-----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, GUXFd/jy5BeC0N6Sf1pZqGddLhSj8KhPkrtblHqbuuZeOUQHVZNWBSjktiu36lb1 Io+km280vup6/X0kDtsPpQ== 0000936392-96-000755.txt : 19960911 0000936392-96-000755.hdr.sgml : 19960911 ACCESSION NUMBER: 0000936392-96-000755 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 24 FILED AS OF DATE: 19960909 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S MEDICAL INSTRUMENTS INC CENTRAL INDEX KEY: 0000910507 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 331688497 STATE OF INCORPORATION: CA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-11657 FILM NUMBER: 96627733 BUSINESS ADDRESS: STREET 1: 16825 VIA DEL CAMPO COURT CITY: RANCHO BERNARDO STATE: CA ZIP: 92127 BUSINESS PHONE: 6196747200 MAIL ADDRESS: STREET 1: 16825 VIA DEL CAMPO COURT CITY: RANCHO BERNARDO STATE: CA ZIP: 92127 S-1 1 U.S. MEDICAL INSTRUMENTS, INC. -- FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 9, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ U.S. MEDICAL INSTRUMENTS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 5047 33-1688497 (STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
16825 VIA DEL CAMPO COURT, SAN DIEGO, CALIFORNIA 92127 (619) 674-7200 (ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) MATTHEW S. MAZUR, PRESIDENT U.S. MEDICAL INSTRUMENTS, INC. 16825 VIA DEL CAMPO COURT, SAN DIEGO, CALIFORNIA 92127 (619) 674-7200 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ IT IS REQUESTED THAT COPIES OF ALL COMMUNICATIONS BE SENT TO: OTTO E. SORENSEN, ESQ. STEPHEN H. KAY, ESQ. LUCE, FORWARD, HAMILTON & SCRIPPS LLP SQUADRON, ELLENOFF, PLESENT & SHEINFELD, LLP 600 WEST BROADWAY, 26TH FLOOR 551 FIFTH AVENUE SAN DIEGO, CALIFORNIA 92101 NEW YORK, NEW YORK 10176 (619) 236-1414 (212) 661-6500 (619) 232-8311(FAX) (212) 697-6686 (FAX)
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after this Registration Statement becomes effective. If 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. / / If the 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 delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- PROPOSED PROPOSED MAXIMUM MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE - ------------------------------------------------------------------------------------------------- Common Stock........................ $25,300,000 $8,724 - ------------------------------------------------------------------------------------------------- Representative's Warrant............ -- - ------------------------------------------------------------------------------------------------- Common Stock issuable upon exercise of Representative's Warrant(3).... 2,640,000 910 - ------------------------------------------------------------------------------------------------- Total Registration Fee.............. $9,634 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) Includes shares that the Underwriters have the option to purchase solely to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457. (3) Pursuant to Rule 416, there are also being registered such additional shares of Common Stock as may become issuable upon exercise of the Representative's Warrant. ------------------------ 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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED SEPTEMBER 9, 1996 SHARES U.S. MEDICAL INSTRUMENTS, INC. COMMON STOCK All of the shares of Common Stock offered hereby are being offered by U.S. Medical Instruments, Inc. (the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently anticipated that the initial public offering price will be between $ and $ per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Company has applied for quotation of the Common Stock on the Nasdaq National Market under the symbol "USMI." FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING ON PAGE 6. ------------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS (1) COMPANY (2) - -------------------------------------------------------------------------------------------------- Per Share....................... $ $ $ - -------------------------------------------------------------------------------------------------- Total (3)....................... $ $ $ - -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting offering expenses estimated to be $ payable by the Company. (3) The Company has granted to the Underwriters a 30-day option to purchase up to additional shares of Common Stock solely to cover over-allotments, if any, on the same terms and conditions as the shares offered hereby. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------------ The shares of Common Stock are offered by the several Underwriters named herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made at the offices of Rodman & Renshaw, Inc., New York, New York, on or about , 1996. ------------------------------ RODMAN & RENSHAW, INC. The date of this Prospectus is , 1996 3 INSIDE FRONT COVER The SafeSnap syringe is similar in appearance, size and manner of use to a standard syringe. After the injection, it serves as a container to completely encapsulate the contaminated needle for safe disposal, thereby reducing the risk of an accidental needlestick and preventing reuse. SAFESNAP [PICTURE OF SAFESNAP SYRINGE] A series of four photographs showing four distinct stages in the use of the syringe: the injection, the retraction of the needle, the snapping off of the plunger and the sealing of the needle in the syringe. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SafeSnap(R) is a registered trademark of the Company. This Prospectus also includes trade names, trademarks and registered trademarks of companies other than the Company. 4 PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by the more detailed information and financial statements and the notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all financial and share information set forth in this Prospectus assumes (i) the conversion at the closing of this offering of all 6,693,582 outstanding shares of the Company's Preferred Stock to 6,693,582 shares of Common Stock, (ii) no issuance of an aggregate of 3,197,196 shares of Common Stock reserved for issuance pursuant to outstanding options and warrants, (iii) an initial public offering price of $ per share, the midpoint of the range set forth on the cover page of this Prospectus and (iv) no exercise of the Underwriters' over-allotment option. All references to fiscal years refer to the fiscal year of the Company ending January 31. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in "Risk Factors." THE COMPANY The Company designs, develops, manufactures and markets proprietary, safety-enhanced, disposable medical products intended to protect healthcare workers from the spread of infectious diseases such as AIDS and hepatitis. The Company's first product line, the SafeSnap syringe, consists of a line of single-use hypodermic syringes designed to reduce the risk of transmission of blood borne diseases from accidental needlesticks. A SafeSnap syringe is similar in appearance, size and manner of use to a standard (i.e., non-safety) syringe; however, it incorporates patented retraction and encapsulation technology that permits the isolation of the needle within the barrel of the syringe immediately after use, thereby facilitating safe disposal. The SafeSnap product line consists of four syringes which vary by size, needle length and gauge. The SafeSnap syringe is also latex-free and will not cause adverse reactions in the estimated 8-10% of patients and healthcare workers with allergies to latex. The Company believes that the SafeSnap syringe is the only safety syringe currently on the market that is latex-free. The Company has five additional safety products under development: a winged butterfly set, an arterial-venous fistula set, a blood gas syringe, a needleless vial adapter and a phlebotomy (blood collection) device. An estimated 800,000 accidental needlesticks from syringes, catheters and blood collection devices occur nationwide each year in hospital and clinic settings with direct costs of up to $1,200 per incident, including treatment of the wound, diagnostic tests and lost worker time and excluding long-term treatment and liability costs. The spread of infectious diseases to nurses, doctors, medical technicians and others through accidental needlesticks is a matter of concern to the healthcare industry. Heightened awareness of the risk of infection from accidental needlesticks and the substantial cost to healthcare providers of complying with regulatory protocols when needlesticks occur have led to growing demand for safe medical devices such as the Company's SafeSnap syringes. In response to these concerns, healthcare regulations have been promulgated by the Occupational Safety and Health Administration mandating that "universal precautions" be observed to minimize exposure to blood and other body fluids. In addition, several states have directed hospitals to develop programs to track the effectiveness of safety devices and to develop guidelines for the handling and disposal of "sharps" devices. According to industry reports, approximately 5.2 billion syringes were sold in the United States in 1995. Although safety has increasingly become a concern in the healthcare industry, safety syringes currently represent only a small portion of the overall syringe market. Studies indicate that safety syringes will become widely used during the next five years, capturing up to 80 percent of the syringe market by the year 2001. The Company believes that its SafeSnap syringe has the potential to capture a significant share of the overall syringe market because of its advantages over standard and other competitive safety syringes. The Company's objective is to become a leading designer, developer, manufacturer and marketer of safety-enhanced medical products. Its business strategy is to (i) increase its customer base through direct selling efforts and establishing strategic distribution alliances, (ii) broaden its product lines by applying its technology, manufacturing capabilities and market presence developed with the SafeSnap syringe and 3 5 (iii) reduce per unit cost by increasing unit volume, completing the Company's automation of assembly and printing processes and incorporating design enhancements in production tooling. The Company has devoted a substantial portion of its efforts since its formation to research and development and the establishment of its manufacturing capabilities. From inception through April 30, 1996, the Company has incurred approximately $3.4 million in research and development expenses and approximately $10.8 million in pre-manufacturing and manufacturing costs, including depreciation. In addition, as of April 30, 1996, the Company had invested approximately $9.6 million in property and equipment. The Company operates a 55,000 square foot vertically integrated manufacturing facility where it designs and builds most of its high precision molds and prototypes. The Company has established a high-speed, fully automated production line for the molding, printing, assembly and packaging of the 3cc size SafeSnap syringe. The Company also molds, prints and packages the remaining sizes at its facility. Assembly of those sizes is currently performed by third-party subcontractors. The Company will use a portion of the proceeds of this offering to implement automation of the printing and assembly processes for those remaining syringe sizes. The Company has recently expanded its direct sales force and distribution channels. Since January 31, 1996, the Company has hired a Vice President of Sales, area sales directors and a majority of its planned 24 member direct sales force which will establish a presence in 24 major metropolitan areas in the United States. The Company has also entered into a distribution partnership with one of the largest medical products distributors in Asia to facilitate sales of its products in Japan. In the five months ended June 30, 1996, net sales were approximately $630,000, principally as a result of sales to the Company's distributor in Japan and increased domestic sales, as compared to net sales of $51,000 in the five months ended June 30, 1995. The Company was incorporated in California in 1991. Its offices are located at 16825 Via Del Campo Court, San Diego, California 92127, and its telephone number is (619) 674-7200. THE OFFERING Common Stock Offered by the Company............................. shares Common Stock to be Outstanding After the Offering........................ shares (1) Use of Proceeds..................... Purchase of capital equipment for manufacturing and assembly; marketing, sales, and advertising; development of additional product lines; and general working capital purposes. Proposed Nasdaq National Market Symbol.............................. "USMI" - --------------- (1) Excludes (i) 1,377,000 shares of Common Stock issuable upon exercise of options granted under the Company's 1993 Stock Plan (the "Option Plan"), (ii) up to 1,820,196 shares of Common Stock issuable upon exercise of outstanding warrants and (iii) up to shares of Common Stock issuable upon exercise of a warrant to Rodman & Renshaw, Inc. (the "Representative's Warrant"). See "Description of Capital Stock." 4 6 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED FISCAL YEAR ENDED JANUARY 31, APRIL 30, ----------------------------------------------- ----------------- 1992(1) 1993 1994 1995 1996 1995 1996 ------- ------- ------- ------- ------- ------- ------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net sales................................ $ -- $ 5 $ 1 $ 44 $ 372 $ 22 $ 222 Costs and expenses: Pre-manufacturing and manufacturing.... -- 366 626 3,926 4,966 1,355 937 General and administrative............. 142 651 1,049 1,217 1,925 398 502 Selling and marketing.................. -- 571 385 1,136 941 198 354 Research and development............... 458 249 1,116 857 588 178 117 ----- ------- ------- ------- ------- ------- ------- Total costs and expenses............. 600 1,837 3,176 7,136 8,420 2,129 1,910 ----- ------- ------- ------- ------- ------- ------- Loss from operations..................... (600) (1,832) (3,175) (7,092) (8,048) (2,107) (1,688) Interest expense and debt issuance costs................................ -- -- 67 205 765 40 33 Other expenses......................... -- 8 -- 185 -- -- -- ----- ------- ------- ------- ------- ------- ------- Net loss................................. $(600) $(1,840) $(3,242) $(7,482) $(8,813) $(2,147) $(1,721) ===== ======= ======= ======= ======= ======= ======= Pro forma net loss per common share...... ======= ======= Shares used in computing pro forma net loss per common share..............
AT APRIL 30, 1996 -------------------------- ACTUAL AS ADJUSTED(2) ------- -------------- (UNAUDITED) BALANCE SHEET DATA: Total assets.............................................................. $12,352 Long-term debt, including current portion................................. 2,049 Working capital (deficit)................................................. (1,089) Shareholders' equity...................................................... 8,073
- --------------- (1) From the date of the Company's inception on June 19, 1991 to January 31, 1992. (2) Adjusted to reflect receipt by the Company of estimated net proceeds of $ from the issuance of shares of Common Stock at an assumed public offering price of $ per share and the application of such proceeds. See "Use of Proceeds" and "Capitalization." 5 7 RISK FACTORS In evaluating an investment in the Common Stock being offered hereby, investors should consider carefully, among other matters, the following risk factors, as well as the other information contained in this Prospectus. An investment in the Common Stock is speculative in nature, and involves a high degree of risk. UNCERTAINTY OF MARKET ACCEPTANCE; LIMITED CURRENT MARKET FOR SAFETY SYRINGES; PREMIUM PRICING The use of safety medical products, including safety syringes, is a recent development within the healthcare industry. While the market for syringes is large, the market for safety syringes, including the Company's SafeSnap line of products, has not yet been established. Safety syringes currently represent a small portion of the domestic syringe market. In addition, the Company has not completed the development of its safety winged butterfly set, arterial-venous fistula set, blood gas syringe, needleless vial adapter or phlebotomy devices. Therefore, the Company cannot be certain that any of these safety products will be accepted by the healthcare industry. Market acceptance of the Company's products will depend in large part on the Company's ability to demonstrate the operational advantages, safety and cost effectiveness of its products as compared to standard products and its competitors' safety products. Failure to achieve market acceptance would have an adverse effect on the Company's business, financial condition and results of operations. Manufacturing costs and prices for the Company's safety products are higher than for their standard counterparts. While the Company believes that its products can be cost effective on an actual use basis, prospective customers must be convinced to pay premium prices for safety products. Increasing sensitivity to healthcare costs, public interest in healthcare reform and continuing pressure from Medicare, Medicaid and other payors to reduce costs in the healthcare industry, as well as increasing competition from other safety products, could affect the Company's ability to sell its products at premium prices. In the event that the market will not accept premium prices for the Company's products, the Company's sales and profits could be adversely affected. The Company believes that its ability to increase its market share and operate profitably in the long term will depend in part on its ability to reduce the manufacturing costs of its products on a per unit basis through high volume production using highly automated molding, printing and assembly systems. If the Company is unable to reduce unit manufacturing costs, it may be unable to obtain a significant share of the syringe market. Such a result would adversely affect the Company's future results of operations. See "Business -- Sales, Marketing and Distribution." HISTORY OF OPERATING LOSSES; GOING CONCERN OPINION IN INDEPENDENT ACCOUNTANTS' REPORT From its inception in 1991, the Company has been engaged principally in research and development and the establishment of its manufacturing capabilities. Product sales have not been significant to date, and the Company has sustained losses in each year since its inception. Accordingly, the Company's operations are subject to the risks inherent in the establishment of a new business enterprise. The likelihood of the Company's success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in the marketing of new products. These include, but are not limited to, manufacturing and marketing delays and expenses that may exceed current estimates. See "Business." The Company sustained net losses of $7,482,000, $8,813,000 and $1,721,000 for the fiscal years ended January 31, 1995 and 1996 and the three months ended April 30, 1996, respectively. Its accumulated deficit as of April 30, 1996 was $23,698,000. The Company's independent accountants, Price Waterhouse LLP, have included an explanatory paragraph in their report on the Company's financial statements for 1996 which states that "the Company is in the development stage, has incurred a cumulative net loss since inception and is dependent on additional financing in order to continue its operations and execute its growth strategy. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern." The Company expects to continue to incur losses during the near term due to the significant costs it believes will be incurred in marketing the SafeSnap syringe and in developing future products. There can be no assurance that the Company will achieve profitability. See "Use of Proceeds," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Financial Statements." 6 8 DEPENDENCE ON SAFESNAP; UNCERTAINTIES OF NEW PRODUCT DEVELOPMENT The Company is currently dependent upon sales of the SafeSnap syringe for all its revenue, and market acceptance of the SafeSnap syringe has not yet been demonstrated and is not assured. Factors adversely affecting the pricing of or demand for the SafeSnap syringe will have a substantial impact upon the Company's financial condition and its ability to introduce new products. Such factors may include lack of market acceptance, competition from other products, obsolescence as a result of the development of alternative drug delivery systems and negative publicity. Furthermore, even if the SafeSnap syringe is successful, the Company's success will also be dependent on new product development. Although the Company is developing a variety of new safety products, there can be no assurance that any of the Company's new products will be commercially successful or that the Company will be able to recover the costs of developing, testing, producing and marketing such products. INTENSE COMPETITION; RISK OF TECHNOLOGICAL OBSOLESCENCE The market for syringe products is intensely competitive. The Company believes that its ability to compete depends upon its continued product innovation, the quality, convenience and reliability of its products, access to distribution channels, the success of its direct sales strategy and patent protection. The Company encounters significant competition both from large, established medical device manufacturers and from smaller companies. Significant competitors of the Company in the safety syringe market include Becton, Dickinson and Company, Sherwood Medical (a division of American Home Products Corporation) and Terumo Medical Corporation. Many companies have introduced their own safety-enhanced syringes. Most of the Company's current and prospective competitors have economic and other resources substantially greater than the Company's and are well established as suppliers to the healthcare industry. Several large, established competitors offer broad product lines and have been successful in obtaining full-line contracts with a large number of healthcare providers to supply a significant portion of their medical products. There can be no assurance that the Company's competitors will not substantially increase their resources devoted to the development, manufacture and marketing of products that compete with the Company's products. The successful implementation of such a strategy by one or more of the Company's competitors could have a material adverse effect on the Company. The Company's initial focus on a single product line and technology makes it vulnerable to the development of superior products and changes in technology. The Company's proprietary technology relates to the safe injection or withdrawal of fluids. To the extent that competing technologies may be developed which provide a more effective or less intrusive method to achieve the same results, the Company's technology could be rendered obsolete. Such obsolescence would have an immediate and adverse effect on the Company's business, financial condition and results of operations. See "Business -- Competition." LIMITED MANUFACTURING EXPERIENCE The Company has limited experience in manufacturing its products. The Company is currently manufacturing the SafeSnap syringe and no other products. The Company began manufacturing the 3cc SafeSnap syringe in fiscal 1994 and its 1cc, 5cc and 10cc syringe sizes in fiscal 1995. The Company has not yet begun to function at full manufacturing capacity. Should orders increase, the Company may experience manufacturing difficulties. For the Company to be successful, it must manufacture the SafeSnap syringe in sufficient quantities and at a reasonable cost while maintaining quality control standards. The Company does not have sufficient manufacturing experience to be assured that it will meet these requirements. In the course of making changes to its manufacturing processes as it develops new products, the Company may encounter difficulties involving product quality, product reliability, manufacturing costs, supplies and personnel, which may lead to delays in production. There also can be no assurance that the Company will be able to manufacture any of its proposed new products. See "Business -- Manufacturing." 7 9 DEPENDENCE ON KEY SUPPLIERS Certain of the materials used to manufacture the Company's SafeSnap product line are obtained from a sole supplier or a limited group of suppliers. For example, the needles used in the Company's syringes are produced by a single supplier located in Japan. In addition, as of the date of this Prospectus, a majority of the Company's products are assembled by a third-party Maquiladora operation in Mexico. Therefore, in addition to the normal risks attendant to a sole supplier, such as the possibility of interruptions in supply and volatility in prices, the cost of manufacturing the Company's syringes could be adversely affected by changes in currency exchange rates. Regulatory requirements applicable to medical device manufacturing can make substitution of suppliers costly and time-consuming. While alternative suppliers are available, a change in suppliers would cause an interruption of supply and possibly an increase in costs. See "Business -- Manufacturing." LIMITED SALES AND MARKETING EXPERIENCE The Company has experienced only limited sales to date. Historically, the Company attempted to sell its products through distributors in the United States. In 1996, the Company determined that the introduction of a new product such as the Company's SafeSnap syringe would require the efforts and attention of a direct sales force. Consequently, the Company shifted its marketing and sales strategy to direct sales. To implement this strategy it hired a Vice President of Sales and area sales directors, and it began hiring 24 sales representatives in fiscal 1996. This sales force has only recently been employed, and there can be no assurance that this strategy will be successful. See "Business -- Sales, Marketing and Distribution." LIMITED MANAGEMENT EXPERIENCE Although the Company intends to pursue a strategy of growth and will seek to expand the market for its SafeSnap syringe and develop additional products, the Company's management has had limited experience in effecting rapid expansion and in managing operations which are more extensive than those presently conducted. The Company's proposed expansion will be dependent, among other things, on its ability to monitor operations, control costs, maintain quality control standards and establish a successful marketing program. Although the Company may seek to hire additional management with greater experience in the operations of a medical products company, there can be no assurance that it will be able to do so. See "Management." PROPRIETARY PROTECTION; NEED TO DEVOTE ADDITIONAL RESOURCES TO PATENTS The Company's success will depend in part on its ability to protect its proprietary rights. The Company owns the rights to three patents issued by the United States Patent Office and has an exclusive paid-up license for an additional patent with regard to its SafeSnap syringes. There can be no assurance that the Company's patents will offer meaningful protection. There can be no assurance that the Company's patents, if challenged, will be broad enough to protect its proprietary position. In general, there has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. Patent infringement litigation, which may be necessary to enforce patents issued to or licensed by the Company, or to defend the Company against claimed infringement of the rights of others, can be expensive and may involve a substantial commitment of the Company's resources, thereby diverting resources from other uses. Adverse determinations or settlements in any such litigation could subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties or prevent the Company from manufacturing and selling its products, any of which could have a material adverse effect on the Company's business. Additionally, disputes may arise in the future with respect to the ownership of technology developed by consultants or employees who were previously employed by other companies. Patent infringement litigation and related litigation is inherently uncertain and costly, and the claims and counterclaims which might be asserted against the Company could, if successful, have a material adverse effect on the Company and its finances. Moreover, the Company has not had sufficient financial resources to expand its patent protection. To date, the Company has not filed any patent applications for any products other than its SafeSnap syringe. Accordingly, there can be no assurance that such products will be patentable. See "Business -- Patents." 8 10 In addition to its patents, the Company intends to rely upon unpatented trade secrets and proprietary know-how and on the expertise of its employees. Although the Company believes that it has in the past taken, and intends in the future to take, appropriate steps to protect its unpatented proprietary rights, including requiring that all of its employees and any third parties granted access to the Company's proprietary technology enter into confidentiality agreements with the Company, there can be no assurance that these measures will be sufficient to protect the Company's rights against third parties. Likewise, there can be no assurance that others will not independently develop or otherwise acquire unpatented technologies or products similar or superior to those of the Company. GOVERNMENT REGULATION The testing, manufacture and sale of the Company's products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies. Pursuant to the Federal Food, Drug and Cosmetic Act (the "FDC Act"), and the regulations promulgated thereunder, the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution, and promotion of medical devices. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing clearances or approvals, and criminal prosecution. The FDA also has the authority to request recall, repair, replacement or refund of the cost of any device manufactured or distributed by the Company. The Company will not be able to commence marketing or commercial sales in the United States of new products under development until it receives clearance or approval for such products from the FDA, which can be a lengthy, expensive and uncertain process. Modifications to a device that is the subject of an approved premarket approval ("PMA") application, its labeling or manufacturing process may require approval by the FDA of PMA supplements or new PMAs. For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness, or constitute a major change in the intended use of the device, will require new 510(k) submissions. Any devices manufactured or distributed by the Company pursuant to FDA clearance or approvals are subject to pervasive and continuing regulation by the FDA and certain state agencies. Manufacturers of medical devices for marketing in the United States are required to adhere to applicable regulations setting forth detailed Good Manufacturing Practices ("GMP") requirements, which include testing, control and documentation requirements. Manufacturers must also comply with Medical Device Reporting ("MDR") requirements that a firm report to the FDA any incident in which its product may have caused or contributed to a death or serious injury, or in which its product malfunctioned and, if the malfunction were to recur, it would be likely to cause or contribute to a death or serious injury. