subject to termination pursuant to Section 8.2) if the
Option Holder is removed as a director of the Company (other than by reason of
Disability) within six (6) months after the occurrence of any Change in Control.
ARTICLE VIII
------------
TERMINATION OF OPTION
---------------------
8.1. Except as otherwise stated herein, each option held by a Qualified
Person other than an Independent Director shall terminate on the first to occur
of the following dates (the "Termination Date"):
(a) The expiration of thirty (30) calendar days after the date on
which the employment of such Qualified Person by the Company or any Subsidiary
is terminated by the Company or such Subsidiary for cause (which shall not
include Disability), except if such termination occurs within six (6) months
after the occurrence of any Change in Control.
(b) The expiration of ninety (90) calendar days after the date on
which the employment of such Qualified Person by the Company or any Subsidiary
is terminated by such Qualified Person (except if such termination occurs by
reason of Retirement, death or Disability).
(c) The Expiration Date.
The granting of an Option to a Qualified Person does not alter in any way
the existing rights of the Company or any Subsidiary to terminate the employment
of such Qualified Person with or without cause and does not create an actual or
implied contract of employment.
-11-
<PAGE>
If an Option is to terminate on either of the dates described in
subsections (a) and (b) of this Section 8.1, the Option may be exercised prior
to the Termination Date only if, and only to the extent that, the Option, in
accordance with its terms, is vested and exercisable on the date on which the
employment of the Qualified Person by the Company or any Subsidiary is
terminated.
8.2. Except as otherwise stated herein, each Option held by an Independent
Director shall terminate on the first to occur of the following dates (the
"Termination Date"):
(a) The expiration of thirty (30) calendar days after the date on
which such Independent Director resigns as director of the Company or the term
of such Independent Director as a director of the Company expires and such
Independent Director is not reelected (in either case, other than by reason of
death or Disability) or after the date on which such Independent Director is
removed as a director of the Company for cause (which shall not include
Disability), except if such termination occurs within six (6) months after the
occurrence of any Change in Control.
(b) The Expiration Date.
If an Option is to terminate pursuant to subsection (a) of this Section
8.2, the Option may be exercised prior to the Termination Date only if, and only
to the extent that, the Option, in accordance with its terms, is vested and
exercisable on the date on which the Independent Director resigns or is
-12-
<PAGE>
removed as a director of the Company or the term of such Independent Director
expires.
ARTICLE IX
----------
EXERCISE OF OPTIONS AND SHAREHOLDERS RIGHTS
-------------------------------------------
9.1 An Option may be exercised only for full Shares. No fractional Shares
shall be issued.
9.2 No Option may be exercised in whole or in part and the Company shall
not be required to issue or deliver any certificate evidencing Shares
purchasable upon the exercise of any Option prior to fulfillment of all of the
following conditions:
(a) receipt by the Secretary of the Company from the Option Holder
or his executor or administrator of a written notice of exercise of the Option
specifying the number of Shares for which the Option is to be exercised,
substantially in the form set out as Exhibit 1 to such Option Holder's Stock
Option Agreement, together with full payment of the Subscription Price per Share
in United States dollars for each Share for which the Option is to be exercised;
(b) if the Option is to be exercised by an executor or administrator
of the Option Holder, receipt by the Secretary of the Company from such executor
or administrator of evidence satisfactory to the Company of such person's right
to exercise the Option;
(c) (i) receipt by the Secretary of the Company from the Option
Holder or his executor or administrator of such documents as the Company shall
deem necessary to determine
-13-
<PAGE>
whether registration of the Shares is required under the Securities Act of 1933
or to comply with such act or any other law and (ii) the completion of any such
registration or other qualification of such Shares under any federal or state
law or under the rulings or regulations of the Securities and Exchange
Commission or any other governmental regulatory body that the Committee shall in
its sole discretion deem necessary or advisable;
(d) receipt by the Company of any approval or other consent from any
federal, state of foreign governmental agency that the Committee shall in its
sole discretion deem necessary or advisable;
(e) if requested by the Company, receipt by the Secretary of the
Company from the Option Holder or his executor or administrator of a letter
representing that the Shares to be acquired upon exercise of the option are to
be acquired for the account of the Option Holder or for the account of his
executor or administrator for investment and not with a view to distribution of
such Shares; and
(f) for issuance of certificates evidencing Shares for which the
Option has been exercised, the lapse of such reasonable period of time following
the exercise of the Option as the Committee from time to time may establish for
reasons of administrative convenience.
9.3 If notice is duly given of a Resolution for the voluntary winding up
of the Company an Option Holder may forthwith and before the commencement of the
winding-up exercise
-14-
<PAGE>
his Option up to the full extent to which it remains vested and unexercised (but
so that such exercise shall be conditional upon such Resolution being passed)
provided that an Option shall not be exercisable later than the Termination
Date.
9.4 No Option Holder shall have any rights as a shareholder with respect
to Shares subject to an Option until the date of exercise of such Option in
accordance with the Plan and the issuance of the Shares for which the Option has
been exercised. All Shares acquired by an Option Holder pursuant to the Plan
shall be subject to the restrictions contained in the Certificate of
Incorporation and Bylaws of the Company, as in effect on the date hereof and as
they may be amended or restated from time to time, and (subject thereto) shall
be effective on the date of issue thereof and rank pari passu with the Shares of
the Company then issued and outstanding (including the right to receive all
dividends or other distributions thereafter declared, paid or made by reference
to a record date falling on or after the date of issue thereof). Except for
adjustments to be made to Options pursuant to the terms of the Plan, no
adjustment shall be made for dividends or other rights that have accrued to
shareholders of the Company prior to the date of issue of such Shares.
ARTICLE X
---------
TERMINATION, AMENDMENT, AND MODIFICATION OF PLAN
------------------------------------------------
10.1. The Board of Directors of the Company may at any time terminate the
Plan and may at any time and from time to time and in any respect amend or
modify the Plan; provided, that no
-15-
<PAGE>
termination, amendment, or modification of the Plan shall in any manner affect
any Option theretofore granted under the Plan without the consent of the Option
Holder or (in the event of his death) his executors and administrators and (b)
the provisions of Sections 5.1(a) and 6.1 shall not be amended more than once
each period of six calendar months from and after the date hereof, other than to
comport with changes in the Internal Revenue Code of 1986, as amended, the
Employee Retirement Income Security Act, or the rules thereunder.
ARTICLE XI
----------
MISCELLANEOUS
-------------
11.1. The adoption of the Plan shall not affect any other stock option or
incentive stock option or other compensation plans in effect for the Company or
any Subsidiary, nor shall the Plan preclude the Company or any Subsidiary from
establishing any other forms of incentive or other compensation for employees of
the Company or any Subsidiary.
11.2. The Plan shall be binding upon the successors and assigns of the
Company.
11.3. The place of administration of the Plan shall conclusively be
deemed to be within the Commonwealth of Pennsylvania and the validity,
construction, interpretation, administration, and effect of the Plan and of its
rules and regulations and the rights of any and all personnel having or claiming
to have an interest therein or thereunder shall be governed by and determined
exclusively and solely in accordance with the laws of the State of Delaware.
-16-
<PAGE>
11.4. No member of the Board of Directors of the Company shall be liable,
in respect to this Plan, for any act whether of commission or omission taken
by any other member or by any officer, agent, or employee of the Company, any
Subsidiary or any affiliated company, nor, except in circumstances involving his
own bad faith, for anything done or omitted to be done by himself.
ARTICLE XII
-----------
EXCHANGE ACT COMPLIANCE
-----------------------
12.1. Notwithstanding anything to the contrary herein, each grant of an
Option to an officer of the Company and the terms of such Option shall be
subject to approval of the Disinterested Administrators, in their sole
discretion.
12.2. With respect to persons who are subject to Section 16 of the
Exchange Act, transactions under the Plan are intended to comply with Rule 16b-3
or its successor provisions under the Exchange Act. To the extent that any
provision of the Plan or action by the Committee fails to so comply, it shall be
deemed null and void to the extent permitted by law and deemed advisable by the
Board of Directors.
Attest: THE MED-DESIGN CORPORATION
By: By:
--------------------------- ---------------------------
Joseph N. Bongiovanni, III James M. Donegan
LICENSE AGREEMENT
This License Agreement, (hereinafter referred to as the "AGREEMENT")
effective as of the 11th day of December, 1998 (hereinafter referred to as
"EFFECTIVE DATE"), is by and between The Med-Design Corporation, having an
address at 2810 Bunsen Avenue, Ventura, California 93003 (hereinafter referred
to as "LICENSOR"), and Becton, Dickinson and Company, having a place of business
at 1 Becton Drive, Franklin Lakes, New Jersey 07417-1880 (hereinafter referred
to as "BECTON").
WITNESSETH
WHEREAS, LICENSOR represents and warrants that it is the sole and exclusive
owner of the entire right, title and interest in and to a certain inventions
relating to retractable needle assemblies as described and claimed in the
patents and patent applications including, but not limited to those listed in
Appendix A of this AGREEMENT and all corresponding re-examinations, reissues,
continuations, divisionals, continuations-in-part and all foreign counterparts
(except as relating to U.S. Patent No. 4,904,242) thereof and as described and
shown by the technical information including, but not limited to those in
Appendix B and Appendix C;
WHEREAS, LICENSOR represents and warrants that it is the sole and exclusive
owner of the entire right, title and interest in and to certain technical and
business information necessary to develop, manufacture and sell retractable
needle assemblies;
WHEREAS, BECTON desires to obtain from LICENSOR an exclusive worldwide
license to make, have made, use and sell said certain inventions relating to
retractable needle assemblies, including, but not limited to the Safe Step
Safety Blood Collection Needle, Safe Step Safety Winged Set Blood Collection
Needle, Safe Step Safety Wing Needle Set/Catheter, Safe Step Safety PICC
Catheter System and Safe Step Safety I.V. Catheter Systems and LICENSOR is
willing to grant such a license to BECTON; and
WHEREAS, BECTON desires to obtain from LICENSOR an exclusive worldwide
license to the technical and business information necessary to develop,
manufacture and sell retractable needle assemblies.
NOW, THEREFORE, in consideration of the premises and the mutual promises
and covenants herein contained, it is agreed by and between the parties hereto
as follows:
ARTICLE I - DEFINITIONS
- -----------------------
1. "STOCK PURCHASE AGREEMENT" as used herein shall mean those certain
[Confidential Treatment requested for bracketed portion of document]
<PAGE>
Agreements and related documents between BECTON and LICENSOR entered into on
even date with this AGREEMENT.
2. "TRANSFER AGREEMENT" as used herein shall mean that certain Agreement
between BECTON and LICENSOR relating to the transfer of U.S. Patent No.
4,900,307 entered into on an even date with this AGREEMENT in accordance with
Appendix G of this AGREEMENT.
3. "BECTON" as used herein shall include Becton, Dickinson and Company and
any entity which at any time during the life of this AGREEMENT directly or
indirectly, through one or more intermediaries, controls BECTON, is controlled
by BECTON, or is under common control of BECTON, (including subsidiaries of
BECTON), or is controlled by an entity that controls BECTON.
4. "LICENSOR" as used herein shall include The Med-Design Corporation and
any entity which at any time during the life of this AGREEMENT directly or
indirectly, through one or more intermediaries, controls The Med-Design
Corporation, is controlled by The Med-Design Corporation, or is under common
control of The Med-Design Corporation, including but not limited to subsidiaries
of The Med-Design Corporation, MDC Research Ltd. or MDC Investment Holdings,
Inc., or is controlled by an entity that controls The Med-Design Corporation.
5. "DEVICE(S)" as used herein shall mean:
a. The Safe Step Safety Blood Collection Needle of the type illustrated
and described in the Product information in Appendix B;
b. The Safe Step Safety Winged Set Blood Collection Needle of the type
illustrated and described in the Product Information in Appendix B;
c. The Safe Step Safety Wing Needle Set/Catheter of the type illustrated
and described in the Product Information in Appendix C;
d. The Safe Step Safety PICC Catheter System of the type illustrated and
described in the Product Information in Appendix C;
e. The Safe Step Safety I.V. Catheter Systems of the type illustrated
and described in the Product Information in Appendix C;
f. Any retractable needle blood collection device designed to operate in
conjunction with a separable vacuum container. It is understood that DEVICE(S)
does not include arterial blood gas syringes and retractable needle blood donor
systems designed to
[Confidential Treatment requested for bracketed portion of document]
<PAGE>
operate in conjunction with an expandable reservoir and does not include needles
used for drawing blood and infusing blood to operate with dialysis systems; and
g. Any retractable needle device for venous, or arterial insertion of
any fluid delivery catheter or diagnostic catheter, as taught and claimed in the
patent applications and patents including, but not limited to those of Appendix
A of this AGREEMENT.
6. "TECHNICAL INFORMATION" as used herein shall mean, but is not limited to
unpublished research and development information, improvements, know-how,
drawings, specifications and technical data in the possession of LICENSOR which
are needed to produce DEVICES and which LICENSOR has the right to provide to
BECTON and including, but not limited to the information described and shown in
Appendix B and Appendix C. It is understood that TECHNICAL INFORMATION disclosed
to BECTON shall be maintained in confidence by BECTON as set forth in ARTICLE
XII, Paragraph 7.
7. "PATENT RIGHTS" as used herein shall mean patents or patent applications
relating to the DEVICES, or any improvement or modification to said DEVICES, its
manufacture or use, including, but not limited to the patents and patent
applications of Appendix A of this AGREEMENT, as well as all re-examinations,
reissues, continuations, divisionals, and continuations-in-part (except as
relating to U.S. Patent No. 4,904,242) and their counterparts in other
countries, in whole or in part, and any subsequently filed patent applications,
and any patents issuing therefrom that are owned by or assigned to LICENSOR, or
any of the foregoing in which LICENSOR has an ownership or licensable interest
as relating to this AGREEMENT.
8. "VALID CLAIM(S)" as used herein shall mean a claim of a pending patent
application or a claim of an issued or granted patent within PATENT RIGHTS so
long as such claim is enforceable and shall not have been disclaimed by LICENSOR
or shall not have been held invalid by BECTON or, any third party or not
infringed by BECTON in an unappealed or unappealable decision rendered by a
tribunal of competent jurisdiction.
9. "LICENSED PRODUCT(S)" as used herein shall mean any DEVICE whose
manufacture, use or sale by BECTON, would, but for this AGREEMENT, in a
jurisdiction where a VALID CLAIM exists, infringe such a VALID CLAIM under
PATENT RIGHTS whether or not any DEVICE is made, at least in part, using the
TECHNICAL INFORMATION.
10. "NET SALES" as used herein shall mean, unless otherwise provided, the
invoice price at which the LICENSED PRODUCTS is sold by BECTON, to a purchaser
other than BECTON, less returns, allowances or credits, rebates, excise, sales,
use or value-added taxes, delivery charges billed on the invoice to the
purchaser, cash and trade discounts allowed, import duty, and commissions to
agents other than employees of BECTON.
11. "IMPROVEMENTS" as used herein shall mean improvements made to said
[Confidential Treatment requested for bracketed portion of document]
<PAGE>
DEVICES by BECTON.
12. "DEVELOPMENTS" as used herein shall mean improvements and modifications
made to DEVICE(S) by LICENSOR during the term of this AGREEMENT.
13. "OPTION PRODUCTS" as used herein shall mean:
(a) Safety Hypodermic Syringe, fixed or stake needle, using retractable
needle technology;
(b) Safety Hypodermic Syringe, luer type, using retractable needle
technology;
(c) Safety Arterial Blood Gas Syringe, add-on type, using retractable
needle technology;
(d) Safety prefilled glass Syringe, fixed or stake needle, using
retractable needle technology;
(e) Safety prefilled glass Syringe, luer type, using retractable
needle.
OPTION PRODUCTS shall not mean devices for injecting medication from
pre-filled vials, cartridges or ampoules.
ARTICLE II - GRANT
- ------------------
1. Subject to the terms and conditions of this AGREEMENT, LICENSOR hereby
grants to BECTON (i) an exclusive worldwide right and license, under the PATENT
RIGHTS to make, have made, use and sell the LICENSED PRODUCTS, together with the
right to grant sublicenses throughout the world; (ii) an exclusive worldwide
right and license to use the TECHNICAL INFORMATION to make or have made the
LICENSED PRODUCTS, together with the right to grant sublicenses throughout the
world; and (iii) an assignment of ownership to U.S. Patent No. 4,900,307 in
accordance with Appendix F of this AGREEMENT.
ARTICLE III - PAYMENTS
- ----------------------
1. In consideration of the right and license herein granted to it, BECTON
shall purchase from LICENSOR for an aggregate purchase price of One Million Five
Hundred Thousand Dollars ($1,500,000) for shares of stock of Med-Design
Corporation and receive a seat on the Board of Directors of Med-Design
Corporation, as further described in the separate
[Confidential Treatment requested for bracketed portion of document]
<PAGE>
STOCK PURCHASE AGREEMENT, BECTON shall pay LICENSOR a nonrefundable payment of
Four Million Five Hundred Thousand Dollars ($4,500,000), within ten (10) days of
the EFFECTIVE DATE of this AGREEMENT and BECTON shall grant to LICENSOR a
limited non-exclusive right under U.S. Patent No. 4,900,307 in accordance with
Appendix G of this AGREEMENT.
2. In further consideration of the right and license herein granted to it,
BECTON agrees to pay LICENSOR while this AGREEMENT is in effect, for the term
herein defined, a royalty of [two and three quarter percent (2-3/4%)] of NET
SALES of LICENSED PRODUCTS sold by BECTON, from the EFFECTIVE DATE of this
AGREEMENT, except as provided in Paragraph 3 of this ARTICLE. The royalties
payable under this Paragraph are not applicable to LICENSED PRODUCTS sold by any
sublicensees, except as provided in ARTICLE X, Paragraph 3.
3. If no U.S. patent which contains a VALID CLAIM that covers the LICENSED
PRODUCT shall issue within two (2) years of the EFFECTIVE DATE of this
AGREEMENT, BECTON's obligation to pay royalties in the U.S. with respect to such
LICENSED PRODUCT shall be [one and three-eighths percent (1-3/8%)] of NET SALES
of the LICENSED PRODUCT, until such time as such U.S. patent does issue,
provided however, that if no U.S. patent with a VALID CLAIM covering the
LICENSED PRODUCT shall issue within six (6) years of the EFFECTIVE DATE of this
AGREEMENT then BECTON'S obligation to pay royalties on the LICENSED PRODUCT
made, used or sold shall cease.
4. It is mutually agreed that in situations where the LICENSED PRODUCT
hereunder is sold by BECTON in combination with other products not licensed
hereunder, such as a kit or package, the NET SALES on which the royalty rate is
applied shall be the NET SALES of the LICENSED PRODUCT if sold separately in a
transaction in substantially the same quantity at the same time as the
transaction to which this Paragraph relates and in accordance with Paragraphs 2
and 3. If the LICENSED PRODUCT is not sold separately in a transaction in
substantially the same quantity at the same time as the transaction to which
this paragraph relates, the NET SALES on which the royalty rate is applied shall
be calculated by applying to the total net selling price of the kit or package a
fractional multiplier having as its denominator the total manufacturing cost of
the kit or package and as its numerator the manufacturing cost of the included
LICENSED PRODUCT and in accordance with Paragraphs 2 and 3.
5. Royalties are payable by BECTON based solely on LICENSED PRODUCTS sold
by BECTON, on a country-by-country basis, until the PATENT RIGHTS on a
country-by-country basis herein expire or if no U.S. patent which contains a
VALID CLAIM that covers the LICENSED PRODUCT shall issue within six (6) years of
the EFFECTIVE DATE of this AGREEMENT, then BECTON's obligation to pay royalties
on the LICENSED PRODUCT shall cease.
[Confidential Treatment requested for bracketed portion of document]
<PAGE>
6. At the expiration of the period set forth in Paragraph 5 of this
ARTICLE, BECTON shall have a completely paid-up, royalty-free right and license
to subsequently make, have made, use, sell and sublicense the LICENSED PRODUCT,
and to use and sublicense the TECHNICAL INFORMATION to make or have made the
LICENSED PRODUCT throughout the world and shall have no further obligations to
LICENSOR.
7. (A) BECTON agrees to pay a minimum annual royalty to maintain its
exclusive licensee status hereunder only so long as there exists an unexpired
patent under PATENT RIGHTS having a VALID CLAIM covering one of the LICENSED
PRODUCTS. If the foregoing conditions are met, for each year, commencing on the
second anniversary of the EFFECTIVE DATE of this AGREEMENT, BECTON agrees to pay
to LICENSOR a minimum annual royalty, less any earned royalties which shall have
been paid to LICENSOR during the previous twelve (12) months, according to the
following schedule:
a. [One Hundred Thousand Dollars ($100,000)] on the second anniversary of
this AGREEMENT.
b. [Two Hundred Thousand Dollars ($200,000)] on the third anniversary of
this AGREEMENT.
c. [Three Hundred Thousand Dollars ($300,000)] on the fourth anniversary
of this AGREEMENT;
d. [Four Hundred Thousand Dollars ($400,000)] on the fifth anniversary of
this AGREEMENT and on each anniversary thereafter during the remaining
term of this AGREEMENT.
(B) If no U.S. patent which contains a VALID CLAIM that covers a
LICENSED PRODUCT shall issue within six (6) years of the EFFECTIVE DATE of this
AGREEMENT, BECTON'S obligation to pay minimums shall cease.
8. (A) Payment by BECTON of the royalties referred to in Paragraphs 2, 3
and 4 of this ARTICLE, or the minimum annual royalty referred to in Paragraph 7
of this ARTICLE, is considered to be complete satisfaction of any duty imposed
upon BECTON to commercially exploit the LICENSED PRODUCTS and is accepted by
LICENSOR in lieu of any best efforts obligation on the part of BECTON.
(B) Nothing in this AGREEMENT shall impose upon BECTON the obligation to
create, continue or maximize sales of the LICENSED PRODUCTS or prevent BECTON
from making, using or selling or causing to be made, have made, used or sold,
any place in the world, products competitive in nature to LICENSED PRODUCTS.
Nothing herein contained shall in any way limit BECTON's free and exclusive
right to determine in its discretion the timing or manner of marketing,
manufacturing or advertising the LICENSED PRODUCTS.
9. If BECTON does not pay the minimum annual royalty at the time such
minimum is payable, LICENSOR, at its option, may convert this AGREEMENT to a
nonexclusive license, at one-half the royalty rates as set forth in Paragraphs 2
[Confidential Treatment requested for bracketed portion of document]
<PAGE>
and 3 of this ARTICLE, upon written notice to BECTON. BECTON shall have ninety
(90) days after receiving such notice to make up any deficiencies in its
payments in order to maintain its exclusive licensee status. It is understood
that the monies representing any outstanding minimum payments are not
collectable as damages by LICENSOR if BECTON fails to make any such minimum
royalty payments, with the only remedy for LICENSOR being the conversion of the
license granted herein to a non-exclusive license as set forth above.
ARTICLE IV - COMMERCIAL DEVELOPMENT ACTIVITIES
- ----------------------------------------------
1. LICENSOR in consultation with BECTON, shall use its best efforts to work
with BECTON in any further design and development necessary to complete the
commercial development of the DEVICES and all of the objectives of the
commercial development program identified in Appendix E hereto.
[Confidential Treatment requested for bracketed portion of document]
<PAGE>
ARTICLE V - REPRESENTATIONS AND WARRANTIES
- ------------------------------------------
1. LICENSOR represents and warrants that it has the right to grant the
exclusive license as set forth in this AGREEMENT and is able to enter into this
AGREEMENT and become bound by the terms hereof.
2. LICENSOR represents and warrants that it knows of no patent and patent
applications owned by a third party that would be infringed by the making,
using, offering for sale, sale or importing of one of the products illustrated
and described in Appendix B and Appendix C.
3. LICENSOR represents and warrants that it has not received any notice,
whether written or oral, that the products illustrated and described in Appendix
B and Appendix C infringe any patents or patent applications of a third party.
4. LICENSOR represents and warrants that all documents, including, but not
limited to debt instruments, third party agreements, financing statements,
security interests, encumbrances and liens, have been disclosed by copy and in
writing to BECTON prior to the EFFECTIVE DATE of this AGREEMENT and that such
documents do not contain terms and conditions which would alter, amend,
supersede, interfere or void the terms and conditions of this AGREEMENT.
5. LICENSOR represents and warrants that it is under no obligation to any
third party that would interfere with its representations or obligations under
this AGREEMENT.
ARTICLE VI - PATENT PROSECUTION AND MAINTENANCE
- -----------------------------------------------
1. (A) LICENSOR agrees to file and prosecute in good faith and without
delay all patent applications covering the DEVICES coming within PATENT RIGHTS.
LICENSOR shall keep BECTON currently informed of the filing and progress of all
aspects of the prosecution of all such applications and of the issuance of
patents, and shall inform BECTON to receive its input in any decisions which
would affect the scope of any issued VALID CLAIMS and other prosecutorial
details, including the potential abandonment of any application.
(B) LICENSOR agrees to file and prosecute in good faith and without
delay all patent applications coming within PATENT RIGHTS in the foreign
countries designated in writing by BECTON to LICENSOR, except as provided in
Paragraph C of this ARTICLE. LICENSOR agrees to prepare and dispatch foreign
filings within such period of time as will result in the application claiming
priority to the relating parent applications. LICENSOR shall keep BECTON
currently informed of the filing and progress of all aspects of the prosecution
of all such foreign applications and the issuance of foreign patents, and shall
[Confidential Treatment requested for bracketed portion of document]
<PAGE>
inform BECTON to receive its input in any decision which would affect the scope
of any issued VALID CLAIMS and other potential abandonment of any application.
(C) A country which BECTON desires LICENSOR to file and/or prosecute a
patent application in and LICENSOR does not desire to do so, shall be considered
an "ELECTED COUNTRY." LICENSOR shall file and/or prosecute the patent
application in the ELECTED COUNTRY and BECTON shall reimburse LICENSOR for
reasonable costs, expenses and legal fees that LICENSOR incurs for such activity
after the EFFECTIVE DATE of this AGREEMENT, provided, however, that one-half of
any payment made by BECTON to LICENSOR for such activity shall be credited
against future earned royalties for LICENSED PRODUCTS sold in the ELECTED
COUNTRY. LICENSOR shall provide a monthly itemized invoice to BECTON for such
expenses that are incurred after the EFFECTIVE DATE of this AGREEMENT no later
than thirty (30) days after the last day of each monthly period. Such itemized
invoice shall be forwarded to the attention of the Intellectual Property
Department at Becton Dickinson and Company, I Becton Drive, MC 089, Franklin
Lakes, New Jersey 07417. Payment of the invoice shall be made by BECTON to
LICENSOR within forty-five (45) days following review and approval by the
responsible attorney or designee, of the invoice submitted by LICENSOR. LICENSOR
shall make a good faith effort to negotiate a fair and reasonable rate for
costs, expenses and legal fees that will be reimbursed by BECTON.
2. LICENSOR agrees to maintain all issued U.S. and foreign patents and
applications coming within PATENT RIGHTS in good faith and without delay.
LICENSOR shall keep BECTON currently informed and shall permit BECTON to provide
its input in the potential abandonment of any patent or application.
3. All costs and expenses under this ARTICLE associated with all patent
applications and patents coming within PATENT RIGHTS shall be borne entirely by
LICENSOR, except as otherwise provided in this ARTICLE.
