-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MjZjHuWrzUtNYpntRk+mIkYghm7SNa5ukUBzlv1nFGqVz6emW82Yx63fPh7SQElS 52NSXr18rO5F7hpGZlOpvA== 0001011438-04-000309.txt : 20060316 0001011438-04-000309.hdr.sgml : 20060316 20040923105605 ACCESSION NUMBER: 0001011438-04-000309 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 20040923 DATE AS OF CHANGE: 20050203 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVERSAL DETECTION TECHNOLOGY CENTRAL INDEX KEY: 0000763950 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 952746949 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-117859 FILM NUMBER: 041042135 BUSINESS ADDRESS: STREET 1: 9300 WILSHIRE BOULEVARD, SUITE 308 CITY: BEVERLY HILLS STATE: CA ZIP: 90212 BUSINESS PHONE: 3102483655 MAIL ADDRESS: STREET 1: 9300 WILSHIRE BOULEVARD, SUITE 308 CITY: BEVERLY HILLS STATE: CA ZIP: 90212 FORMER COMPANY: FORMER CONFORMED NAME: POLLUTION RESEARCH & CONTROL CORP /CA/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DASIBI ENVIRONMENTAL CORP DATE OF NAME CHANGE: 19900529 SB-2/A 1 form_sb2a.txt As filed with the Securities and Exchange Commission on September 23, 2004 REGISTRATION NO. 333-117859 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 UNIVERSAL DETECTION TECHNOLOGY (Exact Name of Registrant as Specified in Its Charter) CALIFORNIA 3823 95-2746949 (State or Other (Primary Standard (I.R.S. Employer Jurisdiction of Industrial Identification Incorporation or Classification Code Number) Organization) Number) 9595 WILSHIRE BLVD., SUITE 700 BEVERLY HILLS, CALIFORNIA 90212 (310) 248-3655 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) JACQUES TIZABI PRESIDENT & CHIEF EXECUTIVE OFFICER UNIVERSAL DETECTION TECHNOLOGY 9595 WILSHIRE BLVD., SUITE 700 BEVERLY HILLS, CALIFORNIA 90212 (310) 248-3655 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Services) ------------------------------------ WITH A COPY TO: JULIE M. KAUFER, ESQ. AFSHIN HAKIM, ESQ. AKIN GUMP STRAUSS HAUER & FELD LLP 2029 CENTURY PARK EAST, SUITE 2400 LOS ANGELES, CALIFORNIA 90067 TELEPHONE: (310) 229-1000 FACSIMILE: (310) 229-1001 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after the effective date of this registration statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. |X| If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| ______________ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| ---------------- If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| ---------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_| - -------------------------------------------------------------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ SUBJECT TO COMPLETION, DATED September __, 2004 PROSPECTUS UNIVERSAL DETECTION TECHNOLOGY 15,600,000 SHARES OF COMMON STOCK The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. This prospectus relates to the resale of up to 15,600,000 shares of common stock by the selling stockholders named in this prospectus. Of the shares being offered pursuant to this prospectus, 6,000,000 shares relate to shares presently owned by the selling stockholders and the remaining 9,600,000 shares relate to shares which the selling stockholders will receive as a result of the exercise of warrants granted to them by us. The selling stockholders may offer for resale the shares covered by this prospectus from time to time directly to purchasers or through underwriters, broker-dealers or agents, in public or private transactions, at prevailing market prices, at prices related to prevailing market prices or at privately negotiated prices. We will not receive any proceeds from the resale of our common stock by the selling stockholders. Our common stock is quoted on the Over The Counter Bulletin Board under the symbol "UDTT." The last reported sale price of our common stock on September 10, 2004, was $0.62 per share. You should read this prospectus carefully before you invest. INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 2. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------------------- The date of this prospectus is _______, 2004. TABLE OF CONTENTS Page Prospectus Summary........................................................................1 Risk Factors...................................................................2 Forward-Looking Statements.....................................................7 Use of Proceeds................................................................8 Market Price of Securities.....................................................8 Dividend Policy................................................................8 Plan of Operation..............................................................9 Business......................................................................13 Management....................................................................19 Certain Relationships and Related Transactions................................23 Selling Stockholders..........................................................24 Plan of Distribution..........................................................28 Description of Securities.....................................................30 Legal Matters.................................................................32 Experts.......................................................................32 Where You Can Find More Information...........................................32 Index to Consolidated Financial Statements...................................F-1 PROSPECTUS SUMMARY YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE ENTIRE PROSPECTUS, INCLUDING THE MORE DETAILED INFORMATION IN OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. UNIVERSAL DETECTION TECHNOLOGY We are engaged in the research and development of bio-terrorism detection devices. After engaging in initial research and development efforts, we determined to pursue a strategy to identify qualified strategic partners and collaborate to develop commercially viable bio-terrorism detection devices. Consistent with this strategy, in August 2002, we entered into a Technology Affiliates Agreement with the Jet Propulsion Laboratory, commonly referred to as JPL, to develop technology for our bio-terrorism detection equipment. JPL is a federally funded research and development center sponsored by NASA and also is an operating division of the California Institute of Technology, or Caltech, a private non-profit educational institution. Under the Technology Affiliates Agreement, JPL developed its proprietary bacterial spore detection technology and integrated it into our existing aerosol monitoring system, resulting in a product which we refer to as the Anthrax Smoke Detector. The Anthrax Smoke Detector is designed to provide continuous unattended monitoring of airborne bacterial spores in large public places, with real-time automated alert functionality. The Anthrax Smoke Detector combines a bioaerosol capture device with a chemical test for bacterial spores that we believe will provide accurate results in a timely fashion. Our system is designed to function fully automated and at a low cost compared to existing technologies. We believe that the technology developed by JPL and incorporated into our Anthrax Smoke Detector will substantially reduce the occurrence of false positives that could arise due to natural fluctuations in bacterial spore concentrations. Under our agreement with JPL, we paid it approximately $250,000 for its services and we received an option to license all technology developed under the Technology Affiliates Agreement from Caltech. On September 30, 2003, we exercised the option and entered into a license agreement with Caltech, whereby we received licenses to produce, provide and sell proprietary products, processes and services for use in the detection of pathogens, spores, and biological warfare agents. Specifically, these licenses include a worldwide exclusive license to the patent rights referenced in the Technology Affiliates Agreement and a worldwide nonexclusive license to rights in related proprietary technology. In May 2004, we unveiled the first functional prototype of our Anthrax Smoke Detector available for sale. JPL recently began simulated tests of the Anthrax Smoke Detector with particles having anthrax-like properties. Based on the results we obtain, we intend to modify the specifications of our product, if necessary, and order several units from Met One Instruments, a third-party manufacturer that assembled our first prototype. During the remainder of 2004 and through the summer of 2005, we hope to engage in field testing of these units in different environments and conditions and to use the empirical data gained from the testing to further improve the design and functionality of our product. After completing our field testing and any modifications to our product, we plan to initiate orders of our Anthrax Smoke Detector with Met One Instruments based on sales orders we receive. We have not sold any units of our Anthrax Smoke Detector and otherwise have not had any revenues from sales of our products since the beginning of fiscal 2002, the commencement of development of our Anthrax Smoke Detector. We have incurred losses for the six months ended June 30, 2004, and for the fiscal years ended December 31, 2003 and 2002 in the approximate amounts of $3.0, $4.7, and $2.1 million, respectively, and have an accumulated deficit of $24.0 million as of June 30, 2004. At June 30, 2004, we were in default on certain debt obligations totaling approximately $550,000, excluding accumulated interest of approximately $190,398. We are incorporated under the laws of California. Our corporate headquarters are located at 9595 Wilshire Blvd., Suite 700, Beverly Hills, California 90212. Our telephone number is (310) 248-3655. 1 RISK FACTORS BEFORE DECIDING WHETHER TO INVEST IN OUR COMMON STOCK, YOU SHOULD UNDERSTAND THE HIGH DEGREE OF RISK INVOLVED. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS, INCLUDING OUR HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. OUR MOST SIGNIFICANT RISKS AND UNCERTAINTIES ARE DESCRIBED BELOW. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD SUFFER. AS A RESULT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU COULD LOSE PART OR ALL OF YOUR INVESTMENT. THE RISKS DISCUSSED BELOW ALSO INCLUDE FORWARD-LOOKING STATEMENTS, AND OUR ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM THOSE DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS. OUR INDEPENDENT AUDITORS' REPORT EXPRESSES DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN. Our independent auditors' report, dated February 4, 2004 (except for Note 14, as to which the date is July 27, 2004), includes an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern, due to our working capital deficit at December 31, 2003, and the sale of our operating subsidiary in March 2002. We have experienced operating losses since the date of the auditors' report and in prior years. Our auditor's opinion may impede our ability to raise additional capital on terms acceptable to us. If we are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and will be forced to consider steps that would protect our assets against our creditors. If we are unable to continue as a going concern, your entire investment in us could be lost. WE ARE IN DEFAULT OF SOME OF OUR DEBT. OUR FAILURE TIMELY TO PAY OUR INDEBTEDNESS MAY REQUIRE US TO CONSIDER STEPS THAT WOULD PROTECT OUR ASSETS AGAINST OUR CREDITORS. If we cannot raise additional capital, we will not be able to repay our debt or pursue our business strategies as scheduled, or at all, and we may cease operations. We have been unable to pay all of our creditors and certain other obligations in accordance with their terms, and as a result, at June 30, 2004, we are in default on certain debt obligations totaling approximately $550,000, excluding accumulated interest of approximately $190,398. In the aggregate, we have approximately $1.8 million in debt obligations owing within the next 12 months. Of this amount, we have entered into settlement agreements with respect to approximately $700,000, pursuant to which we are obligated to make scheduled payments. We currently have verbal extensions with respect to approximately $650,000 of this debt to a date to be mutually agreed upon by us and each of the respective noteholders. However, we cannot assure you that any of these noteholders will continue to extend payment of these debt obligations or ultimately agree to revise the terms of this debt to allow us to make scheduled payments over an extended period of time. We have limited cash on hand and short-term investments and we do not expect to generate material cash from operations within the next 12 months. We have attempted to raise additional capital through debt or equity financings and to date have had limited success. The down-trend in the financial markets has made it extremely difficult for us to raise additional capital. In addition, our common stock trades on The Over the Counter Bulletin Board which makes it more difficult to raise capital than if we were trading on the Nasdaq Stock Market. Also, our default in repaying our debt restricts our ability to file registration statements, including those relating to capital-raising transactions, on Form S-3, which may make it more difficult for us to raise additional capital. In July 2004, we completed a private placement resulting in net proceeds to us of approximately $2.5 million. As a condition to this financing however, we agreed that we would not use the net proceeds to repay any of our debt outstanding as of the closing of the financing. We intend to use the proceeds from the financing for working capital purposes, principally with respect to, completion of development of our Anthrax Smoke Detector, testing and manufacturing units for demonstration, marketing to both end users as well as potentially to intermediaries including distributors or joint ventures, and developing a sales and marketing program. If we are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and will be forced to consider steps that would protect our assets against our creditors. WE HAVE A HISTORY OF LOSSES AND WE DO NOT ANTICIPATE THAT WE WILL BE PROFITABLE IN FISCAL 2004. We do not anticipate any material sales of the Anthrax Smoke Detector until we complete all testing and modifications, which we expect may not occur until the summer of 2005. We have not been profitable in the past years and had an accumulated deficit of approximately $24.0 million at June 30, 2004. We have not had revenues from sales of our products since the beginning of fiscal 2002, the commencement of development of our Anthrax Smoke Detector. During the six months ended June 30, 2004, and the fiscal years ended December 31, 2003 and 2 2002, we have experienced losses of $3.0, $4.7, and $2.1million respectively. Achieving profitability depends upon numerous factors, including our ability to develop, market and sell commercially accepted products timely and cost-efficiently. We do not anticipate that we will be profitable in fiscal 2004. IF WE OBTAIN FINANCING, EXISTING SHAREHOLDER INTERESTS MAY BE DILUTED. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our shareholders will be diluted. In addition, any convertible securities issued may not contain a minimum conversion price, which may make it more difficult for us to raise financing and may cause the market price of our common stock to decline because of the indeterminable overhang that is created by the discount to market conversion feature. In addition, any new securities could have rights, preferences and privileges senior to those of our common stock. Furthermore, we cannot assure you that additional financing will be available when and to the extent we require or that, if available, it will be on acceptable terms. IF WE CANNOT PARTNER WITH THIRD PARTIES TO ENGAGE IN RESEARCH AND DEVELOPMENT AND TESTING OF OUR DEVICE AT MINIMAL COST TO US, OUR PRODUCT DEVELOPMENT WILL BE DELAYED. We contract with third parties at minimal cost to us to conduct research and development activities and we expect to continue to do so in the future. Under our agreement with JPL, it will engage in limited testing of our device. We have engaged in discussions with Rutgers University to conduct field testing of our Anthrax Smoke Detector but Rutgers' obligations are contingent upon its receipt of funding from the National Science Foundation to conduct the testing. If Rutgers is unable to obtain funding necessary to engage in field testing, or we are unable to partner with a reputable organization at a nominal cost to us, we will need to raise additional capital, and our testing and further product development will be delayed. Also, because we rely on third parties for our research and development activities, we have less direct control over those activities and cannot assure you that the research will be done properly or in a timely manner. MANAGEMENT HAS NO EXPERIENCE IN PRODUCT MANUFACTURING, MARKETING, SALES, OR DISTRIBUTION. WE MAY NOT BE ABLE TO MANUFACTURE OUR ANTHRAX SMOKE DETECTOR IN SUFFICIENT QUANTITIES AT AN ACCEPTABLE COST, OR IN A TIMELY FASHION, AND MAY NOT BE ABLE TO MARKET AND DISTRIBUTE IT EFFECTIVELY, EACH OF WHICH COULD HARM OUR FUTURE PROSPECTS. If we are unable to establish an efficient manufacturing process for the Anthrax Smoke Detector, our costs of production will increase, our projected margins may decrease, and we may not be able to timely deliver our product to customers. We remain in the research and development phase of product commercialization. When and if we complete all design and testing of our product, we will need to establish the capability to manufacture it. Management has no experience in establishing, supervising, or conducting commercial manufacturing. We plan to rely on third party contractors to manufacture our product, although to date we have not entered into any manufacturing arrangements with any third party. Relying on third parties may expose us to the risk of not being able to directly oversee the manufacturing process, which may adversely affect the production and quality of our Anthrax Smoke Detector. In addition, these third party contractors may experience regulatory compliance difficulty, mechanical shutdowns, employee strikes, or other unforeseeable acts that may increase the cost of production or delay or prevent production. 3 In addition, if we are unable to establish a successful sales, marketing, and distribution operation, we will not be able to generate sufficient revenue in order to maintain operations. We have no experience in marketing or distributing new products. We have not yet established marketing, sales, or distribution capabilities for our Anthrax Smoke Detector. At this time, we have retained KAL Consultants, Inc. to assist us with our marketing and sales efforts. We also plan on entering into distribution agreements with third parties to sell our Anthrax Smoke Detector. If we are unable to enter into relationships with third parties to market, sell, and distribute our products, we will need to develop our own capabilities. We have no experience in developing, training, or managing a sales force. If we choose to establish a direct sales force, we will incur substantial additional expense. We may not be able to build a sales force on a cost effective basis or at all. Any direct marketing and sales efforts may prove to be unsuccessful. In addition, our marketing and sales efforts may be unable to compete with the extensive and well-funded marketing and sales operations of some of our competitors. We also may be unable to engage qualified distributors. Even if engaged, they may fail to satisfy financial or contractual obligations to us, or adequately market our products. WE CANNOT GUARANTEE THAT OUR BIO-TERRORISM DETECTION DEVICE WILL WORK OR BE COMMERCIALLY VIABLE. Our product in development requires further research, development, laboratory testing and demonstration of commercial scale manufacturing before it can be proven to be commercially viable. Potential products that appear to be promising at early stages of development may not reach the market for a number of reasons. These reasons include the possibilities that the product may be ineffective, unsafe, difficult or uneconomical to manufacture on a large scale, or precluded from commercialization by proprietary rights of third parties. We cannot predict with any degree of certainty when, or if, the research, development, testing and regulatory approval process (if required), will be completed. If our product development efforts are unsuccessful or if we are unable to develop a commercially viable product timely, we would need to consider steps to protect our assets against our creditors. OUR PRODUCTS MAY NOT BE COMMERCIALLY ACCEPTED WHICH WILL ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY. Our ability to enter into the bio-terrorism detection device market, establish brand recognition and compete effectively depends upon many factors, including broad commercial acceptance of our products. If our products are not commercially accepted, we will not recognize meaningful revenue and may not continue to operate. The success of our products will depend in large part on the breadth of information these products capture and the timeliness of delivery of that information. The commercial success of our products also depends upon the quality and acceptance of other competing products, general economic and political conditions and other factors, all of which can change and cannot be predicted with certainty. We cannot assure you that our new products will achieve market acceptance or will generate significant revenue. EXISTING AND DEVELOPING TECHNOLOGIES MAY AFFECT THE DEMAND FOR OUR ANTHRAX SMOKE DETECTOR. Our industry is subject to rapid and substantial technological change. Developments by others may render our technology and planned product noncompetitive or obsolete, or we may be unable to keep pace with technological developments or other market factors. Competition from other biotechnology companies, universities, governmental research organizations and others diversifying into our field is intense and is expected to increase. According to the public filings of Cepheid, one of our competitors, it has begun shipping its detection technology product, including for use by the United States Postal Service. Cepheid's entry into the market before us may make it more difficult for us to penetrate the market. In addition, our competitors offer technologies different than ours which potential customers may find more suitable to their needs. For example, Cepheid's technology specifically detects for Anthrax whereas our technology detects for an increase in the level of bacterial spores. Many of our competitors also have significantly greater research and development capabilities than we do, as well as substantially greater marketing, manufacturing, financial and managerial resources. SHARES ISSUED UPON THE EXERCISE OF OUR OUTSTANDING OPTIONS AND WARRANTS MAY DILUTE YOUR STOCK HOLDINGS AND ADVERSELY AFFECT OUR STOCK PRICE. If exercised, our outstanding options and warrants will cause immediate and substantial dilution to our stockholders. We have issued options and warrants to acquire our common stock to our employees, consultants, and investors at various prices, some of which are or may in the future be below the market price of our stock. As of June 30, 2004, we had outstanding options and warrants to purchase a total of 20,000,657 shares of common stock. Of these options and warrants, 3,904,391 have exercise prices above the recent market price of $0.62 per share (as of September 10, 2004), and 16,096,266 have exercise prices at or below this price. The weighted average exercise price for these outstanding options and warrants is $0.53. WE USE A SIGNIFICANT PORTION OF OUR CASH ON HAND AND STOCK TO PAY CONSULTING FEES. WE MAY NOT RECEIVE THE BENEFIT WE EXPECT FROM THESE CONSULTANTS. The consultants that we hire may not provide us with the level of services, and consequently, the operating results, we anticipate. We spent approximately $2.0 million and $2.4 million in consulting fees during the six months ended June 30, 2004 and the year ended December 31, 2003, respectively, and utilized approximately 13 consultants during this period. The consultants we have engaged have provided us with various services including, marketing, public and investor relations, administrative oversight of research and development, Scientific Advisory Board services, website design, and corporate business strategy and development. 4 WE HAVE ENTERED INTO SEVERAL RELATED PARTY TRANSACTIONS IN 2003 AND 2004. We have engaged in a number of transactions with related parties in 2004 and 2003. During the six months ended June 30, 2004 and the fiscal year ended December 31, 2003, we spent an aggregate of $616,599 in related party transactions. These include an agreement with Astor Capital, Inc. pursuant to which it provides us with investment banking and strategic advisory services as well as a 10% placement fee for debt and equity financings raised for us. We also sublease office space from Astor. In addition, we issued notes to other related parties. Since September 25, 2001, the date we retained Mr. Tizabi as our CEO, we have issued him options to purchase 7,950,000 shares of our common stock and he has earned $687,500 as compensation for his services. Of the $687,500 cash compensation, we have paid $217,000 and have accrued $470,500 for payment at a future date. In light of the number of transactions and the aggregate sums involved, there may be a perception that these transactions were not at arm's length. We believe that each of these transactions were on terms at least as favorable to us as they would have been with unrelated parties. THE LOSS OF OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER WOULD DISRUPT OUR BUSINESS. Our success depends in substantial part upon the services of Jacques Tizabi, our President, Chief Executive Officer and Chairman of the Board of Directors. The loss of or the failure to retain the services of Mr. Tizabi would adversely affect the development of our business and our ability to realize or sustain profitable operations. We do not maintain key-man life insurance on Mr. Tizabi and have no present plans to obtain this insurance. IF A U.S. PATENT FOR THE BACTERIAL SPORE DETECTION TECHNOLOGY IS NOT ISSUED, COMPETITORS MAY BE ABLE TO COPY AND SELL PRODUCTS SIMILAR TO OURS WITHOUT PAYING A ROYALTY, WHICH WOULD HAVE A MATERIAL ADVERSE IMPACT ON OUR ABILITY TO COMPETE. If our Anthrax Smoke Detector is commercialized, the lack of U.S. or foreign patent protection could allow competitors to copy and sell products similar to ours without paying a royalty. The bacterial spore detection technology that is integrated into our Anthrax Smoke Detector is owned by Caltech. On January 31, 2003, Caltech filed a U.S. patent application covering the technology, which currently is being reviewed by the U.S. Patent and Trademark Office. Caltech also filed a patent application with the European Patent Office. We paid and filed on behalf of Caltech a patent application in Japan as well. No patents have been issued and we cannot assure you that any patents will be issued. If a U.S. patent is not issued, or not issued timely, we may face substantially increased competition in our primary geographic market. WE MAY BE SUED BY THIRD PARTIES WHO CLAIM OUR PRODUCT INFRINGES ON THEIR INTELLECTUAL PROPERTY RIGHTS. DEFENDING AN INFRINGEMENT LAWSUIT IS COSTLY AND WE MAY NOT HAVE ADEQUATE RESOURCES TO DEFEND OURSELVES. We may be exposed to future litigation by third parties based on claims that our technology, product, or activity infringes on the intellectual property rights of others or that we have misappropriated the trade secrets of others. This risk is compounded by the fact that the validity and breadth of claims covered in technology patents in general and the breadth and scope of trade secret protection involves complex legal and factual questions for which important legal principles are unresolved. Any litigation or claims against us, whether or not valid, could result in substantial costs, could place a significant strain on our financial and managerial resources, and could harm our reputation. Our license agreement with Caltech requires that we pay the costs associated with initiating an infringement claim and defending claims by third parties for infringement, subject to certain offsets that may be 5 allowed against amounts we may owe to Caltech under the licensing agreement. In addition, intellectual property litigation or claims could force us to do one or more of the following: o cease selling, incorporating, or using any of our technology and/or products that incorporate the challenged intellectual property, which could adversely affect our potential revenue; o obtain a license from the holder of the infringed intellectual property right, which license may be costly or may not be available on reasonable terms, if at all; or o redesign our products, which would be costly and time consuming. THE U.S GOVERNMENT HAS RIGHTS TO THE TECHNOLOGY WE LICENSE FROM CALTECH. Under the license rights provided to the United States government in our license agreement with Caltech, a United States government agency or the United States armed forces may, either produce the proprietary products or use the proprietary processes or contract with third parties to provide the proprietary products, processes, and services to one or more Federal agencies or the armed forces of the United States government, for use in activities carried out by the United States government, its agencies, and the armed forces, including, for instance, the war on terrorism or the national defense. Further, the Federal agency that provided funding to Caltech for the research that produced the inventions covered by the patent rights referenced in the Technology Affiliates Agreement with JPL and the related technology may require us to grant, or if we refuse, itself may grant a nonexclusive, partially exclusive, or exclusive license to these intellectual property rights to a third party if the agency determines that action is necessary: o because we have not taken, or are not expected to take within a reasonable time, effective steps to achieve practical application of the invention in the detection of pathogens, spores, and biological warfare agents; o to alleviate health or safety needs which are not reasonably satisfied by us or our sublicensees; o to meet requirements for public use specified by Federal regulations and such regulations are not reasonably satisfied by us; or o because we have not satisfied, or obtained a waiver of, our obligation to have the licensed products manufactured substantially in the United States. THE BACTERIAL SPORE DETECTION TECHNOLOGY IS LICENSED TO US BY CALTECH. IF OUR LICENSE TERMINATES, OUR FUTURE PROSPECTS WOULD BE HARMED. The loss of our technology license would require us to cease operations until we identify, license and integrate into our product another technology, if available. If we fail to fulfill any payment obligation under the terms of the license agreement or materially breach the agreement, Caltech may terminate the license. To maintain our license with Caltech, a minimum annual royalty of $10,000 is due to Caltech on August 1, 2005, and each anniversary thereof, regardless of any product sales. Any royalties paid from product sales for the 12-month period preceding the date of payment of the minimum annual royalty will be credited against the annual minimum. OUR STOCK PRICE IS VOLATILE. The trading price of our common stock fluctuates widely and in the future may be subject to similar fluctuations in response to quarter-to-quarter variations in our operating results, announcements of technological innovations or new products by us or our competitors, general conditions in the bio-terrorism detection device industry in which we compete and other events or factors. In addition, in recent years, broad stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations. These broad market fluctuations also may adversely affect the future trading price of our common stock. OUR STOCK HISTORICALLY HAS BEEN THINLY TRADED. THEREFORE, SHAREHOLDERS MAY NOT BE ABLE TO SELL THEIR SHARES FREELY. The volume of trading in our common stock historically has been low and a limited market presently exists for the shares. We have no analyst coverage of our securities. The lack of analyst reports about our stock may make it difficult for potential investors to make decisions about whether to purchase our stock and may make it less likely that investors will purchase our stock. We cannot assure you that our trading volume will increase, or that our historically light trading volume or any trading volume whatsoever will be sustained in the future. Therefore, we cannot assure you that our shareholders will be able to sell their shares of our common stock at the time or at the price that they desire, or at all. 6 POTENTIAL ANTI-TAKEOVER TACTICS THROUGH ISSUANCE OF PREFERRED STOCK RIGHTS MAY BE DETRIMENTAL TO COMMON SHAREHOLDERS. We are authorized to issue up to 20,000,000 shares of preferred stock, of which none currently are issued and outstanding. The issuance of preferred stock does not require approval by the shareholders of our common stock. Our Board of Directors, in its sole discretion, has the power to issue preferred stock in one or more series and establish the dividend rates and preferences, liquidation preferences, voting rights, redemption and conversion terms and conditions and any other relative rights and preferences with respect to any series of preferred stock. Holders of preferred stock may have the right to receive dividends, certain preferences in liquidation and conversion and other rights, any of which rights and preferences may operate to the detriment of the shareholders of our common stock. Further, the issuance of any preferred stock having rights superior to those of our common stock may result in a decrease in the market price of the common stock and, additionally, could be used by our Board of Directors as an anti-takeover measure or device to prevent a change in our control. FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to in this prospectus as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to in this prospectus as the Exchange Act. Forward-looking statements are not statements of historical fact but rather reflect our current expectations, estimates and predictions about future results and events. These statements may use words such as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project" and similar expressions as they relate to us or our management. When we make forward-looking statements, we are basing them on our management's beliefs and assumptions, using information currently available to us. These forward-looking statements are subject to risks, uncertainties and assumptions, including but not limited to, risks, uncertainties and assumptions discussed in this prospectus. Factors that can cause or contribute to these differences include those described under the headings "Risk Factors" and "Management Discussion and Analysis of Financial Condition and Results of Operations." If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statement you read in this prospectus reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. You should specifically consider the factors identified in this prospectus which would cause actual results to differ before making an investment decision. We are under no duty to update any of the forward-looking statements after the date of this prospectus or to conform these statements to actual results. 7 USE OF PROCEEDS We will not receive any proceeds from the sale of the shares by the selling stockholders. All proceeds from the sale of the common stock under this prospectus will be for the account of the selling stockholders. MARKET PRICE OF SECURITIES The following table sets forth, for the periods indicated, the range of high and low intraday bid information per share of our common stock as quoted on the Over The Counter Bulletin Board. Our stock is traded under the symbol "UDTT." Year Period Historic Prices --------------------------- High Low --------------- ------------------------------- ------------ ------------- 2002 First Quarter $ 0.69 $ 0.36 Second Quarter 0.42 0.12 Third Quarter 0.27 0.14 Fourth Quarter 0.32 0.16 2003 First Quarter 0.25 0.17 Second Quarter 0.31 0.18 Third Quarter 0.54 0.22 Fourth Quarter 0.80 0.45 2004 First Quarter 1.01 0.60 Second Quarter 0.99 0.70 Third Quarter (through September 10, 2004) 0.91 0.60 As of September 10, 2004, the closing price of our common stock on Over The Counter Bulletin Board was $0.62, and at that date, our outstanding common stock was held of record by 1,298 stockholders. DIVIDEND POLICY We do not currently pay any dividends on our common stock, and we currently intend to retain any future earnings for use in our business. Any future determination as to the payment of dividends on our common stock will be at the discretion of our Board of Directors and will depend on our earnings, operating and financial condition, capital requirements and other factors deemed relevant by our Board of Directors including the General Corporation Law of the State of California, which provides that dividends are only payable out of retained earnings or if certain minimum ratios of assets to liabilities are satisfied. The declaration of dividends on our common stock also may be restricted by the provisions of credit agreements that we may enter into from time to time. 8 PLAN OF OPERATION The following discussion should be read in conjunction with our consolidated financial statements provided in this prospectus. Certain statements contained herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed more fully herein. The forward-looking information set forth in this prospectus is as of the date of this filing, and we undertake no duty to update this information. More information about potential factors that could affect our business and financial results is included in the section entitled "Risk Factors" of this prospectus. OVERVIEW We are engaged in the research and development of bio-terrorism detection devices. After engaging in initial research and development efforts, we determined to pursue a strategy to identify qualified strategic partners and collaborate to develop commercially viable bio-terrorism detection devices. Consistent with this strategy, in August 2002, we entered into a Technology Affiliates Agreement with the Jet Propulsion Laboratory, commonly referred to as JPL, to develop technology for our bio-terrorism detection equipment. JPL is a federally funded research and development center sponsored by NASA and also is an operating division of the California Institute of Technology, or Caltech, a private non-profit educational institution. Under the Technology Affiliates Agreement, JPL developed its proprietary bacterial spore detection technology and integrated it into our existing aerosol monitoring system, resulting in a product which we refer to as the Anthrax Smoke Detector. The Anthrax Smoke Detector is designed to provide continuous unattended monitoring of airborne bacterial spores in large public places, with real-time automated alert functionality. The device operates to detect an increase in the concentration of bacterial spores, which is indicative of a potential presence of Anthrax. Under our agreement with JPL, we paid it approximately $250,000 for its services and we received an option to license all technology developed under the Technology Affiliates Agreement from Caltech. On September 30, 2003, we exercised our option and Caltech granted to us a worldwide exclusive license to the patent rights referenced in the Technology Affiliates Agreement and a worldwide nonexclusive license to rights in related proprietary technology. To maintain our license with Caltech, a minimum annual royalty of $10,000 is due to Caltech on August 1, 2005, and each anniversary thereof, regardless of any product sales. Any royalties paid from product sales for the 12-month period preceding the date of payment of the minimum annual royalty will be credited against the annual minimum. Pursuant to the terms of the license, we must pay four percent royalties on product sales in countries where a patent is issued and two percent royalties on product sales in countries where a patent is not issued, as well as 35 percent of net revenues received from sublicensees. PLAN OF OPERATION In May 2004, we unveiled the first functional prototype of our Anthrax Smoke Detector. The prototype operated on external software. In July 2004, we commenced simulated tests with benign bacterial spores having anthrax-like properties in order to fine tune our product. We expect these benign spores to be as effective as Anthrax spores for testing purposes because our device is designed to detect an increase in bacterial spore concentration levels. Based on the results we obtain, we intend to modify the specifications to our product, if necessary, and to order several units from Met One Instruments, a third-party manufacturer that assembled our first commercial prototype. During the remainder of 2004 and through the summer of 2005, we plan to engage in field testing of these units in different environments and conditions and to use the empirical data gained from the testing to further improve the design and functionality of our product. We are engaged in discussions with Rutgers University to perform our field testing, which we expect to commence following the testing performed by JPL in order to incorporate the findings of the JPL testing into the product provided to Rutgers. The Center for Advanced Infrastructure and Transportation at Rutgers University was given an initial (Phase I) grant from the National Science Foundation to conduct a preliminary study on methods to protect the nation's transportation infrastructure against a potential airborne biological attack. Rutgers identified us as a partner in this project. At this time, Rutgers has applied for a Phase II grant from the National Science Foundation. Rutgers would use the proceeds from this grant to implement its site-specific emergency management response protocol. Rutgers orally has agreed 9 to incorporate our bio-detection technology in its response protocol. Rutgers has informed us that it intends to select a facility managed by the NY/NJ Port Authority to run simulated tests. Rutgers will manage all details relating to the implementation of the program. We hope to initiate the field testing with Rutgers by January 2005. We plan to initiate orders of our Anthrax Smoke Detector with Met One Instruments based on sales orders we receive. In connection with our sales and marketing efforts, we hope to sell units to customers in specific sectors in the market including, sports stadiums, conventions centers, and casinos. We believe that these sales will provide us a well-defined customer base to use as a reference in connection with our marketing campaign in 2005. In August 2004, we retained KAL Consultants, Inc., to assist us with our marketing and sales efforts. At this time, we have not entered into any agreements with any third parties regarding the manufacturing of our product, but Met One Instruments has indicated to us that it will be capable of producing between 50 to 100 units per month. During the next 12 month period, we also plan on securing and leasing a testing facility close to the JPL laboratories where we would be able to implement a quality assurance program and test our products against the required specifications before shipping them to customers. We believe that the proximity to JPL and in particular to Caltech will help us by utilizing the knowledge of graduate and PhD students familiar with the project in a consultant or employment capacity. During the first half of 2004, we hired four additional employees and increased our use of consultants for corporate development purposes, including further development of our strategic business plan to sell our Anthrax Smoke Detector. We anticipate hiring up to three additional employees in the next twelve months, one of whom would concentrate on marketing our Anthrax Smoke Detector to both the public and private sector. Upon establishment of the testing facility, we intend to hire up to two employees to assist with the testing of the products. During the six months ended June 30, 2004, and fiscal year ended December 31, 2003, we spent an aggregate of $2,860,402 and $3,588,375, respectively, on selling, general and administrative expenses and marketing expenses. We have incurred a significant increase in our selling, general and administrative expenses in these periods in comparison to the comparable year ago periods. This increase principally is based on the additional amounts we spent on legal and accounting fees, rent and utilities, significant amounts of travel for business development, wages for additional employees we hired, consulting fees, and capital raising. In connection with our selling, general and administrative expenses, we have engaged consultants for services including, membership on our Scientific Advisory Board, administrative oversight of our research and development efforts, and assistance with corporate business strategy and development. We also have incurred a significant increase in our marketing expenses during these periods in comparison to the prior periods. We retained several consultants to help promote awareness of and create an interest in our product and company in the U.S. and abroad, facilitate contacts with strategic individuals and agencies, and assist in arranging meetings in connection with the manufacturing, distribution, and sale of our product. We also attended several trade shows in the U.S. and abroad, including England and France, made several presentations to various private and public entities in the U.S., England, and France. During fiscal 2003, we also hired an investor relations company to help promote awareness of our company, through press releases, road shows, meetings with brokers and fund managers, and other appropriate means. LIQUIDITY AND CAPITAL RESOURCES On April 29, 2004, we commenced a private offering of our securities. In this private placement, we sold $3.0 million of Units. The offering was made solely to accredited investors through Meyers Associates, L.P., a registered broker dealer firm. Each Unit consists of one share of common stock and a Class A Warrant and a Class B Warrant. The offering price per Unit was $0.50. Both the Class A and Class B Warrants are exercisable by the holder at any time up to the expiration date of the warrant, which is five years from the date of issuance. In the aggregate, the investors purchased 6,000,000 shares of common stock, Class A Warrants to purchase 3,000,000 10 shares of common stock at $0.50 per share and Class B Warrants to purchase 3,000,000 shares of common stock at $0.70 per share. Meyers received a sales commission equal to 10% of the gross proceeds and payment of 3% of the gross proceeds for a non-accountable expense allowance for an aggregate payment of $403,140. Meyers and its agents also received Class A Warrants to purchase an aggregate of 2.4 million shares of common stock as consideration for their services as placement agent. In connection with the private placement, we also entered into a consulting agreement with Meyers for an 18 month term, whereby Meyers will provide us consulting services related to corporate finance and other financial service matters and will receive $7,500 per month, as well as Class A Warrants to purchase 1.2 million shares of our common stock. The net proceeds to us from the sale of the Units were approximately $2.5 million. We require approximately $2.0 million in the next twelve months to complete our existing prototype, engage in testing of the device, and revise the technology or reengineer the device as may be necessary or desirable and otherwise execute our business plan. As a result of the private placement, we believe we have sufficient capital to fund our operating expenses for the next twelve months. We do not believe we have adequate capital to repay our debt currently due and becoming due in the next twelve months. We anticipate that our uses of capital during the next twelve months principally will be for: o administrative expenses, including salaries of officers and other employees we plan to hire; o research and development of our Anthrax Smoke Detector; o repayment of debt; o sales and marketing; and o expenses of professionals, including accountants and attorneys. Our working capital deficit at June 30, 2004, was $465,797. Our independent auditors' report, dated February 4, 2004 (except for note 14, as to which the date is July 27, 2004), includes an explanatory paragraph relating to substantial doubt as to our ability to continue as a going concern, due to our working capital deficit at December 31, 2003, and the sale of our operating subsidiary. We require approximately $1.8 million to repay indebtedness in the next twelve months. As a condition to completing our private placement in July 2004, we agreed not to use any of the proceeds to repay debt outstanding at the time of the closing of the offering, or to pay accrued but unpaid salary to our Chief Executive Officer, or our monthly consulting fee under our Agreement for Investment Banking and Advisory Services with Astor Capital, Inc. The following provides the principal terms of our outstanding debt as of June 30, 2004: o One loan from three family members, each of whom is an unaffiliated party, evidenced by four promissory notes in the aggregate principal amounts of $100,000, $50,000, $50,000, and $100,000, each due June 24, 2001. The aggregate interest due on these notes as of June 30, 2004 was $139,773. We entered into a settlement agreement on July 26, 2004 with each of these parties. Pursuant to this agreement, in July 2004, we repaid a total of $73,333 of the debt and agreed to pay a total of $298,667, through monthly installments over the next 18 months, including interest through January 2006 as full payment of our obligations. The settlement agreement provides for an accelerated payment schedule (at our option), which would reduce the total debt we are required to repay by approximately $12,000. o One loan from an unaffiliated party in the aggregate principal amount of $200,000, due October 13, 2004, with interest at the rate of 12% per annum. As of June 30, 2004, we owed $67,500 in interest on this note. On August 31, 2004, we entered into a settlement agreement with this party and agreed to pay a total of $261,000 pursuant to a scheduled payment plan over the next 12 months. o One loan from an unaffiliated party in the aggregate principal amount of $100,000, due October 13, 2004, with interest at the rate of 9% per annum. As of June 30, 2004, we owed $59,985 in interest on this note. 11 o Two loans from JRT Holdings, Inc., a company in which our Chief Executive Officer owns a 50% equity interest, evidenced by two promissory notes each in aggregate principal amounts of $20,000, due February and April, 2004, and verbally extended to a date to be mutually agreed upon by the parties, with interest at the rates of 6% and 9% per annum. As of June 30, 2004, we owed $1,908 in interest on these notes. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $200,000, due on the extended due date of June 30, 2002, and further verbally extended to a date to be mutually agreed upon by the parties, with interest at the rate of 18% per annum. As of June 30, 2004, we owed $145,500 in interest on this note. o One loan from an unaffiliated party in the aggregate principal amount of $250,000 at the interest rate of Wall Street Journal Prime plus 3% per annum, due on an extended due date of June 30, 2002, and currently in default. As of June 30, 2004, we owed $50,625 in interest on this note. o Two loans from an unaffiliated party evidenced by two promissory notes in the aggregate principal amount of $57,526, due September 10, 2002, and verbally extended to a date to be mutually agreed upon by the parties, with interest at the rate of 10% per annum. As of June 30, 3004, we owed $12,075 in interest on these notes. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $75,000, due on May 10, 2003, and verbally extended to a date to be mutually agreed upon by the parties, with interest at the rate of 18% per annum. As of June 30, 2004, we owed $14,730 in interest on this note. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $75,000, due on the extended due date of June 30, 2002, and further verbally extended to a date to be mutually agreed upon by the parties, with interest at the rate of 10% per annum. As of June 30, 2004, we owed $31,438 in interest on this note. We may need to raise additional capital to repay our debt. We currently are in discussions with several note holders to make scheduled payment arrangements with respect to those notes. We may need to obtain extensions on some of our notes as they become due. Historically, we have financed operations through private debt and equity financings. In recent years, financial institutions have been unwilling to lend to us and the cost of obtaining working capital from investors has been expensive. We actively continue to pursue additional equity or debt financings. If we are unable to pay our debt as it becomes due and are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and will be forced to consider steps that would protect our assets against our creditors. 12 BUSINESS GENERAL We primarily are engaged in the research and development of bio-terrorism detection devices. In August 2002, we entered into a Technology Affiliates Agreement with JPL, to develop technology for our bio-terrorism detection equipment. Under the Technology Affiliates Agreement, JPL developed its proprietary bacterial spore detection technology and integrated it into our existing aerosol monitoring system, resulting in a product which we refer to as the Anthrax Smoke Detector. The Anthrax Smoke Detector is designed to provide continuous unattended monitoring of airborne bacterial spores in large public places, with real-time automated alert functionality. The Anthrax Smoke Detector combines a bioaerosol capture device with a chemical test for bacterial spores that we believe will provide accurate results in a timely fashion. Our system is designed to function fully automated and at a low cost compared to existing technologies. We unveiled the first functional prototype of our Anthrax Smoke Detector at a press conference on May 6, 2004. We currently are engaging in simulated tests and in the next six months hope to conduct field tests in different environments and conditions in order to obtain empirical date to improve the overall design and functionality of our product. INDUSTRY BACKGROUND The attacks of September 11, 2001, and the subsequent spread of and potential future threat of anthrax spores have created a new sense of urgency in the public health systems across the world, and especially in the United States. During the 2001 anthrax attacks in the United States, emergency response personnel, clinicians, laboratories, and public health officials were overwhelmed by requests for evaluation of suspicious powders and by calls from patients concerned about exposures to bio-terrorism agents. Systems designed to detect bio-terrorism agents in clinical and environmental samples have become essential components of responses to both hoaxes and actual bio-terrorism events. First responders and public health officials require sensitive and specific detection systems that can identify bio-terrorism agents early enough to take actions that limit their spread. The United States government has responded to this urgent need for preparedness against bio-terrorism by establishing the Department of Homeland Security. The Department of Homeland Security is intended to unite much of the federal government's effort to secure the homeland, with the primary goal being an America that is stronger, safer, and more secure. The primary mission of the Department is to, among other things, o prevent terrorist attacks within the United States, o reduce the vulnerability of the United States to terrorism, and o minimize the damage, and assist in the recovery, from terrorist attacks that do occur within the United States. For fiscal 2004, the Department has allocated $350 million in new funding for research, development, testing, and evaluation capabilities. According to the Department, these funds are targeted to promote innovative, high payoff capabilities through the Homeland Security Advanced Research Projects Agency, as well as focused efforts to rapidly evaluate and prototype near-term technologies available from the private sector. We may retain an outside consultant specialized in government grants, to screen the applicable grants for us. At this time, we have not received any portion of these grants, and cannot assure you that we will submit applications for or receive any portion in the future. The private sector also has responded to the need for preparedness against bio-terrorism. A number of companies have developed or are in the process of developing various methods to detect harmful pathogens in the air through genetic analysis, including DNA or RNA analysis. In recent years, significant advances in molecular biology have led to the development of increasingly efficient and sensitive techniques for detecting and measuring the presence of a particular genetic sequence in a biological sample. Genetic testing involves highly technical procedures, including: 13 o SAMPLE PREPARATION - procedures that must be performed to isolate the target cells and to separate and purify their nucleic acids; o AMPLIFICATION - a chemical process to make large quantities of DNA from the nucleic acids isolated from the sample; and o DETECTION - the method of determining the presence or absence of the target DNA or RNA, typically through the use of fluorescent dyes. Existing technologies for determining the genetic composition of a cell or organism generally face the following limitations: o REQUIRE HIGHLY SKILLED TECHNICIANS AND SPECIAL LABORATORIES. Currently available methods and systems for genetic analysis require highly skilled scientists and technicians in a controlled laboratory setting, including, in many cases, separate rooms to prevent contamination of one sample by another. Some progress has been made to automate this process. o LARGE AND INFLEXIBLE EQUIPMENT. Most currently available genetic analysis equipment is large and inflexible and requires a technically complex operating environment. New designs are attempting to address miniaturization of equipment. o TIMELINESS OF RESULT. Current sample preparation, amplification and detection technologies rely on processes that often require hours to complete, rendering results that may not be timely enough to be medically useful. Some new instruments are attempting to reduce analysis times. o SENSITIVITY CONSTRAINTS. Some existing technologies accept and process only very small sample volumes, forcing laboratory technicians to spend significant effort in concentrating larger samples in order to obtain the required level of sensitivity for detecting and measuring the presence of a genetic sequence. o LACK OF INTEGRATION. We believe that current amplification and detection systems do not fully automate and integrate sample preparation into their processes in a manner that can be useful in a non-laboratory setting in a cost effective fashion. o OPERATIONAL COST. The operating costs for existing technologies can be extremely high, making the implementation of the device cost-prohibitive. o FALSE POSITIVES. Most existing technologies are susceptible to false positive results, which can have significant social and economic consequences. Currently, the two most commonly used methods for genetic testing are microbial culture and Polymerase Chain Reaction, commonly referred to as PCR. With microbial culture, a sample from the environment is placed into a small laboratory dish containing a nutrient rich media. The microbial culture is allowed to grow for a specified period of time, usually between 24-48 hours. The sample is then examined and a determination is made as to whether an organism is present in the sample. Although highly accurate, the disadvantages of microbial cultures are the time required to determine the presence of an organism and the need for a laboratory and an expertise in culture preparation and analysis. PCR has been one of the most promising methods for an automated anthrax detection system. PCR amplifies DNA targets of choice, such as gene sequences encoded for the anthrax toxins to detectable levels. PCR is very sensitive and is able to detect very small amounts of DNA. But, the PCR process requires about three to eight hours to complete, plus an additional three hours for sample preparation time, which must usually be performed by a trained technician. Some developments have been made to automate the PCR process and reduce the analysis time. We believe that the principal desired characteristics of an anthrax detection system are sustained, online operation with minimal maintenance, minimal susceptibility to false alarms, and low operating costs. These 14 attributes require that we address the limitations inherent in most current technologies with a product that can operate as a stand alone detection device. OUR SOLUTION Our Anthrax Smoke Detector combines a bioaerosol capture device with a chemical test for bacterial spores that we believe will provide accurate results in a timely fashion. Our system is designed to function fully automated as a stand alone product at a low cost compared to existing technologies. We believe that the technology developed by JPL and incorporated into our Anthrax Smoke Detector will substantially reduce the occurrence of false positives that could arise due to natural fluctuations in bacterial spore concentrations. COMPANY PRODUCTS We are expending all of our research and development efforts towards the design and testing of the Anthrax Smoke Detector. This instrument consists of four components: o an air sampler for aerosol capture, which collects aerosolized particles on a meshed glass fiber tape, o thermal lysis for releasing the dipicolinic acid from the spores, o reagent delivery via syringe pump, and o a lifetime gated luminescence detection of the terbium-dipicolinate complex. The device is designed to continuously monitor the air and measure the concentration of airborne bacterial endospores every 15 minutes. Bacterial endospores are captured on the glass fiber tape. Next, thermal lysis "pops" the endospores, releasing a chemical from inside the endospore called dipicolinic acid, which is unique to bacterial endospores. Then, a syringe pump adds a drop of terbium containing solution to the tape on the location where the endospores were lysed. Finally, a lifetime gated photometer measures the resultant terbium dipicolinate luminescence intensity, which is proportional to the bacterial spore concentration in the tape. A large change in endospore concentration is a strong indication of an anthrax attack, because endospores are the means by which anthrax travels. The collection tape becomes a permanent record of the air environment and can be sorted and subsequently reanalyzed as desired. Pursuant to our development plan, if an increase in spore concentration is detected, an alarm will sound notifying both a building's internal security as well as local emergency services through the device's landline or wireless networking capability. The system is designed to ensure the maximum time it takes to detect, and generate an alarm in response to, a release of bacterial spores is approximately 15 minutes, which we believe will be adequate to substantially reduce the likelihood of widespread contamination. This response time also provides adequate time to begin antibiotic treatment prior to the onset of symptoms which can arise within two to three days if left untreated. The system is designed for constant and unattended monitoring of spaces such as public facilities and commercial buildings. The device is designed to prevent false alarms. Technologies that allow a high percentage of false positive results are problematic not only for the obvious reason relating to their level of accuracy, but also because of the cost and consequences resulting from a false alarm. On one occasion, a false anthrax alarm shut down 11 postal facilities in the Washington D.C. area. JPL's detection technology is designed to sound an alarm only when it detects a significant increase in spore count and discriminates against detecting aerosol components such as dust. Thus, we anticipate that false positives will be rare, because natural background fluctuation of airborne endospores are very low, whereas an anthrax attack would result in a concentration swing many orders of magnitude greater than background levels, and spores from other microorganisms, such as fungi and molds, are not detected. The Anthrax Smoke Detector is designed to function as a stand-alone product, or as a complement to an existing bio-terrorism detection device in places such as public buildings and stadiums. For example, we believe that the Anthrax Smoke Detector would function well as a front-end monitor to a PCR-based device. In the case of 15 a positive reading, the PCR-based device would be employed to validate the Anthrax Smoke Detector reading to help further reduce the possibility of a false positive. We expect to complete the testing of our device within the next six months and initiate placement of orders for our product based on customer demand thereafter. GOVERNMENTAL APPROVAL We are not presently aware of any governmental agency approval required for the Anthrax Smoke Detector before we can sell it in the United States. Completion of a nitric oxide instrument is dependent upon FDA approval. We have not applied for any regulatory approvals with respect to any of our products currently under development. We cannot assure you that the Anthrax Smoke Detector is not subject to or will not become subject to governmental approval. To the extent that any governmental approval is required in the future, we intend to obtain all required approvals consistent with applicable law. We cannot assure you that future governmental regulation will not adversely affect our ability to successfully commercialize a viable product. MARKETING AND SALES We primarily are focused on research and development of our bio-terrorism product. However, we are in the process of developing our sales and marketing plan which may include strategic partnership agreements, retention of an in-house staff or consultants, or a combination of the foregoing. MANUFACTURING Currently, we do not have any manufacturing or distribution capabilities. We have been in talks with a third-party contractor regarding the manufacturing of our Anthrax Smoke Detector. RESEARCH AND DEVELOPMENT We spent $199,000 and $82,000 on research and development for the years ended December 31, 2003 and 2002, respectively. We currently intend to focus substantially all of our efforts and resources to the development, testing, and commercialization of our Anthrax Smoke Detector. EMPLOYEES As of July 30, 2004, we had five full-time employees. We also employ outside consultants from time to time to provide various services. None of our employees are represented by a labor union. We consider our employee relations to be good. SCIENTIFIC ADVISORY BOARD We are building a Scientific Advisory Board and to date have assembled two scientific advisors with demonstrated expertise in fields related to molecular, chemical and medical pharmacology and hepatic science. These advisors are not members of our Board of Directors. The role of our Scientific Advisory Board principally is to meet periodically with our Chief Executive Officer and certain of our consultants and members of JPL to discuss our present and long-term research and development activities, provide input and evaluation of our overall product line, assist and consult on our strategic direction, and introduce us to business relationships, industry contacts, and other strategic relationships that may be of value to us. Scientific Advisory Board members include: Leonard Makowka, M.D., Ph.D., a distinguished clinical surgeon, transplantation specialist and medical researcher, recognized as one of the world's leading authorities in hepatic science (study relating to the liver), and Louis Ignarro, Ph.D., Distinguished Professor of Pharmacology, University of California at Los Angeles School of Medicine. As medical doctors, both of these individuals are knowledgeable on the properties of bacterial spores, including Anthrax, how these spores operate in our environment, and their effect on the human body, which has been valuable in the overall development of our Anthrax Smoke Detector. 16 In August 2003, we began paying Dr. Makowka a monthly consulting fee of $5,000. We also issued 475,000 shares of our common stock to Dr. Makowka as compensation for his services. These shares were valued at $85,000, the market value of our common stock on the date issued. To date Dr. Ignarro has received warrants to purchase 200,000 shares of our common stock immediately exercisable at $0.25 per share, valued at $31,438, as compensation for his services. COMPETITION We face intense competition from a number of companies that offer products in our targeted application areas. Our competitors may offer or be developing products superior to ours. From time to time, we have been required to reduce our research efforts while we seek to raise additional funds. Our competitors may be significantly better financed than us. There are various technological approaches available to our competitors and us that may be applicable to the detection of pathogens in the air, and the feasibility and effectiveness of these techniques has yet to be fully evaluated or demonstrated. Several companies provide or are in the process of developing instruments for detection of bio-terrorism agents. Centrex, Inc., a publicly traded company, owns the exclusive worldwide license to develop, manufacture, and market a system for detecting microbial contamination in air, food and water. Centrex is seeking to develop and market an automated fully integrated system which enables rapid detection of harmful pathogens in the air by recognizing the unique DNA (or RNA) fingerprint of the organism, whether bacteria or virus. Its planned product is designed to be a system that automatically collects samples, prepares the DNA, performs the analysis rapidly, and communicates results to the end-user, via specially integrated software, with a goal to produce test results within 30 minutes after a sample is collected. Similarly, Cepheid, a publicly traded company, focuses on the detection and analysis of DNA in samples such as blood, urine, cell cultures, food and industrial air and water. According to public disclosures of Cepheid, Northrop Grumnan is developing a Biohazard Detection System that consists of a detection system (GeneXpert(R)) manufactured by Cepheid. This detection system offers rapid (about one hour) and sensitive detection of specific gene sequences present in Bacillus anthracis, the causative agent for anthrax. The Biohazard Detection System currently is scheduled to be installed on a production basis in identified U.S. Postal Service mail sorting facilities throughout the United States beginning in 2004. Cepheid states that it is anticipating to commercially launch a self contained version of the GeneXpert system, which is in the final stages of development, into non-clinical markets in the second half of 2004 and in the clinical genetic assessment market in 2005. Cellomics, Inc. has developed a system that utilizes living cells for the detection, classification, and identification of chemical and biological warfare threat agents such as anthrax and botulinum neurotoxin. Smiths Detection, a privately held U.K. company, has developed an automated biological agent detector that simultaneously detects up to eight different agents using Immuno-ligand Assay chemistries. This device is an on-demand, portable system that identifies specific biological agents and their concentration levels. We believe that the primary competition for the Anthrax Smoke Detector is PCR-based methods. However, the complexity of PCR makes automated implementation extremely expensive. We believe that the Anthrax Smoke Detector operating costs will be substantially less than PCR-based methods. Thus, we expect to be competitive with companies offering these PCR methods. Moreover, we believe the two technologies are synergistic and may be employed in concert. In order to compete against vendors of PCR-based methods, we will need to demonstrate the advantages of our products over alternative existing technologies and products and the potential cost advantages of our products relative to these conventional technologies and products. We also expect to encounter intense competition from a number of established and development-stage companies that continually enter the bioterrorism detection device market. Our competitors may succeed in developing or marketing technologies and products that are more effective or commercially attractive than our potential products or that render our technologies and potential products obsolete. As these companies develop their technologies, they may develop proprietary positions that prevent us from successfully commercializing our products. 17 INTELLECTUAL PROPERTY On September 30, 2003, we entered into a license agreement with Caltech, whereby we received licenses to produce, provide and sell proprietary products, processes and services for use in the detection of pathogens, spores, and biological warfare agents. These licenses include a worldwide exclusive license to the patent rights referenced in the Technology Affiliates Agreement with JPL and a worldwide nonexclusive license to rights in related proprietary technology. We also have a right under the agreement to grant sublicenses without rights to sublicense further. Caltech reserves the right to produce, provide and sell the licensed products, processes and services solely for noncommercial educational and research purposes. The United States government also has a worldwide, non-exclusive, non-transferable license to use or have used, for the performance of work for it or on its behalf, any inventions covered by the patent rights or the rights in the proprietary technology. The terms of the license further require that our licensed products are manufactured substantially in the United States, unless we can show that domestic manufacturing is not commercially feasible. As part of the sale of our wholly-owned subsidiary, Dasibi Environmental Corp. to a third party in March 2002, we obtained a perpetual nonexclusive license to exploit all of Dasibi's intellectual property rights anywhere in the universe outside of mainland China. Dasibi's core business had been the design, manufacture and marketing of automated continuous monitoring instruments used to detect and measure various types of air pollution, such as "acid rain," "ozone depletion" and "smog episodes." Dasibi also supplied computer-controlled calibration systems that verify the accuracy of our instruments, data loggers to collect and manage pollutant information, and final reporting software for remote centralized applications. PROPERTIES We currently do not own or lease any property. As of January 2004, we moved our corporate headquarters to 9595 Wilshire Blvd., Suite 700, Beverly Hills, California, an office space leased by Astor Capital, Inc., a company partially owned by our President and Chief Executive Officer. We currently are negotiating a written sub-lease agreement with Astor with respect to this space. We believe that this space, which is approximately 3,245 square feet is adequate for our current needs. We plan to lease property for our testing facility as our business demands require in the future. 18 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following tables set forth certain information with respect to our directors and officers as of July 26, 2004. The following persons serve as our directors and executive officers:
DIRECTORS & EXECUTIVE OFFICERS AGE PRESENT POSITION ------------------------------ --- ---------------- Jacques Tizabi....................... 33 Director, Chief Executive Officer and President Matin Emouna (1) (2)................. 34 Director Michael Collins (1) (2).............. 35 Director, Secretary (1) Member of the Compensation Committee. (2) Member of the Audit Committee.