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses. The Company has obtained clearance from the FDA under Section 510(k) of the FDC Act to market its SafeSnap line of syringes. The Company has made modifications to its devices which the Company believes do not require the submission of new 510(k) notices. There can be no assurance, however, that the FDA would agree with any of the Company's determinations not to submit a new 510(k) notice for any of these changes or would not require the Company to submit a new 510(k) notice for any of the changes made to the device. If the FDA requires the Company to submit a new 510(k) notice for any device modification, the Company may be prohibited from marketing the modified device until the 510(k) notice is cleared by the FDA. The Company currently has five product lines under development, a winged butterfly set, an arterial-venous fistula set, a blood gas syringe, a needleless vial adapter and a phlebotomy device. The Company expects that these products will be subject to 510(k) premarket clearance by the FDA (as opposed to the more costly and time consuming premarket approval process) based upon the FDA's treatment of similar products on the market. There can be no assurance, however, that the FDA will not require PMA applications for one or more of these products under development. Further, there can be no assurance that the Company will be able to obtain necessary regulatory approvals or clearances for these products under development on a timely basis or at all, and delays in receipt of or failure to receive such approvals or clearances, the loss of 9 11 previously received clearances, limitations on intended use imposed as a condition of such approvals or clearances, or failure to comply with existing or future regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. The sale and distribution of the Company's medical devices outside the United States are subject to foreign regulatory requirements that vary widely from country to country. The time required to obtain approval or clearance required by foreign countries may be longer or shorter than that required for FDA approval or clearance and the requirements may differ. There can be no assurance that the Company will be able to obtain necessary regulatory approvals or clearances in countries in which it wants to introduce its products. See "Business -- Government Regulation." DEPENDENCE UPON KEY EMPLOYEES The success of the Company depends on the skills, experience and efforts of its executive officers and certain marketing and technical personnel. The Company is particularly dependent on the services of Matthew S. Mazur, the founder, Chairman, President and Chief Executive Officer of the Company. The Company is also dependent on the services of Scott M. Dolin, Vice President of Operations, Carlos H. Manjarrez, Vice President of Research and Development, Marshall Kerr, Vice President of Sales, and Louis Hernandez, Jr., Chief Financial Officer. The loss of the services of Mr. Mazur or any of the Company's other key employees could have an adverse effect on the Company. Mr. Mazur has an employment agreement with the Company which may be terminated by either party upon 30 days' notice. The Company does not have an employment agreement with any other key employee. See "Management." NEED FOR QUALIFIED PERSONNEL In order to meet its business objectives, the Company will need to hire additional marketing, engineering, manufacturing and sales personnel. The Company will be required to compete for such personnel with companies having greater financial and other resources. Since the future success of the Company will be dependent, in part, upon its ability to attract and retain qualified personnel, an inability to do so could have an adverse effect on the Company. RISKS ASSOCIATED WITH INTERNATIONAL SALES In fiscal 1996 and for the first three months of fiscal 1997, international sales represented approximately 66% and 86% of the Company's total revenues, respectively. The Company intends to expand its sales outside the United States and to enter markets, either directly or through distributors, that will require significant management attention and financial resources. There can be no assurance that the Company's efforts to increase its presence in international markets will be successful or that such markets will prove to be viable. To the extent that the Company is able to continue to successfully increase its foreign sales, it will become increasingly subject to risks inherent in foreign trade, including increased credit risk, customs duties and import quotas and other trade restrictions, fluctuations in foreign currency exchange rates, shipping delays, and international political, regulatory and economic developments, all of which could have a material adverse effect on the Company. In addition, to the extent that the Company establishes operations in foreign countries, there can be no assurance that political, regulatory, economic or military developments, over which the Company will have no control, will not subject the Company to increased risk of loss of revenues and property due to, among other things, expropriation, nationalization, inflation, currency devaluation, international hostilities, confiscatory taxation, limitations on repatriation and currency controls. The Company's current international sales are denominated in United States dollars and the Company anticipates that its future international sales will be as well. An increase in the value of the United States dollar relative to foreign currencies could make the Company's products more expensive and potentially less competitive in foreign markets. If for any reason exchange or price controls or other restrictions on foreign currencies are imposed, the Company's business, financial condition and results of operations could be 10 12 materially adversely affected. See "Business -- Sales, Marketing and Distribution" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." GROWTH AND ACQUISITION RISKS The Company intends to use a substantial portion of the net proceeds from this offering to continue to hire additional direct marketing staff, establish strategic distribution channels and acquire additional manufacturing equipment. It may also use a portion of the net proceeds to expand its product offerings through acquisitions in the United States or in foreign countries. The expansion of the marketing, distribution and manufacturing operations of the Company both internally and through acquisitions may place substantial burdens on the Company's management resources and financial controls. There can be no assurance that such increased burdens would not have an adverse effect on the Company's operating results. In addition, acquisitions may involve a number of special risks, including adverse short-term effects on the Company's operating results, diversion of management's attention, dependence on retention, hiring and training of key personnel, risks associated with unanticipated problems or legal liabilities and amortization of acquired intangible assets, some or all of which could have a material adverse effect on the Company's operations and financial performance. See "Use of Proceeds." REQUIREMENT FOR ADDITIONAL FUNDS The Company believes that the net proceeds of this offering of approximately $ (assuming an initial offering price of $ per share; $ if the Underwriters' over-allotment option is exercised in full) will be sufficient to satisfy its cash requirements for the coming eighteen months. The Company anticipates that it may require additional funds to cover the costs of continued research and development, manufacturing, marketing and other operating activities. Funds for these purposes may be obtained from a number of sources, including strategic partners, bank financing and additional public or private sales of debt or equity. If additional funds are raised through the issuance of equity securities, the percentage ownership of the current stockholders of the Company will be reduced and such equity securities may have rights, preferences or privileges senior to those of the holders of the Company's Common Stock. However, the Company currently has no arrangements for such financing, and there can be no assurance that any additional financing can be obtained or, if obtained, that it will be on reasonable terms. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the offering there has been no public market for the Company's Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or continue after the offering. The Company has applied for its Common Stock to be listed on the Nasdaq National Market, but its application is pending. If accepted for listing, adverse trends in the Company's financial position and results of operations could result in the delisting of its Common Stock. The trading price of the Company's Common Stock could be subject to wide fluctuations in response to a variety of factors, many of which are beyond the Company's control. These include (i) quarter-to-quarter variations in the Company's operating results, (ii) announcements by the Company or its competitors regarding new products, improvements of their technology and regulatory approvals, (iii) developments or disputes concerning proprietary rights, (iv) technological innovations and new products and (v) general conditions in the medical device industry. Moreover, the stock market has experienced extreme price and volume fluctuations, which have particularly affected the market prices of many medical device companies and which have often been unrelated to the operating performance of such companies. RISK OF PRODUCT LIABILITY The use of the Company's products exposes it to an inherent risk of product liability. Patients, healthcare workers or healthcare providers who claim that the Company's products have resulted in injury could initiate product liability litigation seeking large damage awards from the Company. Even if the litigation is 11 13 successfully defended, the cost of the defense could be substantial. The Company maintains insurance against product liability and defense costs in the amount of $3,000,000 per occurrence and in the aggregate. There can be no assurance that any product liability claims will be successfully defended or that the insurance carried by the Company will be sufficient. A successful claim against the Company in excess of insurance coverage could have a material adverse effect on the Company. Furthermore, there can be no assurance that product liability insurance will continue to be available to the Company on acceptable terms, if at all. PENDING LITIGATION On December 4, 1995, a complaint by plaintiffs Barry L. Rosenblatt, World Video Movies, Ltd., whose representative is Roy K. Black, and Richard Caras, investors in the Company's Series E Preferred Stock, against the Company, Matthew S. Mazur and James R. Yarter, was filed in the United States District Court for the Southern District of California, Case No. 95-3862H(RBB). The complaint alleges the plaintiffs purchased the Company's Series E Preferred Stock in reliance upon fraudulent misrepresentations of projections concerning sales, revenues, profits and production capabilities of the Company. The complaint seeks damages of $1,560,000, the amount of plaintiffs' investment in the securities, together with interest, attorneys' fees and costs, or recision and recovery of the $1,560,000, plus interest and attorneys' fees and costs. The Company believes the action is without merit and is vigorously contesting the action, which has been withdrawn once and dismissed once without prejudice. Following its dismissal, the complaint was refiled. Plaintiffs have agreed to immediately dismiss their claims against James R. Yarter. On August 6, 1996, the Company filed a motion for summary judgment seeking to dispose of all of the plaintiffs' claims. On June 28, 1996, a complaint by plaintiffs G.C. Investments LLC, whose representative is Brian L. Greenspun (a former Director of the Company), and The Medicine Partners, whose representative is Andrew G. Bluhm (a former Director of the Company), investors in the Company's Series E Preferred Stock, was filed in the United States District Court for the Southern District of California, Case No. 96-1187H(CGA). The complaint alleges the plaintiffs purchased the Company's Series E Preferred Stock in reliance upon fraudulent misrepresentations of projections concerning sales, revenues, profits and the intended use of the invested funds. The complaint seeks damages of $8,000,000, the amount of plaintiffs' investment in the securities, together with interest, attorneys' fees, costs and punitive damages. The Company believes the action is without merit and is vigorously contesting the action. On August 13, 1996, the Company filed a motion to dismiss the action for failure to state a claim. If any of the pending actions were successfully prosecuted against the Company, the results could have a material adverse effect upon the Company's financial position, results of operations, cash flows and ability to conduct business. See "Business -- Legal Proceedings." ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS The Board of Directors has the authority to issue up to 12,000,000 shares of Preferred Stock, in one or more series, and to fix the number of shares and the rights, preferences and privileges of any such series. At the time of the closing of the offering, all of the Company's 6,693,582 shares of Preferred Stock currently outstanding will be converted to Common Stock. Therefore, all of the authorized Preferred Stock will be available for issuance. Accordingly, the Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the Company's Common Stock. In the event of such issuance, the Preferred Stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. The Board of Directors does not currently intend to issue shares of Preferred Stock. In addition, after the completion of the offering Mr. Mazur, the President and Chief Executive Officer, will beneficially own % of the Common Stock outstanding ( % if the Underwriters' over-allotment option is exercised in full). The existence of such a large block of stock could make it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company, and may discourage or prevent a change in control of the Company. 12 14 SUBSTANTIAL SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have a total of shares of Common Stock outstanding ( shares if the Underwriters' over-allotment option is exercised in full). Of these shares shares are "restricted securities" under Rule 144 promulgated under the Securities Act of 1933, as amended (the "Securities Act"). Ordinarily, under Rule 144, a person who has held restricted securities for a period of two years may, every three months, sell in ordinary brokerage transactions or in transactions directly with a market maker an amount equal to the greater of one percent of the Company's then-outstanding Common Stock or the average weekly trading volume during the four calendar weeks prior to such sale. Rule 144 also permits the sale of shares without any quantity limitations by a person who is not an affiliate of the Company and has satisfied a three-year holding period. Of the restricted shares, executive officers and directors and certain shareholders holding an aggregate of shares have agreed not to offer or sell such shares for a period of 180 days after the date of this Prospectus without the consent of the Representative on behalf of the Underwriters. Of the remaining restricted securities, shares are now eligible or will be eligible for sale under Rule 144 within 90 days from the date of this Prospectus. Sales of Common Stock pursuant to Rule 144 may have a depressive effect on the market price of the Common Stock. The Company has reserved 2,000,000 shares of Common Stock for issuance to key employees, officers, directors and consultants pursuant to the Company's stock option plans, and options for 1,377,000 of such shares are outstanding as of the date of this Prospectus. The Company has reserved 1,820,196 shares of Common Stock for issuance upon exercise of outstanding warrants convertible to Common Stock. Substantially all of these options and warrants have an exercise price that is significantly less than the offering price of the Common Stock in this offering. The existence of such options and warrants may hinder future equity financing by the Company. Further, the holders of such warrants and options may exercise them at a time when the Company would otherwise be able to obtain additional equity capital on terms more favorable to the Company. In addition, the holders of warrants for 213,334 shares issued to certain shareholders in connection with the private placement offering of Series E Preferred Stock have been granted certain demand registration rights. The existence of these registration rights may involve added costs to the Company. See "Description of Capital Stock" and "Shares Eligible for Future Sale." FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS This Prospectus contains certain forward-looking statements which include the plans and objectives of management for future operations, including plans and objectives relating to the products and future financial performance of the Company. The forward-looking statements are subject to various uncertainties and risks set forth in this Prospectus. Those risks may include uncertainty related to (i) the size and growth of the safety medical device industry, (ii) the Company's ability to increase sales through the introduction and development of new products and product lines, (iii) the success of marketing initiatives to be undertaken by the Company, (iv) the Company's ability to forecast demand for particular designs and products and establish production and delivery schedules which accurately anticipate and respond to market demand and (v) the Company's ability to achieve increases in net sales such that cost of goods sold and selling, general and administrative expenses decrease as a percentage of net sales. These forward-looking statements are based upon assumptions that the Company will continue to design, develop, manufacture, market and ship new products on a timely basis, that competitive conditions with the safety medical device industry will not change materially or adversely, that the safety medical device market will experience steady growth, that demand for the Company's products will develop, that the Company will obtain customers, that the Company will retain key personnel, that technology obsolescence risks will be minimized, and that there will be no material adverse change in the Company's operations or business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking statements will be realized. In light of the significant uncertainties inherent in the forward- 13 15 looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. IMMEDIATE AND SUBSTANTIAL DILUTION This offering involves an immediate and substantial dilution to purchasers of Common Stock offered hereby, in that the pro forma net tangible book value per share of Common Stock after giving effect to the offering will be $ compared to an assumed public offering price per share of $ and assuming no exercise of the Underwriters' over-allotment option, the Representative's Warrant and any outstanding Common Stock, warrants or options. See "Dilution." 14 16 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock being offered hereby at an assumed initial public offering price of $ per share are estimated to be $ ($ if the Underwriters' over-allotment option is exercised in full) after deducting underwriting discounts and estimated offering expenses payable by the Company. The Company anticipates using the net proceeds of this offering as follows: (i) approximately $6,000,000 will be used to purchase capital equipment, including molds and automation, production and assembly machinery, (ii) $6,000,000 will be used to fund sales and marketing activities, including an increased direct sales force and (iii) $2,000,000 will be used to fund research and development focused on developing additional product lines. The balance of the net proceeds will be used for working capital and other general corporate purposes. The Company may also use a portion of the net proceeds to acquire technologies, products or businesses compatible with its existing business, although the Company has no current arrangements, commitments or understanding, in this regard. These amounts are estimates, and the amount and timing of the expenditure of the offering proceeds will depend upon numerous factors, including the effectiveness of the Company's sales and marketing efforts, the results of the Company's product development efforts, and the timing of any required regulatory approvals for future products. The Company believes that the net proceeds from this offering, combined with cash on hand, interest expected to be earned on its cash balances and its revenues, will be sufficient to satisfy its cash requirements for the next eighteen months. Pending their application, the Company intends to invest the net proceeds of this offering in bank deposits and short-term, investment grade securities, including government obligations and money market instruments. DIVIDEND POLICY The Company has not declared or paid any dividends since its inception and for the foreseeable future intends to continue its policy of retaining any earnings to finance the development and expansion of its business. In the future, the payment of dividends by the Company on its Common Stock will depend on the Company's financial condition, results of operations and such other factors as the Board of Directors of the Company may consider relevant. 15 17 CAPITALIZATION The following table sets forth the capitalization and short-term debt of the Company at April 30, 1996: (i) on a pro forma basis giving effect to the conversion of all outstanding shares of Preferred Stock into Common Stock and (ii) on a pro forma as adjusted basis to reflect the issuance and sale of the shares of Common Stock offered hereby at an assumed initial offering price of $ per share and the application of the estimated net proceeds therefrom. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements of the Company and the notes thereto appearing elsewhere in this Prospectus.
AT APRIL 30, 1996 ------------------------- PRO PRO FORMA FORMA AS ADJUSTED --------- ----------- (IN THOUSANDS) Short-term debt....................................................... $ 1,946 $ ======== ======= Long-term debt........................................................ $ 103 $ -------- ------- Shareholders' equity: Preferred Stock, undesignated as to series, no par value: 12,000,000 shares authorized pro forma and pro forma as adjusted; no shares issued and outstanding pro forma or pro forma as adjusted........ -- -- Common Stock, no par value, 28,000,000 shares authorized: 8,787,284 shares issued and outstanding pro forma, shares issued and outstanding, pro forma as adjusted(1)............................ 30,291 Additional paid-in capital.......................................... 1,485 Shareholder receivable.............................................. (5) Deficit accumulated during development stage........................ (23,698) -------- ------- Total shareholders' equity....................................... 8,073 -------- ------- Total capitalization........................................ $ 8,176 $ ======== =======
- --------------- (1) Excludes (i) 1,359,000 shares of Common Stock issuable upon exercise of options granted under the Option Plan, (ii) up to 1,544,135 shares of Common Stock issuable upon exercise of outstanding warrants and (iii) up to shares issuable upon exercise of the Representative's Warrant. See "Description of Capital Stock." 16 18 DILUTION The pro forma net tangible book value of the Company's Common Stock at April 30, 1996 was $ , or $ per share. The difference between the public offering price per share of the Common Stock and the pro forma net tangible book value per share of the Common Stock after this offering constitutes the dilution to new investors in this offering. Pro forma net tangible book value per share as of April 30, 1996 represents the pro forma net tangible book value of the Company (total tangible assets less total liabilities) divided by the shares of Common Stock after giving effect to the conversion of all outstanding shares of Preferred Stock into Common Stock. After giving effect to the sale of shares of the Common Stock offered hereby at an assumed initial public offering price of $ per share and after deducting the underwriting discounts and commissions and estimated offering expenses, the pro forma net tangible book value of the Company at April 30, 1996 would have been $ , or $ per share. This represents an immediate increase in net tangible book value of $ per share to existing shareholders and an immediate dilution to new investors of $ per share, or %. The following table illustrates this per share dilution: Assumed initial public offering price per share....................... $ Pro forma net tangible book value per share before this offering...... $ Increase in net tangible book value per share attributable to new investors........................................................... $ Pro forma net tangible book value per share after this offering....... $ Dilution in net tangible book value per share to new investors........ $
If the Underwriters' over-allotment option is exercised in full, the pro forma net tangible book value per share of Common Stock after the offering would be $ per share, which would result in dilution to the new investors of $ per share, or %. The following table summarizes as of April 30, 1996 the difference between existing shareholders and new investors with respect to the total number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid, assuming an initial public offering price of $ per share.
TOTAL SHARES PURCHASED CONSIDERATION ----------------- ----------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------- ------- ------- ------- ------------- Existing shareholders(1)........................ New investors................................... ------- ----- ----- ----- ----- Total................................. ======= ===== ===== ===== =====
- --------------- (1) Excludes (i) 1,359,000 shares of Common Stock issuable upon exercise of outstanding options granted under the Option Plan, (ii) up to 1,544,135 shares of Common Stock issuable upon exercise of outstanding warrants and (iii) up to shares issuable upon the exercise of the Representative's Warrant. 17 19 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following selected financial data of the Company are qualified by reference to and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included elsewhere in this Prospectus. The statement of operations data for each of the three years in the period ended January 31, 1996 and the balance sheet data at January 31, 1995 and 1996 are derived from, and are qualified by reference to, the audited financial statements included elsewhere in this Prospectus and should be read in conjunction with those financial statements and notes thereto. The statement of operations data for the period from June 19, 1991 (inception) to January 31, 1992 and for the year ended January 31, 1993 and the balance sheet data at January 31, 1992, 1993 and 1994 are derived from audited financial statements not included herein. The selected financial data as of and for the three months ended April 30, 1995 and 1996 have been derived from unaudited financial statements of the Company which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's operating results and financial position for the three months ended April 30, 1995 and 1996 and are not necessarily indicative of the results to be expected for any other interim period or any future fiscal year.
THREE MONTHS ENDED FISCAL YEAR ENDED JANUARY 31, APRIL 30, --------------------------------------------------- ------------------ 1992(1) 1993 1994 1995 1996 1995 1996 ------- ------- ------- ------- ------- ------- ------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net sales..................................... $ -- $ 5 $ 1 $ 44 $ 372 $ 22 $ 222 Costs and expenses: Pre-manufacturing and manufacturing......... -- 366 626 3,926 4,966 1,355 937 General and administrative.................. 142 651 1,049 1,217 1,925 398 502 Selling and marketing....................... -- 571 385 1,136 941 198 354 Research and development.................... 458 249 1,116 857 588 178 117 ----- ------- ------- ------- ------- ------- ------- Total costs and expenses................ 600 1,837 3,176 7,136 8,420 2,129 1,910 ----- ------- ------- ------- ------- ------- ------- Loss from operations.......................... (600) (1,832) (3,175) (7,092) (8,048) (2,107) (1,688) Interest expense and debt issuance costs.... -- -- 67 205 765 40 33 Other expenses.............................. -- 8 -- 185 -- -- -- ----- ------- ------- ------- ------- ------- ------- Net loss...................................... $(600) $(1,840) $(3,242) $(7,482) $(8,813) $(2,147) $(1,721) ===== ======= ======= ======= ======= ======= ======= Pro forma net loss per common share........... ======= ======= Shares used in computing pro forma net loss per share..............................
AT JANUARY 31, AT APRIL ------------------------------------------------- 30, 1992 1993 1994 1995 1996 1996 ------ ------ ------- ------- ------- ----------- (UNAUDITED) BALANCE SHEET DATA: Total assets........................................... $ 178 $1,826 $ 2,791 $11,614 $12,543 $12,352 Long-term debt including current portion............... -- -- 1,126 2,609 2,232 2,049 Working capital (deficit).............................. 3 115 (1,052) (622) (169) (1,089) Shareholders' equity................................... 179 1,585 1,026 7,649 8,234 8,073
- --------------- (1) From the date of the Company's inception on June 19, 1991 to January 31, 1992. 18 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Selected Financial Data and the financial statements of the Company and notes thereto appearing elsewhere in this Prospectus. This Prospectus, including the following discussion, contains forward-looking statements that involve risk and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in "Risk Factors." OVERVIEW The Company was formed in 1991 to develop medical products that protect healthcare workers from the hazards of infection through contact with blood and other bodily fluids. From its inception through the end of fiscal 1994, the Company focused primarily on the design, development, and evaluation of its first line of products, the SafeSnap syringe, and the associated design and development of molds, assembly machines and production processes. The Company has filed appropriate 510(k) notifications for the SafeSnap syringe with the FDA and has received the requisite approvals. During fiscal 1995, the Company acquired and installed multicavity injection molds for three sizes of SafeSnap syringe, molding presses, and other production equipment, and obtained regulatory clearances for the manufacture and sale of the SafeSnap syringe. Also during fiscal 1995, the Company began marketing and sales efforts with regard to its initial sizes of the SafeSnap syringe through a group of domestic medical products distributors. During fiscal 1996, the Company completed the development of the SafeSnap syringe product line with the introduction of two additional syringe sizes and increased its emphasis on sales and marketing. During fiscal 1997, the Company began deliveries on an initial $3,000,000 order from its Japanese distributor, strengthened its management team, continued development of additional safety-enhanced medical products and established an in-house direct sales force. From its inception in 1991 through January 31, 1996 and April 30, 1996, the Company has incurred losses from operations totaling $21,977,000 and $23,698,000, respectively. The Company currently markets its products for clinical use in the United States, Europe and in certain foreign countries including Japan, Australia and New Zealand. The Company anticipates increases in product sales following the completion of this offering as a result of expanded marketing and distribution efforts and increased manufacturing capacity. RESULTS OF OPERATIONS Three Months Ended April 30, 1996 Compared to Three Months Ended April 30, 1995 Net sales increased $200,000, or 909%, to $222,000 for the three months ended April 30, 1996 from $22,000 for the three months ended April 30, 1995. This increase is primarily attributable to shipments to the Company's distributor in Japan pursuant to an initial $3,000,000 purchase order from this distributor. Pre-manufacturing and manufacturing costs decreased $418,000, or 31%, to $937,000 for the three months ended April 30, 1996 from $1,355,000 for the three months ended April 30, 1995. The reduction is primarily a result of lower overhead costs during fiscal year 1996 due to the Company's re-engineering of certain manufacturing processes. In addition, certain non-recurring pre-manufacturing costs were incurred during fiscal year 1995 due to the construction of machinery for new syringe sizes as the Company completed its SafeSnap syringe product line. General and administrative expenses increased $104,000, or 26%, to $502,000 for the three months ended April 30, 1996 compared to $398,000 for the three months ended April 30, 1995. This increase was due primarily to costs associated with the addition of management personnel and increased legal costs. 19 21 Selling and marketing expenses increased $156,000, or 79%, to $354,000 for the three months ended April 30, 1996 from $198,000 during the three months ended April 30, 1995. The increase is due primarily to the Company's hiring of a direct sales force and three experienced area sales directors. Research and development expenses decreased $61,000, or 34%, to $117,000 for the three months ended April 30, 1996 from $178,000 for the three months ended April 30, 1995 as the Company's 1cc and 10cc size SafeSnap syringes moved out of the development stage and into production. Continued research and development is focused primarily on the Company's new safety products currently under development. Interest expense and debt issuance costs decreased $7,000, or 18%, to $33,000 for the three months ended April 30, 1996 from $40,000 for the three months ended April 30, 1995. Year Ended January 31, 1996 Compared to Year Ended January 31, 1995 Net sales increased $328,000, or 745%, to $372,000 for the year ended January 31, 1996 from $44,000 for the year ended January 31, 1995. This increase is attributable to the introduction of the 1cc and 10cc size SafeSnap syringes, which provided customers the ability to purchase a comprehensive line of syringes. The Company's sales were primarily made to its Japanese distributor. Pre-manufacturing and manufacturing costs increased $1,040,000, or 26%, to $4,966,000 for the year ended January 31, 1996 compared to $3,926,000 for the year ended January 31, 1995, due to the hiring of additional manufacturing employees necessary to meet the increased production demands and increased depreciation on machinery and equipment purchased to meet the expected demand for the Company's products. General and administrative expenses increased $708,000, or 58%, to $1,925,000 for the year ended January 31, 1996 compared to $1,217,000 for the year ended January 31, 1995. This increase was due to accounting and legal costs associated with consideration of various financing arrangements, additions to the senior management team, an increase in property taxes due to new machinery and equipment purchases and legal fees incurred in connection with a debt restructuring and a legal action brought against the Company. Selling and marketing expenses decreased $195,000, or 17%, to $941,000 for the year ended January 31, 1996 from $1,136,000 for the year ended January 31, 1995. During fiscal 1995, the Company ran an advertising campaign to promote sales of the SafeSnap syringe through smaller independent distributors. This program was discontinued in early fiscal 1996, as the Company focused its efforts on building a direct sales force and strategic distribution alliances. Research and development expenses decreased $269,000, or 31%, to $588,000 for the year ended January 31, 1996 from $857,000 for the year ended January 31, 1995. The decrease was due to reduced research and development expenses during fiscal 1996 as compared to fiscal 1995, as many of the Company's syringes, including the 1cc and 10cc sizes, moved out of the development stage and into production. Interest expense and debt issuance costs increased $560,000, or 273%, to $765,000 for the year ended January 31, 1996 from $205,000 for the year ended January 31, 1995 due to interest costs of a promissory note previously given by the Company, amortization of debt issuance costs, and costs associated with the conversion of the note to equity. Other expenses for the year ended January 31, 1995 were $185,000 primarily related to a loss on extinguishment of shareholder debt whereby the Company issued Series D Preferred Stock and Common Stock warrants and paid cash to settle a promissory note including accrued interest. No similar expenses were incurred in fiscal 1996. Year Ended January 31, 1995 Compared to Year Ended January 31, 1994 Net sales were $44,000 for the year ended January 31, 1995 compared to $1,000 for the year ended January 31, 1994. The Company's focus during this period was primarily on relocation and capital improvements and the regulatory approval process. 