4. In no event shall BECTON be liable or responsible for any such costs or
expenses as set forth in Paragraph I of this ARTICLE after the termination of
this AGREEMENT, the expiration of this AGREEMENT, or in the event the AGREEMENT
becomes non-exclusive or royalties have ceased as provided in ARTICLE III,
Paragraph 3.
5. It is understood and agreed that all right, title and interest to
IMPROVEMENTS made by BECTON, including, but not limited to, any patents issued,
remain the sole property of BECTON and shall not be subject to any of the terms
of this AGREEMENT unless said IMPROVEMENTS would infringe a VALID CLAIM.
6. It is understood and agreed that LICENSOR shall promptly disclose to
BECTON all DEVELOPMENTS made by LICENSOR during the term of this AGREEMENT in
writing to BECTON and grant to BECTON, at BECTON's option an exclusive worldwide
[Confidential Treatment requested for bracketed portion of document]
<PAGE>
license, to make, use, sell and sublicense any one or more of LICENSOR's
DEVELOPMENTS, whether patented or not, at the same terms and conditions of this
AGREEMENT with the exception of the payment in ARTICLE III, Paragraph 1.
LICENSOR retains the exclusive rights to the DEVELOPMENTS for use with products
other than the DEVICES and any elected and licensed OPTION PRODUCTS. It is
understood that the DEVELOPMENTS disclosed to BECTON become part of the
TECHNICAL INFORMATION defined in ARTICLE I, Paragraph 5 and BECTON shall
maintain the DEVELOPMENTS in confidence as set forth in ARTICLE XII,
Paragraph 7.
ARTICLE VII - BOOKS OF ACCOUNT AND REPORTS
1. BECTON agrees to keep complete and accurate records of its sales of the
LICENSED PRODUCT sold and all data necessary for the computation of payments to
be made to LICENSOR hereunder. However, BECTON shall have no duty of trust or
other fiduciary relationship with LICENSOR regarding the maintenance of the
books of account or the calculation and reporting of royalties.
2. Payments under ARTICLE III, when due, shall be made on or before the
last business day of June, September, December and March of each year for the
sales of the LICENSED PRODUCT sold by BECTON during the preceding quarterly
periods ending on the last day of March, June, September and December,
respectively. Such payments to LICENSOR shall be accompanied by a statement
showing the total NET SALES of the LICENSED PRODUCTS sold by BECTON, and such
other particulars as are necessary for an account of the payments to be made
pursuant to this AGREEMENT. Payment of the amount due shall accompany such
statement, which shall be deemed to be true and correct unless objected to and
audited in accordance with Paragraph 4 of this ARTICLE.
3. (A) To the extent sales requiring a royalty payment may have been made
by BECTON in a country other than the United States, such royalty payments shall
be made by BECTON in United States dollars on the basis of conversion, from the
currency of such other country, at the rate of exchange recited in the report
entitled "Rates of Exchange" issued monthly by BECTON's International Finance
Department which provides spot exchange rates for each other country where sales
were made, on the last business day of the calendar quarter when the sales
occurred, and shall be paid at the time and in the manner set forth above,
provided however, that royalties based on sales in any other country shall be
payable to LICENSOR only after deducting for exchange and all other charges due
to other governments, including withholding taxes, arising from the origin and
transmittal of such royalties.
(B) The foregoing is subject to the right of BECTON to make payment of
royalties in any country where the currency is blocked and where legal
[Confidential Treatment requested for bracketed portion of document]
<PAGE>
conversion of the currency billed cannot be made into United States dollars by
depositing such royalty payments in each LICENSOR's name in a bank designated by
each LICENSOR within such country.
4. LICENSOR, at its own expense, shall have the right for a period of two
(2) years after receiving any report from BECTON to nominate an independent
Certified Public Accountant, acceptable to BECTON which acceptance shall not be
unreasonably withheld, who shall have access to BECTON's records during
reasonable business hours for the purpose of verifying the payments made under
this AGREEMENT, but this right may not be exercised more than once in any
calendar year and the Accountant shall disclose to LICENSOR information limited
only to the accuracy of the payment report and the payments made in accordance
with this AGREEMENT, provided, however, that if the payments made by BECTON on
the basis of BECTON'S reports are found to be in error by more than a negative
ten percent (10%), BECTON shall bear the cost of the audit. The failure of
LICENSOR to request verification of any payment report during said two (2) year
period shall be considered acceptance of the accuracy of such report and BECTON
shall have no obligation to maintain any records pertaining to such report
beyond said two (2) year period.
ARTICLE VIII - PATENT LITIGATION
- --------------------------------
1. (A) In the event either party hereto receives notice of alleged
infringement of any of the PATENT RIGHTS, covering the DEVICES, it shall
promptly notify the other party in writing of such infringement. BECTON shall
have the right, but not the obligation, to bring suit and to control the conduct
thereof against the alleged infringer, and to join LICENSOR as a party to such
suit, in which event BECTON shall hold LICENSOR free, clear and harmless from
any and all costs and expenses of such litigation, including attorneys' fees. In
the event BECTON exercises the right to bring suit herein conferred, LICENSOR
shall have the right to receive twenty-five percent (25%) of the damages
recovered after a deduction for all legal expenses by BECTON, including
attorneys' fees, incurred and paid by BECTON in such lawsuit and BECTON shall
have the right to retain any remaining damages thereafter.
(B) If BECTON does not bring suit against said infringer, as herein
provided, within one hundred twenty (120) days after receipt of such notice,
LICENSOR shall have the right, but shall not be obligated, to bring suit for
such alleged infringement, and to join BECTON as a party to such suit only if a
court of competent jurisdiction determines BECTON is a necessary party to such
suit, in which event LICENSOR shall hold BECTON free, clear and harmless from
any and all costs and expenses of such litigation, including attorneys' fees. In
the event LICENSOR exercises the right to bring suit for such alleged
infringement, BECTON shall have the right to receive twenty-five percent (25%)
of all damages recovered after deduction for all legal expenses, including
attorneys' fees, incurred and paid by LICENSOR in such lawsuit and LICENSOR
shall have the right to retain any remaining damages thereafter.
(C) In any litigation under Paragraph I of this ARTICLE in which a third
[Confidential Treatment requested for bracketed portion of document]
<PAGE>
party challenges validity of those VALID CLAIMS alleged to be infringed, or any
litigation in which BECTON in a particular country challenges validity of those
VALID CLAIMS covering the LICENSED PRODUCT in a particular country, then upon
filing of such suit by a third party or BECTON, fifty-percent (50%) of all the
earned and minimum royalty payments, attributed to the country in which the
lawsuit is brought, which would otherwise be paid to LICENSOR, with respect to
LICENSED PRODUCT made or sold in the country affected by such lawsuit, shall be
deposited in an interest bearing escrow account. All monies in the escrow
account, together with all accrued interest, in the country affected by such
litigation, shall be retained by BECTON if those VALID CLAIMS are found invalid
or unenforceable by a court of proper jurisdiction in an unappealed or
unappealable decision, and, if at least one VALID CLAIM is found not invalid by
a court of proper jurisdiction in an unappealed or unappealable decision, all
monies in the interest bearing escrow account, together with all accrued
interest, in the country affected by such litigation, shall be released to
LICENSOR.
(D) Any VALID CLAIM held to be invalid, or unenforceable shall be
considered canceled from the PATENT RIGHTS effective as of the date BECTON or
the third party had received judgment in such legal action, subject however, to
reinstatement in the PATENT RIGHTS in the event that such VALID CLAIM is held
valid or enforceable by a court of proper jurisdiction in an unappealed or
unappealable decision.
(E) Each party shall always have the right to be represented by counsel
of its own selection and at its own expense in any suit instituted by the other
for infringement, under the terms hereof. Either party has the right, within
ninety (90) days of the filing of the original complaint, to join in, but not
control, any such infringement suit brought by the other party and shall share
equally in the cost and expenses of such litigation, including attorneys' fees,
and any sums recovered.
2. (A) If BECTON is sued by a third party, in a country, charging
infringement of a patent relating to LICENSED PRODUCTS resulting from the
making, using, or selling by BECTON, of LICENSED PRODUCTS, BECTON shall promptly
notify LICENSOR. Upon filing of such suit by a third party, fifty-percent (50%)
of all the earned and minimum royalty payments, attributable to the country in
which the lawsuit was brought, which would otherwise be paid to LICENSOR, with
respect to LICENSED PRODUCT made or sold in the country affected by such
lawsuit, shall be deposited in an interest bearing escrow account in the United
States.
(B) In the event of (i) a final adjudication in any suit enjoining
BECTON from making, using, or selling the LICENSED PRODUCT or holding BECTON
liable for damages or (ii) a settlement of such suit requiring payment of
damages by BECTON, an amount shall be deducted by BECTON from the escrow account
described in Paragraph 2 (A) of this ARTICLE, sufficient to reimburse itself for
all damages and legal expenses incurred and paid by BECTON in such suit. After
such deduction, any funds remaining in the escrow account, together with all
earnings on such account, shall be released and paid over to LICENSOR.
[Confidential Treatment requested for bracketed portion of document]
<PAGE>
(C) In the event of a final adjudication in any such suit which holds
the patent of such third party invalid or valid but not infringed, BECTON shall
deduct an amount from the escrow account described in Paragraph 2 (A) of this
ARTICLE, equal to its reasonable legal expenses incurred and paid by BECTON in
such suit that are not fully recovered as a result of final adjudication. After
such deduction, any funds remaining in the escrow account, shall be released and
paid over to LICENSOR.
3. While this AGREEMENT is in effect, should BECTON find it necessary, or
an exercise of reasonable business prudence, to obtain a license under any
patent rights from a third party in a particular country in order to render
marketable the LICENSED PRODUCT manufactured by or for, and/or sold by, BECTON,
or used by its customers or to use the TECHNICAL INFORMATION, it shall notify
LICENSOR of such decision. If such a third party license is obtained by BECTON,
or as a result of a settlement entered into with respect to patent rights
dominant to the rights herein granted, BECTON is required to pay and does pay
royalties to a party other than LICENSOR in respect of BECTON's sales of the
LICENSED PRODUCT in the particular country, the applicable prospective royalties
payable to LICENSOR with respect to the particular country, pursuant to this
AGREEMENT shall be reduced by BECTON to an amount equal to the amount of
royalties paid to such third party.
ARTICLE IX - OPTION
- -------------------
1. During the first twelve (12) months of the EFFECTIVE DATE of this
AGREEMENT, LICENSOR shall disclose in writing to BECTON, subject to the
confidentiality conditions of ARTICLE XII, Paragraph 7, all information,
including, but not limited to patent applications, specifications, designs and
prototypes for OPTION PRODUCTS not previously disclosed to BECTON under any
other Agreement, for BECTON's consideration. At BECTON's option, LICENSOR shall
grant to BECTON an exclusive worldwide license, to make, use, sell and
sublicense any one or more of LICENSOR's OPTION PRODUCTS whether patented or
not, at terms and conditions to be negotiated.
2. In the event BECTON does not elect to exercise the option for an OPTION
PRODUCT under Paragraph I of this ARTICLE, BECTON agrees to grant LICENSOR a
limited non-exclusive license to make, use and sell the non-elected OPTION
PRODUCT under U.S. Patent No. 4,900,307. In accordance with Appendix H of this
AGREEMENT.
ARTICLE X - SUBLICENSING
- ------------------------
1. Sublicensing shall be the responsibility of BECTON so long as this
AGREEMENT remains in effect. Sublicenses granted under PATENT RIGHTS by BECTON
shall be non-exclusive licenses.
[Confidential Treatment requested for bracketed portion of document]
<PAGE>
2. The granting by BECTON of sublicenses under PATENT RIGHTS shall be in
the discretion of BECTON and BECTON shall have the sole and exclusive power to
determine whether or not to grant sublicenses under PATENT RIGHTS, the identity
of the sublicenses, royalty rates and terms and conditions of sublicenses.
ARTICLE XI - DURATION AND TERMINATION
- -------------------------------------
1. Unless sooner terminated as herein provided in Paragraph 2 of this
ARTICLE, this AGREEMENT shall continue in effect until the expiration of the
last to expire patent within PATENT RIGHTS having a VALID CLAIM.
2. This AGREEMENT may be sooner terminated as follows:
(A) By BECTON at any time, giving LICENSOR sixty (60) days advance
written notice thereof. Such termination shall not operate to relieve BECTON of
its obligation to pay all unpaid earned royalties on the LICENSED PRODUCTS sold
prior to the effective date of termination. No payment of any outstanding
minimum royalty is due by BECTON to LICENSOR, if BECTON terminates this
AGREEMENT. BECTON's right to grant sublicenses shall terminate as of the date of
any such notice hereunder and all sublicenses granted prior to the date of such
notice shall terminate with the termination of this AGREEMENT.
(B) By LICENSOR effective immediately on notice to BECTON if BECTON: (i)
files a petition under the Federal Bankruptcy Code, or (ii) makes an assignment
for the benefit of creditors or has a receiver appointed for it, or otherwise
takes advantage of laws designed for the relief of debtors, all to the extent
permitted by the Intellectual Property Bankruptcy Protection Act (1988).
(C) Should a party hereto fail to perform any material covenant of this
AGREEMENT the sole and exclusive remedy of the non-defaulting party shall be
written notice of such failure to the party in breach or default who shall have
sixty (60) days from the date of notice to correct the breach or default, and
upon failure to do so, the party not in breach or default may cancel and
terminate this AGREEMENT upon written notice.
3. In the event this AGREEMENT is terminated by BECTON, BECTON agrees to
grant LICENSOR a non-exclusive, royalty-free license to U.S. Patent No.
4,900,307 in accordance with Appendix I of this AGREEMENT.
ARTICLE XII - MISCELLANEOUS
- ---------------------------
1. Any notice or other communication required or permitted by this
[Confidential Treatment requested for bracketed portion of document]
<PAGE>
AGREEMENT shall be deemed to have been validly delivered on the date mailed if
the same shall be mailed by registered or certified mail, postage prepaid,
return receipt requested, or faxed with confirmation, addressed as follows:
To LICENSOR: Med-Design Corporation
2801 Bunsen Avenue
Ventura, California 93003
Attention: ________________
Tel No.: __________________
Fax No.: __________________
To BECTON: Becton, Dickinson and Company
Becton Dickinson Vacutainer Systems Division
1 Becton Drive
Franklin Lakes, NJ 07417-1880
Attention: President
Tel. No.: (201) ___________
Fax No.: (201) 847-4867
With copy to: Becton, Dickinson and Company
1 Becton Drive
Franklin Lakes, NJ 07417-1880
Attention: Chief Intellectual Property Counsel
Tel. No.: (201) 847-7116
Fax No.: (201) 848-9228
2. This AGREEMENT shall not be assigned or transferable by LICENSOR without
the prior written consent of BECTON, which consent shall not be unreasonably
withheld, and shall be freely assignable or transferable by BECTON.
3. This AGREEMENT shall be binding upon and inure to the benefit of the
successor and assigns of BECTON to which this AGREEMENT relates and shall be
binding upon and inure to the benefit of the successors and assigns of the
LICENSOR to which this AGREEMENT relates.
4. Nothing herein contained shall be construed to place the parties in the
relationship of partners or joint venturers or principal and agent or create any
entity or association, and neither party shall have the power to obligate or
bind the other in any manner whatsoever.
5. LICENSOR shall not use the name of BECTON or any adaptation thereof in
any advertising, promotion, sales literature or packaging in a manner which
[Confidential Treatment requested for bracketed portion of document]
<PAGE>
would constitute an expressed or implied endorsement for any commercial product
without the prior written consent of BECTON.
6. Nothing herein contained shall be construed to grant to LICENSOR any
license or rights in any of BECTON's intellectual property including, but not
limited to, BECTON's know-how, trade secrets, and patents which are assigned
and/or licensed to BECTON, except as provided in this AGREEMENT with respect to
U.S. Patent No. 4,900,307.
7. In the event LICENSOR discloses TECHNICAL INFORMATION, DEVELOPMENTS,
OPTION PRODUCTS and/or information on PATENT RIGHTS under prosecution to BECTON,
and BECTON discloses confidential information under ARTICLE IV and APPENDIX E to
LICENSOR, during the term of this AGREEMENT that were not previously disclosed
under any other Agreement, BECTON and LICENSOR agree to the following terms and
conditions:
a. For a period of three (3) years from the EFFECTIVE DATE of this
AGREEMENT, BECTON agrees not to disclose the TECHNICAL INFORMATION,
DEVELOPMENTS, OPTION PRODUCTS, and/or information on PATENT RIGHTS under
prosecution, it receives from LICENSOR that is marked confidential to
anyone not employed by BECTON without LICENSOR's consent and LICENSOR
agrees not to disclose BECTON's confidential information under ARTICLE IV
and APPENDIX E it receives from BECTON that is marked confidential to
anyone not employed by LICENSOR without BECTON's consent.
b. The recipient of the information in Section a shall not be bound by the
obligations of this Paragraph 7 unless the discloser provides the recipient
such information reduced to writing and marked as "Confidential" within
thirty (30) days of such disclosure.
c. The obligations of the recipient under this Paragraph 7 shall not apply
to any information, which:
(i) is already known to recipient or is independently developed by
recipient as established by recipient's written records; or
(ii) is or becomes publicly known, through no wrongful act of
recipient; or
(iii) is rightfully received from a third party without restriction
and without breach of this Agreement; or
(iv) is approved for release by written authorization by discloser.
8. Neither BECTON nor LICENSOR shall be responsible for and the terms of
[Confidential Treatment requested for bracketed portion of document]
<PAGE>
this AGREEMENT shall be inapplicable to any default or delays which are due to
cause beyond BECTON's or LICENSOR's control, including but without limitation
acts of God or of the public enemy, acts or any order of a government, fires,
floods, or other natural disasters, embargoes, accidents, explosions, strikes,
or other labor disturbances (regardless of the reasonableness of the demands of
labor), shortages of fuel, power or raw materials, inability to obtain or delays
of transportation facilities, incidents of war, or other events causing the
inability of BECTON or LICENSOR, acting in good faith with due diligence, to
perform its obligations under this AGREEMENT.
9. BECTON makes no warranty and will accept no liability for any expenses
or damages of whatever kind or nature, including consequential damages, incurred
by LICENSOR as a result of this AGREEMENT.
10. This AGREEMENT constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof, and no modification of this
AGREEMENT shall be effective unless it is in writing and is signed by a duly
authorized representative of each party. There are no understandings,
representations or warranties except as herein expressly set forth.
11. The failure or delay of a party hereto to enforce any of its rights
under this AGREEMENT shall not be deemed to be a continuing waiver or a
modification by such party of any of its rights under this AGREEMENT, and a
party may, within the time provided by the applicable law, commence appropriate
legal proceedings to enforce any or all of its rights under this AGREEMENT. Any
failure to enforce or delay in enforcement shall not constitute a defense.
12. LICENSOR shall not originate any publicity, news release or public
announcement, written or oral, whether to the public, press or otherwise,
relating to this AGREEMENT, or that the AGREEMENT has been negotiated or
executed, or the terms and conditions of this AGREEMENT, or to any amendment
hereto or performance hereunder, without the written approval of BECTON, which
approval shall not be unreasonably held. LICENSOR shall not disclose to any
third party the terms and conditions of this AGREEMENT unless required by law.
13. Should any part or provision of this AGREEMENT be held unenforceable
or in conflict with the law of any jurisdiction, the validity of the remaining
part or provisions shall not be affected by such holdings.
14. This AGREEMENT shall be construed, interpreted and applied in
accordance with and governed by the laws of the State of New Jersey, United
States of America and the parties hereby submit to the jurisdiction of the
courts of that State.
[Confidential Treatment requested for bracketed portion of document]
<PAGE>
IN WITNESS WHEREOF, LICENSOR and BECTON have caused this AGREEMENT to be duly
executed in duplicate originals as of the date first hereinabove written.
The Med-Design Corporation, Becton, Dickinson and Company
By: /s/ James Donegan By: /s/ Richard Brajer
--------------------- ----------------------
James Donegan Rick Brajer
President President
Worldwide Sample Collection
Date: December 11, 1998 Dated: December 11, 1998
- ----------------------- ------------------------
[Confidential Treatment requested for bracketed portion of document]
THE MED-DESIGN CORPORATION
REGISTRATION RIGHTS AGREEMENT
THIS AGREEMENT is made as of the __ day of December, 1998 by and among The
Med-Design Corporation, a Delaware corporation (the "Company"), and Becton,
Dickinson and Company (the "Stockholder").
BACKGROUND
Stockholder has been issued on the date hereof 300,000 Shares of the
Company's Series A Convertible Preferred Stock (the "Preferred Stock") and the
Company has agreed, on the terms hereof, to register for sale under the
Securities Act of 1933 (the "1933 Act") shares of the Company's Common Stock
into which the Preferred Stock is convertible (said shares of Common Stock
hereafter referred to as the "Registrable Securities").
The parties hereto, each intending to be legally bound and in exchange for
the mutual covenants herein, agree as follows:
1. Piggyback Registrations.
a. Right to Piggyback. Whenever the Company proposes to register any of its
securities under the 1933 Act and the registration form to be used may be used
for the registration of Registrable Securities (a "Piggyback Registration"),
the Company will give prompt written notice to all holders of Registrable
Securities and will include in such Piggyback Registration, subject to the
allocation provisions below, all Registrable Securities with respect to which
the Company has received written requests for inclusion within 20 days after the
Company's mailing of such notice.
b. Piggyback Expenses. In all Piggyback Registrations, the Company will pay
the Registration Expenses related to the Registrable Securities of the Selling
Stockholders, but the Selling Stockholders will pay any Underwriting Commissions
related to their Registrable Securities.
c. Priority on Primary Registrations. If a Piggyback Registration is an
underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
that, can be sold in such offering, at a price reasonably related to fair value,
the Company will allocate the securities to be included as follows: first, the
securities the Company proposes to sell on its own behalf; and second, any
securities (including Registrable Securities) requested to be included in such
registration, pro rata on the basis of the number of securities requested to be
included in such registration.
d. Priority on Secondary Registrations. If a Piggyback Registration is
initiated as an underwritten secondary registration on behalf of holders of the
Company's securities and the
<PAGE>
managing underwriters advise the Company in writing that in their opinion the
number of securities requested to be included in such registration exceeds the
number that can be sold in such offering, at a price reasonably related to fair
value, the Company will allocate the securities to be included as follows:
first, the securities requested to be included by the holders initiating such
registration; and second, any securities (including Registrable Securities)
requested to be included in such registration, pro rata on the basis of the
number of securities requested to be included in such registration.
e. Selection of Underwriters. If any Piggyback Registration is
underwritten, the selection of investment banker(s) and manager(s) and the other
decisions regarding the underwriting arrangements for the offering will be made
by the Company.
2. Holdback Agreements.
No Stockholder shall effect any public sale or distribution of equity
securities of the Company or any securities convertible into or exchangeable or
exercisable for such securities during the seven days prior to and the 90 days
after any underwritten Piggyback Registration has become effective (except as
part of such underwritten registration).
3. Registration Procedures.
Whenever the holders of Registrable Securities have requested that any
Registrable Securities be registered pursuant to Section 1 of this Agreement,
the Company will:
a. prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and use its
reasonable commercial efforts to cause such registration statement to become
effective;
b. prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective for a period of 120 days;
c. furnish to each Selling Stockholder such number of copies of such
registration statement, each amendment and supplement thereto and the prospectus
included in such registration statement (including each preliminary prospectus),
and such other documents as such seller may reasonably request in order to
facilitate the disposition of the Registrable Securities owned by such seller;
d. use its best efforts to register or qualify such Registrable Securities
under such other securities or blue sky laws of such jurisdictions as the
managing underwriter(s) may reasonably request;
e. notify each Selling Stockholder at any time when a prospectus relating
thereto is required to be delivered under the 1933 Act within the period that
the Company is required to keep
<PAGE>
the registration statement effective of the happening of any event as a result
of which the prospectus included in such registration statement contains an
untrue statement of a material fact or omits any fact necessary to make the
statement therein not misleading, and, at the request of any such seller, the
Company will as promptly as reasonably possible prepare a supplement or
amendment to such prospectus so that, as thereafter delivered to the purchasers
of such Registrable Securities, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make the
statement therein not misleading;
f. cause all such Registrable Securities to be listed or included on
securities exchanges or automated trading markets on which similar securities
issued by the Company are then listed or included;
g. provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
h. enter into such customary agreements (including with respect to each
underwritten offering, an underwriting agreement in customary form) and take
such other customary actions as may be reasonably necessary to expedite or
facilitate the disposition of such Registrable Securities; and
i. obtain a "comfort" letter addressed to the Company's officers and board
of directors and the underwriter(s) (with respect to an underwritten offering)
from its independent public accountants in customary form and covering such
matters of the type customarily covered by "comfort" letters.
4. Indemnification.
a. The Company hereby indemnifies, to the extent permitted by law, each
Stockholder, its officers and directors, and each person who controls such
holder (within the meaning of the 1933 Act), against all losses, claims,
damages, liabilities and expenses arising out of or resulting from any untrue or
alleged untrue statement of material fact contained in any registration
statement, prospectus or preliminary prospectus or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as the
same are caused by or contained in any information furnished in writing to the
Company by such Stockholder expressly for use therein or by any such holder's
failure to deliver a copy of the prospectus or any amendments or supplements
thereto after the Company has furnished such holder with a sufficient number of
copies of the same.
b. In connection with any registration statement in which a Stockholder is
participating, each such Stockholder will furnish to the Company in writing such
information with respect to such Stockholder as is reasonably requested by the
Company for use in any such registration statement or prospectus and will
indemnify, to the extent permitted by law, the Company, its directors and
officers and each person who controls the Company (within the meaning of the
1933 Act) against
<PAGE>
any losses, claims, damages, liabilities and expenses resulting from any untrue
or alleged untrue statement of material fact or any omission or alleged omission
of a material fact required to be stated in the registration statement or
prospectus or any amendment thereof or supplement thereto or necessary to make
the statements therein not misleading, but only to the extent that such untrue
statement or omission is contained in information so furnished in writing by
such holder specifically for use in preparing the registration statement.
Notwithstanding the foregoing, the liability of a Stockholder under this Section
4(b) shall be limited to an amount equal to the net proceeds actually received
by the Selling Stockholder from the sale of Registrable Securities covered by
the registration statement
c. Any person entitled to indemnification hereunder will (i) give prompt
notice to the indemnifying party of any claim with respect to which it seeks
indemnification and (ii) unless in such indemnified party's reasonable judgment
a conflict of interest between such indemnified and idemnifying parties may
exist with respect to such claim, permit such indemnifying party to assume the
defense of such claim with counsel reasonably satisfactory to the indemnified
party. If the indemnifying party is not permitted to assume such defense, the
indemnifying party will not be subject to any liability for any settlement made
without its consent (but such consent will not be unreasonably withheld). An
indemnifying party who is not entitled, or elects not, to assume the defense of
a claim will not be obligated to pay the fees and expenses of more than one
counsel for all parties indemnified by such indemnifying party with respect to
such claim, unless in the reasonable judgment of any indemnified party a
conflict of interest may exist between such in indemnified party and any other
of such indemnified parties with respect to such claim.