Our executive officers are appointed by and serve at the discretion of our Board of Directors. There are no family relationships between any director and/or any executive officer. JACQUES TIZABI has been the Chief Executive Officer, President and Chairman of the Board of Directors of our Company since October 2001. He also serves as our Acting Chief Financial Officer. Mr. Tizabi spends most of his business time providing services to us, although he is involved with several other companies in industries unrelated to our business. He is the co-founder and managing partner of Astor Capital, Inc., which was founded in 1995 and specializes in investment banking and asset management, predominantly in the area of direct private investment in public companies. He is also a director of eCast Media, a subsidiary of NT Media Corp. of California, a publicly traded company, and President, Chief Executive Officer, and director of Riddle Records, Inc., a publicly traded company. Mr. Tizabi has substantial experience in evaluating, structuring and negotiating direct investments in public companies and later stage private companies. Mr. Tizabi holds a B.S. degree in Business from New York University and an M.B.A. from Pepperdine University. MICHAEL COLLINS has been the Secretary and a director of our Company since October 2001. He has been an independent business consultant since December 1998. Between 1993 and 1997, Mr. Collins worked for Twentieth Century Fox International, PolyGram Filmed Entertainment and Savoy Pictures in the field of media management. Mr. Collins received a B.A. in Political Science from Columbia University and an M.B.A. from The Anderson School at UCLA. MATIN EMOUNA has served as a director of our Company since October 2001. Since 1997, Mr. Emouna has maintained his own law practice in New York, where he represents foreign and domestic clients in a broad range of real estate transactions, with emphasis on new constructions, commercial real estate transactions, shopping center development, financing, and commercial leasing. Mr. Emouna also serves as a general counsel for Omni Abstract Title, Radio Sedayeh Iran and several non-profit religious organizations. He holds B.S. degrees in Business Administration and Spanish from New York State University at Albany and a J.D. from Benjamin N. Cardozo School of Law. DIRECTOR COMPENSATION During fiscal 2003, our directors did not receive compensation pursuant to any standard arrangement for their services as directors. When requested by us to attend Board meetings in person, it is our policy to reimburse directors for reasonable travel and lodging expenses incurred in attending these Board meetings. AUDIT COMMITTEE Our Audit Committee currently consists of Michael Collins and Matin Emouna. Each Audit Committee member is independent within the meaning of the applicable Nasdaq listing standards and applicable rules and regulations promulgated by the Securities and Exchange Commission. Our Audit Committee currently does not 19 have a financial expert within the meaning of the applicable SEC rules as management does not believe one is necessary in light of the Company's current stage of product development. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth information concerning the compensation for services in all capacities rendered to us for the three fiscal years ended December 31, 2003, of our Chief Executive Officer and our other executive officers whose annual compensation exceeded $100,000 in the fiscal year ended December 31, 2003, if any. We refer to the Chief Executive Officer and these other officers as the named executive officers.
ANNUAL LONG-TERM COMPENSATION COMPENSATION AWARDS SECURITIES UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS Jacques Tizabi 2003 $145,833 (1) $416,667 (1) 6,800,000 President, Chief Executive 2002 -- (1) -- Officer, Acting CFO and 2001 -- (1) 1,150,000 Chairman of the Board - ------------- (1) To enable us to meet a portion of our obligations as they became due, our Chairman and Chief Executive Officer agreed to continue to provide services to us, despite our inability to pay his salary to him for 20 consecutive months, totaling $416,667. Our CEO agreed permanently to waive that compensation. In August 2003, our Board of Directors approved a bonus of $416,667 based largely upon our CEO's continued service to the Company without payment, his waiver of those amounts owed, and the progress of the Anthrax Smoke Detector.
OPTION GRANTS IN FISCAL 2003 The following table sets forth certain information regarding the grant of stock options made during fiscal 2003 to the named executive officers. PERCENT OF TOTAL NUMBER OF OPTIONS SECURITIES GRANTED TO UNDERLYING EMPLOYEES EXERCISE OPTIONS IN FISCAL OR BASE EXPIRATION NAME GRANTED YEAR PRICE DATE -------------- ------------- --------- ---------- Jacques Tizabi 6,800,000 (1) 100% $0.33 8/18/13 - ----------- (1) Our Compensation Committee approved the grant of options to purchase 6,800,000 shares of common stock for various reasons, including as an inducement for Mr. Tizabi to continue to provide services as our Chief Executive Officer, as a bonus for his accomplishments on behalf of the Company for the first two years of employment, and his willingness to continue to provide services to the Company despite its inability to pay salary to him for 20 consecutive months and his agreement to waive that salary. a portion of his salary. 20 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth, for each of the named executive officers, certain information regarding the exercise of stock options during fiscal 2003, the number of shares of common stock underlying stock options held at fiscal year-end and the value of options held at fiscal year-end based upon the last reported sales price of the common stock on the OTC Bulletin Board on December 31, 2003 ($0.70 per share).
NUMBER OF SECURITIES SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED ACQUIRED OPTIONS AT IN-THE-MONEY OPTIONS AT ON VALUE DECEMBER 31, 2003 DECEMBER 31, 2003 NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE --------- --------- --------- ----------- ------------ ------------ ------------ Jacques Tizabi -- -- 7,950,000 -- $2,976,000 --
EMPLOYMENT AGREEMENTS We have an employment agreement with Jacques Tizabi. Mr. Tizabi's employment agreement, dated as of September 24, 2001, provides for Mr. Tizabi to serve as our Chairman of the Board, Chief Executive Officer and President for a term of five years from any given date, such that there shall always be a minimum of five years remaining under his employment agreement. The employment agreement provides for Mr. Tizabi to receive an annual base salary of $250,000, subject to annual increase based on comparable compensation packages provided to executives of similarly situated companies, and to participate in a bonus plan based on annual performance standards to be established by the compensation committee of our Board of Directors. Mr. Tizabi also is entitled to specified perquisites, including participation in any group life, medical, disability and other insurance plans provided by us, use of a luxury automobile approved by the compensation committee, monthly dues for club memberships not to exceed $1,500 per month, and reimbursement of entertainment expenses provided to our customers, vendors, and strategic partners. To date, Mr. Tizabi has not received any of these specified perquisites. If Mr. Tizabi's employment is terminated due to his death, the employment agreement provides that we will pay Mr. Tizabi's estate his remaining base salary during the remaining scheduled term of the employment agreement, accelerate the vesting of his options and continue to provide family medical benefits. If Mr. Tizabi's employment is terminated due to his disability, the employment agreement provides that we will pay Mr. Tizabi his remaining base salary during the remaining scheduled term of the employment agreement (reduced by any amounts paid under long-term disability insurance policy maintained by us for the benefit of Mr. Tizabi). If Mr. Tizabi terminates the employment agreement for cause, if we terminate the employment agreement without cause or in the event of a change of control, in which event the employment of Mr. Tizabi terminates automatically, we will pay Mr. Tizabi his remaining base salary during the remaining scheduled term of the employment agreement and an amount based on his past bonuses and continue to provide specified benefits and perquisites. If Mr. Tizabi terminates the employment agreement without cause or we terminate the employment agreement for cause, Mr. Tizabi is entitled to receive all accrued and unpaid salary and other compensation and all accrued and unused vacation and sick pay. If any of the payments due Mr. Tizabi upon termination qualifies as "excess parachute payments" under the Internal Revenue Code, Mr. Tizabi also is entitled to an additional payment to cover the tax consequences associated with these excess parachute payments. In connection with our recently completed private placement offering, Mr. Tizabi agreed that he will defer payment of all accrued but unpaid bonus or salary, as well as any compensation payable to him in excess of $150,000 per year, for nine months from April 29, 2004. 21 STOCK INCENTIVE PLANS We have in effect the 2003 Stock Incentive Plan, which we refer to as the 2003 Plan. The purpose of the 2003 Plan is to advance our interests and our stockholders by strengthening our ability to obtain and retain the services of the types of officers, employees, directors, and consultants who will contribute to our long-term success and to provide incentives which are linked directly to increases in stock value which will inure to the benefit of all of our stockholders. The total number of our common shares authorized and reserved for issuance under 2003 Plan is 4,500,000. The 2003 Plan is administered by our board of directors or a committee comprised of at least two members of our board of directors appointed by our board of directors, referred to as the Plan Administrator. The Plan Administrator has the authority to grant to eligible persons following rights: o incentive stock options; o nonstatutory stock options; and o restricted stock. The Plan Administrator also has the authority to: o construe and interpret the 2003 Plan; o promulgate, amend, and rescind rules and regulations relating to the administration of the 2003 Plan; o from time to time select from among our and our subsidiaries' eligible employees, directors, and consultants those persons to whom options will be granted; o determine the timing and manner of the grant of the options or award of stock, whether the option will be an incentive stock option or a nonstatutory stock option; o determine the exercise price, the number of shares covered by, and all of the terms of the options (which need not be identical) as well as the number of shares of restricted stock that may be awarded, the purchase price, and form of payment; o determine the duration and purpose of leaves of absence which may be granted to optionees without constituting termination of their employment for purposes of the 2003 Plan; o make all of the determinations necessary or advisable for administration of the 2003 Plan; and o in its absolute discretion, without amendment to the 2003 Plan, accelerate the date on which any option granted under the 2003 Plan becomes exercisable, waive or amend the operation of 2003 Plan provisions respecting exercise after termination of employment, or otherwise adjust any of the terms of the option. The 2003 Plan will terminate automatically on June 13, 2013. To date, we have not yet issued any options nor granted any restricted common stock under the 2003 Plan. PRINCIPAL STOCKHOLDERS The following table sets forth certain information relating to the ownership of common stock by (i) each person known by us be the beneficial owner of more than five percent (2,311,594 shares) of the outstanding shares of our common stock, (ii) each of our directors, (iii) each of our named executive officers, and (iv) all of our executive officers and directors as a group. Unless otherwise indicated, the information relates to these persons, beneficial ownership as of July 22, 2004. Except as may be indicated in the footnotes to the table and subject to applicable community property laws, each person has the sole voting and investment power with respect to the shares owned. The address of each person listed is in care of Universal Detection Technology, 9595 Wilshire Blvd., Suite 700, Beverly Hills, California 90212, unless otherwise set forth below that person's name. 22
NAME AND ADDRESS Number of Shares of Common Stock Percent of Beneficially Owned (1) Class (1) ---------------------- ------------- Jacques Tizabi (2)......................... 7,979,700 14.7% Michael Collins............................ -- 0% Matin Emouna............................... -- 0% Directors and executive officers as a group (3 persons) (2)................. 7,979,700 14.7% - ----------- (1) Under Rule 13d-3 under the Exchange Act, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by that person (and only that person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person's actual ownership with respect to the number of shares of our common stock actually outstanding at September 20, 2004. (2) Includes (a) 7,950,000 shares that may be acquired upon the exercise of options, which are or will become exercisable on or prior to September 20, 2004, (b) 21,900 shares that may be acquired upon the exercise of warrants owned by Astor Capital, Inc., and (c) 6,000 shares that may be acquired upon the exercise of warrants owned by JRT Holdings, Inc. Mr. Tizabi and Mr. Ali Moussavi, each a fifty-percent owner of Astor Capital, Inc., share voting and dispositive power. Mr. Tizabi and Mr. Raymond Tizabi, each a fifty-percent owner of JRT Holdings, Inc., share voting and dispositive power.
The information as to shares beneficially owned has been individually furnished by our respective directors, named executive officers and other stockholders, or taken from documents filed with the SEC. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In connection with our recently completed private placement offering, our Chief Executive Officer agreed to defer payment of all accrued but unpaid bonus and salary, as well as any compensation payable to him in excess of $150,000 per year, for nine months from April 29, 2004. Effective June 1, 2003, we entered into an agreement with Astor Capital, Inc., a company in which Jacques Tizabi, our Chief Executive Officer, is the President of and owns a 50% interest, pursuant to which we have agreed to pay $25,000 per month for investment banking and strategic advisory services as well as a 10% fee for all debt and equity financing raised for us. In connection with our recently completed private placement offering , we modified this agreement so that the compensation payable to Astor Capital under the agreement is reduced during the period from April 29, 2004, and for nine months thereafter, to an amount not to exceed the sum of $5,000 per month, excluding any fees for placement of securities. During the six months ended June 30, 2004, and the fiscal years ended December 31, 2003 and 2002, we paid Astor Capital, Inc., placement fees in the aggregate amounts of $101,196, $157,633, and $34,900, respectively, in connection with private placements and equity financings for us. During the six months ended June 30, 2004 and the year ended December 31, 2003, we paid Astor Capital, Inc. $30,124 and $28,654 in connection with the use of the office space we sublease from it. This amount is equal to the amount Astor Capital paid to its landlord for the pro rata portion of the lease of the office space. 23 SELLING STOCKHOLDERS The shares of our common stock to which this prospectus relates are being registered for re-offers and resales by the selling stockholders named below. We have registered these shares to permit the selling stockholders to resell the shares when they deem appropriate. Subject to the restrictions described in this prospectus, the selling stockholders may resell all, a portion or none of their shares at any time under this prospectus. In addition, subject to the restrictions described in this prospectus, the selling stockholders identified below may sell, transfer or otherwise dispose of all or a portion of our common stock being offered under this prospectus in transactions exempt from the registration requirements of the Securities Act. We do not know when or in what amounts a selling stockholder may offer shares for sale under this prospectus. The following table sets forth each selling stockholder, together with the number of shares of our common stock owned by each stockholder as of July 22, 2004, unless otherwise indicated, the number of shares of our common stock being offered by each selling stockholder under this prospectus and the number of shares of our common stock owned by each stockholder upon completion of this offering. Our common stock being offered under this prospectus is being offered for the account of the selling stockholders.
NUMBER OF PERCENTAGE SHARES OF OF SHARES NUMBER OF OUR COMMON OF OUR SHARES OF OUR NUMBER OF STOCK OWNED COMMON COMMON STOCK SHARES OF OUR AFTER THE STOCK OWNED OWNED PRIOR TO COMMON STOCK OFFERING AFTER THE SELLING STOCKHOLDER THE OFFERING BEING OFFERED OFFERING - ----------------------------- ----------------- ---------------- --------------- ------------- Michael Stone (1) 200,000 200,000 --- * Leroy Darby (1) 300,000 300,000 --- * Carmelo Luppino (1) 600,000 600,000 --- * Donald Mudd (1) 200,000 200,000 --- * Jerry Clark (1) 50,000 50,000 --- * David Erickson (1) 200,000 200,000 --- * Patrick Bujold (1) 150,000 150,000 --- * Frank Lefevre (1) 100,000 100,000 --- * Thomas Stramat (1) 50,000 50,000 --- * Bill O'Donnell (1) 50,000 50,000 --- * Mark Summerfield (1) 200,000 200,000 --- * Martin Legge (1) 200,000 200,000 --- * Robert Lucas (1) 100,000 100,000 --- * Gary Filler (1) 50,000 50,000 --- * Alan Parberry (1) 100,000 100,000 --- * Robert Hanfling (1) 200,000 200,000 --- * Michael Catanzarro (1) 50,000 50,000 --- * Kevin Sullivan (1) 50,000 50,000 --- * Andrew Mitchell (1) 200,000 200,000 --- * Roy Cappadona (1) 50,000 50,000 --- * Robert Segusso (1) 400,000 400,000 --- * Robert Johnsen (1) 50,000 50,000 --- * Morris Rotenstein (1) 200,000 200,000 --- * Gordon Gregoretti (1) 120,000 120,000 --- * Bob Baron (1) 50,000 50,000 --- * Larry Sylvester (1) 50,000 50,000 --- * Norman Rothstein (1) 200,000 200,000 --- * SRG Capital, Inc. (1) (2) 600,000 600,000 --- * Greg Mason (1) 25,000 25,000 --- * Ron Moey (1) 25,000 25,000 --- * Bob Cohen (1) 50,000 50,000 --- * Richard N. Houlding 1993 100,000 100,000 --- * Trust (1) (3) JD Lauren, Inc. (1) (4) 200,000 200,000 --- * 24 NUMBER OF PERCENTAGE SHARES OF OF SHARES NUMBER OF OUR COMMON OF OUR SHARES OF OUR NUMBER OF STOCK OWNED COMMON COMMON STOCK SHARES OF OUR AFTER THE STOCK OWNED OWNED PRIOR TO COMMON STOCK OFFERING AFTER THE SELLING STOCKHOLDER THE OFFERING BEING OFFERED OFFERING - ----------------------------- ----------------- ---------------- --------------- ------------- Rock II, LLC (1) (5) 480,000 480,000 * Maple Investments (1) (6) 200,000 200,000 --- * Jupiter Investments (1) (7) 100,000 100,000 --- * Brian Kane (1) 200,000 200,000 --- * Fiona Emily Holland (1) 100,000 100,000 --- * Roy Knollys Ellard 200,000 200,000 --- * Nicholson (1) Iain Stewart (1) 200,000 200,000 --- * Karen Lynn Miller (1) 100,000 100,000 --- * Gerry Penfold (1) 200,000 200,000 --- * Rick Van Der Toorn (1) 100,000 100,000 --- * Frank Sangster (1) 200,000 200,000 --- * Martin G. Findly (1) 100,000 100,000 --- * Christine Stock (1) 100,000 100,000 --- * William B. Remick (1) 200,000 200,000 --- * David Ney (1) 50,000 50,000 --- * Richard A. and Elizabeth 100,000 100,000 --- * Smart (1) Kim Misciosa (1) 1,000,000 1,000,000 --- * Rheal Cote (1) 100,000 100,000 --- * Andrew Cranston (1) 200,000 200,000 James S. Holliday (1) 100,000 100,000 --- * R/S Fisher Trust UTA Dated 100,000 100,000 --- * 10/10/94 (1) (8) Anthony J. Spatacco, Jr. (1) 121,250 121,250 --- * Stuart Lee (1) 300,000 300,000 --- * Zephyr Ventures Ltd. (1) (9) 200,000 200,000 --- * Christopher Michael Convey (1) 100,000 100,000 --- * Anthony and Martha 100,000 100,000 --- * Prochillo (1) Jean Oliver Tedesco (1) 100,000 100,000 --- * Brian Fillweber, IRA (1) 100,000 100,000 --- * Brian Fillweber (1) 100,000 100,000 --- * Entrust, Inc. (1) (10) 100,000 100,000 --- * Peter Fink (1) 160,000 160,000 --- * John P. Faure (1) 100,000 100,000 --- * Demir Kozi (1) 50,000 50,000 --- * Yong S. Chen (1) 50,000 50,000 --- * Steven and Martha Pliskin (1) 200,000 200,000 --- * Professional Trades 400,000 400,000 --- * Management LLC (1) (11) Margie Chassman (1) 240,000 240,000 --- * Michael G. Jesselson 300,000 300,000 --- * 12/18/80 Trust (1) (12) Meyers Associates, L.P. (13) 1,664,250 1,664,250 Alex Mak (13) 180,000 180,000 --- * Joseph Salino (13) 86,250 86,250 --- * Leor Yohanan (13) 124,500 124,500 --- * Bruce Meyers (13) 800,000 800,000 --- * Imtiaz Khan (13) 600,000 600,000 --- * 25 NUMBER OF PERCENTAGE SHARES OF OF SHARES NUMBER OF OUR COMMON OF OUR SHARES OF OUR NUMBER OF STOCK OWNED COMMON COMMON STOCK SHARES OF OUR AFTER THE STOCK OWNED OWNED PRIOR TO COMMON STOCK OFFERING AFTER THE SELLING STOCKHOLDER THE OFFERING BEING OFFERED OFFERING - ----------------------------- ----------------- ---------------- --------------- ------------- Maria Molinsky (13) 60,000 60,000 --- * Michael Hambelt (13) 42,500 42,500 --- * Starboard Capital (13) (14) 21,250 21,250 --- *
* Assumes the sale of all shares of the selling stockholder being offered. No estimate can be given as to the amount of shares that will be held by the selling stockholders after completion of this offering because the selling stockholders may offer some or all of the shares and because there are currently no agreements, arrangements or understandings with respect to the sale of any of the shares held by the selling stockholders, whether or not covered by this prospectus. (1) These selling stockholders purchased an aggregate of 6,000,000 shares of our common stock through a placement agent, Meyers & Associates, L.P., in a private placement transaction that closed on July 2, 2004. These shares were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act or Regulation D as promulgated by the SEC thereunder. The issuance was made without general solicitation or advertising. The selling stockholders were a limited number of accredited investors who were provided with an opportunity to ask questions and receive answers concerning the terms and conditions of the offering and to obtain any additional information which was in our possession or we could acquire without unreasonable effort or expense. The investors represented to us that the shares were being acquired for investment for their own account. We granted registration rights to the selling stockholders in connection with this transaction. Net proceeds to us from these sales were approximately $2.5 million. One half of the shares being offered by each of the selling stockholders represents common stock that the selling stockholder may purchase through exercise of warrants. (2) Edwin Mecabe and Tai May Lee share both dispositive and voting power with respect to the shares being offered by the selling stockholder for resale. (3) Richard Houlding exercises both dispositive and voting power with respect to the shares being offered by the selling stockholder for resale. (4) Ken Orr exercises both dispositive and voting power with respect to the shares being offered by the selling stockholder for resale. (5) Howard Chalfin exercises both dispositive and voting power with respect to the shares being offered by the selling stockholder for resale (6) Christian Kimdersely exercises both dispositive and voting power with respect to the shares being offered by the selling stockholder for resale (7) Philip Beck exercises both dispositive and voting power with respect to the shares being offered by the selling stockholder for resale. (8) Robert Fisher exercises both dispositive and voting power with respect to the shares being offered by the selling stockholder for resale (9) Jean Meurice Emery and Stephen Screech share both dispositive and voting power with respect to the shares being offered by the selling stockholder for resale. (10) Richard Hayes exercises both dispositive and voting power with respect to the shares being offered by the selling stockholder for resale. 26 (11) Marc Swickle and Howard Berger share both dispositive and voting power with respect to the shares being offered by the selling stockholder for resale. (12) Michael Jesselmen exercises both dispositive and voting power with respect to the shares being offered by the selling stockholder for resale. (13) Represents warrants Meyers Associates, L.P., and/or its agents received as consideration for their work as placement agent in a private placement transaction referenced in footnote 1 above. (14) Anthony Spatacco exercises both dispositive and voting power with respect to the shares being offered by the selling stockholder for resale. 27 PLAN OF DISTRIBUTION The selling stockholders, which as used in this section includes donees, pledgees, transferees or other successors-in-interest selling shares of our common stock or interests in shares of our common stock received after the date of this prospectus from a selling stockholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale or at negotiated prices. The selling stockholders may use any one or more of the following methods when disposing of shares or interests therein: (i) ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; (ii) block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction; (iii) purchases by a broker-dealer as principal and resale by the broker-dealer for its account; (iv) an exchange distribution in accordance with the rules of the applicable exchange; (v) privately negotiated transactions; (vi) short sales; (vii) through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; (viii) broker-dealers may agree with the selling stockholders to sell a specified number of the shares at a stipulated price per share; (ix) a combination of any of these methods of sale and (x) any other method permitted pursuant to applicable law. The selling stockholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee, transferee or other successors-in-interest as selling stockholders under this prospectus. The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors-in-interest will be the selling beneficial owners for purposes of this prospectus. In connection with the sale of our common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders also may sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders also may enter into option or other transactions with broker-dealers or other financial institutions for the creation of one or more derivative securities which require the delivery to the broker-dealer or other financial institution of shares offered by this prospectus, which shares the broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect the transaction). The aggregate proceeds to the selling stockholders from the sale of the common stock offered by them will be the purchase price of the common stock less discounts or commissions, if any. Each of the selling stockholders reserves the right to accept and, together with its agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through agents. We will not receive any of the proceeds from this offering. The selling stockholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act, provided that they meet the criteria and conform to the requirements of that rule. The selling stockholders and any underwriters, broker-dealers or agents that participate in the sale of the common stock or interests therein may be "underwriters" within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Selling stockholders that are "underwriters" within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act. 28 To the extent required, the shares of our common stock to be sold, the names of the selling stockholders, the respective purchase prices and public offering prices, the names of any agents, dealers or underwriters, and any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus. In order to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with. We have advised the selling stockholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the selling stockholders and their affiliates. In addition, we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling stockholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling stockholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act. We have agreed to indemnify the selling stockholders against certain liabilities, including liabilities under the Securities Act and state securities laws, relating to the registration of the shares offered by this prospectus. We have agreed with the selling stockholders to keep the registration statement of which this prospectus constitutes a part effective until the earlier of two (2) years from the effective date of the registration statement, the date on which the shares may be sold pursuant to Rule 144, and the date on which the shares have been sold or otherwise disposed. 29 DESCRIPTION OF SECURITIES Our authorized capital stock consists of 480,000,000 shares of common stock, no par value per share, and 20,000,000 shares of preferred stock, par value $0.01 per share, the rights and preferences of which may be established from time to time by our Board of Directors. As of July 22, 2004, there were 46,231,862 shares of common stock outstanding that were held of record by approximately 1,275 stockholders, no shares of preferred stock outstanding, outstanding options to purchase 9,010,446 shares of common stock, and outstanding warrants to purchase 12,262,211 shares of common stock. The following description of our capital stock does not purport to be complete and is subject to and qualified by our Articles of Incorporation, as amended, and Bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and by the provisions of applicable California law. COMMON STOCK Our common stock is traded on the Over the Counter Bulletin Board under the symbol "UDTT." Holders of our common stock are entitled to one vote for each share on all matters voted upon by our stockholders, including the election of directors and have cumulative voting rights. For a description of our dividend policy, please refer to the information in this prospectus under the heading "Dividend Policy." Holders of our common stock are entitled to share ratably in our net assets upon our dissolution or liquidation after payment or provision for all liabilities and any preferential liquidation rights of our preferred stock then outstanding. Holders of our common stock have no preemptive rights to purchase shares of our stock. The shares of our common stock are not subject to any redemption provisions and are not convertible into any other shares of our capital stock. All outstanding shares of our common stock are fully paid and nonassessable. The rights, preferences and privileges of holders of our common stock will be subject to those of the holders of any shares of our preferred stock we may issue in the future. PREFERRED STOCK As of July 22, 2004, we have no shares of preferred stock outstanding. Our Board of Directors may, from time to time, authorize the issuance of one or more additional classes or series of preferred stock without stockholder approval. Subject to the provisions of our Articles of Incorporation, as amended, and limitations prescribed by law, our Board of Directors is authorized to adopt resolutions to issue shares, establish the number of shares, change the number of shares constituting any series and provide or change the voting powers, designations, preferences and relative rights, qualifications, limitations or restrictions on shares of our preferred stock, including dividend rights, terms of redemption, conversion rights and liquidation preferences, in each case without any action or vote by our stockholders. We have no current intention to issue any shares of preferred stock. One of the effects of undesignated preferred stock may be to enable our Board of Directors to discourage an attempt to obtain control of our Company by means of a tender offer, proxy contest, merger or otherwise. The issuance of preferred stock may adversely affect the rights of our common stockholders by, among other things: o restricting dividends on the common stock; o diluting the voting power of the common stock; o impairing the liquidation rights of the common stock; or o delaying or preventing a change in control without further action by the stockholders. REGISTRATION RIGHTS As of the date hereof, certain holders of our common stock and warrants are entitled to rights with respect to the registration under the Securities Act of the shares of our common stock they currently own and the shares of our common stock they may acquire upon exercise of their warrants. The registration statement of which this prospectus constitutes a part includes all of the shares of common stock that we have agreed to register pursuant to registration rights agreements that we have entered into for the 30 benefit of the selling stockholders. In the case of each of the convertible securities referred to above, the registration statement of which this prospectus constitutes a part registers with the SEC the resale by the holder of those convertible securities of the shares of our common stock underlying the convertible securities. We have agreed to use all reasonable efforts to cause the registration statement to become effective as soon as reasonably practicable following its filing. In addition, we have agreed to prepare and file with the SEC any amendments or supplements to the registration statement, which may be necessary to keep the registration statement effective and to comply with the provisions of the Securities Act with respect to the resale of the shares covered by the registration statement for a period of the earlier of two years from the effective date of the registration statement, the date when the shares may be sold under Rule 144 of the Securities Act, and the date when all shares covered by the registration statement have been sold or otherwise disposed. We also have agreed to pay all expenses incurred by us incident to the registration of the resale of the shares covered by the prospectus, and to indemnify and hold harmless each purchaser of the securities. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Our Articles of Incorporation provide that the liability of our directors for monetary damages shall be eliminated to the fullest extent permissible under California law. This is intended to eliminate the personal liability of a director for monetary damages in an action brought by or in the right of our Company for breach of a director's duties to us or our shareholders except for liability: (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (ii) for acts or omissions that a director believes to be contrary to the best interests of our Company or our shareholders or that involve the absence of good faith on the part of the director; (iii) for any transaction for which a director derived an improper benefit; (iv) for acts or omissions that show a reckless disregard for the director's duty to us or our shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to our Company or our shareholders; (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to us or our shareholders; (vi) with respect to certain transactions, or the approval of transactions in which a director has a material financial interest; and (vii) expressly imposed by statute, for approval of certain improper distributions to shareholders or certain loans or guarantees. Our Articles of Incorporation also authorize us to provide indemnification to our agents (as defined in Section 317 of the California Corporations Code), through our Bylaws, by agreement or otherwise, with such agents or both, for breach of duty to us and our shareholders, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the California Corporations Code. Insofar as indemnification for liabilities arising under the Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is OTR Stock Transfer Corporation. 31 LEGAL MATTERS The validity of the shares of common stock offered by this prospectus will be passed upon for us by Akin Gump Strauss Hauer & Feld LLP, Los Angeles, California. EXPERTS Our consolidated financial statements as of December 31, 2003, and for each of the years in the two year period then ended, and the related financial statement schedules included in this prospectus have been audited by AJ Robbins PC, independent auditors, as stated in their reports appearing herein which reports express a qualified opinion and include explanatory paragraphs relating to a going concern uncertainty and prior period restatement and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC a registration statement on Form SB-2 under the Securities Act with respect to our common stock. This prospectus does not contain all of the information set forth in the registration statement, as amended, and the exhibits and schedule to the registration statement. For further information with respect to us and our common stock, we refer you to the registration statement and the exhibits and schedules filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, we refer you to the copy of the contract or document that has been filed as an exhibit is qualified in all respects by the filed exhibit. You may read and copy the registration statement, the related exhibits and the other material we file with the SEC without charge at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549. You also can request copies of those documents, upon payment of a duplication fee, by writing to the SEC. Please call the SEC at (800) SEC-0330 for further information on the operation of the public reference rooms. The SEC also maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file with the SEC. The site's address is www.sec.gov. We also will provide to you a copy of these filings at no cost. You may request copies of these filings by writing or telephoning us as follows: 9595 Wilshire Blvd., Suite 700, Beverly Hills, California 90212, Attention, Chief Executive Officer; telephone number 310-248-3655. In addition, you may access these filings at our website. Our website's address is www.udetection.com. The foregoing website references are inactive textual references only. You should rely only on the information contained in this prospectus or any prospectus supplement or that we have specifically referred you to. We have not authorized anyone else to provide you with different information. You should not assume that the information in this prospectus or any prospectus supplement is accurate as of any date other than the date on the front of those documents or that any document incorporated by reference is accurate as of any date other than its filing date. You should not consider this prospectus to be an offer or solicitation relating to the securities in any jurisdiction in which such an offer or solicitation relating to the securities is not authorized. Furthermore, you should not consider this prospectus to be an offer or solicitation relating to the securities if the person making the offer or solicitation is not qualified to do so, or if it is unlawful for you to receive such an offer or solicitation. 32 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) INDEX TO FINANCIAL STATEMENTS PAGE Independent Auditors' Report F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Changes in Stockholders' Equity (Deficit) F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 F-1 AJ. ROBBINS, P.C. 216 SIXTEENTH STREET SUITE 600 DENVER, COLORADO 80202 INDEPENDENT AUDITORS' REPORT Audit Committee Universal Detection Technology (f/k/a Pollution Research and Control Corporation and Subsidiaries) Beverly Hills, California We have audited the accompanying consolidated balance sheet of Universal Detection Technology (formerly Pollution Research and Control Corp.) and Subsidiaries as of December 31, 2003, and the related statements of operations, changes in stockholders' equity (deficit), and cash flows for each of the years in the two year period then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Universal Detection Technology (formerly Pollution Research and Control Corp.) and Subsidiaries as of December 31, 2003, and the results of its consolidated operations and its cash flows for each of the years in the two year period then ended in conformity with generally accepted accounting principles in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, it has a net working capital deficiency, and has a net capital deficiency that raises substantial doubt about the entity's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 14 to the financial statements, certain errors resulting in understatement of previously reported accrued expenses as of December 31, 2002, were discovered by management of the Company during the quarter ended June 30, 2004. Accordingly, the December 31, 2003 and 2002 financial statements have been restated and an adjustment has been made to retained earnings and accrued expenses as of December 31, 2003 and 2002 to correct the error. AJ. ROBBINS, PC CERTIFIED PUBLIC ACCOUNTANTS DENVER, COLORADO FEBRUARY 4, 2004 (Except for Note 14, as to which the date is July 27, 2004) F-2 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) CONSOLIDATED BALANCE SHEETS (RESTATED)
ASSETS June 30, December 31, 2004 2003 -------------- -------------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 955,914 $ 14,899 Certificate of deposit 900,990 --- Restricted cash 100,978 100,233 Accounts receivable 10,000 --- Due from related parties 47,770 29,099 Bridge notes, related party --- 50,000 Inventories 20,000 20,000 Prepaid expenses and other current assets 293,187 1,045,155 -------------- -------------- Total current assets 2,328,839 1,259,386 EQUIPMENT, NET 76,628 3,507 -------------- -------------- $ 2,405,467 $ 1,262,893 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable, trade $ 69,132 $ 112,759 Accrued liabilities 904,444 864,000 Notes payable, related party 40,000 40,000 Notes payable 1,257,526 1,517,526 Accrued interest expense 523,534 454,736 -------------- -------------- Total current liabilities 2,794,636 2,989,021 -------------- -------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock, $.01 par value, 20,000,000 shares authorized, -0- issued and outstanding --- --- Common stock, no par value, 480,000,000 shares authorized, 44,969,865 and 35,002,197 shares issued and outstanding 19,999,642 15,705,055 Additional paid-in-capital 3,606,891 3,606,891 Accumulated (deficit) (23,995,702) (21,038,074) -------------- -------------- Total stockholders' equity (deficit) (389,169) (1,726,128) -------------- -------------- $ 2,405,467 $ 1,262,893 ============== ============== See accompanying notes to consolidated financial statements.