20 22 Pre-manufacturing and manufacturing costs increased $3,300,000, or 527%, to $3,926,000 for the year ended January 31,1995 compared to $626,000 for the year ended January 31, 1994. The increase was primarily due to costs necessary to prepare the Company's facility for full production. These costs included production set up and the establishment of new production departments and their associated employees. General and administrative expenses increased $168,000, or 16%, to $1,217,000 for the year ended January 31, 1995 compared to $1,049,000 for the year ended January 31, 1994. The increase resulted from the addition of finance and administrative personnel to assist in the Company's growth and increased rent expense associated with the Company's new facility. Selling and marketing expenses increased $751,000, or 195%, to $1,136,000 for the year ended January 31, 1995 compared to $385,000 for the year ended January 31, 1994. The increase was due to increased costs related to an extensive advertising campaign to promote sales of the SafeSnap syringe through distributors and an increase in sales and marketing personnel in order to support market introduction of the SafeSnap. Research and development expenses decreased $259,000, or 23%, to $857,000 for the year ended January 31, 1995 as compared to $1,116,000 for the year ended January 31, 1994. This reduction was due to the Company moving out of the development phase and into the production phase with regard to certain sizes of its SafeSnap syringe. Also, patent expenses were incurred during fiscal year 1994 that were not incurred during fiscal year 1995. Interest expense and debt issuance costs for the year ended January 31, 1995 increased to $205,000 from $67,000 for the year ended January 31, 1994 due to an increase in long-term debt to finance the Company's continued operations. Other expenses for the year ended January 31, 1995 were $185,000 primarily related to a loss on extinguishment of shareholder debt whereby the Company issued Series D Preferred Stock and Common Stock warrants and paid cash to settle a promissory note including accrued interest. No similar expenses were incurred during fiscal 1994. LIQUIDITY AND CAPITAL RESOURCES In August 1996, the Company entered into an agreement with Merrill Lynch Business Financial Services, Inc. ("Merrill Lynch") whereby Merrill Lynch has agreed to provide the Company a $2.3 million working capital line of credit, at a variable interest rate based on 2.65% plus the 30-day Commercial Paper Rate (as published in the Wall Street Journal). As of July 31, 1996, the interest rate was 8.07%. The loan is subject to an annual fee and is secured with a security interest in assets pledged by a shareholder of the Company. Historically, the Company has relied upon equity funding and limited borrowing from management and certain shareholders to fund operations. There are no commitments for such financings with any of these individuals and no assurance can be given that such borrowings will continue to provide a source of funds. The Company's need for funds has increased from period to period as it has increased the research and development of the SafeSnap product line and its related production processes, increased its capital expenditures on molds and production equipment, expanded staff, and commenced production of its SafeSnap syringe line. The cumulative net loss incurred by the Company through April 30, 1996 was $23,698,000. The Company had negative working capital of $1,089,000 at April 30, 1996. As of April 30, 1996, the Company had raised capital of $31,771,000. The report of the Company's independent accountants with respect to the Company's financial statements for the three years ended January 31, 1996 contains an explanatory paragraph which states that "the Company is in the development stage, has incurred a cumulative net loss since inception and is dependent on additional financing in order to continue its operations and execute its growth strategy. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern." The financial statements included herein have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. The 21 23 Company has been advised by its independent accountants that, upon completion of this offering, the independent accountants expect to issue a report without the explanatory paragraph as described above. Notwithstanding the foregoing, there can be no assurance that such conditions will not recur or that the accountants' report will not contain such an explanatory paragraph in the future. The Company also anticipates that sales of its SafeSnap syringes will satisfy an increasing percentage of its capital requirements. However, the Company's gross margin is affected by a number of factors, including product mix, product pricing, the extent of sterile, packaged safety syringe sales versus bulk, non-sterile safety syringe sales, and the percentage of direct sales compared to distributor sales and manufacturing costs, including overhead and material costs. Any decline in the average selling price of a particular product not offset by a reduction in production costs or by sales of other products with higher gross margins would decrease the Company's overall gross margin and adversely affect the Company's liquidity and capital resources. Although the Company believes that the net proceeds of this offering will support the Company's operations and planned capital expenditures for approximately eighteen months after the closing of this offering, the Company's future liquidity and capital requirements will depend on numerous factors, including market demand for its products, the expansion of the sales and marketing force, regulatory actions by the FDA and other regulatory bodies and intellectual property protection. The Company's need for capital could vary based on the actual rate of sales growth and the level of additional investment required to further increase manufacturing capacity. Failure to raise needed capital would have a material adverse effect on the Company's operations, development plans and cash flows. In such case, the Company would attempt to reduce costs and expenses, in turn slowing the Company's planned rate of expansion. NET OPERATING TAX LOSS CARRYFORWARDS The Company has incurred net losses since inception and therefore has not been subject to state or federal income taxes. At January 31, 1996, the Company had federal and California net operating tax loss carryforwards ("NOL") of approximately $17,000,000 and $8,500,000, respectively, available to reduce future income taxes. The difference between the federal and California NOL is primarily attributable to the 50% limitation on California loss carryforwards. The federal and California NOL begin expiring in 2008 and 1998, respectively, unless used. The Company also has research and development credit carryforwards for federal and state tax reporting purposes totaling approximately $166,000 and $87,000, respectively, which expire at various times through 2009. Pursuant to the Internal Revenue Code, use of the Company's NOL and credit carryforwards may be limited because of a change in ownership of more than 50%, which management believes occurred in the year ended January 31, 1995. As a result, the Company believes that its ability to utilize its current net operating loss and credit carryforwards, and to realize the benefit of future tax deductions in subsequent periods will be subject to annual limitations of approximately $1,600,000 for net operating losses generated through the year ended January 31, 1995. The Company also believes that a second change in ownership may occur at the closing of this offering. The Company does not believe these limitations will have a material impact upon its utilization of the NOL and credits over their respective carryforward periods; however, the Company does believe they will impact the timing of such utilization. 22 24 BUSINESS GENERAL The Company designs, develops, manufactures and markets proprietary, safety-enhanced, disposable medical products intended to protect healthcare workers from the spread of infectious diseases such as AIDS and hepatitis. The Company's first product line, the SafeSnap syringe, consists of a line of single-use hypodermic syringes designed to reduce the risk of transmission of blood borne diseases from accidental needlesticks. A SafeSnap syringe is similar in appearance, size and manner of use to a standard (i.e., non-safety) syringe; however, it incorporates patented retraction and encapsulation technology that isolates the needle within the barrel of the syringe immediately after use, facilitating safe disposal. The Company's SafeSnap product line consists of four syringes which vary by size, needle length and gauge. The SafeSnap syringe is also latex-free and will not cause adverse reactions in the estimated 8-10% of patients and healthcare workers with allergies to latex. The Company believes that the SafeSnap syringe is the only safety syringe currently on the market that is latex-free. The Company has five additional safety product lines under development: a winged butterfly set, an arterial-venous fistula set, a blood gas syringe, a needleless vial adaptor and a phlebotomy (blood collection) device. INDUSTRY TRENDS Accidental Needlesticks Infections contracted as a result of accidental needlesticks from syringes and other instruments used to inject medication or collect body fluids are of significant concern to healthcare institutions, healthcare workers and the various agencies charged with regulating their work environments. Accidental needlesticks are the second leading cause of hospital injury, accounting for more than one-third of all hospital injuries. Industry reports estimate that over 800,000 accidental needlesticks occur within the United States each year. The estimated cost of each reported accidental needlestick is up to approximately $1,200 for treatment of the wound, diagnostic tests and lost worker time. This figure does not include specialized, longer term treatment and potential liability costs. Hepatitis and HIV are transmitted through blood and other body fluids, and workers who come in contact with such fluids are at risk of contracting these and other diseases. Transmission may occur from needlesticks by contaminated needles or exposure of mucous membranes to body fluids containing blood traces. The Centers for Disease Control ("CDC") estimates that approximately 12,000 hepatitis infections occur each year in healthcare workers with occupational exposure to blood and other potentially infected body fluids, resulting in more than 6,000 cases of symptomatic hepatitis, approximately 600 hospitalizations and more than 200 deaths. The Occupational Safety and Health Administration ("OSHA") estimates that the incidence of hepatitis infection in healthcare workers with exposure to blood and other potentially infected body fluids is more than twice as great as the incidence of infection in the general population. OSHA has determined that the increased incidence of HIV infection among healthcare workers with no known risk factors is statistically significant. The United States Public Health Service estimates that there are approximately one million cases of HIV infection in the United States. In addition to the HIV and hepatitis viruses, there are a number of other blood borne diseases which can be transmitted by accidental needlesticks and which also have serious consequences for the victim, including diphtheria, gonorrhea, typhus, herpes, malaria, rocky mountain spotted fever, syphilis and tuberculosis. The possibility of infection to healthcare workers from contaminated needles has caused and continues to cause a great deal of concern in the healthcare field and its regulatory agencies. OSHA has adopted regulations requiring employers to institute "universal precautions" to prevent contact with blood and other body fluids. OSHA's regulations also require employers to establish controls (such as sharps disposal containers and self-sheathing needles) and safe work practices to ensure compliance with these universal precautions. OSHA does not mandate specific technologies; rather, employers are permitted to choose the most appropriate and effective safety control devices to meet their specific institutional needs. According to OSHA guidelines, while employers are not required to institute the most sophisticated controls, they must evaluate the effectiveness of their existing controls and evaluate the feasibility of instituting more advanced 23 25 controls. OSHA specifically prohibits the recapping, bending or removal of needles, unless there is no feasible alternative or unless required for a specific medical procedure. The FDA has issued a safety alert to hospitals warning of the risks of needlestick injuries from the use of hypodermic needles with intravenous equipment. Among other things, the safety alert stated that, although the FDA could not recommend specific products, it urged the recipients of the alert to use needleless systems or recessed needle system devices with a fixed safety feature. According to the alert, (i) a fixed safety feature should provide a barrier between the hands and needle after use, (ii) the safety feature should allow or require the worker's hand to remain behind the needle at all times, (iii) the safety feature should be an integral part of the device and not an accessory, (iv) the safety feature should be in effect before disassembly and remain in effect after disposal to protect both users and disposers of medical devices and for environmental safety, and (v) the safety feature should be as simple as possible and require little or no training for effective use. In addition, the CDC and the National Institutes of Health have published guidelines that specify that needles should not be re-sheathed, bent, broken, removed from disposable syringes or otherwise manipulated by hand because of the potential for needlestick injury and the associated risk of blood-related infection. Market for Syringes, Safety Syringes and other Safety Medical Products Currently, more than an estimated 15.5 billion disposable syringes are sold each year worldwide. The U.S. market accounted for an estimated 5.2 billion units in 1995. Safety syringes are estimated to represent a small portion of total current U.S. syringe sales, but sales are expected to grow at a faster rate than the domestic syringe market as a whole as better designs and lower prices become available. Industry reports project that demand for safety syringes will increase each year through 2001 as healthcare providers convert to safety syringes. Thereafter, increases in demand are expected to reflect changes in patient populations and in injectable treatment therapies, including an increase in the number of elderly Americans, growing use of multiple-injection insulin regimens for diabetics, and the growing availability of biotechnology drugs, which typically require parenteral administration. Nearly 400 million arterial, central venous, intravenous, and urological catheters were sold in the U.S. in 1993, representing approximately a $100 million domestic market. The Company believes that at least half of these 400 million catheters are winged butterfly sets. Arterial-venous fistula needles are estimated to represent 20 percent of total disposable specialty needle and syringe revenues. The number of units sold in 1995 are estimated to be 44 million domestically. Domestic sales for 1996 are estimated in industry reports to be $18 million with annual projected growth of 5%. The Company believes this market is being driven by an increase in the end-stage renal dialysis patient population and shortages in the number of transplant organs which have increased the demand for dialysis. Arterial-venous fistula needles are used in hospitals, but use is growing at faster rates in hemodialysis clinics and centers. Blood gas syringes, including intra-arterial catheters and intra-arterial blood gas analyzers, are new products in the blood collection segment. Revenue data for the disposable blood gas kit market provides limited indications of the growth potential for blood gas syringes. Revenues for the blood gas kit market were approximately $42 million (70 million units) in 1992 and are estimated to reach $58 million in 1999. According to industry reports, phlebotomy devices represent a $250 million industry domestically that is growing at a rate of 30% annually. Safety phlebotomy devices are a relatively new segment of this market and are estimated to account for approximately 25% of the current blood collection market with a projected growth rate of 15%. Safety phlebotomy devices are projected to represent more than 65% of the blood collection market by 1998. 24 26 PRODUCTS SafeSnap SafeSnap is a patented line of single-use hypodermic syringes that are intended to reduce the incidence of accidental needlesticks. SafeSnap syringes are presently available in the 1cc, 3cc, 5cc and 10cc sizes. These sizes account for approximately 90% of the hypodermic syringe market. The 1/2cc SafeSnap syringe is in the pilot manufacturing stage, and will expand the Company's line of syringes that are most commonly used for patient injections. The SafeSnap syringe is similar in appearance, size, and manner of use to standard syringes. However, the SafeSnap design has several unique features. The SafeSnap design permits the used needle to retract into the barrel of the syringe, shielding the needle from accidental human contact. The plunger rod is designed to be broken off once the needle is fully retracted, thereby preventing re-use. Once broken off, the plunger rod is inserted into the front end of the barrel, completely enclosing the needle within the barrel. In effect, the syringe is transformed into a sealed container for the contaminated needle. The SafeSnap design also employs a unique needle carrier, which is a separate piece within the barrel, with a clear silicone o-ring, and a locking mechanism. Whereas in an ordinary syringe the needles attaches to the barrel, the needle in the SafeSnap attaches to the needle carrier. The locking feature on the needle carrier allows the users to use their needle-of-choice with the SafeSnap syringe. The SafeSnap syringe is sold with or without a needle and may be used with several needle sizes. The product is packaged using color-coded identification that is comparable to other standard hypodermic syringes. The methods of use and disposal of SafeSnap syringes are virtually identical to those for standard syringes. The Company's SafeSnap syringes sell for approximately the same price as other safety syringes, but the Company's SafeSnap design is unique among safety syringes. All other currently available safety syringes use an external sheath design which generally requires the operator to move a protective sheath over the needle after the needle has been removed from the patient (a sliding sleeve) or manipulate the device to cover the used needle tip (a disappearing needle). The outer protective sheath of a sliding sleeve design can obscure calibration markings on the side of the syringe when it is retracted. Moreover, the SafeSnap's retractable design uses approximately 40% less space in a "sharps" container than either the sliding sleeve or the disappearing needle design, thereby reducing disposal costs. The Company believes that the SafeSnap syringe is the only safety syringe currently on the market that is latex-free. There is a growing concern among healthcare workers and patients about allergic reactions to products containing latex. Studies indicate that 8-10% of healthcare workers have allergic reactions to latex, ranging in severity from hives to the potentially fatal asthma-like condition known as anaphylactic shock. The FDA has recently proposed a labeling system for latex products that would warn of possible allergic reactions. It is the Company's intent that all of its new products will also be latex-free, if the products can be so manufactured. Products Under Development The Company is planning to enter additional markets for complementary products where it believes its technology, manufacturing capability and market presence can assist it in gaining significant market share. The Company is developing designs for the devices indicated below and has produced prototypes of two of these products, the winged butterfly set and the needleless vial adapter. There can be no assurance that the Company will successfully design, manufacture or sell any such products. Winged Butterfly Set. Winged butterfly sets are used most frequently with children to provide multiple doses of medication without unnecessary pain to the patient. Another popular application is drawing blood from patients, when syringes or vacuum tube systems are impractical. The device consists of a small housing with a needle at the end, which is taped to the skin by two plastic wings attached to the housing. In order to preserve its international patent rights, the Company will file a U.S. patent application covering the unique inventions embodied in the Company's device prior to making any public disclosure of them. 25 27 Needleless Vial Adapter. The current practice of filling a syringe with medication to administer an injection requires attaching a needle to a syringe, uncapping the needle, and inserting the needle into the medication vial. The plunger is then drawn back, pulling medication through the vacuum seal into the vial. The needle with syringe is then removed from the vial, and an injection is given to the patient with the syringe. This process is oftentimes cumbersome to accomplish. More importantly, this process is often performed in a room separate from the injection site, resulting in the need to either recap the needle and/or expose the previously sterile needle to pathogens during travel to the injection site. In order to preserve its international patent rights, the Company will file a U.S. patent application covering the unique inventions embodied in the Company's device prior to making any public disclosure of them. Arterial-Venous Fistula Set. An arterial-venous fistula set consist of a winged needle connected to plastic tubing. A fistula needle is inserted into the arterialized vein of a patient undergoing hemodialysis treatment. The Company anticipates that a private label packaging agreement under negotiation with its needle supplier will provide the Company with a standard arterial-venous fistula device to market and sell. If negotiations are successful, prior to marketing the arterial-venous fistula set, the Company will need to secure 510(k) premarket clearance for the device. In order to preserve its international patent rights, the Company will file a U.S. patent application covering the unique inventions embodied in the Company's device prior to making any public disclosure of them. Blood Gas Syringe. Blood gas sampling currently involves drawing a blood sample into a blood gas syringe via an arterial catheter and then analyzing the sample with a blood gas analyzer. In order to preserve its international patent rights, the Company will file a U.S. patent application covering the unique inventions embodied in the Company's device prior to making any public disclosure of them. Phlebotomy Device. Phlebotomy devices collect and store blood during transport. Blood drawing is a very common practice in the healthcare industry and is often performed by medical assistants or healthcare workers whose levels of training and education are not as extensive as that of nurses. The Company believes that the risk of accidental needlesticks arising from the use of such devices may be even greater than from the use of syringes. In order to preserve its international patent rights, the Company will file a U.S. patent application covering the unique inventions embodied in the Company's device prior to making any public disclosure of them. STRATEGY The Company's objective is to use its proprietary technology to establish itself as a leading provider of safety syringes and other safety related medical devices. To achieve this objective, the Company's growth strategy is focused on the following three principal elements: Increasing its customer base through direct selling efforts and establishing strategic distribution channels. The Company has recently begun the hiring of its planned 24 member direct sales force, a majority of which have been hired, which will establish a presence in 24 major metropolitan areas in the United States. Since January 1996, the Company has also added a new Vice President of Sales and area sales directors. As demand increases, the Company plans to augment its sales force with additional personnel. In April 1995, the Company received a $3 million order from its Japanese distributor, a leading manufacturer and marketer of healthcare products in Asia. In December 1995, the Company received premarket approval for the SafeSnap syringe from the Ministry of Health in Japan. The Company began shipping to its Japanese distributor in early calendar 1996 and expects to fill this order by the end of the fourth quarter of calendar 1996. The distributor purchases the Company's products and markets them through its 300 person direct sales force. The distributor is actively promoting and supporting the Company's SafeSnap products through various marketing programs. The Company believes that over time the relationship with its Japanese distributor may lead to a substantial increase in sales and the penetration of additional Asian markets. Broadening its product lines by applying its technology, manufacturing capabilities and market presence developed with the SafeSnap syringe. The Company has invested approximately $9,600,000 in machinery 26 28 and equipment since its inception for the production of its SafeSnap syringe line. That same machinery will be used to assist in the development and production of the five new products under development, as well as other future products. The Company also intends to continue its research and development to exploit its proprietary expertise to develop additional products in addition to the future products discussed elsewhere in this Prospectus. The Company intends to minimize the cost and time necessary to bring its new products to market by using the information and experience gained in the design, development and assembly of its safety syringe line since such new products employ a safety feature to reduce the accidental transmission of blood or other body fluids to a healthcare worker during or after use. The Company also plans to use the sales and distribution channels it has developed for its safety syringes to support these follow-on products. The Company plans to continue development of each of these devices but has not built the production equipment necessary to assemble these devices, nor has it conducted tests or produced a commercial version of any of these devices. Reducing per unit cost by increasing unit volume, completing the Company's automation of assembly and printing processes and incorporating design enhancements in production tooling. The Company relocated its manufacturing operations to a modern 55,000 square foot facility in San Diego, California in April 1994. This facility is expected to accommodate the Company's needs for at least the next two years. The Company will use a portion of the net proceeds from the offering to acquire additional equipment and facilities for the manufacturing of a full line of SafeSnap syringes and, to the extent possible, for the manufacture of its products under development. To achieve profitability the Company must reduce its per-unit manufacturing costs which currently exceed the Company's average selling price in the SafeSnap syringe line. The Company expects to achieve significant reduction in per-unit manufacturing costs as production volume increases and as a result of cost saving efforts. These other cost-saving efforts include the completion of the Company's automated assembly and printing processes through the acquisition of additional molds and equipment, ongoing improvements in overall manufacturing processes and reducing scrap, as well as planned reductions in component costs through design enhancements in production tooling and other efforts in cooperation with its outside suppliers. The Company believes that the proceeds of this offering will enable it to achieve per-unit cost reductions during the balance of fiscal 1997 and fulfill its plans to further reduce per-unit costs in fiscal 1998 and 1999. RESEARCH AND DEVELOPMENT The Company has devoted a substantial portion of its efforts since its formation to research and development concerning safety medical products and the design and production of the SafeSnap syringe product line. As of April 30, 1996, research and development costs since the inception of the Company totaled $3.4 million. The Company remains committed to continued funding of research focused on product development and improvement. The Company believes it has substantially completed its research and development of the SafeSnap syringe line. While there may be changes to the manufacturing process, the Company does not anticipate any significant changes to the syringe. With a portion of the net proceeds of this offering, the Company plans to continue research and development of all of its future products and the equipment of manufacturing processes needed for such products. In that process, the Company expects to draw heavily upon its experience with the retractable syringe and other safety features contained in the SafeSnap syringe. COMPETITION The syringe market is highly competitive. Becton, Dickinson and Company ("B-D") and Sherwood Medical ("Sherwood"), an American Home Products Corporation subsidiary, are the two major domestic competitors which garner approximately 70% and 20%, respectively of revenues in the U.S. syringe market. B-D and Sherwood, as well as numerous other smaller companies, also manufacture safety syringes that use plastic sleeves or shields as protective devices. Terumo Medical Corporation of Japan is a major international competitor in the standard syringe market. The Company believes that the SafeSnap syringe is superior in its design, quality and convenience of use to all other safety syringes on the market today. However, many of the 27 29 Company's competitors have longer operating histories and are substantially larger, better financed and better situated in the market than the Company. Some of these larger competitors have the potential marketing advantage of being able to offer multiple products to the Company's current or prospective customers. The Company's initial product, SafeSnap, competes with both standard and safety syringes. The Company believes that its safety syringes are a cost-effective alternative to standard syringes. Safety syringes, including SafeSnap syringes, sell at approximately two to three times the price of standard syringes depending on the market segment. Historically, the syringe market has been price competitive with little differentiation between products. In recent years, however, due to the high cost of treating infections, and the potential for liability, the medical industry has adopted infection control practices which encourage the use of safer medical devices. The Company believes that for the average hospital, the incremental cost of using safety syringes should be less than the direct costs resulting from accidental needlesticks which would otherwise occur. The Company believes it will also face significant competition in its product lines that are under development from established and well financed entities. Competitors in the catheter market include Abbott Labs, Sherwood, B-D and Johnson and Johnson Medical, Inc. Competitors in the arterial-venous fistula market include Medisystems Corporation, National Medical Care, and Terumo Medical Corporation, which collectively control 81% of the market. Two companies are currently developing safety mechanisms for fistula needles: Medisystems Corporation, which markets the Pointguard safety device, and MBO Laboratories/ Sherwood, which markets the Angel-Wing safety device for venous infusion. Competitors in the blood gas market include anesthesia product manufacturers, blood gas analyzer manufacturers, and general healthcare manufacturers. Disposable blood gas kit manufacturers include Concord/Portex, B-D and Radiometer America. SALES, MARKETING AND DISTRIBUTION Domestic The Company has developed a multi-segmented approach to the domestic distribution and sale of its products. The market segments for safety medical products can be broadly segregated into acute care (hospitals), alternate sites (clinics, hospices, ambulatory care), and retail (physicians offices and home care). The Company has assessed the sales cycle for each segment, the size of the segment, the number of facilities per segment, the cost to enter each segment, the competition within each segment, and the barriers to entry such as group purchasing organizations ("GPO") for acute care. The Company has further divided the domestic market into regional territories and identified those facilities that are on GPO contracts, government entities, stand-alone facilities, and high-volume accounts. The Company has developed approaches to penetrate each of these market segments through a combination of a direct selling force, strategic alliances, and telemarketing. The Company has expanded its selling force, managed by area sales directors, to penetrate the acute care market which has the longest sales lead time, highest volume per facility and is the most price sensitive. The direct sales force has recently been placed in the field resulting in several product evaluations and multiple new accounts. The purpose of this direct selling force is to create the initial product demand necessary to enter into significant distribution and group purchasing agreements for the Company's current and future products. The Company's direct sales force is focused on gaining market acceptance of the SafeSnap syringe in the U.S. hospital and large alternate care market. Between July 1995 and July 1996, the Company increased its hospital account base for this product from two customers to 15 customers. In addition, the Company increased its product trials from approximately 12 to approximately 60 during the same period. The Company believes that, as it establishes distribution channels for its initial SafeSnap product, these channels will also be available to its products under development. However, the introduction of new technologies to hospitals and large clinics can be a lengthy process and typically involves screening by many individuals and committees within each institution. Committees include, for example, new product evaluation committees, product trials, infection control, safety, risk management, and purchasing. 