5. Participation in Underwritten Registrations.
No Stockholder may participate in any underwritten registration hereunder
unless such holder (a) agrees to sell such holder's securities on the basis
provided in any underwriting arrangements and (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such underwriting agreements.
6. As to any particular Registrable Securities, such securities will cease
to be Registrable Securities (i) when they have been effectively registered
under the 1933 Act and disposed of in accordance with the registration statement
covering them, or (ii) on the later of the second anniversary of the date of
this Agreement or the date when they become eligible for sale pursuant to Rule
144 under the 1933 Act (or any similar provision then in force).
<PAGE>
7. Definitions.
a. The term "Registration Expenses" means all expenses incident to the
Company's performance of or compliance with this Agreement, including all
registration and filing fees, fees and expenses of compliance with securities or
blue sky laws, printing expenses, messenger and delivery expenses, expenses and
fees for listing the securities to be registered on exchanges or automated
trading markets on which similar securities issued by the Company are then
listed, and fees and disbursements of counsel for the Company and of all
independent certified public accountants, underwriters (other than Underwriting
Commissions) and other persons retained by the Company.
b. The term "Selling Stockholders" means registered holders of Registrable
Securities who request inclusion of all or a portion of their shares of
Registrable Securities in a Piggyback Registration pursuant to Section 1(a).
c. The term "Stockholder" means a registered holder of Registrable
Securities.
d. The term "Underwriting Commissions" means all underwriting discounts or
commissions relating to the sale of the Registrable Securities, but excludes any
expenses reimbursed to underwriters.
8. Limitations on Subsequent Registration Rights.
From and after the date of this Agreement, the Company may enter into an
agreement with any holder or prospective holder of any securities of the Company
that would allow such holder or prospective holder to include such securities
for sale pursuant to any Registration Statement filed by the Company under the
1933 Act or that would add any such holder or prospective holder as a party to
this Agreement.
9. Miscellaneous.
c. Notices. Any notices required hereunder shall be deemed to be given
upon the earlier of the date when received at, or the seventh day after the
date when sent by certified or registered mail to, the address of the Company's
corporate headquarters in the case of any notice to the Company, and until
changed by notice to the Company, the address of the Stockholder on file with
the Company in the case of any notice to the Stockholder.
d. Amendments and Waivers. The provisions of this Agreement may be amended
or terminate and the Company may take any action herein prohibited, or omit to
perform any act herein required to be performed by it, if approved in writing by
the Stockholders that hold a majority of the Registrable Securities.
e. Assignment; Binding Effect. This Agreement may be amended, assigned,
modified or supplemented only by a written instrument duly executed by each of
the parties hereto. This
<PAGE>
Agreement will bind and inure to the benefit of the respective successors
(including any successor resulting from a merger or similar reorganization),
permitted assigns, heirs, and personal representatives of the parties hereto.
f. Prior Agreements. This Agreement is the only agreement among the Company
and any of the Stockholders with respect to the subject matter hereof, and any
prior agreements between the Company and any of the Stockholders relating to the
subject matter of this Agreement are terminated as of the date hereof and shall
have no further force and effect.
g. Governing Law. All questions concerning the construction, validity and
interpretation of this Agreement will be governed by the internal law, but not
the law of conflicts, of the State of Delaware.
h. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be considered to be an original instrument and
to be effective as of the date first written above. Each such copy shall be
deemed an original, and it shall not be necessary in making proof of this
Agreement to produce or account for more than one such counterpart.
i. Interpretation. Unless the context of this Agreement clearly requires
otherwise, (i) references to the plural include the singular, the singular the
plural, the part the whole, (ii) references to one gender include all genders,
(iii) "or" has the inclusive meaning frequently identified with the phrase
"and/or" and (iv) "including" has the inclusive meaning frequently identified
with the phrase "but not limited to." The section and other headings contained
in this Agreement are for reference purposes only and shall not control or
affect the construction of this Agreement or the interpretation thereof in any
respect.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
The Med-Design Corporation
By:
--------------------------
Becton Dickinson and Company
By:
--------------------------
<PAGE>
State of Delaware
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
DESIGNATION OF "THE MED-DESIGN CORPORATION", FILED IN THIS OFFICE ON THE
FOURTEENTH DAY OF DECEMBER, A.D. 1998, AT 10 O'CLOCK A. M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY
RECORDER OF DEEDS.
[SEAL]
/s/ Edward J. Freel
Edward J. Freel, Secretary of State
2447427 8100 AUTHENTICATION: 9459689
981479670 DATE: 12-14-98
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK
OF
THE MED-DESIGN CORPORATION
----------
The Med-Design Corporation, a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), by its Secretary, does hereby
certify that, pursuant to authority conferred upon the Board of Directors by
Article 4 of the Amended and Restated Certificate of Incorporation of the
Company, which authorized the issuance of 5,000,000 shares of Preferred Stock of
the Company, $.01 par value per share ("Preferred Stock"), and pursuant to the
provisions of Section 151 of the Delaware General Corporation Law, as amended,
the Board of Directors of the Company, by unanimous consent in writing dated
December 11, 1998, has duly adopted resolutions providing for the issuance out
of such Preferred Stock of up to 300,000 shares of Series A Convertible
Preferred Stock, and setting forth in full the voting powers, designations,
preferences and relative, participating, optional and other special rights and
the qualifications, limitations and restrictions thereof, in their entirety, as
follows:
RESOLVED, that the Company is authorized to issue, out of the 5,000,000
shares of Preferred Stock of the Company authorized in Article 4 of its
Certificate of Incorporation, a class of Preferred Stock of the Company to be
designated as "Series A Convertible Preferred Stock," $.01 par value per share,
with the following voting powers, designations, preferences and relative,
participating, optional and other special rights and qualifications, limitations
and restrictions thereof:
The Preferred Stock of the Company authorized by this resolution shall be
designated and known as the "Series A Convertible Preferred Stock." The number
of shares of the Series A Convertible Preferred Stock authorized hereby shall be
500,000 shares.
1. Definitions. As used herein, the following terms shall have the
following definitions:
(a) "Conversion Price" shall have the meaning set forth in Section
4(a)(i) hereof.
(b) "Conversion Rights" shall have the meaning set forth in Section 4
hereof.
(c) "Original Series A Issue Price" means $5.00 per share of Series A
Preferred Stock (appropriately adjusted for stock splits, reverse stock splits
and similar type transactions or occurrences with respect to the Series A
Preferred Stock).
<PAGE>
(d) "Purchase Agreement" means the Preferred Stock Purchase Agreement
dated the Series A Issuance Date, by and between the Corporation and Becton,
Dickinson and Company (as defined therein).
(e) "Series A Conversion Price" shall have the meaning set forth in
Section 4(a)(i) hereof.
(f) "Series A Issuance Date" means the date on which the first share of
Series A Preferred Stock is issued.
(g) "Series A Liquidation Preference" means, as to each share of Series
A Preferred Stock, the Original Series A Issue Price, plus all accrued,
accumulated or declared but unpaid dividends thereon, if any, as adjusted for
stock splits, reverse stock splits and similar type transactions or occurrences
with respect to the Series A Preferred Stock.
(h) "Series A Preferred Stock" means the Corporation's Series A
Convertible Preferred Stock, $.01 par value per share.
2 Dividend Provisions.
(a) General. The holder of each share of Series A Preferred Stock shall
be entitled to receive, before any dividend shall be declared and paid upon or
set aside for any shares of Common Stock in any year, out of funds legally
available for that purpose, dividends at such rates and upon such terms and
conditions as hereinafter set forth.
(b) Series A Preferred Stock.
From and after the Series A Issuance Date, the holder of each share of
Series A Preferred Stock shall be entitled to receive dividends accruing from
and after the series A Issuance Date at the rate of $.40 per share per year (a
dividend of 5%) (appropriately adjusted for stock splits, reverse stock splits
and similar type transactions or occurrences with respect to the Series A
Preferred Stock). Dividends shall be paid semi-annually, with the first dividend
payment to be made 180 days after the Issuance Date. At the option of the
Company, dividends may be paid in Shares of Series A Preferred Stock based upon
the Original Series A Issuance Price hereunder.
(c) Common Stock. The holders of shares of Series A Preferred Stock
shall participate with holders of shares of Common Stock on a pro rata basis,
based on the number of shares of Common Stock held by each (assuming conversion
of all such shares of Series A Preferred Stock into Common Stock on the terms
set forth herein), in the receipt of dividends when, as and if declared by the
Board of Directors (other than a dividend payable in Common Stock or other
securities or rights convertible into or entitling the holder thereof to
receive,
-2-
<PAGE>
directly or indirectly, additional shares of Common Stock), which dividends
shall be in addition to and not in lieu of the dividends on shares of Series A
Preferred Stock set forth in Section 2(b).
3. Liquidation Preference.
(a) Priority. In the event of any liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, the assets of the
Corporation legally available for distribution to its stockholders shall be
distributed in the following order of priority:
(i) The holders of shares of Series A Preferred Stock shall be
entitled to receive, prior and in preference to any distribution in such
liquidation, dissolution or winding up of any of the assets of the Corporation
to the holders of shares of Common Stock or holders of other series of Preferred
Stock by reason of their ownership their ownership thereof, an amount per share
equal to the greater of (A) the Series A Liquidation Preference, or (B) the
amount per share that each holder of shares of Common Stock would be entitled to
receive (assuming the conversion of all of the shares of Series A Preferred
Stock into Common Stock on the terms set forth herein). If upon the occurrence
of any such distribution, the assets of the Corporation thus distributed among
the holders of shares of Series A Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential amounts,
then the entire assets of the Corporation legally available for distribution
shall be distributed on a pro rata basis among the holders of shares of Series A
Preferred Stock (in proportion to the number of shares of Series A Preferred
Stock held by each such holder).
(ii) After the distributions described in Section 3(a)(i) hereof
have been made, the remaining assets of the Corporation, to the extent
available, shall be distributed among the holders of shares of Common Stock pro
rata based on the number of shares of Common Stock held by each.
(b) Consolidation, Merger, Etc. A consolidation or merger of the
Corporation with or into any other corporation or corporations, or a sale,
conveyance or disposition of all or substantially all of the assets of the
Corporation or the effectuation by the Corporation of a transaction or series of
related transactions in which more than 50% of the voting power of the
Corporation is disposed of, shall each be deemed to be, at the option of the
holders of majority of the outstanding shares of Series A Preferred Stock (the
"Required Holders"), a liquidation, dissolution or winding up within the meaning
of this Section 3. Any such election shall be made within 30 days of the
Required Holders' receipt of notice of the same.
(c) Valuation. Liquidation proceeds shall be payable in cash, unless
otherwise elected by the Required Holders. Any securities to be delivered to the
stockholders pursuant to a liquidation shall be valued as follows:
(i) Securities not subject to restrictions on free marketability;
-3-
<PAGE>
(A) If traded on a securities exchange or a national
interdealer quotation system such as NASDAQ, the value shall be deemed to be the
average of the closing prices of the securities on such exchange over the 30-day
period ending three (3) days prior to the closing;
(B) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid prices over the 30-day period ending
three (3) days prior to the closing; and
(C) If there is no active public market, the value shall be
the fair market value thereof, as determined jointly by the Board of Directors
and the Required Holders.
(ii) The method of valuation of securities subject to investment
letter or other restrictions on free marketability shall be to make an
appropriate discount from the market value determined above in Section
3(c)(i)(A), (B) or (C) hereof to reflect the approximate fair market value
thereof, as determined jointly by the Board of Directors and the Required
Holders.
4. Conversion. The holders of shares of Series A Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Subject to the terms and conditions of this
Section 4(a), at any time after the Series A Issuance Date, the Series A
Preferred Stock and accrued but unpaid dividends shall be convertible at the
option of the holder at a conversion price of $5.00 per share. (The "Series A
Conversion Price"). Such rights of conversion shall be exercised by the holder
thereof by giving written notice that the holder elects to convert a stated
number of shares of Series A Preferred Stock into Common Stock and by surrender
of a certificate or certificates for the shares so to be converted to the
Corporation at its principal office (or such other office or agency of the
Corporation as the Corporation may designate by notice in writing to the holders
of the Series A Convertible Preferred Stock) at any time during its usual
business hours on the date set forth in such notice, together with a statement
of the name or names (with address) in which the certificate or certificates for
shares of Common Stock shall be issued.
(b) Mandatory Conversion. At the option of the Company (the "Company
Conversion Option"), exercised at any time after 270 days from the Series A
Issuance Date, the Series A Preferred Stock shall automatically be converted
into Common Stock upon written notice to the holder(s) of such Company's
exercise of the option to convert (the "Company's Conversion Notice" ). The
number of shares of Common Stock, issuable upon the exercise of the Company
Conversion Option shall be based upon a Conversion Price which is equal to 130%
of the average Closing Price of the Common Stock for the twenty consecutive
trading days immediately preceding the date on which the Company Conversion
Notice is given by the
-4-
<PAGE>
Company; provided, however, that said Conversion Price shall not be less than
$3.25 nor greater than $5.00 per share.
(c) Mechanics of Conversion. Before any holder of shares of Series A
Preferred Stock shall be entitled to convert any of such shares into shares of
Common Stock, such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for the office of the Corporation or of any transfer agent for the Series
A Preferred Stock, and shall give written notice by mail, postage prepaid, or
hand delivery, to the Corporation at its principal corporate office, of the
election to convert the same and shall state therein the name or names in which
the certificate or certificates for shares of Common Stock are to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holders of shares of Series A Preferred Stock, or the nominee or
nominees of such holders, a certificate or certificates for the number of shares
of Common Stock to which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Series A Preferred Stock
to be converted, and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock as of such date. If
the conversion is in connection with an underwritten offering of securities
registered pursuant to the Securities Act of 1933, as amended, the conversion
may, at the option of any holder tendering the Series A Preferred Stock for
conversion, be conditioned upon the closing with the underwriter of the sale of
securities pursuant to such offering, in which event the person(s) entitled to
receive Common Stock issuable upon such conversion of the Series A Preferred
Stock shall not be deemed to have converted such Series A Preferred Stock until
immediately prior to the closing of such sale of securities.
(d) Conversion Price Adjustments of Series A Preferred Stock. The
Series A Conversion Price shall be subject to adjustment from time to time as
follows:
(i) In the event the Corporation at any time or from time to time
after the Series A Issuance Date fixes a record date for the effectuation of a
split or subdivision of the outstanding shares of Common Stock or the
determination of holders of shares of Common Stock entitled to receive a
dividend or other distribution payable in additional shares of Common Stock or
other securities or rights convertible into or exercisable for, or entitling the
holder thereof to receive directly or indirectly, additional shares of Common
Stock (hereinafter referred to as "Common Stock Equivalents") without payment of
any consideration by such holder for the additional shares of Common Stock
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend,
distribution, split or subdivision if no record date is fixed), the Series A
Conversion Price shall be appropriately decreased so that the number of shares
of Common Stock issuable on conversion of each share of Series A Preferred Stock
shall be increased in proportion to such increase in the aggregate number of
shares of Common Stock outstanding on a fully diluted basis.
-5-
<PAGE>
(ii) If the number of shares of Common Stock outstanding at any
time after the Series A Issuance Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the Series A Conversion Price shall be appropriately increased so
that the number of shares of Common Stock issuable on conversion of each share
of Series A Preferred Stock shall be decreased in proportion to such decrease in
the aggregate number of outstanding shares of Common Stock.
(e) Other Distributions. In the event the Corporation shall declare a
distribution payable in securities of other persons, evidences of indebtedness
issued by the Corporation or other persons, assets (excluding cash dividends),
securities of the Corporation other than Common Stock or options or rights not
referred to in Section 4(c) hereof, then, in each such case for the purpose of
this Section 4(d), the holders of shares of Series A Preferred Stock shall be
entitled to proportionate share of any such distribution as though they were
holders of the number of shares of Common Stock into which their shares of
Series A Preferred Stock are convertible as of the record date fixed for the
determination of the holders of shares of Common Stock entitled to receive such
distribution.
(f) Recapitalization. If at any time or from time to time there shall
be a recapitalization of Common Stock or a consolidation, merger, or other
business combination of the Corporation with or into any other corporation
(other than, with respect to any holder of Series A Preferred Stock, a split
subdivision or combination of the outstanding Common Stock or a consolidation,
merger or sale of assets or stock transaction provided for in Section 3 hereof,
which the Required Holders have elected to treat as a liquidation, dissolution
or winding up of the Corporation), provision shall be made so that each holder
of shares of Series A Preferred Stock shall thereafter be entitled to receive,
upon conversion of the Series A Preferred Stock, the number of shares of stock
or other securities or property of the Corporation or otherwise receivable upon
such recapitalization or business combination by a holder of the number of
shares of Common Stock into which such shares of Series A Preferred Stock could
have been converted immediately prior to such recapitalization or business
combination. In any such case, appropriate adjustment shall be made in the
application of this Section 4 with respect to the rights of the holders of
shares of Series A Preferred Stock after the recapitalization to the end that
the provisions of this Section 4 (including adjustments of the Series A
Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series A Preferred Stock) shall be applicable after that event
as nearly equivalent as may be practicable.
(g) No Impairment. The Corporation will not, by amendment of is
Certificate of Incorporation or through any reorganization, recapitalization or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms to be observed or performed hereunder by the Corporation,
but will at all times in good faith assist in carrying out of all the provisions
of this Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of shares
of Series A Preferred Stock against impairment.
-6-
<PAGE>
(h) No Fractional Shares. No fractional shares shall be issued upon
conversion of the Series A Preferred Stock, and the number of shares of Common
Stock to be issued shall be rounded down to the nearest whole share, and there
shall be no payment to a holder of shares of Series A Preferred Stock for any
such rounded fractional share. Whether or not fractional shares result from such
conversion shall be determined on the basis of the total number of shares of
Series A Preferred Stock the holder is at the time converting into Common Stock
and the number of shares of Common Stock issuable upon such aggregate
conversion.
(i) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Series A Conversion Price pursuant to this
Section 4, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of shares of Series A Preferred Stock a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Corporation shall, upon
the written request at any time or any holder of shares of Series A Preferred
Stock, furnish or cause to be furnished to such holder a like certificate
setting forth (i) such adjustment and readjustment, (ii) the Series A Conversion
Price, as applicable, at the time in effect, and (iii) the number of shares of
Common Stock and the amount, if any, of other property which at the time would
be received upon the conversion of a share of Series A Preferred Stock, as
applicable.
(j) Notices of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
shall mail to each holder of shares of Series A Preferred Stock, at least twenty
(20) days prior to the date specified therein, a notice specifying the date on
which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
(k) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of Series A Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of Series A Preferred Stock, and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Series A Preferred Stock, then
in addition to such other remedies as shall be available to the holder of such
shares of Series A Preferred Stock, the Corporation will take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number as shall be
sufficient for such purposes.
-7-
<PAGE>
(l) Notices. Any notice required by the provisions of this Section 4 to
be given to the holders of shares of Series A Preferred Stock shall be deemed
given when received if delivered via courier or sent by facsimile, by telex, or
by United States mail, postage prepaid, and addressed to each holder of record
at his, her or its address appearing on the books of the Corporation.
5. Status of Converted Stock. In the event any shares of shares of Series A
Preferred Stock are converted pursuant to Section 4 hereof, the shares so
converted shall be canceled, retired and eliminated and shall not be reissued by
the Corporation. The Certificate of Incorporation of the Corporation shall be
appropriately amended to effect the corresponding reduction in the Corporation's
authorized capital stock.
6. Voting Rights.
Each holder of a share of Series A Preferred Stock shall have the right
to one vote for each share of such Series A Preferred Stock. The holders of
shares of Series A Preferred Stock shall have full voting rights and powers
equal to the voting rights and powers of the holders of shares of Common Stock,
and shall be entitled to notice of any stockholder's meeting in accordance with
the Bylaws of the Corporation and applicable law and shall vote, together with
the holders of shares of Common Stock (and any other class or series or stock
entitled to vote together as one class with the Common Stock), with respect to
any question upon which holders of shares of Common Stock have the right to
vote, as a single class, including, but not limited to, actions amending the
Certificate of Incorporation of the Corporation to increase the number of
authorized shares of Common Stock. In addition, the holders of Series A
Preferred Stock shall have the right as a class to elect, by majority vote of
the class, one member of the Board of Directors of the Corporation.
IN WITNESS WHEREOF, we have signed this certificate and affirm the truth of
the statements contained therein under penalty of perjury this 11th day of
December, 1998.
THE MED-DESIGN CORPORATION
By: /s/ James M. Donegan
--------------------------
Name: James M. Donegan
Title: President
-8-
<PAGE>
SERIES A
PREFERRED STOCK PURCHASE AGREEMENT
THE MED-DESIGN CORPORATION
2810 Bunsen Ave.
Ventura, California 98003
As of December 11, 1998
Becton, Dickinson and Company
1 Becton Drive
Franklin Lakes, NJ 07417
Re: Series A Preferred Stock
Gentlemen:
The Med-Design Corporation (the "Company"), a Delaware corporation, agrees with
you as follows:
ARTICLE I
PURCHASE, SALE AND TERMS OF SHARES
1.01 The Preferred Shares. The Company has authorized the issuance, sale
and exchange of 300,000 shares (the "Series A Shares") of its authorized but
unissued shares of Series A Preferred Stock, $.01 par value (the "Series A
Preferred Stock), at a purchase price of $5.00 per share to Becton, Dickinson
and Company (the "Series A Purchaser"'). The Series A Preferred Stock is
sometimes hereinafter referred to as the "Preferred Stock"; the Series A Shares
are sometimes hereinafter referred to as the "Preferred Shares"; and the Series
A Purchaser is sometimes hereinafter referred to as the "Purchaser". The
designation, rights, preferences and other terms and provisions of the Preferred
Stock are set forth in Exhibit 2.02(a) hereto.
1.02 The Conversion Shares. The Company has authorized and has reserved and
covenants to continue to reserve, free of preemptive rights and other similar
contractual rights of shareholders, a sufficient number of its authorized but
unissued shares of Common Stock to satisfy the rights of conversion of the
holders of the Preferred Shares. Any shares of Common Stock issuable upon
conversion of the Preferred Shares (and such shares when issued) are herein
referred to as the "Conversion Shares". The Preferred Shares and Conversion
Shares are sometimes collectively referred to as the "Shares".
<PAGE>
1.03 Purchase Price and Closing. The Company agrees to issue, sell and
exchange to the Purchaser and, in consideration of and in express reliance upon
the representations, warranties, covenants, terms and conditions of this
Agreement, the Purchaser agrees to purchase, 300,000 of the Preferred Shares.
The aggregate purchase price of the Preferred Shares being acquired by Purchaser
is $1,500,000. The closing of the purchase, sale and exchange of the Preferred
Shares to be acquired by the Purchaser and delivery of the purchase price of the
Preferred Shares being acquired by Purchaser from the Company under this
Agreement shall take place at the offices of the Purchaser, on December 12,
1998, or at such time and date thereafter as the Purchaser and the Company may
agree (the "Closing"). At the closing, the Company will deliver to the Purchaser
certificates for the Preferred Shares registered in the Purchaser's name,
against delivery of a check or checks payable to the order of the Company, or a
transfer of funds to the account of the Company by wire transfer, representing
the net cash consideration.
1.04 Representations by the Purchaser.
(a) Investment Representations. Purchaser represents that it is acquiring
the Preferred Shares for its own account (and it will be the sole beneficial
owner thereof) and that the Shares are being and will be acquired by it for the
purpose of investment and not with a view to distribution or resale thereof
except pursuant to registration under the Securities Act or an exemption
therefrom. The acquisition by Purchaser of the Preferred Shares acquired by it
shall constitute a confirmation of this representation by Purchaser. Purchaser
further represents that it understands and agrees that, until registered under
the Securities Act or transferred pursuant to the provisions of Rule 144 or Rule
144A as promulgated by the Securities Exchange Commission, all certificates
evidencing any of the Shares, whether upon initial issuance or upon any transfer
thereof, shall bear a legend, prominently stamped or printed thereon, reading
substantially as follows:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 (the "Act") or
applicable state securities laws. These securities have been
acquired for investment and not with a view to distribution or
resale. These securities may not be offered for sale, sold,
delivered after sale, transferred, pledged or hypothecated in the
absence of an effective registration statement covering such
shares under the Act and any applicable state securities laws, or
the availability, in the opinion of counsel, of an exemption from
registration thereunder."
(b) Access to Information. Purchaser or its representative during the
course of this transaction, and prior to the purchase of any Preferred Shares,
has had the opportunity to ask questions of and receive answers from management
of the Company concerning the terms and conditions of the offering of the
Preferred Shares and the additional information, documents, records and books
relative to its business, assets, financial condition, results of operations and
liabilities (contingent or otherwise) of the Company.
2
<PAGE>
(c) General Access. Purchaser or its representative has received and read
or reviewed, and is familiar with, this Agreement and the other agreements
executed or delivered herewith, including the terms of the Preferred Stock, and
confirms that all documents, records, and books pertaining to Purchaser's
investment in the Company and requested by Purchaser or its representative have
been made available or delivered to it.
(d) Sophistication and Knowledge. Purchaser or its representative has such
knowledge and experience in financial and business matters that it is capable of
evaluating the merits and risks of the purchase of the Preferred Shares.
Purchaser can bear the economic risks of this investment and can afford a
complete loss of its investment.
(e) Transfer Restrictions Imposed by Securities Laws. Purchaser understands
that: the Shares have not been registered under the Securities Act of 1933 (the
"Securities Act") and applicable state securities laws, and therefore, cannot be
resold unless they are subsequently registered under the Securities Act and
applicable state securities laws or unless an exemption from such registration
is available; Purchaser is and must be purchasing the Preferred Shares for
investment for the account of Purchaser and not for the account or benefit of
others, and not with any present view toward resale or other distribution
thereof. Purchaser agrees not to resell or otherwise dispose of all or any part
of the Shares purchased by it, except as permitted by law, including, without
limitation, any regulations under the Securities Act and applicable state
securities laws; the Company does not have any present intention and is under no
obligation to register the Shares under the Securities Act and applicable state
securities laws, except as provided in the Registration Rights Agreement between
the Company and you; and Rule 144 or Rule 144A under the Securities Act may not
be available as a basis for exemption from registration of the Shares
thereunder.
(f) Lack of Liquidity. Purchaser has no present need for liquidity in
connection with its purchase of the Preferred Shares.
(g) Suitability and Investment Objectives. The purchase of the Preferred
Shares by Purchaser is consistent with the general investment objectives of the
Purchaser. The Purchaser understands that the purchase of the Preferred Shares
involves a high degree of risk in view of the fact that, among other things, the
Company is a start-up enterprise, and there may be no established market for
the Company's capital stock.
(h) Accredited Investor Status. Purchaser is an "Accredited Investor" as
that term is defined in Rule 501 of Regulation D promulgated under the
Securities Act.
1.05 Brokers of Finders. Purchaser represents that no Person has or will
have, as a result of the transactions contemplated by this Agreement, any right,
interest or valid claim against or upon the Company for any commission, fee or
other compensation as a finder or broker because of any act or omission by
Purchaser or its respective agents.