F-3 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six For the Six Months Ended Months Ended June 30, June 30, 2004 2003 ------------- ------------- (Unaudited) (Unaudited) REVENUE $ 25,000 $ --- COST OF GOODS SOLD --- --- ------------- ------------- GROSS PROFIT 25,000 --- ------------- ------------- OPERATING EXPENSES: Selling, general and administrative 1,460,018 249,077 Marketing 1,400,384 430,309 Research and development --- 169,000 ------------- ------------- Total expenses 2,860,402 848,386 ------------- ------------- (LOSS) FROM OPERATIONS (2,835,402) (848,386) OTHER INCOME (EXPENSE): Interest income 2,461 48 Interest expense (81,427) (102,627) Interest expense, related parties --- (651) Amortization of loan fees (43,260) (58,500) ------------- ------------- Net other income (expense) (122,226) (161,730) ------------- ------------- (LOSS) FROM OPERATIONS BEFORE INCOME TAXES (2,957,628) (1,010,116) INCOME TAX EXPENSE --- --- NET (LOSS) $ (2,957,628) $ (1,010,116) ============ ============= NET (LOSS) PER SHARE - BASIC AND DILUTED $ (0.07) (0.07) ============= ============= WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 39,489,581 14,100,585 ============= =============
See accompanying notes to consolidated financial statements. F-4 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
For the Year For the Year Ended Ended December 31, December 31, 2003 2002 -------------- -------------- (Restated) REVENUE $ --- $ 30,000 COST OF GOODS SOLD --- 8,600 -------------- -------------- GROSS PROFIT --- 21,400 -------------- -------------- OPERATING EXPENSES: Selling, general and administrative 1,655,863 721,487 Marketing 1,932,512 45,000 Research and development 199,000 82,000 Loss on write-down of inventory --- 1,894,342 Loss on legal judgment --- 411,500 -------------- -------------- Total expenses 3,787,375 3,154,329 -------------- -------------- (LOSS) FROM OPERATIONS (3,787,375) (3,132,929) OTHER INCOME (EXPENSE): Interest income 726 --- Interest expense (208,063) (232,345) Amortization of loan fees (235,136) (5,752) Beneficial conversion feature of convertible debt (495,305) (113,000) -------------- -------------- Net other income (expense) (937,778) (351,097) -------------- -------------- (LOSS) FROM OPERATIONS BEFORE INCOME TAXES (4,725,153) (3,484,026) INCOME TAX EXPENSE --- --- -------------- -------------- (LOSS) FROM CONTINUING OPERATIONS (4,725,153) (3,484,026) DISCONTINUED OPERATIONS: (Loss) from operations of discontinued subsidiaries (less applicable income tax expense of $-0-) --- (149,745) Gain on disposal of subsidiaries, including provision of $-0- for operating losses during phase-out period less applicable income taxes of $-0- --- 1,490,553 -------------- -------------- NET GAIN FROM DISCONTINUED OPERATIONS --- 1,340,808 -------------- -------------- NET (LOSS) $ (4,725,153) $ (2,143,218) ============== ============== NET INCOME (LOSS) PER SHARE - BASIC AND DILUTED: Continuing operations $ (0.23) $ (0.42) Discontinued operations: (Loss) from operations --- (0.02) Gain on disposal --- 0.18 -------------- -------------- $ (0.23) $ (0.26) ============== ============== WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 20,919,845 8,212,300 ============== ==============
See accompanying notes to consolidated financial statements. F-5 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003 AND FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
Total Common Stock Additional Accumulated Stockholders' Equity Shares Amount Paid-in-Capital (Deficit) (Deficit) ------------ ----------- --------------- ------------- -------------- BALANCE, DECEMBER 31, 2001 5,949,616 $ 9,789,742 $ 2,485,062 $ (14,169,703) $ (1,894,899) Conversion of convertible debt and accrued interest 2,072,464 505,238 --- --- 505,238 Stock based compensation for consulting services --- --- 111,112 --- 111,112 Common stock issued for services 730,000 154,250 --- --- 154,250 Stock issued in private placements, net of offering costs of $34,900 2,121,312 364,100 --- --- 364,100 Value of stock based compensation issued for sale of Dasibi --- --- 160,993 --- 160,993 Value of beneficial conversion feature of convertible debt --- --- 113,000 --- 113,000 Net (loss) for the year (Restated) --- --- --- (2,143,218) (2,143,218) ------------ ----------- --------------- ------------- -------------- BALANCE, DECEMBER 31, 2002 10,873,392 10,813,330 2,870,167 (16,312,921) (2,629,424) Common stock issued for services 3,357,000 1,181,280 --- --- 1,181,280 Common stock issued for loan fees 415,000 198,400 --- --- 198,400 Conversion of convertible debt and accrued interest 3,889,044 573,805 --- --- 573,805 Stock issued in private placements net of offering costs of $443,033 15,907,903 2,876,222 --- --- 2,876,222 Fair market value of repriced warrants --- --- 56,019 --- 56,019 Warrants issued for services --- --- 185,400 --- 185,400 Value of beneficial conversion feature of convertible debt --- --- 495,305 --- 495,305 Exercise of warrants 559,858 62,018 --- --- 62,018 Net (loss) for the year --- --- --- (4,725,153) (4,725,153) ------------ ----------- --------------- ------------- -------------- BALANCE, DECEMBER 31, 2003 35,002,197 15,705,055 3,606,891 (21,038,074) (1,726,128) Stock issued in private placements, net of offerings costs of $585,514 (Unaudited) 9,857,668 4,245,587 --- --- 4,245,587 Stock issued for services (Unaudited) 110,000 49,000 --- --- 49,000 Net (loss) for the period (Unaudited) --- --- --- (2,957,628) (2,957,628) ------------ ----------- --------------- ------------- -------------- BALANCE, JUNE 30, 2004 (UNAUDITED) 44,969,865 $ 19,999,642 $ 3,606,891 $ (23,995,702) $ (389,169) ========== ========== ============= ============= ==============
See accompanying notes to consolidated financial statements. F-6 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six For the Six Months Ended Months Ended June 30, June 30, 2004 2003 ------------- -------------- (Unaudited) (Unaudited) CASH FLOWS FROM (TO) OPERATING ACTIVITIES: Net (loss) (2,957,628) (1,010,116) Adjustments to reconcile net (loss) to net cash (used in) operations: Stock issued for services 49,000 11,280 Stock issued for loan fees --- 16,500 Fair market value of repriced warrants --- 56,019 Depreciation 3,646 --- Changes in operating assets and liabilities: Accounts receivable (10,000) --- Prepaid expenses and other current assets 751,968 (3,727) Accounts payable and accrued expenses 65,615 42,803 ------------- -------------- Net cash (used in) operating activities (2,097,399) (887,241) ------------- -------------- CASH FLOWS FROM (TO) INVESTINGACTIVITIES: Purchase of equipment (76,767) --- Advances to related party (18,671) --- Payments received on bridge note to related party 50,000 --- Investment in certificate of deposit (900,990) --- (Increase) in restricted cash (745) --- ------------- -------------- Net cash (used in) investing activities (947,173) --- ------------- -------------- CASH FLOWS FROM (TO) FINANCING ACTIVITIES: Proceeds from issuance of common stock 4,831,101 839,947 Payment of offering costs (585,514) (115,613) Proceeds from exercise of warrants --- 62,018 Advances on notes payable --- 145,000 Payments on notes payable (260,000) (25,000) ------------- -------------- Net cash provided by financing activities 3,985,587 906,352 ------------- -------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 941,015 19,111 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,899 9,318 ------------- -------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 955,914 $ 28,429 =========== ==============
See accompanying notes to consolidated financial statements. F-7 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Year For the Year Ended Ended December 31, December 31, 2003 2002 --------------- -------------- (Restated) CASH FLOWS FROM (TO) OPERATING ACTIVITIES: Net (loss) from continuing operations (4,725,153) (3,484,026) Adjustments to reconcile net (loss) to net cash (used in) operations: Beneficial conversion feature of convertible debt 495,305 113,000 Stock issued for services 1,181,280 154,250 Stock based compensation issued for services 185,400 111,112 Stock issued for loan fees 198,400 --- Fair market value of repriced warrants 56,019 --- Depreciation 152 --- Changes in operating assets and liabilities: Accounts receivable 30,000 (30,000) Due from related parties (29,099) --- Inventories --- 1,894,342 Prepaid expenses (999,217) (45,938) Accounts payable (126,701) 222,950 Accrued expenses 599,847 509,248 --------------- -------------- Net cash (used in) operating activities (3,133,767) (555,062) --------------- -------------- CASH FLOWS (TO) INVESTING ACTIVITIES: Purchase of equipment (3,659) --- Bridge note to related party (50,000) --- Payments received on bridge note to related party --- --- (Increase) in restricted cash (100,233) --- Advances to related party --- --- --------------- -------------- Net cash (used in) investing activities (153,892) --- --------------- -------------- CASH FLOWS FROM (TO) FINANCING ACTIVITIES: Proceeds from issuance of common stock 3,319,255 399,000 Payment of offering costs (443,033) (34,900) Proceeds from exercise of warrants 62,018 --- Proceeds from notes payable 450,000 57,526 Payments on notes payable (95,000) --- --------------- -------------- Net cash provided by financing activities 3,293,240 421,626 --------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,581 (133,436) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,318 142,754 --------------- -------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,899 $ 9,318 =============== ==============
See accompanying notes to consolidated financial statements. F-8 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 1 - BUSINESS ACTIVITY Universal Detection Technology (formerly Pollution Research and Control Corp.), a California corporation, primarily designed, manufactured and marketed air pollution monitoring instruments, through its wholly-owned subsidiary Dasibi Environmental Corporation ("Dasibi"). The Company's wholly owned subsidiary Nutek, Inc. ("Nutek") is inactive. The Company's wholly owned subsidiary Logan Medical Devices, Inc. ("Logan") was renamed Dasibi China, Inc. ("Dasibi China") and is currently inactive. In March 2002, the Company sold Dasibi to one of its creditors in exchange for the cancellation of $1,500,000 in debt and accrued interest owed to the creditor. A non-exclusive license agreement for all of the Dasibi's technology was also granted to the Company. In May 2002, Dasibi vacated its premises and management believes Dasibi has since suspended operations. Beginning in 2002, the Company began doing business as Universal Detection Technology and has focused its research and development efforts in developing a real time biological weapon detection device. On August 8, 2003, the shareholders approved the change of the name of Pollution Research and Control Corp. to Universal Detection Technology. To accelerate development of its initial biological weapon detection device, the Company has developed and is implementing a collaborative partnering strategy. Under this strategy, the Company identifies and partners with researchers and developers. The Company entered into a technology affiliates agreement with NASA's Jet Propulsion Laboratory ("JPL") to develop technology for its bio-terrorism detection equipment and a license agreement with the California Institute of Technology ("CalTech"), which granted the Company an exclusive worldwide license to products that incorporate patent rights referenced in the above technology affiliates agreement. PRIOR PERIOD RESTATEMENT During the quarter ended June 30, 2004, a change was made to the retained earnings and accrued expenses of the Company to correct the legal judgment recorded during the year ended December 31, 2002. The Company originally recorded the amount of damages sought by the plaintiff, rather than the amount of the final judgment. The Company has retroactively restated net loss for the year ended December 31, 2002, increasing the net loss from $1,980,718 to $2,143,218 due to an adjustment of $162,500. (See Note 14.) GOING CONCERN AND MANAGEMENT'S PLANS In March 2002, the Company sold its operating subsidiary, Dasibi Environmental Corp., as further described in Note 12. As of December 31, 2003 and June 30, 2004, the Company had a working capital deficit and a capital deficit. These conditions raise substantial doubt about its ability to continue as a going concern. Its ability to continue as a going concern is dependent upon its ability to develop additional sources of capital and ultimately achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is currently devoting its efforts to raising capital and development and marketing of its bio-terrorism detection device, known as the Anthrax Smoke Detector ("ASD"). The Company entered into a technology affiliates agreement with JPL to develop technology for its bio-terrorism detection equipment and a license agreement with Caltech, which granted the Company an exclusive worldwide license to products that incorporate patent rights referenced in the above technology affiliates agreement. The Company unveiled the first functional prototype of its ASD in May 2004. Though not fully tested, the ASD is currently available for sale. F-9 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 1 - BUSINESS ACTIVITY (CONTINUED) In July 2004, the Company commenced simulated tests with benign bacterial spores having anthrax-like properties in order to fine tune our product. Based on the results obtained, the Company intends to modify the product, if necessary, and to order several units from Met One Instruments ("Met One"), a third-party manufacturer that assembled the first functional prototype. During the remainder of 2004 and through the summer of 2005, the Company plans to engage in field testing of these units in different environments and conditions and to use the empirical data gained from the testing to further improve the design and functionality of the product. The Company is engaged in discussions with Rutgers University to perform our field testing, which we expect to commence following the testing performed by JPL in order to incorporate the findings of the JPL testing into the product provided to Rutgers. The Center for Advanced Infrastructure and Transportation at Rutgers University was given an initial (Phase I) grant from the National Science Foundation to conduct a preliminary study on methods to protect the nation's transportation infrastructure against a potential airborne biological attack. Rutgers identified the Company as a partner in this project. At this time, Rutgers has applied for a Phase II grant from the National Science Foundation. Rutgers would use the proceeds from this grant to implement its site-specific emergency management response protocol. Rutgers orally has agreed to incorporate the Company's bio-detection technology in its response protocol. Rutgers has informed the Company that it intends to select a facility managed by the NY/NJ Port Authority to run simulated tests. Rutgers will manage all details relating to the implementation of the program. The Company hopes to initiate the field testing with Rutgers by January 2005. The Company plans to initiate orders of the ASD with Met One based on sales orders it receives. In connection with sales and marketing efforts, the Company hopes to sell units to customers in specific sectors in the market including, sports stadiums, conventions centers, and casinos. At this time, the Company has not entered into any agreements with any third parties regarding the manufacturing of the ASD, but Met One has indicated that it will be capable of producing between 50 to 100 units per month. During the next 12 month period, the Company also plans on securing and leasing a testing facility close to the JPL laboratories where it would be able to implement a quality assurance program and test its products against the required specifications before shipping them to customers. During July 2004, the Company completed the final closing of its private placement offering of Units consisting of common stock and warrants to purchase common stock. The aggregate gross proceeds from the offering were $3,000,000. The Company intends to use these proceeds for working capital and general corporate purposes but is precluded from using the proceeds to pay debt outstanding at the time of final closing of the offering or make payments to Astor Capital, Inc. ("Astor"), a company in which its President and CEO has a 50% equity interest and is a co-founder and managing partner. Pursuant to a related Registration Rights Agreement, the Company filed a registration statement with the Securities and Exchange Commission within 30 days of final closing of the offering to register for resale shares of the Company's common stock and the shares underlying the warrants included in the Units. F-10 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 1 - BUSINESS ACTIVITY (CONTINUED) The Company estimates that it will require approximately $2.0 million in the next twelve months to complete its existing prototype, engage in testing of the device, and revise the technology or reengineer the device as may be necessary or desirable and otherwise execute its business plan. As a result of the private placement the Company believes it has sufficient capital to fund its operating expenses for the next twelve months. The Company does not believe it has adequate capital to repay its debt currently due and becoming due in the next twelve months. UNAUDITED INTERIM FINANCIAL STATEMENTS In the opinion of management, the unaudited interim financial statements for the three and six months ended June 30, 2004 and 2003 are presented on a basis consistent with the audited financial statements and reflect all adjustments, consisting only of normal recurring accruals, necessary for fair presentation of the results of such period. The results of operations for the three and six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of Universal Detection Technology and its wholly-owned subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. REVENUE RECOGNITION Revenue will be recognized upon shipment of products. Title of goods is transferred when the products are shipped from the Company's facility. Income not earned will be recorded as deferred revenue. During the six months ended June 30, 2004, the Company recognized $25,000 of revenue in accordance with its agreement with Rutgers University to assist Rutgers in identifying a partner for its study on methods to protect the nation's transportation infrastructure against a potential airborne biological attack. The Company completed all obligations under the agreement. INVENTORIES Inventories, consisting of finished goods, are stated at the lower of cost (first-in first-out) basis or market. ADVERTISING EXPENSES The Company expenses advertising costs as incurred. During the years ended December 31, 2003 and 2002, and the three and six months ended June 30, 2004 and 2003, the Company did not have significant advertising costs. EQUIPMENT AND DEPRECIATION Equipment, consisting of office equipment, is recorded at cost less accumulated depreciation. Depreciation is provided for on the straight-line method over the estimated useful lives of the assets, generally five years. Total depreciation expense was $152 and $-0- for the years ended December 31, 2003 and 2002, respectively and $3,646 and $-0- for the six months ended June 30, 2004 and 2003, respectively. As of June 30, 2004 and December 31, 2003, accumulated depreciation was $3,798 and $152, respectively. F-11 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION The Company accounts for stock based compensation in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). This standard requires the Company to adopt the "fair value" method with respect to stock-based compensation of consultants and other non-employees and allows for use of the intrinsic value method for stock-based compensation of employees under Accounting Principles Board Opinion No. 25. Had compensation cost for the Company's stock-based compensation plans been determined using the fair value of the options at the grant date as prescribed by SFAS 123, the Company's pro forma net loss and loss per common share would be as follows:
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED JUNE 30, DECEMBER 31, -------- ------------ 2004 2003 2003 2002 ---- ---- ---- ---- Net (loss): As reported $ (2,957,628) $ (1,010,116) $ (4,725,153) $ (2,143,218) Stock based employee compensation (as recorded): --- --- --- --- Stock based employee compensation (fair value method): --- --- 1,995,000 --- ------------- ------------- -------------- ------------- Proforma $ (2,957,628) $ (1,010,116) $ (6,720,153) $ (2,143,218) ============= ============= ============== ============= Basic and diluted (loss) per share: As reported $ (0.07) $ (0.07) $ (0.23) $ (0.26) ============= ============= ============== ============= Proforma $ (0.07) $ (0.07) $ (0.32) $ (0.26) ============= ============= ============== =============
VALUATION OF THE COMPANY'S COMMON STOCK Unless otherwise disclosed, all stock based transactions entered into by the Company have been valued at the market value of the Company's common stock on the date the transaction was entered into or have been valued using the Modified Black-Scholes European Model to estimate the fair market value. EARNINGS PER COMMON SHARE The Company computes earnings per common share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). The Statement requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding. The computation of diluted loss per share is similar to the basic loss per share computation except the denominator is increased to include the number of additional shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, the numerator is adjusted for any changes in income or loss that would result from the assumed conversions of those potential shares. However, such presentation is not required if the effect is antidilutive. Accordingly, the diluted per share amounts do not reflect the impact of warrants and options or convertible debt outstanding for 20,000,657 and 7,581,449 shares at June 30, 2004 and 2003, respectively, and 11,834,560 and 10,201,038 shares December 31, 2003 and 2002, respectively, because the effect of each is antidilutive. F-12 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH EQUIVALENTS For purposes of reporting cash flows, the Company considers all short term, interest bearing deposits with original maturities of three months or less to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, accounts receivable, notes receivable, accounts payable, accrued expenses and notes payable approximate fair value because of the short maturity of these items. IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates its long-lived assets by measuring the carrying amounts of assets against the estimated undiscounted future cash flows associated with them. At the time the carrying value of such assets exceeds the fair value of such assets, impairment is recognized. To date, no adjustments to the carrying value of the assets have been made. RESEARCH AND DEVELOPMENT COSTS In 2002, the Company entered into a technology affiliates agreement with NASA's Jet Propulsion Laboratory ("JPL") to develop technology for its bio-terrorism detection equipment. These costs are charged to expense as incurred. Research and development expenses were $-0- and $169,000 for the six months ended June 30, 2004 and 2003, respectively and $199,000 and $82,000 for the years ended December 31, 2003 and 2002, respectively. INCOME TAXES Deferred income taxes are recorded to reflect the tax consequences in future years of temporary differences between the tax basis of the assets and liabilities and their financial statement amounts at the end of each reporting period. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the current period and the change during the period in deferred tax assets and liabilities. The deferred tax assets and liabilities have been netted to reflect the tax impact of temporary differences. At June 30, 2004 and December 31, 2003, a full valuation allowance has been established for the deferred tax asset as management believes that it is more likely than not that a tax benefit will not be realized. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATION Certain amounts in the prior period financial statements have been reclassified for comparative purposes to conform to the presentation in the current period financial statements. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In April 2003, FASB issued SFAS No. 149, "Accounting for Derivative Instruments and Hedging Activities," which is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. This statement amends and clarifies financial accounting and reporting for derivative instruments including certain instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The adoption of this standard did not have a material impact on the Company's financial statements. F-13 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The adoption of this standard did not have a material impact on the Company's financial statements. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," for certain entities which do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest ("variable interest entities"). Variable interest entities will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both, as a result of holding variable interests, which are ownership, contractual, or other pecuniary interests in an entity. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period. The Company's adoption of FIN 46 did not have any impact upon the Company's financial condition or results of operations. NOTE 3 - INVENTORIES As part of the sale of Dasibi, the Company arranged with Dasibi that Dasibi would continue to house the inventory that was assigned to the Company. During the second quarter of 2002, Dasibi vacated its manufacturing space, and moved the inventory that was assigned to the Company to a location unknown to the Company. The Company currently is in the process of reviewing its rights under the circumstances and has been unsuccessful in locating the inventory. At December 31, 2002, such inventory was written down to reflect the loss. Remaining inventory consists entirely of finished goods. F-14 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 4 - ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK At December 31, 2002, the accounts receivable balance from one customer was $30,000, or 100% of the total accounts receivable balance. Generally, no collateral is required. The Company's credit losses in the aggregate have not exceeded managements' expectations. During 2003, the product was returned and is being used by the Company for research and development activities and the receivable was written off to research and development expense. The Company maintains all cash in bank accounts, which at times may exceed federally insured limits. The Company has not experienced a loss in such accounts. NOTE 5 - NOTES PAYABLE, RELATED PARTY During the year ended December 31, 2003, the Company borrowed cash for operating expenses on a short-term basis from certain related entities, Astor and JRT Holdings. JRT Holdings is a company in which the Company's President and CEO has a 50% equity interest. The Company borrowed a total of $-0- and $85,000 during the six months ended June 30, 2004 and during the year ended December 31, 2003, respectively and repaid a total of $45,000. Notes payable, related party consists of the following at December 31, 2003 and June 30, 2004: Note payable to JRT Holdings, interest at 9% per annum; principal and interest due April 2004, unsecured, converted from debenture $ 20,000 Note payable to JRT Holdings, interest at 6% per annum, principal and interest due February 2004, unsecured 20,000 ----------- Total notes payable, related party $ 40,000 =========== F-15 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 6 - NOTES PAYABLE Notes payable consisted of the following at December 31, 2003: Notes payable to individuals, interest at 11% per annum, principal and interest due June 2001, unsecured $ 150,000 Notes payable to individuals, interest at 12% per annum, principal and interest due June 2001, unsecured 150,000 Notes payable, interest at 12% per annum, principal and interest due October 2004, unsecured, converted from debenture 200,000 Notes payable, interest at 9% per annum, principal and interest due October 2004, unsecured, converted from debenture 100,000 Note payable, interest at 18% per annum, principal and interest due June 2000, and verbally extended, unsecured 200,000 Demand note under Ex-Im Bank authorization at Wall Street Journal Prime rate +3.0% per annum (7% at December 31, 2003), matured June 30, 2002 previously secured by Dasibi customer line of credit 250,000 Bridge loan payable, interest of 10% per annum, principal and interest due June 2002 and verbally extended, unsecured 22,526 Bridge loan payable, interest of 10% per annum, principal and interest due September 2002 and verbally extended, unsecured 35,000 Notes payable, interest at 18% per annum, due May 2003 and verbally extended, unsecured, effective interest, which includes loan fees, is 72.6% 75,000 Notes payable, interest at 18% per annum, due August 2003 and verbally extended, unsecured, effective interest, which includes loan fees, is 154.2% 60,000 Notes payable, interest at 10% per annum, due in December 2003 and verbally extended, unsecured, effective interest, which includes values ascribed to stock compensation granted and other loan fees, is 638.1% 100,000 Notes payable, interest at 10% per annum, due in February 2004, unsecured, effective interest, which includes values ascribed to stock compensation granted and other loan fees is 314.9% 100,000 Note payable, interest at 10% per annum, due June 2002 and verbally extended, unsecured 75,000 ---------- Total notes payable $ 1,517,526 ========== Certain notes were past due and in default, totaling $550,000, as of December 31, 2003. F-16 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 6 - NOTES PAYABLE (CONTINUED) Notes payable consisted of the following at June 30, 2004: Notes payable to individuals, interest at 11% per annum, principal and interest due June 2001, unsecured $ 150,000 Notes payable to individuals, interest at 12% per annum, principal and interest due June 2001, unsecured 150,000 Notes payable, interest at 12% per annum, principal and interest due October 2004, unsecured, converted from debenture 200,000 Notes payable, interest at 9% per annum, principal and interest due October 2004, unsecured, converted from debenture 100,000 Note payable, interest at 18% per annum, principal and interest due June 2000, and verbally extended, unsecured 200,000 Demand note under Ex-Im Bank authorization at Wall Street Journal Prime rate +3.0% per annum (7% at December 31, 2003), matured June 30, 2002 previously secured by Dasibi customer line of credit 250,000 Bridge loan payable, interest of 10% per annum, principal and interest due June 2002 and verbally extended, unsecured 22,526 Bridge loan payable, interest of 10% per annum, principal and interest due September 2002 and verbally extended, unsecured 35,000 Notes payable, interest at 18% per annum, due May 2003 and verbally extended, unsecured 75,000 Note payable, interest at 10% per annum, due June 2002 and verbally extended, unsecured 75,000 ------------ Total notes payable $ 1,257,526 ============ Certain notes were past due and in default, totaling $550,000, as of June 30, 2004. F-17 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 6 - NOTES PAYABLE (CONTINUED) During the year ended December 31, 2003, certain convertible debt holders converted debt of $485,000 into 3,258,887 shares of the Company's common stock. In addition, certain convertible debt holders converted $88,805 of accrued interest on the convertible debt to 630,157 shares of the Company's common stock. In October 2003, as incentive to certain debenture holders, the Company agreed to convert the debentures to the Company's common stock at $.15 per share rather than at 70% to 80% of market price per the terms of the debentures. In connection with these transactions, the Company recorded $495,305 as an expense for the beneficial conversion feature. In October 2003, certain debenture holders agreed in principle to novate the $320,000 of convertible debentures and enter into non-convertible notes payable with extended due dates ranging from six months to one year. During the year ended December 31, 2002, certain convertible debt holders converted $435,000 to 1,801,252 shares of the Company's common stock. In addition, certain convertible debt holders converted $70,238 of accrued interest on the convertible debt to 271,212 shares of the Company's common stock. In March 2002, the holder of $450,000 of convertible debt agreed to extend the due date of the debt to February 23, 2004 and the Company agreed to reduce the conversion rate on the convertible debt from 85% of the market price of the Company's common stock to 70% of the market price of the Company's common stock. The Company recorded $113,000 as an expense for the beneficial conversion feature of the new conversion rate. During 2002, $250,000 was converted and the remaining outstanding debt balance was $200,000 as of December 31, 2002. During the year ended December 31, 2003 the remaining balance was converted to shares of the Company's common stock as described above. NOTE 7 - INCOME TAXES The income tax provision (benefit) for six months ended June 30, 2004 and 2003 differs from the computed expected provision (benefit) at the federal statutory rate for the following reasons:
2004 2003 --------------- -------------- Computed expected income tax provision $ (1,006,000) $ (343,000) (benefit) Net operating loss carryforward 1,006,000 343,000 increased --------------- -------------- Income tax provision (benefit) $ --- $ --- =============== ==============
F-18 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 7 - INCOME TAXES (CONTINUED) The income tax provision (benefit) for the years ended December 31, 2003 and 2002 differs from the computed expected provision (benefit) at the federal statutory rate for the following reasons:
2003 2002 --------------- ------------- Computed expected income tax provision $ (1,606,000) $ (673,000) (benefit) Net operating loss carryforward interest 1,356,000 964,000 Accrued litigation --- 85,000 Stock-based expenses 82,000 93,000 Beneficial conversion feature of convertible 168,000 38,000 debt Gain on disposal of subsidiary --- (507,000) --------------- ------------- Income tax provision (benefit) $ --- $ --- =============== =============
The components of the deferred tax assets and (liabilities) as of June 30, 2004 were as follows: Deferred tax assets: Temporary differences: Net operating loss carryforward $ 6,008,000 Valuation allowance (6,008,000) -------------- Net long-term deferred tax asset $ --- ============== The components of the deferred tax assets and (liabilities) as of December 31, 2003 were as follows: Deferred tax assets: Temporary differences: Net operating loss carryforward $ 5,002,000 Valuation allowance (5,002,000) -------------- Net long-term deferred tax asset $ --- ============== The components of the deferred tax (expense) benefit were as follows for the six months ended June 30, 2004 and 2003: June 30, 2004 2003 ----------- ---------- Deferred tax assets: Increase in net operating loss carryforward $(1,006,000) $ (343,000) Change in valuation allowance 1,006,000 343,000 ----------- ---------- $ -- $ -- =========== ========== F-19 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 7 - INCOME TAXES (CONTINUED) The components of the deferred tax (expense) benefit were as follows for the years ended December 31, 2003 and 2002: December 31, 2003 2002 ----------- ---------- Deferred tax assets: Accrued expenses $ --- $ (83,000) --- (4,000) Depreciation Increase in net operating loss carryforward 1,723,000 1,356,000 Change in valuation allowance (1,723,000) (1,335,000) Loss on previous joint venture investment --- 66,000 with Logan ----------- ----------- $ --- $ --- =========== =========== As of June 30, 2004 and December 31, 2003, the Company has net operating loss carryforwards available to offset future taxable income of approximately $15,458,000 and $12,500,000, respectively expiring in 2005 through 2023. NOTE 8- STOCKHOLDERS' EQUITY PREFERRED STOCK The Company is authorized to issue up to 20,000,000 shares of preferred stock, $.01 par value per share in series to be designated by the Board of Directors. No preferred shares are issued. COMMON STOCK On August 8, 2003, the stockholders approved an increase in the number of shares of common stock authorized to 480,000,000 from 30,000,000. PRIVATE PLACEMENT On April 29, 2004, the Company commenced a private placement, offering for sale a minimum of $250,000 of Units on a "best efforts all or none" basis and an additional of $750,000 of Units on a "best efforts" basis. Upon mutual agreement between the Company and the placement agent, the Company offered an additional $2,000,000 of Units. The offering was completed in July 2004, generating gross proceeds of $3,000,000. The Company paid placement fees of $414,640 related to the offering. The Company intends to use the proceeds for working capital and general corporate use. The Company is precluded from using the proceeds to pay debt outstanding at the time of the closing of the offering or to make payments to Astor. Each Unit consists of one share of common stock and a Class A Warrant and a Class B Warrant (for every two shares of common stock purchased), each immediately exercisable by the holder to purchase a share of the Company's common stock for $0.50 and $0.70 per share, respectively. The warrants expire five years from the final closing date. In the aggregate, the investors purchased 6,000,000 shares of common stock, Class A Warrants to purchase 3,000,000 shares of common stock at $0.50 per share and Class B Warrants to purchase 3,000,000 shares of common stock at $0.70 per share. The price per Unit was $0.50. Pursuant to the agreement with the placement agent, following closing of the private placement offering, the Company amended the terms of its agreement with Astor for investment banking and strategic advisory services, reducing the monthly payment to Astor to a sum no greater than $5,000 per month commencing. F-20 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 8- STOCKHOLDERS' EQUITY (CONTINUED) April 29, 2004, and the nine months thereafter. In addition, the Company's Chief Executive Officer agreed to defer payment of all accrued wages and future compensation due to him in excess of $150,000 per year for nine months from April 29, 2004. SALES OF COMMON STOCK During the six months ended June 30, 2004, the Company sold 9,857,668 shares of common stock for a total of $4,831,101. The Company paid placement fees totaling $585,514 which includes $101,196 in placement fees to Astor and $484,318 in placement fees to an unrelated entity. Certain investors received warrants to purchase 5,371,668 shares of the Company's common stock at $0.50, 0.70, and $0.90 per share in connection with the sale of stock. The Company also issued warrants to purchase 3,123,000 shares of its common stock as placement fees. The warrants are exercisable at $0.50 per share and expire in July 2009. Certain of these stock issuances have been further described above. During the year ended December 31, 2003, the Company sold 15,907,903 shares of common stock for a total of $3,319,255, $50,000 of which had been received prior to December 31, 2002, and had been recorded as a liability. The Company paid placement fees totaling $443,033 which includes $157,634 in placement fees to Astor and $285,399 in placement fees to an unrelated company. Certain investors received warrants to purchase 349,300 shares of common stock at prices ranging from $0.27 to $0.65 per share. During the year ended December 31, 2002 the Company sold 2,121,312 shares of common stock for $399,000, $50,000 of which had been received prior to December 31, 2001 and had been recorded as a liability. The Company paid a $34,900 placement fee to Astor. Certain investors received warrants to purchase 1,214,843 shares of common stock at prices ranging from $0.225 to $0.63 per share. STOCK ISSUED FOR SERVICES In June 2004, the Company issued 10,000 shares of its common stock for consulting services. The shares were valued at $9,000, the fair market value of the stock on the date issued. Pursuant to a binding Letter of Intent dated March 18, 2002, in connection with the sale of its wholly owned subsidiary, Dasibi Environmental Corp., the Company was obligated to issue 100,000 shares of its common stock to the purchaser of Dasibi. During the six months ended June 30, 2004, the Company issued these 100,000 shares of common stock. The shares were valued at $40,000, the fair market value of the stock on March 18, 2002. During August 2003, the Company entered into two agreements for strategic business planning, financial advisory, investor relations and public relations services. As compensation, the Company issued a total of 3,000,000 shares of its common stock to the consultants, valued at $1,110,000, the fair market value of the stock on the effective date of the agreements, which amount is being amortized over the one-year term of the agreements. The Company had recorded $740,000 and $185,000 as prepaid expense as of December 31, 2003 and June 30, 2004, respectively. The Company expensed related consulting fees of $370,000 for the year ended December 31, 2003 and $550,000 for the six months ended June 30, 2004. F-21 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 8- STOCKHOLDERS' EQUITY (CONTINUED) On January 6, 2003, the Company entered into an agreement with an individual to provide consulting services through January 6, 2004 in connection with the Company's corporate business development and strategy. As compensation for services received, the Company issued 300,000 unrestricted shares of its common stock valued at $60,000 based upon the price of the Company's common stock on the date of issuance. The Company recognized $60,000 in related expenses during 2003. During 2003, the Company issued an additional 57,000 shares of its common stock to individuals for various consulting services rendered. The stock was valued at $11,280 based upon the price of the Company's common stock on the date of issuance. The Company recognized $11,280 in related expenses during 2003. In February 2002, the Company entered into an agreement with an individual to provide consulting services through December 31, 2002 in connection with the Company's corporate business development and strategy. As compensation for services received, the Company issued 50,000 unrestricted shares of its common stock valued at $21,500 based upon the price of the Company's common stock on the date of issuance. The Company recognized $21,500 in related expenses. In August 2002, the agreement was amended and extended through June 30, 2003. An additional 50,000 unrestricted shares of the Company's common stock were issued as consideration. The shares were valued at $9,500 based on the price of the Company's common stock on the date of issuance. As of December 31, 2003, $9,500 had been expensed as consulting fees. During 2002, the Company issued an additional 630,000 shares of its common stock to individuals for various consulting services rendered. The stock was valued at $123,250 based upon the price of the Company's common stock on the date of issuance. The Company recognized $123,250 in related expenses during 2002. ISSUANCE OF OPTIONS AND WARRANTS On October 18, 2003, the Company issued warrants to purchase 600,000 shares of common stock at an exercise price of $0.60 per share to two individuals for services to be rendered during the period through October 15, 2004. The warrants expire October 15, 2008. The warrants were valued at $185,400, the fair market value using the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 3.32%, volatility was estimated at 93.5% and the expected life was five years. The amount was recorded as a prepaid expense and is being amortized over the term of the service period. In December 2002, the Company issued warrants to purchase 200,000 shares of its common stock for $0.26 per share, expiring in 2005 and valued at $31,438 in connection with an agreement for advisory board and product development services. The Company has recorded this amount as a prepaid consulting expense and is amortizing the expense over the two-year term of the contract. In estimating the expense, the Company used the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 2.63%, volatility was estimated at 93%, and the expected life was three years. In January 2002, the Company issued options to purchase 250,000 shares of its common stock at prices ranging from $1.00 to $2.00 per share, expiring in 2006 and valued at $79,674 for public relations services. In estimating the expense, the Company used the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 3.99%, volatility was estimated at 103%, and the expected life was four years. The amount was expensed during the initial 90-day term of the agreement. F-22 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 8- STOCKHOLDERS' EQUITY (CONTINUED) REPRICED AND EXERCISED WARRANTS In February 2003, the Company agreed to reprice warrants to purchase 300,000 shares of common stock related to outstanding debt from $2.25 and $4.50 per share to $0.12 per share. The repriced warrants were valued at $30,000, the fair market value using the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 1.19%, volatility was estimated at 93% and the expected life was one day. The value of the repriced warrants was expensed as loan fees. The warrants to purchase 300,000 shares of common stock were immediately exercised for proceeds of $36,000. During the second quarter of 2003, the Company agreed to reprice warrants to purchase 260,191 shares of common stock issued as incentive to exercise warrants from $4.00 per share to $0.10 per share. The repriced warrants were valued at $26,019, the fair market value using the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 1.12%, volatility was estimated at 91% and the expected life was one day. The value of the repriced warrants was expensed as stock based compensation. The warrants to purchase 259,858 shares of common stock were exercised for proceeds of $26,018. STOCK OPTION PLAN During 2003, the Company adopted the 2003 Stock Incentive Plan ("the Plan"), which provides for the granting of stock and options to selected officers, directors, employees and consultants of the Company. 4,500,000 shares are reserved for issuance under the Plan for the granting of options. Unless terminated sooner, the Plan will terminate on June 22, 2013. The options issued under the Plan may be exercisable to purchase stock for a period of up to ten years from the date of grant. Incentive stock options granted pursuant to this Plan may not have an option price that is less than the fair market value of the stock on the date of grant. Incentive stock options granted to significant stockholders shall have an option price of not less than 110% of the fair market value of the stock on the date of grant. To date, no options have been granted under the Plan. The following table summarizes the activity of options and warrants under all agreements and plans for the two years ended December 31, 2003 and for the six months ended June 30, 2004:
Weighted Average Exercise Number of ------------- - ------------ -------- --- ---------- Options Warrants Price Amount ------------- ------------ -------- ---------- Outstanding, December 31, 2001 1,894,821 1,606,938 $ 1.75 $ 6,121,004 Granted 960,446 1,414,843 .64 1,508,492 Expired/cancelled (153,250) (626,331) 1.17 (912,506) ------------- ------------ -------- ---------- Outstanding, December 31, 2002 2,702,017 2,395,450 1.32 6,716,990 Granted 6,800,000 949,300 .35 2,740,320 Repriced warrants exercised --- (559,858) 3.76 (2,102,445) Expired/cancelled (163,000) (289,349) 3.06 (1,382,879 ------------- ------------ -------- ---------- Outstanding, December 31, 2003 9,339,017 2,495,543 .50 5,971,986 Granted --- 8,494,668 .57 4,834,501 Expired/cancelled (328,571) --- .92 (301,142) ------------- ------------ -------- ---------- Outstanding, June 30, 2004 9,010,446 10,990,211 $ .53 $ 10,505,345 ============= ============ ======== ==========
F-23 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED)
NOTE 8- STOCKHOLDERS' EQUITY (CONTINUED) The following table summarizes information about stock options and warrants outstanding at June 30, 2004: OPTIONS AND WARRANTS - ------------------------------------------------------------------------------------------- OUTSTANDING EXERCISABLE WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE-YEARS PRICE EXERCISABLE PRICE --------------- ------------ ------------ ----------- ----------- ---------- $0.225 to $0.33 9,122,925 7.82 $0.323 9,122,925 $0.323 $0.35 to $0.525 6,131,362 4.64 $0.496 6,131,362 $0.496 $0.55 to $0.70 3,597,856 4.33 $0.671 3,597,856 $0.671 $0.875 to $1.00 895,239 1.18 $0.908 895,239 $0.908 $2.00 to $3.10 253,275 1.23 $2.244 253,275 $2.244 -------------- -------------- ------------- ------------ ----------- ------------- $0.225 to $3.10 20,000,657 5.84 $ 0.53 20,000,657 $ 0.53 ============== ============== ============= ============ ============ ============= The following table summarizes information about stock options and warrants outstanding at December 31, 2003: OPTIONS AND WARRANTS - ------------------------------------------------------------------------------------------ OUTSTANDING EXERCISABLE WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE-YEARS PRICE EXERCISABLE PRICE --------------- ------------ ------------ ----------- ----------- ---------- $0.225 to $0.33 9,122,925 8.32 $0.323 9,122,925 $0.323 $0.35 to $0.525 405,862 1.00 $0.442 405,862 $0.442 $0.55 to $0.65 995,356 3.27 $0.594 995,356 $0.594 $0.875 to $1.00 1,057,142 0.98 $0.912 1,057,142 $0.912 $2.00 to $3.10 253,275 1.73 $2.244 253,275 $2.244 ---------------- ------------ ------------ ---------- ----------- ----------- $0.225 to $3.10 11,834,560 6.85 $ 0.50 11,834,560 $ 0.50 ================ ============ ============ =========== =========== ============
F-24 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 8- STOCKHOLDERS' EQUITY (CONTINUED) The weighted average exercise price of options at their grant date during the year ended December 31, 2003 where the exercise price equaled the market price on the grant date, was $0.33. No such options were granted during the six months ended June 30, 2004 and the year ended December 31, 2002. The weighted average exercise price of options at their grant date during the six months ended June 30, 2004 and the years ended December 31, 2003 and 2002, where the exercise price exceeded the market price on the grant date, was $0.90, $0.55, and $0.65. The weighted average exercise price of options at their grant date during the six months ended June 30, 2004 and the years ended December 31, 2003 and 2002, where the exercise price was less than the market price on the grant date, was $0.56, $0.37, and $0.38. The weighted average fair values of options at their grant date during the year ended December 31, 2003 where the exercise price equaled the market price on the grant date, were $0.29. The weighted average fair value of options at their grant date during the six months ended June 30, 2004 and the years ended December 31, 2003 and 2002, where the exercise price exceeded the market price on the grant date, was $0.90, $0.55, and $0.14. The weighted average fair value of options at their grant date during the six months ended June 30, 2004 and the years ended December 31, 2003 and 2002, where the exercise price was less than the market price on the grant date, was $0.65, $0.35, and $0.35. The estimated fair value of each option granted is calculated using the Modified European Black-Scholes option-pricing model. The weighted average assumptions used in the model were as follows: 2004 2003 2002 ------------ ------------- ------------- Risk-free interest rate 3.90% 4.29% 2.86% Volatility 89.33% 93.41% 96.36% Expected life 4.96 years 9.27 years 2.59% Dividend yield 0.00% 0.00% 0.00% NOTE 9- STOCK-BASED COMPENSATION The Company accounts for stock based compensation in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The standard requires the Company to adopt the "fair value" method with respect to stock-based compensation of consultants and other non-employees, which resulted in charges to operations of $100,560 and $63,879 during the six months ended June 30, 2004 and 2003, respectively and $110,364 and $79,674 during the years ended December 31, 2003 and 2002 respectively. Effective August 18, 2003, the board of directors of the Company granted an option to the President and CEO to purchase 6,800,000 shares of the Company's common stock at $0.33 per share, the closing price on the date of the grant. The option expires in ten years and is fully vested and immediately exercisable on the date of grant. The fair value of the option is estimated at $1,995,000 based on the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 4.49%, volatility was estimated at 93.5% and the expected life was ten years. F-25 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 10 - COMMITMENTS AND CONTINGENCIES LEGAL JUDGMENT The Company leased its facilities under a long-term non-cancelable operating lease. The Company assigned the lease to Dasibi in March 2002. The Company was named in a lawsuit to collect past due rent. In November 2002, a judgment was entered against the Company for a total of $411,500, which has been accrued. (See Note 14.) LITIGATION From time to time, the Company is a party to a number of lawsuits arising in the normal course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's operations, cash flows or financial position. EMPLOYMENT AGREEMENTS In September 2001, the Company entered into an employment agreement with an individual serving in the capacity of Chairman of the Board, Chief Executive Officer and President of the Company. According to the agreement, there shall always be a minimum of at least five years remaining on the term of the agreement. Base salary is $250,000 to be adjusted on an annual basis, with an as yet undetermined cash bonus plan, provisions for use of a luxury automobile, club memberships, and insurance plans. In addition, as inducement to retain the services of the Officer, the Company granted the Officer options to purchase 1,150,000 shares of its common stock exercisable at $.30 per share. The Officer had waived claim to his cash compensation until June 1, 2003. In August 2003, the Board of Directors approved a bonus of $416,667 for the officer. The future minimum salary payable to the officer is $1,250,000. The Company's President and Chief Executive Officer agreed to defer payment of all accrued wages and future compensation due to him in excess of $150,000 per year for nine months from April 29, 2004. LICENSE AGREEMENT On September 30, 2003, the Company entered into a license agreement with CalTech whereby CalTech granted to the Company an exclusive, royalty-bearing license to make, use, and sell all products that incorporate the technology that was developed under the Technology Affiliates Agreement with JPL and is covered by related patents. In addition, the grant includes a nonexclusive, royalty-bearing license to make derivative works of the technology. The Company is required to make quarterly royalty payments to CalTech, ranging from 2% to 4% of net revenues for each licensed product made, sold, licensed, distributed, or used by the Company and 35% of net revenues that the Company receives from sublicensing the licensed products. A minimum annual royalty of $10,000 is due to CalTech on August 1, 2005 and each anniversary thereof. The minimum royalty will be offset by the abovementioned royalty payments, if any. NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION During the six months ended June 30, 2004, the Company paid $2,400 for income taxes. No cash was paid for income taxes during the six months ended June 30, 2003 or during the years ended December 31, 2003 or 2002. Cash paid for interest was $12,630 and $-0- during the six months ended June 30, 2004 and 2003, respectively, and $747 and $7,661 during the years ended December 31, 2003 and 2002, respectively. F-26 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 12 - SALE OF SUBSIDIARY AND DISCONTINUED OPERATIONS In March 2002, the Company entered into an agreement to sell Dasibi to one of its note holders in exchange for $1,500,000 of debt owed to the creditor. The purchaser assumed all liabilities of Dasibi as of the date of the agreement. The Company retained ownership of the inventory of Dasibi without limitations. Subsequent to the sale of Dasibi, the inventory was moved by Dasibi to a location unknown to the Company and the inventory has been written down to reflect the loss. The Company had granted options to the purchaser of the subsidiary to purchase the Company's common stock as follows: 50,000 at $0.25 per share, 100,000 at $0.50 per share, 528,571 at $0.875 per share, 100,000 at $1.00 per share and 21,875 at $3.10 per share. The options are vested immediately and expire in March 2005. The options are valued at the fair market value of $160,993 on the date of grant utilizing the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 4.73%, volatility was estimated at 99.86%, and the expected life was three years. The Company was granted a perpetual non-exclusive license for all products, software, technologies and other intellectual property (including the use of the name Dasibi and Dasibi Environmental Corp.) of Dasibi throughout the world with the exception of the Peoples Republic of China. As a result of the sale of Dasibi, the Company has reported the operations of Dasibi as discontinued operations. The Company sold Dasibi on March 18, 2002 in a transaction that closed on March 25, 2002. Dasibi had assets of approximately $967,000 and liabilities of approximately $2,072,000 as of December 31, 2001. The Company recorded a gain on the sale of Dasibi of $1,490,553 because the liabilities assumed by the purchaser exceed the fair market value of the assets transferred in the sale. Certain information with respect to discontinued operations of Dasibi is as follows: 2002 -------------- Net sales $ --- Cost of sales --- -------------- Gross profit --- Operating expenses 149,745 -------------- (Loss) before income tax expense (149,745) Income tax expense --- -------------- (Loss) from discontinued operations $ (149,745) ============== F-27 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 13 - RELATED PARTY TRANSACTIONS Effective June 1, 2003, the Company entered into an agreement with Astor. The agreement required the Company to pay $25,000 per month for investment banking and strategic advisory services as well as a 10% fee for all debt and equity financing raised by the Company. The Company amended the terms of its agreement for investment banking and strategic advisory services, reducing the monthly payment to a sum no greater than $5,000 per month commencing April 29, 2004 and for the nine months thereafter. During the six months ended June 30, 2004 and the year ended December 31, 2003 the Company paid Astor approximately $211,196 and $378,000, respectively in related expenses, which includes monthly fees, placement fees, and loan fees. In September 2003, the Company loaned $20,000 to NT Media Corp. of California, Inc. ("NT Media"), a related party entity in which Astor has an approximate 6.4% equity interest and whose Director, Ali Moussavi, is a 50% partner in Astor. The bridge note was due upon the sooner of October 15, 2003, or upon NT Media raising additional funds of more than $50,000, and bears interest at the rate of 6%. The note has been extended by mutual consent and must be repaid from financing before any other creditor. In December 2003, the Company advanced an additional $10,000 and $20,000 under agreements, which provide for interest at 6% per annum and are due upon the sooner of February 24 and 29, 2004, respectively, or upon NT Media raising additional funds of more than $50,000. These notes were paid in full during the three months ended March 31, 2004. Restricted cash consists of a certificate of deposit, which guarantees an irrevocable letter of credit. The letter of credit has been provided for the benefit of Astor. The Company has advanced $47,770 and $28,654 to Astor as of June 30, 2004 and December 31, 2003, respectively. The Company and Astor intend to enter into a written sub-lease agreement before the end of 2004. The Company's restricted cash currently guaranteeing its letter of credit for the benefit of the related party will be incorporated as a condition of the sub-lease agreement when executed. The Company has certain employees in common with NT Media and Astor. NOTE 14- PRIOR PERIOD RESTATEMENT The Company leased its facilities under a long-term non-cancelable operating leases. The Company assigned the lease to Dasibi in March 2002. The Company was named in a lawsuit to collect past due rent. In November 2002, a judgment was entered against the Company for a total of $411,500, which has been accrued. During the quarter ended June 30, 2004, a change was made to the retained earnings and accrued expenses of the Company to correct the legal judgment recorded during the year ended December 31, 2002. The Company originally recorded the amount of damages sought by the plaintiff, rather than the amount of the final judgment. The Company has retroactively restated net loss for the year ended December 31, 2002, increasing the net loss from $1,980,718 to $2,143,218 due to an adjustment of $162,500. F-28 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS UNAUDITED) NOTE 15 - SUBSEQUENT EVENTS The Company entered into a Settlement Agreement on July 26, 2004 related to $440,765 of notes payable and related accrued interest. In July 2003, the Company paid a total of $73,333 towards the debt and agreed to pay a total of $298,667, including interest through January 2006 in full payment. The Settlement Agreement provides for an accelerated payment schedule, which would reduce the total payment made by the Company by approximately $12,000. During July and August 2004, the Company issued an additional 333,334 shares of its common stock for proceeds of $150,000 in private placements. During August 2004, the Company issued 210,000 shares of its common stock per the terms of an agreement for consulting services. The shares have been valued at $75,000, the value of the services, and will be recorded as a prepaid expense to be amortized over the term of the agreement. F-29 You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information contained in this document is current only as of its date. 15,600,000 SHARES UNIVERSAL DETECTION TECHNOLOGY COMMON STOCK ------------ PROSPECTUS ------------ ____________, 2004 Through and including _________, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 33 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Our Articles of Incorporation provide that the liability of our directors for monetary damages shall be eliminated to the fullest extent permissible under California law. This is intended to eliminate the personal liability of a director for monetary damages in an action brought by or in the right of our Company for breach of a director's duties to us or our shareholders except for liability: (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (ii) for acts or omissions that a director believes to be contrary to the best interests of our Company or our shareholders or that involve the absence of good faith on the part of the director; (iii) for any transaction for which a director derived an improper benefit; (iv) for acts or omissions that show a reckless disregard for the director's duty to us or our shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to our Company or our shareholders; (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to us or our shareholders; (vi) with respect to certain transactions, or the approval of transactions in which a director has a material financial interest; and (vii) expressly imposed by statute, for approval of certain improper distributions to shareholders or certain loans or guarantees. Our Articles of Incorporation also authorize us to provide indemnification to our agents (as defined in Section 317 of the California Corporations Code), through our Bylaws, by agreement or otherwise, with such agents or both, for breach of duty to us and our shareholders, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the California Corporations Code. ITEM 25 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table itemizes the fees and expenses incurred by us in connection with the issuance and distribution of the securities being registered. All the amounts shown are estimates except the SEC registration fee.