28 30 The sales force is primarily focused on the acute care market, which includes regional GPO accounts, but will also pursue larger account leads from the alternate care segment. The Company intends to increase the size of its direct selling force as the Company moves through its growth stage and introduces new products. The telemarketing department focuses primarily on the alternate care market, in particular those smaller alternate care facilities which do not generally receive sales calls by a distributor or sales person. For the larger alternate care facilities or alternate site buying groups, the telemarketing department focuses on lead qualification for follow-up by the direct selling force to allow a more focused direct selling approach. Strategic distribution arrangements in the domestic market may include distribution agreements with GPO organizations, pre-packaging of the Company's products with kit manufacturers, and private labeling. The Company will attempt to focus on those alliances which complement its current sales and marketing approach and that do not overlap with current market strategies. International The Company's international sales strategy is to establish strategic distribution channels or relationships with companies with established distribution channels in their respective markets. These companies will be familiar with the key success variables within the markets they serve including related laws and regulations. Certain foreign countries may only require the Company to submit evidence of the FDA's premarket clearance of the Company's products prior to sale, however, some foreign countries may have more stringent requirements and require additional testing and approvals. The Company has received an initial $3,000,000 order from a Japanese distributor. The distributor has a direct sales force of approximately 300 representatives in Japan and handles all account servicing, conversions and in-country distribution. MANUFACTURING Manufacturing of the Company's products involves precision injection molding of plastic parts, manual and automated assembly of molded plastic parts, needles and other components, quality control inspection, packaging, and sterilization. The Company currently occupies a 55,000 square foot facility in San Diego, California, which includes a Class 100,000 (less than 100,000 particles per cubic foot) controlled environment room for its injection molding machines, as well as printing equipment, assembly machines and packaging equipment. The facility is vertically integrated with design, mold making, molding, printing, assembly, and packaging all in the same location. As of April 30, 1996, the Company had invested $9,600,000 in molds, injection molding machines, assembly equipment, and packaging equipment. The Company produces molded parts for its entire SafeSnap syringe product line. The Company has established a high-speed, fully automated production line for the molding, printing, assembly and packaging of the 3cc size SafeSnap syringe. The Company also molds, prints and packages the remaining sizes at its facility. Assembly of those sizes is currently performed by third-party subcontractors. The Company will use a portion of the proceeds of this offering to implement automation of the printing and assembly processes for those remaining syringe sizes. The Company designs and builds most of its high precision molds and prototypes. The Company's computer-assisted design systems, automated machining equipment and internal prototype mold-making capacity have enabled the Company to reduce the lead time for prototype tooling for new products. Management believes that the continued investment of capital in high-speed automation equipment should enhance the prospects of reducing manufacturing costs and increasing margins. The Company's production plan is to continue its joint manufacturing agreements with its subcontractors to assemble and package the SafeSnap syringe while designing and acquiring additional high-speed automated production equipment. Fully-integrated high-speed production should permit the Company to recognize significantly better per unit costs due to efficiencies and economies of scale and the reduction in direct labor expense. 29 31 GOVERNMENT REGULATION The testing, manufacture and sale of the Company's products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies. Pursuant to the Federal Food, Drug and Cosmetic Act (the "FDC Act"), and the regulations promulgated thereunder, the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution and promotion of medical devices. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing clearances or approvals, and criminal prosecution. The FDA also has the authority to request recall, repair, replacement or refund of the cost of any device manufactured or distributed by the Company. In the United States, medical devices are classified into one of three classes (i.e., Class I, II or III) on the basis of the controls deemed necessary by the FDA to reasonably ensure their safety and effectiveness. Class I devices are subject to general controls (such as labeling, premarket notification and adherence to Good Manufacturing Practices ("GMP") and Class II devices are subject to general and special controls (such as performance standards, postmarket surveillance, patient registries, and FDA guidelines). Generally, Class III devices are those which must receive premarket approval by the FDA to ensure their safety and effectiveness (such as life-sustaining, life-supporting and implantable devices, or new devices which have been found not to be substantially equivalent to legally marketed devices). Before a new device can be introduced in the market, the manufacturer must generally obtain FDA clearance or approval through either clearance of a 510(k) notification or approval of a PMA. A PMA application must be filed if a proposed device is not substantially equivalent to a legally marketed Class I or Class II device, or if it is a Class III device for which the FDA has called for PMAs. A PMA application must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device, typically including the results of clinical trials, bench tests, laboratory and animal studies. The PMA must also contain a complete description of the device and its components, and a detailed description of the methods, facilities and controls used to manufacture the device. In addition, the submission must include the proposed labeling, advertising literature and any training materials. The PMA process can be expensive, uncertain and lengthy, and a number of devices for which FDA approval has been sought by other companies have never been approved for marketing. Upon receipt of a PMA application, the FDA makes a threshold determination as to whether the application is sufficiently complete to permit a substantive review. If the FDA determines that the PMA application is sufficiently complete to permit a substantive review, the FDA will accept the application for filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the PMA. The FDA review of a PMA application generally takes one to three years from the date the PMA is accepted for filing, but may take significantly longer. Toward the end of the PMA review process, the FDA generally will conduct an inspection of the manufacturer's facilities to ensure that the facilities are in compliance with applicable GMP requirements. If FDA evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA may issue either an approval letter or an approvable letter which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter, authorizing commercial marketing of the device for certain indications. If the FDA's evaluation of the PMA application or manufacturing facilities is not favorable, the FDA will deny approval of the PMA application or issue a "non-approvable" letter. The FDA may determine that additional clinical trials are necessary, in which case the PMA may be delayed for one or more years while additional clinical trials are conducted and submitted in an amendment to the PMA. Modifications to a device that is the subject of an approved PMA, its labeling or manufacturing process may require approval by the FDA of PMA supplements or new PMAs. Supplements to a PMA often require the submission of the same type of information required for an initial PMA, except that the supplement is generally limited to that information needed to support the proposed change from the product covered by the original PMA. 30 32 A 510(k) clearance will be granted if the submitted information establishes that the proposed device is "substantially equivalent" to a legally marketed Class I or Class II medical device or a Class III medical device for which the FDA has not called for PMAs. The FDA recently has been requiring more rigorous demonstration of substantial equivalence than in the past, including in some cases requiring submission of clinical data. The FDA may determine that the proposed device is not substantially equivalent to a predicate device, or that additional information is needed before a substantial equivalence determination can be made. It generally takes from four to 12 months from submission to obtain 510(k) premarket clearance, but may take longer. The FDA may determine that a proposed device is not substantially equivalent to a legally marketed device, or that additional information is needed before a substantial equivalence determination can be made. A "not substantially equivalent" determination, or a request for additional information, could prevent or delay the market introduction of new products that fall into this category. For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness, or constitute a major change in the intended use of the device, will require new 510(k) submissions. If human clinical trials of a device are required, whether for a 510(k) or a PMA, and the device presents a "significant risk," the sponsor of the trial (usually the manufacturer or the distributor of the device) will have to file an investigational device exemption ("IDE") application prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and laboratory testing. If the IDE application is approved by the FDA and one or more appropriate Institutional Review Boards ("IRBs"), human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor may begin the clinical trial after obtaining approval for the study by one or more appropriate IRBs without the need for FDA approval. Submission of an IDE does not give assurance that the FDA will approve the IDE and, if it is approved, there can be no assurance that the FDA will determine that the data derived from these studies support the safety and efficacy of the device or warrant the continuation of clinical studies. Sponsors of clinical trials are permitted to sell investigational devices distributed in the course of the study provided such compensation does not exceed recovery of the costs of manufacture, research, development and handling. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan that may affect its scientific soundness or the rights, safety or welfare of human subjects. The Company has obtained clearance from the FDA under Section 510(k) of the FDC Act to market its SafeSnap line of syringes, which are currently regulated as Class II devices. The Company has made modifications to its devices which the Company believes do not require the submission of new 510(k) notices. There can be no assurance, however, that the FDA would agree with any of the Company's determinations not to submit a new 510(k) notice for any of these changes or would not require the Company to submit a new 510(k) notice for any of the changes made to the device. If the FDA requires the Company to submit a new 510(k) notice for any device modification, the Company may be prohibited from marketing the modified device until the 510(k) notice is cleared by the FDA. The Company currently has five product lines under development, a winged butterfly set, an arterial-venous fistula set, a blood gas syringe, a needleless vial adapter and a phlebotomy device. These products have not been specifically classified by the FDA. The Company expects such products to be subject to 510(k) premarket clearance as Class II devices based upon the FDA's treatment of similar products on the market. There can be no assurance, however, that the FDA will not require PMA applications for one or more of these products under development. Further, there can be no assurance that the Company will be able to obtain necessary regulatory approvals or clearances for these products on a timely basis or at all, and the delays in receipt of or failure to receive such approvals or clearances, the loss of previously received clearances, limitations on intended use imposed as a condition of such approvals or clearances, or failure to comply with existing or future regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. Devices manufactured or distributed by the Company pursuant to FDA clearance or approvals are subject to pervasive and continuing regulation by FDA and certain state agencies. Manufacturers of medical devices for marketing in the United States are required to adhere to applicable regulations setting forth 31 33 detailed GMP requirements, which include testing, control and documentation requirements. Manufacturers must also comply with Medical Device Reporting ("MDR") requirements that a firm report to the FDA any incident in which its product may have caused or contributed to a death or serious injury, or in which its product malfunctioned and, if the malfunction were to recur, it would be likely to cause or contribute to a death or serious injury. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses. The Company is subject to routine inspection by the FDA and state agencies, such as the California Department of Health Services, for compliance with GMP requirements, MDR requirements, and other applicable regulations. The FDA has proposed certain changes to the GMP regulations that would, among other things, require design controls and maintenance of service records, which, if finalized, would likely increase the cost of complying with GMP requirements. Changes in existing requirements or adoption of new requirements could have a material adverse effect on the Company's business, financial condition and results of operation. There can be no assurance that the Company will not incur significant costs to comply with laws and regulations in the future or that laws and regulations will not have a material adverse effect upon the Company's business, financial condition or results of operation. The Company also is subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. There can be no assurance that the Company will not be required to incur significant costs to comply with such laws and regulations in the future or that such laws or regulations will not have a material adverse effect upon the Company's ability to do business. The sale and distribution of the Company's medical devices outside the United States are subject to foreign requirements that vary widely from country to country. The Company's SafeSnap syringes have been approved by the Japanese Ministry of Health for sale in Japan. The time required to obtain approval or clearance required by other foreign countries may be longer or shorter than that required for FDA approval or clearance and the requirements may differ. There can be no assurance that the Company will be able to obtain necessary regulatory approvals or clearances in countries in which it wants to introduce its products. The Company relies upon the companies selling its products in foreign countries to obtain the necessary regulatory approvals for such sales in those countries. Generally, devices having 510(k) clearance may be exported without further FDA authorization. Sales of the Company's products in Europe are subject to various regulations, including directives adopted by the European Union ("EU"). The Company is in the process of implementing ISO 9002, a certification showing that the Company's procedures and manufacturing facilities comply with standards for quality assurance and manufacturing process control. Such certification, along with European Medical Device Directive ("MDD") certification, would evidence compliance with requirements enabling the Company to affix the CE Mark to its current products. The CE Mark denotes conformity with European standards for safety and allows certified devices to be placed on the market in all EU countries. After June 1998, medical devices may not be sold in EU countries unless they display the CE Mark. There can be no assurance that the Company will obtain the right to affix the CE Mark prior to such time. PATENTS The Company owns the rights to three patents, U.S. Nos. 5,205,824, dated April 27, 1993, 5,308,329, dated May 3, 1994, and 5,401,246, dated March 28, 1995, for a retractable syringe with a closed barrel (the SafeSnap design) and certain designs associated with the development of this product. These three patents were developed by and filed under the names of Matthew S. Mazur, the Company's founder, as to U.S. No. 5,208,824, and Messrs. Mazur and Carlos H. Manjarrez, the Company's Vice President of Research and Development, as to U.S. Nos. 5,308,329 and 5,401,246. Messrs. Mazur and Manjarrez have assigned all their rights and interests under these patents to the Company. 32 34 The Company has also obtained a paid-up license for a fourth patent related to its technology, U.S. No. 4,710,170, dated December 1, 1987, for an Anti-Needle Strike and Anti-Drug Abuse Syringe from Habley Medical Technology Corporation. This license grants to the Company the exclusive right to make, use and sell products incorporating the patent rights or claims solely for applications within the medical field. The license agreement also reserves to the licensor the non-exclusive right to make, use and sell products which are not for administration or withdrawal of pharmaceuticals or other fluids by a syringe of a type described in the patent. This license is a paid-up license with the last payment in the amount of $212,500, due December 31, 1996, being made from the proceeds of this offering. The Company believes the combination of these patents and this license represent a significant competitive barrier in the retractable safety syringe industry. The Company has undertaken and intends to aggressively pursue the necessary steps to file claims for international patent rights in numerous countries. However, despite the patent protection and despite certain trade secrets of the Company, there can be no assurance that the patents or trade secrets will prove to be of value. FACILITIES The Company leases a 55,000 square foot headquarters and manufacturing facility in San Diego, California. The term of the lease expires December 31, 1998, with two options to renew for consecutive periods of three years each. EMPLOYEES As of August 1, 1996, the Company employed 70 people including four research and development employees, 36 in operations, two in facilities, 21 in sales and marketing employees and seven in general and administration. The Company's employees are not represented by a labor union, and the Company believes its employee relations are good. LEGAL PROCEEDINGS On December 4, 1995, a complaint by plaintiffs Barry L. Rosenblatt, World Video Movies, Ltd., whose representative is Roy K. Black, and Richard Caras, against the Company, Matthew S. Mazur and James R. Yarter, was filed in the United States District Court for the Southern District of California, Case No. 95-3862H(RBB). The complaint alleges the plaintiffs purchased the Company's Series E Preferred Stock in reliance upon fraudulent misrepresentations of projections concerning sales, revenues, profits and production capabilities of the Company. The complaint seeks damages of $1,560,000, together with interest, attorneys' fees and costs, or recision and recovery of the $1,560,000, plus interest and attorneys' fees and costs. The Company believe this suit is without merit and is vigorously contesting the action, which has been withdrawn once and dismissed once without prejudice. Following its dismissal, the complaint was refiled. On August 6, 1996, the Company filed a motion for summary judgment to dispose of all of the plaintiffs' claims. On June 28, 1996, a complaint by plaintiffs G.C. Investments LLC, whose representative is Brian L. Greenspun (a former Director of the Company), and The Medicine Partners, whose representative is Andrew G. Bluhm (a former Director of the Company), was filed in the United States District Court for the Southern District of California, Case No. 96-1187H(CGA). The complaint alleges the plaintiffs purchased the Company's Series E Preferred Stock in reliance upon fraudulent misrepresentations of projections concerning sales, revenues, profits and the intended use of the invested funds. The complaint seeks damages of $8,000,000, together with interest, attorneys' fees, costs and punitive damages. The Company believes this suit is without merit and is vigorously contesting the action. On August 13, 1996, the Company filed a motion to dismiss the action for failure to state a claim. If any of the pending actions were successfully prosecuted against the Company, the results could have a material adverse effect upon the Company's financial position, results of operations, cash flows and ability to conduct business. 33 35 The Company is subject to certain claims and disputes arising in the normal course of its business or fund raising efforts. The Company believes the disposition of these matters will not have a material adverse effect on its financial position, results of operations or ability to conduct business. ENVIRONMENTAL MATTERS The Company believes its operations are currently in compliance in all material respects with applicable Federal, state, and local laws, rules, regulations and ordinances regarding the discharge of materials into the environment. Such compliance has no material impact upon the Company's capital expenditures, earnings or competitive position, and no capital expenditures for environmental control facilities are planned. 34 36 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding the Company's executive officers and directors.
NAME AGE POSITION - ------------------------------------ --- ------------------------------------------------------------ Matthew S. Mazur.................... 32 Chairman of the Board, President and Chief Executive Officer Scott M. Dolin...................... 45 Vice President of Operations Carlos H. Manjarrez................. 38 Vice President of Research and Development Marshall Kerr....................... 45 Vice President of Sales Louis Hernandez, Jr................. 30 Chief Financial Officer, Director of Finance and Secretary George A. Schapiro.................. 50 Vice Chairman of the Board and Director Carl R. Brown....................... 69 Director Richard R. Rowe, Ph.D............... 63 Director Robert Hovee........................ 54 Director William W. Martin................... 60 Director
The business experience, principal occupations and employment, as well as the periods of service, of each of the directors and executive officers of the Company during at least the last five years, are set forth below. Matthew S. Mazur is the Chairman of the Board, President and Chief Executive Officer of the Company. Mr. Mazur has held one or more of these offices since the inception of the Company in June 1991. From 1989 to 1991, Mr. Mazur worked as a sole proprietor to develop the business and products leading to the establishment of the Company in 1991. From 1986 to 1989, Mr. Mazur was employed as a marketing representative at Foothill Capital Corporation, the asset-based lending subsidiary of The Foothill Group. Scott M. Dolin joined the Company in August 1994 as Vice President of Engineering Operations. Since February 1996, Mr. Dolin has served as Vice President of Operations. From September 1991 to August 1994, Mr. Dolin was Engineering Manager for IMED Corporation, a San Diego-headquartered disposable medical device manufacturer. From June 1989 to August 1991, Mr. Dolin was Vice President, Operations for Solatrol Inc., and Plant Manager at Nypro San Diego. From 1981 to 1988, he was Director of Operations, Manager of Engineering, Reliability Engineer Manager and Quality Manager for IMED Ireland Limited, a subsidiary of IMED Corporation. Carlos H. Manjarrez joined the Company in February 1992 as Vice President of Research and Development. Mr. Manjarrez maintains primary responsibility for developing new products and overseeing the Company's mold, manufacturing and mold engineering efforts. From February 1990 to February 1992, Mr. Manjarrez was Mold Design Engineer and CAD Manager for Magor Molds, Inc., a manufacturer of precision high volume injection molds. From 1987 to 1990, he served as partner and design engineer of Falcon Engineering, a medical device and injection mold engineering consulting firm. Marshall Kerr joined the Company in August 1996 as Vice President of Sales. From December 1993 to August 1996, Mr. Kerr was Vice President of ICU Medical, Inc., a developer, manufacturer and seller of disposable medical connection systems for use in intravenous therapy applications. He served as Executive Vice President of Professional Hospital Supply Corporation from October 1992 to November 1993, and was Vice President of Sales and Marketing for Medical Design Concepts from June 1987 to October 1992. Louis Hernandez, Jr. joined the Company in January 1996 as Director of Finance and Chief Financial Officer and has served as Secretary since July 1996. From 1990 to 1996, Mr. Hernandez worked in the Audit and Business Advisory Services Group of Price Waterhouse LLP, where he served a variety of both private and public reporting entities, primarily in the high technology and manufacturing areas. George A. Schapiro joined the Company in June 1996 as Vice Chairman of the Board of Directors. Since 1993, Mr. Schapiro has been the President of Sonic Force Corporation, a manufacturer of ultrasonic force measuring instrumentation. From December 1992 to June 1993, Mr. Schapiro was President and Chief Operating Officer of the Company. From April 1976 to August 1991, he served as Chief Executive Officer of 35 37 Andros Incorporated, a public company and a manufacturer of gas analyzers. From July 1979 to December 1980, he served as Chief Executive Officer of Novacor Medical Products Corporation, a medical device manufacturer which was later acquired by Baxter Healthcare Corporation. Carl R. Brown joined the Company at its inception in June 1991 as a Director of the Company. In addition, Mr. Brown served as Secretary for the Company from June 1991 through July 1996. He has been the senior partner with the Company's patent firm, Brown, Martin, Haller & McClain, since 1968. Mr. Brown is also a director of Zest Anchors, Inc., a dental products manufacturing company, and a member of the International Forum for Corporate Directors. Richard R. Rowe, Ph.D. joined the Company in October 1994 as a Director of the Company. Dr. Rowe is presently the President and Chief Executive Officer of Rowe Communications, Inc., a financial services company founded by Dr. Rowe in 1994. From October 1979 to November 1993, Dr. Rowe was President and Chief Executive Officer of the Faxon Company, Inc. Dr. Rowe was a founder and director of the Cambridge Office of the American Institutes for Research, and Associate Dean, Harvard Graduate School of Education. Robert Hovee joined the Company in December 1995 as a Director of the Company. Mr. Hovee has been a private investor and business consultant to CEOs and boards of directors since March 1995. From May 1983 to November 1994, he served as General Manager and Chief Operating Officer, from November 1984 to January 1991 as President and Chief Operating Officer and from January 1991 to May 1995 as Chairman of the Board and Chief Executive Officer of Life Support Products, Inc., a medical device company. From July 1979 to January 1980, he served as Vice President of Sales & Marketing for Atari Corporation. From May 1980 to May 1983, he served as Director of Marketing for Allergan Pharmaceuticals. Mr. Hovee serves as a director of Pro-Dex, Inc., a manufacturer of dental products, and Infrasonics, Inc., a manufacturer of microprocessor ventilation equipment. William W. Martin has served as a director of the Company from October 1995 to December 1995 and from July 1996 to the present. Mr. Martin is the President of Business and Estate Designs, a business consulting, investment advisory and estate planning services firm which he founded in 1964. Each director's term in office continues until the next regular meeting of the shareholders of the Company, at which such director's successor is elected and qualified, or until such director's earlier death, resignation, disqualification or removal as provided by law. Executive officers of the Company are elected by the Board of Directors on an annual basis and serve at the discretion of the Board. DIRECTOR COMPENSATION Non-employee directors do not receive cash fees for their services provided in that capacity but are reimbursed for out-of-pocket expenses incurred in connection with attendance at meetings of the Board of Directors. The board granted each director options to purchase 50,000 shares of Common Stock in recognition of their services to the Company as directors. The exercise prices for such options are equal to the fair market value of the Common Stock at the date of grant and range from $1.00 to $3.50. These options vest monthly over three years at the rate of 20,000, 15,000 and 15,000 per year. EMPLOYMENT AGREEMENTS In 1993 the Company entered into an employment agreement with Matthew S. Mazur, Chairman, President and Chief Executive Officer. The agreement has no termination date but may be terminated at any time by either the Company or Mr. Mazur upon thirty days written notice. The agreement provides for an annual base salary of $180,000 plus an annual bonus in an amount to be determined by the Board of Directors. The Company also pays the premiums on certain of Mr. Mazur's insurance policies. If Mr. Mazur were to be involuntarily terminated by the Company, he would receive up to 36 months of his base pay. The Company has not entered into any other employment agreements. 36 38 BOARD COMMITTEES The Board of Directors has (i) a Compensation Committee, consisting of George A. Schapiro, Carl R. Brown and William W. Martin, which makes recommendations concerning salaries and incentive compensation for employees of the Company, (ii) an Audit Committee, consisting of George A. Schapiro, Carl R. Brown and Richard R. Rowe, which reviews the results and scope of the audit and other services provided by the Company's independent accountants, and (iii) an Investment Committee, consisting of George A. Schapiro, Robert Hovee and William W. Martin, which makes recommendations concerning investment opportunities available to the Company. EXECUTIVE COMPENSATION The following table shows the cash and noncash compensation earned for the past three years by each of the Company's executive officers whose fiscal 1996 compensation exceeded $100,000. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------- ANNUAL COMPENSATION SECURITIES ------------------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER STOCK OPTIONS COMPENSATION - ---------------------------------- ---- -------- ------- ----- ------------- ------------ Matthew S. Mazur.................. 1996 $180,842 $ -- $-- -- $ -- Chairman of the Board, President 1995 183,149 -- -- -- -- and Chief Executive Officer 1994 153,840 66,000 -- -- -- Scott M. Dolin.................... 1996 140,167 -- -- 50,000 -- Vice President of Operations 1995(1) 53,041 -- -- 124,000 -- Carlos H. Manjarrez............... 1996 107,308 -- -- -- -- Vice President of Research 1995 103,538 5,026 -- -- -- and Development 1994.. 83,462 10,000 -- 210,000 -- James R. Yarter................... 1996(2) 72,341 -- -- 500,000(3) -- President
- --------------- (1) Mr. Dolin joined the Company in August 1994. (2) Mr. Yarter served as President of the Company from October 1995 to March 1996. (3) Mr. Yarter's options were terminated at the time of his resignation as President. The following table summarizes options granted during the year ended January 31, 1996 to each of the Company's executive officers. OPTIONS GRANTED DURING YEAR ENDED JANUARY 31, 1996
POTENTIAL REALIZABLE VALUE AT NUMBER OF PERCENTAGE OF ASSUMED ANNUAL RATES OF STOCK SHARES TOTAL OPTIONS PRICE APPRECIATION FOR OPTION UNDERLYING GRANTED TO EXERCISE TERM(2) OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------------------- NAME GRANTED(1) FISCAL 1996 SHARE DATE 5% 10% - ---------------------- ---------- ------------- --------- -------- ------------- ------------------ Scott M. Dolin........ 50,000 4.9% $1.00 10/27/05 James R. Yarter(3).... 500,000 49.0 1.00 10/20/05
- --------------- (1) Incentive stock options granted pursuant to the Option Plan. (2) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the SEC and do not represent the Company's estimate or projection of the Company's future Common Stock prices. These amounts represent certain assumed rates of appreciation only. Actual gains, if any, on stock option exercises are dependent on the future price performance of the Common Stock and overall stock market conditions. The amounts reflected in this table may not necessarily be achieved. (3) Mr. Yarter's options were terminated at the time of his resignation as President. 37 39 The following table summarizes the value of options held at January 31, 1996 by the Company's executive officers. Scott M. Dolin exercised options to purchase 1,000 shares in the year ended January 31, 1996. No other executive officer exercised any options during that period. AGGREGATED OPTION VALUES AT JANUARY 31, 1996
NUMBER OF VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT JANUARY 31, 1996 AT JANUARY 31, 1996(1) ----------------------------- ----------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------------------------------------- ----------- ------------- ----------- ------------- Scott M. Dolin............................... 42,271 131,729 $ $ Carlos H. Manjarrez.......................... 159,688 50,312
- --------------- (1) Value is based on the difference between the assumed initial public offering price of $ per share and the exercise price of such options. STOCK OPTION EXERCISES AND HOLDINGS In fiscal 1994 the Company adopted a stock option plan which allows the granting of incentive and non-statutory options or stock purchase rights to employees, directors, officers and outside consultants. Under the terms of the plan, options of up to 2,000,000 shares may be granted. Nonstatutory stock options may be granted at an exercise price of not less than 85% of the fair market value of the Common Stock as determined by the Board of Directors on the date of the grant; incentive stock options must be granted at an exercise price of not less than 100% of fair market value. As of April 30, 1996, options of up to 1,628,415 shares of Common Stock had been granted, of which 1,359,000 were outstanding and 269,415 were previously exercised. Of the outstanding options, 940,625 were not vested, 311,083 were exercisable at $0.56 per share, 31,042 were exercisable at $0.75 per share, 19,583 were exercisable at $1.00 per share and 56,667 were exercisable at $1.50 per share. 38 40 PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of September 1, 1996, as adjusted to reflect the conversion of all outstanding Preferred Stock into Common Stock and the sale of shares of Common Stock offered hereby, for (i) each person who is known by the Company to beneficially own 5% or more of the Common Stock, (ii) each of the Company's directors, (iii) the executive officers named in the Summary Compensation Table and (iv) all directors and executive officers of the Company as a group.