3
<PAGE>
ARTICLE II
CONDITIONS TO PURCHASER'S OBLIGATIONS
The obligation of Purchaser to purchase and pay for the Preferred Shares to
be purchased by it at the Closing is subject to the following conditions (all of
which shall be deemed satisfied or waived by the Purchaser at or prior to the
Closing in the event all of the transactions contemplated to be effected at the
Closing are consummated):
2.01 Representations and Warranties. Each of the representations and
warranties of the Company set forth in Article III hereof shall be true,
accurate and correct on the date of the Closing.
2.02 Documentation at Closing. The Purchaser shall have received prior to
or at the Closing all of the following materials, each in form and substance
satisfactory to the Purchaser and its special counsel, and each of the following
events shall have occurred, and each of the following documents shall have been
delivered, prior to or simultaneous with the Closing:
(a) A copy of the Certificate of Designations and Preferences in the
form attached as Exhibit 2.02(a), together with evidence of the filing thereof
with the Delaware Secretary of State; a certified copy of the resolutions of the
Board of Directors and Stockholders of the Company providing for the approval of
(i) the Amendment to the Articles of Incorporation of the Company in the form
attached as Exhibit 2.02(a), and (ii) the approval of this Agreement, the
issuance of the Preferred Shares and the Conversion Shares and all other
agreements or matters contemplated hereby or executed in connection herewith; a
copy of the Certificate of Designations and Preferences certified by the
Secretary of the Company to be true, complete and correct in every particular,
and certified copies of all documents evidencing other necessary corporate or
other action and governmental approvals, if any, required to be obtained at or
prior to the Closing with respect to this Agreement and the issuance of the
Preferred Shares; and a stock certificate issued in the name of the Purchaser
evidencing the Preferred Shares.
(b) A certificate of the Secretary or an Assistant Secretary of the
Company which shall certify the names of the officers of the Company authorized
to sign this Agreement, the certificates for the Preferred Shares and the other
documents, instruments or certificates to be delivered pursuant to this
Agreement by the Company or any of its officers, together with the true
signatures of such officers.
(c) A certificate of the President and the Treasurer of the Company
stating that the representations and warranties of the Company contained in
Article III hereof and otherwise made by the Company in writing in connection
with the transactions contemplated hereby are true, accurate and correct as of
the date of the Closing and that all covenants and agreements of the Company
contained herein and required to be performed prior to or at the Closing have
been performed as of the Closing.
4
<PAGE>
(d) The Company shall have obtained any consents or waivers necessary
to be obtained at or prior to the Closing to execute and deliver this Agreement,
the Preferred Shares and the other agreements and instruments executed and
delivered by the Company in connection herewith and to carry out the
transactions contemplated hereby and thereby, and such consents and waivers
shall be in full force and effect at the Closing. All corporate and other action
and governmental filings necessary to effectuate the terms of the Agreement, the
Preferred Shares and the other agreements and instruments executed and delivered
by the Company in connection herewith shall have been made or taken.
(e) The Certificate of Designations representing the Preferred Stock
shall have been filed in the form set forth in Exhibit 2.02(a) attached hereto.
(f) The Company and Purchaser shall have executed a License Agreement
(the "License Agreement") of even date herewith in form satisfactory to
Purchaser.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants as of the Closing as follows:
3.01 Organization and Standing of the Company. The Company is a duly
organized and validly existing corporation and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority for
the ownership and operation of its properties and for the carrying on of its
business as now conducted and as now proposed to be conducted and to execute
this Agreement and the other Agreements and documents to be executed and
delivered by the Company in connection herewith, including without limitation,
the License Agreement, and to issue and deliver the Preferred Shares and to
issue and deliver the Conversion Shares and to perform its other obligations
pursuant hereto and thereto. The Company is duly licensed or qualified and in
good standing as a foreign corporation authorized to do business in all
jurisdictions wherein the character of the property owned or leased or the
nature of the activities conducted by it makes such licensing or qualification
necessary, except where the failure to be so licensed or qualified would not
have a material adverse effect on the business, operations or financial
condition of the Company.
3.02 Corporate Action. This Agreement and the other agreements executed and
delivered in connection herewith have been duly authorized, executed and
delivered by the Company and constitute the legal, valid and binding obligations
of the Company, enforceable against the Company in accordance with their
respective terms. The execution and delivery of this Agreement and the other
agreements to be executed and delivered in connection herewith and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all required corporation action; the Preferred Shares have been
validly issued, are fully paid and nonassessable with no personal liability
attaching to the ownership thereof and are free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through
5
<PAGE>
the Company except as set forth in this Agreement and the Conversion Shares
have, as of the Closing, been duly reserved for issuance upon conversion of the
Preferred Shares and, when so issued, will be duly authorized, validly issued,
fully paid and nonassessable with no personal liability attaching to the
ownership thereof and will be free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through the Company except
as set forth in this Agreement
3.03 Approvals. Except as set forth on Exhibit 3.03 and except for the
filing of any notice prior or subsequent to the Closing that may be required
under applicable state and/or Federal securities laws (which, if required, shall
be filed on a timely basis), no authorization, consent, approval, license,
exemption of or filing or registration with any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, or any third party, is or will be necessary for, or in connection with,
the execution and delivery by the Company of this Agreement for the offer,
issue, sale, execution or delivery of the Shares, or for the performance by the
Company of its obligations under this Agreement or any agreement executed and
delivered by the Company in connection herewith.
3.04 Securities Act Filings. The Company has made available to Purchaser
all filings of the Company under the Securities Exchange Act of 1934 (the
"Filings"). The Company represents that filings do not contain any
misrepresentations of material fact or omit to state any material fact the
inclusion of which is necessary to make the statements therein not misleading.
The Company shall timely file all reports and statements required to be filed
under the Securities Exchange Act of 1934.
ARTICLE IV
MISCELLANEOUS
4.00 Right to Elect Director. The Company agrees to use its best efforts to
cause a designee of Series A Purchaser to be elected to the Board of Directors
of the Company after conversion of the Preferred Shares to Common Stock, at
which time the class vote of the Preferred Shares under the Certificate of
Incorporation would otherwise terminate.
4.01 Costs, Expenses and Taxes. Each party shall pay its own costs and
expenses in connection with the preparation, execution and delivery of this
Agreement and the issuance of the Preferred Shares at the Closing. The Company
shall pay the reasonable fees and out-of-pocket expenses of legal counsel,
independent public accountants, consultants and other outside experts retained
by the Purchaser in connection with any amendment or waiver to this Agreement
(initiated by the Company) or the successful enforcement of this Agreement by
the Purchaser. In addition, the Company shall pay any and all stamp, or other
similar taxes payable or determined to be payable in connection with the
execution and delivery of this Agreement, the issuance of the Shares and the
other instruments and documents to be delivered hereunder or thereunder, and
agrees to save the Purchaser harmless from and against any and all liabilities
with respect to or resulting from any delay in the paying or omission to pay
such taxes.
6
<PAGE>
4.02 Binding Effect; Assignment. This Agreement shall be binding upon and
inure to the benefit of the Company and the Purchaser and their respective
heirs, successors and assigns, except that the Company shall not have the right
to delegate its obligations hereunder or to assign its rights hereunder or any
interest herein without the prior written consent of the Purchaser.
4.03 Survival of Representations and Warranties. All representations and
warranties made in this Agreement, the Shares, or any other instrument or
document delivered in connection herewith or therewith, shall survive the
execution and delivery hereof or thereof.
4.04 Prior Agreements. This Agreement, the terms of the Preferred Stock,
and the other agreements executed and delivered herewith constitute the entire
agreement between the parties and supersedes any prior misunderstandings or
agreements concerning the subject matter hereof.
4.05 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Delaware, and without giving
effect to choice of law provisions.
4.06 Headings. Article, section and subsection headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
4.07 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
4.08 Further Assurances. From and after the date of this Agreement, upon
the request of the Purchaser or the Company, the Company and the Purchaser shall
execute and deliver such instruments, documents and other writings as may be
reasonably necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement and the Shares.
IN WITNESS WHEREOF, the parties hereto have caused this Series B Preferred
Stock Purchaser Agreement to be executed as of the date first above written.
THE MED-DESIGN CORPORATION
By: /s/ James M. Donegan
--------------------------
James M. Donegan
Title: President
BECTON, DICKINSON AND COMPANY
-7-
THE MED-DESIGN CORPORATION
REGISTRATION RIGHTS AGREEMENT
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is entered into as of
the Closing Date (as defined herein) by and among The Med-Design Corporation, a
Delaware corporation, and the persons whose signatures appear on the execution
pages of this Agreement.
This Agreement is made pursuant to the Debenture Purchase Agreement between
the Company and each of the Purchasers listed (the "Purchase Agreements"). In
order to induce the Purchasers to enter into the Purchase Agreement, the Company
has agreed to provide the registration rights set forth in this Agreement. The
execution of this Agreement by the Company is a condition to the closing under
the Purchase Agreement.
The parties hereby agree as follows:
1. Definitions
Capitalized terms used herein without definition shall have their
respective meanings set forth in the Purchase Agreement. As used in this
Agreement, the following terms shall have the following meanings:
Closing Date: The date assigned thereto in the Purchase Agreement.
Common Stock: The common stock, $0.01 par value per share, of the Company.
Company: The Med-Design Corporation, a Delaware corporation.
Conversion Shares: Shares obtained through the Subordinated Debenture.
Exchange Act: The Securities Exchange Act of 1934, as amended, and the
rules and regulations of the SEC promulgated thereunder.
Losses: See Section 6 hereof.
Placement Agent: Pennsylvania Merchant Group
Prospectus: The prospectus included in any Registration Statement
(including, without limitation, a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Securities Act Rule 430A), as amended or supplemented
by any prospectus supplement, with respect to the terms of the offering of any
portion of the Registrable Securities covered by such Registration Statement and
all other amendments and supplements to the prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such prospectus.
Purchase Agreement: The Debenture Purchase Agreement by and among the
Company and the Purchasers thereunder pursuant to which the Debentures were
issued.
Purchasers: The purchasers listed on the signature pages to the Debenture
Purchase Agreement.
1
<PAGE>
Registration Expenses: All reasonable expenses incurred by the Company in
complying with Section 3 hereof, including all registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company, and blue
sky fees and expenses in all states listed in Schedule I attached hereto.
Registrable Securities: The Conversion Shares upon original issuance
thereof, and at all times subsequent thereto, until, in the case of any such
security it is no longer required to bear the legend set forth on such security
pursuant to the terms of the Debenture, the Purchase Agreement and applicable
laws which are Restricted Securities, and any Common Stock issued or issuable in
respect of the Conversion Shares, pursuant to any stock split, stock dividend,
recapitalization, or similar event.
Registration Statement: Any registration statement of the Company which
covers any of the Registrable Securities pursuant to the provisions of this
Agreement, including the Prospectus, amendments and supplements to such
registration statement, including post-effective amendments, all exhibits, and
all material incorporated by reference or deemed to be incorporated reference in
such registration statement.
Restricted Securities: The Debentures and the Conversion Shares upon
original issuance thereof, and at all times subsequent thereto, until, in the
case of any such security, it is no longer required to bear the legend set forth
on such security pursuant to the terms of the security, the Purchase Agreement
and applicable law.
Rule 144: Rule 144 under the Securities Act, as such Rule may be amended
from time to time, or any similar rule or regulation hereafter adopted by the
SEC (excluding Rule 144A).
SEC: The Securities and Exchange Commission.
Securities Act: The Securities Act of 1933, as amended, and the rules and
regulations promulgated by the SEC thereunder.
Shelf Registration: See Section 3(a) hereof.
Underwritten registration or underwritten offering: A registration in which
securities of the Company are sold to an underwriter for re-offering to the
public.
2. Securities Subject to this Agreement
The securities entitled to the benefits of this Agreement are the
Registrable Securities.
3. Shelf Registration
(a) Shelf Registration. The Company shall, not later than six months after
the Closing Date, prepare and file with the SEC a Registration Statement for an
offering to be made on a continuous basis pursuant to Rule 415 (or any
appropriate similar rule that may be adopted by the SEC) under the Securities
Act covering the Registrable Securities (the "Shelf Registration"). The Shelf
Registration shall be on a Form S-3 or another appropriate form (unless the
holders of the Registrable Securities offered thereby reasonably request a
specific form) permitting registration of such Registrable Securities for resale
by such holders in the manner or manners reasonably designated by them
(including, without limitation, one or more underwritten offerings).
(b) Effectiveness. The Company shall use reasonable efforts to cause the
Shelf Registration to become effective under the Securities Act as soon as
practicable following the Closing Date. Subject to
2
<PAGE>
the requirements of the Securities Act including, without limitation,
requirements relating to updating prospectuses through post-effective amendments
or otherwise, the Company shall use reasonable efforts to keep the Shelf
Registration continuously effective until June 30, 2005 (the "Expiration
Date"); provided, that in the event of a Suspension Period, as set forth in
Section 5(d) hereof, the Company shall extend the period of effectiveness of
such Shelf Registration by the number of days of each such Suspension Period.
Priority on Shelf Registration. If any of the Registrable Securities to be
registered pursuant to Shelf Registration are to be sold in a firm commitment
underwritten offering, and if the managing underwriters advise the Company and
the holders of such Registrable Securities that in their opinion the amount of
Registrable Securities proposed to be sold in such offering exceeds the amount
of Registrable Securities which can be sold in such offering, there shall be
included in such firm commitment underwritten offering the amount of such
Registrable Securities requested to be included in such registration which in
the opinion of such underwriters can be sold, and such amount shall be allocated
pro rata among the holders of such Registrable Securities requested to be
included in such registration on the basis of the number shares of Common Stock
represented by Registrable Securities requested to be included therein by such
holders.
4. Holdback Agreements.
(a) Restrictions on Public Sale by Holders of Registrable Securities. Each
holder of Registrable Securities whose Registrable Securities are covered by a
Registration Statement filed pursuant to Section 3 hereof agrees, if requested
by the managing underwriters in an underwritten offering (to the extent timely
notified in writing by the Company or the managing underwriters), not to effect
any public sale or distribution of securities of the Company of any class
included in such Registration Statement, including a sale pursuant to Rule 144
(except as part of such underwritten offering), during the 10-day period prior
to, and the 90-day period beginning on, the effective date of any underwritten
offering made pursuant to such Registration Statement.
The foregoing provisions shall not apply to any holder of Registrable
Securities if such holder is prevented by applicable statute or regulation from
entering into any such agreement; provided, however, that any such holder shall
undertake in its request to participate in any such underwritten offering not to
effect any public sale or distribution of the class of Registrable Securities
covered by such Registration Statement (except as part of such underwritten
offering) during such period unless it has provided five (5) business days
prior written notice of such sale or distribution to the managing underwriter or
underwriters.
5. Expenses and Procedures.
(a) Expenses of Registration. All Registration Expenses (exclusive of
underwriting discounts and commissions) shall be borne by the Company. Each
holder shall bear all underwriting discounts, selling commissions, sales
concessions and similar expenses applicable to the sale of securities
attributable to the Registrable Securities sold by such holder.
(b) Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to Section 3, the
Company will keep the holders advised as to the initiation of registration,
qualification and compliance and as to the completion thereof. At its expense,
the Company will furnish such number of Prospectuses and other documents
incident thereto as the holders from time to time may reasonably request.
3
<PAGE>
(c) Information. The Company may require each seller of Registrable
Securities as to which any registration is being effected to furnish such
information regarding the distribution of such Registrable Securities as the
Company may from time to time reasonably request and the Company may exclude
from such registration the Registrable Securities of any seller who unreasonably
fails to furnish such information after receiving such request.
(d) Delay or Suspension. Notwithstanding anything herein to the contrary,
the Company may, at any time, delay the filing of the Shelf Registration for a
period of up to 60 days following the Filing Date or suspend the effectiveness
of any Registration Statement for a period of up to 90 days in the aggregate in
any calendar year, as appropriate (a "Suspension Period"), by giving notice to
each holder of Registrable Securities to be included in the Registration
Statement, if the Company shall have determined that the Company may be
required to disclose any material corporate development which disclosure may
have a material effect on the Company. Each holder of Registrable Securities
agrees by acquisition of such Registrable Securities that, upon receipt of any
notice from the Company of a Suspension Period, such holder shall forthwith
discontinue disposition of such Registrable Securities covered by such
Registration Statement or Prospectus until such holder (i) is advised in writing
by the Company that the use of the applicable Prospectus may be resumed, (ii)
has received copies of a supplemental or amended prospectus, if applicable, and
(iii) has received copies of any additional or supplemental filings which are
incorporated or deemed to be incorporated by reference in such Prospectus. The
Company shall prepare, file and furnish to each holder of Registrable Securities
immediately upon the expiration of any Suspension Period, appropriate
supplements or amendments, if applicable, to the Prospectus and appropriate
documents, if applicable, incorporated by reference in the Registration
Statement.
6. Indemnification
(a) Indemnification by Company. The Company shall, without limitation as to
time, indemnify and hold harmless, to the full extent permitted by law, each
holder of Registrable Securities, its officers, directors, agents and employees,
each person who controls such holder (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act), and the officers, directors,
agents or employees of any such controlling person, from and against all losses,
claims, damages, liabilities, costs (including, without limitation, all
reasonable attorneys' fees) and expenses (collectively, "Losses), as incurred,
arising out of or based upon any untrue statement or alleged untrue statement of
a material fact contained in any Registration Statement, Prospectus or
preliminary prospectus, or arising out of or based upon any omission or alleged
omission of a material fact required to be stated therein or necessary to make
the statements therein (in light of the circumstances under which they were made
in the case of any Prospectus) not Misleading, except insofar as the same are
based solely upon information furnished to the Company by such holder for use
therein; provided, however, that the Company shall not be liable in any such
case to the extent that any such Loss arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any preliminary prospectus or Prospectus if (i) such holder failed to send or
deliver a copy of the Prospectus or Prospectus supplement with or prior to the
delivery of written confirmation of the sale of Registrable Securities and (ii)
the Prospectus or Prospectus supplement would have corrected such untrue
statement or omission. If requested, the Company shall also indemnify
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in the distribution, their officers, directors,
agents and employees and each person who controls such persons (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
to the same extent as provided above with respect to the indemnification of the
holders of Registrable Securities.
(b) Indemnification by Holder of Registrable Securities. In connection with
any Registration Statement in which a holder of Registrable Securities is
participating, such holder of Registrable Securities shall furnish to the
Company in writing such information as the Company may reasonably request for
use
4
<PAGE>
in connection with any Registration Statement or Prospectus. Such holder hereby
agrees to indemnify and hold harmless, to the full extent permitted by law, the
Company, and its officers, directors, agents and employees, each person who
controls the Company (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) and the officers, directors, agents or employees
of any such controlling person, from and against all Losses arising out of or
based upon any untrue statement of a material fact contained in any Registration
Statement, Prospectus or preliminary prospectus, or arising out of or based upon
any omission of a material fact required to be stated therein or necessary to
make the statements therein (in light of the circumstances under which they were
made in the case of any Prospectus) not misleading, to the extent, but only to
the extent, that such untrue statement or omission is contained in any
information so furnished in writing by such holder to the Company for use in
such Registration Statement, Prospectus or preliminary prospectus. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Company or any holder and any of their respective
directors, officers, agents, employees or controlling persons (within the
meaning of Section 15 of the securities Act or Section 20 of the Exchange Act)
and shall survive the transfer of such securities by such holder. The Company
shall be entitled to receive indemnities from accountants, underwriters,
selling brokers, dealer managers and similar securities industry professionals
participating in the distribution to the same extent as provided above with
respect to information so furnished by such persons specifically for inclusion
in any Registration Statement, Prospectus or preliminary prospectus, provided,
that the failure of the Company to obtain any such indemnity shall not relieve
the Company of any of its obligations hereunder.
(c) Conduct of Indemnification Proceedings. If any action or proceeding
(including any governmental investigation or inquiry) shall be brought or any
claim shall be asserted against any person entitled to indemnity hereunder (an
"indemnified party"), such indemnified party shall promptly notify the party
from which such indemnity is sought (the "indemnifying party") in writing, and
the indemnifying party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the indemnified party and the
payment of all fees and expenses incurred in connection with the defense
thereof. All such fees and expenses (including any fees and expenses incurred in
connection with investigating or preparing to defend such action or proceeding)
shall be paid to the indemnified party, as incurred, within 20 days of written
notice thereof to the indemnifying party; provided, however, that if, in
accordance with this Section 6, the indemnifying party is not liable to the
indemnified party, such fees and expenses shall be returned promptly to the
indemnifying party. Any such indemnified party shall have the right to employ
separate counsel in any such action, claim or proceeding and to participate in
the defense thereof, but the fees and expenses of such counsel shall be the
expense of such indemnified party unless (a) the indemnifying party has agreed
to pay such fees and expenses, (b) the indemnifying party shall have failed
promptly to assume the defense of such action, claim or proceeding and to employ
counsel reasonably satisfactory to the indemnified party in any such action,
claim or proceeding, or (c) the named parties to any such action, claim or
proceeding (including any impleaded parties) include both such indemnified party
and the indemnifying party, and such indemnified party shall have been advised
by counsel that there may be one or more legal defenses available to it which
are different from or additional to those available to the indemnifying party
(in which case, if such indemnified party notifies the indemnifying party in
writing that it elects to employ separate counsel at the expense of the
indemnifying party, the indemnifying party shall not have the right to assume
the defense of such action, claim or proceeding on behalf of such indemnified
party, it being understood, however, that the indemnifying party shall not, in
connection with any one such action, claim or proceeding or separate but
substantially similar or related actions, claims or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys (together with appropriate local counsel) at any time for all such
indemnified parties, unless in the opinion of counsel for such indemnified
party a conflict of interest may exist between such indemnified party and any
other of such indemnified parties with respect to such action, claim or
proceeding, in which event the indemnifying party shall be obligated to pay the
fees and expenses of such additional counsel or counsels). No indemnifying
5
<PAGE>
party will consent to entry of any judgment or enter into any settlement which
does not include as an unconditional term thereof the release of such
indemnified party from all liability in respect to such claim or litigation
without the written consent (which consent will not be unreasonably withheld) of
the indemnified party. No indemnified party shall consent to entry of any
judgment or enter into any settlement without the written consent (which consent
will not be unreasonably withheld) of the indemnifying party from which
indemnity or contribution is sought.
(d) Contribution. If the indemnification provided for in this Section 6 is
unavailable to an indemnified party under Section 6(a) or 6(b) hereof (other
than by reason of exceptions provided in those Sections) in respect of any
Losses, then each applicable 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, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party and
indemnified party in connection with the actions, statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether any action in question,
including any untrue statement or alleged untrue statement of a material fact or
omission or alleged omission of a material fact, has been taken or made by, or
relates to information supplied by, such indemnifying party or indemnified
party, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such action, statement or omission. The amount
paid or payable by a party as a result of any Losses shall be deemed to include,
subject to the limitations set forth in Section 6(c), any legal or other fees or
expenses reasonably incurred by such party in connection with any action, suit,
claim, investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
7. Rule 144
The Company shall file the reports required to be filed by it under the
Securities Act and the Exchange Act and the rules and regulations adopted by the
SEC thereunder, and will take such further action as any holder of Registrable
Securities may reasonably request, all to the extent required from time to time
to enable such holder to sell Registrable Securities without registration under
the Securities Act within the limitation of the exemption provided by Rule 144
or Rule 144A. Upon the request of any holder of Registrable Securities, the
Company shall deliver to such holder a written statement as to whether the
Company has complied with such information and requirements. Notwithstanding the
foregoing, nothing in this Section 7 shall be deemed to require the Company to
register any of its securities under any section of the Exchange Act.
8. Underwritten Registrations
If any of the Registrable Securities covered by any Shelf Registration are
to be sold in an underwritten offering, the investment banker or investment
bankers and manager or managers that will administer the offering will be
selected by the Company, provided that such investment bank or manager shall be
reasonably satisfactory to a majority of the holders of Registrable Securities
to be included in the underwritten offering.
6
<PAGE>
No person may participate in any underwritten registration hereunder unless
such person (i) agrees to sell such person's Registrable Securities on the basis
provided in any underwriting arrangements approved by the persons entitled
hereunder to approve such arrangements, and (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such underwriting arrangements.
9. Miscellaneous
(a) Amendments and Waivers. The provisions of this Agreement, including the
provisions of this sentence, may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given
unless the Company obtains the written consent of holders of at least 66 2/3 %
of the then outstanding Registrable Securities affected by such amendment,
modification or supplement. Notwithstanding the foregoing, a waiver or consent
to depart from the provisions hereof with respect to a matter which relates
exclusively to the rights of holders of Registrable Securities whose securities
are being sold pursuant to a Registration Statement and which does not directly
or indirectly affect the rights of holders of Registrable Securities whose
securities are not being sold pursuant to such Registration Statement may be
given by holders of a majority of the Registrable Securities being sold by such
holders.
(b) Notices. All notices and other communications provided for or permitted
hereunder shall be made in writing by hand-delivery, registered first-class
mail, next day air courier, telex, or telecopy: (i) If to a holder of
Registrable Securities, at the most current address given by such holder to the
Company in accordance with the provisions of this Section 9(b), which address
initially is, with respect to each purchaser, the address set forth on the
signature page attached hereto; and (ii) if to the Company initially at the
address set forth on the first page of the Purchase Agreement, attention:
Secretary and thereafter at such other address, notice of which is given in
accordance with the provisions of this Section 9(b), with a copy to Morgan Lewis
& Bockius, Philadelphia, PA.
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; two business days after
being deposited in the mail, postage prepaid, if mailed; one business day after
being sent by next day air courier; when answered back, if telexed; and when
receipt acknowledged, if telecopied.
(c) Transfer of Registration Rights. The rights granted to the holders
pursuant to this Agreement to cause the Company to register securities may be
assigned in connection with the transfer, assignment or sale of any Registrable
Security to the extent such securities and rights may be transferred, assigned
or sold pursuant to applicable laws and to the agreements to which the
particular holder is a party; provided, however, that no transfer or assignment
of such rights shall be effective or valid unless the purchaser, transferee or
assignee, after giving effect to the transfer, assignment or sale of the
Registrable Securities, owns or has the right to acquire at least 5,000 shares
of Common Stock.
(d) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(e) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(f) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania without regard to
principles of conflict of laws.
7
<PAGE>
(g) Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and the parties hereto shall use
their best efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the
intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or unenforceable.
(h) Entire Agreement. This Agreement is intended by the parties to be a
final expression of their agreement and a complete and exclusive statement of
the agreement and understanding of the parties hereto in respect of the subject
matter contained herein. There are no restrictions, promises, warranties nor
undertakings, other than those set forth or referred to herein with respect to
the registration rights granted by the Company with respect to the securities
sold pursuant to the Purchase Agreement. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
(i) Attorneys' Fees. In any action proceeding brought to enforce any
provision of this Agreement, or where any provision hereof is validly asserted
as a defense, the successful party shall be entitled to recover reasonable
attorneys' fees in addition to its costs and expenses and any other available
remedy.