SEC registration fee................................................. $ 1,542 Accounting fees and expenses......................................... 20,000 Legal fees and expenses.............................................. 100,000 Transfer agent and registrar fees and expenses....................... 5,000 Miscellaneous expenses............................................... 10,000 Total........................................................ $ 136,542
ITEM 26 RECENT SALES OF UNREGISTERED SECURITIES During the first two quarters of fiscal 2004, we issued the following securities which were not registered under the Securities Act of 1933, as amended. We did not employ any form of general solicitation or advertising in connection with the offer and sale of the securities described below. In addition, we believe the purchasers of the securities are "accredited investors" for the purpose of Rule 501 of the Securities Act. For these reasons, among others, the offer and sale of the following securities were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act or Regulation D promulgated by the SEC under the Securities Act: o In February 2004, we engaged in an offering of an aggregate of 125,000 shares of common stock for a total purchase price of $91,500. We incurred $9,148 in placement fees, and our net proceeds were $82,352. o In February 2004, we issued an aggregate of 100 units, consisting of a total of 333,334 shares of common stock and warrants to purchase 166,668 shares of common stock at $0.90 per share, for a total II-1 purchase price of $100,000. We incurred $10,000 in placement fees, and our net proceeds were $90,000. o In June 2004, we issued an aggregate of 10,000 shares of common stock to a consultant for consulting services rendered to us valued at $7,500. o In June 2004, we engaged in a private placement of $3 million of Units. The offering was made solely to accredited investors through Meyers Associates, L.P., a registered broker dealer firm. Each Unit consists of one share of common stock and a Class A Warrant and a Class B Warrant. We incurred $414,640 in placement fees, and our net proceeds were $2,585,360. During the first two quarters of fiscal 2004 and through July 30, 2004, we issued 3,681,979 shares of common stock to non-U.S. persons, as such term is defined in Regulation S, for an aggregate offering price of $1,762,702. We incurred $192,615 in placement fees, and our net proceeds were $1,570,087. No offer or sale of the securities was made to a person in the United States. We believe that each purchaser of securities was not a U.S. person as defined in Rule 902(k) of Regulation S and did not acquire the securities for the account or benefit of any U.S. person. We did not engage in any directed selling efforts in the United States. For these reasons, among others, the offer and sale of the following securities were not subject to Section 5 of the Securities Act by virtue of Regulation S promulgated by the SEC under the Securities Act. During fiscal 2003, we issued the following securities which were not registered under the Securities Act of 1933, as amended. We did not employ any form of general solicitation or advertising in connection with the offer and sale of the securities described below. In addition, we believe the purchasers of the securities are "accredited investors" for the purpose of Rule 501 of the Securities Act. For these reasons, among others, the offer and sale of the following securities were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act or Regulation D promulgated by the SEC under the Securities Act: o Commencing in January 2003 and during each month in 2003 thereafter (other than February and October), we were engaged in an offering of an aggregate of 1,719,106 shares of common stock for a total purchase price of $457,275. We incurred $45,581 in placement fees, and our net proceeds were $411,694. o In January, February and August 2003, we issued an aggregate of 3,357,000 shares of common stock to various consultants for their consulting services rendered to us valued at $1,181,280. o On October 15, 2003, we issued warrants to purchase an aggregate of 600,000 shares of common stock to two consultants in connection with consulting services rendered to us valued at $185,400. These warrants are immediately exercisable. o On February 15, 2003, we agreed to reprice warrants to purchase 300,000 shares of common stock, from $2.25 and $4.50 per share to $0.12 per share. The repriced warrants were valued at $30,000. o On March 31, 2003, we agreed to reprice warrants to purchase 260,191 shares of common stock, from $4.00 per share to $0.10 per share. The repriced warrants were valued at $26,019. We incurred $2,602 in offering costs in connection with the repricing. o In February and April 2003, we issued an aggregate of 559,858 shares of common stock pursuant to exercises of warrants. Our net proceeds from these exercises were $62,018. o In April, July, October and December 2003, we issued an aggregate of 415,000 shares of common stock to an unrelated entity in connection with loan fees arising from bridge financing provided by that entity. The loan fees are valued at $188,400. In January, March and October 2003, we issued 3,889,044 shares of common stock pursuant to the conversion of debt and accrued and unpaid interest in the aggregate amount of $573,805, which shares were not II-2 registered under the Securities Act of 1933. No commission or other remuneration was paid or given in connection with the issuance of these securities. For these reasons, among others, the securities issued in the following transaction were exempt from registration by Section 3(a)(9) of the Securities Act. In January, March and October 2003, we issued 3,889,044 shares of common stock upon the conversion of debt and accrued and unpaid interest in the aggregate amount of $573,805, which shares were not registered under the Securities Act of 1933. No offer or sale of the securities was made to a person in the United States. We believe that each purchaser of securities was not a U.S. person as defined in Rule 902(k) of Regulation S and did not acquire the securities for the account or benefit of any U.S. person. We did not engage in any directed selling efforts in the United States. For these reasons, among others, the offer and sale of the following securities were not subject to Section 5 of the Securities Act by virtue of Regulation S promulgated by the SEC under the Securities Act. During fiscal 2003, we issued 14,188,797 shares of common stock to non-U.S. persons, as such term is defined in Regulation S, for an aggregate offering price of $2,861,980, which shares were not registered under the Securities Act of 1933. We incurred $394,850 in placement fees, and our net proceeds were $2,467,130. No offer or sale of the securities was made to a person in the United States. We believe that each purchaser of securities was not a U.S. person as defined in Rule 902(k) of Regulation S and did not acquire the securities for the account or benefit of any U.S. person. We did not engage in any directed selling efforts in the United States. For these reasons, among others, the offer and sale of the following securities were not subject to Section 5 of the Securities Act by virtue of Regulation S promulgated by the SEC under the Securities Act. During fiscal 2002, we sold the following securities which were not registered under the Securities Act of 1933, as amended. We did not employ any form of general solicitation or general advertising in connection with the offer and sale of the securities described below. In addition, we believe the purchasers of the securities are "accredited investors" for the purpose of Rule 501 of the Securities Act. For these reasons, among others, the offer and sale of the following securities were exempt from registration pursuant to Rules 506 and/or Section 4(2) of the Securities Act: o In March 2002, we issued 154,799 shares of common stock at $0.323 per share for an aggregate offering price of $50,000, which was received during the year ended December 31, 2001. o On March 27, 2002, we sold 250,000 shares of common stock at $0.40 per share for an aggregate offering price of $90,000 net of $10,000 in placement fees. o On August 6, 2002, we sold 69,444 shares of common stock at $0.144 per share for an aggregate offering price of $9,000 net of $1,000 in placement fees. In connection with this private placement, we issued 6,944 warrants to purchase shares of common stock at $0.27 per share, 6,944 warrants to purchase shares of common stock at $0.45 per share, and 6,944 warrants to purchase shares of common stock at $0.63 per share. o On September 26, 2002, we sold 277,778 shares of common stock at $0.144 per share for an aggregate offering price of $36,000 net of $4,000 in placement fees. In connection with this private placement, we issued 27,778 warrants to purchase shares of common stock at $0.27 per share, 27,778 warrants to purchase shares of common stock at $0.45 per share, 83,333 warrants to purchase shares of common stock at $0.63 per share. o On October 2, 2002, we sold 241,677 shares of common stock at $0.12 per share for an aggregate offering price of $26,100 net of $2,900 in placement fees. In connection with this private placement, we issued 24,167 warrants to purchase shares of common stock at $0.225 per share, 24,167 warrants to purchase shares of common stock at $0.375 per share, 24,167 warrants to purchase shares of common stock at $0.525 per share. o On October 12, 2002, we sold 1,135,364 shares of common stock at $0.176 per share for an aggregate offering price of $180,000 net of $20,000 in placement fees. In connection with this private II-3 placement, we issued 681,818 warrants to purchase shares of common stock at $0.33 per share and 227,273 warrants to purchase shares of common stock at $0.55 per share. o On November 1, 2002, we sold 147,059 shares of common stock at $0.136 per share for an aggregate offering price of $18,000 net of $2,000 in placement fees. In connection with this private placement, we issued 44,118 warrants to purchase shares of common stock at $0.26 per share, 14,706 warrants to purchase shares of common stock at $0.375 per share, 14,706 warrants to purchase shares of common stock at $0.525 per share. During fiscal 2002, we also issued shares of our common stock and/or options to purchase our common stock to various consultants for their consulting services. We did not employ any form of general solicitation or general advertising in connection with the offer and sale of the securities described below. In addition, we believe the purchasers of the securities are "accredited investors" for the purpose of Rule 501 of the Securities Act. For these reasons, among others, the offer and sale of the following securities were exempt from registration pursuant to Rules 506 and/or Section 4(2) of the Securities Act: o On January 25, 2002, we issued options to purchase 100,000 shares of our common stock at $1.00 per share, 50,000 shares of our common stock at $1.50 per share, and 100,000 shares of our common stock at $2.00 per share. o On January 30, 2002, we issued 5,000 shares of common stock at $0.65 per share. o On March 1, 2002, we issued 50,000 shares of common stock at $0.43 per share. o On March 27, 2002, we issued 10,000 shares of common stock at $0.43 per share. o On April 17, 2002, we issued 200,000 shares of common stock at $0.18 per share and 25,000 shares of common stock at $0.34 per share. o On July 1, 2002, we issued 30,000 shares of common stock at $0.19 per share. o On October 9, 2002, we issued 100,000 shares of common stock at $0.19 per share. o On October 23, 2002, we issued 275,000 shares of common stock at $0.18 per share. o On November 1, 2002, we issued 15,000 shares of common stock at $0.20 per share and 20,000 shares of common stock at $0.175. o On December 18, 2002, we issued warrants to purchase 200,000 shares of our common stock at $0.25 per share. During fiscal 2001, we sold the following securities which were not registered under the Securities Act of 1933, as amended. We did not employ any form of general solicitation or general advertising in connection with the offer and sale of the securities described below. In addition, the purchasers of the securities are "accredited investors" for the purpose of Rule 501 of the Securities Act, unless otherwise specified or unless the sale was exempt pursuant to Section 4(2) of the Securities Act. For these reasons, among others, the offer and sale of the following securities were exempt from registration pursuant to Rules 506 and/or Section 4(2) of the Securities Act: o On January 12, 2001, we issued to Steven Sion an option to purchase 228,571 shares of our common stock at an exercise price of $0.875 per share in consideration for a promissory note in the amount of $650,000 issued to us and other services provided by Steven Sion. These options expire on March 25, 2005. II-4 o On January 25, 2001, we issued 700,000 shares of common stock valued at $700,000 to Silverline Partners, Inc. under a one-year consulting agreement. o On April 4, 2001, we issued 200,000 shares of common stock valued at $176,000 to East West Network for services rendered. o On June 6, 2001, we issued to Lee Sion an option to purchase 100,000 shares of our common stock at an exercise price of $1.00 per share in consideration for a promissory note in the amount of $100,000 issued to us by Lee Sion. These options expire on March 25, 2005. o On July 30, 2001, we issued to Lee Sion an option to purchase 100,000 shares of our common stock at an exercise price of $.50 per share in consideration for a promissory note in the amount of $100,000 issued to us by Lee Sion. These options expire on March 25, 2005. o On November 9, 2001, we sold 125,000 shares of common stock at $0.40 per share to Spiga Ltd. o In November and December 2001, we issued an aggregate of 59,500 shares of common stock valued at $41,016 to John Holt Smith for legal services. o On December 26, 2001, we issued 10,000 shares of our common stock valued at $6,000 to Amir Eddehadieh for consulting services rendered. o On December 26, 2001, we issued 5,000 shares of our common stock valued at $3,000 to Nima Montazeri for consulting services rendered. II-5 ITEM 27. EXHIBITS. (a) The following exhibits are filed herewith: NUMBER EXHIBIT TITLE The following exhibits are included as part of this filing and incorporated herein by this reference. 3.1 Articles of Incorporation of A. E. Gosselin Engineering, Inc. (now Registrant) (incorporated herein by reference to Exhibit 3(a) to the Amendment No. 1 to the Registration Statement on Form 10 of Dasibi Environmental Corporation). 3.2 Certificate of Amendment of Articles of Incorporation of A. E. Gosselin Engineering, Inc. (now Registrant) (incorporated herein by reference to Exhibit 3(a) to the Amendment No. 1 to the Registration Statement on Form 10 of Dasibi Environmental Corporation). 3.3 Certificate of Amendment of Articles of Incorporation of Dasibi Environmental Corp. (now Registrant) (incorporated herein by reference to Exhibit 3(a) to the Amendment No. 1 to the Registration Statement on Form 10 of Dasibi Environmental Corporation). 3.4 Amended and Restated Bylaws of Registrant (incorporated by reference to Exhibit 3.4 of Registrant's Annual Report on Form 10-KSB for the year ended December 31, 2001, filed on April 15, 2002). 5.1* Opinion of Akin Gump Strauss Hauer & Feld LLP. 10.1 Binding letter of Intent dated March 19, 2002, by and between Registrant and Steven Sion (incorporated herein by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K filed on March 22, 2002). 10.2 Employment Agreement by and between Registrant and Jacques Tizabi dated September 25, 2001 (incorporated by reference to Exhibit 10.4 to Registrant's Quarterly Report on Form 10-QSB for the Quarter Ended March 31, 2002, filed on May 20, 2002). 10.3 Technology Affiliates Agreement by and between Registrant and California Institute of Technology, dated August 6, 2002. (incorporated herein by reference to Exhibit 10.3 to Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002, filed on April 15, 2003). 10.4 Licensing Agreement by and between Registrant and California Institute of Technology, dated September 30, 2003 (incorporated by reference to Exhibit 10.4 to Registrant's Quarterly Report on Form 10-QSB for the Quarter Ended September 30, 2003, filed on November 19, 2003). 10.5 Agreement for Investment Banking and Advisory Services, by and between Registrant and Astor Capital, Inc., dated June 1, 2003. (incorporated by reference to Exhibit 10.5 of Registrant's Annual Report on Form 10-KSB for the year ended December 31, 2003, filed on March 31, 2004) 10.6 Amendment to Agreement for Investment Banking and Advisory Services with Astor Capital, Inc. dated April 29, 2004 (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-QSB for the Quarter Ended June 30, 2004, filed on August 23, 2004). 10.7 Placement Agency Agreement by and between Registrant and Meyers Associates, L.P. dated April 29, 2004. 10.8 Amendment No. 1 to the Placement Agency Agreement by and between Registrant and Meyers Associates, L.P., dated May 25, 2004. 10.9 Form of Subscription Agreement by and between Registrant and the selling stockholders named in the Registration Statement on Form SB-2 filed on August 2, 2004 (file no. 333117859). 10.10 Form of Class A Warrants issued to selling stockholders named in the Registration Statement on Form SB-2 filed on August 2, 2004 (File No. 333117859). II-6 10.11 Form of Class B Warrants issued to selling stockholders named in the Registration Statement on Form SB-2 filed on August 2, 2004 (File No. 333117859). 10.12 Registration Rights Agreement by and between Registrant and Meyers Associates, L.P., as agent for the selling stockholders named in the Registration Statement on Form SB-2 filed on August 2, 2004 (File No. 333117859). 21.1 Subsidiaries of Registrant. Incorporated by reference to Exhibit 21.1 of Registrant's Annual Report on Form 10-KSB for the year ended December 31, 2003, filed March 31, 2004. 23.1* Consent of Akin Gump Strauss Hauer & Feld LLP (as set forth in Exhibit 5.1). 23.2 Consent of Independent Auditors - AJ Robbins, P.C. - -------------------- * previously filed (b) The following financial statement schedule is filed herewith: Other financial statement schedules are omitted because the information called for is not required or is shown either in our consolidated financial statements or the notes thereto. ITEM 28. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sale are being made, a post-effective amendment to this registration statement; to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof; and (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 24 above, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is II-7 asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-9 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this amendment to registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on this 22nd day of September, 2004. UNIVERSAL DETECTION CORPORATION /s/ Jacques Tizabi ----------------------------------------- Jacques Tizabi Chief Executive Officer and President Pursuant to the requirements of the Securities Act of 1933, as amended, this amendment to registration statement has been signed by the following persons in the capacities and on the date indicated.
NAME TITLE DATE /s/ Jacques Tizabi - -------------------------------- Jacques Tizabi President, Chief Executive Officer & September 22, 2004 Acting Chief Financial Officer * - -------------------------------- Michael Collins Director, Secretary September 22, 2004 * - -------------------------------- Matin Emouna Director September 22, 2004 * By /s/ Jacques Tizabi ---------------------------------------- Jacques Tizabi, as attorney-in-fact
II-9
EXHIBIT INDEX NUMBER EXHIBIT TITLE The following exhibits are included as part of this filing and incorporated herein by this reference: 3.1 Articles of Incorporation of A. E. Gosselin Engineering, Inc. (now Registrant) (incorporated herein by reference to Exhibit 3(a) to the Amendment No. 1 to the Registration Statement on Form 10 of Dasibi Environmental Corporation). 3.2 Certificate of Amendment of Articles of Incorporation of A. E. Gosselin Engineering, Inc. (now Registrant) (incorporated herein by reference to Exhibit 3(a) to the Amendment No. 1 to the Registration Statement on Form 10 of Dasibi Environmental Corporation). 3.3 Certificate of Amendment of Articles of Incorporation of Dasibi Environmental Corp. (now Registrant) (incorporated herein by reference to Exhibit 3(a) to the Amendment No. 1 to the Registration Statement on Form 10 of Dasibi Environmental Corporation). 3.4 Amended and Restated Bylaws of Registrant (incorporated by reference to Exhibit 3.4 of Registrant's Annual Report on Form 10-KSB for the year ended December 31, 2001, filed on April 15, 2002). 5.1* Opinion of Akin Gump Strauss Hauer & Feld LLP. 10.1 Binding letter of Intent dated March 19, 2002, by and between Registrant and Steven Sion (incorporated herein by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K filed on March 22, 2002). 10.2 Employment Agreement by and between Registrant and Jacques Tizabi dated September 25, 2001 (incorporated by reference to Exhibit 10.4 to Registrant's Quarterly Report on Form 10-QSB for the Quarter Ended March 31, 2002, filed on May 20, 2002). 10.3 Technology Affiliates Agreement by and between Registrant and California Institute of Technology, dated August 6, 2002. (incorporated herein by reference to Exhibit 10.3 to Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002, filed on April 15, 2003). 10.4 Licensing Agreement by and between Universal Detection Technology and California Institute of Technology, dated September 30, 2003 (incorporated by reference to Exhibit 10.4 to Registrant's Quarterly Report on Form 10-QSB for the Quarter Ended September 30, 2003, filed on November 19, 2003). 10.5 Agreement for Investment Banking and Advisory Services, by and between Registrant and Astor Capital, Inc., dated June 1, 2003 (incorporated by reference to Exhibit 10.5 of Registrant's Annual Report on Form 10-KSB for the year ended December 31, 2003, filed on March 31, 2004). 10.6 Amendment to Agreement for Investment Banking and Advisory Services with Astor Capital, Inc. dated April 29, 2004 (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-QSB for the Quarter Ended June 30, 2004, filed on August 23, 2004). 10.7 Placement Agency Agreement with Meyers Associates, L.P. dated April 29, 2004. 10.8 Amendment No. 1 to the Placement Agency Agreement by and between Registrant and Meyers Associates, L.P., dated May 25, 2004. 10.9 Form of Subscription Agreement by and between the Company and the selling stockholders named in the Registration Statement on Form SB-2 filed on August 2, 2004 (File No. 333117859). 10.10 Form of Class A Warrants issued to selling stockholders named in the Registration Statement on Form SB-2 filed on August 2, 2004 (File No. 333117859). 1 10.11 Form of Class B Warrants issued to selling stockholders named in the Registration Statement on Form SB-2 filed on August 2, 2004 (File No. 333117859). 10.12 Registration Rights Agreement by and between the Company and Meyers Associates, L.P., as agent for the selling stockholders named in the Registration Statement on Form SB-2 filed on August 2, 2004 (File No. 333117859). 21.1 Subsidiaries of Registrant. Incorporated by reference to Exhibit 21.1 of Registrant's Annual Report on Form 10-KSB for the year ended December 31, 2003, filed March 31, 2004. 23.1* Consent of Akin Gump Strauss Hauer & Feld LLP (as set forth in Exhibit 5.1). 23.2 Consent of Independent Auditors - AJ Robbins, P.C.
- -------------------- * previously filed 2 EX-10 2 exhibit_10-7.txt UNIVERSAL DETECTION TECHNOLOGY Private Placement of Units PLACEMENT AGENCY AGREEMENT Dated as of April 29, 2004 Meyers Associates L.P. 45 Broadway - 2nd Floor New York, New York 10006 Attn: President Ladies and Gentlemen: Universal Detection Technology, a California corporation (the "COMPANY") proposes to offer for sale (the "OFFERING") in a private offering pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "ACT"), and Regulation D promulgated thereunder, units (the "UNITS") to certain Accredited Investors (as defined in Regulation D). The Units shall be comprised of shares of common stock ("COMMON STOCK") and warrants to purchase common stock ("WARRANTS"). The Units, Common Stock, and Warrants are sometimes referred to herein as the "SECURITIES." The private offering is being made on a "best efforts all or none" basis for gross proceeds of $250,000 ("MINIMUM OFFERING") and on a "best efforts" basis as to an additional $750,000 of gross proceeds (the "MAXIMUM Offering"). Offers and sales of the Securities shall be to Accredited Investors only. This letter agreement (the "AGREEMENT") shall confirm our agreement concerning Meyers Associates L.P. acting as our exclusive placement agent (the "PLACEMENT AGENT" or "MEYERS ASSOCIATES") in connection with the offer and sale of the Securities. l. Appointment of Placement Agent. On the basis of the representations and warranties contained herein, and subject to the terms and conditions set forth herein, the Company hereby appoints Meyers Associates L.P. as its Placement Agent and grants to it the exclusive right to offer, as its agent, the Securities pursuant to the terms of this Agreement. The Company expressly acknowledges and agrees that Meyers Associates's obligations hereunder are not on a firm commitment basis and that the execution of this Agreement does not constitute a commitment by Meyers Associates to purchase the Securities and does not ensure the successful placement of the Securities or any portion thereof. Further, Meyers Associates's obligation to use its best efforts to assist the Company in the Offering is subject to general market conditions. On the basis of such representations and warranties, and subject to such conditions, Meyers Associates hereby accepts such appointment and agrees to use its best efforts to secure subscriptions to purchase up to $1,000,000 of Units, subject to adjustment pursuant to the terms of this Agreement. 1 2. Terms of the Offering. (a) The Company shall prepare and deliver to the Placement Agent copies of a Confidential Disclosure Statement (the "DISCLOSURE STATEMENT"), relating to, among other things, the Company, the Securities, and the terms of the sale of the Securities. The Disclosure Statement, including all exhibits, and appendices thereto and documents delivered therewith, are referred to herein as the "OFFERING DOCUMENTS" and shall include any supplements or amendments in accordance with this Agreement. The Company shall utilize the services of securities counsel with experience in private placement offerings and the rules and regulations of the Securities and Exchange Commission ("SEC") in drafting the Offering Documents. (b) The Offering shall consist of up to $1,000,000 of Units. The terms of the Offering and Securities are further described on EXHIBIT A attached hereto which is incorporated herein. The Offering is being made on a "best efforts all or none" basis up to $250,000 of gross proceeds and on a "best efforts" basis as to an additional $750,000 of gross proceeds. The Offering may be expanded by an additional $1,000,000 of gross proceeds at the option of the Company and Meyers Associates LP. In the event a subscription is not accepted, such rejected subscription funds will be returned to the subscriber without interest or deductions. (c) The Offering shall commence on the date that the Company delivers to the Placement Agent the Offering Documents that have been completed to the reasonable satisfaction of the Placement Agent and its counsel, and shall expire at 5:00 p.m., New York time, on a date which is 45 days thereafter; provided however, in the event that subscriptions for the Minimum Offering has been received into escrow prior to the expiration of such 45 day period, the Offering Period shall be extended for an additional 75 days. Such period, as same may be so extended, shall hereinafter be referred to as the "OFFERING PERIOD." (d) Each prospective investor ("PROSPECTIVE INVESTOR") who desires to purchase Securities shall deliver to the Placement Agent a fully executed subscription agreement ("SUBSCRIPTION AGREEMENT") and investor questionnaire ("INVESTOR QUESTIONNAIRE"), in the form attached to the Disclosure Statement and immediately available funds in the amount necessary to purchase the number of Securities such Prospective Investor desires to purchase. Neither the Company nor the Placement Agent shall have any obligation to independently verify the accuracy or completeness of any information contained in any Subscription Agreement or Investor Questionnaire, or the authenticity, sufficiency, or validity of any check delivered by any Prospective Investor in payment for Securities. (e) The Placement Agent shall deliver each subscription funds received from a Prospective Investor to the Company for deposit in a segregated escrow account at an independent banking institution and shall deliver the executed copies of the Subscription Agreement received from such Prospective Investor to the Company. All funds shall be held in the segregated account pending acceptance of the subscription. The Company shall notify the Placement Agent promptly of the acceptance or rejection or any subscription which shall be made 2 in the Company's sole discretion; ; provided, however, any rejection shall be made in good faith by the Company. (f) Meyers Associates may engage other persons selected by Meyers Associates to assist Meyers Associates in the Offering (each such broker/dealers being hereinafter referred to as a "SELLING GROUP MEMBER") and Meyers Associates may allow such Selling Group Member such part of the compensation and payment of expenses payable to Meyers Associates under Section 5 hereof as Meyers Associates shall determine. Any such Selling Group Member shall be a member firm in good standing as a broker-dealer under the rules of the National Association of Securities Dealers, Inc. (the "NASD"). Each Selling Group Member shall be required to agree in writing to comply with the applicable provisions of this Agreement. The Placement Agent shall be fully responsible for any and all actions of each Selling Group Member in connection with this Agreement. The Company hereby agrees to make such representations and warranties to, and covenants and agreements with, any Selling Group Member (including an agreement to indemnify such Selling Group Member on terms substantially similar to Section 12 hereof) as provided herein. 3. Closings: Release of Funds. (a) The date that the initial subscriptions in the amount of the Minimum Offering are accepted by the Company and funds are released from the escrow account shall be deemed the "INITIAL CLOSING." At least one (1) day prior to the release of funds, the Placement Agent shall send a written notice to the Company, which notice shall state the amount of funds to be released, the name and address of each subscriber whose subscription has been accepted, and the amount of each subscription. (b) At any time prior to the expiration of the Offering Period following the Initial Closing and after acceptance by the Company of subscriptions for the sale of additional Securities of at least $250,000 ("INTERIM CLOSING AMOUNT") up to the Maximum Offering, one or more closings (each an "INTERIM CLOSING") shall take place in the manner herein set forth with respect to the Initial Closing. The final Interim Closing to be held in accordance herewith shall have no minimum amount and shall be deemed the "FINAL CLOSING" and the date thereof shall be the "FINAL CLOSING DATE." References herein to a "CLOSING" shall mean the Initial Closing, any Interim Closing, or the Final Closing, as the context requires, and the date thereof shall be referred to as a "CLOSING DATE." 4. Representations and Warranties of the Placement Agent. The Placement Agent represents and warrants to the Company as follows: (a) The Placement Agent is duly incorporated and validly existing and in good standing under the laws of its State of incorporation and has the power and authority to conduct its business as now conducted and to enter into and perform its obligations under this Agreement. 3 (b) The Placement Agent is, and at the time of each Closing will be, a registered broker-dealer under the Act and a member in good standing of the NASD. (c) Sales of Securities by the Placement Agent will only be made in such jurisdictions in which the Placement Agent or a Selling Group Member is a registered broker-dealer or where an applicable exemption from such registration exists. (d) Offers and sales of Securities by the Placement Agent will be made only in accordance with this Agreement and in compliance with the provisions of Rule 506 of Regulation D (it being understood and agreed that the Placement Agent shall be entitled to rely upon the information and statements provided by the Prospective Investor in the Subscription Agreement and Investor Questionnaires), and the Placement Agent will furnish to each Prospective Investor a copy of the Offering Documents prior to accepting any subscription for the Securities. (e) The execution, delivery, and performance by the Placement Agent of this Agreement have been duly authorized by all necessary action of the Placement Agent, its officers and directors and this Agreement has been duly executed and delivered by the Placement Agent. This Agreement constitutes the valid and binding obligation of the Placement Agent, enforceable in accordance with its terms, except as rights to indemnity and contribution hereunder and thereunder may be limited by the securities laws of the United States and except as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws or equitable principles affecting the enforcement of creditors' rights generally. 5. Compensation. (a) The Placement Agent shall be entitled, on each Closing Date, as compensation for Meyers Associates services as Placement Agent under this Agreement, to selling commissions equal to 10% of the gross proceeds received by the Company from the sale of the Units effected at each Closing. In addition, the Placement Agent shall be entitled to 3% of the gross proceeds from the sale of the Units effected at each Closing in payment for a non-accountable expense allowance, of which $10,000 has previously been paid and will be credited against all amounts due Placement Agent at the Initial Closing. (b) In addition to the compensation payable to the Placement Agent set forth in clause (a) above, the Company shall sell and issue to the Placement Agent (or its assigns) warrants to purchase Common Stock equal to 20% of the number of shares of Common Stock included in the Units and underlying the investors warrants in the Units ("AGENT WARRANTS") at an exercise price equal to purchase price of the Units issued to investors. The Agent Warrants shall be exercisable for a period of five (5) years from the Final Closing Date. 4 (c) The Company covenants and agrees that with respect to registration of the Securities underlying the Agent Warrants under the Act, the Placement Agent shall be entitled to the same registration rights as being provided to subscribers in the Offering. 6. Representations and Warranties of the Company. (a) The Company represents and warrants to, and agrees with, the Placement Agent that as of the date hereof and as of each Closing Date (except as affected by the Offering): (i) Assuming the accuracy of the representations and warranties of the Prospective Investors set forth in the Subscription Agreements and Investor Questionnaires and the representations and warranties of the Placement Agent set forth herein, the Offering Documents (a) contain, and at all times during the period from the date hereof to and including each Closing Date, will contain all information required to be contained therein, if any, pursuant to Rules 502 and 506 of Regulation D and all applicable federal and/or state securities and "blue sky" laws, and (b) do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances made therein not misleading. Each contract, agreement, instrument, lease, license, or other document required to be described in the Offering Documents shall be, and has been, accurately described therein in all material respects. (ii) No Offering Documents or information (it being understood that neither the Company nor any of its officers or directors or employees shall provide any written information to any Prospective Investor which is not contained in the Offering Documents) provided by the Company to Prospective Investors pursuant to Section 7(f) hereof shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of circumstances made therein not misleading. (iii) The Company has not, directly or indirectly, sold any other securities of the Company during the twelve-month period ending on the date hereof, except as may be properly described in the Offering Documents, and during the term hereof has no present intention to solicit any offer to buy or to offer to sell any of the Securities, any Common Stock or any other securities of the Company other than pursuant to this Agreement. (iv) The Company is, and at all times during the period from the date hereof to and including each Closing Date will be, a corporation duly organized, validly existing, and in good standing under the laws of the State of California, with full corporate power and authority to own its properties and assets. As of the date hereof, the Company is, and at all times during the period from the date hereof to and including each Closing Date, duly qualified to do business and is in good standing in every jurisdiction in which its ownership, leasing, licensing, or use of property and assets or the conduct of its business makes such qualification necessary except 5 where the failure to be so qualified would not have a material adverse effect on the Company's business. (v) All sales of securities within the three years prior to the date hereof have complied with all material requirements of the Securities Act, applicable state blue sky laws and the rules and regulations thereunder and there are no rights of rescission requiring the Company to rescind prior sales of securities existing under such laws, rules and regulations. (vi) Since the dates as of which information is given in the Offering Documents, other than as set forth therein, (A) there has not been any material adverse change or any development involving a prospective material adverse change in the general affairs, business, prospects, properties, management, condition (financial or otherwise) or results of operations of the Company, whether or not arising from transactions in the ordinary course of business, (B) except in the ordinary course of business, the Company has not incurred any material liabilities or obligations, direct or indirect, and has not entered into any material transaction, (C) the Company has not and will not have paid or declared any dividends or other distributions on its capital stock and (D) there has not been any change in the authorized capital stock of the Company or any material change in the short-term or long-term debt of the Company. (vii) AJ Robbins PC, whose report on the Company's audited financial statements is included in the Company's filings under the Securities and Exchange Act of 1934 ("SEC FILINGS") to the SEC included as part of the Offering Documents, are independent public accountants with respect to the Company as required by the Act and the rules and regulations thereunder. (viii) The consolidated financial statements, together with related notes and schedules of the Company included as part of the Offering Documents comply in all material respects with the requirements of the Act and the rules and regulations thereunder and present fairly the financial position of the Company on the respective dates indicated and its statement of operations for the respective periods covered thereby. Any condensed financial information appearing in the Offering Documents is fairly stated in all material respects in relation to the financial statements of the Company from which they have been derived. Such financial statements, and related notes and schedules, have been prepared in conformity with generally accepted accounting principles applied on a consistent basis through the entire period involved. (ix) Except as described in the Offering Documents, there is no action, suit, investigation or proceeding pending or threatened before or by any Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, or arbitrator to which the Company is or may become a party or of which any property of the Company is subject or affected that (A) might affect the consummation of the transactions contemplated under this Agreement, including the issuance or validity of the Units offered hereby, or the Common Stock issuable upon exercise of the Warrants, or (B) might have a material adverse effect on the condition (financial or otherwise), sales, properties, earnings, net 6 worth, prospects, results of operations or businesses of the Company, taken as a whole ("MATERIAL ADVERSE EFFECT"), or any of its principal officers. All pending legal or governmental proceedings to which the Company is a party or of which any of its properties are subject or affected which are not described in the Offering Documents, including ordinary routine litigation incidental to the business, would not have a Material Adverse Effect. No labor dispute with the employees of the Company exists or is threatened or imminent that could have a Material Adverse Effect. (x) The Company owns or is licensed to use all patents, patent applications, inventions, trademarks, trade names, applications for registration of trademarks, copyrights, know-how, trade secrets, licenses and rights in any thereof ("PROPRIETARY RIGHTS") which it is currently using as described in the Offering Documents. The Company does not have any knowledge of, and has not given or received any notice of any pending conflict with or infringement of, the rights of others with respect to any Proprietary Rights or with respect to any license of Proprietary Rights. No action, suit, arbitration, or legal, administrative or other proceeding, or domestic or foreign governmental investigation is pending or, to the best of the Company's knowledge, threatened, which involves any Proprietary Rights. The Company is not subject to any judgment, order, writ, injunction or decree of any court or any Federal, state, local, foreign or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or any arbitrator, or has entered into or is a party to any contract which restricts or impairs the use of any such Proprietary Rights in a manner which would have a Material Adverse Effect on the use of any of the Proprietary Rights. No Proprietary Rights used by the Company and no services or products sold by the Company, conflict with or infringe upon, to the knowledge of the Company, any proprietary rights of any third party. The Company has not received written notice of any pending conflict with or infringement upon such third party proprietary rights. The Company has not entered into any consent, indemnification, forbearance to sue or settlement agreement with respect to Proprietary Rights other than in the ordinary course of business. The Company has complied, in all material respects, with its contractual obligations relating to the protection of the Proprietary Rights used pursuant to licenses. To the best knowledge of the Company, no person is infringing on or violating the Proprietary Rights owned or used by the Company. (xi) The Company has an authorized, issued, and outstanding capitalization as set forth in the Offering Documents. All of the issued and outstanding shares of capital stock of the Company have been duly authorized and are validly issued, fully paid and non- assessable. No shares of capital stock have been issued in violation of any preemptive rights. Except as described in the Offering Documents, there are no outstanding (A) securities or obligations of the Company convertible into or exchangeable for any shares of capital stock of the Company, (B) warrants, rights or options to subscribe for or purchase from the Company any such capital stock or any such convertible or exchangeable securities or obligations or (C) obligations for the Company to issue such shares, any such convertible or exchangeable securities or obligations, or any such warrants, rights or obligations. 