PERCENTAGE OWNED(1) --------------------- AMOUNT AND NATURE OF BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OFFERING OFFERING - ------------------------------------------------------ ----------------------- -------- -------- Matthew S. Mazur(2)................................... 2,513,134 % % Robert C. Siegel(3)................................... 2,171,334 G.C. Investments LLC(4)............................... 656,201 The Medicine Partners(5).............................. 640,001 Carl R. Brown(6)...................................... 196,077 Carlos H. Manjarrez(7)................................ 181,563 Richard R. Rowe(6).................................... 117,492 George A. Schapiro(8)................................. 89,494 Scott M. Dolin(9)..................................... 87,959 Louis Hernandez, Jr.(10) ............................. 77,500 William W. Martin(11)................................. 54,545 Robert Hovee(12)...................................... 18,333 All executive officers and directors as a group (9 persons)............................................ 3,336,097
- --------------- * Less than 1%. (1) Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is generally determined by voting power or investment power with respect to securities. Shares of Common Stock subject to options or warrants currently exercisable or exercisable within 60 days of September 1, 1996, are deemed outstanding for computing the percentage of the person holding such options but are not deemed outstanding for computing the percentage of any other person. This table does not reflect any shares that these existing shareholders may acquire in this offering. Except as indicated by footnote, and subject to community property laws where applicable, the Company believes that the persons named in the table above have sole voting and investment power with respect to all shares of Common Stock shares as beneficially owned by them. (2) Includes 89,134 shares of Common Stock beneficially owned by Dina Mazur, the wife of Matthew S. Mazur, 50,000 shares of Common Stock held in a trust controlled by Mr. Mazur, and 1,162,000 shares of Common Stock and 1,212,000 shares of Preferred Stock Series A held by Polar Bear Partners LLC, which is controlled by Mr. Mazur. (3) Includes warrants to acquire 1,523,000 shares of Common Stock which are currently exercisable. Includes 648,334 shares of Preferred Stock held in The Robert and Doris Siegel Charitable Trust, which is controlled by Mr. Siegel. The address for Mr. Siegel is 503 Vista Bella, Suite 9, Oceanside, California 92057. (4) Includes warrants to acquire 106,667 shares of Common Stock which are currently exercisable. The address for G.C. Investments LLC, whose representative is Brian L. Greenspun, is 800 South Valley View Boulevard, Las Vegas, Nevada 89107. (5) Includes warrants to acquire 106,667 shares of Common Stock which are currently exercisable. The address for The Medicine Partners, whose representative is Andrew G. Bluhm, is 900 North Michigan Avenue, Chicago, Illinois 60611. (6) Includes 18,333 shares which are subject to currently exercisable stock options. (7) Consists of 181,563 shares which are subject to currently exercisable stock options. (8) Includes warrants to acquire 27,083 shares of Common Stock which are currently exercisable and 5,000 shares which are subject to currently exercisable stock options. (9) Consists of 87,959 shares which are subject to currently exercisable stock options. (10) Consists of 77,500 shares which are subject to currently exercisable stock options. (11) Includes 42,331 shares of Common Stock held by First Trust Corporation, Trustee for the benefit of William W. Martin; 325 shares held by the Lance W. Martin Memorial Trust; 470 shares held by Heidi Lynn Martin; warrants to acquire 727 shares of Common Stock which are currently exercisable and 5,000 shares which are subject to currently exercisable stock options. (12) Consists of 18,333 shares which are subject to currently exercisable stock options. 39 41 CERTAIN TRANSACTIONS Carl R. Brown, the senior partner of the law firm of Brown, Martin, Haller and McClain, which provides patent advice to the Company, is a Director and was Secretary of the Company. The Company paid Mr. Brown's firm approximately $143,000 for legal services rendered during the three years ended January 31, 1996, of which $88,000 has been accrued at January 31, 1996. The Company has recently entered into a consulting agreement with George A. Schapiro, a Director as of August 19, 1996 and former President and Chief Operating Officer of the Company. Pursuant to the Agreement, Mr. Schapiro is to provide planning and marketing services to the Company for one year with an option to extend the term for two additional one year terms. For such services Mr. Schapiro will receive $60,000 and a warrant to purchase 50,000 of the Company's Common Stock which vested as to 25,000 shares immediately and the balance will vest on a monthly basis thereafter over three years. In connection with Robert C. Siegel's agreement to pledge certain assets as security for the Merrill Lynch $2.3 million working capital line of credit, the Company granted Mr. Siegel a warrant to purchase 223,000 shares of the Company's Common Stock at $8.00 per share and has agreed to indemnify Mr. Siegel for certain potential tax liabilities associated with this transaction. Carl R. Brown, Richard R. Rowe and William W. Martin, Directors of the Company, have loaned the Company $60,000, $20,000 and $50,000, respectively. These loans bear interest at a rate of 8% and are payable on demand. As of August 3, 1996, the Company had repaid all loans to Carl R. Brown, Richard R. Rowe and William W. Martin. Brian L. Greenspun, a former Director of the Company, has loaned the Company $60,000. This loan bears interest at a rate of 8% and is payable on demand. As of August 31, 1996, the Company had repaid all loans to Brian L. Greenspun. William W. Martin, a Director of the Company since August 19, 1996, has served as an investment adviser and finder for the Company. The Company has paid Mr. Martin's firm fees for finder's services of $90,000 for fiscal 1995, $100,000 for fiscal 1996 and $213,000 for the three months ended April 30, 1996. Additionally, the Company has accrued $97,300 for finder's services performed by Mr. Martin during fiscal 1997, which may be paid from the proceeds of this offering and the proceeds from the bridge financing. Dina Mazur and Gloria Mazur, the wife and mother, respectively, of Matthew S. Mazur, have loaned the Company $210,000 and $200,000, respectively. These loans bear interest at a rate of 8-10% and are payable on demand. As of August 31, 1996, the Company had repaid all loans to Gloria Mazur and the balance due to Dina Mazur was $50,000. DESCRIPTION OF CAPITAL STOCK The following description of the capital stock of the Company and the Company's Amended and Restated Articles of Incorporation and Bylaws is a summary and qualified in its entirety by the Company's Amended and Restated Articles of Incorporation and Bylaws, which are included as exhibits to the Registration Statement of which this Prospectus is a part, and by relevant provisions of the California Corporations Code. At the closing of the offering the outstanding shares of the Company's Preferred Stock will be converted automatically to shares of the Company's Common Stock. COMMON STOCK The Company is authorized to issue up to 28,000,000 shares of Common Stock. The holders of Common Stock have full voting rights, subject to any voting rights of any shares of Preferred Stock then outstanding, and are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders, except that, upon giving notice required by law, shareholders may cumulate their votes in the election of directors. Under California law, upon listing of the Company's Common Stock on the Nasdaq National Market and obtaining 800 shareholders, the Company can amend its Articles of Incorporation or Bylaws to eliminate cumulative voting for directors. Holders of Common Stock have no rights to convert their shares 40 42 into other securities or have their shares redeemed, no preemptive rights or other rights to subscribe for additional securities. Subject to preferences that may be applicable to any shares of Preferred Stock then outstanding, the holders of the shares of Common Stock will be entitled to receive such dividends, if any, as may be declared by the Board of Directors out of legally available funds and to share ratably in any distribution to the stockholders, including any distributions upon liquidation of the Company. PREFERRED STOCK All of the Company's outstanding Preferred Stock will be converted into Common Stock upon the closing of this offering pursuant to the terms of the Preferred Stock. Immediately after the conversion of the Preferred Stock into Common Stock, there will be no Preferred Stock outstanding and the Company will be authorized to issue 12,000,000 shares of Preferred Stock that is undesignated as to terms and preferences. Under California law and the Company's Amended and Restated Articles of Incorporation, the Board of Directors is authorized, without further shareholder approval, to issue Preferred Stock in one or more classes or series and to fix the voting rights, liquidation preferences, dividend rights, repurchase rights, conversion rights, redemption rights and terms, including sinking fund provisions, and certain other rights and preferences of the Preferred Stock. Accordingly, although it currently has no intention of doing so, the Board of Directors of the Company may, without shareholder approval, issue shares of or class or series of Preferred Stock with voting and conversion rights which could adversely affect the voting power and the dividend and other rights of the holders of Common Stock. In addition, the existence of undesignated Preferred Stock may have the effect of discouraging, delaying, deferring or preventing an attempt, through acquisition of a substantial number of shares of Common Stock, to acquire control of the Company with a view to effecting a merger, sale or exchange of assets or a similar transaction. The anti-takeover effects of the undesignated Preferred Stock may deny shareholders the receipt of a premium on their Common Stock and may also have a depressive effect on the market price of the Common Stock. WARRANTS AND OPTIONS As of August 31, 1996, the Company had issued options to purchase 1,377,000 shares of Common Stock to employees, directors and consultants pursuant to the Option Plan with a weighted average exercise price of $1.63 per share. The Company has also issued warrants to purchase shares of its Common Stock. The Company has issued warrants to acquire up to 1,300,000 shares of Common Stock at $14.00 per share. Those warrants expire in December 1997. Additionally, the Company has issued warrants for 223,000 shares of Common Stock at $8.00 per share which expire in August 2001, 232,001 shares of Series E Preferred Stock at $7.50 per share which expire from December 1997 to February 1998, 50,727 shares at $3.50 per share which expire from July to August 1999, and 14,468 shares of Common Stock at $1.50 per share which expire from November 1998 to May 1999. In addition, at such time as the Company is qualified to file a registration statement on Form S-3 under the Securities Act, the holders of warrants to purchase 213,334 shares of Series E Preferred Stock will be entitled to cause the Company to register under the Securities Act the sale of all of the Common Stock held by such warrant holders, including the Common Stock underlying their Series E Preferred Stock. Upon the written request by the holders of at least 20% of the Common Stock underlying such Series E Preferred Stock, the Company shall be required to prepare and file a registration statement on Form S-3 at its expense. If less than 90% of the Common Stock is sold pursuant to such registration statement, then the Company shall be required to prepare and file an additional registration statement for the remaining unsold shares. Registration of such shares would result in such shares becoming freely tradeable without restriction under the Securities Act immediately upon the effectiveness of such registration. TRANSFER AGENT The transfer agent for the Common Stock is American Stock Transfer & Trust Company, New York, New York. 41 43 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have outstanding shares of Common Stock. Of these shares, approximately shares will be freely tradable without restriction or further registration under the Securities Act. The remaining shares of Common Stock held by existing stockholders upon completion of this offering are "restricted securities" as defined in Rule 144 promulgated under the Securities Act, and may only be sold in the public market if such shares are registered under the Securities Act or sold in accordance with Rule 144 or another exemption from registration under the Securities Act. In general, under Rule 144 a person (or group of persons whose shares are aggregated) who has beneficially owned restricted securities for at least two years, including persons who may be deemed "affiliates" (as defined in Rule 144) of the Company, will be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of the Common Stock, or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain manner of sale limitations, notice requirements and the availability of current public information about the Company. A person who has not been an "affiliate" of the Company for the 90 days preceding a sale and who has beneficially owned restricted securities for at least three years will be entitled to sell such shares in the public market without restriction. Restricted securities properly sold in reliance upon Rule 144 are thereafter freely tradeable without restrictions or registration under the Securities Act, unless thereafter held by an "affiliate" of the Company. For purposes of Rule 144, of the outstanding restricted shares of Common Stock have been beneficially owned by their holders for over two years. The Company is unable to estimate the amount, timing or nature of future sales of outstanding Common Stock. Of the restricted shares that will be outstanding upon completion of this offering, executive officers and directors, holding an aggregate of shares, have agreed that, for a period of 180 days from the date of this Prospectus, they will not offer for sale, sell, solicit an offer to buy, contract to sell, distribute, grant any option for the sale of or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into, exercisable for or exchangeable for any shares of Common Stock without the prior written consent of the Representative. Of the remaining restricted shares, shares are now eligible or will be eligible for sale under Rule 144 within 90 days from the date of this Prospectus. See "Underwriting." The Company has reserved 2,000,000 shares of Common Stock for issuance to key employees, officers, directors and consultants pursuant to the Company's Option Plan, and options for 1,377,000 of such shares are outstanding as of the date of this Prospectus. The Company has further reserved 1,820,196 shares of Common Stock for issuance upon exercise of outstanding warrants. The existence of such options and warrants may hinder future equity financing by the Company. Further, the holders of such warrants and options may exercise them at a time when the Company would otherwise be able to obtain additional equity capital on terms more favorable to the Company. In addition, the holders of warrants for 213,334 shares have certain demand registration rights. See "Description of Capital Stock." 42 44 UNDERWRITING The Underwriters named below, for whom Rodman & Renshaw, Inc. is acting as representative (the "Representative"), have severally agreed to purchase from the Company, and the Company has agreed to sell to the Underwriters, the respective number of shares of Common Stock set forth opposite their names below.
UNDERWRITER NUMBER OF SHARES ------------------------------------------------------------------------------- Rodman & Renshaw, Inc.......................................... ------- Total................................................ =======
The Underwriting Agreement provides that the obligations of the several Underwriters thereunder are subject to approval of certain legal matters by counsel and to various other conditions. The nature of the Underwriters' obligations is such that they are committed to purchase and pay for all of the above shares of Common Stock offered hereby if any are purchased. The Underwriters, through the Representative, have advised the Company that they propose to offer the shares of Common Stock initially at the public offering price set forth on the cover page of this Prospectus; that the Underwriters may allow to selected dealers a concession of $ per share and that such dealers may reallot a concession not in excess of $ per share to certain other dealers who are members of the National Association of Securities Dealers, Inc. After the public offering, the offering price and other selling terms may be changed by the Underwriters. Application has been made for the Common Stock to be included on the Nasdaq National Market. The Representative has advised the Company that it does not intend to confirm sales to any accounts over which it exercises discretionary authority. The Underwriters have been granted a 30-day over-allotment option to purchase up to an aggregate of additional shares of Common Stock from the Company at the public offering price less the underwriting discount. If the Underwriters exercise such over-allotment option, then each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage thereof as the number of shares of Common Stock to be purchased by it as shown in the above table bears to the shares of Common Stock offered hereby. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the shares of Common Stock offered hereby. In connection with this offering, the Company has agreed to issue and sell to the Representative, for nominal consideration, warrants to purchase a number of shares of Common Stock equal to 10% of the shares of Common Stock in this offering, exclusive of any shares sold pursuant to the Underwriters' over-allotment option (the "Representative's Warrant"). The Representative's Warrant will be exercisable at a price per share equal to 120% of the public offering price, commencing one year from the date of this Prospectus, and will continue to be exercisable for a period of four years after such date. The Representative's Warrant is restricted from sale, transfer, assignment or hypothecation for a period of one year from the effective date of this offering, except to officers, partners or successors of the Representative. The exercise price of the Representative's Warrant and the number of shares of Common Stock issuable upon exercise thereof are subject to adjustment under certain circumstances. The Representative's Warrant grants to the holders thereof certain rights regarding the registration of the Common Stock issuable upon exercise of the Representative's Warrant. All executive officers and directors of the Company, as well as certain shareholders, who own shares of the Company's Common Stock, have agreed that for a period of 180 days from the date of this Prospectus, they will not offer for sale, sell, solicit an offer to buy, contract to sell, distribute, grant any option for the sale of or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any 43 45 securities convertible into or exercisable for any shares of Common Stock without the prior written consent of the Representative on behalf of the Underwriters. See "Shares Eligible for Future Sale." The Company has agreed to indemnify the Underwriters against certain liabilities, including civil liabilities, losses and expenses under the Securities Act, or to contribute to certain payments the Underwriters may be required to make in respect thereof. For a period of one year following the closing of this offering, the Representative has a right of first negotiation to act as the Company's financial advisor, managing underwriter or exclusive placement agent in connection with any sale of all or part of the Company, an acquisition or merger by the Company, or the raising of financing through an offering of securities. Prior to this offering, there has been no public market for the Common Stock. Consequently, the initial public offering price has been determined through negotiations between the Company and the Representative. Among the factors considered in determining the initial public offering price were prevailing market and economic conditions, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, an assessment of the Company's management and the consideration of the above factors in relation to the market valuation of companies in related businesses. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered hereby is being passed upon for the Company by Luce, Forward, Hamilton & Scripps LLP, San Diego, California. Certain legal matters in connection with the sale of the Common Stock offered hereby will be passed upon for the Underwriters by Squadron, Ellenoff, Plesent & Sheinfeld, LLP, New York, New York. EXPERTS The financial statements as of January 31, 1995 and 1996, and for each of the three years in the period ended January 31, 1996 and for the period from June 19, 1991 (inception) to January 31, 1996 included in this Prospectus have been so included in reliance on the report (which contains an explanatory paragraph relating to the Company's ability to continue as a going concern as described in Note 2 of Notes to Financial Statements) of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The statements in this Prospectus under the captions "Risk Factors -- Proprietary Protection; Need to Devote Additional Resources to Patents," "Business -- Patents" and other references herein to intellectual property of the Company have been reviewed and approved by Luce, Forward, Hamilton & Scripps LLP, San Diego, California, as experts on such matters, and are included herein in reliance upon such review and approval. AVAILABLE INFORMATION The Company has filed a Registration Statement on Form S-1 (herein, together with all amendments and exhibits, referred to as the "Registration Statement") with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Common Stock offered pursuant to this Prospectus. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement and the documents incorporated herein by reference, which may be inspected without charge and copied at prescribed notes at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The Company is an electronic filer, and the Commission maintains a Web site that contains information regarding the Company. The address of such Web site is http://www.sec.gov. Copies of the Registration Statement may be obtained from the Company without charge upon written or oral request. Statements contained in this Prospectus or in any document incorporated 44 46 herein by reference as to the contents of any contract or documents referred to herein or therein are not necessarily complete, and in each instance reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Company intends to furnish shareholders with annual reports containing financial statements audited by its independent public accountants and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. 45 47 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants..................................................... F-2 Balance Sheet as of January 31, 1995, 1996 and April 30, 1996 (unaudited) and Pro Forma Shareholders' Equity as of April 30, 1996(unaudited).......................... F-3 Statement of Operations for the years ended January 31, 1994, 1995 and 1996, for the period from June 19, 1991 (inception) through January 31, 1996, and for the three months ended April 30, 1995 and 1996 (unaudited), and for the period from June 19, 1991 (inception) through April 30, 1996 (unaudited)................................. F-4 Statement of Cash Flows for the years ended January 31, 1994, 1995, and 1996, for the period from June 19, 1991 (inception) through January 31, 1996 and for the three months ended April 30, 1995 and 1996 (unaudited) and for the period from June 19, 1991 (inception) through April 30, 1996 (unaudited)................................. F-5 Statement of Shareholders' Equity for the period from June 19, 1991 (inception) through January 31, 1996 and for the three months ended April 30, 1996 (unaudited)......................................................................... F-6 Notes to Financial Statements......................................................... F-11
F-1 48 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of U.S. Medical Instruments, Inc. In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of U.S. Medical Instruments, Inc. (a development stage enterprise) at January 31, 1995 and 1996, and the results of its operations and its cash flows for the years ended January 31, 1994, 1995 and 1996 and the period from June 19, 1991 (inception) to January 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 to the financial statements, the Company is in the development stage, has incurred a cumulative net loss since inception and is dependent on additional financing in order to continue its operations and execute its growth strategy. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans to raise additional financing are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PRICE WATERHOUSE LLP San Diego, California August 14, 1996 F-2 49 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PRO FORMA JANUARY 31, SHAREHOLDERS' --------------------- APRIL 30, EQUITY 1995 1996 1996 (NOTE 3) -------- -------- ----------- ------------- (UNAUDITED) (UNAUDITED) ASSETS Current assets: Accounts receivable, net of allowance for doubtful accounts of $34 and $10 (unaudited)................................. $ -- $ 224 $ 8 Inventories.................................................. 1,723 2,451 2,860 Prepaid expenses............................................. 21 77 85 -------- -------- -------- Total current assets.................................. 1,744 2,752 2,953 Property and equipment, net -- secured......................... 8,108 8,234 7,888 Intangible assets, net......................................... 1,673 1,491 1,445 Other assets................................................... 89 66 66 -------- -------- -------- $ 11,614 $ 12,543 $ 12,352 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses........................ $ 1,268 $ 1,934 $ 2,096 Related party notes payable.................................. -- 260 260 Current portion of long-term notes payable................... 972 490 1,475 Current portion of capital leases............................ 126 158 211 -------- -------- -------- Total current liabilities............................. 2,366 2,842 4,042 Long-term liabilities: Long-term notes payable, less current portion................ 1,159 1,101 -- Capital leases, less current portion......................... 352 223 103 Deferred rent................................................ 88 143 134 -------- -------- -------- Total liabilities..................................... 3,965 4,309 4,279 -------- -------- -------- Commitments and contingencies (Note 9) Shareholders' equity: Preferred Stock; 12,000,000 shares authorized; 5,398,679, 6,348,512 and 6,560,582 shares issued and outstanding at January 31, 1995 and 1996, and April 30, 1996 (unaudited) respectively: Series A Convertible Preferred Stock..................... 26 26 26 Series B Convertible Preferred Stock..................... 1,636 1,636 1,636 Series C Convertible Preferred Stock..................... 577 577 577 Series D Convertible Preferred Stock..................... 9,476 9,476 9,476 Series E Convertible Preferred Stock..................... 9,264 16,342 17,557 Series F Convertible Preferred Stock..................... -- -- 332 Common Stock, no par value; 28,000,000 shares authorized; 1,717,524, 2,226,702, 2,226,702 and 8,787,284 shares issued and outstanding at January 31, 1995 and 1996, April 30, 1996 (unaudited) and pro forma (unaudited), respectively... 380 687 687 $ 30,291 Additional paid-in capital................................... 1,159 1,472 1,485 1,485 Shareholder receivable....................................... (1,705) (5) (5) (5) Deficit accumulated during development stage................. (13,164) (21,977) (23,698) (23,698) -------- -------- -------- -------- Total shareholders' equity............................ 7,649 8,234 8,073 $ 8,073 ======== -------- -------- -------- $ 11,614 $ 12,543 $ 12,352 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-3 50 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF OPERATIONS (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
PERIOD FROM FOR THE THREE PERIOD FROM JUNE 19, 1991 MONTHS ENDED JUNE 19, 1991 YEAR ENDED JANUARY 31, (INCEPTION) APRIL 30, (INCEPTION) -------------------------------- TO JANUARY 31, ---------------------- TO APRIL 30, 1994 1995 1996 1996 1995 1996 1996 ------- ------- ---------- -------------- ------- ----------- ------------- (UNAUDITED) (UNAUDITED) Net sales............. $ 1 $ 44 $ 372 $ 422 $ 22 $ 222 $ 644 ----- ----- -------- ------- ------ ------ ------ Costs and expenses: Pre-manufacturing and manufacturing..... 626 3,926 4,966 9,884 1,355 937 10,821 General and administrative.... 1,049 1,217 1,925 4,984 398 502 5,486 Selling and marketing......... 385 1,136 941 3,033 198 354 3,387 Research and development....... 1,116 857 588 3,268 178 117 3,385 ----- ----- -------- ------- ------ ------ ------ Total costs and expenses........ 3,176 7,136 8,420 21,169 2,129 1,910 23,079 ----- ----- -------- ------- ------ ------ ------ Loss from operations.......... (3,175) (7,092) (8,048) (20,747) (2,107) (1,688) (22,435) Interest expense and debt issuance costs............. 67 205 765 1,045 40 33 1,078 Other expense....... -- 185 -- 185 -- -- 185 ----- ----- -------- ------- ------ ------ ------ Net loss.............. $(3,242) $(7,482) $ (8,813) $(21,977) $(2,147) $ (1,721) $ (23,698) ===== ===== ======== ======= ====== ====== ====== Pro forma net loss per common share........ $ $ ======== ====== Shares used in computing pro forma net loss per common share...............