IN WITNESS WHEREOF, the parties have executed this agreement as of the date
first written
THE MED-DESIGN CORPORATION
By:
-------------------------------
James M. Donegan
President and Chief Executive Officer
8
<PAGE>
SCHEDULE 1
New York
Pennsylvania
California
New Jersey
Florida
<PAGE>
THE MED-DESIGN CORPORATION
DEBENTURE PURCHASE AGREEMENT
<PAGE>
TABLE OF CONTENTS
1. PURCHASE AND SALE OF DEBENTURES.............................. 2
1.1 Issue of Convertible Collateralized Debentures.......... 2
2. CLOSING DATE; DELIVERY....................................... 2
2.1 Closing.................................................. 2
2.2 DELIVERY..................................................... 3
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY................ 3
3.1 Organization........................................ 3
3.2 Capitalization...................................... 3
3.3 Authority, etc...................................... 3
3.4 Securities Filings.................................. 4
3.5 Issuance of the Debentures; etc..................... 4
3.6 No Conflict with Law or Documents................... 4
3.7 Consents, Approvals and Private Offering............ 5
3.8 Absence of Certain Developments..................... 5
3.9 Litigation.......................................... 5
3.10 Registration Rights................................. 5
3.11 Disclosure.......................................... 5
3.12 Debenture Interest.................................. 5
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS............. 6
4.1 Legal Power......................................... 6
4.2 Due Execution....................................... 6
4.3 Investment Representations ......................... 6
4.4 Pennsylvania Requirements .......................... 7
5. CERTAIN COVENANTS OF THE COMPANY............................. 7
5.1 Information......................................... 7
5.2 Maintenance of Properties and Leases; Insurance..... 8
5.3 Rights, Licenses, Etc............................... 9
5.4 Payment Of Taxes And Claims......................... 9
5.5 Compliance With Laws, Etc........................... 9
5.6 Further Assurances.................................. 9
5.7 Accounts And Records................................ 9
5.8 Cooperation In Private Sale......................... 9
5.9 Communication With Accountants...................... 10
5.10 Inspection.......................................... 10
5.11 Limitation on Liens................................. 10
5.12 Transactions with Affiliates........................ 10
5.13 Merger Consolidation, Sale or Transfer of Assets.... 10
5.14 Change in Business.................................. 11
6. REPRESENTATIONS OF PLACEMENT AGENT; COMPENSATION OF
PLACEMENT AGENT.............................................. 11
6.1 Sales To Accredited Investors....................... 11
6.2 Regulation D Compliance............................. 11
6.3 Compliance Generally................................ 11
6.4 Placement Agent Fees................................ 11
6.5 Right of First Refusal to Manage Future Offerings... 11
-ii-
<PAGE>
7. REPURCHASE AND CONVERSION.................................... 12
7.1 Repurchase of Debentures at Option of the Holder
Upon Change in...................................... 12
7.2 Effect of Repurchase Notice......................... 14
7.3 Deposit of Repurchase Price......................... 15
7.4 Debentures Repurchased in Part...................... 15
7.5 Compliance with Securities Laws upon Repurchase
of Debentures....................................... 15
7.6 Holder's Conversion Privilege; Right of Company
to Require Conversion............................... 15
7.7 Conversion Procedure................................ 16
7.8 Fractional Shares................................... 17
7.9 Taxes on Conversion................................. 17
7.10 Company to Provide Stock............................ 17
7.11 Adjustment of Conversion Price...................... 18
7.12 No Adjustment....................................... 20
7.13 Equivalent Adjustments.............................. 20
7.14 Adjustment for Tax Purposes......................... 21
7.15 Notice of Adjustment................................ 21
7.16 Notice of Certain Transactions...................... 21
7.17 Effect of Reclassification, Consolidation,
Merger or Sale on Conversion Privilege.............. 21
8. DEFAULT AND REMEDIES......................................... 22
8.1 Events of Default................................... 22
8.2 Acceleration........................................ 24
8.3 Other Remedies...................................... 24
8.5 Rights of Holders to Receive Payment................ 24
8.6 Defaulted Interest.................................. 24
9. CONDITIONS TO CLOSING........................................ 25
9.1 Conditions to Obligations of the Purchaser.......... 25
9.2 Conditions to Obligations of the Company............ 25
10. MISCELLANEOUS................................................ 26
10.1 Governing Law....................................... 26
10.2 Successors and Assigns.............................. 26
10.3 Entire Agreement.................................... 26
10.4 Severability........................................ 26
10.5 Amendment and Waiver ............................... 26
10.6 Notices............................................. 27
10.7 Fees and Expenses................................... 27
10.8 Titles and Subtitles................................ 27
10.9 Counterparts........................................ 27
11. CERTAIN DEFINITIONS.......................................... 27
-iii-
<PAGE>
THE MED-DESIGN CORPORATION
DEBENTURE PURCHASE AGREEMENT
This agreement (this "Agreement") is made as of the Closing Date (as
hereinafter defined) by and among Med-Design Corporation, a Delaware corporation
(the "Company"), with its principal office located at 2810 Bunsen Avenue,
Ventura CA, 93003, Pennsylvania Merchant Group (the "Placement Agent") and each
of the purchasers who are signatories hereto and any other purchasers who are
made a party to this Agreement pursuant to Section 1.1(c) (individually, a
"Purchaser" and collectively, the "Purchasers").
RECITALS
The Company has engaged the Placement Agent as exclusive agent of the
Company in connection with the placement and sale (the "Offering") of $1,500,000
in aggregate principal amount of Convertible Collateralized Debentures (the
"Debentures") substantially in the form of Exhibit I hereto. The Debentures will
be convertible into shares of the Company's $0.01 par value common stock
("Common Stock") commencing on the Closing Date (as hereinafter defined) at an
initial conversion price of $1.25 per share of Common Stock (as same may be
adjusted, the "Conversion Price"). The Debentures are non-callable. However,
after one year from the Closing Date, the Company can force conversion of the
Debentures if the Common Stock trades above $2.00 for 25 consecutive trading
days, as hereinafter more specifically provided. The Debentures will be sold by
the Company to Purchasers pursuant to Rule 506 under the Securities Act of 1933,
as amended (the "Act"). Offers and sales of Debentures will only be made
pursuant to the Confidential Private Offering Memorandum dated June 18, 1998
(together with all amendments, supplements, exhibits and attachments thereto,
the "Offering Materials").
AGREEMENT
In consideration of the mutual promises, representations, warranties and
conditions set forth in this Agreement, the Company, each Purchaser (severally
and not jointly) and the Placement Agent, intending to be legally bound, agree
as follows:
1
<PAGE>
1. PURCHASE AND SALE OF DEBENTURES.
1.1 Issue of Convertible Collateralized Debentures.
(a) The Company has authorized the execution, delivery and performance
of this Agreement, with such changes thereto as may be approved by an
officer of the Company (the execution thereof by any officer being
conclusive evidence of such approval), and in connection therewith has
authorized the issuance and sale of up to $1,500,000 aggregate principal
amount of Debentures and up to 1,200,000 shares of Common Stock plus such
additional number of such shares as may be required by adjustments to the
Conversion Price (the "Conversion Shares") pursuant to the conversion of
the Debentures, in accordance with this Agreement.
(b) In reliance upon the Purchaser's representations and warranties
contained in Section 4 hereof and upon the Placement Agent's
representations and warranties contained in Section 6 hereof, and subject
to the terms and conditions set forth herein, the Company hereby agrees to
sell to each Purchaser the aggregate amount of Debentures set forth below
such Purchaser's signature on the subscription page bearing such
Purchaser's name.
(c) In reliance upon the representations and warranties of the Company
contained herein, and subject to the terms and conditions set forth herein,
each Purchaser hereby agrees to purchase the amount of Debentures set forth
below such Purchaser's signature on the subscription page bearing such
Purchaser's name. Each Purchaser shall severally, and not jointly, be
liable for only the amount of Debentures that appears on the subscription
page hereof relating to such Purchaser.
(d) The Company's agreement with each of the Purchasers is a separate
agreement, and the sale of the Debentures to each of the Purchasers is a
separate sale.
2. CLOSING DATE; DELIVERY.
2.1 Closing.
(a) The initial closing of the sale and purchase of the Debentures
under this Agreement (the "Closing"), shall be held at 10:00 a.m. (Pacific
Standard Time) on or before June 22, 1998 (the "Closing Date"), at the
offices of Morgan Lewis & Bockius, Philadelphia, PA, or at such other time
and place as the Company and the Placement Agent may agree. There is no
minimum amount of Debentures required for an initial closing.
(b) From time to time prior to and following the Closing Date, the
Company may, but shall not be obligated to, offer and sell the balance of
the Debentures authorized but not sold as of the Closing Date herein to
other purchasers (the "other Purchasers") at one or more subsequent
closings to be held no later than June 22, 1998 unless otherwise extended
by the Company and the Placement Agent. By executing this Agreement, the
Purchasers hereunder agree to the inclusion of such other Purchasers as
parties to this Agreement, the Registration Rights Agreement referenced in
Section 9.1(d) herein (the "Registration Rights Agreement") and the
Security Agreement referenced in Section 9.1(d) (the "Security
Agreement"), and it shall be a condition to each subsequent closing that
the other Purchasers, if any, shall become parties to this Agreement and
the Registration Rights Agreement and the Security Agreement, subject to
the terms
2
<PAGE>
hereof and thereof. If such a subsequent closing is held, the terms "Closing"
and "Closing Date", as used herein, shall be deemed to apply to the
initial closing and each such subsequent closing.
2.2 Delivery. At the Closing, subject to the terms and conditions hereof,
the Company shall deliver to each Purchaser the amount of Debentures subscribed
for by such Purchaser, dated as of the Closing Date, against payment of the
purchase price therefor by wire transfer, unless other means of payment shall
have been agreed upon by such Purchaser, on the one hand, and the Company and
the Placement Agent, on the other hand.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Subject to and except as disclosed by the Company in the Offering
Materials, the Company hereby represents to each Purchaser as of the date hereof
as follows, and all such representations and warranties shall be true and
correct as of the Closing Date as if then made and shall survive the Closing:
3.1 Organization. Each of the Company and its Subsidiaries (as defined in
Section 11) is a corporation, duly incorporated, validly existing and in good
standing under the laws of the jurisdiction of its incorporation. Each of the
Company and its Subsidiaries has all requisite power and authority to own or
lease its properties and to conduct its business as now conducted. Each of the
Company and its Subsidiaries holds all licenses and permits required for the
conduct of its business as now conducted, the absence of which, if not obtained,
would have a Material Adverse Effect (as defined in Section 11). Each of the
Company and its Subsidiaries is qualified as a domestic corporation and is in
good standing in all states where the conduct of its business or its ownership
or leasing of property requires such qualification, except where the failure to
so qualify would not have a Material Adverse Effect. The Company has previously
delivered a true and complete copy of its Certificate of Incorporation
("Certificate") and Bylaws to the Placement Agent.
3.2 Capitalization. The authorized, issued and outstanding capital stock of
the Company and its Subsidiaries on March 31, 1998 is as set forth in the Report
on Form 10-QSB (March 31, 1998) which is included in the Offering Materials
(Tab A). Since March 31, 1998, there has been no material change in the
capitalization of the Company or its Subsidiaries, except as has been described
in the Offering Materials. All of the issued and outstanding shares of the
Company's Common Stock have been duly authorized and validly issued and are
fully paid and nonassessable. Except as stated in the Offering Materials and
except for rights granted under the Company's stock plans, there are no existing
subscriptions, options, calls, commitments, agreements, conversion or other
rights of any character (contingent or otherwise) to purchase or otherwise
acquire from the Company or any of its Subsidiaries at any time, or upon the
happening of any stated event, any shares of the capital stock of the Company or
any of its Subsidiaries.
3.3 Authority, etc. The Company has all requisite corporate power and
authority to enter into this Agreement, the Registration Rights Agreement and
the Security Agreement, and to consummate the transactions contemplated hereby
and thereby. The execution and delivery of this Agreement, the Registration
Rights Agreement and the Security Agreement and the consummation of the
transactions contemplated hereby and thereby, have been duly authorized by all
necessary corporate action on the part of the Company. Upon their execution and
delivery by the Company, such documents will constitute valid and binding
obligations of the Company, enforceable against the Company in accordance with
their terms, except as the indemnification and contribution
3
<PAGE>
provisions of any thereof may be limited by principles of public policy, and
subject as to enforceability to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws relating to or affecting creditor's
rights generally and subject to general equity principles.
3.4 Securities Filings. The Company has timely filed with the Securities
and Exchange Commission (the "SEC") the documents set forth in the Offering
Materials included herein under Tab A and all other reports and all other
filings required to be filed with the SEC under the rules and regulations of the
SEC (collectively, the "SEC Filings").
(a) The SEC Filings, when filed, conformed in all material respects to
the requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the SEC thereunder as of
their respective filing dates and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. The
documents or portions thereof that were incorporated by reference in the
SEC Filings pursuant to the requirements of the Exchange Act, when such
incorporated documents or portions were first filed with the SEC, conformed
in all material respects with all applicable requirements of the Exchange
Act and the rules and regulations of the SEC thereunder.
(b) The consolidated financial statements of the Company included in
the SEC Filings fairly presented in all material respects the financial
position and results of operations of the Company and its Subsidiaries at
the respective dates and for the respective periods to which they apply;
and such financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied throughout
the periods involved except as otherwise stated therein.
(c) Nowithstanding any provision therein to the contrary, it is
understood by the Company and the Purchasers that the Company is not
representing or warranting any statement in the SEC Filings relating to
future, anticipated or possible circumstances, occurrences or developments.
3.5 Issuance of the Debentures; etc. The Debentures, when issued against
payment therefor pursuant to the terms thereof and hereof, will be duly and
validly authorized and issued, will constitute valid obligations of the Company
enforceable in accordance with their terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws relating to or
affecting creditors' rights generally and subject to equitable principles and
will be entitled to the benefits of this Agreement. The lien granted by the
Company under the Security Agreement will constitute a first lien on all of the
collateral described in the Security Agreement in favor of the Purchasers and
their assignees as holders of the Debentures.
3.6 No Conflict with Law or Documents. The execution, delivery and
consummation of this Agreement, the Registration Rights Agreement and the
Security Agreement and the transactions contemplated hereby and thereby will not
(a) conflict with any provisions of the Certificate or Bylaws of the Company or
any of its Subsidiaries (b) result in any violation of or default or loss of a
benefit under, or permit the acceleration of any obligation under (in each
case, upon the giving of notice, the passage of time, or both) any mortgage,
indenture, lease, agreement or other instrument, permit, franchise, license,
judgement, order, decree, law, ordinance, rule or regulation applicable to the
Company or any of its Subsidiaries.
4
<PAGE>
3.7 Consents, Approvals and Private Offering. Except for any filings
required under federal and applicable state securities laws, and with respect to
the perfection of the lien of the Security Agreement, all of which shall have
been made as of the Closing Date to the extent required as of such time, no
consent, approval, order or authorization of, or registration, declaration or
filing with, any federal, state, local or foreign governmental authority is
required to be made or obtained by the Company in connection with the execution
and delivery of this Agreement, the Registration Rights Agreement or the
Security Agreement and the consummation of the transactions contemplated hereby
and thereby.
3.8 Absence of Certain Developments. Except as described in the Offering
Materials, since March 31, 1998, neither the Company nor any of its Subsidiaries
has (a) incurred or become subject to any material liabilities (absolute or
contingent) except current liabilities incurred, and liabilities under contracts
entered into, in the ordinary course of business, consistent with past
practices; (b) mortgaged, pledged or subjected to any lien, charge or other
encumbrance any of its assets, tangible or intangible; (c) sold, assigned or
transferred any of its assets or canceled any debts or obligations except in the
ordinary course of business, consistent with past practices; (d) suffered any
extraordinary losses, or waived any rights of substantial value; (e) entered
into any material transaction other than in the ordinary course of business,
consistent with past practices; or (f) otherwise had any change in its
condition, financial or otherwise, except as shown on or reflected in the
consolidated balance sheet as of March 31, 1998 that is included in the
Company's Report on Form 10-QSB for the quarter ended March 31, 1998, except for
changes in the ordinary course of business, consistent with past practices, none
of which individually or in the aggregate has been materially adverse, and
except further that the Company continues to incur additional substantial losses
of the nature set forth in and/or otherwise contemplated by the Offering
Materials. Except as described in the SEC Filings and the Offering Materials,
neither the Company nor any of its Subsidiaries has entered into any agreement
since March 31, 1998 of the type that would be required under the SEC's rules
and regulations to be filed as an exhibit to a Report on Form 10-KSB.
3.9 Litigation. Except as described in the Offering Materials, to the
Company's knowledge, there are no actions, suits, proceedings or investigations
pending against or affecting the Company or any of its Subsidiaries that could
reasonably be anticipated to result in any Material Adverse Effect.
3.10 Registration Rights. Except for shares issued or issuable in
connection with the Company's existing stock option plans and those disclosed in
the Offering Materials the Company has not granted any rights to have any of the
securities of the Company or any of its Subsidiaries registered under the Act.
3.11 Disclosure. The Offering Materials taken as a whole do not contain any
untrue statement of material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3.12 Debenture Interest. In order to secure the Company's obligations in
connection with the Debentures and to perfect the Purchasers' Debenture
interests in all of the Company's and its Subsidiaries pending and issued
patents, the Company has made all the necessary filings and has not, nor has any
of its Subsidiaries granted a Debenture interest in such patents to any other
party.
5
<PAGE>
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser hereby represents to, and covenants with the Company as
follows:
4.1 Legal Power. Purchaser has the requisite corporate, partnership, trust
or fiduciary power, as appropriate, and is authorized, if Purchaser is a
corporation, partnership or trust, to enter into this Agreement, the
Registration Rights Agreement and the Security Agreement, to purchase the
Debentures hereunder, and to carry out and perform its obligations under the
terms of this Agreement, the Registration Rights Agreement and the Security
Agreement.
4.2 Due Execution. Each of this Agreement, the Registration Rights
Agreement and the Security Agreement has been duly authorized, if Purchaser is a
corporation, partnership, trust or fiduciary, and has been executed and
delivered by the Purchaser, and, upon due execution and delivery by the Company,
this Agreement, the Registration Rights Agreement and the Security Agreement
will be valid and binding agreements of the Purchaser and subject as to
enforceability to applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws relating to or affecting creditor's rights from time to time in
effect and subject to general equity principles.
4.3 Investment Representations.
(a) Purchaser is acquiring the Debentures for its own account, not as
nominee or agent, for investment and not with a view to or for resale in
connection with, any distribution or public offering thereof within the
meaning of the Act, except pursuant to an effective registration statement
under the Act.
(b) Purchaser understands that (i) the Debentures have not been and
upon issuance the Conversion Shares will not have been registered under the
Act by reason of a specific exemption therefrom, and may not be transferred
or resold except pursuant to an effective registration statement or
exemption from registration; (ii) each of the Debentures and, subject to
the registration thereof pursuant to the Registration Rights Agreement,
each of the conversion Shares will be endorsed with the following legends:
(i) THE SECURITY REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY
STATE SECURITIES LAW. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY,
AGREES FOR THE BENEFIT OF MED-DESIGN CORPORATION ("COMPANY") THAT THIS
SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (1) TO
THE COMPANY (UPON CONVERSION OR REPURCHASE), OR (2) PURSUANT TO AN
AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, OR (3)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF
ANY STATE OF THE UNITED STATES. IN CONNECTION WITH ANY TRANSFER
PURSUANT TO CLAUSE (2) ABOVE, THE HOLDER HEREOF WILL DELIVER TO THE
COMPANY SUCH OPINION OF COUNSEL, CERTIFICATES AND OTHER INFORMATION AS
IT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH
THE FOREGOING RESTRICTIONS.
6
<PAGE>
(ii) Any legend required to be placed thereon by applicable
federal, state, or Canadian Provincial Securities laws; and
(iii) the Company will instruct any transfer agent not to
register the transfer of any of the Debentures or, subject to
registration thereof in accordance with the Registration Rights
Agreement, the Conversion Shares, unless the conditions specified in
the foregoing legends are satisfied;
(c) Purchaser has received and reviewed the Offering Materials. In
addition, Purchaser has been furnished with such materials, and has been
given access to such information relating to the Company as it or its
qualified representative has requested, and has been afforded the
opportunity to ask questions regarding the Company and the Debentures, in
order to make an informed investment decision.
(d) Purchaser is an "accredited investor" as such term is defined in
Rule 501 of the Act and was not formed for the specific purpose of
acquiring the Debentures.
(e) Purchaser is not a resident of Canada or any territory thereof, or
of any jurisdiction outside the United States and its territories.
4.4 Pennsylvania Requirements.
Each Purchaser who is a Pennsylvania resident, or which has its principal
place of business in Pennsylvania and is not an "institutional investor" within
the meaning of the Pennsylvania Securities Act of 1972 as amended and the
regulations thereunder, hereby agrees not to sell any of the Debentures for a
period of 12 months from the date hereof, except in accordance with the
requirements of section 203(d) of such act and regulation 204.011 thereunder.
5. CERTAIN COVENANTS OF THE COMPANY.
The Company, on behalf of itself and its Subsidiaries (as hereinafter
defined), if any from time to time, shall comply with the following affirmative
and negative covenants:
5.1 Information.
(a) So long as the Company is subject to the periodic reporting
requirements of the Exchange Act, the Company shall deliver to each holder
of Debentures (a "Holder") all annual, quarterly or other reports furnished
to the Company's public securityholders; provided that if the Company is
not subject to the requirements of Section 13 or 15(d) of the Exchange Act,
the Company will promptly furnish to each Holder of Debentures (i) as soon
as available, and in any event within 90 days after the end of each fiscal
year of the Company, a consolidated balance sheet of the Company and its
consolidated Subsidiaries, if any, as of the end of such fiscal year and
the related consolidated statements of income, stockholders' equity and
cash flows for such fiscal year, setting forth in each case in comparative
form the figures for the previous fiscal year, all prepared in accordance
with generally accepted accounting principles and reported on by
independent certified public accountants of recognized national standing;
and (ii) as soon as available, and in any event within 45 days after the
end of each of the first three fiscal quarters of each fiscal year of the
Company, a consolidated balance sheet of the Company and its consolidated
Subsidiaries, if any, as of the end of such quarter and the related
consolidated statements of income and stockholder's
7
<PAGE>
equity (together with any other quarterly financial statements being prepared by
the Company at such time), setting forth in each case in comparative form the
figures for the corresponding quarter and the corresponding portion of the
Company's previous fiscal year, all certified (subject to normal year-end
adjustments) as to fairness of presentation and consistency by the chief
financial officer or the chief accounting officer of the Company.
(b) Together with each delivery of reports and other financial
information required by paragraph (a) above, the Company shall deliver to
each Holder of Debentures an officers' certificate of the chief financial
officer of the Company (an "Officers' Certificate") stating that the signer
has reviewed the terms of this Agreement and the Debentures and has made,
or caused to be made under his supervision, a review in reasonable detail
of the transactions and condition of the Company and its Subsidiaries
during the fiscal period covered by such financial statements and that such
review has not disclosed the existence during or at the end of such fiscal
period, and that the signer does not have knowledge of the existence, as at
the date of the Officers' Certificate, of any condition or event which
constitutes a default or Event of Default under the Debentures or, if any
such condition or event existed or exists, specifying the nature and period
of existence thereof and what action, if any, the Company has taken or is
taking or proposes to take with respect thereto.
(c) Promptly upon any executive officer of the Company or any of its
Subsidiaries obtaining knowledge (i) of any condition or event which
constitutes a default or Event of Default under the Debentures, (ii) that
the Holder of any Debenture has given any notice or taken any other action
with respect to a claimed default or Event of Default under the Debentures,
(iii) that any person or entity has given any notice to the Company or any
of its Subsidiaries or taken any other action with respect to a claimed
default or event or condition under any other indebtedness, or (iv) of the
institution of any litigation involving claims against the Company or any
of its Subsidiaries or any adverse determination in any litigation
involving a potential liability to the Company or any of its Subsidiaries,
the Company shall provide to each Holder of a Debenture an Officers'
Certificate specifying the nature and period of existence of any such
condition or event, or specifying the notice given or action taken by such
Holder or person or entity and the nature of such claimed default, Event of
Default, event or condition, or specifying the nature and particulars of
any such litigation and what action, if any, the Company has taken, is
taking or proposes to take with respect thereto.
5.2 Maintenance of Properties and Leases; Insurance. The Company and its
Subsidiaries will maintain or cause to be maintained in good repair, working
order and condition all properties used in the business of the Company and its
Subsidiaries and from time to time will make or cause to be made all appropriate
repairs, renewals, additions, improvements and replacements thereto. The Company
and its Subsidiaries will (i) at all times comply with each provision of all
leases or agreements to which any of them is a party or under which any of them
occupies property and (ii) maintain and keep in effect any leases or agreement
pursuant to which the Company or such Subsidiary leases, uses or occupies any of
its real or personal property; provided, however, that if any such lease or
agreement is cancelled or terminated by the lessor prior to the expiration of
its stated term as the result of a default by the Company thereunder, which
cancellation or termination, individually or in the aggregate, would have a
Material Adverse Effect, the Company shall, (a) provide written notice of such
cancellation or termination to the Holders of Debentures, and (b) within 60 days
of such cancellation or termination of such lease or agreement, either cause
such lease or agreement to be reinstated or enter into a new lease or agreement
of comparable value to the Company as the lease or agreement so cancelled or
terminated. Notwithstanding the foregoing, it
8
<PAGE>
shall not be deemed a breach of the covenant set forth in this Section 5.2 if
the Company fails to make a payment of rent under a lease in connection with a
bona fide dispute with the landlord in question. The Company and its
Subsidiaries will maintain or cause to be maintained, with financially sound and
reputable insurers or, as to workers' compensation or similar insurance, in an
insurance fund or by self-insurance authorized by the laws of the jurisdiction
in question, insurance with respect to their respective properties and
businesses against loss or damage of the kinds customarily insured against by
corporations of established reputation engaged in the same or similar businesses
and similarly situated, of such type and in such amounts including appropriate
deductible levels as are customarily carried under similar circumstances by such
other corporations, including without limitation insurance against risks and
liabilities to third parties.
5.3 Rights, Licenses, Etc. The Company will, and will cause each of its
Subsidiaries to, at all times preserve and keep in full force and effect its
corporate existence, rights, licenses, franchises, trademarks and trade names
material to its business, and will qualify and cause each of its Subsidiaries to
qualify to do business in any jurisdiction the ownership of property or the
operation of its business makes such qualification necessary except where the
failure to so qualify would not have a Material Adverse Effect.
5.4 Payment Of Taxes And Claims. The Company will, and will cause each of
its Subsidiaries to, promptly pay all Taxes (as defined in Section 11) before
any penalty or interest accrues thereon, and all claims (including, without
limitation, claims for labor, services, materials and supplies) for sums which
have become due and payable and which by law have or may become a lien upon any
of their properties or assets; provided, however, that no such tax, charge or
claim need be paid if being contested in good faith and if adequate reserves
shall have been made therefor in accordance with GAAP (as defined in Section
11).
5.5 Compliance With Laws, Etc. The Company will, and will cause each of its
Subsidiaries to, comply with the requirements of all applicable laws, rules,
regulations and orders of any court or other governmental authority. The Company
will, and will cause each of its Subsidiaries to, timely make all filings
required to be made by it with all relevant Federal state and/or local
regulatory bodies, except where the failure to so file is not likely to result
in a Material Adverse Effect.
5.6 Further Assurances. From time to time the Company will, and will cause
each of its Subsidiaries to, execute and deliver to the Holders of Debentures,
such other instruments, certificates, agreements and documents and take such
other action and do all other things as may be requested by a Holder in order to
implement or effectuate the terms and provisions of this Agreement.