7 (xii) Except as described in the SEC Filings or in Paragraph 6(a)(xii) of the Company's Disclosure Letter attached to this Agreement ("DISCLOSURE LETTER"), there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities being registered pursuant to any registration statement filed by the Company under the Act. (xiii) The Units to be issued and sold to Prospective Investors as provided in the Subscription Agreements have been duly authorized and when issued and delivered against payment therefor, will be validly issued, fully paid and nonassessable and will conform to the description thereof in the Offering Documents. The shares of Common Stock issuable upon exercise of the Warrants have been duly authorized and when issued and delivered upon exercise and due payment therefor will be validly issued, fully paid and nonassessable and will conform to the description thereof in the Offering Documents; and there are no preemptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any shares of the Common Stock issuable upon the exercise of the Warrants pursuant to the Company's articles of incorporation or by-laws or any agreement or other outstanding instrument to which the Company is a party or is otherwise known to the Company. The Company has reserved sufficient shares of Common Stock to be issued upon exercise of the Warrants. (xiv) The Agent Warrants have been duly authorized and, when issued and delivered against payment therefor, will be validly issued, fully paid and nonassessable; the Agent Warrants are exercisable for Common Stock in accordance with the terms of the Agent Warrants and at the price therein provided; the shares of Common Stock issuable upon the exercise of the Agent Warrants have been duly authorized and reserved for issuance upon such exercise and such shares, when issued upon such exercise in accordance with the terms of the Agent Warrants, will be duly authorized, validly issued, fully paid and nonassessable; and there are no preemptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any shares of the Common Stock issuable upon exercise of the Agent Warrants pursuant to the Company's articles of incorporation or by-laws or any agreement or other outstanding instrument to which the Company is a party or is otherwise known to the Company. (xv) Except as disclosed in the Offering Documents, the Company is not (A) in violation of its articles of incorporation or by-laws, (B) in violation of any statute, law, rule, code, administrative regulation, ordinance, judgment, order or decree of any government, governmental instrumentality, court, domestic or foreign, or arbitration panel or other body applicable to it where such violation would have a Material Adverse Effect or (C) in default in the performance or observance of any obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, voting agreement, voting trust agreement, loan agreement, bond, debenture, note or other evidence of indebtedness, lease, sublease, license agreement, contract or other agreement or instrument to which it is a party or by which it or any of its respective properties are bound or affected ("CONTRACTS"), where such defaults, singly or in 8 the aggregate, would have a Material Adverse Effect. To the knowledge of the Company, no other party to any Contract is in default in any material respect thereunder which affects the Company. (xvi) The Company has all requisite power and authority to execute, deliver, and perform its obligations under this Agreement, the Subscription Agreement, the Warrants and the Agent Warrants. This Agreement has been duly and validly authorized, executed and delivered by the Company, and constitutes a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except as rights to indemnity and contribution hereunder and thereunder may be limited by the securities laws of the United States and except as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws or equitable principles affecting the enforcement of creditors' rights generally; (xvii) The issuance of the Units, including the Common Stock, the Warrants, the Agent Warrants, and the execution, delivery and performance of this Agreement, the Subscription Agreement, the Warrants and the Agents Warrants, and the consummation of the transactions contemplated hereby and thereby, do not and will not conflict with or result in a material breach or violation of any of the terms or provisions of, or constitute a material default under, or give rise to rights of termination under, or result in the acceleration of any obligation under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to the terms of any Contracts or result in a material breach or violation of any of the terms or provisions of, or constitute a material default under any Contracts, nor will such action result in any violation of the provisions of the articles of incorporation or by-laws of the Company or a material violation of any applicable statute, law, rule, code, administrative regulation, ordinance, judgment, order or decree of any government, governmental instrumentality or court, domestic or foreign, or arbitration panel or other body, having jurisdiction over the Company or any of the Company's properties. (xviii) No consent, approval, authorization, license or order of or from, or registration, qualification, declaration or filing with, federal, state, local, or other governmental authority or any person or court, administrative agency, or other body is required for the consummation of the transactions contemplated in this Agreement, or the Offering Documents, except as may have been made or may be required under any state securities or Blue Sky laws or pursuant to Regulation D. (xix) The Company is in compliance in all material respects with all applicable federal, state and local environmental laws and regulations, including, without limitation, those applicable to emissions to the environment, waste management and waste disposal (collectively, the "ENVIRONMENTAL LAWS"), except for any noncompliance as may be described in the Offering Documents, and to the best of the Company's knowledge, there are no circumstances that would prevent, interfere with, or materially increase the cost of such compliance in the future. Except as set forth in the Offering Documents, there is no claim under any Environmental Law, including common law ("ENVIRONMENTAL CLAIM"), pending or, to the knowledge of the Company, threatened against or affecting the Company and, to the best of the Company's 9 knowledge, there are no past or present actions, activities, circumstances, events or incidents, including, without limitation, releases of any material into the environment, that could form the basis of any Environmental Claim against or affecting the Company. (xx) Except as set forth in Paragraph 6(a) (xx) of the Disclosure Letter, the Company has good and marketable title to all property owned by it, in each case free and clear of all liens, charges, encumbrances or restrictions except as described in the Offering Documents or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company. Except as described in the Offering Documents, all material Contracts to which the Company is a party, or by which the Company or any of its properties or assets are bound, are valid, subsisting and enforceable and are in full force and effect. (xxi) Except as set forth in Paragraph 6(a) (xx) of the Disclosure Letter, the Company (A) has paid all federal, state, local and foreign taxes for which it is liable and has furnished all information returns it is required to furnish pursuant to the Internal Revenue Code of 1986, as amended, (B) has established adequate reserves for such taxes which are not due and payable and (C) does not have any tax deficiency or claims outstanding, proposed or assessed against it. (xxii) The Company maintains insurance of the types and in amounts which it deems adequate for its business, all of which are in full force and effect. (xxiii) Other than set forth in this Agreement, there are no claims, payments, issuances, arrangements or understandings, whether oral or written, for services in the nature of a finder's or origination fee with respect to the sale of the Units. (xxiv) Neither the Company nor, to the best of the Company's knowledge, any of the Company's officers, employees, agents or any other person acting on behalf of, at the direction of or for the benefit of the Company has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency (domestic or foreign) or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist the Company in connection with any actual or proposed transaction) which (a) might subject the Company or any other such person to any damage or penalty in any civil, criminal or governmental litigation or proceeding (domestic or foreign), (b) if not given in the past, might have had a Material Adverse Effect or (c) if not continued in the future, might result in a Material Adverse Effect. (xxv) During the past five years, none of the current officers or directors of the Company have been: 10 (a) The subject of a petition under the federal bankruptcy laws or any state insolvency law filed by or against them, or by a receiver, fiscal agent or similar officer appointed by a court for their business or property, or any partnership in which any or them was a general partner at or within two years before the time of such filing, or any corporation or business association of which any of them was an executive officer at or within two years before the time of such filing; (b) Convicted in a criminal proceeding or a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (c) The subject of any order, judgment, or decree not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining any of them from, or otherwise limiting, any of the following activities: (1) acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with any such activity; (2) engaging in any type of business practice; or (3) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities law or federal commodity laws; (d) The subject of any order, judgment or decree, not subsequently reversed, suspended or vacated of any federal or state authority barring, suspending or otherwise limiting for more than sixty (60) days their right to engage in any activity described in paragraph (3)(i) above, or be associated with persons engaged in any such activity; (e) Found by any court of competent jurisdiction in a civil action or by the SEC to have violated any federal or state securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended or vacated; (f) Found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated; or (g) Found by a court or an administrative agency to have or is alleged to have violated any Canadian or foreign securities laws. 11 (xxv) Neither the Company nor, to the knowledge of the Company, any of its affiliates has, directly or through any agent, sold, offered for sale or solicited offers to buy nor will any of the foregoing directly buy any security of the Company, as defined in the Act, which is or will be integrated with the sale of the Units in a manner that would require the registration, pursuant to the Act, of the Offering. (xxvi) During the period commencing on the date hereof and ending on the Final Closing Date, the Company shall not, without prior notice to and consent of the Placement Agent, which consent shall not be unreasonably withheld: (A) issue any securities or incur any liability or obligation, primary or contingent, for borrowed money; (B) enter into any transaction not in the ordinary course of business; or (C) declare or pay any dividend on its capital stock. (xxvii) Neither the Company nor any of its officers, directors, or affiliates, has engaged, directly or indirectly, in any act or activity that may jeopardize the status of the offering and sale of the Securities as an exempt transaction under the Act or under all applicable federal and/or state securities or "blue sky" laws of any jurisdiction in which the Securities may be offered or sold. 7. Covenants of the Company. The Company covenants that it will: (a) Notify Meyers Associates immediately, and confirm such notice in writing, (i) when any event shall have occurred during the period commencing on the date hereof and ending on the Final Closing Date, as a result of which the Offering Documents would include any untrue statement of a material fact or omit to state any 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, and (ii) of the receipt of any notification with respect to the modification, rescission, withdrawal, or suspension of the qualification or registration of the Securities, or of an exemption from such registration or qualification, in any jurisdiction. The Company will use its reasonable best efforts to prevent the issuance of any such modification, rescission, withdrawal, or suspension and if Meyers Associates so request, to obtain the lifting thereof as promptly as possible. (b) Not make any supplement or amendment to the Offering Documents unless such supplement or amendment complies with the requirements of the Act and Regulation D and the applicable federal and/or state securities and "blue sky" laws. If, at any time during the period commencing on the date hereof and ending on the Final Closing Date, any event shall have occurred as a result of which the Offering Documents contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or if, in the opinion of counsel to the Company, it is necessary at any time to supplement or amend the Offering Documents to comply with the Act, Regulation D, or any applicable securities or "blue sky" laws, the Company will promptly 12 prepare an appropriate supplement or amendment in form and substance reasonably satisfactory to the Placement Agent, which will correct such statement or omission or which will effect such compliance. (c) Deliver without charge to the Placement Agent such number of copies of the Offering Documents and any supplement or amendment thereto as may reasonably be requested by the Placement Agent. (d) Not, directly or indirectly, solicit any offer to buy from, or offer to sell to any person any Securities during the Offering Period, except through the Placement Agent. (e) Use its reasonable best efforts to qualify the Securities for offering and sale under, or establish an exemption from such qualification or registration under, the securities or "blue sky" laws of the jurisdictions as may be required by the Placement Agent; provided, however, that the Company will not be obligated to qualify to do business as a dealer in securities in any jurisdiction in which it is not so qualified. The Company will not consummate any sale of Securities in any jurisdiction or in any manner in which such sale may not be lawfully made; in this regard the Company shall be entitled to rely on the Placement Agent's representations herein, and the representations of Prospective Investors in the Subscription Agreement and the Investor Questionnaires, and on the Blue Sky qualifications affected by the Placement Agent's counsel. (f) At all times during the period commencing on the date hereof and ending on the Final Closing Date, provide to each Prospective Investor or his Purchaser Representative (as defined in Regulation D), if any, on request, such information (in addition to that contained in the Offering Documents) concerning the Offering, the Company and any other relevant matters, as it possesses or can acquire without unreasonable effort or expense, and to extend to each Prospective Investor or his Purchaser Representative, if any, the opportunity to ask questions of, and receive answers from, the President or other Executive Officers of the Company concerning the terms and conditions of the Offering and the business of the Company and to obtain any other additional information, to the extent it possesses the same or can acquire it without reasonable effort or expense, as such Prospective Investor or Purchaser Representative may consider necessary in making an informed investment decision or in order to verify the accuracy of the information furnished to such Prospective Investor or Purchaser Representative, as the case may be; PROVIDED, HOWEVER, the Company will not provide any information pursuant to this Section 7(f) which would violate any applicable law or agreement to which it is a party. (g) Notify Meyers Associates promptly of the acceptance or rejection of any subscription. The Company shall not accept subscriptions from, or make sales of Securities to, any Prospective Investors who are not, to the Company's knowledge, accredited investors. (h) Cooperate with Placement Agent's counsel to file five copies of a Notice of Sales of Securities on Form D with the Securities and Exchange Commission (the "Commission") no later than 15 days after the first sale of the Securities, and/or such documents 13 or certificates as are required by any particular state "blue sky" law. The Company shall file promptly such amendments to such Notice on Form D as shall become necessary and, as requested by Meyers Associates, shall also comply with any filing requirement imposed by the laws of any state or jurisdiction in which offers and sales are made. The Company shall furnish Meyers Associates with copies of all such filings. (i) Not, directly or indirectly, engage in any act or activity which may jeopardize the status of the offering and sale of the Securities as exempt transactions under the Act or under the securities or "blue sky" laws of any jurisdiction in which the Offering maybe made. Without limiting the generality of the foregoing, and notwithstanding anything contained herein to the contrary, the Company shall not, directly or indirectly, engage in any offering of securities which, if integrated with the Offering in the manner prescribed by Rule 502(a) of Regulation D and applicable releases of the Commission, may jeopardize the status of the offering and sale of the Securities as exempt transactions under Regulation D. (j) Apply the net proceeds from the sale of the Securities as set forth in the Disclosure Statement. No proceeds of the Offering shall be used to pay, in whole or in part, (A) any outstanding debt represented by the outstanding debt obligations set forth on Paragraph 7j of the Disclosure Letter or (B) any accrued but unpaid salary or bonus to officers or directors of the Company. (k) Not, during the period commencing on the date hereof and ending on the Final Closing Date, issue any press release or other communication, or hold any press conference with respect to the Company, its financial condition, results of operations, business, properties, assets, or liabilities, or the Offering, without Meyers Associates prior written consent which consent will not be unreasonably withheld, except as required by applicable securities laws and except as may be related to the marketing and sale of its products in the normal course of business. (l) Provide each Prospective Investor with registration rights which provide that the Company shall file a registration statement (the "REGISTRATION STATEMENT") with the SEC within 30 days of the final closing of the Offering to provide for the resale of the shares of Common Stock issued pursuant to the Subscription Agreements or upon exercise of the Warrants. The registration rights also shall provide that the failure to file an the registration statement as contemplated herein shall result in a two-percent (2%) per month, pro-rated daily, penalty on the subscription price payable through the issuance by the Company to each investor of additional shares of Common Stock and an additional three (3%) percent penalty for each 90 days period thereafter. The Company shall use commercially reasonable efforts to obtain an order of effectiveness from the SEC declaring the registration statement effective as soon as reasonably possible, including responding to all SEC comments within 15 business days. 14 8. Payment of Expenses. The Company hereby agrees to pay all fees, charges, and expenses incident to the performance by the Company of its obligations hereunder, including, without limitation, all fees, charges, and expenses in connection with: (i) the preparation, printing, filing, distribution, and mailing of the Offering Documents including the cost of all copies thereof; (ii) the issuance of the Securities including any transfer or other taxes payable thereon and the fees of any transfer agent or registrar; (iii) the qualification of the Securities or the securing of an exemption therefrom under state or foreign "blue sky" or securities laws, including without limitation, filing fees payable in the jurisdictions in which such registration or qualification or exemption therefrom is sought and disbursements in connection therewith. 9. Conditions of Placement Agent's Obligations. The obligations of the Placement Agent pursuant to this Agreement shall be subject, to the continuing accuracy, in all material respects, of the representations and warranties of the Company contained herein and in each certificate and document contemplated under this Agreement to be delivered to the Placement Agent, as of the date hereof and as of each Closing Date, with respect to the performance by the Company of its obligations hereunder, and to the following conditions: (a) At the First Closing and the Final Closing, the Placement Agent shall have received an opinion of Akin Gump Strauss Hauer & Feld LLP, counsel for the Company, dated each Closing Date, addressed to the Placement Agent, and in form and scope satisfactory to counsel for the Placement Agent, to the effect that: (i) The Company is a corporation in good standing under the laws of the State of California, the jurisdiction of its organization. The Company has the corporate power to enter into each of the Transaction Documents (as shall be defined) and to perform its obligations thereunder; (ii) The execution and delivery of each of the Transaction Documents by the Company and the performance by the Company of the transactions contemplated by the Transaction Documents have been duly authorized by all necessary corporate action on the part of the Company. Each of the Transaction Documents has been duly and validly executed and delivered by the Company. The Transaction Documents constitute the valid and binding obligations of the Company; (iii) The shares of Common Stock issuable pursuant to the Transaction Documents have been duly authorized and reserved for issuance and will be validly issued, fully paid and non-assessable; the shares of Common Stock underlying the Warrants (the "UNDERLYING SHARES") have been duly authorized and reserved for issuance upon exercise of the Warrants and, if and when issued upon the exercise of the Warrants in accordance with the terms of the Transaction Documents, the Underlying Shares will be validly issued, fully paid and non-assessable; 15 (iv) The execution and delivery of the Transaction Documents by the Company do not, and the performance by the Company of the transactions contemplated by the Transaction Documents will not, (a) result in any violation of any law, rule or regulation of any Included Law (as shall be defined), (b) result in any violation of any order, writ, judgment or decree known to us, or (c) result in a violation of the Company's articles of incorporation or bylaws; (v) No authorization, consent or approval or other action by, and no notice to or filing with, any governmental authority, regulatory body or other person (each, a "FILING") is required under any of the Included Laws for the due execution and delivery of the Transaction Documents by the Company and the performance by the Company of the transactions contemplated by the Transaction Documents except (ii) Filings necessary in connection with the exercise of remedies under the Transaction Documents, (iv) such other Filings as have been obtained or made, (v) Filings required under federal and state securities laws as contemplated by the Transaction Documents, and (vii) Filings required to maintain corporate and similar standing and existence; and (vi) The offer and sale of the Securities are exempt from the registration and prospectus delivery requirements of the Act. We express no opinion as to any subsequent resale of the Securities. In rendering such opinions, counsel for the Company may rely (A) as to matters of fact, on certificates of responsible officers of the Company; and (B) to the extent they deem proper, upon written statements or certificates of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to counsel for the Placement Agent. (b) On or prior to the Initial Closing Date the Placement Agent shall have been furnished such information, documents, and certificates, as it may reasonably require for the purpose of enabling it to review the matters referred to in Section 8(a), and in order to evidence the accuracy, completeness, or satisfaction of any of the representations, warranties, covenants, agreements, or conditions herein contained. (c) At the First Closing and at each subsequent Closing, the Placement Agent shall have received one or more certificates of the chief executive officer and of the chief financial officer of the Company, dated the applicable Closing Date to the effect that, as of the date of this Agreement and as of the applicable Closing Date the representations and warranties of the Company contained herein were and are accurate in all material respects, and that as of the Closing Date the obligations to be performed by the Company hereunder on or prior thereto have been fully performed in all material respects. Notwithstanding the foregoing, the Company hereby represents and warrants that at each Closing, the representations and warranties contained herein shall be true and correct in all material respects. 16 (d) All corporate action taken in connection with the issuance, sale, and delivery of the Securities shall be reasonably satisfactory in form and substance to Meyers Associates and its counsel. (e) There shall not have occurred after the date hereof, at any time prior to each Closing: (A) any domestic or international event, act, or occurrence which has materially disrupted, or in Meyers Associates opinion will in the immediate future materially disrupt the securities markets; (B) a general suspension of, or a general limitation on prices for, trading in securities on the the over-the-counter market; (C) any banking moratorium declared by a state or federal authority; (D) any material interruption in the mail service or other means of communication within the United States; (E) any material adverse change in the business, properties, assets, results of operations, or financial condition of the Company; or (F) any change in the market for securities in general or in political, financial, or economic conditions which, in Meyers Associates reasonable judgment, makes it inadvisable to proceed with the offering, sale, and delivery of the Securities. (f) The Company shall have executed and delivered to Meyers Associates the Advisory and Consulting Agreement as required under Section 13 hereunder and any required Agent Warrants as provided herein. (g) The Company shall have obtained an extension on the maturity date of its outstanding bridge debt in the principal amount of approximately $250,000 to provide for an extended maturity date of one year from the closing of the Offering and such other terms as may be agreed upon by the Placement Agent and the Company. (h) Any certificate or other document signed by any officer of the Company and delivered to Meyers Associates or to its counsel at a Closing shall be deemed a representation and warranty by the Company hereunder as to the statements made therein. If any condition to Meyers Associates obligations hereunder has not been fulfilled in all material respects as and when required to be so fulfilled, Meyers Associates may terminate this Agreement or, if Meyers Associates so elect, in writing waive any such conditions which have not been fulfilled or extend the time for their fulfillment. If Meyers Associates elects to terminate this Agreement, Meyers Associates shall notify the Company of such election in writing. Upon such termination, neither party shall have any further liability or obligation to the other except as provided in Section 11 hereof. (i) Prior to the Initial Closing, the Company and Jacques Tizabi shall have executed a written agreement, the terms of which shall be contingent on the consummation of the Initial Closing, whereby (A) Mr. Tizabi defers payment of all accrued but unpaid bonus or salary for nine months after the date hereof and (B) Mr. Tazabi defers payment of cash compensation pursuant to his employment agreement in excess of $150,000 (pro rated for each pay period) for nine months following the date hereof. 17 (j) Prior to the Initial Closing, the Company and Astor Capital ("ASTOR") shall have executed a written agreement, the terms of which shall be contingent on the consummation of the Initial Closing, whereby the Company and Astor agree that (i) the compensation payable to Astor pursuant to that certain Agreement for Investment Banking and Advisory Services dated June 1, 2003, shall be reduced during the period from the date hereof and for nine months hereafter to an amount not to exceed the sum of $5,000 per month, (ii) no Offering proceeds shall be used to make such payments, and (iii) no new agreements for services with compensation payable to Astor shall be entered into between the Company and Astor during the nine month period commencing on the date hereof, unless Astor is successful in raising capital for the Company or assists the Company in a corporate transaction such as a merger, consolidation, joint venture, strategic relationship or license agreement. 10. Conditions of Company's Obligations. The obligations of the Company pursuant to this Agreement shall be subject, in its discretion, to the performance by the Placement Agent in all material respects of its obligations hereunder. 11. Termination. This Agreement may be terminated by (a) the Placement Agent if any of the closing conditions contained in Section 9 have not been satisfied in all material respects or (b) the Company if any of the closing conditions contained in Section 10 have not been satisfied in all material respects or if the Minimum Offering has not been successfully placed by the end of the Offering Period. If the Agreement is terminated as the result of a breach by the Company of any covenant, representation, or warranty contained in the Agreement then, in that event, and provided the Placement Agent is not in breach hereunder, the Company shall be liable for the Placement Agent's reasonable expenses, including counsel fees, after giving credit for any prior payment of expenses by the Company. If the Agreement is terminated as the result of a breach by the Placement Agent of any material covenant, representation, or warranty contained in the Agreement then, in that event, and provided the Company is not in breach hereunder, the Placement Agent shall be liable for the Company's reasonable expenses, including counsel fees. 12. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless the Placement Agent, its officers, directors, partners, employees, agents, and counsel, and each person, if any, who controls the Placement Agent (each an "INDEMNIFIED PARTY") within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), against any and all loss, liability, claim, damage, and expense whatsoever (which shall include, for all purposes of this Section 12, but not be limited to, attorneys' fees and any and all expense whatsoever incurred in investigating, preparing, or defending against any litigation, commenced or threatened, or any claim whatsoever and any and all amounts paid in settlement of any claim or litigation) as and when incurred arising out of, 18 based upon, or in connection with (i) any untrue statement or alleged untrue statement of a material fact contained in (A) the Offering Documents or in any document delivered or written statement made pursuant to Section 7(f) or (B) any application or other document or communication (it being understood that neither the Company nor any officer, director or employee shall provide any information to any Prospective Investor which is not contained in the Offering Documents) (in this Section 12 collectively called an "application") executed by or on behalf of the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to register or qualify the Securities under the "blue sky" or securities laws thereof or in order to secure an exemption from such registration or qualification or filed with the Commission; (ii) any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, unless such statement or omission was made in reliance upon and in conformity with written information furnished to the Company as stated in Section 12(b) with respect to the Placement Agent expressly for inclusion in the Offering Documents or in any application, as the case may be; or (iii) any breach of any representation, warranty, covenant, or agreement of the Company contained in this Agreement; PROVIDED, HOWEVER, that the Company shall not be liable in any such case to the extent that any such loss, liability, claim, damage, and expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Offering Documents or application relating to the Securities in reliance upon and conformity with written information relating to the Placement Agent furnished to the Company by the Placement Agent. The foregoing agreement to indemnify shall be in addition to any liability the Company may otherwise have, including liabilities arising under this Agreement. If any action is brought against an Indemnified Party, in respect of which indemnify may be sought against the Company pursuant to the foregoing paragraph, such Indemnified Party or Parties shall promptly notify the Company (the "INDEMNIFYING PARTY") in writing of the institution of such action. The failure so to notify shall not relieve the Indemnifying Party from any liability it may have except to the extent that it has been prejudiced in any respect by such failure or from any liability that it may have to such Indemnified Party other than pursuant to this Section 12(a). In case of such action, the Indemnifying Party shall promptly assume the defense of such action, including the employment of counsel (reasonably satisfactory to such Indemnified Party or Parties) and payment of expenses. Such Indemnified Party shall have the right to employ its own counsel in any such case, but the fees and expense of such counsel shall be at the expense of such Indemnified Party unless the employment of such counsel shall have been authorized in writing by the Indemnifying Party in connection with the defense of such action or the Indemnifying Party shall not have promptly employed counsel satisfactory to such Indemnified Party or Parties to have charge of the defense of such action or such Indemnified Party or Parties shall have been advised by counsel that there may be a conflict of interest between the Indemnified Parties the Indemnifying Party in the conduct of the defense, in any of which events such fees and expenses of one such counsel shall be borne by the Indemnifying Party and the Indemnifying Party shall not have the right to direct the defense of such action on behalf of the Indemnified Party or Parties. Anything in this paragraph to the contrary notwithstanding, the Indemnifying Party shall not be liable for any settlement of any 19 such claim or action effected without its written consent. The Company agrees promptly to notify the Placement Agent of the commencement of any litigation or proceedings against the Company or any of its officers or directors in connection with the sale of the Securities, the Offering Documents, or any application. (b) The Placement Agent agrees to indemnify and hold harmless the Company, its officers, directors, employees, agents, and counsel, and each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Company to the Placement Agent in Section 12(a), with respect to any and all loss, liability, claim, damage, and expense whatsoever (which shall include, for all purposes of this Section 12, but not be limited to, attorneys' fees and any and all expense whatsoever incurred in investigating, preparing, or defending against any litigation, commenced or threatened, or any claim whatsoever and any and all amounts paid in settlement of any claim or litigation) as and when incurred arising out of, based upon, or in connection with (i) statements or omissions, if any, made in the Offering Documents, any registration statement, or any prospectus pursuant to this Agreement in reliance upon and in conformity with written information furnished to the Company as stated in this Section 12 with respect to the Placement Agent expressly for inclusion in the Offering Documents, (ii) the failure of the Placement Agent to comply with the provisions of Section 2(c) hereof or with the "blue sky" or securities laws of the jurisdictions in which the Placement Agent solicits offers to buy or offers to sell any Securities, or (iii) any breach of any representation, warranty, covenant or agreement of the Placement Agent contained in this Agreement. The foregoing agreement to indemnify shall be in addition to any liability the Placement Agent may otherwise have, including liabilities arising under this Agreement. In no case, notwithstanding anything to the contrary contained in this Section 12, shall the Placement Agent be liable under this Section 12(b) in excess of the compensation received by it pursuant to Section 5(a) hereof. If any action shall be brought against the Company or any other person so indemnified based on the Offering Documents and in respect of which indemnity may be sought against the Placement Agent pursuant to this Section 12, the Placement Agent shall have the rights and duties given to the Indemnifying Party, and the Company and each other person so indemnified shall have the rights and duties given to the Indemnified Parties, by the provisions of Section 12(a) hereof. (c) To provide for just and equitable contribution, if (i) an Indemnified Party makes a claim for indemnification pursuant to Section 12(a) or 12(b) hereof but it is found in a final judicial determination, not subject to further appeal, that such indemnification may not be enforced in such case, even though this Agreement expressly provides for indemnification in such case, or (ii) any Indemnified or Indemnifying Party seeks contribution under the Act, the Exchange Act, or otherwise, then the Company (including for this purpose any contribution made by or on behalf of any officer, director, employee, agent, or counsel of the Company, or any controlling person of the Company), on the one hand, and the Placement Agent (including for this purpose any contribution by or on behalf of an Indemnified Party), on the other hand, shall contribute to the losses, liabilities, claims, damages, and expenses whatsoever to which any of them may be subject, in such proportions as are appropriate to reflect the relative benefits received by the Company, on the one hand, and the Placement Agent, on the other hand; 20 PROVIDED, HOWEVER, that if applicable law does not permit such allocation, then other relevant equitable considerations such as the relative fault of the Company and the Placement Agent in connection with the facts which resulted in such losses, liabilities, claims, damages, and expenses shall also be considered. The relative benefits received by the Company, on the one hand, and the Placement Agent, on the other hand, shall be deemed to be in the same proportion as (x) the total proceeds from the Offering (net of compensation payable to the Placement Agent pursuant to Section 5(a) hereof but before deducting expenses) received by the Company, and (y) the compensation received by the Placement Agent pursuant to Section 5(a) hereof. The relative fault, in the case of an untrue statement, alleged untrue statement, omission, or alleged omission, shall be determined by, among other things, whether such statement, alleged statement, omission, or alleged omission relates to information supplied by the Company or by the Placement Agent, and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement, alleged statement, omission, or alleged omission. The Company and the Placement Agent agree that it would be unjust and inequitable if the respective obligations of the Company and the Placement Agent for contribution were determined by pro rata or per capita allocation of the aggregate losses, liabilities, claims, damages, and expenses or by any other method of allocation that does not reflect the equitable considerations referred to in this Section 12(c). In no case, notwithstanding anything to the contrary contained in this Section 12, shall the Placement Agent be responsible for a portion of the contribution obligation in excess of the compensation received by it pursuant to Section 5(a) hereof. No person guilty of a fraudulent misrepresentation shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 12(c), each person, if any, who controls the Placement Agent within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, partners, employee, agent, and counsel of the Placement Agent, shall have the same rights to contribution as the Placement Agent, and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, employee, agent, and counsel of the Company, shall have the same rights to contribution as the Company, subject in each case to the provisions of this Section 12(c). Anything in this Section 12(c) to the contrary notwithstanding, no party shall be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 12(c) is intended to supersede any right to contribution under the Act, the Exchange Act, or otherwise. 13. Consulting Agreement. Upon completion of the Minimum Offering, the Company and the Placement Agent shall enter into an Advisory and Consulting Agreement upon mutually agreeable terms which shall provide for the Placement Agent to serve, on a non-exclusive basis, as a financial consultant to the Company in consideration for warrant to purchase a number of Units equal to 10% of the Units sold in the Offering ("CONSULTING WARRANTS"), exercisable at the Offering Price of the Units. The Consulting Warrants shall have terms, including registration rights, similar to the Units sold to investors, and shall have an exercise term of five years. 21 14. Non-Solicitation. The Company agrees that, for a period of three years from the date hereof, it shall not solicit any offer to buy from or offer to sell to any person originally introduced to the Company by the Placement Agent in connection with the Offering, directly or indirectly, any securities of the Company or of any other entity, or provide the name of any such person to any other securities broker or dealer or selling agent. If the Company or any of its affiliates, directly or indirectly, solicits, offers to buy from or offers to sell to any such person any such securities, or provides the name of any such person to any other securities broker or dealer or selling agent, and such person purchases such securities or purchases securities from any other securities broker or dealer or selling agent, the Company shall pay to the Placement Agent an amount equal to 10% of the aggregate purchase price of the securities so purchased by such person. 15. Representations and Agreements to Survive Delivery. All representations, warranties, covenants, and agreements contained in this Agreement shall be deemed to be representations, warranties, covenants, and agreements at the Closing Date and, such representations, warranties, covenants, and agreements, including the indemnification and contribution agreements contained in Section 12, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Placement Agent or any indemnified person, or by or on behalf of the Company or any person or entity which is entitled to be indemnified under Section 12(b), and shall survive the issuance, sale, and delivery of the Securities. In addition, notwithstanding any election hereunder or any termination of this Agreement, and whether or not the terms of this Agreement are otherwise carried out, the provisions of Sections 12 and 14 shall survive termination of this Agreement and shall not be affected in any way by such election or termination or failure to carry out the terms of this Agreement or any part thereof. 16. Notices. All communications hereunder, except as may be otherwise specifically provided herein, shall be in writing and, if sent to the Placement Agent, shall be mailed by certified mail, hand delivered, or sent by overnight courier service, to Meyers Associates L.P. 45 Broadway, New York, New York 10006 Attention: Bruce Meyers, with a copy to Goldstein & DiGioia LLP, 45 Broadway, 11th Floor, New York, New York 10017, Attention: Brian C. Daughney, Esq.; or if sent to the Company, shall be mailed by certified mail, hand delivered, or sent by overnight courier service, to Universal Detection Technology, 9595 Wilshire Blvd., Suite 700, Beverly Hills, California 90212, Attention Jacques Tizabi, with a copy to Akin Gump Strauss Hauer & Feld, 2029 Century Park East, 24th Floor, Los Angeles, California 90067, Attention: Julie M. Kaufer. All notices hereunder shall be effective upon receipt by the party to which it is addressed. 22 17. Parties. This Agreement shall inure solely to the benefit of, and shall be binding upon, the Placement Agent and the Company and the persons and entities referred to in Section 10 who are entitled to indemnification or contribution, and their respective successors, legal representatives, and assigns (which shall not include any purchaser, as such, of Securities), and no other person shall have or be construed to have any legal or equitable right remedy, or claim under or in respect of or by virtue of this Agreement or any provision herein contained. 18. Construction. This Agreement shall be construed in accordance with the laws of the State of New York, without giving effect to conflict of laws. Any or all actions or proceedings which may be brought by the Company or Meyers Associates under this Agreement shall be brought in the federal or state courts having a situs within the State of New York, New York County, and the Company and Meyers Associates each hereby consent to the jurisdiction of any local, state, or federal court located within the State of New York, New York County and waive all objections to venue. 19. Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original and all of which, when taken together, shall constitute one agreement. If the foregoing correctly sets forth the understanding between us, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us. Very truly yours, UNIVERSAL DETECTION TECHNOLOGY By: ________________________________ Name: Jacques Tizabi Title: Chief Executive Officer Accepted as of the date first above written: Meyers Associates L.P. By: Meyer Janssen Securities Corp General Partner By: ----------------------------------------------- Name: Bruce Meyers Title: President 23
EXHIBIT A Additional Offering Terms Total Offering Up to $1,000,000 of Units, subject to increase by an additional $1,000,0000 of Units Units Units are comprised of Shares of common Stock and Class A and Class B Warrants. Offering Price The Units shall have an offering price of the lower of (i) the average closing bid price for the Company's Common Stock for the five trading days ending the trading day immediately prior to the initial closing date less 33% (rounded to the nearest whole cent) or (ii) $0.50 per Unit. Class A Warrants Provide for the purchase of 1/2 share of Common Stock at the Unit Offering price. Class B Warrants Provide for the purchase of 1/2 share of Common Stock at $0.70 per share. Registration Rights. The Company has agreed to file a registration statement with the Securities and Exchange Commission within 30 days of final closing of the Offering to register for resale the shares of Common Stock and the shares underlying the Warrants included in the Units. This registration statement will also register for resale the shares of Common Stock underlying the Placement Agent Warrants.
24 EX-10 3 exhibit_10-8.txt AMENDMENT NO. 1 TO PLACEMENT AGENCY AGREEMENT This Amendment No.1 is made as of May 25, 2004, by and between Meyers Associates L.P. ("PLACEMENT AGENT") and Universal Detection Technology ("UDT"). Reference is made to that certain Placement Agency Agreement dated as of April 29, 2004 (the "ORIGINAL AGREEMENT") by and between Placement Agent and UDT. All terms not otherwise defined herein shall have the meanings ascribed to them in the Original Agreement. Placement Agent and UDT hereby amend the Original Agreement as follows: 1. Section 2(b) of the Original Agreement is hereby amended to reflect that the Offering may be increased by another additional $1,000,000 so that the total potential increase may be $2,000,000. 2. Section 5 of the Original Agreement is hereby amended to add a new section (d) as follows: (d) In the event that subscriptions of $2,000,000 are received and accepted, then the Placement Agent and the Company shall enter into a Financial Consulting Agreement, substantially in the form of Exhibit A annexed hereto, providing for a monthly payment to the Placement Agent of $5,000 per month for term of one year. Further, in the event that subscriptions in the amount of $2,500,000 or more are receive and accepted, then the term of the Consulting Agreement shall be 18 months and the monthly fee shall be $7,500. 3. UDT hereby agrees that in the event that subscriptions of $2,500,000 are received and accepted, then the Placement Agent shall have the right to have one of its representatives be present at all of UDT's board of director (the "BOARD") meetings for a period of one year from the final closing date of the Offering; PROVIDED, HOWEVER, that in the event that the Board intends to discuss or vote upon any matter in which the Placement Agent has a material business or financial interest (other than by reason of its interests as a stockholder of the UDT), the Placement Agent's designated representative may be excluded from that portion of the meeting by a vote of a majority of the directors present. In addition, UDT reserves the right to exclude such representative from access to any meeting or portion thereof (including any documents or other materials related thereto) if UDT believes upon advice of counsel that such exclusion is reasonably necessary to preserve the attorney-client privilege or to protect confidential proprietary information. The Placement Agent hereby agrees that any proprietary information obtained by it and/or its observer in connection with such observer's attendance at Board meetings shall be held in confidence and will not be disclosed by the Placement Agent, except to the extent otherwise required by law and any other regulatory process to which the Placement Agent is subject, and will not be used except for purposes of participating in Board meetings. 4. UDT hereby agrees that the Placement Agent has the right, in its capacity as a placement agent of UDT, to nominate to UDT a candidate for the Board at UDT's next annual shareholder meeting. The Board shall have sole discretion exercised in good faith in determining whether the candidate nominated by the Placement Agent to UDT will be nominated by the Board and named as a director nominee in the proxy statement for UDT's next annual shareholder meeting. 5. Except as provided herein, all other terms and conditions of the Original Agreement shall remain in full force and effect. [signature page appears next] This Agreement may be executed in counterparts, each of which shall constitute an original and all of which, when taken together, shall constitute one agreement. IN WITNESS WHEREOF, the undersigned have caused this Amendment no.1 to be duly executed as of that date written above. UNIVERSAL DETECTION TECHNOLOGY By: ________________________________ Name: Jacques Tizabi Title: Chief Executive Officer Meyers Associates L.P. By: Meyer Janssen Securities Corp. General Partner By:_________________________________ Bruce Meyers President EX-10 4 exhibit_10-9.txt NO.____________________ _______________________ NAME OF OFFEREE UNIVERSAL DETECTION TECHNOLOGY Offering of Units $250,000 Minimum Offering Amount $2,000,000 Maximum Offering Amount SUBSCRIPTION AGREEMENT AND INVESTOR QUESTIONNAIRE Placement Agent: Meyers Associates L.P. 45 Broadway - 2nd Floor New York, NY 10006 1 CONFIDENTIAL SUBSCRIPTION AGREEMENT AND QUESTIONNAIRE This Subscription Agreement and Investor Questionnaire (the "SUBSCRIPTION AGREEMENT") is to be completed by each person who desires to purchase the securities of Universal Detection Technology (the "COMPANY"), in connection with the proposed private placement of Units comprised of shares of common stock and common stock purchase warrants (the "Offering"). This material does not constitute an offer to sell or a solicitation of an offer to buy any securities. This offering will be made solely pursuant to the terms and conditions of the Confidential Private Memorandum dated April 29, 2004 (the "MEMORANDUM") which contains material information required to be reviewed in connection with any investment decision. ALL TERMS NOT DEFINED HEREIN SHALL HAVE THE MEANING ASCRIBED TO THEM IN THE MEMORANDUM. INSTRUCTIONS: Items to be delivered by all Investors: a. One (1) completed and executed Subscription Agreement. b. One (1) completed and executed Selling Security Holder Questionnaire. c. Payment in the amount of subscription, by wire transfer of funds or check. All checks should be made payable to "SIGNATURE BANK AS ESCROW AGENT FOR UNIVERSAL DETECTION TECHNOLOGY." Wire instructions are as follows: SIGNATURE BANK 261 MADISON AVENUE NEW YORK, NY 10016 ABA# 026013576 ACCOUNT# 1500517634 BENEFICIARY ACCOUNT NAME: SIGNATURE BANK AS ESCROW AGENT FOR UNIVERSAL DETECTION TECHNOLOGY For additional information call: MEYERS ASSOCIATES L.P. 45 BROADWAY - 2ND FLOOR NEW YORK, NEW YORK 10006 Attn: Eileen Slitkin Telephone: (212) 742-4200 THE INVESTOR IS RESPONSIBLE FOR ALL WIRE TRANSFER FEES IMPOSED BY THE INVESTOR'S BANK. 2 The Units are being offered by the Company through Meyers Associates L.P. as placement agent (the "PLACEMENT AGENT"). The Units, as well as the specific terms of the Offering, are described in the Memorandum, and are being offered without registration under the Securities Act of 1933, as amended (the "ACT"), or the securities laws of any state or any other jurisdiction, in reliance on the exemption contained in Section 4(2) of the Act and/or Regulation D promulgated thereunder and on similar exemptions under applicable state laws. Under Regulation D of the Act, the Company is required to determine that an individual, or each individual equity owner of an "investing entity" meets certain suitability requirements before selling Units to such individual or entity. You understand that the Company and the Placement Agent will rely upon the following information to determine whether you meet these suitability requirements. The Company will not sell Units to any subscriber who has not filled out, as thoroughly as possible, this Subscription Agreement and other required documents referenced herein. If an investor is a partnership, trust, corporation or other entity, an authorized officer, or general partner or each equity owner or beneficiary, as applicable, must complete this Subscription Agreement. This Subscription Agreement is merely a request for information and does not constitute an offer to sell or a solicitation of an offer to buy the Units or any other security of the Company. No sale will occur prior to the acceptance of any subscription by the Company and the Placement Agent. Investors should also understand that they may be required to furnish additional information to the Company. Your answers will be kept confidential. At all times, however, you hereby agree that the Company may present this Subscription Agreement to such parties as it deems appropriate in order to assure itself that the offer and the sale of Units to you will not result in violations of federal or state securities laws which are being relied upon by the Company in connection with the offer and sale thereof and as otherwise required by law or any regulatory authority. Please type or clearly print your answers, and state "none or "not applicable" when appropriate. If there is insufficient space for any of your answers, please attach additional pages. If the Units are to be owned by more than one individual or by a corporation or partnership, you may need extra copies of this Subscription Agreement. You may use photocopies or request extra copies from the Company or the Placement Agent. PLEASE CONTACT YOUR LAWYER, ACCOUNTANT, OR BROKER AT MEYERS ASSOCIATES L.P. WITH ANY QUESTIONS. 3
SECTION A. INVESTOR INFORMATION A1. Name(s) of Investor(s): ___________________________________ ___________________________________ ___________________________________ A2. Principal Amount of Units Subscribed for $___________________________________ (Minimum Subscription is $25,000) A3. Manner of Ownership of Securities. _____ One Individual Please complete Section A, B and C. _____ Husband and Wife Please have one spouse complete Sections Tenants by the Entirety A, B and C. Please have both spouses complete Section C. _____ Tenants in Common Please have each individual separately complete Sections A, B and C. _____ Joint Tenants with Right Please have each individual separately complete Right of Survivorship Sections A, B and C. Two or more Individuals (but not husband and wife) _____ Corporate Ownership Please complete Section A, B, D and, if applicable, E and F for the corporation. If the corporation does not qualify as an "accredited investor" on its own, please have each person who owns an equity interest in the corporation separately complete Sections B and, if applicable, C, D, E and F. _____ Partnership or LLC Ownership Please complete Sections A, B and D, and have each general partner and limited partner separately complete Sections B, C, D, E and F, if applicable. _____ Trust Ownership Please complete Sections A, B and F, if applicable, and have each beneficiary and trustee of the trust separately complete Sections B, C, D, E and F, if applicable.