The accompanying notes are an integral part of these financial statements. F-4 51 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM FOR THE THREE PERIOD FROM JUNE 19, 1991 MONTHS ENDED JUNE 19, 1991 YEAR ENDED JANUARY 31, (INCEPTION) APRIL 30, (INCEPTION) --------------------------- TO JANUARY ----------------- TO APRIL 30, 1994 1995 1996 31, 1996 1995 1996 1996 ------- ------- ------- ------------- ------- ------- ------------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss................................... $(3,242) $(7,482) $(8,813) $ (21,977) $(2,147) $(1,721) $ (23,698) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation of property and equipment... 208 456 809 1,583 205 354 1,937 Amortization of intangible assets........ 120 58 182 373 51 46 419 Amortization of discount on notes payable................................ 6 -- 197 203 -- -- 203 Loss on disposal of asset................ -- -- 38 38 -- -- 38 Cancellation of accrued interest upon conversion of debt..................... -- -- 120 120 -- -- 120 Non-cash charge for debt transactions.... -- -- 274 274 -- -- 274 Non-cash portion of loss on settlement of related party notes payable............ -- 94 -- 94 -- -- 94 Common Stock issued for research and development............................ -- -- -- 322 -- -- 322 Common Stock issued for services performed.............................. 11 17 5 33 -- -- 33 Common Stock issued for preincorporation costs.................................. -- -- -- 97 -- -- 97 Increase (decrease) in cash resulting from changes in: Accounts receivable.................... 1 2 (224) (224) (5) 216 (8) Inventories............................ 28 (1,723) (728) (2,451) (933) (409) (2,860) Prepaid expenses....................... (7) (14) (56) (77) 1 (8) (85) Other assets........................... (13) (20) 23 (66) (10) -- (66) Accounts payable and accrued expenses............................ 382 646 666 1,934 897 162 2,096 Deferred rent.......................... 17 71 55 143 58 (9) 134 ------- ------- ------- -------- ------- ------- -------- Net cash used in operating activities.... (2,489) (7,895) (7,452) (19,581) (1,883) (1,369) (20,950) ------- ------- ------- -------- ------- ------- -------- Cash flows from investing activities: Proceeds from disposal of assets........... -- -- 16 16 -- -- 16 Purchases of property and equipment........ (725) (5,427) (990) (8,298) (246) (8) (8,306) Payments for intangible assets............. (9) (750) (348) (1,433) -- -- (1,433) ------- ------- ------- -------- ------- ------- -------- Net cash used in investing activities.... (734) (6,177) (1,322) (9,715) (246) (8) (9,723) ------- ------- ------- -------- ------- ------- -------- Cash flows from financing activities: Net proceeds from issuance of Preferred and Common Stock............................. 2,506 11,703 3,047 20,807 144 1,547 22,354 Net proceeds from issuance of warrants..... 100 1,384 302 1,786 20 13 1,799 Net proceeds from issuance of debt......... 1,484 3,754 5,238 350 -- 5,238 Net proceeds from issuance of related party notes payable............................ 293 -- 700 993 -- -- 993 Collection of shareholder receivable....... -- -- 1,700 1,700 1,700 -- 1,700 Payments on long-term debt................. -- (99) (192) (291) (55) (116) (407) Payments on capital leases................. -- (107) (97) (204) (30) (67) (271) Payments on related party notes payable.... -- (293) (440) (733) -- -- (733) ------- ------- ------- -------- ------- ------- -------- Net cash provided by financing activities............................. 2,899 14,072 8,774 29,296 2,129 1,377 30,673 ------- ------- ------- -------- ------- ------- -------- Decrease in cash............................. (324) -- -- -- -- -- -- Cash at beginning of period.................. 324 -- -- -- -- -- -- ------- ------- ------- -------- ------- ------- -------- Cash at end of period........................ $ -- $ -- $ -- $ -- $ -- $ -- $ -- ======= ======= ======= ======== ======= ======= ========
The accompanying notes are an integral part of these financial statements. F-5 52 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS) PAGE 1 OF 5
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE SERIES A SERIES B SERIES C SERIES D SERIES E PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK ----------------- --------------- --------------- ----------------- ------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- ------ ------- ------ ------- ------ --------- ------ --------- ------- Issuance of Common Stock for certain assets and costs of founders....................... Issuance of Common Stock for cash August 1991 to January 1992.......................... Net loss for the period from June 19, 1991 (inception) to January 31, 1992.............. ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Balance at January 31, 1992..... Issuance of Common Stock for cash February 1992 to June 1992.......................... Issuance of Common Stock for cash June 1992 to July 1992... Issuance of Common Stock for cash August 1992 to January 1993, net of related costs of $37........................... Net loss for the year ended January 31, 1993.............. ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Balance at January 31, 1993..... CONVERTIBLE DEFICIT SERIES F ACCUMULATED PREFERRED STOCK COMMON STOCK ADDITIONAL DURING ----------------- -------------------- PAID-IN SHAREHOLDER DEVELOPMENT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE STAGE --------- ------ ---------- -------- ---------- ----------- ----------- Issuance of Common Stock for certain assets and costs of founders....................... 552,000 $ 474 Issuance of Common Stock for cash August 1991 to January 1992.......................... 48,000 304 Net loss for the period from June 19, 1991 (inception) to January 31, 1992.............. $ (600) ------ ------ ------ ------ ------ ------ ------ Balance at January 31, 1992..... 600,000 778 (600) Issuance of Common Stock for cash February 1992 to June 1992.......................... 69,230 727 Issuance of Common Stock for cash June 1992 to July 1992... 42,972 603 Issuance of Common Stock for cash August 1992 to January 1993, net of related costs of $37........................... 72,865 1,917 Net loss for the year ended January 31, 1993.............. (1,840) ------ ------ ------ ------ ------ ------ ------ Balance at January 31, 1993..... 785,067 $ 4,025 $ (2,440)
F-6 53 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS) PAGE 2 OF 5
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE SERIES A SERIES B SERIES C SERIES D SERIES E PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK ----------------- --------------- --------------- ----------------- ------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- ------ ------- ------ ------- ------ --------- ------ --------- ------- Balance at January 31, 1993..... Five for one stock split........ Conversion of Common Stock into preferred stock............... 1,332,000 $ 26 554,195 $1,164 205,933 $ 577 363,825 $2,037 Issuance of Common Stock for services August 1993.......... Issuance of Series D Preferred Stock for cash April 1993 to January 1994, net of related costs of $99.................. 455,383 2,447 Preferred stock issued for finders fee January 1994...... 9,378 53 Issuance of Common Stock for resignation agreement January 1994.......................... Exercise of stock options....... Issuance of warrants with debt June 1993..................... Net loss for the year ended January 31, 1994.............. --------- ------ ------- ------ ------- ------ --------- ------ --------- ------- Balance at January 31, 1994..... 1,332,000 $ 26 554,195 $1,164 205,933 $ 577 828,586 $4,573 CONVERTIBLE DEFICIT SERIES F ACCUMULATED PREFERRED STOCK COMMON STOCK ADDITIONAL DURING ----------------- -------------------- PAID-IN SHAREHOLDER DEVELOPMENT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE STAGE --------- ------ ---------- -------- ---------- ----------- ----------- Balance at January 31, 1993..... 785,067 $ 4,025 $ (2,440) Five for one stock split........ 3,140,268 Conversion of Common Stock into preferred stock............... (2,455,953) (3,804) Issuance of Common Stock for services August 1993.......... 20,239 11 Issuance of Series D Preferred Stock for cash April 1993 to January 1994, net of related costs of $99.................. Preferred stock issued for finders fee January 1994...... Issuance of Common Stock for resignation agreement January 1994.......................... 22,911 13 Exercise of stock options....... 105,000 59 Issuance of warrants with debt June 1993..................... $ 100 Net loss for the year ended January 31, 1994.............. (3,242) --------- ------ ---------- -------- ---------- ----------- ----------- Balance at January 31, 1994..... 1,617,532 $ 304 $ 100 $ (5,682)
F-7 54 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS) PAGE 3 OF 5
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE SERIES A SERIES B SERIES C SERIES D SERIES E PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK ----------------- --------------- --------------- ----------------- ------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- ------ ------- ------ ------- ------ --------- ------ --------- ------- Balance at January 31, 1994..... 1,332,000 $ 26 554,195 $1,164 205,933 $ 577 828,586 $4,537 Issuance of stock for exercise of options and warrants June 1994 to November 1994......... 225,000 472 Issuance of Common Stock for consulting services October 1994.......................... Sale of Series D Preferred Stock for cash February 1994 to August 1994, net of related cost of $70................... 611,037 3,377 Preferred Stock and warrants issued for settlement of related party note payable August 1994................... 142,857 800 Common Stock issued for finder's fee August 1994............... Sales of Series E Preferred Stock for cash September 1994 to November 1994, net of related costs of $4......................... 296,332 $2,197 Issuance of warrants for finder's fee and other December 1994................. (75) Sales of Series E Preferred Stock for cash with warrants December 1994 to January 1995.......................... 1,066,668 7,142 Net loss for the year ended January 31, 1995.............. --------- ------ ------- ------ ------- ------ --------- ------ --------- ------- Balance at January 31, 1995..... 1,332,000 $ 26 779,195 $1,636 205,933 $ 577 1,718,551 $9,476 1,363,000 $9,264 CONVERTIBLE DEFICIT SERIES F ACCUMULATED PREFERRED STOCK COMMON STOCK ADDITIONAL DURING ----------------- -------------------- PAID-IN SHAREHOLDER DEVELOPMENT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE STAGE --------- ------ ---------- -------- ---------- ----------- ----------- Balance at January 31, 1994..... 1,617,532 $ 304 $ 100 $ (5,682) Issuance of stock for exercise of options and warrants June 1994 to November 1994......... 59,144 54 Issuance of Common Stock for consulting services October 1994.......................... 25,000 14 Sale of Series D Preferred Stock for cash February 1994 to August 1994, net of related cost of $70................... Sale of Series D Preferred Stock with common stock May 1994.... 136,071 762 Sale of Series D Preferred Stock with common stock May 1994.... 10,156 5 $ (5) Preferred Stock and warrants related party note payable August 1994................... 107 Common Stock issued for finder's fee August 1994............... 5,692 3 Sales of Series E Preferred Stock for cash September 1994 to November 1994, net of related costs of $4......................... Issuance of warrants for finder's fee and other December 1994................. 94 Sales of Series E Preferred Stock for cash with warrants December 1994 to January 1995.......................... 858 (1,700) Net loss for the year ended January 31, 1995.............. (7,482) --------- ------ ---------- -------- ---------- ----------- ----------- Balance at January 31, 1995..... 1,717,524 $ 380 $1,159 $(1,705) $ (13,164) issued for settlement of
F-8 55 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS) PAGE 4 OF 5
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE SERIES A SERIES B SERIES C SERIES D SERIES E PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK ----------------- --------------- --------------- ----------------- ------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- ------ ------- ------ ------- ------ --------- ------ --------- ------- Balance at January 31, 1995..... 1,332,000 $ 26 779,195 $1,636 205,933 $ 577 1,718,551 $9,476 1,363,000 $9,264 Issuance of Common Stock for exercise of options and warrants...................... Issuance of Common Stock for consulting services February 1995 to October 1995.......... Conversion of debt to equity and issuance of warrants December 1995.......................... 533,334 4,031 Sales of Series E Preferred Stock April 1995 to July 1995, net of related costs of $77... 416,499 3,047 Collections on shareholder receivable February 1995...... Issuance of warrants with debt April 1995 to September 1995.......................... Net loss for the year ended January 31, 1996.............. --------- ------ ------- ------ ------- ------ --------- ------ --------- ------- Balance at January 31, 1996..... 1,332,000 $ 26 779,195 $1,636 205,933 $ 577 1,718,551 $9,476 2,312,833 $16,342 CONVERTIBLE DEFICIT SERIES F ACCUMULATED PREFERRED STOCK COMMON STOCK ADDITIONAL DURING ----------------- -------------------- PAID-IN SHAREHOLDER DEVELOPMENT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE STAGE --------- ------ ---------- -------- ---------- ----------- ----------- Balance at January 31, 1995..... 1,717,524 $ 380 $1,159 $(1,705) $ (13,164) Issuance of Common Stock for exercise of options and warrants...................... 502,111 302 Issuance of Common Stock for consulting services February 1995 to October 1995.......... 7,067 5 Conversion of debt to equity and issuance of warrants December 1995.......................... 39 Sales of Series E Preferred Stock April 1995 to July 1995, net of related costs of $77... Collections on shareholder receivable February 1995...... 1,700 Issuance of warrants with debt April 1995 to September 1995.......................... 274 Net loss for the year ended January 31, 1996.............. (8,813) --------- ------ ---------- -------- ---------- ----------- ----------- Balance at January 31, 1996..... 2,226,702 $ 687 $1,472 $ (5) $ (21,977)
F-9 56 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS) PAGE 5 OF 5
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE SERIES A SERIES B SERIES C SERIES D SERIES E PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK ----------------- --------------- --------------- ----------------- ------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- ------ ------- ------ ------- ------ --------- ------ --------- ------- Balance at January 31, 1996..... 1,332,000 $ 26 779,195 $1,636 205,933 $ 577 1,718,551 $9,476 2,312,833 $16,342 Sales of Series E Preferred Stock for cash February 1996 to March 1996, net of related costs of $113....................... 177,070 1,215 Sales of Series F Preferred Stock for cash March 1996, net of related costs of $18....... Issuance of warrants with debt February 1996................. Net loss for the three months ended April 30, 1996.......... --------- ------ ------- ------ ------- ------ --------- ------ --------- ------- Balance at April 30, 1996 (unaudited)................... 1,332,000 $ 26 779,195 $1,636 205,933 $ 577 1,718,551 $9,476 2,489,903 $17,557 ======== ======= ======= ======= ======= ======= ======== ======= ======== ======= CONVERTIBLE DEFICIT SERIES F ACCUMULATED PREFERRED STOCK COMMON STOCK ADDITIONAL DURING ----------------- -------------------- PAID-IN SHAREHOLDER DEVELOPMENT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE STAGE --------- ------ ---------- -------- ---------- ----------- ----------- Balance at January 31, 1996..... 2,226,702 $ 687 $1,472 $ (5) $ (21,977) Sales of Series E Preferred Stock for cash February 1996 to March 1996, net of related costs of $113....................... Sales of Series F Preferred Stock for cash March 1996, net of related costs of $18....... 35,000 $ 332 Issuance of warrants with debt February 1996................. 13 Net loss for the three months ended April 30, 1996.......... $ (1,721) --------- ------ ---------- -------- ---------- ----------- ----------- Balance at April 30, 1996 (unaudited)................... 35,000 $ 332 2,226,702 $ 687 $1,485 $ (5) $ (23,698) ======== ======= ========= ======== ========= =========== ===========
The accompanying notes are an integral part of these financial statements. F-10 57 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS NOTE 1 -- THE COMPANY U.S. Medical Instruments, Inc. (the "Company") was incorporated in California on June 19, 1991. The Company's business is to design, develop, manufacture and market safety medical products. The Company's initial product is a safety syringe which the Company markets to acute care (hospitals), alternate care (clinics, hospices, etc.), and retail facilities throughout the United States and worldwide. NOTE 2 -- DEVELOPMENT STAGE ACTIVITIES AND DEPENDENCY ON ADDITIONAL FINANCING The Company is considered a development stage Company as defined in FASB No. 7 "Accounting and Reporting by Development Stage Enterprises." The Company's primary activities since inception have included developing its proprietary safety medical products, acquiring and securing patents, raising capital to finance its operations, securing regulatory approval for its products and designing the manufacturing process for its initial product line. Revenues from inception to January 31, 1996 have not been significant. The cumulative net loss incurred during the development stage from inception to January 31, 1996 is $21,977,000 and from inception to April 30, 1996 is $23,698,000 (unaudited). The Company had negative working capital of $90,000 and $1,089,000 at January 31, 1996 and April 30, 1996 (unaudited), respectively. Management plans to pursue a growth strategy for fiscal 1997. The Company is dependent on additional financing to execute that growth strategy and to continue its operations. Management believes that the proceeds of the planned initial public offering of the Company's stock and/or private financing, if successful, will be sufficient to fund its operations and anticipated growth for at least the next twelve months. There can be no assurance that these anticipated financings will be consummated. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. NOTE 3 -- SIGNIFICANT ACCOUNTING POLICIES FINANCIAL STATEMENT PREPARATION The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVENTORIES Inventories are valued at the lower of cost (determined by the first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost and depreciated using the straight-line method over estimated useful lives of three to ten years. Expenditures which substantially increase value or extend useful lives are capitalized. Maintenance and repairs are expensed as incurred. Leasehold improvements are capitalized and amortized over the remaining lease term. INTANGIBLE ASSETS Intangible assets are recorded at cost and amortized using the straight-line method over their estimated remaining useful lives, which currently range from ten to twelve years. F-11 58 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) LONG-LIVED ASSETS The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss would be recognized when the asset's fair value is less than its carrying amount. No such impairment losses have been identified by the Company. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. As of January 31, 1996, approximately 96% of trade receivables were from one customer. To reduce credit risk, the Company performs ongoing credit evaluations of its customers' financial condition. The Company does not generally require collateral on credit sales to its customers. For the years ended January 31, 1994, 1995, and 1996, approximately 100%, 95% and 67% of net sales were to one customer, two customers and one customer, respectively. The Company has not experienced significant credit losses and maintains a reserve for potential credit losses. As of and for the three month period ended April 30, 1996 approximately $8,000 (unaudited) of trade receivables and 86% (unaudited) of net sales were to one customer. DEFERRED FINANCING COSTS AND DEBT DISCOUNT Deferred financing costs and debt discounts recorded in connection with the issuance of long-term debt are amortized using the interest method over the term of the debt. INCOME TAXES Current income tax expense is the amount of income taxes expected to be payable in the current year. Deferred tax assets and liabilities are computed for both the expected future tax consequences resulting from the differences in financial reporting and tax bases of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carryforwards. Deferred income tax expense (benefit) is the net change during the period in the deferred income tax asset or liability, net of valuation allowances (Note 8). REVENUE Revenue from product sales is recognized upon shipment, net of an allowance for estimated sales returns. Net sales for the year ended January 31, 1996 and the three months ended April 30, 1996 included $246,000 and $192,000 (unaudited) from a customer in Japan. Such sales were made under an executed letter of credit. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. REGULATORY APPROVAL COSTS Regulatory approval costs are expensed as incurred. F-12 59 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) STOCK-BASED COMPENSATION ACCOUNTING Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation" is effective beginning with the Company's first quarter of fiscal year 1997. In the opinion of management, adoption will not have a material effect on the Company's financial position or results of operations. Upon adoption of FAS 123, the Company will continue to measure compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" and will provide pro forma disclosures of results of operations as if the fair value-based method prescribed by FAS 123 had been applied in measuring compensation expense. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts shown for the Company's financial instruments, due to their relative short term nature, are not materially different from the estimates of their related fair values. PRO FORMA NET LOSS PER SHARE (UNAUDITED) Pro forma net loss per share is computed using the weighted average number of common and common equivalent shares, if dilutive, outstanding during the period. All securities issued by the Company during the twelve months preceding the filing date of its initial public offering and thereafter through the effective date have been included in the calculation of weighted average shares outstanding as if they were outstanding for all periods in which such information is presented. The pro forma net loss per share also includes the effect of conversion to Common Stock of the Company's Preferred Stock which is convertible at the option of the holder or automatically in the event of an initial public offering. Historical net loss per share amounts are not presented because such amounts are not believed to be meaningful. INTERIM FINANCIAL STATEMENTS The interim financial statements included herein are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation of such financial statements have been included. The results of operations for the three months ended April 30, 1996 are not necessarily indicative of the results to be expected for the year. PRO FORMA SHAREHOLDERS' EQUITY (UNAUDITED) Pro forma shareholders' equity of the Company at April 30, 1996 gives effect to the automatic conversion of Series A, B, C, D, E and F convertible Preferred Stock into an equal number of shares of Common Stock upon the closing of the Company's initial public offering. F-13 60 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
JANUARY 31, ------------------ 1995 1996 ------ ------- APRIL 30, 1996 ----------- (UNAUDITED) (IN THOUSANDS) Inventories: Raw materials......................................... $1,035 $ 1,032 $ 1,001 Work-in-process....................................... 128 233 426 Finished goods........................................ 560 1,186 1,433 ------ ------- ------- $1,723 $ 2,451 $ 2,860 ====== ======= ======= Property and equipment: USEFUL LIFE Machinery............................. 10 years $4,132 $ 5,936 $ 5,936 Injection molds....................... 10 years 1,918 2,185 2,202 Leasehold improvements................ lease term 666 687 687 Office and computer equipment......... 3 - 5 years 404 320 320 Equipment deposits (Note 9)........................... 1,664 477 468 ------ ------- ------- 8,784 9,605 9,613 Accumulated depreciation and amortization............. (676) (1,371) (1,725) ------ ------- ------- $8,108 $ 8,234 $ 7,888 ====== ======= ======= Intangible assets: Patents and license agreements (Note 5)............... $1,863 $ 1,863 $ 1,863 Accumulated amortization.............................. (190) (372) (418) ------ ------- ------- $1,673 $ 1,491 $ 1,445 ====== ======= ======= Accounts payable and accrued expenses: Accounts payable...................................... $ 479 $ 1,444 $ 1,542 Accrued expenses...................................... 421 258 225 Accrued payroll costs................................. 70 113 252 Bank overdrafts....................................... 189 119 77 Other................................................. 109 -- -- ------ ------- ------- $1,268 $ 1,934 $ 2,096 ====== ======= =======
F-14 61 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5 -- LONG-TERM NOTES PAYABLE AND LIABILITIES TO RELATED PARTIES AND OTHERS The Company had long-term notes payable and liabilities outstanding as follows:
JANUARY 31, ----------------- 1995 1996 ------ ------ APRIL 30, 1996 ----------- (UNAUDITED) (IN THOUSANDS) Secured promissory note, monthly payments of $12,750 with 5.8% interest per annum, balance due March 13, 1997; secured by certain manufacturing equipment............................. $ 870 $ 816 $ 756 Secured promissory note, monthly payments of $14,729 with 1.9% interest per annum; balance due March 13, 1997; secured by certain manufacturing equipment............................. 515 377 321 Long-term liability related to patent acquisition, 4 payments of $212,500 beginning on June 30, 1995 and due semiannually thereafter through December 31, 1996, which have been discounted to their present value using an effective interest rate of 10%........................................ 746 398 398 ------ ------ ------- 2,131 1,591 1,475 Less current portion.......................................... (972) (490) (1,475) ------ ------ ------- $1,159 $1,101 $ -- ====== ====== =======
The obligations are payable as follows for the subsequent years ending January 31 (in thousands): 1997................................................................ $ 490 1998................................................................ 1,101 ------ $1,591 ======
On August 5, 1994, the Company had an outstanding promissory note payable to a shareholder with a face value of $851,000, accrued interest of $31,000 and an unamortized discount of $69,000. The note was settled in fiscal 1995 by issuing the shareholder 142,857 shares of Series D Preferred Stock valued at $800,000, a warrant to purchase 228,000 shares of Common Stock at $.56 per share, and cash of $82,000. The warrants were valued by management at $107,000. The Company recorded a loss on extinguishment of debt of $176,000 on this transaction. During fiscal 1993, the Company acquired the exclusive long-term license to certain patents, technical data and trade styles relating to its safety syringe. During fiscal 1994, the Company paid $50,000 in minimum royalties related to this agreement. In December 1994, the Company exercised its option to discharge its royalty obligation in full by paying $750,000 in December 1994 and agreeing to make four semi-annual payments of $212,500 each beginning on June 30, 1995. The Company has capitalized $1,496,000 representing the December 1994 payment and the present value of all future payments under the agreement, using an effective interest rate of 10%, and is amortizing such costs over the remaining ten year life of the patent. Under the terms of the agreement, if the Company fails to make a semi-annual payment within ten days after written notice, the Company shall forfeit its paid up, royalty-free license. During February 1996, the Company renegotiated the two secured promissory notes discussed above. Under the new terms, the Company was required to make a lump sum payment of $120,000 on February 23, 1996 and interest only payments of $7,600 per month (8.25% per annum) commencing March 13, 1996 and ending on August 13, 1996 at which time the Company had the option to pay the remaining outstanding balance. If the Company had exercised its option to pay the note on August 13, 1996, the Company would have been entitled to a reduction of the principal amount of $150,000. The Company did not elect to exercise F-15 62 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) the early payment option and will make interest and principal payments under the original term of the secured promissory note and must pay the total outstanding balance no later than March 13, 1997. NOTE 6 -- SHAREHOLDERS' EQUITY In April 1993, the shareholders approved a five for one stock split and a recapitalization plan whereby the common shareholders converted their common shares into Preferred Stock Series A, Series B, Series C, or Series D, depending on the price originally paid for such common shares. All outstanding shares of Series A and C, 554,195 shares of Series B, and 363,825 shares of Series D were former common shares converted pursuant to this plan. In August 1994, the shareholders approved an increase in the authorized shares to 12 million preferred shares and 28 million common shares. The following preferred shares are issued and outstanding:
JANUARY 31, ------------------- APRIL 30, 1995 1996 1996 ------- ------- ----------- (UNAUDITED) (IN THOUSANDS) Series A Convertible Preferred Stock (Series A), $.002 per annum noncumulative dividend, no par value; 1,332,000 shares authorized, issued and outstanding at January 31, 1995 and 1996 and April 30, 1996 (unaudited)............ $ 26 $ 26 $ 26 Series B Convertible Preferred Stock (Series B), $.21 per annum noncumulative dividend, no par value; 937,150 shares authorized, 779,195 issued and outstanding at January 31, 1995 and 1996 and April 30, 1996 (unaudited)............................................. 1,636 1,636 1,636 Series C Convertible Preferred Stock (Series C), $.28 per annum noncumulative dividend, no par value; 222,020 shares authorized, 205,933 issued and outstanding at January 31, 1995 and 1996 and April 30, 1996 (unaudited)............................................. 577 577 577 Series D Convertible Preferred Stock (Series D), $.56 per annum noncumulative dividend, no par value; 1,780,000 shares authorized, 1,718,551 issued and outstanding at January 31, 1995 and 1996 and April 30, 1996 (unaudited)............................................. 9,476 9,476 9,476 Series E Convertible Preferred Stock (Series E), $.75 per annum noncumulative dividend, no par value; 2,500,000 shares authorized, 1,363,000, 2,312,833 and 2,489,903 issued and outstanding at January 31, 1995 and 1996 and April 30, 1996 (unaudited).............................. 9,264 16,342 17,557 Series F Convertible Preferred Stock (Series F), $1.00 per annum noncumulative dividend, no par value; 3,000,000 shares authorized, 35,000 shares issued and outstanding at April 30, 1996 (unaudited)........................... 332 ----- ------ ------ Total Preferred Stock........................... $20,979 $28,057 $29,604 ===== ====== ======
In the event of any liquidation, dissolution or winding up of the Company, the holders of Series A, B, C, D, E and F Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any assets to the common shareholders, an amount per share equal to $0.02, $2.10, $2.80, $5.60, $7.50 and $10.00 plus an amount equal to all declared but unpaid dividends, respectively. After April 30, 1996, the Company may, at the option of the Board of Directors, redeem in whole or in part the Series A, B, C, D, E and F Preferred Stock by paying cash equal to the original issue price for each share, plus any declared but unpaid dividends on such shares. F-16 63 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Each share of Series A, B, C, D, E and F Preferred Stock is convertible into one share of Common Stock, at the option of the shareholder, at any time prior to redemption by the Company or upon automatic conversion. The conversion rate is subject to adjustment in the event of a stock split or stock dividend. The Preferred Stock has voting rights which are identical to the Common Stock voting rights, and automatically convert into shares of Common Stock immediately upon the closing of a public offering which results in gross proceeds to the Company exceeding $3,000,000. WARRANTS In connection with the issuance of short-term notes payable to directors and shareholders, the Company issued warrants to purchase 17,656 and 81,184 shares of Common Stock at $.56 per share during the years ended January 31, 1994 and 1995, respectively. The exercise price of the warrants granted was equal to the fair market value of the Company's Common Stock at the date of grant, as determined by the Board of Directors. Approximately 32,000 warrants were exercised during fiscal year 1995 and the remaining warrants are exercisable at any time through February 2004. The value of the warrants issued in fiscal 1994 was considered immaterial. The warrants issued in fiscal 1995 were valued by management at $19,000 and charged to interest expense. During fiscal 1994, in connection with the issuance of a long-term note due to a shareholder, the Company issued warrants to purchase 50,000 shares of Series D Preferred Stock at $5.60 per share. The warrants may be exercised at anytime through November 1998. The fair value of these warrants has been recorded as a discount to the related debt and charged to expense ratably over the debt repayment terms. In August 1994, the shareholder note was settled in exchange for 142,857 shares of Series D Preferred Stock valued at $800,000, a warrant to purchase 228,000 shares of Common Stock at $.56 per share, and cash. The warrants were valued by management at $107,000. During fiscal 1995, in connection with the sale of Series E Preferred Stock, the Company issued warrants to purchase 213,334 shares of Series E Preferred Stock at $7.50 per share. The proceeds of the issuance were allocated based upon the estimated fair value of the securities issued. Additionally, the Company issued warrants to purchase 18,667 shares of Series E Preferred Stock at $7.50 per share to a third party as payment for a finder's fee for the above transaction. These warrants were valued by management at $75,000 and recorded as a reduction of the proceeds from the sale of Series E Preferred Stock. All warrants issued in connection with this transaction are exercisable at any time until expiration on January 31, 1998. During fiscal 1996, the Company issued demand notes payable to certain shareholders totaling $440,000 together with 52,800 warrants to purchase Common Stock. The notes bore interest at 8% per annum and were paid in full as of January 31, 1996. The Common Stock purchase warrants have an exercise price of $.75 per share, which was the fair market value at the date of grant, as determined by the Board of Directors, and are exercisable over a period of between three months and five years from the date of grant. The warrants were valued by management at $25,000 and charged to interest expense. During fiscal 1996, the Company issued convertible secured notes payable to a shareholder for a total of $4,000,000 together with warrants to purchase 106,667 shares of Series E Preferred Stock at $7.50 per share and warrants to purchase 50,000 shares of Common Stock at $.75 per share. The notes were due in August 1998 and bore interest at 9% payable quarterly. The lender had the right to demand payment of the convertible note on or after January 31, 1996. The notes were secured by the Company's patents, plastic injection molds, and automated assembly equipment. At any time prior to August 1998 or until the notes were paid, the notes were convertible into Series E Preferred Stock at $7.50 per share. The proceeds of the issuance were allocated based upon the estimated fair value of the securities issued. The fair value, as determined by management, of the Preferred Stock warrants of $246,000 has been recorded as a discount to the related debt and charged to expense ratably over the minimum term of the debt. F-17 64 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company and noteholder subsequently agreed that the noteholder would exercise the conversion right of the note into 533,334 shares of Series E Preferred Stock. As part of the conversion, the noteholder cancelled the warrant to purchase 106,667 shares of Series E Preferred Stock at $7.50 per share; the warrant to purchase 50,000 shares of Common Stock at $.75 per share; and all accrued interest, in exchange for a warrant to purchase 1,300,000 shares of Common Stock at $14.00 per share. The warrant expires on December 31, 1997. An additional charge of $39,000 was recorded as a result of the conversion. SHAREHOLDER RECEIVABLE At January 31, 1995, the Company had a receivable from a stockholder for $1,700,000 resulting from the purchase of 226,670 shares of Series E Preferred Stock which was collected in full in February 1995. Additionally, the Company has a receivable from a stockholder for $5,000 for the purchase of 10,156 shares of Common Stock, which remains outstanding at January 31, 1996. NOTE 7 -- STOCK OPTION PLAN During fiscal 1994, the Board of Directors approved a stock option plan ("the Plan") which provides for the granting of options or stock purchase rights to employees, directors and outside consultants of the Company. Nonstatutory stock options and incentive stock options may be granted at an exercise price not less than 85 percent and 100 percent, respectively, of the fair market value of the Common Stock, as determined by the Board of Directors, on the date of grant of such option. At January 31, 1996, options for 221,585 common shares were available for future grant under the Plan and 447,958 were exercisable. At April 30, 1996 options for 371,585 common shares (unaudited) were available for future grant under the Plan and 398,375 common shares (unaudited) were exercisable. The options granted, exercised and cancelled under this Plan were as follows:
OPTIONS OUTSTANDING -------------------------- NUMBER OF PRICE PER SHARES SHARE --------- ------------ Options granted........................................... 435,000 $ .56 Options exercised......................................... (105,000) .56 --------- Balance at January 31, 1994................................. 330,000 Options granted........................................... 727,000 .56 - .75 Options exercised......................................... (27,000) .56 --------- Balance at January 31, 1995................................. 1,030,000 Options granted........................................... 1,020,000 .75 - 1.50 Options exercised......................................... (137,415) .56 - .75 Options cancelled......................................... (403,585) .56 - .75 --------- Balance at January 31, 1996................................. 1,509,000 Options granted (unaudited)............................... 450,000 1.50 - 2.75 Options cancelled (unaudited)............................. (600,000) .75 - 1.00 --------- Balance at April 30, 1996 (unaudited)....................... 1,359,000 =========
During fiscal 1993, certain key employees were granted non-statutory options to purchase 292,160 shares of Preferred Stock at an exercise price of between $2.10 to $5.60 per share. All options were fully vested upon grant, 225,000 were exercised during the year ended January 31, 1995 and 30,000 and 37,160 were F-18 65 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) forfeited upon employee termination during the years ended January 31, 1994 and 1995, respectively. None of these options remain outstanding at January 31, 1995. During fiscal 1994, in connection with the severance agreement of a director and a former officer of the Company, an option to purchase 22,911 shares of Common Stock was issued with an exercise price of $.56 which was exercised during fiscal year 1994. The options were granted at a price equal to the fair market value as determined by the Board of Directors on the date of grant. During fiscal 1995, the Company granted options to the members of the Board of Directors to purchase 12,000 shares and 75,000 shares of Common Stock at $.56 and $.75 per share, respectively. The $.56 per share options vested immediately while the $.75 per share options vest in equal monthly instalments over a one year period. All options were granted at exercise prices equal to or greater than the fair market value of the Company's Common Stock as determined by the Board of Directors at the date of grant. Approximately 12,000 shares were exercised in November 1994. During the year ended January 31, 1996, 41,500 shares were exercised and 33,500 shares were canceled. None of these options remain outstanding at January 31, 1996. During fiscal 1996, the Company granted options to purchase 150,000 shares of Common Stock at exercise prices ranging from $1.00 - $1.50 per share to the members of the Board of Directors. The options vest at a rate of 40%, 30%, and 30% over a three year period commencing January 1, 1996. All options were granted at prices equal to the fair market value of the Company's Common Stock as determined by the Board of Directors at the date of grant. No shares were exercisable as of January 31, 1996. The outstanding options expire upon the Board member ceasing to be a Director of the Company. NOTE 8 -- INCOME TAXES Deferred tax assets (liabilities) are comprised of the following (in thousands):
JANUARY 31, ------------------- DESCRIPTION 1995 1996 ----------------------------------------------------------------- ------- ------- Net operating loss carryforwards................................. $ 3,990 $ 6,305 Research and development costs capitalized for tax purposes...... 1,177 1,147 Start-up costs capitalized for tax purposes...................... 435 262 Research tax credits............................................. 216 253 Inventory........................................................ -- 453 Depreciation..................................................... (514) (249) Other............................................................ 174 263 ----- ----- 5,478 8,434 Deferred tax asset valuation allowance........................... (5,478) (8,434) ----- ----- Deferred tax assets (liabilities), net........................... $ -- $ -- ===== =====
As of January 31, 1996, the Company has Federal and state net operating loss carryforwards of approximately $17,000,000 and $8,500,000, respectively. The Federal and state net operating loss carryforwards expire beginning in 2008 and 1998, respectively. The Company also has research and development credit carryforwards for Federal and state tax reporting purposes totaling approximately $166,000 and $87,000, respectively, which expire at various times through 2009. Based upon the Company's lack of prior earnings history, realization of the Company's deferred tax assets does not meet the more likely than not criteria and are fully reserved through a valuation allowance. No current tax provision or benefit was recorded for the years ended January 31, 1994, 1995 or 1996, due to net losses of the Company. F-19 66 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company believes that it has incurred an ownership change in the year ended January 31, 1995. As a result, the Company believes that its ability to utilize its current net operating loss and credit carryforwards, and to realize the benefit of future tax deductions in subsequent periods will be subject to annual limitations of approximately $1,600,000 for net operating losses generated through the year ended January 31, 1995. The Company expects that a second change may occur as a result of the anticipated public offering of the Common Stock which may subject the Company to further annual limitations. NOTE 9 -- COMMITMENTS AND CONTINGENCIES LEASES In September 1993, the Company entered into a lease agreement for its headquarters and manufacturing facility. The term of the lease is five years and commenced January 1, 1994. The agreement provides for options to renew the lease for two consecutive periods of three years each and also contains certain abatement periods. Rent expense is recognized ratably over the lease term. The Company also leases certain manufacturing and computer equipment under operating and capital leases. Rent expense for leased facilities and equipment was $79,000, $312,000 and $315,350 for the years ended January 31, 1994, 1995 and 1996, respectively. Capitalized lease amounts included under property and equipment were $62,000, $592,000 and $592,000 as of January 31, 1994 and 1995, and 1996, respectively, net of accumulated amortization of $3,000, $48,000 and $124,000, respectively. Future minimum lease payments under capital and operating leases are as follows for the years ending January 31, (in thousands):
CAPITAL OPERATING YEARS LEASES LEASES ------------------------------------------------------- ------- --------- 1997................................................... $ 190 $ 347 1998................................................... 125 347 1999................................................... 74 331 2000................................................... 45 10 --- ---- Total minimum lease payments........................... 434 $ 1,035 ==== Amount representing interest........................... 53 --- Present value of minimum lease payments................ $ 381 ===
COMMITMENTS In conjunction with the purchase of machinery and equipment, the Company has outstanding deposits which are included in property and equipment. As of January 31, 1996 and April 30, 1996 (unaudited), the Company has outstanding commitments for the purchase of additional equipment of $235,000. CONTINGENCIES The Company has an employee/shareholder agreement with a key employee/shareholder which provides for a maximum of $540,000 to be paid to the employee/shareholder upon termination of employment. Based upon the provisions of the agreement, no accrual is required. The Company has been sued by two groups of investors holding shares of Series E Preferred Stock. In an action filed in 1995, the first group of investor shareholders comprised of Barry L. Rosenblatt, World Video Movies, Ltd., whose representative is Roy K. Black, and Richard Caras, allege in their complaint that the Company's offering documents contained fraudulent misrepresentations of earnings projections and produc- F-20 67 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) tion capabilities of the Company. The plaintiffs seek damages of $1,560,000 together with interest and attorneys' fees and costs. The suit has been withdrawn once and dismissed once with leave to amend. The Company has filed a summary judgment motion to dispose of all of the plaintiffs' claims. In an action filed in June 1996, the second group of Series E Preferred Stock shareholders, comprised of G.C. Investments LLC, whose representative is Brian L. Greenspun, and The Medicine Partners, whose representative is Andrew G. Bluhm, filed an action containing allegations similar to those contained in the first action with the addition of fraudulent misrepresentation of the intended use of funds. The plaintiffs seek damages of $8,000,000 together with interest and attorneys' fees and costs. The Company believes these suits are without merit and is vigorously contesting the actions. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position, results of operations, cash flows or ability to conduct business. The Company is subject to certain claims and disputes arising in the normal course of its business. Although there can be no assurances, management believes that the disposition of these matters will not have a material adverse effect on the Company's financial position, results of operations, cash flows or ability to conduct business. NOTE 10 -- CERTAIN RELATED PARTY TRANSACTIONS A shareholder and director of the Company is also a partner in a professional firm providing legal and patent advice to the Company. The Company paid the professional firm for legal services in the amounts of approximately $47,000, $69,000, $27,000 and $2,000 (unaudited), during the years ended January 31, 1994, 1995, 1996 and for the three months ended April 30, 1996 (unaudited), respectively. Amounts due to the professional firm for legal services at January 31, 1996 and April 30, 1996 (unaudited) were $88,000 and $100,000 (unaudited), respectively. A shareholder and director of the Company provides consulting services to the Company. The Company incurred costs of $30,000 and $45,000 during the years ended January 31, 1995 and 1996, respectively, for consulting services. At January 31, 1996, the Company had outstanding short term notes payable to certain shareholders totalling $260,000 bearing interest at 10% payable in cash with interest and principal payment due upon demand. Interest accrued in fiscal 1996 was $3,000. During fiscal 1996, the Company issued demand notes payable to certain shareholders totaling $440,000 together with Common Stock purchase warrants. The notes had a stated interest rate of 8% per annum, interest of $13,000 and the principal balance were paid in full prior to January 31, 1996. F-21 68 U.S. MEDICAL INSTRUMENTS, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11 -- SUPPLEMENTAL CASH FLOW INFORMATION
FOR THE THREE PERIOD FROM MONTHS ENDED PERIOD FROM JUNE 19, 1991 JUNE 19, 1991 YEAR ENDED JANUARY 31, (INCEPTION) APRIL 30, (INCEPTION) ---------------------- TO JANUARY 31, ------------ TO APRIL 30, 1994 1995 1996 1996 1995 1996 1996 ---- ---- ------ -------------- ---- ---- -------------- (UNAUDITED) (UNAUDITED) The Company's payments for interest and income taxes were as follows (in thousands): Interest paid....................... $ 62 $135 $ 320 $ 515 $ 16 $ 33 $548 Income taxes paid................... 1 1 1 5 1 1 6 Non-cash investing and financing activities were as follows (in thousands): Series E Preferred Stock and warrants issued upon conversion of debt.............................. -- -- 3,950 3,950 -- -- 3,950 Series D Preferred Stock and warrants issued in settlement of debt.............................. -- 907 -- 907 -- -- 907 Warrants issued in lieu of interest.......................... 100 19 -- 119 -- -- 119 Warrants issued in lieu of finder's fee on Preferred Stock............ -- 75 -- 75 -- -- 75 Stock issued for finder's fee and other............................. 66 -- -- 66 -- -- 66 Debt issued for intangible assets... -- 746 -- 746 -- -- 746 Capital leases...................... 62 530 -- 592 -- -- 592 Common Stock issued to founders for: Property and equipment.............. -- -- -- 24 -- -- 24 Intangible assets................... -- -- -- 31 -- -- 31 Research and development expense.... -- -- -- 322 -- -- 322 Reimbursement of preincorporation costs............................. -- -- -- 97 -- -- 97
NOTE 12 -- SUBSEQUENT EVENTS In August 1996, the Company entered into an agreement with Merrill Lynch Business Financial Services, Inc. ("Merrill Lynch") whereby Merrill Lynch will provide the Company up to $2,300,000 in working capital. The interest rate is variable based on 2.65% plus the 30-day Commercial Paper Rate (as published in the Wall Street Journal). As of July 31, 1996, the interest rate was 8.07%. The loan is subject to an annual fee and is secured with a security interest in assets pledged by a shareholder of the Company. In connection with the shareholder's agreement to pledge the assets as security for the working capital loan discussed above, the Company granted the shareholder a warrant to purchase 223,000 shares of the Company's Common Stock at $8.00 per share and has agreed to indemnify the shareholder for certain potential tax liabilities associated with this transaction. The estimated fair market value of the warrant will be recognized as interest expense over the one year term of the loan agreement. F-22 69 Inside Back Cover The Company's medical products manufacturing is conducted in its 55,000 square foot facility in San Diego, California. MANUFACTURING [PICTURE OF EXTERIOR OF MANUFACTURING FACILITY AND EQUIPMENT CONTAINED THEREIN] Six photographs, one showing the exterior of the Company's building and five showing the equipment for production of the SafeSnap syringe. 70 - --------------------------------------------------- - --------------------------------------------------- NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................. 3 Risk Factors........................ 6 Use of Proceeds..................... 15 Dividend Policy..................... 15 Capitalization...................... 16 Dilution............................ 17 Selected Financial Data............. 18 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 19 Business............................ 23 Management.......................... 35 Principal Shareholders.............. 39 Certain Transactions................ 40 Description of Capital Stock........ 40 Share Eligible for Future Sale...... 42 Underwriting........................ 43 Legal Matters....................... 44 Experts............................. 44 Available Information............... 44 Index to Financial Statements....... F-1
- --------------------------------------------------- - --------------------------------------------------- - --------------------------------------------------- - --------------------------------------------------- [LOGO] U.S. MEDICAL INSTRUMENTS, INC. SHARES COMMON STOCK -------------------- PROSPECTUS -------------------- RODMAN & RENSHAW, INC. , 1996 - --------------------------------------------------- - --------------------------------------------------- 71 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION An itemized statement of expenses in connection with the issuance and distribution of the securities to be registered, other than underwriting discounts and commissions, appears below. All amounts are estimates, except for the SEC registration fee and the NASD filing fee. SEC Registration Fee.............................................................. $ 9,634 NASD Filing Fee................................................................... 3,030 Nasdaq Stock Market Listing Fee................................................... Blue Sky Qualification Fees and Expenses.......................................... Accounting Fees and Expenses...................................................... Legal Fees and Expenses........................................................... Transfer Agent's Fees............................................................. Printing and Engraving Fees....................................................... Miscellaneous Expenses............................................................ -------- Total................................................................... $ ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Amended and Restated Articles of Incorporation eliminates the personal liability of the directors of the Company for monetary damages to the fullest extent permitted by California law, for breach of fiduciary duties as a director of the Company except: (i) for any breach of the directors' duty of loyalty to the Company or its stockholders; (ii) for acts for omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) for unlawful dividends or distributions; or, (iv) for any transaction from which the director derived an improper personal benefit. The Company's Amended and Restated Articles of Incorporation also permit the Company to indemnify its directors and officers to the fullest extent permitted by California law. Article VI of the Company's Bylaws permits the Company to indemnify its directors, officers, employees and agents to the maximum extent permitted by the California General Corporation Law. Section 317 of the California General Corporation Law provides that a corporation has the power to indemnify and hold harmless a director, officer, employer, or agent of the corporation who is or is made a party or is threatened to made a party to any threatened, action, suit or proceeding, whether civil, criminal, administrative or investigative, against all expense, liability and loss actually and reasonably incurred or suffered by such person in connection with such a proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in the best interest of the corporation, and, with respect to any criminal proceeding, had no reasonable cause to believe that the conduct was unlawful. If it is determined that the conduct of such person meets these standards, such person may be indemnified for expenses incurred and amounts paid in such proceeding if actually and reasonably incurred in connection therewith. If such a proceeding is brought by or on behalf of the corporation (i.e., a derivative suit), such person may be indemnified against expenses actually and reasonably incurred if such person acted in good faith and in a manner reasonably believed to be in the best interest of the corporation and its shareholders. There can be no indemnification with respect to any matter as to which such person is adjudged to be liable to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite such adjudication but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper. Where any such person is successful in any such proceeding, such person is entitled to be indemnified against expenses actually and reasonably incurred by him or her. In all other cases (unless order by a court), II-1 72 indemnification is made by the corporation upon determination by it that indemnification of such person is proper in the circumstances because such person has met the applicable standard of conduct. A corporation may advance expenses incurred in defending any such proceeding upon receipt of an undertaking to repay any amount so advanced if it is ultimately determined that the person is not eligible for indemnification. The indemnification rights provided in Section 317 are not exclusive of additional rights to indemnification for breach of duty to the corporation and its shareholders to the extent additional rights are authorized in the corporation's articles of incorporation and are not exclusive of any other rights to indemnification under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his or her office and as to action in another capacity while holding such office. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In the last three years, the Company sold the following securities without registration under the Securities Act. In each case, the offering was made on a private placement basis in reliance on Section 4(2) of the Securities Act. No advertising or general solicitation was employed in the offering the securities. All stockholders were sophisticated investors capable of analyzing the merits and risks of their investment. Except as indicated below, no commissions or placement fees were paid in connection with any of the offerings. During the period from October 15, 1993 to August 31, 1996, the Company has issued an aggregate of 1,646,415 Options to purchase Common Stock to certain directors, officers and key employees under the Company's Stock Option Plan. The Options are exercisable, subject to vesting, at prices ranging from $.56 to $3.50 per share. On November 10, 1994 and August 9, 1995, the Company issued 12,000 and 52,124 shares, respectively, of its Common Stock, for an aggregate of 64,124 shares, to three investors in connection with the exercise of outstanding warrants to purchase Common Stock. Of the shares issued on August 9, 1995, 12,000 were beneficially owned by Mr. Matthew S. Mazur, the Chairman, President and Chief Executive Officer of the Company. The exercise price for the warrants was $.56, resulting in aggregate proceeds to the Company of $36,000. During the period from April 1994 to July 1994, the Company issued 225,000 shares of its Series B Preferred Stock in a private placement for $2.10 per share for an aggregate of $472,500 to 4 investors. During the period from June 1993 through August 1994, the Company issued an aggregate of 363,000 shares of its Series D Preferred Stock to 101 individuals in a private placement at a price of $5.60 per share for an aggregate of $2,032,800 including 91,428 shares to Dr. Richard R. Rowe, a director of the Company. During the period from September 1994 through February 1996, the Company issued an aggregate of 2,493,677 shares of its Series E Preferred Stock to 71 individuals in a private placement at a price of $7.50 per share for an aggregate of $18,702,578. In connection with the placement of the Series E Preferred Stock the Company paid fees to a placement agent in the form of Warrants to purchase Series E Preferred Stock, including 18,667 Warrants to Artemis Investments. In conjunction with the sale of Series E Preferred Stock, G.C. Investments LLC, whose principal is Brian L. Greenspun, and The Medicine Partners, whose principal is Andrew G. Bluhm, each received warrants to purchase 106,667 shares of Series E Preferred Stock. Each Warrant entitles the holder to purchase one share of Series E Preferred Stock at an exercise price of $7.50 per share, subject to certain antidilution provisions. The Warrants expire three years from the date of issue. From November 1995 to July 1996, the Company issued an aggregate of 15,195 Warrants to purchase Common Stock to three investors, including 5,134 Warrants beneficially owned by Mr. Mazur. Each Warrant entitles the holder to purchase one share of Common Stock at an exercise price of $1.50 per share, subject to certain antidilution provisions. The Warrants expire three years from their date of issue. The Warrants were issued as partial consideration for $360,000 in loans to the Company. During the period from December 1995 to May 1995, the Company issued 1,300,000 Warrants to purchase Common Stock to one of the Company's largest shareholders. Each Warrant entitles the holder to II-2 73 purchase one share of Common Stock at an exercise price of $14.00 per share, subject to certain antidilution provisions. The Warrants were issued as partial consideration in a debt to equity conversion and expire two years from the date of issue. During the period from December 1995 to May 1996, the Company issued 14,468 Warrants to purchase Common Stock to three shareholders as partial consideration for $310,000 in loans made to the Company. The exercise price of the Warrants is $1.50 per share, subject to certain antidilution provisions. The Warrants expire three years from the date of issue. During the period from March 1996 through August 1996, the Company issued an aggregate of 133,000 shares of its Series F Preferred Stock to eight individuals in a private placement at a price of $10.00 per share for an aggregate of $1,330,000. On August 6, 1996 the Company issued 223,000 Warrants to purchase Common Stock to one of the Company's largest shareholders as partial consideration for the pledging of certain assets as security for the Merrill Lynch $2.3 million working capital line of credit. The exercise price of the Warrants is $8.00 per share, subject to certain antidilution provisions. The Warrants expire five years from the date of issue. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
NUMBER DESCRIPTION - --------- ---------------------------------------------------------------------------------- 1.1 -- Form of Underwriting Agreement 1.2 -- Form of Representative's Warrant 3.1 -- Amended and Restated Articles of Incorporation of the Company 3.2 -- Bylaws of the Company *4.1 -- Form of Certificate for Common Stock 4.2 -- Form of Warrant to Purchase Series E Preferred Stock 4.3 -- Form of Warrant to Purchase Common Stock in November 1995 Private Placement 4.4 -- Warrant to Purchase Common Stock in December 1995 Private Placement 4.5 -- Warrant to Purchase Common Stock issued to George A. Schapiro 4.6 -- Warrant to Purchase Common Stock issued to Robert C. Siegel *4.7 -- Form of Subscription Agreement -- Series D Preferred Stock *4.8 -- Form of Subscription Agreement -- Series E Preferred Stock *4.9 -- Form of Subscription Agreement -- Series F Preferred Stock 4.10 -- Amended and Restated Investors Rights Agreement *5.1 -- Opinion of Luce, Forward, Hamilton & Scripps LLP 10.1 -- License Agreement with Habley Medical Technology Corporation as amended 10.2 -- Facilities Lease of the Registrant 10.3 -- Employment Agreement with Mr. Matthew S. Mazur 10.4 -- Note and Loan Agreement with Merrill Lynch 10.5 -- Memo of Understanding Concerning Pledge of Security for Merrill Lynch Loan 10.6 -- Note and Purchase Agreement with Eldridge R. Fridge 10.7 -- 1993 Stock Plan 10.8 -- Agreement with Nypro Precision Assemblies, Inc. 10.9 -- Consulting Agreement with George A. Schapiro 10.10 -- Assignment of Patent *11.1 -- Computation of Pro-forma Net Income Per Share 23.1 -- Consent of Price Waterhouse LLP 23.2 -- Consent of Luce, Forward, Hamilton & Scripps LLP 24.1 -- Power of Attorney (included on signature pages) 27.1 -- Financial Data Schedule
- --------------- * To be filed by amendment. II-3 74 ITEM 17. UNDERTAKINGS (a) Registrant hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to including any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) 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 set forth in the Registration Statement; (iii) to include any material information with respect to its plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) To provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (3) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as a part of the Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (4) For purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus 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. (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 foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 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 asserted by such director, officer or controlling person in connection with the securities being registered, 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 is expressed in the Act and will be governed by the final adjudication of such issue. II-4 75 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on the 9th day of September 1996. U.S. MEDICAL INSTRUMENTS, INC., a California corporation By: /s/ MATTHEW S. MAZUR ---------------------------------- Matthew S. Mazur, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Matthew S. Mazur and Louis Hernandez, Jr., and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any additional Registration Statement pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and any or all amendments (including post-effective amendments) to this Registration Statement (or Registration Statements, if an additional Registration Statement is filed pursuant to Rule 462(b)), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, whereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their, his or her substitute or substitutions, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on S-1 has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------------------------------------------- ----------------------------- ------------------- /s/ MATTHEW S. MAZUR Chairman of the Board, September 9, 1996 - --------------------------------------------- President, Chief Executive Matthew S. Mazur Officer and Director (Principal Executive Officer) /s/ LOUIS HERNANDEZ, JR. Vice President -- Finance, September 9, 1996 - --------------------------------------------- Chief Financial Officer and Louis Hernandez, Jr. Secretary (Principal Financial and Accounting Officer) /s/ CARL R. BROWN Director September 9, 1996 - --------------------------------------------- Carl R. Brown /s/ RICHARD R. ROWE Director September 9, 1996 - --------------------------------------------- Richard R. Rowe /s/ ROBERT HOVEE Director September 9, 1996 - --------------------------------------------- Robert Hovee /s/ GEORGE A. SCHAPIRO Director September 9, 1996 - --------------------------------------------- George A. Schapiro /s/ WILLIAM MARTIN Director September 9, 1996 - --------------------------------------------- William Martin
II-5 76 EXHIBIT INDEX
SEQUENTIALLY NUMBERED NUMBER DESCRIPTION PAGES - --------- ---------------------------------------------------------------------- ------------ 1.1 -- Form of Underwriting Agreement........................................ 1.2 -- Form of Representative's Warrant...................................... 3.1 -- Amended and Restated Articles of Incorporation of the Company......... 3.2 -- Bylaws of the Company................................................. *4.1 -- Form of Certificate for Common Stock.................................. 4.2 -- Form of Warrant to Purchase Series E Preferred Stock.................. 4.3 -- Form of Warrant to Purchase Common Stock in November 1995 Private Placement............................................................. 4.4 -- Warrant to Purchase Common Stock in December 1995 Private Placement... 4.5 -- Warrant to Purchase Common Stock issued to George A. Schapiro......... 4.6 -- Warrant to Purchase Common Stock issued to Robert C. Siegel........... *4.7 -- Form of Subscription Agreement -- Series D Preferred Stock............ *4.8 -- Form of Subscription Agreement -- Series E Preferred Stock............ *4.9 -- Form of Subscription Agreement -- Series F Preferred Stock............ 4.10 -- amended and Restated Investors Rights Agreement....................... *5.1 -- Opinion of Luce, Forward, Hamilton & Scripps LLP...................... 10.1 -- License Agreement with Habley Medical Technology Corporation as amended............................................................... 10.2 -- Facilities Lease of the Registrant.................................... 10.3 -- Employment Agreement with Mr. Matthew S. Mazur........................ 10.4 -- Note and Loan Agreement with Merrill Lynch............................ 10.5 -- Memo of Understanding Concerning Pledge of Security for Merrill Lynch Loan.................................................................. 10.6 -- Note and Purchase Agreement with Eldridge R. Fridge................... 10.7 -- 1993 Stock Plan....................................................... 10.8 -- Agreement with Nypro Precision Assemblies, Inc........................ 10.9 -- Consulting Agreement with George A. Schapiro.......................... 10.10 -- Assignment of Patent.................................................. *11.1 -- Computation of Pro-forma Net Income Per Share......................... 23.1 -- Consent of Price Waterhouse LLP....................................... ........ 23.2 -- Consent of Luce, Forward, Hamilton & Scripps LLP...................... 24.1 -- Power of Attorney (included on signature pages)....................... 27.1 -- Financial Data Schedule...............................................