5.7 Accounts And Records. The Company and all it Subsidiaries will keep
true records and books of account in which full, true and correct entries will
be made of all dealings or transactions in relation to its business and affairs.
5.8 Cooperation In Private Sale. So long as any of the Debentures are
outstanding, the Company will use reasonably efforts to cooperate with any
Holder of the Debentures or the proposed transferee of one or more of the
Debentures to facilitate a proposed transfer, subject to the proposed transferee
executing appropriate confidentiality agreements. To this end, the Company will
make available to any proposed transferee or Holder (i) all information
reasonably requested by such holder, (ii) its appropriate executive officers to
be interviewed, at reasonable times and intervals, by
9
<PAGE>
proposed transferees (acting in a coordinated fashion) about the affairs and
status of the Company, and (iii) any other information reasonably required by
the Holder in order to transfer any of the Debentures in compliance with
Section 4(l) of the Act or any other exemption from registration thereunder and
any applicable state securities law.
5.9 Communication With Accountants. The Company authorizes each Holder or a
of a Debenture to communicate directly with its auditors and authorizes the
auditor to disclose to each Holder of a Debenture any and all financial
statements and other supporting financial documents and schedules, including
copies of any management letter with respect to the business, financial
condition and other affairs of the Company. The Company shall, on or before the
Closing Date and at or before the time of its engagement of the auditor for each
fiscal year, obtain and deliver to each Holder of a Debenture a letter from such
auditor authorizing each Holder of a Debenture to rely on the financial
statements of the company certified by such auditor for such fiscal year (the
"Auditor Reliance Letter").
5.10 Inspection. The Company will permit any representatives designated by
each Holder of a Debenture to visit and inspect any of the properties of the
Company or its Subsidiaries, including its books of account and other records
(and to make copies thereof and to take extracts therefrom), and to discuss the
affairs, finances and accounts of the Company and its Subsidiaries with its
offers and its independent certified accountants, all at such reasonable times
and as often as may be reasonably be requested.
5.11 Limitation on Liens. The Company will not, and will not permit any of
its Subsidiaries to, create, incur, assume or permit or suffer to exist any lien
upon any of the collateral covered by the Security Agreement, except for the
interests created in favor of the Holders of Debentures under such Security
Agreement.
5.12 Transactions with Affiliates. The Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, purchase, acquire or
lease any property to, or otherwise deal with or enter into a transaction or
series of transactions, in the ordinary course of business or otherwise, any
Affiliate (as defined in Section 11) of the Company or its Subsidiaries except
(i) on an arm's length basis in transactions which are on no less favorable
terms to the Company or such Subsidiary than would be the case with a similar
transaction with an unaffiliated person or entity; (ii) reasonable customary and
regular fees to the non-management directors of the Company or any of its
Subsidiaries; (iii) any transaction among the Company and its wholly-owned
Subsidiaries or among such Subsidiaries in the ordinary course of their
respective business; or (iv) any transaction related to compensation or benefit
arrangements in the ordinary course of business or under an employee benefit
plan or trust for the benefit of employees of the Company or its Subsidiaries.
5.13 Merger Consolidation, Sale or Transfer of Assets. The Company
covenants that it shall not, and will not permit any of its Subsidiaries to be a
party to any merger or consolidation with or into any person or entity or sell,
lease or transfer or otherwise dispose of all or substantially all of its
assets, to any person or entity, or dissolve or liquidate except that (i) any
wholly-owned Subsidiary of the Company may merge into the Company or another
wholly-owned Subsidiary of the Company if the Company or such other wholly-owned
Subsidiary, as the case may be, shall be the surviving corporation, and if,
immediately after giving effect to such transaction, no condition or event shall
exist which constitutes a default or an Event of Default under the Debentures,
and (ii) any Subsidiary of the Company may sell, lease, transfer or otherwise
dispose of any of its assets to
10
<PAGE>
the Company or to any other wholly-owned Subsidiary of the Company, whether by
dissolution, liquidation or otherwise.
5.14 Change in Business. Neither the Company nor any of its Subsidiaries
will enter into or engage in any business other than that currently engaged in
or as currently anticipated and disclosed in the Offering Materials.
6. REPRESENTATIONS OF PLACEMENT AGENT; COMPENSATION OF PLACEMENT AGENT.
The Company has authorized the Placement Agent to conduct the private
placement of the Debentures (the "Private Placement") under Rule 506 under the
Act, and the Placement Agent represents and agrees with the Company as follows:
6.1 Sales To Accredited Investors. Placement Agent has and will only make
offers and sales of the Debentures to Purchasers it reasonably believes to be
"accredited investors" as that term is defined in Rule 501 (a) under the Act;
6.2 Regulation D Compliance. Offers and sales of the Debentures have
and will be made in compliance with Regulation D, to the extent applicable to
the Placement Agent, and the Placement Agent has not and shall not offer to sell
the Debentures by any form of general solicitation or general advertising that
is prohibited by Rule 502(c) promulgated under the Act.
6.3 Compliance Generally. The Placement Agent has and will observe all
Securities laws and regulations applicable to it in any jurisdiction in which it
has or may offer, sell or deliver any of the Debentures and it will not,
directly or indirectly, offer, sell or deliver any of the Debentures or
distribute or publish any prospectus, circular, advertisement or other offering
material in relation to any of the Debentures in or from any state in the United
States or country or jurisdiction except under circumstances that will result in
compliance with any applicable laws and regulations.
6.4 Placement Agent Fees. Upon the initial closing, the Company shall
reimburse the Placement Agent for its reasonable, accountable, out-of-pocket
expenses, and the fees of Placement Agent's counsel, which shall be limited to
an aggregate of $30,000. In consideration for the services rendered by the
Placement Agent hereunder, the Company agrees to pay the Placement Agent on the
Closing Date and on the date of any subsequent Closing, a commission of two
percent (2.0%) of the aggregate principal amount raised. If a Closing shall not
have taken place and this Agreement is terminated, neither party shall be
obligated to the other party, except that the Company shall reimburse the
Placement Agent for its reasonable, out-of-pocket expenses.
6.5 Right of First Refusal to Manage Future Offerings. For a period of two
(2) years commencing on the Closing Date hereunder, the Placement Agent shall
have a right of first refusal to act as the managing underwriter or minimally as
co-manager with at least 50% of the economics (or in the case of a three-handed
managed deal, 33 1/3 of the economics), for any and all future public and
private equity offerings (excluding offerings to Company employees, or to others
as consideration for the purchase of assets for use in the Company's business,
or in one or more business combinations) of the Company, or any successor to or
any Subsidiary of the Company. The Placement Agent must exercise this right of
first refusal within thirty (30) days of receipt of written notice from the
Company, or its successor or Subsidiary, of its intention to offer securities
for sale.
11
<PAGE>
7. REPURCHASE AND CONVERSION.
7.1 Repurchase of Debentures at Option of the Holder Upon Change in Control
(a)(i) If at any time that Debentures remain outstanding there shall
have occurred a Change in Control (as hereinafter defined), Debentures
shall be repurchased by the Company at the option of the Holder thereof, at
a purchase price (the "Repurchase Price") equal to the principal amount
thereof plus accrued interest up to and including the date of repurchase,
which shall be a date (the "Repurchase Date") fixed by the Company that is
not less than 45 days nor more than 60 days after the date of the Company
Notice (as hereinafter defined), subject to satisfaction by or on behalf of
the Holder of the requirements set forth in paragraph (c) of this Section
7.1. Any failure by the Company to comply with this Section 7.1 to offer
to repurchase, or to repurchase, the Debentures shall constitute an Event
of Default under Section 8.1(c) unless cured as therein provided.
(ii) (A) A Change in Control shall be deemed to have occurred at such
time after the Closing Date as there shall occur:
(1) the acquisition by any person (including any syndicate or
group deemed to be a "person" under Section 13(d)(3) or 14(d)(2) of
the Exchange Act or any successor provision to either of the
foregoing) of beneficial ownership, directly or indirectly, of shares
of capital stock of the Company entitling such person to exercise more
than 50% of the total voting power of all voting securities of the
Company; or
(2) any consolidation of the Company with, or merger of the
Company into, any other person, any merger of another person into the
Company, or any sale or transfer of all or substantially all of the
assets of the Company to another person (other than (a) a
consolidation or merger which does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of capital
stock other than shares of capital stock owned by any of the parties
to the consolidation or merger and in which the consolidated net worth
of the surviving corporation (as determined in accordance with GAAP)
immediately after the transaction equals or exceeds the consolidated
net worth of the Company immediately prior to such transaction or (b)
a merger which is effected solely to change the jurisdiction of
incorporation of the Company or (c) any consolidation with or merger
of the Company into a wholly owned Subsidiary, or any sale or transfer
by the Company of all or substantially all of its assets to one or
more of its wholly owned Subsidiaries in any one transaction or a
series of transactions; provided in each case that the resulting
corporation or each such Subsidiary assumes or guarantees the
obligations of the Company under the Debentures and the consolidated
net worth of the surviving or acquiring corporation in any such
consolidation, merger or sale of assets immediately after the
consummation of such transaction equals or exceeds the consolidated
net worth of the Company immediately prior to such transaction).
(B) "Beneficial owner" shall be determined in accordance with Rule
l3d-3 promulgated by the SEC under the Exchange Act, as in effect on the
Closing Date of, except that a person shall be deemed to be the "beneficial
owner" of all Debentures that such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time.
12
<PAGE>
(C) "Voting securities" means all outstanding securities of any class
or classes (however designated) of the Company entitled to vote generally
in the election of the Board of Directors of the Company.
(b) Within 30 days after the occurrence of a Change in Control, the
Company shall mail a written notice (the "Company Notice") by first-class
mail. The notice shall include the form of a Repurchase Notice (as defined
below) to be completed by the Holder and shall state:
(1) the date and particulars of such Change in Control;
(2) the date by which the Repurchase Notice pursuant to this Section 7.1
must be given;
(3) the Repurchase Date;
(4) the Repurchase Price;
(5) briefly, the conversion rights of the Debentures including, without
limitation, the Conversion Price and any adjustments thereto;
(6) the name and address of the Paying Agent and the Conversion Agent;
(7) that Debentures as to which a Repurchase Notice has been given may be
converted into Common Stock only to the extent that the Repurchase
Notice has been withdrawn in accordance with the terms of this
Indenture;
(8) the procedures that the Holder must follow to exercise rights under
this Section 7.1; and
(9) the procedures for withdrawing a Repurchase Notice, including a form of
notice of withdrawal.
(c) A Holder may exercise its rights specified in subsection (a) of
this Section 7.1 upon delivery of a written notice of the exercise of such
rights (a "Repurchase Notice") to the Paying Agent at any time prior to
the close of business on the Repurchase Date, stating:
(1) the certificate number of each Debenture that the Holder will deliver
to be repurchased;
(2) the portion of the principal amount of each Debenture that the Holder
will deliver to be repurchased, which portion must be $1,000 or an
integral multiple thereof, and
(3) that such Debenture shall be repurchased pursuant to the terms and
conditions specified in this Agreement
The delivery of such Debenture to the Paying Agent prior to, on or after
the Repurchase Date (together with all necessary endorsements) at the office of
the Paying Agent shall be a condition to
13
<PAGE>
the receipt by the Holder of the Repurchase Price therefor; provided, however,
that such Repurchase Price shall be so paid pursuant to this Section 7.1 only if
the Debenture so delivered to the Paying Agent shall conform in all respects to
the description thereof set forth in the related Repurchase Notice. The Company
shall repurchase from the Holder thereof, pursuant to this Section 7.1, a
portion of a Debenture if the principal amount of such portion is $1,000 or an
integral multiple of $1,000. Provisions of this Agreement that apply to the
repurchase of all of a Debenture also apply to the repurchase of such portion of
such Debenture. Notwithstanding anything herein to the contrary, any Holder
delivering to the Paying Agent the Repurchase Notice contemplated by this
Section 7.1(c) shall have the right to withdraw such Repurchase Notice in
whole or in a portion thereof that is $1,000 or an integral multiple thereof at
any time prior to the close of business on the Repurchase Date by delivery of a
written notice of withdrawal to the Paying Agent in accordance with Section 7.2.
The Paying Agent shall promptly notify the Company of the receipt by it of any
Repurchase Notice or written withdrawal thereof
7.2 Effect of Repurchase Notice
Upon receipt by the Paying Agent of the Repurchase Notice, the Holder of
the Debenture in respect of which such Repurchase Notice was given shall (unless
such Repurchase Notice is withdrawn as specified below) thereafter be entitled
to receive solely the Repurchase Price with respect to such Debenture. Such
Repurchase Price shall be paid to such Holder promptly following the later of
(i) the Repurchase Date with respect to such Debenture (provided the conditions
in Section 7.1(c) have been satisfied) and (ii) the time of delivery of such
Debenture to the Paying Agent by the Holder thereof in the manner required by
Section 7.1(c). Debentures in respect of which a Repurchase Notice has been
given by the Holder thereof may not be converted into shares of Common Stock on
or after the date of the delivery of such Repurchase Notice unless such
Repurchase Notice has first been validly withdrawn.
A Repurchase Notice may be withdrawn by means of a written notice of
withdrawal delivered by the Holder to the office of the Paying Agent at any time
prior to the close of business on the Repurchase Date to which it relates,
specifying:
(1) the certificate number of each Debenture in respect of which such
notice of withdrawal is being submitted;
(2) the principal amount of the Debenture or portion thereof with respect
to which such notice of withdrawal is being submitted; and
(3) the principal amount, if any, of such Debenture that remains subject to
the original Repurchase Notice and that has been or will be delivered
for purchase by the Company.
There shall be no purchase of any Debentures pursuant to Section 7.1 if
there has occurred (prior to, on or after, as the case may be, the giving, by
the Holders of such Debentures, of the required Repurchase Notice) and is
continuing an Event of Default (other than a default in the payment of the
Repurchase Price with respect to such Debentures).
14
<PAGE>
7.3 Deposit of Repurchase Price.
On or before the Repurchase Date, the Company shall deposit with the Paying
Agent (or, if the Company is acting as the Paying Agent, shall segregate and
hold in trust) an amount of money sufficient to pay the aggregate Repurchase
Price of all the Debentures or portions thereof that are to be repurchased as of
such Repurchase Date. If the Paying Agent holds, in accordance with the terms
hereof, money sufficient to pay the Repurchase Price of any Debenture tendered
for repurchase on the Repurchase Date, then, on and after the Repurchase Date,
such Debenture will cease to be outstanding and interest on such Debenture will
cease to accrue and will be deemed paid, whether or not such Debenture is
delivered to the Paying Agent, and all other rights of the Holder in respect
thereof shall terminate (other than the right to receive the Repurchase Price
upon delivery of such Debenture).
7.4 Debentures Repurchased in Part.
Any Debenture that is to be repurchased only in part shall be surrendered
at the office of the Paying Agent (with, if the Company so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company duly executed by, the Holder thereof or such Holder's attorney duly
authorized in writing), and the Company shall execute and deliver to the Holder
of such Debenture, without service charge, a new Debenture or Debentures, or
such other denomination or denominations as may be requested by such Holder, in
aggregate principal amount equal to, and in exchange for, the portion of the
principal amount of the Debenture so surrendered that is not purchased.
7.5 Compliance with Securities Laws upon Repurchase of Debentures.
In connection with any offer to repurchase or repurchase of Debentures
under Section 7.1 hereof (provided that such offer or repurchase constitutes an
"issuer tender offer" for purposes of Rule 13 e-4 (which term, as used herein,
includes any successor provision thereto) at the time of such offer or
repurchase), the Company shall (i) comply with Rule 13e-4 and Rule l4e-1 under
the Exchange Act, (ii) file the related Schedule 13E-4 (or any successor
schedule, form or report) under the Exchange Act, and (iii) otherwise comply
with all Federal and state Debentures laws so as to permit the rights of the
Holders and obligations of the Company under Sections 7.1 through 7.4 to be
exercised in the time and in the manner specified therein.
7.6 Holder's Conversion Privilege; Right of Company to Require Conversion.
(a) At any time prior to maturity or earlier conversion, a Holder of a
Debenture may convert such Debenture into Conversion Shares at the
Conversion Price then in effect. The number of Conversion Shares issuable
upon conversion of a Debenture shall be determined by dividing the
principal amount of the Debenture or portion thereof surrendered for
conversion by the Conversion Price in effect on the conversion date. The
initial Conversion Price of $1.25 is subject to adjustment as provided in
Section 7.11. A Holder may convert a portion of a Debenture equal to $1,000
or any integral multiple thereof. Provisions of this Purchase Agreement
that apply to conversion of all of a Debenture also apply to conversion of
a portion of a Debenture.
(b) A Debenture in respect of which a Holder has delivered a
Repurchase Notice pursuant to Section 7.1(c) exercising the option of
such Holder to require the Company to repurchase
15
<PAGE>
such Debenture may be converted only if such Repurchase Notice is withdrawn by a
written notice of withdrawal delivered to the Paying Agent prior to the close of
business on the Repurchase Date in accordance with Section 7.1(c).
(c) At any time following the later of (1) the first anniversary of
the Closing Date, or (ii) the expiration of a period of 25 consecutive
trading days in each of which the closing price (as determined in
accordance with Section 7.11(e) below) exceeds $2.00 (as appropriately
adjusted to reflect adjustments to the Conversion Price pursuant to Section
7.11(b)), and provided (A) there is not then existing any event or
condition that constitutes or, with or without notice or the passage would
constitute, a default or Event of Default under the Debentures and (B) no
Holder of a Debenture is then entitled to elect to require the Company to
repurchase such Debenture pursuant to Section 7.1 above, the Company may
elect to require the Holders of all, but not less than all outstanding
Debentures, to convert all, but not less than all, outstanding Debentures
upon 30 days prior written notice to the Holders. The conversion date in
connection with such a required conversion shall be specified in such
notice and shall be no earlier than the 30th day following delivery of such
notice. The notice of the Company's election to require conversion shall
not preclude the exercise by a Holder of its optional right of conversion.
(d) A Holder of Debentures is not entitled to any rights of a holder
of Common Stock until such Holder has converted his Debentures into Common
Stock and, upon such conversion, only to the extent such Debentures are
deemed to have been converted into Common Stock pursuant to this Section 7.
7.7 Conversion Procedure.
(a) (i) To convert a Debenture at the option of the Holder, a Holder
must (A) complete and manually sign the conversion notice on the back of
the Debenture and deliver such notice to the Conversion Agent, (B)
surrender the Debenture to the Conversion Agent, (C) furnish appropriate
endorsements and transfer documents if required by the Registrar or the
Conversion Agent and (D) pay any transfer or similar tax, if required. With
regard to a conversion at the option of the Holder, the date on which the
Holder satisfies all of the foregoing requirements is the conversion date.
(ii) To convert a Debenture at the election of the Company, the
Holder shall complete the requirements of clauses (i)(B), (C) and (D) above
by the conversion date specified in the Company's notice of its election to
cause a conversion.
(b) As soon as practicable after the conversion date, the Company
shall deliver to the Holder through the Conversion Agent a certificate for
the number of whole shares of Common Stock issuable upon the conversion and
cash in lieu of any fractional shares pursuant to Section 7.8. The person
in whose name the Common Stock certificate is registered shall be deemed to
be a stockholder of record on the conversion date; provided, however, that
no surrender of a Debenture on any date when the stock transfer books of
the Company shall be closed shall be effective to constitute the person or
persons entitled to receive the shares of Common Stock upon such conversion
as the record holder or holders of such shares of Common Stock on such
date, but such surrender shall be effective to constitute the person or
persons entitled to receive such shares of Common Stock as the record
holder or holders thereof for all purposes at the close of business on the
next succeeding day on which such stock transfer books are open; provided
further, that such conversion shall be at the conversion rate in effect on
the date that such Debenture shall have been
16
<PAGE>
surrendered for conversion, as if the stock transfer books of the Company had
not been closed. Upon conversion of a Debenture, such person shall no longer be
a Holder of such Debenture.
(c) No payment or adjustment will be made for accrued interest on a
converted Debenture or for dividends or distributions on shares of Common
Stock issued upon conversion of a Debenture, but if any Holder surrenders a
Debenture for conversion between the record date for the payment of an
installment of interest and the next interest payment date, then,
notwithstanding such conversion, the interest payable on such interest
payment date shall be paid to the Holder of such Debenture on such record
date. In such event, such Debenture, when surrendered for conversion, must
be accompanied by delivery of a check or draft payable to the Conversion
Agent in an amount equal to the interest payable on such interest payment
date on the portion so converted. If such payment does not accompany such
Debenture, the Debenture shall not be converted; provided, however that no
such check or draft shall be required if such Debenture is surrendered for
conversion on the interest payment date. If the Company defaults in the
payment of interest payable on the interest payment date, the Conversion
Agent shall repay such funds to the Holder.
(d) If a Holder converts more than one Debenture at the same time, the
number of shares of Common Stock issuable upon the conversion shall be
based on the aggregate principal amount of Debentures converted.
(e) Upon surrender of a Debenture that is converted in part, the
Company shall execute, and deliver to the Holder a new Debenture equal in
principal amount to the unconverted portion of the Debenture surrendered.
7.8 Fractional Shares
The Company will not issue fractional shares of Common Stock upon
conversion of Debentures. In lieu thereof, the Company will pay an amount in
cash based upon the current market price of the Common Stock on the trading day
prior to the date of conversion, determined as provided in Section 7.11(e).
7.9 Taxes on Conversion.
If a Holder converts a Debenture, the Company shall pay any documentary,
stamp or similar issue or transfer tax due on the issue of shares of Common
Stock upon such conversion. However, the Holder shall pay any such tax which is
due because the Holder requests the shares to be issued in a name other than the
Holder's name. The Conversion Agent may refuse to deliver the certificates
representing the Common Stock being issued in a name other than the Holder's
name until the Conversion Agent receives a sum sufficient to pay any tax which
will be due because the shares are to be issued in a name other than the
Holder's name. Nothing herein shall preclude any tax withholding required by law
or regulations.
7.10 Company to Provide Stock.
(a) The Company shall, prior to issuance of any Debentures hereunder,
and from time to time as may be necessary, reserve, out of its authorized
but unissued Common Stock a sufficient number of shares of Common Stock to
permit the conversion of all outstanding Debentures for shares of Common
Stock. The shares of Common Stock or other Debentures issued upon
conversion of the Debentures shall bear any legend required by law. All
shares of Common Stock
17
<PAGE>
delivered upon conversion of the Debentures shall be newly issued shares or
treasury shares, shall be duly authorized, validly issued, fully paid and
non-assessable and shall be free from preemptive rights and free of any lien or
adverse claim.
(b) The Company will endeavor promptly to comply with all Federal and
state securities laws regulating the offer and delivery of shares of Common
Stock upon conversion of Debentures, if any, and will list or cause to have
quoted such shares of Common Stock on each national securities exchange or
in the over-the-counter market or such other market on which the Common
Stock is then listed or quoted.
7.11 Adjustment of Conversion Price.
The Conversion Price shall be adjusted from time to time by the Company as
follows:
(a) In the event the Company (i) fails for any reason to cause a
registration statement covering all of the Conversion Shares into which all
outstanding Debentures could be converted to be filed under the Act and to
become effective, and to remain effective, by and as of the 180th day
following the Closing Date, or (ii) fails thereafter to maintain such
registration statement in effect with respect to all such Conversion
Shares, in each case without same being subject to any stop order, or (iii)
otherwise fails to perform its duties with respect to the registration of
the Conversion Shares pursuant to the Registration Rights Agreement such
that all or any portion of the Conversion Shares may not legally be offered
or sold pursuant to an effective registration statement, then for each
month, or portion thereof, between the 180th day following the Closing Date
and the maturity of the Debentures that any such failure occurs or
continues the Conversion Price, as theretofore adjusted, shall be reduced
by $.0625 (as concomitantly adjusted to reflect prior adjustment to the
Conversion Price other than adjustments pursuant to this paragraph (a)),
provided that the aggregate reduction of the Conversion Price pursuant to
this paragraph (a) shall not exceed $375 (as concomitantly adjusted to
reflect prior adjustments to the Conversion Price other than adjustments
pursuant to this paragraph (a)).
(b) In case the Company shall (i) pay a dividend in shares of Common
Stock to holders of Common Stock, (ii) make a distribution in shares of
Common Stock to holders of Common Stock, (iii) subdivide its outstanding
Common Stock into a greater number of shares, or (iv) combine its
outstanding Common Stock into a smaller number of shares, the Conversion
Price in effect immediately prior thereto shall be adjusted so that the
Holder of any Debenture thereafter surrendered for conversion shall be
entitled to receive the number of shares of Common Stock which he would
have owned (attributable to Conversion Shares) had such Debenture been
converted immediately prior to the happening of such event. An adjustment
made pursuant to this paragraph (b) shall become effective immediately
after the record date in the case of a dividend or distribution and shall
become effective immediately after the effective date in the case of a
subdivision or combination.
(c) In case the Company shall issue rights or warrants to all or
substantially all holders of its Common Stock entitling them to subscribe
for or purchase shares of Common Stock (or securities convertible into
Common Stock) at a price per share less than the current market price per
share of Common Stock (as determined in accordance with paragraph (e)
below) at the record date for the determination of stockholders entitled to
receive such rights or warrants, the Conversion Price in effect immediately
prior thereto shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior
to such record date by a fraction of which the numerator shall be the
number of shares of Common Stock outstanding on
18
<PAGE>
such record date, plus the number of shares which the aggregate subscription or
purchase price for the total number of shares of Common Stock offered by the
rights or warrants so issued (or the aggregate conversion price of the
convertible securities offered by such rights or warrants) would purchase at
such current market price, and of which the denominator shall be the number of
shares of Common Stock outstanding, on such record date plus the number of
additional shares of Common Stock offered by such rights or warrants (or into
which the convertible securities so offered by such rights or warrants are
convertible). Such adjustment shall be made successively whenever any such
rights or warrants are issued, and shall become effective immediately after such
record date. If at the end of the period during which such rights or warrants
are exercisable not all rights or warrants shall have been exercised, the
adjusted Conversion Price shall be immediately readjusted to what it would have
been upon application of the foregoing adjustment substituting the number of
additional shares of Common Stock actually issued (or the number of shares of
Common Stock issuable upon conversion of convertible securities actually issued)
for the total number of shares of Common Stock offered (or the convertible
securities offered).
(d) In case the Company shall distribute to all or substantially all
holders of its Common Stock any shares of capital stock of the Company
(other than Common Stock) or evidences of its indebtedness, other
securities or other assets (excluding cash dividends or other cash
distributions to the extent paid from retained earnings of the Company with
funds legally available for such dividends or distributions under the laws
of the Company's state of incorporation), or shall distribute to all or
substantially all holders of its Common Stock rights or warrants to
subscribe for or purchase any of its securities (excluding those referred
to in paragraph (c) above), then in each such case the Conversion Price
shall be adjusted so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to the date of
such distribution by a fraction of which the numerator shall be the current
market price per share (as defined in paragraph (e) below) of the Common
Stock on the record date mentioned below less the fair market value on such
record date (as determined in good faith by the Board of Directors of the
Company) of the portion of the capital stock or evidences of indebtedness,
other securities or assets so distributed or of such rights or warrants, in
each case as applicable to one share of Common Stock, and of which the
denominator shall be the current market price per share (as defined in
paragraph (e) below) of the Common Stock on such record date. Such
adjustment shall become effective immediately after the record date for the
determination of shareholders entitled to receive such distribution.