4 NASD AFFILIATION. Please state whether you or any of your associates or affiliates (which includes your spouse, in-laws and children or parents): (i) are a member or a person associated (including as an employee, officer, director, partner) with a member of the National Association of Securities Dealers, Inc. (the "NASD"), (ii) are an owner of stock or other securities of an NASD member, (iii) has made a subordinated loan to any NASD member, or (iv) or a relative or member of the same household of any person meeting the description set forth in clauses (i) through (iii) above. ------- ------- Yes No If you marked yes above, please briefly describe the NASD relationship below: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ SECTION B. ACCREDITED INVESTOR STATUS AND PATRIOT ACT CERTIFICATIONS B1. Please check one or more of the following definitions of "accredited investor," if any, which applies to you. If none of the following applies to you, please leave a blank. _____(a) A Bank as defined in Section 3 (a) (2) of the Act, or any savings and loan association or other institution as defined in Section 3 (a) (5) (A) of the Act whether acting in its individual or fiduciary capacity; _____(b) Any broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934 (the "EXCHANGE ACT"); _____(c) An insurance company as defined in Section 2(13) of the Act; _____(d) Investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that act; _____(e) Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; 5 _____(f) Plan established and maintained by a state, or its political subdivisions, or any agency or instrumentality of a state or its political subdivisions for the benefit of its employees, if such plan has total assets in excess of $5,000,000; _____(g) Any employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, as amended, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are Accredited Investors. _____(h) A Private Business Development Company as defined in Section 202(a) (22) of the Investment Advisers Act of 1940. _____(i) An organization described in Section 501(c) (3) of the Internal Revenue Code, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000. _____(j) A natural person whose individual net worth,* or joint net worth with that person's spouse, at the time of purchase exceeds $1,000,000. _____(k) A natural person who had an individual income** in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year. _____(l) A trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Units, whose purchase is directed by a sophisticated person as described in Rule 506(b) (2) (ii) of Regulation D. _____(m) Any entity in which all of the equity owners are Accredited Investors. * For purposes hereof net worth shall be deemed to include ALL of your assets, liquid or illiquid (including such items as home, furnishings, automobile and restricted securities) MINUS any liabilities (including such items as home mortgages and other debts and liabilities). * For purposes hereof the term "income" is not limited to "adjusted gross income" as that term is defined for federal income tax purposes, but rather includes certain items of income which are deducted in computing "adjusted gross income." For investors who are salaried employees, the gross salary of such investor, minus any significant expenses personally incurred by such investor in connection with earning the salary, plus any income from any other source including unearned income, is a fair measure 6 of "income" for purposes hereof. For investors who are self-employed, "income" is generally construed to mean total revenues received during the calendar year minus significant expenses incurred in connection with earning such revenues. B2. U.S. Patriot Act Certifications To induce the Company to accept the undersigned's investment, the undersigned hereby makes the following representations, warranties and covenants to the Company: A. The undersigned represents and warrants that no holder of any beneficial interest in the undersigned's equity securities of the Company (each a "BENEFICIAL INTEREST Holder") and, no Related Person (in the case the undersigned is an entity) is or will be: 1. A person or entity whose name appears on the list of specially designated nationals and blocked persons maintained by the Office of Foreign Asset Control from time to time; 2. A Foreign Shell Bank; or 3. A person or entity resident in or whose subscription funds are transferred from or through an account in a Non-Cooperative Jurisdiction. B. The undersigned represents that the bank or other financial institution (the "WIRING INSTITUTION") from which the undersigned's funds will be wired is located in a FATF Country. C. The undersigned represents that: 1. Neither it, any Beneficial Interest Holder nor any Related Person (in the case of the undersigned is an entity) is a Senior Foreign Political Figure, any member of a Senior Foreign Political Figure's Immediate Family or any Close Associate of a Senior Foreign Political Figure; or 2. Neither it, any Beneficial Interest Holder nor any Related Person (in the case the undersigned is an entity) is resident in, or organized or chartered under the laws of, a jurisdiction that has been designated by the Secretary of the Treasury under Section 311 or 312 of the USA PATRIOT Act as warranting special measures due to money laundering concerns. 3. Its investment funds do not originate from, nor will they be routed through, an account maintained at a Foreign Shell Bank, an "offshore bank," or a bank organized or chartered under the laws of a Non-Cooperative Jurisdiction. D. For purposes of this SECTION B, the following definitions are applicable. 7 CLOSE ASSOCIATE: With respect to a Senior Foreign Political Figure, a person who is widely and publicly known internationally to maintain an unusually close relationship with the Senior Foreign Political Figure, and includes a person who is in a position to conduct substantial domestic and international financial transactions on behalf of the Senior Foreign Political Figure. FATF: The Financial Action Task Force on Money Laundering. FATF COUNTRY: A country that is a member of FATF. As of September 1, 2003, the countries which are members of FATF are: Argentina; Australia; Austria; Belgium; Brazil; Canada; Denmark; Finland; France; Germany; Greece; Hong Kong; Iceland; Ireland; Italy; Japan; Luxembourg; Mexico; Kingdom of the Netherlands; New Zealand; Norway; Portugal; Singapore; South Africa; Spain; Sweden; Switzerland; Turkey; United Kingdom and United States. For a current list of FATF members see http://www1.oecd.org/fatf/Members_en.htm. FOREIGN BANK: An organization that (i) is organized under the laws of a country outside the United States; (ii) engages in the business of banking; (iii) is recognized as a bank by the bank supervisory or monetary authority of the country of its organization or principal banking operations; (iv) receives deposits to a substantial extent in the regular course of its business; and (v) has the power to accept demand deposits, but does not include the U.S. branches or agencies of a foreign bank. FOREIGN SHELL BANK: A Foreign Bank without a Physical Presence in any country, but does not include a Regulated Affiliate. GOVERNMENT ENTITY: Any government or any state, department or other political subdivision thereof, or any governmental body, agency, authority or instrumentality in any jurisdiction exercising executive, legislative, regulatory or administrative functions of or pertaining to government. IMMEDIATE FAMILY: With respect to a Senior Foreign Political Figure, typically includes the political figure's parents, siblings, spouse, children and in-laws. NON-COOPERATIVE JURISDICTION: Any foreign country or territory that has been designated as non-cooperative with international anti-money laundering principles or procedures by an intergovernmental group or organization, such as FATF, of which the United States is a member and with which designation the United States representative to the group or organization continues to concur. See http://www1.oecd.org/fatf/NCCT_en.htm for FATF's list of non-cooperative countries and territories. PHYSICAL PRESENCE: A place of business that is maintained by a Foreign Bank and is located at a fixed address, other than solely a post office box or an electronic address, in a country in which the Foreign Bank is authorized to conduct banking activities, at which location the Foreign Bank: (a) employs one or more individuals on a full-time basis; (b) maintains 8 operating records related to its banking activities; and (c) is subject to inspection by the banking authority that licensed the Foreign Bank to conduct banking activities. PUBLICLY TRADED COMPANY: An entity whose securities are listed on a recognized securities exchange or quoted on an automated quotation system in the U.S. or country other than a Non-Cooperative Jurisdiction or a wholly-owned subsidiary of such an entity. REGULATED AFFILIATE: A Foreign Shell Bank that: (a) is an affiliate of a depository institution, credit union, or Foreign Bank that maintains a Physical Presence in the U.S. or a foreign country, as applicable; and (b) is subject to supervision by a banking authority in the country regulating such affiliated depository institution, credit union, or Foreign Bank. RELATED PERSON: With respect to any entity, any interest holder, director, senior officer, trustee, beneficiary or grantor of such entity; provided that in the case of an entity that is a Publicly Traded Company or a Qualified Plan, the term "Related Person" shall exclude any interest holder holding less than 5% of any class of securities of such Publicly Traded Company and beneficiaries of such Qualified Plan. SENIOR FOREIGN POLITICAL FIGURE: A senior official in the executive, legislative, administrative, military or judicial branches of a non-U.S. government (whether elected or not), a senior official of a major non-U.S. political party, or a senior executive of a non-U.S. government-owned corporation. In addition, a Senior Foreign Political Figure includes any corporation, business or other entity that has been formed by, or for the benefit of, a Senior Foreign Political Figure. USA PATRIOT ACT: The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act) Act of 2001 (Pub. L. No. 107-56). SECTION C. INDIVIDUAL INFORMATION C1. General Information Name:___________________________________________________________ Age:_______________ Social Security Number:_____________________ Marital Status:__________ Spouse's Name:________________________ If the Securities are to be owned by two or more individuals (not husband and wife), are you related to any other co-owner(s)? ------- ------- Yes No 9 (If Yes, please state the name of the other person, the manner in which the Securities should be issued and explain the relationship(s): ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ C2. Principal Residence Address: _______________________________________________________ Number Street _______________________________________________________ City State Zip Code _______________________________________________________ Country Mailing Address (if other than Principal Residence above): _______________________________________________________ Number Street _______________________________________________________ City State Zip Code Telephone Number: Facsimile Number: C3. Current Employment or Business Activity: Company Name: Address: _______________________________________________________ Number Street _______________________________________________________ City State Zip Code Telephone Number:_______________________________________________________ Principal Business:_____________________________________________________ Position and Title:_____________________________________________________ 10 C4. Net worth, inclusive of the net worth of your spouse and the value of your principal residence, furnishings therein and personal automobile and other assets (IT IS IMPORTANT THAT YOU CHECK THE HIGHEST APPLICABLE AMOUNT) exclusive of any liabilities: ( ) below $249,999 ( ) $250,000 to $349,999 ( ) $350,000 to $699,999 ( ) $700,000 to $799,999 ( ) $800,000 to $1,000,000 ( ) $1,000,000 to $1,249,999 ( ) over $1,250,000 C5. Net worth: Your net worth, inclusive of the net worth of your spouse and excluding the value of your principal residence, furnishings therein and personal automobiles and exclusive of any liabilities: ( ) below $249,999 ( ) $250,000 to $349,999 ( ) $350,000 to $699,999 ( ) $700,000 to $799,999 ( ) $800,000 to $1,000,000 ( ) $1,000,000 to $1,249,999 ( ) over $1,250,000 C6. Indicate (a) your individual income from all sources for the calendar years 2002 and 2003 and estimated income for 2004 or (b) your joint income with your spouse from all sources for the calendar years 2002 and 2003 and estimated income for 2004 (it is important that you check the highest applicable amount): (a) individual income: $200,000 $300,000 $400,000 $500,000 to to to and $299,000 $399,000 $499,000 OVER -------- -------- --------- --------- 2002 _________ _________ _________ _________ 2003 _________ _________ _________ _________ 2004 _________ _________ _________ _________ (b) joint income: $200,000 $300,000 $400,000 $500,000 to to to and $299,000 $399,000 $499,000 OVER -------- -------- -------- --------- 2002 _________ _________ _________ _________ 2003 _________ _________ _________ _________ 2004 _________ _________ _________ _________ 11 C7. Investment experience: (a) The frequency with which you invest in marketable securities is: ( ) often ( ) occasionally ( ) never (b) The frequency with which you invest in unmarketable securities (such as private placement offerings) is: ( ) often ( ) occasionally ( ) never (c) Have you previously participated in private placement offerings in the last 5 years? ------- ------- Yes No (d) If you answered "yes" to (c) above state the private placements in which you participated in the last 5 years. Amount Name of YEAR INVESTED ENTITY ---- -------- ------------- 1998 $________ ______________ 1999 $________ ______________ 2001 $________ ______________ 2002 $________ ______________ 2003 $________ ______________ YOU MAY USE ADDITIONAL SHEETS IF NECESSARY C8. (a) Have you been afforded an opportunity to investigate the Company and review relevant factors and documents pertaining to the officers, directors and the Company and its business and to ask questions of a qualified representative of the Company regarding this investment and the properties, operations, and methods of doing business of the Company? ------- ------- Yes No 12 (b) Do you understand the nature of an investment in the Company and the risk associated with such an investment? ------- ------- Yes No (c) Do you understand that there is no guarantee of any financial return on this investment. ------- ------- Yes No (d) Do you understand that this investment is not liquid? ------- ------- Yes No (e) Do you have adequate means of providing for your current needs and personal contingencies in view of the fact that this is not a liquid investment? ------- ------- Yes No (f) Are you aware of the Company's business affairs and financial condition, and have you acquired all such information about the Company as you deem necessary and appropriate to enable you to reach an informed and knowledgeable decision to acquire Units? ------- ------- Yes No (g) Do you have a "pre-existing relationship" with the Company or any of its officers, directors or controlling person? ------- ------- Yes No (For purposes hereof, "Pre-existing relationship" means any relationship consisting of person or business contacts of a nature and duration such as would enable a reasonable prudent investor to be aware of the character, business acumen, and general business and financial circumstances of the person with whom such relations exists.) 13 If so, please name the individual or other person with whom you have a pre-existing relationship and describe the relationship: ________________________________________________________________________________ ________________________________________________________________________________ SECTION D. CORPORATE OFFEREES OR PARTNERSHIP OFFEREES D1. General Information Legal name of Corporation or Partnership:__________________________________ ___________________________________________________________________________ ___________________________________________________________________________ Fictitious name (d/b/a): __________________________________________________ State or Place of Incorporation: __________________________________________ Date of Incorporation:_____________________________________________________ If Partnership, type: ______ General ______ Limited Federal Number: ___________________________________________________________ Fiscal Year Ends:__________________________________________________________ Number of Equity Owners:___________________________________________________ Name and Title of Authorized Person Executing Subscription Agreement: _____ D2. Business Address: _________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ 14 Mailing Address (if different): ___________________________________________ ___________________________________________________________________________ Telephone Number: ( )_______________ Facsimile Number: ( )_____________ D3. Name of Primary Bank:______________________________________________________ Address:___________________________________________________________________ Telephone Number: ( )_______________ Account Type and Number:___________________________________________________ Person Familiar with your Account:_________________________________________ Was the corporation or partnership formed for the specific purpose of purchasing securities? ---------- ------------ Yes No Check if applicable to the corporation: Subchapter S________ Professional________ D4. The undersigned represents and warrants as follows: (a) The corporation or partnership, as the case may be, has been duly organized (if a partnership) is validly existing as a corporation or partnership in good standing under the laws of the jurisdiction of its incorporation or formation with full power and authority to enter into the transactions contemplated by the Subscription Agreement; (b) (i) The officers or partners of the undersigned who, on behalf of the undersigned, have considered the purchase of the Securities and the advisers, if any, of the corporation or the partnership, as the case may be, in connection with such consideration are named below in this Subscription Agreement, and such officers and advisors or partners, if any, were duly authorized to act for the corporation or the partnership in reviewing such investment; (ii) The names and positions of the officers or partners, of the undersigned who, on its behalf, have reviewed the purchase of the Securities are as follows: ______________________________________________________ 15 ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ (iii) In evaluating the merits and risks of the purchase of the Securities, the corporation or the partnership, as the case may be, intends to rely upon the advice of, or will consult with, the following persons: ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ (c) The officers of the corporation or the partners of the partnership who, on its behalf, have considered the purchase of the Securities and the advisors, if any, of the corporation or the partnership who, in connection with such consideration, together have such knowledge and experience in financial and business matters that such offering(s), partner(s) and such advisor(s), if any, together are capable of evaluating the merits and risks of the purchase of Securities and of making an informed investment decision; (d) Together with any corporation or group of corporations with which it files a consolidated federal income tax return, the undersigned has reserves and/or net worth adequate to permit it to satisfy any tax or other liabilities arising from its personal liability with respect to the investment and the operation thereof; (e) The total assets of the corporation or the partnership are in excess of $---------------; (f) The corporation or the partnership has had, during each of the past two years, gross income from all sources of at least $_______________ and $___________________ respectively; (g) The undersigned expects the corporation or the partnership to have during the current and the next tax year, gross income from all sources of at least $______; and 16 (h) The undersigned knows of no pending or threatened litigation the outcome of which could adversely affect the answer to any question hereunder. (i) Indicate the following if a partnership Investor: (1) The date the partnership was formed and state of formation: ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ (2) The names of each partner in the partnership: ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ SECTION E. TRUST OFFEREES E1. General Information Legal Name:________________________________________________________________ State or Place of Formation:_______________________________________________ Date of Formation:_________________________________________________________ Federal I.D. Number:_____________________ Fiscal Year Ends:___________ Number of Beneficiaries:___________________________________________________ Principal Purpose:_________________________________________________________ Was the trust formed for the specific purpose of purchasing Units? ------ ------ Yes No E2. Business Address:__________________________________________________________ Telephone Number: ( )_____________________________________________________ Facsimile Number: ( )_____________________________________________________ Mailing Address:___________________________________________________________ 17 E3. Authorization:If the trust was established in connection with a deferred compensation plan, please attach a copy of the trust's organizational documents and a properly certified copy of the resolutions adopted by the trust's board of directors authorizing the trust to purchase Units and authorizing the trustee named below to execute on behalf of the trust all relevant documents necessary to subscribe for and purchase Units. In all cases, please attach a properly certified copy of the resolutions adopted by the trustees of the trust authorizing the trust to purchase Units and authorizing the trustee named below to execute on behalf of the trust all relevant documents necessary to subscribe for an purchase Units. Name of Trustee Authorized and Executing Subscription Agreement: ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ Telephone Number: ( )_____________________________________________________ Facsimile Number: ( )_____________________________________________________ Account Type and Number:___________________________________________________ Person Familiar with your Account:_________________________________________ SECTION F. QUALIFIED PENSION PLAN ("PLAN") OFFEREES F1. Please check one: _______________a. The Plan requires the investment of each beneficiary or participant to be held in a segregated account and the Plan allows each beneficiary or participant to make his own investment decisions and, the decision to purchase the Note(s) has been made by the beneficiary or the participant and such beneficiary or participant is an Accredited Investor (Please have each such beneficiary or participant execute a separate Subscription Agreement). OR _______________b. The investment decisions made for the Plan are made by a plan fiduciary, whether a bank, an insurance company, or a registered investment advisor. OR _______________c. The Plan has total assets exceeding $5,000,000. 18 F2. General Information Legal Name_________________________________________________________________ State or Place of Formation:_______________________________________________ Date of Formation:_________________________________________________________ Federal I.D. Number:______________ Fiscal Year Ends:_______________________ Number of Beneficiaries:___________________________________________________ Principal Purpose:_________________________________________________________ Business Address:__________________________________________________________ Telephone Number:( )____________________ Facsimile Number:( )____________________ Mailing Address:___________________________________________________________ F3. Authorization:If the investment decision is being made by a beneficiary or participant of a Plan, please attach applicable trust documents which permit each beneficiary or participant to make his own investment decisions. In all other cases, please attach a properly certified copy of the resolutions adopted by the trustees of the Plan trust authorizing the Plan to purchase Units and authorizing the fiduciary named below to execute on behalf of the Plan all relevant documents necessary to subscribe for and purchase Units. Name of Trustee Authorized and Executing Subscription Agreement: ___________________________________________________________________________ 19 REPRESENTATIONS, WARRANTIES, AND COVENANTS BY ALL INVESTORS By signing this Subscription Agreement, the undersigned hereby confirms the following statements and make the following covenants: (a) I have read the Memorandum and this Subscription Agreement and other accompanying documents of the Company. I understand and confirm that the Memorandum is confidential, may contain non public information and that I shall not use the information contained therein for any use in connection with the purchase or sale of securities of the Company except as a subscriber in the Offering. Any such use for any other purpose may subject the subscriber to civil or criminal liability under the securities laws. (b) I acknowledge that any delivery to me of the Memorandum relating to the Securities prior to the determination by the Company of my suitability as an investor shall not constitute an offer of Securities until such determination of suitability shall be made, and I agree that I shall promptly return the Memorandum and the other Offering Documents (as defined therein) to the Company upon request. (c) My answers to the foregoing questions are true and complete to the best of my information and belief and I will promptly notify the Company of any changes in the information I have provided. (d) I also understand and agree that, although the Company and the Placement Agent will use their respective best efforts to keep the information provided in answers to this Subscription Agreement strictly confidential, the Company and the Placement Agent or their respective counsel may present this Subscription Agreement and the information provided in answer to it to such parties as they may deem advisable if called upon to establish the availability under any federal or state securities laws of an exemption from registration of the private placement or if the contents thereof are relevant to any issue in any action, suit or proceeding to which the Company, the Placement Agent or their respective affiliates is a party, or by which they are or may be bound or as otherwise required by law or regulatory authority. Notwithstanding the foregoing, in compliance with the rules and regulations of the Internal Revenue Service: YOU AND EACH OTHER PARTY TO THE TRANSACTION (AND EACH AFFILIATE AND PERSON ACTING ON BEHALF OF ANY SUCH PARTY) DESCRIBED HEREIN AND IN THE MEMORANDUM AGREE THAT EACH PARTY (AND EACH EMPLOYEE, REPRESENTATIVE, AND OTHER AGENT OF SUCH PARTY) MAY DISCLOSE TO ANY AND ALL PERSONS, WITHOUT LIMITATION OF ANY KIND, THE TAX TREATMENT AND TAX STRUCTURE OF THE TRANSACTION AND ALL MATERIALS OF ANY KIND (INCLUDING OPINIONS OR OTHER TAX ANALYSES) THAT ARE PROVIDED TO SUCH PARTY OR SUCH PERSON RELATING TO SUCH TAX TREATMENT AND TAX STRUCTURE, EXCEPT TO THE EXTENT NECESSARY TO COMPLY WITH ANY APPLICABLE FEDERAL OR STATE SECURITIES LAWS. THIS AUTHORIZATION IS NOT INTENDED TO PERMIT DISCLOSURE OF ANY OTHER INFORMATION INCLUDING (WITHOUT LIMITATION) (I) ANY PORTION OF ANY MATERIALS TO THE EXTENT NOT RELATED TO THE TAX TREATMENT OR TAX STRUCTURE OF THE TRANSACTION, (II) THE IDENTITIES OF PARTICIPANTS OR POTENTIAL PARTICIPANTS IN THE TRANSACTION, (III) THE EXISTENCE OR STATUS OF ANY NEGOTIATIONS, (IV) ANY PRICING OR FINANCIAL INFORMATION (EXCEPT TO THE EXTENT SUCH PRICING OR FINANCIAL INFORMATION IS RELATED TO THE TAX TREATMENT OR TAX STRUCTURE OF THE TRANSACTION), OR (V) ANY OTHER TERM OR DETAIL NOT RELEVANT TO THE TAX TREATMENT OR THE TAX STRUCTURE OF THE TRANSACTION. 20 (e) I realize that this Subscription Agreement does not constitute an offer to sell or a solicitation of an offer to buy Securities or any other security of the Company but is merely a request for information. (f) I understand that the Securities are being offered without registration under the Securities Act in reliance upon the private offering exemption contained therein, and that such reliance is based in part on the information herein supplied. (g) The individual signing below on behalf of any entity hereby warrants and represents that he/she is authorized to execute this Subscription Agreement on behalf of such entity. (h) The undersigned is able to bear the economic risk of the investment and can afford a complete loss of such investment. (i) The Investor acknowledges and agrees that all subscription amounts will be placed in a non-interest bearing special account pending acceptance by the Company and the Placement Agent. The Offering is being made on a "best efforts all or none" basis as to the minimum offering amount ($250,000) and on a "best efforts" basis as to the additional offering amount ($1,750,000). An initial closing will be held as soon as practicable following receipt and acceptance of the minimum offering amount and thereafter from time to time. (j) In entering into this Agreement and in purchasing the Securities, the Investor further acknowledges that: (i) The Company has informed the Investor that the Securities have not been offered for sale by means of general advertising or solicitation. (ii) The Securities may not be resold by the Investor in the absence of a registration under the Act or exemption from registration. The Investor (i) is acquiring the Securities solely for the Investors own account for investment purposes solely and not with a view toward resale or distribution, either in whole or in part; (ii) has no contract, undertaking, agreement or other arrangement, in existence or contemplated, to sell, pledge, assign or otherwise transfer the Securities to any other person; and (iii) agrees not to sell or otherwise transfer the Investors Securities unless and until they are subsequently registered under the Securities Act and any applicable state securities laws or unless an exemption from any such registration is 21 available. In particular, the Investor is aware that the Securities will be "restricted securities", as such term is defined in Rule 144 promulgated under the Securities Act ("RULE 144"), and they may not be sold pursuant to Rule 144, unless the conditions thereof are met. (iii) The following legend (or similar language) shall be placed on the certificate(s) evidencing the Securities: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended ("Act"), and may not be offered or sold except (i) pursuant to an effective registration statement under the Act or (ii) upon the delivery by the Investor to the Company of an opinion of counsel, reasonably satisfactory to counsel to the Company, stating that an exemption from registration under such Act is available." (iv) The Company may at any time place a stop transfer order on its transfer books against the Securities. Such stop order will be removed, and further transfer of the Securities will be permitted upon an effective registration of the respective Securities, or the receipt by the Company of an opinion of counsel satisfactory to the Company that such further transfer may be effected pursuant to an applicable exemption from registration. (v) The purchase of the Securities involves risks which the Investor has evaluated, and the Investor is able to bear the economic risk of the purchase of such securities and the loss of its entire investment. (vi) The Investor shall be entitled to the registration rights as set forth in the Registration Rights Agreement appended as an Exhibit to the Memorandum. The undersigned has read the Registration Rights Agreement, understands the terms thereof and hereby appoints Meyers Associates, L.P. as its agent to execute the Registration Rights Agreement on behalf of the undersigned. 22 MISCELLANEOUS The Investor agrees to indemnify and hold harmless the Company, the officers, directors, employees, agents, counsel and affiliates of the Company, and each other person, if any, who controls the Company, within the meaning of Section 15 of the Act or Section 20 of the Securities and Exchange Act of 1934, as amended, against any and all losses, liabilities, claims, damages and all expenses reasonably incurred in investigating, preparing or defending against any litigation commenced or threatened or any claim whatsoever arising out of or based upon any false representation or warranty or breach or failure by the Investor to comply with any covenant or agreement made by the Investor herein or in any other document furnished by the Investor to any of the foregoing in connection with this transaction. The Investor hereby acknowledges and agrees, subject to any applicable state securities laws that the subscription and application hereunder are irrevocable, that the Investor is not entitled to cancel, terminate or revoke this Subscription Agreement and that this Subscription Agreement shall survive the death or disability of the Investor and shall be binding upon and inure to the benefit of the Investor and his heirs, executors, administrators, successors, legal representatives, and assigns. If the Investor is more than one person, the obligations of the Investor hereunder shall be joint and several, and the agreements, representations, warranties, and acknowledgments herein contained shall be deemed to be made by and be binding upon each such person and his heirs, executors, administrators, successors, legal representatives, and assigns This Agreement shall be governed, construed and interpreted by and under the laws of the State of New York. If any provision included in this Agreement proves to be invalid or unenforceable, it shall not affect the validity of the remaining provisions. This Agreement may be executed in several counterparts or by separate instruments and all of such counterparts and instruments shall constitute one agreement, binding on all of the parties hereto. CONFIDENTIAL INFORMATION We have provided to you certain information about the Company that may be non-public, confidential or proprietary in nature (the "CONFIDENTIAL INFORMATION"). You agree that the Confidential Information will be used solely in connection with your potential participation in the proposed Offering. You agree that you will keep the Confidential Information confidential except that you may disclose such Confidential Information to your directors, officers, employees, limited partners, affiliates and advisors who need to know the Confidential Information in connection with your potential participation in the Offering, and who are informed by you of the confidential nature of the Confidential Information and are required by you to treat the Confidential Information confidentially. 23 The term Confidential Information shall not include portions of the Confidential Information which (i) are or become generally available to the public, other than as a result of a disclosure by you, your directors, officers, employees, limited partners, affiliates or advisors, or (ii) become available to you on a non-confidential basis from a source other than the Company or its agents or advisors, and which source is not prohibited from disclosing such Confidential Information to you by a legal, contractual, or fiduciary obligation to the Company. Nothing contained herein shall be deemed to prevent the disclosure of any Confidential Information if, in the written opinion of your counsel, such disclosure is legally required to be made in a judicial, administrative or governmental proceeding; PROVIDED, HOWEVER, that in making such disclosure you will take all reasonable efforts to preserve the confidentiality of the Confidential Information. By signing this Subscription Agreement, you are expressly agreeing to the foregoing in connection with the treatment of Confidential Information. 24 I understand that I am purchasing the Units without being furnished any Offering literature or prospectus other than the Memorandum. In making my decision to invest in the Units I have relied on the information set forth in the Memorandum and upon no other representations or promises, written or verbal. Dated: _____________, 2004 FOR INDIVIDUALS __________________________________ (Print Name) __________________________________ (Signature) 25 The undersigned understands that it is purchasing the Units without being furnished any Offering literature or prospectus other than the Memorandum. In making its decision to invest in the Units, the undersigned has relied on the information set forth in the Memorandum and upon no other representations or promises, written or verbal. Dated:_____________________, 2004 FOR CORPORATIONS: ______________________________ Name of Company ______________________________ Executive Officer of Company ______________________________ Signature of Officer 26 The undersigned understands that it is purchasing the Units without being furnished any Offering literature or prospectus other than the Memorandum. In making its decision to invest in the Units, the undersigned has relied on the information set forth in the Memorandum and upon no other representations or promises, written or verbal. Dated:_____________________, 2004 FOR PARTNERSHIPS: _______________________________ Name of Partnership _______________________________ Name of Authorized Partner _______________________________ Signature of Authorized Partner 27 The undersigned understands that it is purchasing the Units without being furnished any Offering literature or prospectus other than the Memorandum. In making its decision to invest in the Units, the undersigned has relied on the information set forth in the Memorandum and upon no other representations or promises, written or verbal. Dated:_____________________, 2004 FOR TRUSTS: Name of Trust Name of Authorized Trustee ________________________________ Signature of Authorized Trustee 28 ACCEPTANCE OF SUBSCRIPTION BY THE COMPANY Universal Detection Technology hereby accepts the Subscription Agreement represented hereby as of the date stated below and agrees, subject to the terms and conditions hereof and on the basis of the representations and warranties made herein, to issue and sell to the Investor, upon Closing, the Securities as described in the Memorandum at a price per Unit as described in the Memorandum. Dated:________________, 2004 UNIVERSAL DETECTION TECHNOLOGY __________________________________ Name: Jacques Tizabi Title: Chief Executive Officer 29 EX-10 5 exhibit_10-10.txt NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND NEITHER MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS (I) PURSUANT TO REGISTRATION UNDER THE ACT OR (II) IN COMPLIANCE WITH AN EXEMPTION THEREFROM AND ACCOMPANIED, IF REQUESTED BY THE COMPANY, WITH AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH AN EXEMPTION THEREFROM. THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 3 OF THIS WARRANT Warrant No. A-____ Number of Shares: ________ (subject to adjustment) Date of Issuance: July 2, 2004 UNIVERSAL DETECTION TECHNOLOGY COMMON STOCK PURCHASE WARRANT Universal Detection Technology, a California corporation (the "COMPANY"), for value received, hereby certifies that [__________________], or [HIS/HER/ITS] registered assigns (the "REGISTERED HOLDER"), is entitled, subject to the terms and conditions set forth below, to purchase from the Company, in whole or in part, at any time and from time to time on or after the date of issuance and, unless earlier terminated pursuant to Section 1(d) below, on or before 5:00 p.m., Pacific Standard Time, on July 2, 2009, and shall expire thereafter (the "EXERCISE PERIOD"), [_________] shares of Common Stock of the Company (the "COMMON Stock"), at an exercise price of $0.50 per share. The shares purchasable upon exercise of this warrant ("WARRANT") and the exercise price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the "WARRANT SHARES" and the "EXERCISE PRICE," respectively. 1. EXERCISE. (a) This Warrant may be exercised by the Registered Holder, in whole or in part, by surrendering this Warrant, along with the purchase form appended hereto as EXHIBIT A duly executed and completed by the Registered Holder or by the Registered Holder's duly authorized attorney, at the principal office of the Company, or at such other office or agency as the Company may designate by notice in writing to the Registered Holder, accompanied by either cash or certified cashier's check payable to the Company (or wire transfer of immediately available funds), in lawful money of the United States, of the Exercise Price payable in respect of the number of Warrant Shares purchased upon such exercise (the "AGGREGATE EXERCISE PRICE"). (b) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been 1 surrendered to the Company as provided in subsection 1(a) above (the "EXERCISE DATE"). At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 1(c) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. (c) Within fifteen (15) days after the date of exercise of this Warrant, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Registered Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full Warrant Shares to which the Registered Holder shall be entitled upon such exercise; and (ii) a new Warrant representing the shares with respect to which this Warrant shall not have been exercised (unless this Warrant has been fully exercised or has expired); PROVIDED, HOWEVER, that the Company shall not be required to pay any tax that may be payable in respect of any transfer involving the issuance and delivery of any such certificate upon exercise in a name other than that of the Registered Holder and the Company shall not be required to issue or deliver certificates until the person or person requesting the issuance thereof shall have paid the Company the amount of tax or shall have established to the Company that such tax has been paid. Notwithstanding the foregoing, the Registered Holder shall be solely responsible for any income taxes payable and arising from the issuance or exercise of this Warrant, or any AD VALOREM property or intangible tax assessed against the Registered Holder. (d) Notwithstanding any other provision of this Warrant, the right to exercise this Warrant shall terminate prior to July 2, 2009, upon the sale of all or substantially all of the capital stock, assets or business of the Company, by merger, consolidation, sale of assets or otherwise in which the Registered Holder would be entitled to cash or securities traded on a national security exchange, the Nasdaq Stock Market, or an over-the-counter market in exchange for the Warrant Shares (other than a merger or consolidation in which all or substantially all of the individuals and entities who were beneficial owners of the Common Stock immediately prior to such transaction beneficially own, directly or indirectly, more than 50% of the outstanding securities entitled to vote generally in the election of directors of the resulting, surviving or acquiring corporation in such transaction). 2. ADJUSTMENTS. In order to prevent dilution of the rights granted under this Warrant and to grant the Registered Holder certain additional rights, the Exercise Price shall be subject to adjustment from time to time as provided in this Section 2 and the number of Warrant Shares shall be subject to adjustment from time to time as provided in this Section 2. (a) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the Company shall at any time after the date on which this Warrant was first issued (the "ORIGINAL ISSUE DATE") effect a subdivision (by any stock split or otherwise) of the outstanding Common Stock into a greater number of shares, the Exercise Price in effect immediately before that subdivision shall be proportionately decreased and the number of shares of Common Stock obtainable upon exercise of this Warrant shall be proportionately increased. Conversely, if the Company shall at any time or from time to time after the Original Issue Date combine (by reverse stock split or otherwise) the outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately before the combination shall be proportionately increased and the number of 2 shares of Common Stock obtainable upon exercise of this Warrant shall be proportionately decreased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. (b) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the event the Company at any time, or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Exercise Price then in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Exercise Price then in effect by a fraction: (i) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; and (ii) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; PROVIDED, HOWEVER, that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Exercise Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Exercise Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions. (c) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If at any time after the Original Issue Date while this Warrant remains outstanding and unexpired, the Common Stock issuable upon exercise of this Warrant is changed into the same or a different number of shares of any class or classes of stock, this Warrant will thereafter represent the right to acquire such number and kind of securities as would have been issuable as a result of exercise of this Warrant and the Exercise Price therefor shall be appropriately adjusted, all subject to further adjustment in this Section 2. (d) ADJUSTMENT FOR MERGERS OR REORGANIZATIONS, ETC. Any reorganization, recapitalization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets or other transaction involving the Company in which the Common Stock is converted into or exchanged for securities, cash or other property (other than a transaction covered by subsections 1(d), 2(a), or 2(b)) is referred to herein as an "ORGANIC CHANGE." Prior to the consummation of any such Organic Change, the Company shall make appropriate provision (in form and substance reasonably satisfactory to the Registered Holders of a majority of the Warrants then remaining outstanding) to ensure that the Registered Holder shall have the right to receive, in lieu of or in addition to (as the case may be) such shares of Common Stock immediately acquirable and receivable upon exercise of this Warrant, the kind and amount of securities, cash or other property as may be issued or payable with respect to or in exchange for 3 the number of shares of Common Stock immediately acquirable and receivable upon exercise of this Warrant had such Organic Change not taken place. In such case, appropriate adjustment (in form and substance reasonably satisfactory to the Registered Holders of a majority of the Warrants then remaining outstanding) shall be made with respect to the Registered Holder's rights and interests to ensure that the provisions of this Section 2 shall thereafter be applicable to the Warrants. (e) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of the Exercise Price pursuant to this Section 2, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Registered Holder a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property for which this Warrant shall be exercisable and the Exercise Price) and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of the Registered Holder, promptly furnish or cause to be furnished to the Registered Holder a certificate setting forth (i) the Exercise Price then in effect and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the exercise of this Warrant, and shall cause a copy of such certificate to be mailed (by first-class mail, postage prepaid) to the Registered Holder. 3. REQUIREMENTS FOR TRANSFER. (a) This Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Act or (ii) the Company first shall have been furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act and that the transferee is an "accredited investor" as the term is defined in Rule 501(a) of Regulation D. (b) Each certificate representing Warrant Shares shall bear a legend substantially in the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL SUCH SECURITIES ARE REGISTERED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO AN EXEMPTION THEREFROM OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS OBTAINED TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED." The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act. 4. NO IMPAIRMENT. The Company will not, by amendment of its charter or through reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or 4 any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. 5. NOTICES OF RECORD DATE, ETC. In the event: (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or (b) of any Organic Change; or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Registered Holders at least ten (10) days prior to the record date specified therein (or such shorter period approved by a majority of the Registered Holders) and at least ten (10) days prior to the effective date of such event specified in clause (b) or (c) hereof a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such Organic Change, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such Organic Change, dissolution, liquidation or winding-up; PROVIDED, HOWEVER, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. Nothing herein shall prohibit the Registered Holder from exercising this Warrant during the ten (10) day period commencing on the date of such notice. 6. RESERVATION OF STOCK. The Company covenants that for the duration of the Exercise Period, the Company will at all times reserve and keep available, from its authorized and unissued Common Stock solely for issuance and delivery upon the exercise of this Warrant and free of preemptive rights, such number of Warrant Shares and other securities, cash and/or property, as from time to time shall be issuable upon the exercise of this Warrant. The Company further covenants that it shall, from time to time, take all steps necessary to increase the authorized number of shares of its Common Stock if at any time the authorized number of shares of Common Stock remaining unissued is insufficient to permit the exercise of this Warrant. 7. ISSUANCE UPON EXERCISE. All shares of Common Stock issuable upon exercise of this Warrant will be duly and validly issued, fully paid and nonassessable and will be free of restrictions on transfer, other than restrictions on transfer under any agreement between the Holder and the Company and under applicable state and federal securities laws, and will be free 5 from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously or otherwise specified herein). The Company shall take all such actions as may be necessary to ensure that all such shares of Common Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic stock exchange upon which shares of Common Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Company upon each such issuance). 8. EXCHANGE OF WARRANTS. Upon the surrender by the Registered Holder, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 3 hereof, issue and deliver to or upon the order of such Holder, at the Company's expense, a new Warrant or Warrants of like tenor, in the name of the Registered Holder or as the Registered Holder (upon payment by the Registered Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock (or other securities, cash and/or property) then issuable upon exercise of this Warrant. 9. REPLACEMENT OF WARRANTS. Upon receipt of evidence reasonably satisfactory to the Company (an affidavit of a Registered Holder shall be satisfactory) of the ownership and loss, theft, destruction or mutilation of any certificate evidencing this Warrant and in the case of loss, theft or destruction, upon delivery of an unsecured indemnity agreement of the Registered Holder in form and amount reasonably satisfactory to the Company, or in the case of mutilation, upon surrender and cancellation of such certificate, the Company shall, at the Registered Holder's expense, execute and deliver in lieu of such certificate, a new certificate of like kind representing the same rights represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. 10. TRANSFERS, ETC. (a) The Company shall maintain a register at its principal executive office containing the name and address of the Registered Holder of this Warrant. The Registered Holder may change its or his address as shown on the warrant register by written notice to the Company requesting such change. (b) Subject to the provisions of Section 3 hereof, this Warrant and all rights hereunder are transferable, in whole or in part (but not for less than 50,000 shares at a time), upon surrender of this Warrant with a properly executed assignment (in the form of EXHIBIT B hereto) at the principal executive office of the Company. (c) Until any transfer of this Warrant is made in the warrant register, the Company may treat the Registered Holder as the absolute owner hereof for all purposes; PROVIDED, however, that if and when this Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. (d) The Company shall not close its books against the transfer of this Warrant or any share of Common Stock issued or issuable upon the exercise of this Warrant in any 6 manner which interferes with the timely exercise of this Warrant. The Company shall from time to time take all such action as may be necessary to ensure that the par value per share of the unissued Common Stock acquirable upon exercisable of this Warrant is at all times equal to or less than the Exercise Price then in effect. 11. MAILING OF NOTICES, ETC. Any notice, request, demand or other communication required or permitted to be given to a party pursuant to the provisions of this Agreement will be in writing and will be effective and deemed given under this Agreement on the earliest of: (a) the date of personal delivery, (b) the date of transmission by facsimile, with confirmed transmission and receipt, (c) two (2) days after deposit with a nationally-recognized courier or overnight service such as Federal Express, or (d) five (5) days after mailing via certified mail, return receipt requested. All notices not delivered personally or by facsimile will be sent with postage and other charges prepaid and properly addressed to the party to be notified at the address set forth for such party: If to a Registered Holder: [INSERT ADDRESS] Attn:_____________________________ If to the Company: Universal Detection Technology 9595 Wilshire Blvd., Suite 700 Beverly Hills, CA 90212 Phone: (310) 273-2661 Fax: (310) 273-2662 Attn: Jacques Tizabi With a copy to (which does not constitute notice): Akin Gump Strauss Hauer & Feld LLP 2029 Century Park East, 24th Floor Los Angeles, California 90067 Phone: (310) 229-1000 Fax: (310) 229-1001 Attn: Julie Kaufer, Esq. Any party hereto (and such party's permitted assigns) may change such party's address for receipt of future notices hereunder by giving written notice to the Company and the other parties hereto. 12. NO RIGHTS OR LIABILITIES AS STOCKHOLDER. Subject to the provisions of Sections 2 and 5 hereof, until the exercise of this Warrant, the Registered Holder shall not have or exercise any rights by virtue hereof as a stockholder of the Company (in its capacity as a Registered Holder), including, without limitation, the right to vote, to receive dividends and other 7 distributions or to receive notice of, or attend meetings of stockholders or any other proceedings of the Company. 