Notwithstanding the foregoing, in the event that the Company shall
distribute rights or warrants (other than those referred to in paragraph
(c) above) ("Rights") pro rata to holders of Common Stock, the Company may,
in lieu of making any adjustment pursuant to this Section 7.11 make proper
provision so that each holder of a Debenture who converts such Debenture
(or any portion thereof) after the record date for such distribution and
prior to the expiration or redemption of the Rights shall be entitled to
receive upon such conversion, in addition to the shares of Common Stock
issuable upon such conversion (the "Conversion Shares"), a number of Rights
to be determined as follows: (i) if such conversion occurs on or prior to
the date for the distribution to the holders of Rights of separate
certificates evidencing such Rights (the "Distribution Date"), the same
number of Rights to which a holder of a number of shares of Common Stock
equal to the number of Conversion Shares is entitled at the time of such
conversion in accordance with the terms and provisions of and applicable to
the Rights; and (ii) if such conversion occurs after the Distribution Date,
the same number of Rights to which a holder of the number of shares of
Common Stock into which the principal amount of the Debenture so converted
was convertible immediately prior to the
19
<PAGE>
Distribution Date would have been entitled on the Distribution Date and
provisions of and applicable to the Rights.
(e) For the purpose of any computation under paragraph (d) above, the
current market price per share of Common Stock on any date shall be deemed
to be the average of the daily closing prices for 20 consecutive trading
days commencing 30 trading days before the record date with respect to any
distribution, issuance or other event requiring such computation. The
closing price for each day shall be the last reported sales price or, in
case no such reported sale takes place on such date, the average of the
reported closing bid and asked prices in either case on the principal
national securities exchange on which the Common Stock is listed or
admitted to trading or, if not listed or admitted to trading on any
national securities exchange, the closing sales price of the Common Stock
as quoted by NASDAQ, or in case no reported sale takes place, the average
of the closing bid and asked prices as quoted by NASDAQ or any comparable
system, or if the Common Stock is not quoted on NASDAQ or any comparable
system, the closing sales price or, in case no reported sale takes place,
the average of the closing bid and asked prices, as furnished by any two
members of the National Association of Securities Dealers, Inc. selected
from time to time by the Company for that purpose.
(f) In any case in which this Section 7.11 shall require that an
adjustment be made immediately following a record date established for
purposes of this Section 7.11, the Company may elect to defer (but only
until five business days following the mailing by the Company of notice of
an adjustment in accordance with Section 7.15 below) issuing to the holder
of any Debenture converted after such record date the shares of Common
Stock and other capital stock of the Company issuable upon such conversion
over and above the shares of Common Stock and other capital stock of the
Company issuable upon such conversion only on the basis of the Conversion
Price prior to adjustment; and, in lieu of the shares the issuance of which
is so deferred, the Company shall issue or cause its transfer agents to
issue due bills or other appropriate evidence of the right to receive such
shares.
7.12 No Adjustment.
No adjustment in the Conversion Price shall be required unless the
adjustment would require an increase or decrease of at least 1% in the
Conversion Price as last adjusted; provide, however, that any adjustments which
by reason of this Section 7.12 are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
with respect to conversion under this Section 7 shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be. No
adjustment to the Conversion Price shall be made for cash dividends or
distributions to the extent paid from retained earnings of the Company with
funds legally available therefor under the laws of the Company's state of
incorporation. No adjustment need be made for rights to purchase Common Stock or
issuances of Common Stock pursuant to a Company plan for reinvestment of
dividends or interest. No adjustment need be made for a change in the par value
or a change to no par value of the Common Stock. To the extent that the
Debentures become convertible into cash, no adjustment need be made thereafter
as to the cash. Interest will not accrue on the cash.
7.13 Equivalent Adjustments.
In the event that, as a result of an adjustment made pursuant to Section
7.11 above, the holder of any Debenture thereafter surrendered for conversion
shall become entitled to receive any shares
20
<PAGE>
of capital stock of the Company other than shares of its Common Stock,
thereafter the Conversion Price of such other shares so receivable upon
Conversion of any Debentures shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions with
respect to the conversion of Common Stock contained in this Section 7.
7.14 Adjustment for Tax Purposes.
The Company shall be entitled to make such reductions in the Conversion
Price, in addition to those required by Section 7.11, as it in its discretion
shall determine to be advisable in order that any stock dividends, subdivision
of shares, distribution of rights to purchase stock or other securities, or a
distribution of securities convertible into or exchangeable for stock hereafter
made by the Company to its stockholders shall not be taxable.
7.15 Notice of Adjustment.
Whenever the Conversion Price is adjusted, or Debentureholders become
entitled to other securities or due bills the Company shall promptly mail to
Debentureholders a notice of the adjustment and an Officers' Certificate briefly
stating the facts requiring the adjustment and the manner of computing it.
7.16 Notice of Certain Transactions.
In the event that:
(1) the Company takes any action which would require an adjustment in
the Conversion Price;
(2) the Company consolidates or merges with, or transfers all or
substantially all of its assets to, another corporation and
stockholders of the Company must approve the transaction; or
(3) there is a dissolution or liquidation of the Company;
the Company shall mail to Debentureholders a notice stating the proposed record
or effective date, as the case may be. The Company shall mail the notice at
least 10 days before the earlier of the proposed record date or the proposed
effective date. Failure to mail such notice or any defect therein shall not
affect the validity of any transaction referred to in clause (1), (2) or (3) of
this Section 7.16.
7.17 Effect of Reclassification, Consolidation, Merger or Sale on
Conversion Privilege.
If any of the following shall occur, namely: (i) any reclassification or
change of outstanding shares of Common Stock (other than a change in par value,
or from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination); (ii) any consolidation or merger to
which the Company is a party other than a merger in which the Company is the
continuing corporation and which does not result in any reclassification of, or
change (other than a change in name, or par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination) in, outstanding shares of Common Stock; or (iii) any sale or
conveyance of all or substantially all of the property or business of the
Company, then the Company, or such successor or purchasing corporation, as the
case may be, shall, as a condition
21
<PAGE>
precedent to such reclassification, change, consolidation, merger, sale or
conveyance, execute and deliver to each Holder of Debentures a supplemental
statement providing that the Holder of each Debenture then outstanding
shall have the right to convert such Debenture into the kind and amount of
shares of stock and other securities and property (including cash) receivable
upon such reclassification, change, consolidation, merger, sale or conveyance by
a holder of the number of shares of Common Stock deliverable upon conversion of
such Debenture immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance. Such supplemental statement shall
provide for adjustments of the Conversion Price which shall be as nearly
equivalent as may be practicable to the adjustments of the Conversion Price
provided for elsewhere in this Section 7. The foregoing, however, shall not in
any way affect the right a Holder of a Debenture may otherwise have, pursuant to
clause (ii) of the last sentence of Section 7.11(d), to receive Rights upon
conversion of a Debenture. If, in the case of any such consolidation, merger,
sale or conveyance the stock or other securities and property (including cash)
receivable thereupon by a holder of Common Stock includes shares of stock or
other securities and property of a corporation other than the successor or
purchasing corporation, as the case may be, in such consolidation, merger, sale
or conveyance, then such supplemental agreement shall also be executed by such
other corporation and shall contain such additional provisions to protect the
interests of the Holders of the Debentures as the Board of Directors of the
Company shall reasonably consider necessary by reason of the foregoing. The
provision of this Section 7.17 shall similarly apply to successive
consolidations, mergers, sales or conveyances. In the event the Company shall
execute a supplemental agreement pursuant to this Section 7.17, the Company
shall promptly send to each Holder of Debentures an Officers' Certificate
briefly stating the reasons therefor, the kind or amount of shares of stock or
other securities or property (including cash) receivable by Holders of the
Debentures upon the conversion of their Debentures after any such
reclassification, change, consolidation, merger, sale or conveyance, any
adjustment to be made with respect thereto and that all conditions precedent
have been complied with.
8. DEFAULT AND REMEDIES
8.1 Events of Default
(a) An "Event of Default" occurs if
(1) the Company defaults in the payment of interest on any
Debenture when the same becomes due and payable and the default
continues for a period of 5 business days;
(2) the Company defaults in the payment of the principal of
any Debenture when the same becomes due and payable at maturity,
upon repurchase or otherwise;
(3) the Company (i) (A) fails for any reason to cause a
registration statement covering all of the Conversion Shares into
which all of the outstanding Debentures could be converted to be
filed under the act and to become effective, and to remain
effective, by and as of the first anniversary of the Closing
Date, or (B) fails thereafter to maintain such registration
statement in effect with respect to all such Conversion Shares,
in each case without same being subject to any stop order, (ii)
fails to comply with any other covenant, warranty or agreement
contained in the Debentures or this Agreement and the default
under (i) (A), (i) (B) or (ii) above continues for a period of 30
days after notice thereof;
22
<PAGE>
(4) the Company shall fail to pay at maturity or at a date
fixed for prepayment or by acceleration (provided, however, such
acceleration is not withdrawn, cancelled or otherwise annulled
within 10 days following the occurrence of such acceleration)
principal of, premium, if any, or interest on any Indebtedness
(as hereinafter defined) other than the Debentures;
(5) final judgments or orders are rendered against the
Company which require the payment in money by the Company, either
individually or in the aggregate of an amount (to the extent not
covered by insurance) that is more than $100,000 and such
judgments or orders remain unsatisfied, undischarged, unvacated,
unbonded and unstayed for more than 30 days and are not being
contested in good faith by appropriate proceedings;
(6) the Company or any Subsidiary pursuant to or within the
meaning of any Bankruptcy Law (as hereinafter defined):
(A) commences a voluntary case or proceeding;
(B) consents to the entry of an order for relief
against it in an involuntary case or proceeding;
(C) consents to the appointment of a Custodian (as
hereinafter defined) of it or for all or substantially all
of its property; or involuntary case or proceeding;
(D) makes a general assignment for the benefit of its
creditors;
(7) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(A) is for relief against the Company or any Subsidiary
in an involuntary case or proceeding;
(B) appoints a Custodian of the Company or any
Subsidiary or for all or substantially all of the property
of any of them; or
(C) orders the liquidation of the Company or any
Subsidiary; and in each case the order or decree remains
unstayed and in effect for 60 days.
(b) For purposes of this Agreement, the following terms shall have the
following meaning:
(i) The term "Bankruptcy Law" means Title 11, U.S. Code or any similar
Federal or state law for the relief of debtors.
(ii) the term "Custodian" means any receiver, trustee, assignee,
liquidator, sequestrator or similar official under any Bankruptcy Law.
(iii) The term "Indebtedness" means (i) any obligation, contingent or
otherwise (a) for borrowed money, (b) evidence by a note, debenture or
similar instrument (including
23
<PAGE>
a purchase money obligation), (c) under-capitalized lease obligations, (d) in
respect of letters of credit (including reimbursement obligations with respect
thereto) or (e) to pay the deferred purchase price of property or services; (ii)
any obligation of others directly or indirectly guaranteed by the Company or any
Subsidiaries (including any monetary obligation of a keep-well or similar
nature); (iii) any obligation secured by a mortgage, pledge, lien, encumbrance,
charge or adverse claim affecting title or resulting in an encumbrance to which
the property or assets of the Company or any Subsidiary are subject, whether or
not the obligations secured thereby shall have been assumed by or shall
otherwise be the Company's or any Subsidiary's legal liability; (iv) to the
extent not otherwise included, obligations under currency swap agreements and
interest rate protection agreements or similar agreements; and (v) any and all
deferrals, renewals, extensions and supplements to, any liability of the kind
described in any of the preceding clauses (i), (ii), (iii) or (iv).
8.2 Acceleration.
If an Event of Default (other than an Event of Default specified in Section
8.1 (a) (6) or (7)) occurs the Holder of a Debenture may, by notice to the
Company, declare all unpaid principal of and accrued interest to the date of
acceleration on the Debentures then outstanding (if not then due and payable) to
be due and payable upon any such declaration, and the same shall become and be
immediately due and payable. If an Event of Default specified in Section 8.1
(a) (6) or (7) occurs, all unpaid principal of and accrued interest on the
Debentures then outstanding shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of any Debentureholder.
8.3 Other Remedies.
(a) If an Event of Default occurs and is continuing, the Holder of a
Debenture may pursue any available remedy by proceeding at law or in equity to
collect the payment of the principal of or interest on the Debentures or to
enforce the performance of any provision of the Debentures or this Agreement or
the Security Agreement.
8.4 A delay or omission by any Debentureholder in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative to the
extent permitted by law.
8.5 Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Agreement or the Security
Agreement, the right of any Holder of a Debenture to receive payment of
principal of and interest on the Debenture, on or after the respective dates on
which such payments are due expressed in the Debenture, or to bring suit for the
enforcement of any such payment on or after such respective dates, is absolute
and unconditional and shall not be impaired or affected without the consent of
the Holder.
8.6 Defaulted Interest.
If the Company defaults on a payment of interest on a Debenture, it shall
pay the defaulted interest in any lawful manner plus any interest payable on the
defaulted interest, to the Holder of such Debenture on a subsequent special
record date. The Company shall fix such special record date and the payment
date. At least 15 days before such special record date the Company shall mail to
24
<PAGE>
such Holder a notice that states the record date, the payment date and the
amount of interest to be paid, and on or before the payment date the Company
shall pay such amount to the record. Holder.
9. CONDITIONS TO CLOSING.
9.1 Conditions to Obligations of the Purchaser. Each Purchaser's obligation
to purchase the Debentures at the Closing is subject to the fulfillment, at or
prior to such Closing, of all of the following conditions:
(a) Representations and Warranties True; Performance of Obligations.
The representations and warranties made by the Company in Section 3 hereof
shall be true and correct in all material respects on the Closing Date with
the same force and effect as if they had been made on and as of said date;
except as described in or contemplated by the Offering Materials, the
business, assets, financial condition and results of operations of the
Company shall not have been adversely affected in any material way prior to
the Closing Date; and the Company shall have performed all obligations and
conditions herein required to be performed by it on or prior to the Closing
Date.
(b) Proceedings and Documents. All corporate and other proceedings in
connection with the transactions contemplated at the Closing hereby and all
documents and instruments incident to such transactions shall be reasonably
satisfactory in substance and form to the Purchaser.
(c) Qualifications, Legal Investment. All authorizations, approvals,
or permits, if any, of any governmental authority or regulatory body of the
United States or of any state that are required in connection with the
lawful sale and issuance of the Debentures pursuant to this Agreement, and
the perfection of a first lien on the patent rights of the Company and to
Subsidiaries as contemplated herein and in the Indentures shall have been
duly obtained and shall be effective on and as of the Closing Date. No stop
order or other order enjoining the sale of the Debentures shall have been
issued and no proceedings for such purpose shall be pending or, to the
knowledge of the Company, threatened by the SEC, or any commissioner of
corporations or similar officer of any state having jurisdiction over this
transaction. At the time of the Closing, the sale and issuance of the
Debentures shall be legally permitted by all laws and regulations to which
the Purchasers and the Company are subject.
(d) Registration Rights Agreement and Security Agreement. The Company
shall have entered into the Registration Rights Agreement and the Security
Agreement in substantially the forms included in the Offering Materials
(Tabs C and D, respectively).
(e) Legal Opinion. Counsel to the Company shall have provided a legal
opinion to the Purchasers dated as of the Closing Date reasonably
acceptable to the Placement Agent.
9.2 Conditions to Obligations of the Company. The Company's obligation to
issue and sell the Debentures at the Closing is subject to the fulfillment to
the Company's satisfaction, on or prior to the Closing, of the following
conditions:
(a) Representations and Warranties True. The representations and
warranties made by each Purchaser in Section 4 and by the Placement Agent
in Section 6 hereof shall be true
25
<PAGE>
and correct at the Closing Date with the same force and effect as if they had
been made on and as of the Closing Date.
(b) Performance of Obligations. Each Purchaser and the Placement Agent
shall have performed and compiled with all agreements and conditions herein
required to be performed or complied with by them on or before the Closing
Date, and each Purchaser shall have delivered payment to the Company in
respect of its purchase of Debentures.
(c) Qualifications, Legal Investment. All authorizations, approvals,
or permits, if any, of any governmental authority or regulatory body of the
United States or of any state that are required in connection with the
lawful sale and issuance of the Debentures pursuant to this Agreement shall
have been duly obtained and shall be effective on and as of the Closing
Date. No stop order or other order enjoining the sale of the Debentures
shall have been issued and no proceedings for such purpose shall be pending
or, to the knowledge of the Company, threatened by the SEC or any
commissioner of corporations or similar officer of any state having
jurisdiction over this transaction. At the time of the Closing, the sale
and issuance of the Debentures shall be legally permitted by all laws and
regulations to which each Purchaser and the Company are subject.
10. MISCELLANEOUS.
10.1 Governing Law. This Agreement shall be governed by and construed under
the laws of the Commonwealth of Pennsylvania without regard to principles of
conflict of laws.
10.2 Successors and Assigns. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors, and administrators of the parties hereto.
10.3 Entire Agreement. This Agreement and the Exhibits hereto and thereto,
and the other documents delivered pursuant hereto and thereto, constitute the
full and entire understanding and agreement among the parties with regard to the
subjects hereof and no party shall be liable or bound to any other party in any
manner by any representations, warranties, covenants, or agreements except as
specifically set forth herein or therein. Nothing in this Agreement, express or
implied, is intended to confer upon any party, other than the parties hereto and
their respective successors and assigns, any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
herein.
10.4 Severability. In case any provision of this Agreement shall be
invalid, illegal, or unenforceable, it shall to the extent practicable, be
modified so as to make it valid, legal and enforceable and to retain as nearly
as practicable the intent of the parties, and the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
10.5 Amendment and Waiver. Except as otherwise provided herein, any term 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, either
retroactively or prospectively, and either for a specified period of time or
indefinitely), with the written consent of the Company and the Purchaser and
with respect to any amendment or waiver of the provisions of Section 6, the
Placement Agent. Any amendment or waiver effected in accordance with this
section shall be binding upon each future
26
<PAGE>
holder of any Debenture purchased under this Agreement (including Shares into
which such Debentures have been converted) and the Company.
10.6 Notices. All notices and other communications required or permitted
hereunder shall be in writing and shall be deemed effectively given upon
personal delivery, on the first business day following mailing by overnight
courier, or on the fifth day following mailing by registered or certified mail,
return receipt requested, postage prepaid, addressed to the Company and the
Purchaser at the respective addresses included herein.
10.7 Fees and Expenses. The Company and the Purchasers shall bear their own
expenses and legal fees incurred on its behalf with respect to this Agreement
and the transactions contemplated hereby; provided, that in the event that the
transactions contemplated hereby close, the Company shall reimburse the
Placement Agent in accordance with the provisions of Section 6.4.
10.8 Titles and Subtitles. The titles of the paragraphs and subparagraphs
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
10.9 Counterparts. Subject to Section 1.1(d), this Agreement may be
executed in any number of counterparts, each of which shall be deemed an
original, but all of which together shall constitute one instrument.
11. CERTAIN DEFINITIONS
For the purpose of this Agreement, the following terms shall have the
meanings specified below:
(a) "Affiliate" means, with respect to any person or entity, any other
person or entity directly or indirectly controlling, controlled by, or
under direct or indirect common control with, such person or entity, but
shall exclude, with respect to the Company, a Holder of a Debenture and any
transferee that might be deemed to be an Affiliate of the Company solely by
reason of its ownership of Securities purchased by a Holder of a Debenture
under this Agreement or Securities issued in exchange for or upon exercise
of any such Securities, or by reason of its benefiting from any agreements
or covenants of the Company contained in this Agreement. A person or entity
shall be deemed to control another person or entity if such person or
entity possesses, directly or indirectly, the power to direct or cause the
direction of the management and pollicies of such other person or entity,
whether through the ownership or voting securities, by contract or
otherwise.
(b) "GAAP" means generally accepted accounting principles in the
United States of America as in effect at the time any determination is made
or financial statement is required hereunder as promulgated by the American
Institute of Certified Public Accountants, the Accounting Principles Board,
the Financial Accounting Standards Board or any other body existing from
time to time which is authorized to establish or interpret such principles,
applied on a consistent basis throughout any applicable period, subject to
any clause required by a change in GAAP; provided, however, that if any
change in generally accepted accounting principles during the term of this
Agreement affects the calculation of any financial covenant contained
herein, the parties hereto
27
<PAGE>
hereby agree to amend this Agreement to the effect that each such financial
covenant is not more or less restrictive than such covenant as in effect on the
date hereof.
(c) "Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including any agreement to give any of the
foregoing, any conditional sale or other title retention agreement, any
lease in the nature thereof and the filing of or agreement to give any
financial statement under the Uniform Commercial Code of any jurisdiction).
(d) "Material Adverse Effect" means a material adverse effect on the
business, earnings, condition (financial or other), assets, properties,
operations or prospects of the Company and its Subsidiaries taken as a
whole.
(e) "Subsidiary" means, with respect to any person or entity any
corporation or similar entity, a majority of the voting capital stock or
other voting equity of which shall, at the time as of which any
determination is made, be owned by such person or entity either directly or
through Subsidiaries.
(f) "Taxes" means, as to any person or entity, any net or gross income
taxes, franchise taxes, gross receipts taxes, stamp taxes, value added
taxes, sales taxes, use taxes, transfer taxes, net worth taxes, social
security wage and/or employment or unemployment taxes, gains taxes, profit
taxes, inventory taxes, real and personal property taxes, excise taxes,
taxes measured on or imposed by or on capital, levies, imposts, duties,
licensing fee, registration fees, withholding taxes, gains taxes, profits
taxes, estimate taxes, required deposits and charges of any nature
whatsoever relating to any of the foregoing, including without limitation,
interest, penalties, fines, additions to tax, assessments and deficiencies
related thereto and any liability as a transferee arising under the laws of
any Federal, state or local taxing authority."
28
<PAGE>
EXHIBIT I
[FORM OF FACE OF DEBENTURE]
Number _________________________ CUSIP _________________
THE SECURITY REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAW. THE
HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF THE
MED-DESIGN CORPORATION ("COMPANY") THAT THIS SECURITY MAY BE RESOLD, PLEDGED OR
OTHERWISE TRANSFERRED ONLY (1) TO TEE COMPANY (UPON CONVERSION OR REPURCHASE) OR
(2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT, OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE
OF THE UNITED STATES. IN CONNECTION WITH ANY TRANSFER PURSUANT TO CLAUSE (2)
ABOVE, THE HOLDER HEREOF WILL DELIVER TO THE COMPANY SUCH OPINION OF COUNSEL,
CERTIFICATES AND OTHER INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT
THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.
<PAGE>
THE MED-DESIGN CORPORATION
4% Convertible Collateralized Debenture due 2003
The Med-Design Corporation, a Delaware corporation (the "Company"),
promises to pay to ________________________, or registered assigns, the
principal sum of ___________________ Dollars ($_________) on ____________, 2003
and interest as hereinafter provided.
Interest Payment Dates: ___________________, __________________, ____________
and ______________
Record Dates: ___________________, __________________, ____________ and
______________
This Debenture is convertible at such times and in such manner as
hereinafter specified. Additional provisions of this Debenture are set forth on
the other side of this Debenture and in the Debenture Purchase Agreement
hereinafter referred to.
THE MED-DESIGN CORPORATION
Dated: By:
------------------------
Name:
Title:
[SEAL]
Attest:
By:
---------------------------------
Name:
Title:
This is one of the Debentures referred to in the Debenture Purchase Agreement
among the Company, certain purchasers of Debentures (collectively, the
"Purchasers") and Pennsylvania Merchant Group dated, 1998 (the "Purchase
Agreement"). The terms of this Debenture include the terms of the Purchase
Agreement.
<PAGE>
[FORM OF REVERSE SIDE OF DEBENTURE]
The Med-Design Corporation
4% Convertible Collateralized Debenture due 2003
1. Interest.
The Company promises to pay interest on the principal amount of this
Debenture at the rate per annum shown above. The Company shall pay interest
quarterly on _____________, ______________, _________________ and ____________
of each year, commencing ____________, 1998. Interest on the Debenture will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of first issuance of the Debenture.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
2. Method of Payment.
The Company will pay interest on this Debenture (except defaulted interest)
on ________________, ___________, and ____________ (each an "Interest Payment
Date") to the person who is the registered Holder of this Debenture at the close
of business on the ___________, ____________, ____________ and ___________,
respectively, next preceding the relevant Interest Payment Date. The Holder must
surrender this Debenture to the Company to collect payment of principal. The
Company will pay principal in money of the United States that at the time of
payment is legal tender for payment of public and private debts. The Company
shall pay interest in such money, or alternatively at its election, the Company
may pay interest or a portion thereof in the form of shares of the Company's
Common Stock. For purposes of the preceding sentence the value of the Company
Common Stock shall be the average of the last reported sale prices thereof for
the five trading days immediately preceding the relevant Interest Payment Date.
The Company, however, may pay principal and cash interest by check or wire
transfer and may mail a cash interest check or certificates for shares of its
Common Stock in lieu thereof to the Holder's last registered address on the
Company's records.
3. Paying Agent, Registrar and Conversion Agent.
Initially, the Company will act as Paying Agent, Registrar and Conversion
Agent. The Company may change any Paying Agent, Registrar or Conversion Agent
and shall provide prompt notice of such change to the Holder.
<PAGE>
4. Limitation as to Arnount.
The Debentures are limited to up to $1,500,000 aggregate principal amount.
5. Redemption.
The Debentures are not redeemable or prepayable at the Company's option, in
whole or in part.
6. Repurchase of Debentures at Option of Holder Upon a Change in Control.
If at any time that Debentures remain outstanding there shall have occurred
a Change in Control (as defined in the Purchase Agreement), at the option of the
Holder and subject to the terms and conditions of the Purchase Agreement, the
Company shall repurchase all or any part specified by the Holder (so long as the
principal amount of such part is $1,000 or an integral multiple thereof) of the
Debentures held by such Holder on the Repurchase Date (as defined in the
Purchase Agreement). The Holder shall have the right to withdraw any Repurchase
Notice (as defined in the Purchase Agreement) by delivering a written notice of
withdrawal to the Paying Agent in accordance with the terms of the Purchase
Agreement.
7. Conversion.
The Debenture shall be convertible into shares of the Company's
Common Stock (the "Conversion Shares") at the Conversion Price (as defined in
the Purchase Agreement) at the election of the Holder or, under certain
circumstances, at the election of the Company, in each case, as provided in the
Purchase Agreement. The initial Convqrsion Price is $1.25 per share of Common
Stock, subject to adjustment under certain circumstances as described in the
Purchase Agreement.
8. Security
The Debentures are secured pursuant to the Security Agreement dated
_______________, 1998 among the Company and the Purchasers (the "Security
Agreement").
9. Registration Rights.
The Holders of the Debentures are entitled to the benefits of the
Registration Rights Agreement among the Company and the Purchasers dated
________________, 1998, with respect to the registration with the United States
Securities and Exchange Commission of the Conversion Shares.
<PAGE>
10. Denominations. Transfer. Exchange.
The Debentures are in registered form without coupons in denominations of
$1,000 and integral multiples thereof. A Holder may register the transfer of or
exchange Debentures subject to the terms of the Purchase Agreement. The
Registrar may require a Holder, among other things, to furnish appropriate
endorsements and transfer documents and to pay any taxes or other governmental
charges that may be imposed by law or permitted by the Purchase Agreement.
11. Persons Deemed Owners.
The registered holder of a Debenture may be treated as the owner of it for
all purposes.
12. Unclaimed Money.
If money for the payment of principal or interest remains unclaimed for two
years, the Paying Agent will pay the money back to the Company at its request.
After that, Holders entitled to money must look to the Company for payment.
13. Defaults and Remedies.
An Event of Default is defined in the Purchase Agreement and includes,
among other events: default for 5 business days in payment of interest on the
Debentures; default in payment of principal on the Debentures when due; failure
by the Company for 30 days after notice to it to comply with any of its other
affirmative or negative covenants contained in the Purchase Agreement or the
Debentures; certain events of bankruptcy, insolvency or reorganization of the
Company or any of its subsidiaries; and certain defaults on other indebtedness.
If an Event of Default (other than as a result of certain events of bankruptcy,
insolvency or reorganization) occurs and is continuing, the Holder of a
Debenture then outstanding may declare all unpaid principal of and accrued
interest to the date of acceleration on such Debenture then outstanding to be
due and payable immediately, all as and to the extent provided in the Purchase
Agreement. If an Event of Default occurs as a result of certain events of
bankruptcy, insolvency or reorganization, all unpaid principal of and accrued
interest on the Debentures then outstanding shall become due and payable
immediately without any declaration or other act on the part of any Holder, all
as and to the extent provided in the Purchase Agreement. The rights of a Holder
with respect to the collateral provided for in the Security Agreement shall be
determined in accordance with the Security Agreement.
14. Abbreviations and Definitions.
Customary abbreviations may be used in the name of a Holder or an assignee,
such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties),
JT TEN (= joint tenants with right of survivorship and not as tenants in
common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors Act).
<PAGE>
All capitalized terms used in this Debenture and not specifically defined
herein are defined in the Purchase Agreement and are used herein as so defined.
15. Purchase Agreement to Control.
In the case of any conflict between the provisions of this Debenture and
the Purchase Agreement, the provisions of the Purchase Agreement shall control.
The Company will furnish to any Holder, upon written request and without
charge, a copy of the Purchase Agreement. Requests may be made to:
[ ]
<PAGE>
OPTION OF HOLDER TO ELECT REPURCHASE
If you want to elect to have this Debenture repurchased by the Company pursuant
to Section __________ of the Purchase Agreement, check the box:
[ ]
If you want to elect to have only part of this Debenture repurchased by the
Company pursuant to Section ____ of the Purchase Agreement, state the amount to
be repurchased:
$ _____________
Date: ________________ Your Signature _____________________________
(Sign exactly as your name
appears on the other side of
this Debenture)
Signature Guarantee:
____________________________________
Date: ______________________
___________________________
NOTICE: The signature to
this assignment must
correspond with the name as
written upon the face of
the within-mentioned
instrument in every
particular, without
alteration or any change
whatsoever.
Signature Guarantee: _________________________________
TO BE COMPLETED BY PURCHASER EF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this
Debenture for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is an accredited
investor within the meaning of Regulation D under the Securities Act of 1933, as
amended, and is aware that the sale to it is being made in reliance on
Regulation D and acknowledges that it has received such information regarding
the Company as the undersigned has requested pursuant to Regulation D or has
determined not to request such information and that it is aware that the
transferor is relying upon the undersigned's foregoing representation in order
to claim the exemption from registration provided by Regulation D.
Dated: ____________________ ______________________________________________
NOTICE: To be executed by an executive officer
<PAGE>
CONVERSION NOTICE
To convert this Debenture into Common Stock of the Company, check the box.
| |
To convert only part of this Debenture, state the amount to be converted:
| |
If you want the stock certificate made out in another person's name, fill in
the form below:
| |
(insert other person's social security or tax I.D. number)
(Print or type other person's name,
address and zip code) _________________________________________________________
Date: _________________________________
Your Signature:* _____________________________________________________________
*(Sign exactly as your name appears
on the other side of this Debenture)
*Signature guaranteed by: ________________________________________________
By: ____________________________________________
*The signature must be guaranteed by a bank, a trust company or a member firm
of the New York Stock Exchange.
<PAGE>
TRANSFER NOTICE
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
________________________________________________________________________________
________________________________________________________________________________
(Please print or typewrite name and address including zip code of assignee)
________________________________________________________________________________
the within Debenture and all rights thereunder, hereby irrevocably constituting
and appointing
________________________________________________________________________________
attorney to transfer such Debenture on the books of the Company with full
power of substitution in the premises.
<PAGE>
THE MED-DESIGN CORPORATION
DEBENTURE PURCHASE AGREEMENT AND
REGISTRATION RIGHTS AGREEMENT
SIGNATURE PAGE
Please complete two copies of the Signature Page and return both copies to:
Pennsylvania Merchant Group, Four Falls Corporate Center, West Conshohocken, PA
19428-2961, Attn: Mary E. Bowler.
________________________________ _____________________________
Purchaser's Name-Please Print Nominee Name (if appropriate)
________________________________ _____________________________
Social Debenture/Tax I.D. Number Telephone Number
________________________________ _____________________________
Address City, State and Zip Code
________________________________ _____________________________
Signature Date
________________________________________________________________________________
Amount of Debentures To Be Purchased $ _________________________
FUNDS SHOULD BE WIRED TO: SUMMIT BANK/Trust, Attention: Shernetta Harris
Hackensack, NJ ABA #021202162. For credit to the Account of Med-Design
Corporation - Trust Account #2970056354.
AGREED TO AND ACCEPTED:
PENNSYLVANIA MERCHANT GROUP
By: _____________________________ Date: ___________________________
Mary E. Bowler
Vice President - Administration
By: _____________________________ Date: ___________________________
29
WARRANT NO. __________________
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK UNDERLYING THIS WARRANT
OF THE MED-DESIGN CORPORATION (THE "COMPANY") HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), NOR UNDER ANY
SECURITIES LAW AND MAY NOT BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED UNTIL (i) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES LAW OR (ii) THE COMPANY RECEIVES AN
OPINION OF COUNSEL IN A FORM REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH
WARRANT OR SHARES MAY BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES
LAWS.
WARRANT TO PURCHASE COMMON STOCK
OF
THE MED-DESIGN CORPORATION
This is to certify that, FOR VALUE RECEIVED, John F. Kelley (the
"Warrantholder") is entitled to purchase, subject to the provisions of this
Warrant, from The Med-Design Corporation, a Delaware Corporation (the
"Company"), two hundred thousand (200,000) fully paid, validly issued and
nonassessable shares of Common Stock, $.01 par value per share (the "Common
Stock"), of the Company (the "Warrant Shares") at a price equal to $1.25 per
share (the "Exercise Price").
(1) GRANT AND VESTING. The Warrant was granted on September 10, 1998, with
vesting according to the following schedule:
(A) 100,000 shares vested on December 11, 1998
(B) 100,000 shares vested on December 23, 1998
<PAGE>
(2) EXERCISE OF WARRANT.
(A) This Warrant may be exercised in whole or in part at any time or
from time to time on or after the date hereof and until December 23, 2003 (the
"Expiration Date"), provided, however, that if any such day is a day on which
banking institutions in the State of New York are authorized by law to close,
then on the next succeeding day. This Warrant may be exercised by presentation
and surrender hereof to the Company at its principal office, or at the office
of its stock transfer agent, if any, with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price of the number of
Warrant Shares specified in such form. As soon as practicable after each such
exercise of the warrant, but not later than seven (7) days from the date of such
exercise, the Company shall issue and deliver to the Warrantholder a certificate
or certificates for the Warrant Shares issuable upon such exercise, registered
in the name of the Warrantholder. If this Warrant should be exercised in part
only, the Company shall, upon surrender of this Warrant for cancellation,
execute and deliver a new Warrant evidencing the rights of the Warrantholder
thereof to purchase the balance of the Warrant Shares purchasable thereunder.
Upon receipt by the Company of this Warrant at its office, or by the stock
transfer agent of the Company at its office, in proper form for exercise, the
Warrantholder shall be deemed to be the holder of record of the shares of Common
Stock issuable upon such exercise, notwithstanding that the stock transfer books
of the Company shall then be closed or that certificates representing such
shares of Common Stock shall not then be physically delivered to the
Warrantholder.
(B) In the event the Company shall at any time subdivide, combine or
reclassify the outstanding shares of Common Stock, the number of Warrant Shares
subject to this Warrant shall be adjusted accordingly and the Exercise Price
shall forthwith be proportionately decreased in the case of a subdivision or
increased in the case of a combination.
(3) RESERVATION OF SHARES. The Company shall at all times reserve for
issuance and/or delivery upon exercise of this Warrant such number of shares of
its Common Stock as shall be required for issuance and delivery upon exercise of
the Warrant.
(4) FRACTIONAL SHARES. No fractional shares or script representing
fractional shares shall be issued upon the exercise of this Warrant.
(5) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is
exchangeable, without expense, at the option of the Warrantholder, upon
presentation and surrender hereof to the Company or at the office of its stock
transfer agent, if any, for other warrants of different denominations entitling
the Warrantholder thereof to purchase in the aggregate the same number of shares
of Common Stock purchasable hereunder. Upon surrender of this Warrant to the
Company at its principal office or at the
2
<PAGE>
office of its stock transfer agent, if any, with the Assignment Form annexed
hereto duly executed and funds sufficient to pay any transfer tax the Company
shall, without charge, subject to the restrictions set forth in Section (5),
execute and deliver a new Warrant in the name of the assignee named in such
instrument of assignment and this Warrant shall promptly be canceled. This
Warrant may be divided or combined with other warrants which carry the same
rights upon presentation hereof at the principal office of the Company or at the
office of its stock transfer agent, if any, together with a written notice
specifying the names and denominations in which new Warrants are to be issued
and signed by the Warrantholder hereof. The term "Warrant" as used herein
includes any Warrants into which this Warrant may be divided or exchanged. Upon
receipt by the Company of evidence satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of reasonably satisfactory indemnification, and upon surrender and
cancellation of this Warrant, if mutilated, the Company will execute and deliver
a new Warrant of like tenor and date.
(6) RESTRICTIONS ON TRANSFER. This Warrant and all rights hereunder are
transferrable, in whole or in part, only to the Company by the Warrantholder in
person or by a duly authorized attorney except as set forth in Subparagraph (A).
(A) Restrictions in General. Prior to any Transfer (as defined below)
of this Warrant or the Warrant Shares, the Warrantholder will give ten (10)
days' written notice to the Company of such Warrantholder's intention to effect
such Transfer. Each such notice shall describe the manner and circumstances of
the proposed Transfer and shall be accompanied by an opinion, addressed to the
Company and reasonably satisfactory in form and substance to it, of counsel for
such Warrantholder, stating whether, in the opinion of such counsel, such
Transfer will be a transaction exempt from registration under the Securities Act
and applicable state securities laws. If such Transfer may in the opinion of
such counsel be effected without registration under the Securities Act and
applicable state securities laws, such Warrantholder shall thereupon be entitled
to Transfer this Warrant and the Warrant Shares in accordance with the terms of
the notice delivered by such Warrantholder to the Company. If in the opinion of
such counsel such Transfer may not be effected without registration under the
Securities Act, such Warrantholder shall not be entitled to so Transfer this
Warrant or the Warrant Shares unless the Company elects or is obligated under
Section (7) to file a registration statement relating to such proposed Transfer
and such registration statement has become effective under the Securities Act
and applicable state securities laws.
(B) "Transfer" means, with respect to the Warrants, the Warrant Shares,
or any interest therein, any disposition which would constitute a sale thereof
within the meaning of the
3
<PAGE>
Securities Act.
(7) RIGHTS OF THE WARRANTHOLDER. The Warrantholder shall not, by virtue
hereof, be entitled to any rights of a shareholder in the Company, either at law
or equity, and the rights of the Warrantholder are limited to those expressed in
the Warrant and are not enforceable against the Company except to the extent set
forth herein.
(8) REGISTRATION UNDER THE SECURITIES ACT OF 1933. The Company shall, for a
period of five (5) years from the date of the Warrant herein granted, advise the
Warrantholder or any then holder of Warrant Shares (such persons being
collectively referred to herein as "Warrantholders") by written notice at least
thirty (30) days prior to the filing of any registration statement (other than a
registration effected solely to implement a transaction of the type for which
form S-4 or form S-8 or any successor form is available) with the Securities and
Exchange Commission (the "Commission") under the Securities Act covering
securities of the Company. Each filing notice shall offer to the Warrantholder
the opportunity to include such number of shares as it may request in the
registration statement to which the filing notice relates and shall advise the
Warrantholder whether or not such registration statement is intended to cover an
underwritten public offering (an "Underwritten Offering"). If the Warrantholder
desires to have his shares included in a registration statement, he shall so
advise the Company in writing (a "Registration Request") within ten (10) days
after the date of receipt of the related filing notice, which Registration
Request shall set forth the number of shares for which registration is
requested. Subject to the provisions of Section (8) of this Agreement, the
Company shall include in a registration statement all shares for which it has
timely received a Registration Request.
Notwithstanding anything to the contrary herein, the Company shall have the
right at any time (irrespective of whether a written Registration Request shall
have been made) to elect not to file any such proposed registration statement,
or to withdraw the same after the filing but prior to the Effective Date
thereof.
(9) UNDERWRITTEN OFFERINGS.
(A) Participation and Limitations. If a registration statement is for
an Underwritten Offering, the right of Warrantholder to registration pursuant to
Section (7) hereof shall be conditioned upon (1) the Warrantholder's
participation in such Underwritten Offering and the inclusion of Warrantholder's
Warrant Shares in the Underwritten Offering to the extent provided herein and
(2) the execution and delivery by Warrantholder of an underwriting agreement in
customary form with the underwriter or underwriters selected by the Company to
manage such Underwritten Offering (individually or collectively, the
"Underwriter"). If the
4
<PAGE>
Underwriter determines that the inclusion of Warrant Shares in such Underwritten
Offering would adversely affect the success of such offering, then the amount of
securities to be included in the Underwritten Offering shall, subject to then
existing agreements to which the Company is presently a party concerning the
registration of Common Stock, be as follows: (1) first, the number of shares of
Common Stock to be offered and sold for the account of the Company (up to the
maximum number of shares of Common Stock as determined by the Underwriter) and
(2) second, if additional shares of Common Stock may then be included in such
Underwritten Offering, such additional number of shares of Common Stock to be
offered and sold for the account of the Warrantholders, which (a) together with
the shares of Common Stock to be offered and sold for the account of the Company
shall not exceed the maximum number of shares of Common Stock as determined by
the Underwriter and (b) shall be allocated among the Warrantholders pro rata
based upon the aggregate number of Warrant Shares requested by each such
Warrantholder to be included in such Underwritten Offering. In addition, the
number of Shares to be included in any Underwritten Offering may, in the
discretion of the Company or the Underwriter, be rounded to the nearest one
hundred (100) shares. If a Warrantholder disapproves of the terms of such
Underwritten Offering, then he may elect to withdraw therefrom by written notice
to the Company and the Underwriter at any time prior to the date on which the
registration statement therefore is declared effective by the Commission (a
"Withdrawal Notice"). Any Shares subject to a Withdrawal Notice shall be
withdrawn and excluded from the registration statement for the Underwritten
Offering to which the Withdrawal Notice relates.
(B) Restrictions on Sales of Shares. If Warrant Shares are covered by a
registration statement for an Underwritten Offering, Warrantholder agrees, if
requested by the Underwriter and timely notified in writing by the Company or
the Underwriter, not to effect any public sale or distribution of Shares
(including a sale pursuant to Rule 144 under the Securities Act) except as part
of such Underwritten Offering during the period commencing on the tenth day
prior to the closing date for such Underwritten Offering and ending on the
forty-sixth day after such closing date.
(10) REGISTRATION PROCEDURES. In the case of each registration of
securities covered by Section (7) hereof (each a "Registration") for which
Warrantholder has timely delivered a Registration Request and has not delivered
a Withdrawal Notice, the Company will keep Warrantholder advised in writing of
the initiation and completion of such registration and will take the following
actions at its own expense:
(A) prepare and file with the Commission a registration statement for
such Shares as are entitled to be included therein, use its best efforts to
cause such registration statement to become effective, and, upon the request of
Warrantholder, keep such registration statement effective for not
5
<PAGE>
less than ninety (90) days;
(B) prepare and file with the Commission 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 Securities Act with respect to the disposition of all
securities covered by such registration statement;
(C) furnish to Warrantholder at least one (1) copy of the registration
statement and any post-effective amendments thereto and such number of copies of
a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, as he may reasonably request;
(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 Warrantholder, provided
that the Company 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 jurisdiction;
(E) in any Underwritten Offering, enter into and perform its
obligations under an underwriting agreement, in usual and customary form, with
the Underwriter;
(F) promptly notify Warrantholder at any time when a prospectus
relating to such registration statement is required to be delivered under the
Securities Act because 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) bear the entire cost and expense of any registration of securities
initiated by it under Section (9) (A) notwithstanding that Warrant Shares
subject to this Warrant may be included in any such registration statement
pursuant to this Section (9) Warrantholder shall, however, bear the fees of his
own counsel and any registration fees, transfer taxes or underwriting discounts
or commissions applicable to the Warrant Shares sold by it pursuant thereto.
The Company's agreements with respect to Warrants or Warrant Shares in
Section (7), (8) and (9) shall continue in effect as provided therein regardless
of the exercise and surrender of this Warrant.
6
<PAGE>
(11) WARRANTHOLDER NOT OBLIGATED. Neither the giving of any notice by any
Warrantholder nor the making of any request for prospectuses shall impose any
obligation to sell any Warrant Shares, or exercise any Warrants upon such
Warrantholder or owner making such request.
(12) INDEMNIFICATION.
(A) The Company shall indemnify and hold harmless each such
Warrantholder and each Underwriter, within the meaning of the Securities Act,
who may purchase from or sell for any such Warrantholder any Warrant Shares from
and against any and all losses, claims, damages and liabilities caused by any
untrue statement or alleged untrue statement of a material fact contained in the
registration statement or any post-effective amendment thereto or any
registration statement under the Securities Act or any prospectus included
therein required to be filed or furnished by reason of Section (7) or caused by
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages or liabilities are caused by any
such untrue statement or alleged untrue statement or omission or alleged
omission based upon information furnished or required to be furnished in writing
to the Company by such Warrantholder or Underwriter expressly for use therein,
which indemnification shall include each person, if any, who controls any such
person within the meaning of the Securities Act; provided however, that the
Company shall not be obliged so to indemnify any such Underwriter or controlling
person unless such Underwriter shall at the same time indemnify the Company, its
directors, each officer signing the related registration statement and each
person, if any, who controls the Company within the meaning, of the Securities
Act, from and against any and all losses, claims, damages and liabilities caused
by any untrue statement or alleged untrue statement of a material fact contained
in the registration statement or amendments thereto or any prospectus required
to be filed or furnished by reason of Section (7) or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statement therein not misleading, insofar as such
losses, claims, damages or liabilities are caused by any untrue statement or
alleged untrue statement or omission based upon information furnished in writing
to the Company by any such Underwriter expressly for use therein.
(B) Warrantholder will, if Shares are included in the securities as to
which such Registration is being effected, indemnify the Company, each of its
directors and officers, each Underwriter of securities covered by such a
registration statement, and each person who controls the Company or such
Underwriter within the meaning of Section 15 of the Securities Act against all
expenses, claims, losses, damages and liabilities (or actions in respect
thereof), including any of the foregoing incurred in
7
<PAGE>
settlement of any litigation, whether commenced or threatened, arising out of or
based on any untrue statement (or alleged untrue statement) of a material fact
contained in any such registration statement, any prospectus, offering circular
or other document related thereto, or any amendment or supplement to any of the
foregoing, or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and will reimburse the Company and such directors, officers,
persons, Underwriter or control persons for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by Warrantholder and stated to be specifically for use therein;
(C) Each party entitled to indemnification or contribution under this
Section (11) (an "Indemnified Party") shall give notice to the party required to
provide indemnification (an "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section (11), unless such
failure is prejudicial to the Indemnifying Party's ability to defend such
action. An Indemnifying Party, in the defense of any such claim or litigation,
shall not except with the consent of each Indemnified Party, consent to entry of
any judgement or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
(D) If the indemnification provided herein is unavailable to an
Indemnified Party in respect of any losses, claims, damages or liabilities
referred to herein, then the Indemnifying Party, in lieu of indemnifying such
Indemnified Party hereunder, shall contribute to the amount paid or payable by
such Indemnified Party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and Warrantholder from the offering or (ii) if
the allocation provided by clause (i) is not permitted by applicable law, in
such proportion as is
8
<PAGE>
appropriate to reflect not only the benefits referred to in clause (i), but also
the relative fault of the Company and Warrantholder in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company and Warrantholder shall be deemed to
be in the same respective proportions as the net proceeds from the offering
(before deducting expenses) received by each of the Company and Warrantholder.
The relative fault of Warrantholder shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by Warrantholder and the parties, relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
(13) NO LIMITATION ON CORPORATE ACTION. No provisions of this Warrant and
no right or option granted or conferred hereunder shall in any way limit,
affect, or abridge the exercise by the Company of its corporate rights or powers
to recapitalize, amend its articles or incorporation or bylaws, reorganize,
consolidate or merge with or into any corporation, or transfer all or any part
of its property or assets or the exercise of any other of its corporate rights
and powers.
(14) REPRESENTATION OF WARRANTHOLDER. Warrantholder, by the acceptance
hereof, represents that it is acquiring this Warrant for its own account for
investment and not with a view to, or sale in connection with, any distribution
hereof or of any of the Warrant Shares issuable upon the exercise hereof, nor
with the present intention of distributing any of such securities.
(15) RESTRICTIVE LEGEND. Each certificate representing Warrant Shares
initially issued upon exercise of this Warrant, unless at the time of exercise
such Warrant Shares are registered under the Securities Act, shall bear the
following legend (and any additional legend required by any applicable state
securities laws) on the face thereof:
The securities represented hereby have been registered under the
Securities Act 1933 and the transfer of such securities is
subject to the restrictions set forth in Section (5) of the
Warrant delivered to registered Warrantholder thereof, a copy of
which is available for inspection at the principal office and no
transfer of such securities shall be valid or effective unless
and until the terms and conditions of such Section (5) shall have
been in satisfied.
9
<PAGE>
Any certificate issued at any time upon transfer or, or in exchange for or
replacement of, any certificate bearing such legend (except a new certificate
issued upon completion of a public distribution pursuant to a registration under
the Securities Act) shall also bear such legend unless, in the opinion of
counsel for the Warrantholder, addressed and delivered to the Company, which
opinion shall be in a form reasonably satisfactory and acceptable to the Company
and such Warrantholder, the securities represented thereby need no longer be
subject to the restrictions contained in Section (5). The provisions of this
Warrant shall be binding upon all subsequent Warrantholders of certificates
bearing the legend hereinbefore described and shall also be applicable to all
subsequent Warrantholders.
(16) GOVERNING LAW. This Warrant shall be governed by construed and
enforced in accordance with the laws of the State of Delaware, without giving
effect to principles of conflicts of laws.
(17) NOTICE. All notices and other communications under this Warrant shall
(a) be in writing (which shall include communications by telex and telecopy),
(b) be (i) sent by registered or certified mail, postage prepaid, or by a
reputable overnight courier (ii) delivered by hand or (iii) transmitted by telex
or telecopier (c) be given at the following respective addresses and telex,
telecopier and telephone numbers and to the attention of the following persons:
If the Company, to it at:
The Med-Design Corporation
2810 Bunsen Avenue
Ventura, CA 93003
Telecopier No.: (805) 339-9375
Telephone No.: (805) 339-0375
Attn: James M. Donegan
If the Warrantholder, to it at:
John F. Kelley
6 Hathaway Drive
Princeton Junction, NJ 08550
Telecopier No.: (609) 275-8865
Telephone No.: (609) 275-9163
or at such other address or telex, telecopier or telephone number or to the
attention of such other person as the party to whom such information pertains
may hereafter specify for the purpose in a notice to the other specifically
captioned "Notice of Change of Address", and (d) be effective or deemed
delivered or furnished (i) if given by mail, on the fifth (5th) Business Day
after such communication is deposited in the mail, addressed as above provided,
(ii) if given by telex or telecopier, when such
10
<PAGE>
communication is transmitted to the appropriate number determined as above
provided in this Section and the appropriate answer back is received or receipt
is otherwise acknowledged, (iii) if given by hand delivery, when left at the
address of the addressee addressed as above provided, and (iv) if sent by
overnight courier, the day after the communication is delivered to such carrier
except that notices of a change of address, telex, telecopier or telephone
number, shall not be deemed furnished, until received.
(18) MISCELLANEOUS. This Warrant and any term hereof may be changed,
waived, discharged, or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. The headings in this Warrant are for purposes of reference only and
shall not limit or otherwise affect the meaning hereof.
(19) DATE AND EFFECTIVENESS. This Warrant, in all events, shall be wholly
void and of no effect after the close of business on the Expiration Date, unless
the Warrant shall have been exercised, in which case this Agreement shall
terminate on the third anniversary of the date of the exercise or partial
exercise of the Warrant herein granted except as provided in Sections (7) and
(9).
The undersigned hereby set their hands and seals to this Warrant Agreement
with full knowledge of its contents and intending thereby to be legally bound.
ATTEST: THE MED-DESIGN CORPORATION
By:______________________________ By: ______________________________
Secretary James M. Donegan
President, CEO
WITNESS:
_________________________________ __________________________________
DATED: John F. Kelley
11
<PAGE>
PURCHASE FORM
-------------
Dated_____________
The undersigned hereby irrevocably elects to exercise the within Warrant to
the extent of purchasing ________________ shares of, Common Stock and hereby
makes payment of __________________ in payment of the actual exercise price
thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
--------------------------------------
Name _______________________________________________________________________
(Please typewrite or print in block letters)
Address ____________________________________________________________________
Signature __________________________________________________________________
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, _______________________________________________
hereby sells, assigns and transfers unto
Name _______________________________________________________________________
(Please typewrite or print in block letters)
Address ____________________________________________________________________
the right to purchase Common Stock represented by this Warrant to the extent of
_______________ shares as to which such right is exercisable and does hereby
irrevocably constitute and appoint ____________________ Attorney, to transfer
the same on the books of the Company with full power of substitution in the
premises.
Date: ____________________
Signature ____________________________
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from The
Med-Design Corporation and subsidiaries Consolidated Statement of Operations for
the year ended December 31, 1998 and balance sheet as at December 31, 1998 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 32,883
<SECURITIES> 6,111,620
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,317,509
<PP&E> 1,484,380
<DEPRECIATION> 619,113
<TOTAL-ASSETS> 8,482,885
<CURRENT-LIABILITIES> 652,615
<BONDS> 1,579,824
0
3,000
<COMMON> 79,516
<OTHER-SE> 6,167,930
<TOTAL-LIABILITY-AND-EQUITY> 8,482,885
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 242,521
<INCOME-PRETAX> 882,889
<INCOME-TAX> 0
<INCOME-CONTINUING> 882,889
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 882,889
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