13. AMENDMENT OR WAIVER. This Warrant is one of a series of Warrants issued by the Company, all dated the date hereof and of like tenor, except as to the number of shares of Common Stock subject thereto and the exercise price (collectively, the "COMPANY WARRANTS"). Any term of this Warrant may be amended or waived upon the written consent of the Company and the holders of Company Warrants representing at least a majority of the number of shares of Common Stock issued or issuable upon exercise of the Company Warrants then remaining outstanding; PROVIDED that any such amendment or waiver must apply to all Company Warrants then outstanding; and PROVIDED FURTHER that the number of Warrant Shares subject to this Warrant, the Exercise Price of this Warrant and the number of shares or class of stock obtainable upon exercise of this Warrant may not be amended, and the right to exercise this Warrant may not be waived, without the written consent of the holder of this Warrant (it being agreed that an amendment to or waiver under any of the provisions of Section 2 of this Warrant shall not be considered an amendment of the number of Warrant Shares or the Exercise Price). The Company shall promptly give notice to all holders of the Company Warrants of any amendments effected in accordance with this Section 13. No special consideration may be given to any holder as inducement to waive or amend this Warrant unless such consideration is given equally and ratably to all holders. 14. SUCCESSORS AND ASSIGNS. Subject to Section 1(d), this Warrant shall be binding upon and inure to the benefit of the Registered Holder and its assigns, and shall be binding upon any entity succeeding to the Company by consolidation, merger or acquisition of all or substantially all of the Company's assets. The Company may not assign this Warrant or any rights or obligations hereunder without the prior written consent of the Registered Holder. The Registered Holder may not assign this Warrant without the Company's prior written consent. 15. REMEDIES. In the event of a breach by the Company of any of its obligations under this Warrant, the Registered Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not provide adequate compensation for any losses incurred by reason of its breach of any of the provisions of this Warrant and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. 16. SECTION HEADINGS. The section headings in this Warrant are for the convenience of the parties and in no way alter, modify, amend, limit or restrict the contractual obligations of the parties. 17. COUNTERPARTS. This Warrant may be executed in two or more counterparts, each of which will be deemed an original but all of which together will constitute one and the same instrument. 18. SEVERABILITY. The provisions of this Warrant will be deemed severable and the invalidity or unenforceability of any provision hereof will not affect the validity or enforceability of the other provisions hereof; provided that if any provision of this Warrant, as applied to any 8 party or to any circumstance, is adjudged by a court not to be enforceable in accordance with its terms, the parties agree that the court making such determination will have the power to modify the provision in a manner consistent with its objectives such that it is enforceable, and/or to delete specific words or phrases, and in its reduced form, such provision will then be enforceable and will be enforced. 19. TITLES AND SUBTITLES. The article and section headings contained in this Warrant are inserted for convenience only and will not affect in any way the meaning or interpretation of this Warrant. 20. THIRD PARTIES. Nothing in this Warrant, express or implied, is intended to confer upon any person other than the parties hereto and their successors and assigns, any rights or remedies under or by reason of this Warrant. 21. GOVERNING LAW. This Warrant and the performance of the transactions and the obligations of the parties hereunder will be governed by and construed and enforced in accordance with the laws of the State of California, without giving effect to any choice of law principles. [SIGNATURE PAGE FOLLOWS] 9 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and attested by its duly authorized officers under its corporate seal and to be dated the Date of Issuance hereof. THE COMPANY: UNIVERSAL DETECTION TECHNOLOGY, a California corporation By: ------------------------------------------- Jacques Tizabi Chief Executive Officer 10 EXHIBIT A PURCHASE FORM To:_________________ Dated:____________ The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ___), hereby irrevocably elects to purchase _____ shares of the Common Stock covered by such Warrant. The undersigned herewith makes payment of the full exercise price for such shares at the price per share provided for in such Warrant, which is $________ in lawful money of the United States. [------------------------------] ------------------------------- Name: Title: Address: ----------------------- ----------------------- 11 EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED, ________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ____) with respect to the number of shares of Common Stock covered thereby set forth below, unto: NAME OF ASSIGNEE ADDRESS NO. OF SHARES Dated:_____________________ [---------------------------] ----------------------------- Name: Title: 12 EX-10 6 exhibit_10-11.txt NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND NEITHER MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS (I) PURSUANT TO REGISTRATION UNDER THE ACT OR (II) IN COMPLIANCE WITH AN EXEMPTION THEREFROM AND ACCOMPANIED, IF REQUESTED BY THE COMPANY, WITH AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH AN EXEMPTION THEREFROM. THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 3 OF THIS WARRANT Warrant No. B-____ Number of Shares: ________ (subject to adjustment) Date of Issuance: July 2, 2004 UNIVERSAL DETECTION TECHNOLOGY COMMON STOCK PURCHASE WARRANT Universal Detection Technology, a California corporation (the "COMPANY"), for value received, hereby certifies that [__________________], or [HIS/HER/ITS] registered assigns (the "REGISTERED HOLDER"), is entitled, subject to the terms and conditions set forth below, to purchase from the Company, in whole or in part, at any time and from time to time on or after the date of issuance and, unless earlier terminated pursuant to Section 1(d) below, on or before 5:00 p.m., Pacific Standard Time, on July 2, 2009, and shall expire thereafter (the "EXERCISE PERIOD"), [_________] shares of Common Stock of the Company (the "COMMON Stock"), at an exercise price of $0.70 per share. The shares purchasable upon exercise of this warrant ("WARRANT") and the exercise price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the "WARRANT SHARES" and the "EXERCISE PRICE," respectively. 1. EXERCISE. (a) This Warrant may be exercised by the Registered Holder, in whole or in part, by surrendering this Warrant, along with the purchase form appended hereto as EXHIBIT A duly executed and completed by the Registered Holder or by the Registered Holder's duly authorized attorney, at the principal office of the Company, or at such other office or agency as the Company may designate by notice in writing to the Registered Holder, accompanied by either cash or certified cashier's check payable to the Company (or wire transfer of immediately available funds), in lawful money of the United States, of the Exercise Price payable in respect of the number of Warrant Shares purchased upon such exercise (the "AGGREGATE EXERCISE PRICE"). (b) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been 1 surrendered to the Company as provided in subsection 1(a) above (the "EXERCISE DATE"). At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 1(c) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. (c) Within fifteen (15) days after the date of exercise of this Warrant, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Registered Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full Warrant Shares to which the Registered Holder shall be entitled upon such exercise; and (ii) a new Warrant representing the shares with respect to which this Warrant shall not have been exercised (unless this Warrant has been fully exercised or has expired); PROVIDED, HOWEVER, that the Company shall not be required to pay any tax that may be payable in respect of any transfer involving the issuance and delivery of any such certificate upon exercise in a name other than that of the Registered Holder and the Company shall not be required to issue or deliver certificates until the person or person requesting the issuance thereof shall have paid the Company the amount of tax or shall have established to the Company that such tax has been paid. Notwithstanding the foregoing, the Registered Holder shall be solely responsible for any income taxes payable and arising from the issuance or exercise of this Warrant, or any AD VALOREM property or intangible tax assessed against the Registered Holder. (d) Notwithstanding any other provision of this Warrant, the right to exercise this Warrant shall terminate prior to July 2, 2009, upon the sale of all or substantially all of the capital stock, assets or business of the Company, by merger, consolidation, sale of assets or otherwise in which the Registered Holder would be entitled to cash or securities traded on a national security exchange, the Nasdaq Stock Market, or an over-the-counter market in exchange for the Warrant Shares (other than a merger or consolidation in which all or substantially all of the individuals and entities who were beneficial owners of the Common Stock immediately prior to such transaction beneficially own, directly or indirectly, more than 50% of the outstanding securities entitled to vote generally in the election of directors of the resulting, surviving or acquiring corporation in such transaction). 2. ADJUSTMENTS. In order to prevent dilution of the rights granted under this Warrant and to grant the Registered Holder certain additional rights, the Exercise Price shall be subject to adjustment from time to time as provided in this Section 2 and the number of Warrant Shares shall be subject to adjustment from time to time as provided in this Section 2. (a) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the Company shall at any time after the date on which this Warrant was first issued (the "ORIGINAL ISSUE DATE") effect a subdivision (by any stock split or otherwise) of the outstanding Common Stock into a greater number of shares, the Exercise Price in effect immediately before that subdivision shall be proportionately decreased and the number of shares of Common Stock obtainable upon exercise of this Warrant shall be proportionately increased. Conversely, if the Company shall at any time or from time to time after the Original Issue Date combine (by reverse stock split or otherwise) the outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately before the combination shall be proportionately increased and the number of 2 shares of Common Stock obtainable upon exercise of this Warrant shall be proportionately decreased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. (b) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the event the Company at any time, or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Exercise Price then in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Exercise Price then in effect by a fraction: (i) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; and (ii) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; PROVIDED, HOWEVER, that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Exercise Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Exercise Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions. (c) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If at any time after the Original Issue Date while this Warrant remains outstanding and unexpired, the Common Stock issuable upon exercise of this Warrant is changed into the same or a different number of shares of any class or classes of stock, this Warrant will thereafter represent the right to acquire such number and kind of securities as would have been issuable as a result of exercise of this Warrant and the Exercise Price therefor shall be appropriately adjusted, all subject to further adjustment in this Section 2. (d) ADJUSTMENT FOR MERGERS OR REORGANIZATIONS, ETC. Any reorganization, recapitalization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets or other transaction involving the Company in which the Common Stock is converted into or exchanged for securities, cash or other property (other than a transaction covered by subsections 1(d), 2(a), or 2(b)) is referred to herein as an "ORGANIC CHANGE." Prior to the consummation of any such Organic Change, the Company shall make appropriate provision (in form and substance reasonably satisfactory to the Registered Holders of a majority of the Warrants then remaining outstanding) to ensure that the Registered Holder shall have the right to receive, in lieu of or in addition to (as the case may be) such shares of Common Stock immediately acquirable and receivable upon exercise of this Warrant, the kind and amount of securities, cash or other property as may be issued or payable with respect to or in exchange for 3 the number of shares of Common Stock immediately acquirable and receivable upon exercise of this Warrant had such Organic Change not taken place. In such case, appropriate adjustment (in form and substance reasonably satisfactory to the Registered Holders of a majority of the Warrants then remaining outstanding) shall be made with respect to the Registered Holder's rights and interests to ensure that the provisions of this Section 2 shall thereafter be applicable to the Warrants. (e) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of the Exercise Price pursuant to this Section 2, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Registered Holder a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property for which this Warrant shall be exercisable and the Exercise Price) and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of the Registered Holder, promptly furnish or cause to be furnished to the Registered Holder a certificate setting forth (i) the Exercise Price then in effect and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the exercise of this Warrant, and shall cause a copy of such certificate to be mailed (by first-class mail, postage prepaid) to the Registered Holder. 3. REQUIREMENTS FOR TRANSFER. (a) This Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Act or (ii) the Company first shall have been furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act and that the transferee is an "accredited investor" as the term is defined in Rule 501(a) of Regulation D. (b) Each certificate representing Warrant Shares shall bear a legend substantially in the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL SUCH SECURITIES ARE REGISTERED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO AN EXEMPTION THEREFROM OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS OBTAINED TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED." The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act. 4. NO IMPAIRMENT. The Company will not, by amendment of its charter or through reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or 4 any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. 5. NOTICES OF RECORD DATE, ETC. In the event: (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or (b) of any Organic Change; or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Registered Holders at least ten (10) days prior to the record date specified therein (or such shorter period approved by a majority of the Registered Holders) and at least ten (10) days prior to the effective date of such event specified in clause (b) or (c) hereof a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such Organic Change, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such Organic Change, dissolution, liquidation or winding-up; PROVIDED, HOWEVER, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. Nothing herein shall prohibit the Registered Holder from exercising this Warrant during the ten (10) day period commencing on the date of such notice. 6. RESERVATION OF STOCK. The Company covenants that for the duration of the Exercise Period, the Company will at all times reserve and keep available, from its authorized and unissued Common Stock solely for issuance and delivery upon the exercise of this Warrant and free of preemptive rights, such number of Warrant Shares and other securities, cash and/or property, as from time to time shall be issuable upon the exercise of this Warrant. The Company further covenants that it shall, from time to time, take all steps necessary to increase the authorized number of shares of its Common Stock if at any time the authorized number of shares of Common Stock remaining unissued is insufficient to permit the exercise of this Warrant. 7. ISSUANCE UPON EXERCISE. All shares of Common Stock issuable upon exercise of this Warrant will be duly and validly issued, fully paid and nonassessable and will be free 5 of restrictions on transfer, other than restrictions on transfer under any agreement between the Holder and the Company and under applicable state and federal securities laws, and will be free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously or otherwise specified herein). The Company shall take all such actions as may be necessary to ensure that all such shares of Common Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic stock exchange upon which shares of Common Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Company upon each such issuance). 8. EXCHANGE OF WARRANTS. Upon the surrender by the Registered Holder, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 3 hereof, issue and deliver to or upon the order of such Holder, at the Company's expense, a new Warrant or Warrants of like tenor, in the name of the Registered Holder or as the Registered Holder (upon payment by the Registered Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock (or other securities, cash and/or property) then issuable upon exercise of this Warrant. 9. REPLACEMENT OF WARRANTS. Upon receipt of evidence reasonably satisfactory to the Company (an affidavit of a Registered Holder shall be satisfactory) of the ownership and loss, theft, destruction or mutilation of any certificate evidencing this Warrant and in the case of loss, theft or destruction, upon delivery of an unsecured indemnity agreement of the Registered Holder in form and amount reasonably satisfactory to the Company, or in the case of mutilation, upon surrender and cancellation of such certificate, the Company shall, at the Registered Holder's expense, execute and deliver in lieu of such certificate, a new certificate of like kind representing the same rights represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. 10. TRANSFERS, ETC. (a) The Company shall maintain a register at its principal executive office containing the name and address of the Registered Holder of this Warrant. The Registered Holder may change its or his address as shown on the warrant register by written notice to the Company requesting such change. (b) Subject to the provisions of Section 3 hereof, this Warrant and all rights hereunder are transferable, in whole or in part (but not for less than 50,000 shares at a time), upon surrender of this Warrant with a properly executed assignment (in the form of EXHIBIT B hereto) at the principal executive office of the Company. (c) Until any transfer of this Warrant is made in the warrant register, the Company may treat the Registered Holder as the absolute owner hereof for all purposes; PROVIDED, HOWEVER, that if and when this Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. (d) The Company shall not close its books against the transfer of this Warrant or any share of Common Stock issued or issuable upon the exercise of this Warrant in any 6 manner which interferes with the timely exercise of this Warrant. The Company shall from time to time take all such action as may be necessary to ensure that the par value per share of the unissued Common Stock acquirable upon exercisable of this Warrant is at all times equal to or less than the Exercise Price then in effect. 11. MAILING OF NOTICES, ETC. Any notice, request, demand or other communication required or permitted to be given to a party pursuant to the provisions of this Agreement will be in writing and will be effective and deemed given under this Agreement on the earliest of: (a) the date of personal delivery, (b) the date of transmission by facsimile, with confirmed transmission and receipt, (c) two (2) days after deposit with a nationally-recognized courier or overnight service such as Federal Express, or (d) five (5) days after mailing via certified mail, return receipt requested. All notices not delivered personally or by facsimile will be sent with postage and other charges prepaid and properly addressed to the party to be notified at the address set forth for such party: If to a Registered Holder: [INSERT ADDRESS] Phone: _____________________________ Fax:_____________________________ Attn:_____________________________ If to the Company: Universal Detection Technology 9595 Wilshire Blvd., Suite 700 Beverly Hills, CA 90212 Phone: (310) 273-2661 Fax: (310) 273-2662 Attn: Jacques Tizabi With a copy to (which does not constitute notice): Akin Gump Strauss Hauer & Feld LLP 2029 Century Park East, 24th Floor Los Angeles, California 90067 Phone: (310) 229-1000 Fax: (310) 229-1001 Attn: Julie Kaufer, Esq. Any party hereto (and such party's permitted assigns) may change such party's address for receipt of future notices hereunder by giving written notice to the Company and the other parties hereto. 12. NO RIGHTS OR LIABILITIES AS STOCKHOLDER. Subject to the provisions of Sections 2 and 5 hereof, until the exercise of this Warrant, the Registered Holder shall not have or exercise 7 any rights by virtue hereof as a stockholder of the Company (in its capacity as a Registered Holder), including, without limitation, the right to vote, to receive dividends and other distributions or to receive notice of, or attend meetings of stockholders or any other proceedings of the Company. 13. AMENDMENT OR WAIVER. This Warrant is one of a series of Warrants issued by the Company, all dated the date hereof and of like tenor, except as to the number of shares of Common Stock subject thereto and the exercise price (collectively, the "COMPANY WARRANTS"). Any term of this Warrant may be amended or waived upon the written consent of the Company and the holders of Company Warrants representing at least a majority of the number of shares of Common Stock issued or issuable upon exercise of the Company Warrants then remaining outstanding; PROVIDED that any such amendment or waiver must apply to all Company Warrants then outstanding; and PROVIDED FURTHER that the number of Warrant Shares subject to this Warrant, the Exercise Price of this Warrant and the number of shares or class of stock obtainable upon exercise of this Warrant may not be amended, and the right to exercise this Warrant may not be waived, without the written consent of the holder of this Warrant (it being agreed that an amendment to or waiver under any of the provisions of Section 2 of this Warrant shall not be considered an amendment of the number of Warrant Shares or the Exercise Price). The Company shall promptly give notice to all holders of the Company Warrants of any amendments effected in accordance with this Section 13. No special consideration may be given to any holder as inducement to waive or amend this Warrant unless such consideration is given equally and ratably to all holders. 14. SUCCESSORS AND ASSIGNS. Subject to Section 1(d), this Warrant shall be binding upon and inure to the benefit of the Registered Holder and its assigns, and shall be binding upon any entity succeeding to the Company by consolidation, merger or acquisition of all or substantially all of the Company's assets. The Company may not assign this Warrant or any rights or obligations hereunder without the prior written consent of the Registered Holder. The Registered Holder may not assign this Warrant without the Company's prior written consent. 15. REMEDIES. In the event of a breach by the Company of any of its obligations under this Warrant, the Registered Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not provide adequate compensation for any losses incurred by reason of its breach of any of the provisions of this Warrant and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. 16. SECTION HEADINGS. The section headings in this Warrant are for the convenience of the parties and in no way alter, modify, amend, limit or restrict the contractual obligations of the parties. 17. COUNTERPARTS. This Warrant may be executed in two or more counterparts, each of which will be deemed an original but all of which together will constitute one and the same instrument. 8 18. SEVERABILITY. The provisions of this Warrant will be deemed severable and the invalidity or unenforceability of any provision hereof will not affect the validity or enforceability of the other provisions hereof; provided that if any provision of this Warrant, as applied to any party or to any circumstance, is adjudged by a court not to be enforceable in accordance with its terms, the parties agree that the court making such determination will have the power to modify the provision in a manner consistent with its objectives such that it is enforceable, and/or to delete specific words or phrases, and in its reduced form, such provision will then be enforceable and will be enforced. 19. TITLES AND SUBTITLES. The article and section headings contained in this Warrant are inserted for convenience only and will not affect in any way the meaning or interpretation of this Warrant. 20. THIRD PARTIES. Nothing in this Warrant, express or implied, is intended to confer upon any person other than the parties hereto and their successors and assigns, any rights or remedies under or by reason of this Warrant. 21. GOVERNING LAW. This Warrant and the performance of the transactions and the obligations of the parties hereunder will be governed by and construed and enforced in accordance with the laws of the State of California, without giving effect to any choice of law principles. [SIGNATURE PAGE FOLLOWS] 9 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and attested by its duly authorized officers under its corporate seal and to be dated the Date of Issuance hereof. THE COMPANY: UNIVERSAL DETECTION TECHNOLOGY, a California corporation By: ------------------------------------------- Jacques Tizabi Chief Executive Officer 10 EXHIBIT A PURCHASE FORM To:_________________ Dated:____________ The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ___), hereby irrevocably elects to purchase _____ shares of the Common Stock covered by such Warrant. The undersigned herewith makes payment of the full exercise price for such shares at the price per share provided for in such Warrant, which is $________ in lawful money of the United States. [------------------------------] ------------------------------- Name: Title: Address: ----------------------- ----------------------- 11 EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED, ________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ____) with respect to the number of shares of Common Stock covered thereby set forth below, unto: NAME OF ASSIGNEE ADDRESS NO. OF SHARES Dated:_____________________ [---------------------------] ----------------------------- Name: Title: EX-10 7 exhibit_10-12.txt REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of July 2, 2004, is entered into by and between Universal Detection Technology, a California corporation (the "COMPANY"), and Meyers Associates, L.P., as agent for the purchasers whose name appears on EXHIBIT A hereto (each, a "PURCHASER" and collectively, the "PURCHASERS"). WHEREAS: A. In connection with the Subscription Agreement and Investor Questionnaires by and among the parties hereto (the "SUBSCRIPTION AGREEMENT") and the Placement Agency Agreement, by and between the Company and Meyers Associates, L.P. (collectively, the "TRANSACTION DOCUMENTS"), the Company has agreed, upon the terms and subject to the conditions of the Transaction Documents, to issue and sell to the Purchasers, Units consisting of an aggregate of up to (i) 6,000,000 shares (the "COMMON SHARES") of the Company's Common Stock (the "COMMON STOCK"), and (ii) warrants (the "WARRANTS") to purchase up to 6,000,000 shares of Common Stock (the "WARRANT SHARES"), and issue to the Agent warrants (the "AGENT WARRANTS") to purchase 3,600,000 shares of Common Stock (the "AGENT SHARES"); and B. To induce the Purchasers to execute and deliver the Subscription Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "1933 ACT"), and applicable state securities laws. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each of the Purchasers hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: a. "AGENT" means Meyers Associates, L.P., which shall serve as agent on behalf of the Purchasers for the purposes of this Agreement. b. "BUSINESS DAY" means any day other than Saturday, Sunday or any other day on which commercial banks in the city of Los Angeles are authorized or required by law to remain closed. c. "INVESTOR" means a Purchaser, any transferee or assignee thereof to whom a Purchaser assigns its rights under this Agreement and who agrees to become bound by the provisions of this Agreement in accordance with Section 9 and any transferee or assignee thereof to whom a transferee or assignee assigns its rights under this Agreement and who agrees to become bound by the provisions of this Agreement in accordance with Section 9. 1 d. "PERSON" means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and governmental or any department or agency thereof. e. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing one or more Registration Statements (as defined below) in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous or delayed basis ("RULE 415"), and the declaration or ordering of effectiveness of such Registration Statement(s) by the United States Securities and Exchange Commission (the "SEC"). f. "REGISTRABLE SECURITIES" means (i) the Common Shares, (ii) the Warrant Shares issued or issuable upon exercise of the Warrants, (iii) the Agent Shares issued or exercisable upon exercise of the Agent Warrants, and (iii) any shares of capital stock issued or issuable with respect to the Common Shares, the Warrant Shares or the Warrants as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise, without regard to any limitations on exercises of Warrants. g. "REGISTRATION STATEMENT" means a registration statement or registration statements of the Company filed under the 1933 Act covering the Registrable Securities. The location of defined terms in this Agreement is set forth on the Index of Terms attached hereto. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Securities Purchase Agreement. 2. REGISTRATION. a. MANDATORY REGISTRATION. The Company shall prepare, and, as soon as practicable but in no event later than 30 days after the final Closing Date (as defined in the Securities Purchase Agreement) (the "FILING DEADLINE"), file with the SEC the Registration Statement on Form SB-2 covering the resale of all of the Registrable Securities. The Registration Statement prepared pursuant hereto shall register for resale at least 15,600,000 shares of Common Stock. The Company shall use its commercially reasonable efforts to have the Initial Registration Statement declared effective by the SEC as soon as practicable. b. LEGAL COUNSEL. Subject to Section 5 hereof, the Purchasers holding at least a majority of the Registrable Securities shall have the right to select one legal counsel to review and oversee any offering pursuant to this Section 2 ("LEGAL COUNSEL"), which shall be Goldstein Digioia, LLP or such other counsel as thereafter designated by the holders of at least a majority of the Registrable Securities. The Company and Legal Counsel shall reasonably cooperate with each other in performing the Company's obligations under this Agreement. c. EFFECT OF FAILURE TO FILE REGISTRATION STATEMENT. If the Registration Statement covering the Registrable Securities required to be filed by the Company pursuant to this Agreement is not filed with the SEC by the Filing Deadline, then the Company will make payments to the Investors equal to a two-percent (2%) per month, pro-rated daily, penalty on the Purchase Price payable through the issuance by the Company to each Investor of additional 2 shares of Common Stock and an additional three (3%) percent penalty, pro-rated daily, for each 90 days period thereafter. For purposes of determining the number of shares of Common Stock which may be payable pursuant to this Section 2(c), the value per share of Common Stock shall be equal to the price of the Units in the Offering. 3. RELATED OBLIGATIONS. At such time as the Company is obligated to file a Registration Statement with the SEC pursuant to Section 2(a), the Company will use its commercially reasonable efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof and, pursuant thereto, the Company shall have the following obligations: a. The Company shall promptly prepare and file with the SEC a Registration Statement with respect to the Registrable Securities (but in no event later than the applicable Filing Deadline) and use its commercially reasonable efforts to cause such Registration Statement relating to the Registrable Securities to become effective as soon as practicable after such filing. The Company shall keep each Registration Statement effective pursuant to Rule 415 at all times until the earlier of (i) the date as of which the Investors may sell all of the Registrable Securities covered by such Registration Statement pursuant to Rule 144 (or successor thereto) promulgated under the 1933 Act, (ii) two years from the effective date of a Registration Statement, or (iii) the date on which the Investors shall have sold all the Registrable Securities covered by such Registration Statement (the "REGISTRATION PERIOD"), which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading. The term "commercially reasonable efforts" shall mean, among other things, that the Company shall (i) reply to all comments received from the SEC within 15 business days, and (ii) submit to the SEC, within three (3) Business Days after the Company learns that no review of a particular Registration Statement will be made by the staff of the SEC or that the staff has no further comments on the Registration Statement, as the case may be, and the approval of Legal Counsel pursuant to Section 3(c), a request for acceleration of effectiveness of such Registration Statement to a time and date not later than 48 hours after the submission of such request. b. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep such Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such Registration Statement. In the case of amendments and supplements to a Registration Statement which are required to be filed pursuant to this Agreement (including pursuant to this Section 3(b)) by reason of the Company filing a report on Form 10-KSB, Form 10-QSB or Form 8-K or any analogous report under the Securities Exchange Act of 1934, as amended (the "1934 ACT"), the Company shall 3 have incorporated such report by reference into the Registration Statement, if applicable, or shall file such amendments or supplements with the SEC on the same day on which the 1934 Act report is filed which created the requirement for the Company to amend or supplement the Registration Statement. c. The Company shall (A) permit Legal Counsel to review and comment upon (i) the Registration Statement at least two (2) Business Days prior to its filing with the SEC and (ii) all other Registration Statements and all amendments and supplements to all Registration Statements (except for Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB, and Current Reports on Form 8-K and any similar or successor reports) within a reasonable number of days prior to their filing with the SEC, and (B) not file any Registration Statement or amendment or supplement thereto in a form to which Legal Counsel reasonably objects. The Company shall not submit a request for acceleration of the effectiveness of a Registration Statement or any amendment or supplement thereto without the prior approval of Legal Counsel, which consent shall not be unreasonably withheld. The Company shall furnish to Legal Counsel, without charge, (i) copies of any correspondence from the SEC or the staff of the SEC to the Company or its representatives relating to any Registration Statement, (ii) promptly after the same is prepared and filed with the SEC, one copy of any Registration Statement and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference, if requested by an Investor, and all exhibits and (iii) upon the effectiveness of any Registration Statement, one copy of the prospectus included in such Registration Statement and all amendments and supplements thereto. The Company shall reasonably cooperate with Legal Counsel in performing the Company's obligations pursuant to this Section 3. d. The Company shall furnish to each Investor whose Registrable Securities are included in any Registration Statement, without charge, (i) promptly after the same is prepared and filed with the SEC, at least one copy of such Registration Statement and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference, if requested by an Investor, all exhibits and each preliminary prospectus, (ii) upon the effectiveness of any Registration Statement, two (2) copies of the prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of copies as such Investor may reasonably request) and (iii) such other documents, including copies of any preliminary or final prospectus, as such Investor may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities owned by such Investor. e. The Company shall use its commercially reasonable efforts to (i) register and qualify, unless an exemption from registration and qualification applies, the resale by Investors of the Registrable Securities covered by a Registration Statement under such other securities or "blue sky" laws of all applicable jurisdictions in the United States, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; PROVIDED, HOWEVER, that the Company 4 shall not be required in connection therewith or as a condition thereto to (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(e), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify Legal Counsel and each Investor who holds Registrable Securities of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or "blue sky" laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threatening of any proceeding for such purpose. f. The Company shall notify Legal Counsel and each Investor in writing, including via facsimile or e-mail followed by overnight courier, of the happening of any event, as promptly as practicable after becoming aware of such event, as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission 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 (provided that in no event shall such notice contain any material, nonpublic information), and, subject to Section 3(o), promptly prepare a supplement or amendment to such Registration Statement to correct such untrue statement or omission, and deliver two (2) copies of such supplement or amendment to Legal Counsel and each Investor (or such other number of copies as Legal Counsel or such Investor may reasonably request). The Company shall also promptly notify Legal Counsel and each Investor in writing, including via facsimile or e-mail followed by overnight courier, (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to Legal Counsel and each Investor by facsimile or e-mail on the same day of such effectiveness and by overnight mail), (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, and (iii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate. g. The Company shall use its commercially reasonable efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify Legal Counsel and each Investor who holds Registrable Securities being sold of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. h. The Company shall make available for inspection by (i) any Investor, (ii) Legal Counsel and (iii) one firm of accountants or other agents retained by the Investors (collectively, the "INSPECTORS"), all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the "RECORDS"), as shall be reasonably deemed necessary by each Inspector in order to enable it to exercise its due diligence responsibility, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request for the purpose of such due diligence; PROVIDED, HOWEVER, that each Inspector shall agree to hold in strict confidence and shall not make any disclosure (except to an Investor) or use of any Record or other information which the 5 Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the 1933 Act, (b) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement of which the Inspector has knowledge. Each Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. Nothing herein (or in any other confidentiality agreement between the Company and any Investor) shall be deemed to limit the Investors' ability to sell Registrable Securities in a manner which is otherwise consistent with applicable laws and regulations. i. The Company shall hold in confidence and not make any disclosure of information concerning an Investor provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to such Investor and allow such Investor, at the Investor's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information. j. The Company shall cooperate with the Investors who hold Registrable Securities being offered and, to the extent applicable, facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the Investors may reasonably request and registered in such names as the Investors may request. k. If requested by an Investor, the Company shall (i) as soon as practicable incorporate in a prospectus supplement or post-effective amendment such information as an Investor reasonably requests to be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being offered or sold, the purchase price being paid therefor and any other terms of the offering of the Registrable Securities to be sold in such offering; and (ii) as soon as practicable make all required filings of such prospectus supplement or post-effective amendment after being notified of the matters to be incorporated in such prospectus supplement or post-effective amendment. l. The Company shall use its commercially reasonable efforts to cause the Registrable Securities covered by the Registration Statement to be registered with or 6 approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities. m. The Company shall otherwise use its commercially reasonable efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder. n. Within two (2) Business Days after a Registration Statement which covers Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) confirmation that such Registration Statement has been declared effective by the SEC in the form attached hereto as EXHIBIT A. o. Notwithstanding anything to the contrary herein, at any time after the Registration Statement has been declared effective by the SEC, the Company may delay the disclosure of material non-public information concerning the Company, the disclosure of which at the time is not, in the good faith opinion of the Board of Directors of the Company and its counsel, in the best interest of the Company and, in the opinion of counsel to the Company, otherwise required (a "GRACE PERIOD"); PROVIDED, that the Company shall promptly (i) notify the Investors in writing of the existence of material non-public information giving rise to a Grace Period (provided that in each notice the Company will not disclose the content of such material non-public information to the Investors) and the date on which the Grace Period will begin, and (ii) notify the Investors in writing of the date on which the Grace Period ends; and, PROVIDED FURTHER, that no Grace Period shall exceed 30 consecutive days and during any 365 day period such Grace Periods shall not exceed an aggregate of 60 days and the first day of any Grace Period must be at least 2 trading days after the last day of any prior Grace Period (an "ALLOWABLE GRACE PERIOD"). For purposes of determining the length of a Grace Period above, the Grace Period shall begin on and include the date the holders receive the notice referred to in clause (i) and shall end on and include the later of the date the holders receive the notice referred to in clause (ii) and the date referred to in such notice. The provisions of Section 3(g) hereof shall not be applicable during the period of any Allowable Grace Period. Upon expiration of the Grace Period, the Company shall again be bound by the first sentence of Section 3(f) with respect to the information giving rise thereto unless such material non-public information is no longer applicable. Notwithstanding anything to the contrary, the Company shall cause its transfer agent to deliver unlegended shares of Common Stock to a transferee of an Investor in accordance with the terms of the Securities Purchase Agreement in connection with any sale of Registrable Securities with respect to which an Investor has entered into a contract for sale, and delivered a copy of the prospectus included as part of the applicable Registration Statement, prior to the Investor's receipt of the notice of a Grace Period and for which the Investor has not yet settled. 4. OBLIGATIONS OF THE INVESTORS. a. At least two (2) Business Days prior to the first anticipated filing date of a Registration Statement, the Company shall notify each Investor in writing of the information the Company requires from each such Investor if such Investor elects to have any of such Investor's Registrable Securities included in such Registration Statement. It shall be a condition 7 precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it, as shall be reasonably required to effect and maintain the effectiveness of the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. b. Each Investor, by such Investor's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of any Registration Statement hereunder, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from such Registration Statement. c. Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(g) or the first sentence of 3(f), such Investor will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(g) or the first sentence of 3(f) or receipt of notice that no supplement or amendment is required. Notwithstanding anything to the contrary, the Company shall cause its transfer agent to deliver unlegended shares of Common Stock to a transferee of an Investor in accordance with the terms of the Securities Purchase Agreement in connection with any sale of Registrable Securities with respect to which an Investor has entered into a contract for sale prior to the Investor's receipt of a notice from the Company of the happening of any event of the kind described in Section 3(g) or the first sentence of 3(f) and for which the Investor has not yet settled. 5. EXPENSES OF REGISTRATION. All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees, and fees and disbursements of counsel for the Company shall be paid by the Company. 6. INDEMNIFICATION. In the event any Registrable Securities are included in a Registration Statement under this Agreement: a. To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend each Investor, the directors, officers, partners, employees, agents, representatives of, and each Person, if any, who controls any Investor within the meaning of the 1933 Act or the 1934 Act (each, an "INDEMNIFIED PERSON"), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, reasonable attorneys' fees, amounts paid in settlement or expenses, joint or several, (collectively, "CLAIMS") incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, 8 investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto ("INDEMNIFIED DAMAGES"), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other "blue sky" laws of any jurisdiction in which Registrable Securities are offered ("BLUE SKY FILING"), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement or (iv) any material violation of this Agreement (the matters in the foregoing clauses (i) through (iv) being, collectively, "VIOLATIONS"). Subject to Section 6(c), the Company shall reimburse the Indemnified Persons, promptly as such expenses are incurred and are due and payable, for any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a Claim by an Indemnified Person arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by such Indemnified Person for such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 3(d); (ii) with respect to any preliminary prospectus, shall not inure to the benefit of any such person from whom the person asserting any such Claim purchased the Registrable Securities that are the subject thereof (or to the benefit of any person controlling such person) if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected in the prospectus, as then amended or supplemented, if such prospectus was timely made available by the Company pursuant to Section 3(d), and the Indemnified Person was promptly advised in writing not to use the incorrect prospectus prior to the use giving rise to a Violation and such Indemnified Person, notwithstanding such advice, used it or failed to deliver the correct prospectus as required by the 1933 Act and such correct prospectus was timely made available pursuant to Section 3(d); (iii) shall not be available to the extent such Claim is based on a failure of the Investor to deliver or to cause to be delivered the prospectus made available by the Company, including a corrected prospectus, if such prospectus or corrected prospectus was timely made available by the Company pursuant to Section 3(d); and (iv) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld or delayed. Such indemnity shall remain in full force and effect regardless of any 9 investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. b. In connection with any Registration Statement in which an Investor is participating, each such Investor agrees to severally and not jointly indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act (each, an "INDEMNIFIED PARTY"), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or are based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Investor expressly for use in connection with such Registration Statement; and, subject to Section 6(c), such Investor will reimburse any legal or other expenses reasonably incurred by an Indemnified Party in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor, which consent shall not be unreasonably withheld or delayed; provided, further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented. c. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; PROVIDED, HOWEVER, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses of not more than one counsel for such Indemnified Person or Indemnified Party to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. In the case of an Indemnified Person, legal counsel referred to in the immediately preceding sentence shall be selected by the Investors 10 holding at least a majority in interest of the Registrable Securities included in the Registration Statement to which the Claim relates. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or Claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or Claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its prior written consent, PROVIDED, HOWEVER, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the prior written consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such Claim or litigation. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. d. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred. e. The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law. 7. CONTRIBUTION. To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; PROVIDED, HOWEVER, that: (i) no person involved in the sale of Registrable Securities which person is guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) in connection with such sale shall be entitled to contribution from any person involved in such sale of Registrable Securities who was not guilty of fraudulent misrepresentation; and (ii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities pursuant to such Registration Statement. 11 8. REPORTS UNDER THE 1934 ACT. With a view to making available to the Investors the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration ("RULE 144"), the Company agrees to: a. make and keep public information available, as those terms are understood and defined in Rule 144; b. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit the Company's obligations under Section 4(c) of the Securities Purchase Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and c. furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company, if true, that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration. 9. ASSIGNMENT OF REGISTRATION RIGHTS. The rights under this Agreement shall be automatically assignable by the Investors to any transferee of Registrable Securities if: (i) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment; (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee, and (b) the securities with respect to which such registration rights are being transferred or assigned; (iii) immediately following such transfer or assignment the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act and applicable state securities laws; (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this sentence the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein; and (v) such transfer shall have been made in accordance with the applicable requirements of the Securities Purchase Agreement and Warrants. 10. AMENDMENT OF REGISTRATION RIGHTS. Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who then hold at least a majority of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Company. No such amendment shall be effective to the extent that it applies to less than all of the holders of the Registrable Securities. No consideration shall be offered or paid to any Person to amend or consent to a waiver or 12 modification of any provision of any of this Agreement unless the same consideration also is offered to all of the parties to this Agreement. 11. MISCELLANEOUS. a. A Person is deemed to be a holder of Registrable Securities whenever such Person owns or is deemed to own of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the such record owner of such Registrable Securities. b. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one Business Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Universal Detection Technology 9595 Wilshire Blvd., Suite 700 Beverly Hills, California 90212 Telephone: (310) 273-2661 Facsimile: (310) 273-2662 Attention: Jacques Tizabi, CEO With a copy to: Akin Gump Strauss Hauer & Feld LLP 2029 Century Park East, 24th Floor Los Angeles, California 90067 Telephone: (310) 229-1000 Facsimile: (310) 229-1001 Attention: Julie M. Kaufer, Esq. If to Legal Counsel: Goldstein & Digioia, LLP 45 Broadway, 11th Floor New York, New York 10006 Telephone: (212) 599-3322 Facsimile: (212) 557-0295 Attention: Brian Daughney, Esq. 13 If to Agent: Meyers Associates, L.P. 45 Broadway, 2nd Floor New York, New York 10006 Telephone: (212) 742-4200 Facsimile: (212) 557-4201 Attention: President If to a Purchaser, to its address and facsimile number set forth on the Schedule of Purchasers attached hereto, with copies to such Purchaser's representatives as set forth on the Schedule of Purchasers, or to such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party five (5) days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a courier or overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. c. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. d. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of California, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of California or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of California. Each party hereby irrevocably submits to the non-exclusive jurisdiction of the state and federal courts sitting in New York, New York, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY. 14 e. This Agreement and the Securities Purchase Agreement constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement and the Securities Purchase Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. f. Subject to the requirements of Section 9, this Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of each of the parties hereto. g. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. h. This Agreement may be executed in identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. i. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. j. All consents and other determinations required to be made by the Investors pursuant to this Agreement shall be made, unless otherwise specified in this Agreement, by Investors holding at least a majority of the Registrable Securities, determined as if all of the Warrants then outstanding have been exercised for Registrable Securities without regard to any limitations on exercises of the Warrants. k. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party. l. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person. * * * * * * 15 IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be duly executed as of day and year first above written. COMPANY: AGENT: UNIVERSAL DETECTION TECHNOLOGY MEYERS ASSOCIATES LP AS AGENTS FOR THE PURCHASERS By: By: ----------------------------------- --------------------------------- Name: Jacques Tizabi Name: Title: Chief Executive Officer Title: 16 SCHEDULE OF PURCHASERS INVESTOR ADDRESS INVESTOR'S REPRESENTATIVE'S INVESTOR AND FACSIMILE NUMBER ADDRESS AND FACSIMILE NUMBER 2 EXHIBIT A FORM OF NOTICE OF EFFECTIVENESS OF REGISTRATION STATEMENT OTR Stock Transfer 317 SW Alder, Suite 1120 Portland, OR 97204 Attention: Debra Adams (Re: UNIVERSAL DETECTION TECHNOLOGY) Ladies and Gentlemen: We are counsel to Universal Detection Technology, a California corporation (the "COMPANY"), and have represented the Company in connection with that certain Securities Purchase Agreement (the "PURCHASE AGREEMENT") entered into by and among the Company and the Purchasers named therein (collectively, the "HOLDERS") pursuant to which the Company issued to the Holders shares of its Common Stock, (the "COMMON SHARES") and warrants exercisable for shares of Company Common Stock (the "WARRANTS"). Pursuant to the Purchase Agreement, the Company also has entered into a Registration Rights Agreement with the Holders (the "REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company agreed, among other things, to register the Registrable Securities (as defined in the Registration Rights Agreement), including the shares of Common Stock issuable upon exercise of the Warrants under the Securities Act of 1933, as amended (the "1933 ACT"). In connection with the Company's obligations under the Registration Rights Agreement, on ____________ ___, 200_, the Company filed a Registration Statement on Form SB-2 (File No. 333-_____________) (the "REGISTRATION STATEMENT") with the Securities and Exchange Commission (the "SEC") relating to the Registrable Securities which names each of the Holders as a selling stockholder thereunder. In connection with the foregoing, we advise you that a member of the SEC's staff has advised us by telephone that the SEC has entered an order declaring the Registration Statement effective under the 1933 Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after telephonic inquiry of a member of the SEC's staff, that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC and the Registrable Securities are available for resale under the 1933 Act pursuant to the Registration Statement. Very truly yours, [ISSUER'S COUNSEL] By:_____________________ CC: [LIST NAMES OF HOLDERS] 1 INDEX OF TERMS PAGE 1933 Act.....................................................................1 1934 Act.....................................................................4 Agreement....................................................................1 Allowable Grace Period......................................................10 Blue Sky Filing.............................................................11 Business Day.................................................................1 Purchaser....................................................................1 Claims......................................................................11 Common Stock.................................................................1 Company......................................................................1 Filing Deadline..............................................................2 Grace Period.................................................................9 Indemnified Damages.........................................................11 Indemnified Party...........................................................12 Indemnified Person..........................................................11 Inspectors...................................................................7 Investor.....................................................................1 Legal Counsel................................................................3 Person.......................................................................2 Records......................................................................7 Register.....................................................................2 Registrable Securities.......................................................2 Registration Period..........................................................5 Registration Statement.......................................................2 Rule 144....................................................................14 Rule 415.....................................................................2 SEC..........................................................................2 Securities Purchase Agreement................................................1 Violations..................................................................11 Warrant Shares...............................................................1 Warrants.....................................................................1 1 EX-23 8 exhibit_23-2.txt AJ. ROBBINS, P.C. CERTIFIED PUBLIC ACCOUNTANTS 216 SIXTEENTH STREET SUITE 600 DENVER, COLORADO 80202 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the inclusion in this Amendment to the Registration Statement on Form SB-2 of Universal Detection Technology of our report dated February 4, 2004 and July 27, 2004 relating to the financial statements of Universal Detection Technology and to the reference made to our firm under the caption "Experts" included in or made part of this Amendment to the Registration Statement on Form SB-2. /s/ AJ. Robbins, P.C. --------------------------------- AJ. ROBBINS, P.C. CERTIFIED PUBLIC ACCOUNTANTS DENVER, COLORADO SEPTEMBER 22, 2004 CORRESP 9 filename9.txt [AKIN GUMP LETTERHEAD] AFSHIN HAKIM 310.728.3289/fax: 31.728.2389 ahakim@akingump September 22, 2004 VIA EDGAR AND OVERNIGHT DELIVERY Jay S. Mumford, Esq. Securities and Exchange Commission 450 Fifth Street Washington, D.C. 20549-0306 Re: Universal Detection Technology Registration Statement on Form SB-2 filed August 2, 2004 File No. 333-117859 Dear Mr. Mumford: On behalf of Universal Detection Technology, a California corporation, we hereby respond to the comment letter of the Securities and Exchange Commission dated August 26, 2004. In our letter, we refer to Universal Detection Technology as the "COMPANY," to Amendment No. 1 to the Registration Statement as the "REGISTRATION STATEMENT," to the Securities and Exchange Commission as the "COMMISSION," to the Staff of the Securities and Exchange Commission as the "STAFF," and to the Securities Act of 1933, as amended, as the "ACT." Paragraph numbering used for each response set forth below corresponds to the paragraph numbering used in the Staff's letter. The references to page numbers of the Registration Statement are references to the pages of the marked version of the Registration Statement, a copy of which we have enclosed. GENERAL 1. UPDATE THE DISCLOSURE THROUGHOUT THE FILING THROUGH FISCAL QUARTER ENDED JUNE 30, 2004. The Company has complied with the Staff's comment. 2. WE SEE THAT YOU FILED RESTATED FINANCIAL STATEMENTS ON A FORM 8-K. THE RESTATED FINANCIAL STATEMENTS SHOULD BE FILED IN AN AMENDMENT TO THE 2003 FORM 10-KSB. PLEASE FILE AN APPROPRIATE AMENDMENT. WHAT ABOUT THE FORM 10-Q FOR THE MARCH 2004 QUARTER? IF RESTATED, IT APPEARS THAT A 10-QSB/A IS NECESSARY. Concurrently with the filing of the Registration Statement, the Company is filing an amendment to its Form 10-KSB for the fiscal year ended December 31, 2003, and an amendment to its Form 10-QSB for the fiscal quarter ended March 31, 2004, reflecting the restated financial statements. 3. IT APPEARS TO THE STAFF THAT AS A RESULT OF THE SALE OF DASIBI IN MARCH 2002 THE COMPANY REENTERED THE DEVELOPMENT STAGE AND BECAME SUBJECT TO THE DISCLOSURE REQUIREMENTS OF FAS 7. REVISE OR EXPLAIN SUPPLEMENTALLY WHY UNIVERSAL DETECTION IS NOT A DEVELOPMENT STAGE ENTERPRISE. The Company does not believe that it has reentered the development stage. Paragraph 8 of FAS 7 states that "AN ENTERPRISE WILL BE CONSIDERED TO BE IN THE DEVELOPMENT STAGE IF IT IS DEVOTING SUBSTANTIALLY ALL OF ITS EFFORTS TO ESTABLISHING A NEW BUSINESS." No efforts currently are being directed to establishing a new business. The Company continues to be in essentially the same business (air monitoring equipment) despite the sale of its wholly owned subsidiary, Dasibi Environmental Corp., and currently is devoting its research and development efforts to modifying the same machine previously produced by Dasibi. The Company has been in the air monitoring equipment business since 1973. 4. WE NOTE YOUR REFERENCE TO RULE 416 IN FOOTNOTE (2) TO THE FEE TABLE. PLEASE SUPPLEMENTALLY PROVIDE US WITH A COPY OF THE ANTI-DILUTION LANGUAGE FROM THE WARRANTS; WE NOTE YOU HAVE NOT FILED THESE AS EXHIBITS. PLEASE NOTE THAT RULE 416 DOES NOT PERMIT YOU TO REGISTER AN INDETERMINATE NUMBER OF ADDITIONAL SHARES THAT MAY BECOME ISSUABLE UPON EXERCISE OF THE WARRANTS OR CONVERSION OF THE PROMISSORY NOTES AS A RESULT OF AN ADJUSTMENT TO THE EXERCISE PRICE. YOU MUST REGISTER THE MAXIMUM NUMBER OF SHARES THAT YOU BELIEVE YOU MAY ISSUE UPON SUCH EXERCISE OR CONVERSION, BASED ON A GOOD-FAITH ESTIMATE, AND IF THE ACTUAL NUMBER OF SHARES TO BE ISSUED IS GREATER THAN THE ESTIMATE, YOU MUST FILE A NEW REGISTRATION STATEMENT TO REGISTER THE ADDITIONAL SHARES. PLEASE REVISE FOOTNOTE (2) ACCORDINGLY AND MODIFY THE NUMBER OF SHARES BEING REGISTERED AS APPROPRIATE. FOR GUIDANCE, WE REFER YOU TO INTERPRETATION ITEM 3 S OF THE SECURITIES ACT RULES SET FORTH IN THE MARCH 1999 SUPPLEMENT TO OUR MANUAL OF PUBLICLY AVAILABLE TELEPHONE INTERPRETATIONS AVAILABLE ON OUR WEBSITE AT www.sec.gov. As discussed during our call with you on September 2, 2004, the warrants provide only for standard anti-dilution adjustments and do not provide for other adjustments to the exercise price. Accordingly, we believe footnote (1) to the Calculation Fee Table on the cover page of the initial Registration Statement complies with Rule 416 of the Act. The Company has filed the form of warrants as Exhibit Nos. 10.10 and 10.11 to the Registration Statement. 5. WE NOTE THAT YOUR REPRESENTATIVE WARRANTS ARE EXERCISABLE WITHIN ONE YEAR. IT APPEARS THAT THE SHARES UNDERLYING THE WARRANTS WILL BE OFFERED ON A CONTINUOUS AND DELAYED BASIS. IF THIS IS THE CASE, PLEASE SUPPLEMENTALLY TELL US YOUR PLANS FOR UPDATING THE PROSPECTUS AFTER COMPLETION OF THE OFFERING. The Company supplementally provides that it has agreed with the selling stockholders named in the Registration Statement to maintain the Registration Statement effective until the 2 earlier of (i) the date that the selling stockholders may sell all of the securities covered by the Registration Statement pursuant to Rule 144 (or successor thereto) promulgated under the Act, (ii) two years from the effective date of a Registration Statement, or (iii) the date on which the selling stockholders shall have sold all the securities covered by the Registration Statement. The Company acknowledges its obligations under the federal securities laws with respect to maintaining the effectiveness of the Registration Statement, and specifically notes the guidance expressed by the Staff in Release No. 33-6423. The Company confirms to the Staff that it will comply with these requirements. 6. IT DOES NOT APPEAR THAT YOU ARE ELIGIBLE TO USE FORM SB-2, FORM 10-KSB AND FORM 10-QSB IN LIGHT OF YOUR PUBLIC FLOAT. PLEASE PROVIDE A DETAILED LEGAL ANALYSIS OF SUCH ELIGIBILITY. The Company respectfully disagrees with the Staff's comment. Form SB-2 refers to Rule 405 of the Act to define a "small business issuer."1 Rule 405 provides that an entity is not a small business issuer if it has a public float (the aggregate market value of the outstanding voting and non-voting common equity held by non-affiliates) of $25,000,000 or more. Rule 405 also states that the public float of a reporting company shall be computed by use of the price at which the stock was last sold, or the average of the bid and asked prices of such stock, on a date within 60 days prior to the end of its most recent fiscal year. The Company had 35,002,197 shares of common stock outstanding (including shares held by affiliates) as of December 31, 2003, its most recent fiscal year end. The closing sales price of the Company's common stock was $0.60 on December 26, 2003, which is within 60 days of the Company's most recent fiscal year. Accordingly, the Company's public float was $21,001,318, calculated by multiplying the sales price of $0.60 on December 26, 2003, by 35,002,197 shares of common stock outstanding as of December 31, 2003. The Company also meets the criteria for being a "small business issuer" for purposes of filing its reports under the Exchange Act of 1934. The Note to Item 10(a)(1) of Regulation SB makes clear that the calculation of public float, as demonstrated above under Item 10, is the same as under Rule 405. Thus, the Company's public float for fiscal 2003 was $21,001,318. We note that Item 10(a)(2)(iii) of Regulation S-B provides that, once a small business issuer becomes a reporting company it will remain a small business issuer until it exceeds the revenue limit or the public float at the end of two consecutive years. Accordingly, the Company has not yet met the criteria for exiting the small business disclosure system and, thus, remains a small business issuer for purposes of filing its reports under the Exchange Act of 1934. Moreover, Item 10(a)(2)(i) states that "[a] company that meets the definition of small business issuer may use Form SB-2 for registration of its securities under the Securities Act." - ------------- 1 Because the Staff's comment addresses solely the public float criteria, we do not provided an analysis with respect to the other criteria of a "small business issuer," which the Company believes it meets. 3 PROSPECTUS SUMMARY 7. PLEASE DISCLOSE THE STATUS OF DEVELOPMENT OF YOUR ANTHRAX SMOKE DETECTOR. HAVE YOU SOLD ANY OF THEM TO CUSTOMERS? IT APPEARS YOU HAVE DEVELOPED A "COMMERCIAL" PROTOTYPE. EXPLAIN WHAT THAT MEANS. The Company has complied with the Staff's comment. Please refer to page 1 of the Registration Statement. 8. IT APPEARS THAT YOUR AGREEMENT WITH CALIFORNIA INSTITUTE OF TECHNOLOGY EXPIRED ON SEPTEMBER 28, 2003. IF SUCH AGREEMENT WAS EXTENDED, WHY DID YOU NOT FILE SUCH EXTENSION AS AN EXHIBIT? DID JPL "DEVELOP ITS PROPRIETARY BACTERIAL SPORE DETECTION TECHNOLOGY FOR INTEGRATION" INTO YOUR PRODUCT, AS YOU STATE? PLEASE SUPPLEMENTALLY SHOW US DOCUMENTATION OF JPL'S SPECIFIC TASK ON DEVELOPING THIS TECHNOLOGY. The Company has revised its disclosure in response to the Staff's comment. Please refer to page 1 of the Registration Statement. The Technology Affiliates Agreement with Jet Propulsion Laboratory, a division of the California Institute of Technology, under which JPL developed its proprietary bacterial spore detection technology and integrated it into the Company's product, expired pursuant to its terms on September 28, 2003. The parties orally have amended the agreement to provide that JPL will continue to work on the project until it uses all of the funds the Company previously provided under the Affiliates Agreement, and if the project is not complete at that time, the parties will enter into a written agreement pursuant to which the Company will transfer additional funds to JPL. To date, approximately $30,000 of the funds remain unused. The Company is informed by representatives of JPL that it does not expect to require additional funds to complete the project. A copy of the Technology Affiliates Agreement, which discloses JPL's task on developing this technology was filed as Exhibit 10.3 to the Annual Report on Form 10-KSB for the year ended December 31, 2002. 9. IF YOUR AGREEMENT IS STILL IN PLACE, WHEN YOU DESCRIBE THE AGREEMENT, PLEASE DISCLOSE HOW MUCH YOU HAVE PAID CALTECH UNDER THIS AGREEMENT AND ANY OTHER AGREEMENTS WITH THEM. The Company has complied with the Staff's comment. Please refer to page 1 of the Registration Statement. 10. BRIEFLY DISCUSS YOUR RELATIONSHIP WITH CALIFORNIA INSTITUTE OF TECHNOLOGY. ALSO DESCRIBE HOW CIT AND JPL ARE AFFILIATED. The Company has complied with the Staff's comment. Please refer to page 1 of the Registration Statement. 11. PLEASE EXPLAIN WHAT A NITRIC OXIDE MACHINE IS AND ITS APPLICATION TO THE MEDICAL DIAGNOSTIC MARKET. DO YOU HAVE ANY APPLICATIONS IN DEVELOPMENT? IF NOT, PLEASE DISCLOSE THAT FACT IN THE FIRST SENTENCE OF THE PARAGRAPH. The Company has not pursued, and has determined not to pursue, any potential opportunities with respect to the nitric oxide machine in the foreseeable future. Accordingly, the 4 Company does not believe it is relevant or meaningful to discuss this machine in the Registration Statement and has eliminated its disclosure in this regard in the Registration Statement. Please refer to page 1 of the Registration Statement. 12. WE NOTE THE DISCLOSURE REGARDING THE LOGAN RESEARCH PROJECT. HOW FAR DID THE PROJECT GET? WHAT BENEFITS DID YOU OBTAIN FROM THE PROJECT? WHY DID IT LACK FUNDING? WAS THAT YOUR DECISION? WERE YOU PAYING FOR THE PROJECT IN ANY WAY? Please refer to the Company's response to Comment No. 11. 13. PLEASE INCLUDE IN THE SUMMARY A DESCRIPTION OF YOUR REVENUES AND LOSSES FOR THE PAST THREE YEARS AND THE CURRENT AMOUNT OF YOUR DEFAULT ON DEBT OBLIGATIONS. The Company has complied with the Staff's comment. Please refer to page 2 of the Registration Statement. RISK FACTORS - PAGE 2 OUR INDEPENDENT AUDITORS REPORT EXPRESSES DOUBT - PAGE 2 14. THE HEADING OF THIS RISK FACTOR DOES NOT MATCH THE INFORMATION INCLUDED IN THE RISK FACTOR. PLEASE REVISE THE HEADING OF THIS RISK FACTOR TO DISCLOSE YOUR DEFAULT ON DEBT, AND POTENTIAL BANKRUPTCY THAT YOU DESCRIBE IN THE BODY OF THE RISK FACTOR. The Company has complied with the Staff's comment. Please refer to page 3 of the Registration Statement. 15. EXPLAIN WHY YOU DO NOT INTEND TO REPAY DEBT WITH THE PROCEEDS OF THE PRIVATE PLACEMENT AND THE NATURE OF THE RESTRICTIONS PLACED ON THE USE OF PROCEEDS. ALSO EXPLAIN HOW THE PROCEEDS WILL BE USED. The Company has complied with the Staff's comment. Please refer to page 3 of the Registration Statement. 16. PLEASE CREATE A SEPARATE RISK FACTOR FOR THE DISCUSSION OF YOUR AUDITORS GOING CONCERN LANGUAGE IN THEIR OPINION. PLEASE EXPLAIN HOW THIS OPINION COULD AFFECT YOUR ABILITY TO COMPLETE FUTURE FINANCINGS. The Company has complied with the Staff's comment. Please refer to page 3 of the Registration Statement. WE HAVE A HISTORY OF LOSSES - PAGE 2 17. PLEASE INCLUDE IN THIS RISK FACTOR A DESCRIPTION OF YOUR LACK OF REVENUES FOR THE PAST THREE YEARS. The Company has complied with the Staff's comment. Please refer to page 4 of the Registration Statement. 5 18. INCLUDE A SEPARATE RISK FACTOR ADDRESSING AND QUANTIFYING THE AMOUNTS YOU PAID IN 2003 AND 2004 IN CONSULTING FEES, AND EXPLAIN THE TYPES OF SERVICES YOU RECEIVED IN RETURN AND THE NUMBER OF CONSULTANTS. The Company has complied with the Staff's comment. Please refer to page 6 of the Registration Statement. 19. INCLUDE A SEPARATE RISK FACTOR DISCLOSING THE EXTENT OF RELATED PARTY TRANSACTIONS YOU HAVE ENTERED INTO AND AMOUNTS PAID IN 2003 AND 2004. ALSO DISCLOSE THE AMOUNT OF CASH AND STOCK COMPENSATION MR. TIZABI HAS RECEIVED TO DATE. The Company has complied with the Staff's comment. Please refer to pages 6-7 of the Registration Statement. WE MAY NEED ADDITIONAL CAPITAL TO FUND OUR RESEARCH AND DEVELOPMENT - PAGE 2 20. REVISE TO QUANTIFY THE AMOUNTS SPENT ON RESEARCH AND DEVELOPMENT IN 2003 AND 2004, AND CLARIFY THAT A FAR GREATER AMOUNT OF YOUR EXPENSES RELATES TO COMPENSATION AND CONSULTING FEES YOU PAY FOR CAPITAL-RAISING EFFORTS. REVISE THE CAPTION TO DISCLOSE THIS FACT. The Company has further considered this risk factor, and does not believe that it will require substantially more cash to fund its research and development expenses. Under its Technology Affiliates Program, JPL expects to complete the development of the technology for amounts previously paid by the Company. Consequently, the Company has deleted this risk factor. As noted in response to Comment No. 18, the Company has added a risk factor regarding its payments to consultants, which we believe addresses the Staff's comment. 21. YOU STATE YOU HAVE ENOUGH CAPITAL FOR THE NEXT 12 MONTHS, BUT IF YOU "ARE UNABLE TO MEET OUR GOALS AS SCHEDULED, WE MAY NEED TO RAISE ADDITIONAL CAPITAL." PLEASE INCLUDE A DISCUSSION OF THE IMPACT OF THE $1.8 MILLION IN DEBT THAT IS DUE IN THE NEXT 12 MONTHS ON YOUR ANALYSIS OF SUFFICIENT CAPITAL. ALSO, IT DOES NOT APPEAR, BASED ON THE DISCLOSURE ON PAGE 7, YOU WILL HAVE COMMERCIALIZED PRODUCTS UNTIL OVER 24 MONTHS FROM NOW. HOW WILL YOU BE ABLE TO FUND YOUR BUSINESS IF YOUR GOALS ARE MET WITHOUT ADDITIONAL CAPITAL IN THE NEXT 12-24 MONTHS? PLEASE ADVISE US OR REVISE YOUR DISCLOSURE. The Company has complied with the Staff's comment. Please refer to pages 3-4 of the Registration Statement. OUR RELIANCE ON THIRD PARTIES FOR RESEARCH - PAGE 3 22. THIS RISK APPEARS TO ADDRESS GENERIC RISKS IN OUTSOURCING RESEARCH AND DEVELOPMENT. PLEASE REVISE TO DISCUSS YOUR SPECIFIC RESEARCH RELATIONSHIPS. The Company has complied with the Staff's comment. Please refer to page 4 of the Registration Statement. 6 OUR PRODUCTS MAY NOT BE COMMERCIALLY ACCEPTED - PAGE 3 23. PLEASE REVISE THIS RISK TO DESCRIBE SPECIFIC RISK YOUR PRODUCTS FACE. YOU SHOULD INCLUDE RISKS IN EACH OF THE STAGES OF BRINGING YOUR PRODUCT TO MARKET, INCLUDING MANUFACTURING, DISTRIBUTION AND SALES, AMONG OTHERS. The Company has complied with the Staff's comment. The Company retained this risk factor and added a new risk factor entitled "MANAGEMENT HAS NO EXPERIENCE IN PRODUCT MANUFACTURING, MARKETING, SALES, OR DISTRIBUTION. WE MAY NOT BE ABLE TO MANUFACTURE OUR ANTHRAX SMOKE DETECTOR IN SUFFICIENT QUANTITIES AT AN ACCEPTABLE COST, OR IN A TIMELY FASHION, AND MAY NOT BE ABLE TO MARKET AND DISTRIBUTE IT EFFECTIVELY, EACH OF WHICH COULD HARM OUR FUTURE PROSPECTS." Please refer to pages 4-5 of the Registration Statement. THE MARKET FOR OUR PLANNED PRODUCT IS RAPIDLY CHANGING - PAGE 3 24. PLEASE REVISE THIS GENERIC RISK FACTOR TO ADDRESS SPECIFIC RISKS IN MARKETS YOU SEEK TO ENTER. The Company has complied with the Staff's comment. Please refer to pages 5-6 of the Registration Statement. OUR COMMON SHARES HAVE BEEN DELISTED - PAGE 3 25. PLEASE DISCLOSE THE REASONS FOR YOUR DELISTING FROM THE NASDAQ SMALLCAP MARKET. The Company was delisted in 2002 for not meeting the minimum bid price requirement of the NASDAQ SmallCap Market. As discussed with you on September 2, 2004, the Company believes that the risk associated at this time with trading on the Over The Counter Bulletin Board, rather than the NASDAQ SmallCap Market, is the increased difficulty in raising capital. Accordingly, the Company has deleted this risk factor and incorporated the additional risk associated with financings in the risk factor entitled "WE ARE IN DEFAULT OF SOME OF OUR DEBT. OUR FAILURE TIMELY TO PAY OUR INDEBTEDNESS MAY REQUIRES US TO CONSIDER STEPS THAT WOULD PROTECT OUR ASSETS AGAINST OUR CREDITORS." Please refer to page 3 of the Registration Statement. OUR OUTSTANDING OPTIONS AND WARRANTS - PAGE 3 26. PLEASE PROVIDE SOME DETAIL ABOUT THE WEIGHTED AVERAGE EXERCISE PRICES OF YOUR OPTIONS AND WARRANTS AND THE EXTENT TO WHICH SHAREHOLDERS WILL BE DILUTED. The Company has complied with the Staff's comment. Please refer to page 6 of the Registration Statement. WE HAVE LIMITED PROTECTION OF INTELLECTUAL PROPERTY - PAGE 4 27. PLEASE EXPLAIN THE SIGNIFICANCE TO INVESTORS THAT THE U.S. GOVERNMENT HAS A NON-EXCLUSIVE, NON-TRANSFERABLE, IRREVOCABLE LICENSE TO PRACTICE ANY INVENTION COVERED BY YOUR AGREEMENT WITH JPL. CAN THEY CREATE PRODUCTS USING THIS TECHNOLOGY? CAN THEY LICENSE IT TO YOUR COMPETITORS? 7 The Company has complied with the Staff's comment. Please refer to page 8 of the Registration Statement. OUR STOCK PRICE IS VOLATILE - PAGE 4 28. PLEASE INCLUDE IN THIS RISK FACTOR, OR A SEPARATE RISK FACTOR, THE IMPACT OF ISSUING 15,600,000 SHARES ON THE MARKET, WHEN YOU CURRENTLY HAVE APPROXIMATELY 39,501,132 SHARES OUTSTANDING. The Company notes the Staff's comment. Of the 15,600,000 shares cited by the Staff, 6,000,000 were issued in the private placement completed in July 2004, and consequently these 6,000,000 shares currently are (and as of the date of filing the initial registration statement with Commission were) outstanding. There remain 9,600,000 shares underlying warrants that were issued to the selling stockholders. The Company has modified its existing risk factor entitled "SHARES ISSUED UPON THE EXERCISE OF OUR OUTSTANDING OPTIONS AND WARRANTS MAY DILUTE YOUR STOCK HOLDINGS AND ADVERSELY AFFECT OUR STOCK PRICE" to disclose the impact of issuing shares of common stock upon conversion or exercise of its derivative securities. Please refer to page 6 of the Registration Statement. OTHER RISKS 29. PLEASE ADD OR EXPAND THE APPROPRIATE RISK FACTORS TO HIGHLIGHT THE LACK OF SUCCESS OF YOUR PREVIOUS PLANNED PRODUCTS AND THE DELAYS IN YOUR PENDING PRODUCTS. The Company notes the Staff's comment. As noted in response to Comment No. 11, the Company has removed all disclosure regarding products other than the Anthrax Smoke Detector. In fact, the prior air monitoring products of the Company did achieve limited success, and historically the Company made sales of these products. The Company's revenues for fiscal 2001 and 2000 were $2,393,681 and $3,636,622, respectively. In September 2001, the Company retained entirely new management. At that same time, the members of the Board of Directors resigned and new members were appointed. In the first quarter of 2002, management recommended to the Board, and the Board approved a change to the strategic direction of the Company. In March 2002, the Company sold its sole operating subsidiary and commenced development of the Anthrax Smoke Detector. In light of the new management, new Board of Directors, new strategic direction, and the fact that to date, the Company has not experienced any significant delays in development of the Anthrax Smoke Detector, the Company does not believe that prior product development delays is relevant to the development of the Anthrax Smoke Detector. 30. PLEASE ADD A RISK FACTOR DISCUSSING ANY REGULATORY APPROVALS YOU MAY NEED, IF MATERIAL. The Company notes the Staff's Comment. The Company does not believe that any regulatory approvals are required in order to sell the Anthrax Smoke Detector. 8 31. ARE THERE ENVIRONMENTAL OR HAZARDOUS MATERIALS USE RISKS THAT YOU FACE, ESPECIALLY IN WORKING WITH ANTHRAX OR RELATED BIOHAZARDS? The Company does not believe it faces any environmental or hazardous materials use risks in connection with the development of its device. With respect to the testing of the device, neither the Company nor JPL will use Anthrax, but rather will use benign bacterial spores that have properties similar to Anthrax. PLAN OF OPERATION - PAGE 7 32. PLEASE REVISE THE OVERVIEW PARAGRAPH TO CONFORM TO THE CHANGES SUGGESTED TO THE SUMMARY SECTION. The Company has complied with the Staff's comment. Please refer to pages 11-12 of the Registration Statement. 33. WE ASSUME THE REFERENCE TO ENGAGE IN SIMULATED TEST WITH PARTICLES HAVING ANTHRAX-LIKE PROPERTIES IN THE NEXT 2004 QUARTER REFERS TO THE THIRD QUARTER, HAVE THESE TESTS ACTUALLY BEGUN? IS COMPLETION OF THIS PHASE REQUIRED PRIOR TO COMMENCEMENT OF THE NEXT PHASE TO BE PERFORMED BY JPL AND RUTGERS UNIVERSITY, OR CAN THEY BE PERFORMED SIMULTANEOUSLY? WHAT ARRANGEMENTS HAS RUTGERS UNIVERSITY MADE IN SELECTING A SITE TO TEST THE PRODUCT UNDER A REAL-TIME ENVIRONMENT? WHAT IS THE PROJECTED TIMING FOR THESE EVENTS, DOES MANAGEMENT EXPECT THESE TESTS TO BE COMPLETED DURING FISCAL 2004? THE PLAN OF OPERATION NEEDS TO BE UPDATED TO CURRENT STATUS WITH SPECIFIC DETAILS AND REASONABLE ESTIMATES TO BRING YOUR PRODUCT TO A VIABLE MARKETABLE STAGE. The Company has complied with the Staff's comment. Please refer to pages 11-12 of the Registration Statement. 34. PLEASE DESCRIBE IN DETAIL YOUR AGREEMENT WITH RUTGERS UNIVERSITY. WHY HAVE YOU NOT FILED SUCH AGREEMENT AS AN EXHIBIT? The Company has complied with the Staff's comment. Please refer to page 12 of the Registration Statement. There is no written agreement at this date with Rutgers University. 35. WHAT PARTICLES WITH SIMILAR ANTHRAX LIKE PROPERTIES WILL YOU BE UTILIZING? WILL THESE BE AS GOOD AT DETECTING ANTHRAX, OR WILL YOU HAVE TO RE-TEST USING ANTHRAX? The Company will be using benign bacterial spores for testing purposes, which it believes will be as effective as Anthrax spores for purposes of detecting an increase in spore count concentration levels. The Anthrax Smoke Detector is designed to continuously monitor the air and measure the concentration of airborne bacterial spores every 15 minutes. Under normal circumstances, there is a baseline concentration level of bacterial spores in the environment. JPL's detection technology is designed to sound an alarm only when it detects a significant increase in the spore count. By using benign bacterial spores, the Company will be able to test the conditions under which an increase in concentration of airborne bacterial spores will trigger the alarm of the Anthrax Smoke Detector. Because, an increase in the spore concentration levels 9 is indicative of a potential presence of Anthrax, the tests results can be used to extrapolate similar results if Anthrax spores were used. 36. PLEASE IDENTIFY THE THIRD PARTY MANUFACTURER YOU DESCRIBE IN THE FIFTH PARAGRAPH ON PAGE 7. The Company has complied with the Staff's comment. Please refer to page 11 of the Registration Statement. 37. IN ORDER TO PROVIDE INVESTORS WITH AN UNDERSTANDING OF YOUR BUSINESS OPERATIONS, EXPAND THIS SECTION TO DISCUSS IN REASONABLE DETAIL THE SIGNIFICANT AMOUNTS SPEND ON SG&A EXPENSES AND MARKETING. SINCE YOU HAVE NO COMMERCIAL PRODUCT, EXPLAIN WHAT TYPE OF MARKETING YOU ARE DOING. TO THE EXTENT THESE AMOUNTS WERE PAID TO AFFILIATES, IDENTIFY THE AFFILIATES AND QUANTIFY THE AMOUNTS PAID TO THEM. TO THE EXTENT THEY WERE PAID TO CONSULTANTS, EXPLAIN THE SERVICES YOU RECEIVED AND THE NUMBER OF INDIVIDUALS WHO WERE COMPENSATED. WE NOTE THE FINANCIAL STATEMENT FOOTNOTE 8 ON PAGE F-L 8. ALSO DISCUSS THE ABSENCE OF R&D EXPENSES FOR THE SIX MONTHS ENDED JUNE 30, 2004, WHICH APPEARS INCONSISTENT WITH YOUR OTHER DISCLOSURE. WE MAY HAVE FURTHER COMMENTS. The Company has complied with the Staff's comment. Please refer to page 12 of the Registration Statement. LIQUIDITY AND CAPITAL RESOURCES - PAGE 7 38. EXPLAIN IN MORE DETAIL WHY YOU ARE PRECLUDED FROM PAYING YOUR DEBTS WITH THE OFFERING PROCEEDS. The Company has complied with the Staff's comment. Please refer to page 13 of the Registration Statement. 39. PLEASE DISCLOSE MORE INFORMATION ABOUT YOUR DEBT FINANCING, INCLUDING TERMS, PARTIES, RATES AND WHEN SUCH AMOUNTS BECOME DUE. The Company has complied with the Staff's comment. Please refer to pages 13-14 of the Registration Statement. BUSINESS - PAGE 9 40. DISCLOSE WHETHER THE COMMERCIAL PROTOTYPE YOU DISPLAYED WAS A FUNCTIONING PROTOTYPE. WE NOTE YOU COMPLETED THE SOFTWARE COMPONENT AFTER THE UNVEILING OF THE PROTOTYPE. DISCLOSE WHETHER THIS COMPONENT IS ESSENTIAL TO THE PRODUCT. The Company has complied with the Staff's comment. Please refer to page 16 of the Registration Statement. The Company supplementally notes that its prototype was a functioning prototype that operated on external software. Since the unveiling, the Company has completed an internal software component for the product. 10 OUR SOLUTION - PAGE 11 41. EXPLAIN WHAT TECHNOLOGICAL DEVELOPMENTS ARE NEEDED IN THE FIELD IN ORDER FOR YOUR PRODUCT TO WORK AS EXPECTED. WILL YOU OR OTHERS BE DEVELOPING SUCH TECHNOLOGY? The Company does not believe any technological developments are needed in the filed in order for its product to work as expected. The Company has modified its disclosure to confirm that the Anthrax Smoke Detector can operate as a stand alone detection device. Please refer to page 18 of the Registration Statement. SCIENTIFIC ADVISORY BOARD - PAGE 12 42. EXPLAIN HOW THE EXPERTISE OF THESE INDIVIDUALS RELATES TO THE ANTHRAX SMOKE DETECTOR TECHNOLOGY. IF THEY HAVE NO RELEVANT EXPERTISE IN THAT AREA, SAY SO. The Company has complied with the Staff's comment. Please refer to pages 19-20 of the Registration Statement. 43. PLEASE CLARIFY THE ROLE AND STATUS OF YOUR SCIENTIFIC ADVISORY BOARD, ESPECIALLY TO DISTINGUISH IT FROM THE BOARD OF DIRECTORS. PLEASE DISCLOSE THAT THE BOARD HAS TWO MEMBERS, RATHER THAN DESCRIBING IT AS A GROUP. DISCLOSE WHETHER THESE MEMBERS ARE COMPENSATED FOR THEIR ADVISORY SERVICES AND, IF SO, DISCLOSE AMOUNTS PAID TO THEM. The Company has complied with the Staff's comment. Please refer to page 20 of the Registration Statement. 44. PLEASE PROVIDE US WITH SUPPLEMENTAL SUPPORT FOR THE DISCLOSURE THAT DR. MAKOWKA IS "RECOGNIZED AS ONE OF THE WORLD'S LEADING AUTHORITIES IN HEPATIC SCIENCE." The Company supplementally provides a summary of Dr. Makowka's experience and accreditations. 45. PLEASE PROVIDE US WITH SUPPLEMENTAL SUPPORT FOR THE DISCLOSURE THAT DR. IGNARRO IS "ONE OF THE LEADING RESEARCHERS ON NITRIC OXIDE AND ITS EFFECTS." The Company supplementally provides a summary of Dr. Ignarro's CURRICULUM VITAE. 46. IF YOU RELY ON CONSULTANTS WITH SCIENTIFIC EXPERTISE IN THE TECHNOLOGY THAT RELATES TO THE ANTHRAX SMOKE DETECTOR, EXPAND TO IDENTIFY THEM AND DISCLOSE HOW THEY ARE COMPENSATED. WE NOTE THE LACK OF RELEVANT EXPERTISE OF YOUR NAMED EXECUTIVE OFFICERS. The Company does not rely on consultants in connection with the development of the technology for the Anthrax Smoke Detector. This technology is developed by JPL under our Technology Affiliates Agreement. 11 PROPERTIES - PAGE 14 47. IS THERE ANY WRITTEN AGREEMENT REGARDING THE OFFICE SPACE YOU USE? HOW LARGE IS THE AREA YOU UTILIZE? The Company has revised its disclosure in response to the Staff's comment. Please refer to page 22 of the Registration Statement. LEGAL PROCEEDINGS 48. IF YOU ARE INVOLVED IN ANY LEGAL PROCEEDINGS REQUIRED TO BE DISCLOSED UNDER ITEM 103 OF REGULATION S-B, PLEASE EXPAND THE DISCLOSURE. WE NOTE LITIGATION DISCLOSED IN YOUR 10-KSB. The Company is not involved in any legal proceedings that are required to be disclosed under Item 103 of Regulation S-B. The legal proceedings disclosed in the Company's Annual Report on form 10-KSB for the year ended December 31, 2003, have been resolved and dismissed. DIRECTORS AND EXECUTIVE OFFICERS - PAGE 15 49. EXPAND TO STATE WHETHER MR. TIZABI WORKS FULL TIME FOR THE REGISTRANT. The Company has complied with the Staff's comment. Please refer to page 23 of the Registration Statement. SUMMARY COMPENSATION TABLE - PAGE 16 50. REVISE THE FOOTNOTE TO CLARIFY. EXPLAIN WHAT AMOUNT HE "WAIVED" AND WHETHER THE WAIVER WAS PERMANENT. WE NOTE THE DISCLOSURE IN NOTE 10 TO THE FINANCIAL STATEMENTS WHICH STATES THAT "FUTURE MINIMUM SALARY PAYABLE TO THE OFFICER IS $1,250,000." DEFERRED AMOUNTS SHOULD BE INCLUDED IN THE TABLE. The Company has complied with the Staff's comment. Please refer to page 24 of the Registration Statement. 51. EXPLAIN WHY THE BOARD APPROVED A BONUS OF $416,667 FOR MR. TIZABI. WE NOTE THAT THE BONUS PLAN IS "BASED ON ANNUAL PERFORMANCE STANDARDS TO BE ESTABLISHED." HAVE THE STANDARDS BEEN ESTABLISHED? IF SO, DISCLOSE THEM AND EXPLAIN HOW MR. TIZABI MET THEM. WE ALSO NOTE THAT THE EMPLOYMENT AGREEMENT INCLUDES PERQUISITES THAT ARE NOT LISTED IN THE TABLE OR DISCLOSED ON PAGE 17. EXPAND TO DISCLOSE THE DOLLAR VALUE PAID TO HIM FOR THESE FOR EACH PERIOD LISTED, AND EXPAND THE DISCLOSURE ON PAGE 17 TO DESCRIBE THEM. The Company has complied with the Staff's comment. Please refer to page 24 of the Registration Statement. 52. EXPLAIN THE REASON FOR THE ISSUANCE OF 6.8 MILLION SHARES TO MR. TIZABI. 12 The Company has complied with the Staff's comment. Please refer to page 24 of the Registration Statement. STOCK INCENTIVE PLANS - PAGE 17 53. EXPAND TO DISCUSS THE MATERIAL TERMS OF THE STOCK INCENTIVE PLANS, INCLUDING THE NUMBER OF SHARES RESERVED FOR ISSUANCE AND THE NUMBER ISSUED TO DATE. The Company has complied with the Staff's comment. Please refer to page 26 of the Registration Statement. PRINCIPAL STOCKHOLDERS - PACE 19 54. PLEASE EXPLAIN THE ABSENCE OF DANIEL GREENSPUN, WHO WAS IDENTIFIED AT A 5.2% OWNER OF YOUR COMMON STOCK IN YOUR MOST RECENT 10-KSB. As of March 31, 2004, the date the Company filed its Annual Report on Form 10-KSB, Daniel Greenspun beneficially owned 2,044,455 shares of the Company common stock and the Company had 39,518,382 shares of common stock outstanding, making Mr. Greenspun a 5.2% owner. As of the date of the filing of the initial registration statement, the Company had 46,983,084 shares of common stock outstanding. Consequently, Mr. Greenspun's ownership percentage was decreased to 4.4%. Because of the increase in the number of outstanding shares of the Company's common stock since the filing of the Company's 10-KSB, Mr. Greenspun no longer meets the 5% threshold and thus was not included in the principal stockholders' table. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - PAGE 25 55. PLEASE RELOCATE THIS SECTION SO THAT IT PRECEDES "SELLING SHAREHOLDERS," WHICH BEGINS ON PAGE 19. The Company has complied with the Staff's comment. Please refer to pages 27-28 of the Registration Statement. 56. PLEASE DISCLOSE WHETHER YOU BELIEVE THE AMOUNT PAID TO ASTOR CAPITAL FOR RENT APPROXIMATES MARKET RATES FOR THE SPACE RENTED. HAVE THERE BEEN PAYMENTS IN OTHER YEARS? The Company has complied with the Staff's comment. Please refer to pages 27-28 of the Registration Statement. The Company has not made payments to Astor for office space in any years other than fiscal 2003 and 2004. 57. QUANTIFY THE AMOUNTS PAID TO ASTOR CAPITAL DURING 2003 AND 2004 TO DATE FOR ALL FEES, SERVICES AND OTHER PURPOSES. During the six months ended June 30, 2004, and the year ended December 31, 2003, the Company paid Astor Capital approximately $236,000 and $378,000, respectively, in related expenses. The Company has modified this section of the Registration Statement to reflect all of 13 the amounts paid to Astor since fiscal 2002. Please refer to pages 27-28 of the Registration Statement. 58. SUPPLEMENTALLY ADVISE WHO HELD THE WARRANTS THAT WERE REPRICED IN 2003. IF THEY WERE HELD BY AFFILIATES, DISCUSS HERE. IF THEY WERE HELD BY MR. TIZABI OR HIS AFFILIATES, ALSO DISCUSS IN THE COMPENSATION SECTION OF THE FILING. The Company has enclosed a supplementary schedule detailing the persons who held the warrants that were repriced in 2003. None were held by Mr. Tizabi or his affiliates. FINANCIAL STATEMENTS GENERAL 59. PLEASE PROVIDE UPDATED FINANCIAL STATEMENTS AS REQUIRED BY ITEM 310(G) OF REGULATION S-B. The Company has complied with the Staff's comment. Please refer to pages F-1 through F-29 of the Registration Statement. 60. ENSURE THE REVISED FILING INCLUDES THE FINANCIAL STATEMENTS WITHIN "THE PROSPECTS [SIC] PROPOSED BY THIS SB-2 REGISTRATION STATEMENT". IT APPEARS THE CURRENT FILING INCLUDES THE FINANCIAL STATEMENTS PAST THE FINAL PAGE OF THE "PROSPECTS"[SIC]. The Company has complied with the Staff's comment. Please refer to pages F-1 through F-29 of the Registration Statement. INDEPENDENT AUDITORS' REPORT - PAGE F-2 61. WHEN PUBLISHED FINANCIAL STATEMENTS HAVE BEEN RESTATED, THE INDIVIDUAL RESTATED FINANCIAL STATEMENTS SHOULD BE LABELED "RESTATED." PLEASE REVISE. The Company has complied with the Staff's comment. Please refer to pages F-3 through F-8 of the Registration Statement. BALANCE SHEET - PAGE F-3 62. SUPPLEMENTALLY SHOW US THE COMPONENTS OF PREPAID EXPENSES AS OF EACH BALANCE SHEET DATE. QUANTIFY SIGNIFICANT AMOUNTS AND UNLESS APPARENT, DESCRIBE THE BASES FOR SIGNIFICANT ITEMS. The Company has enclosed supplemental schedules detailing the components of prepaid expenses (and other current assets) as of June 30, 2004 and December 31, 2003. 63. SUPPLEMENTALLY SHOW US THE COMPONENTS OF ACCRUED LIABILITIES AS OF EACH BALANCE SHEET DATE. QUANTIFY SIGNIFICANT AMOUNTS AND UNLESS APPARENT, DESCRIBE THE BASES FOR SIGNIFICANT ITEMS. 14 The Company has enclosed a supplemental schedule detailing the components of accrued liabilities as of June 30, 2004 and December 31, 2003. 64. AS A RELATED MATTER, WE SEE THE EMPLOYMENT AGREEMENT WITH MR. TIZABI. SHOW US THAT YOU HAVE MADE APPROPRIATE ACCRUALS FOR SALARIES DUE MR. TIZABI AND THAT AMOUNTS HAVE BEEN EXPENSED IN THE APPROPRIATE ACCOUNTING PERIODS. TELL US THE AMOUNT OF ACCRUED, UNPAID SALARY DUE MR. TIZABI AT EACH BALANCE SHEET DATE. The Company has enclosed a supplemental schedule detailing accruals for salaries due to Mr. Tizabi, including amounts of accrued and unpaid salary due Mr. Tizabi as of June 30, 2004 and December 31, 2003. CONSOLIDATED STATEMENTS OF OPERATIONS - PAGE F-4 65. WE SEE THAT YOU RECENTLY UNVEILED A COMMERCIAL PROTOTYPE OF A PROPOSED PRODUCT AND THAT YOU APPARENTLY CONTINUE TO PROGRAM, TEST AND REFINE THAT PRODUCT. TELL US WHY THERE IS NO RESEARCH AND DEVELOPMENT EXPENSE IN 2004. All research and development costs have been charged to expense when incurred in accordance with FAS 2 "Accounting for Research and Development Costs." Pursuant to the Company's agreement with JPL, the Company was required to pay the entire estimated cost of $249,000 in advance of JPL beginning work. If the funds are depleted, the Company may be required to provide additional funding to JPL in advance of further work by JPL. To date, no additional funding has been paid or required. The Company has not accrued for any additional funding since none is anticipated. 66. WE SEE THE SETTLEMENT FOR DELINQUENT RENT RELATED TO THE FORMER DASIBI SUBSIDIARY. BASED ON THE GAIN RECORDED IN 2002, IT ALSO APPEARS THAT THE SUBSIDIARY'S LIABILITIES EXCEEDED ITS ASSETS AT THE TIME OF SALE. TELL US WHETHER YOU REMAIN CONTINGENTLY LIABLE ON ANY OTHER LIABILITIES RELATED TO THE FORMER DASIBI SUBSIDIARY. DESCRIBE THE NATURE AND EXTENT OF YOUR EXPOSURE. IF YOU BELIEVE THAT YOU HAVE NO CONTINUING EXPOSURE, SUPPORT YOUR POSITION SUPPLEMENTALLY AND IN DETAIL. SHOW US THAT YOUR FINANCIAL STATEMENTS APPROPRIATELY CONSIDER ANY POTENTIAL LIABILITIES. WE MAY HAVE FURTHER COMMENT. The Company's only other remaining contingent liability relating to Dasibi (other than the delinquent rent) is a loan by an unaffiliated third party of $250,000, which has been reflected in the Company's financial statements. This loan was due on June 30, 2002, and currently is in default. As of June 30, 2004, the Company owed $50,625 in interest on this note. NOTE 1 - BUSINESS ACTIVITY - PAGE F-7 GOING CONCERN AND MANAGEMENT'S PLANS 67. EXPAND THIS NOTE TO ALSO ADDRESS THE NEEDS FOR AND EXPECTED SOURCES OF FUNDS TO SATISFY THE COMPANY'S CAPITAL REQUIREMENTS UNTIL POSITIVE CASH FLOWS BEGIN. MANAGEMENT'S PROJECTED TIMETABLE FOR THE ACTIONS PLANNED TO BRING YOUR PRODUCT TO MARKET SHOULD ALSO BE DISCUSSED. 15 The Company has complied with the Staff's comment. Please refer to pages F-9 through F-11 of the Registration Statement. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - PAGE F-9 REVENUE RECOGNITION 68. WE SEE THAT YOUR PRODUCT IS NOT READY FOR MARKET. ACCORDINGLY, THE BASES FOR THE REVENUE DISCLOSURE ARE NOT CLEAR. HOW DO YOU KNOW WHAT SALES TERMS THE MARKET WILL DEMAND? HOW DO YOU KNOW THAT THERE WILL NOT BE POST-SALE OBLIGATIONS OR OTHER FACTORS THAT RENDER "REVENUE AT SHIPMENT" INAPPROPRIATE FOR YOUR FINAL PRODUCT, IF AND WHEN AVAILABLE FOR SALE. PLEASE SUPPLEMENTALLY EXPLAIN THE BASES FOR THE DISCLOSURE. Based on the Company's experience as a pollution monitor manufacturer, we believe that disclosure regarding revenue recognition is appropriate. We do not anticipate significant changes in our accounting policies as a result of adjustments made to our products. However, at the time our product is available for sale, we will reevaluate our current revenue recognition policy and modify it as appropriate. 69. YOU STATE IN A PRESS RELEASE DATED MAY 6, 2004 THAT YOU SOLD SOME UNITS TO AN ITALIAN COMPANY. HOW DID YOU ACCOUNT FOR THIS SALE? WHAT DID YOU RECEIVE IN RETURN? WHAT WERE THE TERMS OF THE SALE? WHY ARE THERE NO REVENUES? HOW IS THE PRESS RELEASE DISCLOSURE CONSISTENT WITH YOUR DISCLOSED REVENUE POLICY? RESPOND SUPPLEMENTALLY. The article dated May 6, 2004, was not a press release issued by the Company. The article was written by an unrelated third party. That party was not retained or compensated by the Company. The article erroneously states that a "few units were sold to an Italian company." The Company has been in discussions with an Italian company regarding a potential distribution arrangement with regard to the Anthrax Smoke Detector. However, no sales of the device have been made and the Company has removed this article from its website. STOCK-BASED COMPENSATION 70. EXPAND NOTE 2 TO MAKE FULL DISCLOSURE UNDER PARAGRAPH 2E TO FAS 148. THE DISCLOSURE INCLUDED IN NOTE 9 DOES NOT MEET THE REQUIREMENTS OF THE STANDARD WITH REGARD TO LOCATION OR INFORMATION CONTENT. The Company has complied with the Staff's comment. Please refer to page F-12 of the Registration Statement. VALUATION OF THE COMPANY'S COMMON STOCK 71. TELL US WHY THE MODIFIED BLACK-SCHOLES EUROPEAN MODEL IS APPROPRIATE IN YOUR CIRCUMSTANCES. WE UNDERSTAND THAT THE MODIFIED BLACK-SCHOLES EUROPEAN MODEL ASSUMES THAT OPTIONS MAY NOT BE EXERCISED PRIOR TO EXPIRATION DATES. WHY IS THAT ASSUMPTION VALID IN YOUR CIRCUMSTANCES? PLEASE EXPLAIN SUPPLEMENTALLY. AFTER REVIEWING YOUR RESPONSE WE MAY HAVE ADDITIONAL COMMENTS. 16 Management of the Company believes that the Modified Black-Scholes European Model is the appropriate method to value its stock based compensation. Historically, options and warrants typically are exercised just prior to expiration or are not exercised at all. In calculating the value, significant assumptions include that the exercise period is equal to the expiration period. European exercise terms dictate that the option can only be exercised on the expiration date. American exercise terms allow the option to be exercised at any time during the life of the option, making American options more valuable due to their greater flexibility. This limitation is not a major concern because very few options are ever exercised before the last few days of their life. This is true because when you exercise a call early, you forfeit the remaining time value on the options and collect the intrinsic value. Towards the end of the life of a call, the remaining time value is very small, but the intrinsic value is the same. EARNINGS PER COMMON SHARE 72. FAS 128 HAS BEEN EFFECTIVE SINCE 1997. THE DISCLOSURE ABOUT HOW FAS 128 CHANGED PRIOR PRACTICE IS NO LONGER RELEVANT. PLEASE REVISE TO FOCUS SOLELY ON HOW THE COMPANY COMPUTES LOSS PER SHARE UNDER THE CURRENT GUIDANCE. ALSO MAKE THE QUANTIFIED DISCLOSURE REQUIRED BY PARAGRAPH 40C TO FAS 128. The Company has complied with the Staff's comment. Please refer to page F-12 of the Registration Statement. FAIR VALUE OF FINANCIAL INSTRUMENTS 73. WE SEE THAT SOME OF YOUR DEBT WAS NOT REPAID AT MATURITY, THAT SOME OF YOUR DEBT IS DELINQUENT AND THAT YOU DISCLOSE ON PAGE 8 THAT FINANCIAL INSTITUTIONS HAVE BEEN UNWILLING TO LEND TO YOU IN RECENT PERIODS. WITH RESPECT TO YOUR DEBT, IT STRONGLY APPEARS THAT DISCLOSURE UNDER PARAGRAPH 14 TO FAS 107 MAY BE NECESSARY. REGARDLESS, IN LIGHT OF YOUR FINANCIAL CONDITION AND HISTORY OF DEFAULTS, THE BLANKET STATEMENT THAT THE CARRYING AMOUNT OF YOUR DEBT APPROXIMATES FAIR VALUE BECAUSE OF SHORT MATURITIES DOES NOT APPEAR APPROPRIATE. PLEASE REVISE AND ADVISE. Management of the Company believes that it is practicable to estimate the fair value of the notes payable, negating necessity for disclosure under paragraph 14 to FAS 107. Management believes that the carrying amount of the debt approximates fair value because of the short maturities of the notes payable. As consideration for the notes payable, the Company received cash and intends to repay the debt and related interest in cash, a readily measurable financial instrument. While the Company historically has been unable to repay certain of its debts timely, the intent always has been that notes payable would be paid pursuant to their terms. Management does not believe that it would be appropriate to disclose otherwise. 17 NOTE 3 - INVENTORIES - PAGE F-12 74. SUPPLEMENTALLY TELL US ABOUT THE FINISHED GOODS INVENTORY. DESCRIBE THE NATURE OF THE ITEMS AND PROVIDE AN AGING. SUPPORT SUPPLEMENTALLY AND IN DETAIL THAT THE CARRYING AMOUNT IS RECOVERABLE. THE LACK OF SALES ACTIVITY STRONGLY SUGGESTS THAT THE AMOUNT IS NOT RECOVERABLE. PROVIDE SUPPORT FOR YOU CONCLUSIONS ABOUT RECOVERABILITY. The Company maintained a limited finished goods inventory subsequent to the sale of its subsidiary, Dasibi Environmental Corp. Prior to and through the date of filing of the June 30, 2004 Form 10-QSB, management intended to incorporate the finished units into the completed prototypes of its Anthrax Smoke Detector. Management of the Company evaluates its assets quarterly and at such times as it determines that the value of an asset will not be realized, it records impairment. During the third quarter of 2004, Management determined that the finished units would best be used in research and development activities and reappropriated the entire finished goods inventory to research and development expense at that time. NOTE 6 - NOTES PAYABLE - PAGE F-13 75. SUPPLEMENTALLY IDENTIFY THE CREDITOR FOR EACH BORROWING. SHOW US THAT NONE OF THESE ENTITIES SHOULD BE IDENTIFIED AS RELATED PARTIES. The Company has enclosed a supplemental schedule identifying creditors for each borrowing listed in Note 6. None are related parties. Note that related party notes payable have been disclosed separately in Note 5 to the financial statements. NOTE 8 - STOCKHOLDERS' EQUITY - PAGE F-19 76. PLEASE MAKE DISCLOSURE UNDER PARAGRAPH 48 TO FAS 123. The Company has complied with the Staff's comment. Please refer to page F-24 of the Registration Statement. 77. PLEASE MAKE FAIR VALUE DISCLOSURE UNDER PARAGRAPH 47B TO FAS 123 FOR EACH INCOME STATEMENT PERIOD. The Company has complied with the Staff's comment. Please refer to page F-25 of the Registration Statement. 78. SUPPLEMENTALLY IDENTIFY THE PARTIES TO WHOM YOU ISSUED 3 MILLION SHARES FOR CONSULTING SERVICES. ALSO PROVIDE US COPIES OF THE UNDERLYING AGREEMENTS. The Company has enclosed copies of consulting agreements with Investor Relations Services, Inc. and Summit Trading, Ltd. The Company issued 1,200,000 shares each to Investor Relations Services, Inc. and Summit Trading, Ltd. and 600,000 shares to Profit Earth, an affiliate of Investor Relations Services, Inc. and Summit Trading, Ltd. Profit Earth is providing a portion of the consulting services. None of these entities are related parties. 18 NOTE 9 - STOCK BASED COMPENSATION - PACE F-20 79. TELL US WHY THE FULL FAIR VALUE OF THE 6.8 MILLION OPTIONS IS EXPENSED UPFRONT IN YOUR PRO FORMA DISCLOSURE. TELL US (AND MAKE DISCLOSURE) ABOUT THE VESTING PROVISIONS OF THESE OPTIONS. The full fair value of the option to purchase 6,800,000 shares of the Company's common stock was recognized upon the date of grant for PRO FORMA disclosure purposes since the option was fully vested and immediately exercisable on the date of grant. The Company has revised its disclosure in response to the Staff's comment. Please refer to page F-25 of the Registration Statement. NOTE 10 - COMMITMENTS AND CONTINGENCIES - PAGE F-21 80. REVISE THE DISCUSSION UNDER "LEGAL JUDGMENT" TO ADD A CROSS-REFERENCE TO NOTE 14 REGARDING THE RESTATEMENT TO THE CORRECT AMOUNT FOR THIS LIABILITY. The Company has complied with the Staff's comment. Please refer to page F-26 of the Registration Statement. 81. PLEASE MAKE DISCLOSURE ABOUT ANY COMMITMENTS AND CONTINGENCIES RELATED TO THE CALTECH LICENSE AGREEMENT DATED SEPTEMBER 30, 2003. FOR INSTANCE, WHAT ARE THE LICENSE FEE REQUIREMENTS? SIGNIFICANT COMMITMENTS SHOULD ALSO BE DISCUSSED AND QUANTIFIED IN MD&A. The Company has complied with the Staff's comment. Please refer to page F-26 of the Registration Statement. NOTE 12 - SALE OF SUBSIDIARY AND DISCONTINUED OPERATIONS - PAGE 21 82. SUPPLEMENTALLY PROVIDE THE STAFF WITH THE CALCULATION FOR THE $1,490,553 RECORDED AS THE GAIN ON SALE OF DASIBI. The Company has enclosed a supplemental schedule with the calculation for the $1,490,553 gain on the sale of Dasibi. NOTE 13 - RELATED PARTY TRANSACTIONS - PAGE 22 83. PLEASE UPDATE THE LAST PARAGRAPH OF NOTE 13. WHAT IS THE STATUS OF THE SUB-LEASE AGREEMENT? The Company has complied with the Staff's comment. Please refer to page F-28 of the Registration Statement. 84. WE SEE THE SIGNIFICANCE OF TRANSACTIONS WITH ENTITIES RELATED TO YOUR PRESIDENT AND CEO. IN LIGHT OF THE MATERIALITY, YOU SHOULD REVISE TO IDENTIFY THE RELATED PARTIES BY NAME (FOR INSTANCE, ASTOR CAPITAL, INC.). ALSO DISCLOSE THE EXTENT OF THE EQUITY INTEREST (FOR INSTANCE, WE SEE THE MR. TIZABI IS A 50% OWNER OF ASTOR CAPITAL, INC.) AND WHETHER ANY OF YOUR EMPLOYEES/DIRECTORS ARE ALSO EMPLOYEES, OFFICERS OR DIRECTORS OF THE RELATED ENTITIES. ALSO RESPOND SUPPLEMENTALLY. 19 The Company has complied with the Staff's comment. Please refer to page F-28 of the Registration Statement. The Company also has attached a supplementary schedule for further information regarding employees in common with related party entities. 85. WE SEE THAT YOU ALSO PAID PLACEMENT FEES TO RELATED PARTIES IN EACH PERIOD. PLEASE EXPAND NOTE 13 TO INCLUDE DISCLOSURE ABOUT ALL RELATED PARTY TRANSACTIONS. The Company has complied with the Staff's comment. Please refer to page F-28 of the Registration Statement. EXHIBITS 86. PLEASE ENSURE THAT YOU HAVE FILED ALL YOUR EXHIBITS, INCLUDING: o ANY CREDIT OR LOAN AGREEMENTS; o THE STOCK PURCHASE AGREEMENT FOR THE PURCHASE OF SHARES BY THE SELLING SHAREHOLDERS, IF ANY o THE REGISTRATION RIGHTS AGREEMENT WITH THE SELLING SHAREHOLDERS; o THE AGREEMENT WITH MEYERS & ASSOCIATES AS PLACEMENT AGENT; o THE WARRANTS ISSUED TO THE SELLING SHAREHOLDERS; AND o YOUR AGREEMENT WITH RUTGERS UNIVERSITY. The Company has complied with the Staff's comment. Please refer to Exhibits Nos. 10.7-10.12 to the Registration Statement. ACCOUNTANT'S CONSENT 87. PROVIDE A CURRENTLY DATED AND SIGNED CONSENT OF INDEPENDENT ACCOUNTANTS WITH ANY AMENDMENTS. The Company has complied with the Staff's comment. Please refer to Exhibit No. 23.2 of the Registration Statement. If you have questions or require any additional information or documents, please do not hesitate to contact me at (310) 728-3289. Very truly yours, /s/ Afshin Hakim ----------------------------- Afshin Hakim -----END PRIVACY-ENHANCED MESSAGE-----