- --------------- * To be filed by amendment. EX-1.1 2 EXHIBIT 1.1 1 EXHIBIT 1.1 Draft 9/4/96 _____________ SHARES U.S. MEDICAL INSTRUMENTS, INC. COMMON SHARES UNDERWRITING AGREEMENT _____________, 1996 RODMAN & RENSHAW, INC. [ ] c/o Rodman & Renshaw, Inc. 225 Liberty Street 2 World Financial Center New York, New York 10281 On behalf of the Several Underwriters named in Schedule I attached hereto. Ladies and Gentlemen: U.S. Medical Instruments, Inc., a California corporation (the "Company") proposes to sell to you and the other underwriters named in Schedule I attached hereto (the "Underwriters"), for whom you are acting as the representatives (the "Representatives"), an aggregate of shares (the "Firm Shares") of the Company's Common Shares, no par value (the "Common Stock"), to be issued and sold by the Company. In addition, the Company proposes to grant to the Underwriters an option to purchase up to an additional shares (the "Option Shares"), of Common Stock for the purpose of covering over-allotments in connection with the sale of the Firm Shares. The Firm Shares and the Option Shares are together called the "Shares." 1. Sale and Purchase of the Shares. On the basis of the representations, warranties and agreements contained in, and subject to the terms and conditions of, this Agreement: (a) The Company agrees to issue and sell the Shares to the several Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase at the purchase price per share of Common Stock of $_____ (the "Initial Price"), the aggregate number of Firm Shares set forth opposite such Underwriter's name in Schedule I attached hereto. The Underwriters agree to offer the Firm Shares to the public as set forth in the Prospectus. (b) The Company grants to the several Underwriters an option to purchase all or any part of the number of Option Shares at the Initial 2 Price. The number of Option Shares to be purchased by each Underwriter shall be the same percentage (adjusted by the Representatives to eliminate fractions) of the total number of Option Shares to be purchased by the Underwriters as such Underwriter is purchasing of the Firm Shares. Such option may be exercised only to cover over-allotments in the sales of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time on or before 12:00 noon, New York City time, on the business day before the Firm Shares Closing Date (as defined below), and from time to time thereafter within 30 days after the date of this Agreement, upon written or telegraphic notice, or verbal or telephonic notice confirmed by written or telegraphic notice, by the Representatives to each of the Company no later than 12:00 noon, New York City time, on the business day before the Firm Shares Closing Date or at least two business days before any Option Shares Closing Date (as defined below), as the case may be, setting forth the number of Option Shares to be purchased and the time and date (if other than the Firm Shares Closing Date) of such purchase. (c) On each Closing Date (as defined below), the Company shall issue and sell to Rodman & Renshaw, Inc. ("Rodman"), individually and not as a Representative of the Underwriters, for an aggregate purchase price of $.001 per warrant, warrants representing the right of Rodman to purchase a number of shares of Common Stock (the "Warrant Stock") equal to 10.0% of the aggregate number of shares purchased in the Offering, excluding the over-allotment option (which warrants shall be evidenced in the form set forth as an exhibit to the Registration Statement) (the "Representative's Warrants"). 2. Delivery and Payment. Delivery by the Company of the Firm Shares to the Representatives for the respective accounts of the Underwriters, and payment of the purchase price by certified or official bank check or checks payable in New York Clearing House (next day) funds to the Company, shall take place at the offices of Rodman & Renshaw, Inc., at 225 Liberty Street, 2 World Financial Center, New York, New York 10281, at 10:00 a.m., New York City time, on the third business day following the date on which the public offering of the Shares commences (unless such date is postponed in accordance with the provisions of Section 10(b)), or at such time and place on such other date, not later than 10 business days after the date of this Agreement, as shall be agreed upon by the Company and the Representatives (such time and date of delivery and payment are called the "Firm Shares Closing Date"). The public offering of the Shares shall be deemed to have commenced at the time, which is the earlier of (a) the time, after the Registration Statement (as defined in Section 4 below) becomes effective, of the release by you for publication of the first newspaper advertisement which is subsequently published relating to the Shares or (b) the time, after the Registration Statement becomes effective, when the Shares are first released by you for offering by the Underwriters or dealers by letter or telegram. In the event the option with respect to the Option Shares is exercised, delivery by the Company of the Option Shares to the Representatives for the respective accounts of the Underwriters and payment of the purchase price by certified or official bank check or checks payable in New York Clearing House (next day) funds to the Company shall take place at the offices of Rodman & Renshaw, Inc. specified above at the time and on the date (which may be the same -2- 3 date as, but in no event shall be earlier than, the Firm Shares Closing Date) specified in the notice referred to in Section 1(b) (such time and date of delivery and payment is called the "Option Shares Closing Date"). The Firm Shares Closing Date and the Option Shares Closing Dates are called, individually, a "Closing Date" and, together, the "Closing Dates." Certificates evidencing the Shares shall be registered in such names and shall be in such denominations as the Representatives shall request at least two full business days before the Firm Shares Closing Date or the Option Shares Closing Date, as the case may be, and shall be made available to the Representatives for checking and packaging, at such place as is designated by the Representatives, on the full business day before the Firm Shares Closing Date or the Option Shares Closing Date, as the case may be. 3. Public Offering. The Company understands that the Underwriters propose to make a public offering of the Shares, as set forth in and pursuant to the Prospectus (as defined in Section 4 below), as soon after the effective date of the Registration Statement and the date of this Agreement as the Representatives deem advisable. The Company hereby confirms that the Underwriters and dealers have been authorized to distribute or cause to be distributed each preliminary prospectus and are authorized to distribute the Prospectus (as from time to time amended or supplemented if the Company furnishes amendments or supplements thereto to the Underwriters). 4. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the several Underwriters that: (i) The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement, and may have filed one or more amendments thereto, on Form S-1 (Registration No. 333-_____), including in such registration statement and each such amendment a related preliminary prospectus (a "Preliminary Prospectus"), for the registration of the Shares and the Option Shares, in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"). In addition, the Company has filed or will promptly file a further amendment to such registration statement, in the form heretofore delivered to you. The Company may also file a related registration statement with the Commission pursuant to Rule 462(b) under the Act for the purpose of registering certain additional Shares, which registration shall be effective upon filing with the Commission. As used in this Agreement, the term "Original Registration Statement" means such registration statement, as amended, on file with the Commission at the time such registration statement becomes effective (including the prospectus, financial statements, exhibits, and all other documents filed as a part thereof or incorporated by reference directly or indirectly therein), provided that such registration statement, at the time it becomes effective, may omit such information as is permitted to be omitted from a registration statement when it becomes effective pursuant to Rule 430A of the General Rules and Regulations promulgated under the Act (the "Regulations"), which information ("Rule 430 Information") shall be -3- 4 deemed to be included in such registration statement when a final prospectus is filed with the Commission in accordance with Rules 430A and 424(b)(1) or (4) of the Regulations; the term "Rule 462(b) Registration Statement" means any registration statement filed with the Commission pursuant to Rule 462(b) under the Act (including the Original Registration Statement and any Preliminary Prospectus or Prospectus incorporated therein at the time the Original Registration Statement becomes effective); the term "Registration Statement" includes both the Original Registration Statement and any Rule 462(b) Registration Statement; the term "Preliminary Prospectus" means each prospectus included in the Registration Statement, or any amendments thereto, before it becomes effective under the Act, the form of prospectus omitting Rule 430A Information included in the Registration Statement when it becomes effective, if applicable (the "Rule 430A Prospectus"), and any prospectus filed by the Company with your consent pursuant to Rule 424(a) of the Regulations; and the term "Prospectus" means the final prospectus included as part of the Registration Statement, except that if the prospectus relating to the securities covered by the Registration Statement in the form first filed on behalf of the Company with the Commission pursuant to Rule 424(b) of the Regulations shall differ from such final prospectus, the term "Prospectus" shall mean the prospectus as filed pursuant to Rule 424(b) from and after the date on which it shall have first been used. (ii) When the Registration Statement becomes effective, and at all times subsequent thereto to and including the Closing Dates, and during such longer period as the Prospectus may be required to be delivered in connection with sales by the Underwriters or a dealer, and during such longer period until any post-effective amendment thereto shall become effective, the Registration Statement (and any post-effective amendment thereto) and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement to the Registration Statement or the Prospectus) will contain all statements which are required to be stated therein in accordance with the Act and the Regulations, will comply with the Act and the Regulations, and will 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 not misleading, and no event will have occurred which should have been set forth in an amendment or supplement to the Registration Statement or the Prospectus which has not then been set forth in such an amendment or supplement; if a Rule 430A Prospectus is included in the Registration Statement at the time it becomes effective, the Prospectus filed pursuant to Rules 430A and 424(b)(1) or (4) will contain all Rule 430A Information; and each Preliminary Prospectus, as of the date filed with the Commission, did not 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 not misleading; except that no representation or warranty is made in this Section 4(ii) with respect to statement or omissions made in reliance upon and in -4- 5 conformity with written information furnished to the Company as stated in Section 7(b) with respect to any Underwriter by or on behalf of such Underwriter through the Representatives expressly for inclusion in any Preliminary Prospectus, the Registration Statement, or the Prospectus, or any amendment or supplement thereto. (iii) If the Company has elected to rely on Rule 462(b) and the Rule 462(b) Registration Statement has not been declared effective, then (i) the Company has filed a Rule 462(b) Registration Statement in compliance with and that is effective upon filing pursuant to Rule 462(b) and has received confirmation of its receipt and (ii) the Company has given irrevocable instructions for transmission of the applicable filing fee in connection with the filing of the Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated under the Act or the Commission has received payment of such filing fee. (iv) Neither the Commission nor the "blue sky" or securities authority of any jurisdiction have issued an order (a "Stop Order") suspending the effectiveness of the Registration Statement, preventing or suspending the use of any Preliminary Prospectus, the Prospectus, the Registration Statement, or any amendment or supplement thereto, refusing to permit the effectiveness of the Registration Statement, or suspending the registration or qualification of the Firm Shares or the Option Shares nor has any of such authorities instituted or threatened to institute any proceedings with respect to a Stop Order. (v) Any contract, agreement, instrument, lease, or license required to be described in the Registration Statement or the Prospectus has been properly described therein. Any contract agreement, instrument, lease, or license required to be filed as an exhibit to the Registration Statement has been filed with the Commission as an exhibit to or has been incorporated as an exhibit by reference into the Registration Statement. (vi) The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of California, with full corporate power and authority, and all necessary consents, authorizations, approvals, orders, licenses, certificates, and permits of and from, and declarations and filings with, all federal, state, local, and other governmental authorities and all courts and other tribunals, to own, lease, license, and use its properties and assets and to carry on its business as now being conducted and in the manner described in the Prospectus. The Company is duly qualified to do business and is in good standing in each jurisdiction in which its ownership, leasing, licensing, or character, location or use of property and assets or the conduct of its business makes such qualification necessary. The Company does not own, lease or license any property or conduct any business outside the United States of America. The Company has no subsidiary or subsidiaries and does not control, directly or indirectly, any corporation, partnership, joint venture, -5- 6 association or other business organization, except for those permitted to be excluded pursuant to Item 601, Exhibit 21 of Regulation S-K. (vii) The authorized capital stock of the Company consists of 28,000,000 shares of Common Stock, of which [ ] shares are outstanding, and 12,000,000 preferred shares of the Company (the "Preferred Stock"), of which [ ] shares are outstanding. Each outstanding share of Common Stock and Preferred Stock has been duly and validly authorized and issued, fully paid, and non-assessable, without any personal liability attaching to the ownership thereof and has not been issued and is not owned or held in violation of any preemptive rights of shareholders. There is no commitment, plan, preemptive right or arrangement to issue, and no outstanding option, warrant, or other right calling for the issuance of, shares of capital stock of the Company or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for capital stock of the Company, except as may be properly described in the Prospectus. There is outstanding no security or other instrument which by its terms is convertible into or exchangeable for capital stock of the Company, except as may be properly described in the Prospectus. (viii) The financial statements of the Company included in the Registration Statement and the Prospectus fairly present, with respect to the Company the financial position, the results of operations, and the other information purported to be shown therein at the respective dates and for the respective periods to which they apply. Such financial statements have been prepared in accordance with generally accepted accounting principles (except to the extent that certain footnote disclosures regarding any stub period may have been omitted in accordance with the applicable rules of the Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) consistently applied throughout the periods involved, are correct and complete, and are in accordance with the books and records of the Company. The accountants whose report on the audited financial statements is filed with the Commission as a part of the Registration Statement are, and during the periods covered by their report(s) included in the Registration Statement and the Prospectus were, independent certified public accountants with respect to the Company within the meaning of the Act and the Regulations. No other financial statements are required by Form S-1 or otherwise to be included in the Registration Statement or the Prospectus. There has at no time been a material adverse change in the financial condition, results of operations, business, properties, assets, liabilities, or future prospects of the Company from the latest information set forth in the Registration Statement or the Prospectus, except as may be properly described in the Prospectus. (ix) There is no litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation before any court or before any public body or board pending, threatened, or in prospect (or any basis therefor) with -6- 7 respect to the Company, or any of its operations, business, properties, or assets, except as may be properly described in the Prospectus or such as individually or in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, assets or financial condition of the Company. The Company is not involved in any labor dispute, nor is such dispute threatened, which dispute would have a material adverse effect upon the operations, business, properties, assets or financial condition of the Company. The Company is not in violation of, or in default with respect to, any law, rule, regulation, order, judgment, or decree; nor is the Company required to take any action in order to avoid any such violation or default. (x) The Company has good and marketable title in fee simple absolute to all real properties and good title to all other properties and assets which the Prospectus indicates are owned by it, and has valid and enforceable leasehold interests in each of such items, free and clear of all liens, security interests, pledges, charges, encumbrances, and mortgages (except as may be properly described in the Prospectus). No real property owned, leased, licensed or used by the Company lies in an area which is, or to the knowledge of the Company will be, subject to zoning, use or building code restrictions which would prohibit, and no state of facts relating to the actions or inaction of another person or entity or his or its ownership, leasing, licensing or use of any real or personal property exists or will exist which would prevent, the continued effective ownership, leasing, licensing or use of such real property in the business of the Company as presently conducted or as the Prospectus indicates it contemplates conducting (except as may be properly described in the Prospectus). (xi) The Company, and to the knowledge of the Company, any other party, is not now or is not expected by the Company to be in violation or breach of, or in default with respect to, complying with any term, obligation or provision of any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding which is material to the Company or by which any of its properties or business may be bound or affected, and no event has occurred which with notice or lapse of time or both would constitute such a default, and each such contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding is in full force and is the legal, valid and binding obligation of the parties thereto and is enforceable as to them in accordance with its terms. The Company enjoys peaceful and undisturbed possession under all leases and licenses under which it is operating. The Company is not a party to or bound by any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding, or subject to any charter or other restriction, which has had or may in the future have a material adverse effect on the financial condition, results of operations, business, properties, assets, liabilities or future prospects of the Company. The Company is not in violation or breach of, or in default with respect to, any term of its -7- 8 certificate of incorporation (or other charter document) or by-laws or of any franchise, license, permit, judgment, decree, order, statute, rule or regulation. (xii) The Company has filed all federal, state, local and foreign tax returns which are required to be filed through the date hereof, or have received extensions thereof, and have paid all taxes shown on such returns and all assessments received by it to the extent that the same are material and have become due. (xiii) All patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, franchises, and other intangible properties and assets listed in the Registration Statement under "Business- Patents" (all of the foregoing being collectively herein called "Intangibles") that the Company owns, possesses or has pending, or under which it is licensed, are in good standing and uncontested. There is no right under any Intangible necessary to the business of the Company as presently conducted or as the Prospectus indicates the Company contemplates conducting (except as may be so described in the Prospectus). The Company has not infringed, is infringing, or has received any notice of infringement with respect to asserted Intangibles of others. To the knowledge of the Company, there is no infringement by others of Intangibles of the Company. To the knowledge of the Company, there is no Intangible of others which has had or may in the future have a materially adverse effect on the financial condition, results of operations, business, properties, assets, liabilities or future prospects of the Company. (xiv) Neither the Company, any director, officer, agent, employee or other person associated with or acting on behalf of the Company has, directly or indirectly: used any corporate funds for unlawful contributions, gifts, entertainment, or other unlawful expenses relating to political activity; made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence payment, kickback, or other unlawful payment. No transaction has occurred between or among the Company and any of its officers or directors or any affiliates or affiliates of any such officer or director, except as described in the Prospectus. (xv) The Company has all requisite power and authority to execute, deliver and perform each of this Agreement and the Representative's Warrants (collectively, the "Company Documents"). All necessary corporate proceedings of the Company have been duly taken to authorize the execution, delivery and performance of each of the Company Documents. This Agreement has been duly authorized, executed, and delivered by the Company, is the legal, valid and binding obligation of the Company, and is enforceable as to the Company in accordance with its terms and each of the other Company Documents have been duly authorized and when executed and delivered by the Company will be the legal, valid and binding obligation of -8- 9 the Company enforceable as to the Company in accordance with its terms (subject to applicable bankruptcy, insolvency, and other laws affecting the enforceability of creditors' rights generally). No consent, authorization, approval, order, license, certificate or permit of or from, or declaration or filing with, any federal, state, local or other governmental authority or any court or other tribunal is required by the Company for the execution, delivery or performance by the Company of the Company Documents (except filings under the Act which have been or will be made before the applicable Closing Date and such consents consisting only of consents under "blue sky" or securities laws which have been obtained at or prior to the date of this Agreement). No consent of any party to any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding to which the Company is a party, or to which any of its respective properties or assets are subject, is required for the execution, delivery or performance of the Company Documents, and the execution, delivery and performance of the Company Documents, will not violate, result in a breach of, conflict with, accelerate the due date of any payments under, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under any such contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement, or understanding, or violate or result in a breach of any term of the certificate of incorporation (or other charter document) or by-laws of the Company, or violate, result in a breach of, or conflict with any law, rule, regulation, order, judgment or decree binding on the Company or to which any of its operations, business, properties or assets are subject. (xvi) The Firm Shares and the Option Shares are duly and validly authorized. The Firm Shares, when delivered in accordance with this Agreement, and the Option Shares, when delivered in accordance with this Agreement, will be duly and validly issued, fully paid, and non-assessable, without any personal liability attaching to the ownership thereof, and will not be issued in violation of any preemptive rights of shareholders, optionholders, warrantholders and any other persons and the Underwriters will receive good title to the Firm Shares and the Option Shares purchased by them, respectively, free and clear of all liens, security interests, pledges, charges, encumbrances, shareholders' agreements and voting trusts. (xvii) The Representative's Warrants are duly and validly authorized and when delivered in accordance with this Agreement, will be duly and validly issued, fully paid and non-assessable, without any personal liability attaching to the ownership thereof, and will not be issued in violation of any preemptive rights of shareholders, optionholders, warrantholders and any other persons and the holders of the Representative's Warrants will receive good title to the securities purchased by them, respectively, free and clear of all liens, security interests, pledges, charges, encumbrances, shareholders' agreements and voting trusts. -9- 10 (xviii) The Warrant Stock is duly and validly authorized and reserved for issuance and, when issued and delivered upon exercise of the Representative's Warrants, will be duly and validly issued, fully paid and non-assessable, without any personal liability attaching to the ownership thereof, and will not be issued in violation of any preemptive rights of shareholders, optionholders, warrantholders and any other persons and the holders of the Representative's Warrants will receive good title to the securities purchased by them, respectively, free and clear of all liens, security interests, pledges, charges, encumbrances, shareholders' agreements and voting trusts. (xix) The Firm Shares, the Option Shares, the Representative's Warrants, the Common Stock and the Preferred Stock conform to all statements relating thereto contained in the Registration Statement or the Prospectus. (xx) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as may otherwise be properly described therein, there has not been any material adverse change in the assets or properties, business or results of operations or financial condition of the Company, whether or not arising from transactions in the ordinary course of business; the Company has not sustained any material loss or interference with its business or properties from fire, explosion, earthquake, flood or other calamity, whether or not covered by insurance; since the date of the latest balance sheet included in the Registration Statement and the Prospectus, except as reflected therein, the Company has not undertaken any liability or obligation, direct or contingent, except for liabilities or obligations undertaken in the ordinary course of business; and the Company has not (A) issued any securities or incurred any liability or obligation, primary or contingent, for borrowed money, (B) entered into any transaction not in the ordinary course of business, or (C) declared or paid any dividend or made any distribution on any of its capital stock or redeemed, purchased or otherwise acquired or agreed to redeem, purchase or otherwise acquire any shares of its capital stock. (xxi) Neither the Company nor any of its officers, directors or affiliates (as defined in the Regulations), has taken or will take, directly or indirectly, prior to the termination of the underwriting syndicate contemplated by this Agreement, any action designed to stabilize or manipulate the price of any security of the Company, or which has caused or resulted in, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any security of the Company, to facilitate the sale or resale of any of the Firm Shares or the Option Shares. (xxii) The Company has obtained from each of its executive officers and directors and principal shareholders, their enforceable written agreement, in form and substance satisfactory to counsel for the Underwriters, that for a period of 180 days from -10- 11 the date on which the public offering of the Shares commences they will not, without the prior written consent of Rodman, on behalf of the Underwriters, offer, pledge, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Common Stock or other securities of the Company (or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for shares of Common Stock or other securities of the Company, including, without limitation, any shares of Common Stock issuable under any employee stock options), beneficially owned by them. (xxiii) The Company is not, and does not intend to conduct its business in a manner in which it would be, an "investment company" as defined in Section 3(a) of the Investment Company Act of 1940 (the "Investment Company Act"). (xxiv) All offers and sales of the Company's capital stock prior to the date hereof, were at all relevant times exempt from the registration requirements of the Act, and were the subject of an available exemption from the registration requirements of all applicable state securities or blue sky laws. (xxv) No person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement, except such person or entities from whom written waivers of such rights have been received prior to the date hereof. (xxvi) Except as may be set forth in the Prospectus, the Company has not incurred any liability for a fee, commission or other compensation on account of the employment of a broker or finder in connection with the transactions contemplated by this Agreement. (xxvii) No transaction has occurred between or among the Company and any of its officers or directors or any affiliates of any such officer or director, that is required to be described in and is not described in the Registration Statement and the Prospectus. (xxviii) The Common Stock, including the Shares, are authorized for quotation on the Nasdaq National Market. (xxix) Neither the Company nor any of its affiliates is presently doing business with the government of Cuba or with any person or affiliate located in Cuba. If, at any time after the date that the Registration Statement is declared effective with the Commission or with the Florida Department of Banking and Finance (the "Florida Department"), whichever date is later, and prior to the end of the period referred to in the first clause of Section 4(ii) hereof, the Company commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba, the Company will so inform the Florida Department within ninety days after such commencement of business in Cuba, and during the -11- 12 period referred to in Section 4(ii) hereof will inform the Florida Department within ninety days after any change occurs with respect to previously reported information. 5. Conditions of the Underwriters' Obligations. The obligations of the Underwriters under this Agreement are several and not joint. The respective obligations of the Underwriters to purchase the Shares are subject, in the Representatives' sole discretion, to each of the following terms and conditions: (a) The Prospectus shall have been timely filed with the Commission in accordance with Section 6(a)(i) of this Agreement; if the Original Registration Statement or any amendment thereto filed prior to the Firm Closing Date has not been declared effective as of the time of execution hereof, the Original Registration Statement or such amendment and, if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have been declared effective not later than the earlier of (i) 11:00 a.m. New York time, on the date on which the amendment to the registration statement originally filed with respect to the Shares or to the Registration Statement, as the case may be, containing information regarding the public offering price of the Shares has been filed with the Commission, and (ii) the time confirmations are sent or given as specified by Rule 462(b)(2) or, with respect to the Original Registration Statement, such later time and date as shall have been consented to by the Representatives. (b) No order preventing or suspending the use of any preliminary prospectus or the Prospectus shall have been or shall be in effect and no order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for such purpose shall be pending before or threatened by the Commission, and any requests for additional information on the part of the Commission (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of the Representatives. (c) The representations and warranties of the Company contained in this Agreement and in the certificates delivered pursuant to Section 5(d) shall be true and correct when made and on and as of each Closing Date as if made on such date and the Company shall have performed all covenants and agreements and satisfied all the conditions contained in this Agreement required to be performed or satisfied by it at or before such Closing Date. (d) The Representatives shall have received on each Closing Date a certificate, addressed to the Representatives and dated such Closing Date, of the chief executive or chief operating officer and the chief financial officer of the Company to the effect that the persons executing such certificate have carefully examined the Registration Statement, the Prospectus and this Agreement and that the representations and warranties of the Company in this Agreement are true and correct on and as of such Closing Date with the same effect as if made on such Closing Date and the Company has performed all covenants and agreements and satisfied all conditions contained in this Agreement required to be performed or satisfied by it at or prior to such Closing Date. -12- 13 (e) The Representatives shall have received at the time this Agreement is executed and on each Closing Date, signed letters from Price Waterhouse, LLP addressed to the Representatives and dated, respectively, the date of this Agreement and each such Closing Date, in form and scope reasonably satisfactory to the Representatives, with reproduced copies or signed counterparts thereof for each of the Underwriters confirming that they are independent accountants within the meaning of the Act and the Regulations, that the response to Item 10 of the Registration Statement is correct in so far as it relates to them and stating in effect that: (i) in its opinion the audited financial statements and financial statement schedules included or incorporated by reference in the Registration Statement and the Prospectus and reported on by it comply as to form in all material respects with the applicable accounting requirements of the Act, the Exchange Act and the related published rules and regulations thereunder; (ii) on the basis of a reading of the amounts included in the Registration Statement and the Prospectus under the headings "Summary Financial Data" and "Selected Financial Data" which would not necessarily reveal matters of significance with respect to the comments set forth in such letter, a reading of the minutes of the meetings of the shareholders and directors of the Company, and inquiries of certain officials of the Company who have responsibility for financial and accounting matters of the Company as to transactions and events subsequent to the date of the latest audited financial statements, except as disclosed in the Registration Statement and the Prospectus, nothing came to its attention which caused it to believe that: (A) the amounts in "Summary Financial Data" and "Selected Financial Data" included in the Registration Statement and the Prospectus do not agree with the corresponding amounts in the audited financial statements from which such amounts were derived; or (B) with respect to the Company, there were, at a specified date not more than five business days prior to the date of the letter, any decreases in net sales, income before income taxes and net income or any increases in long-term debt of the Company or any decreases in the capital stock, working capital or the shareholders' equity in the Company, as compared with the amounts shown on the Company's audited Balance Sheet for the fiscal year ended December 31, 1995 included in the Registration Statement or the audited Statement of Operations, for such year; and (iii) it has performed certain other procedures as a result of which it determined that information of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of the Company) set forth in the Registration Statement and the Prospectus and reasonably specified by the Representatives agrees with the accounting records of the Company. -13- 14 References to the Registration Statement and the Prospectus in this paragraph (e) are to such documents as amended and supplemented at the date of such letter. (f) The Representatives shall have received on each Closing Date from Luce, Forward, Hamilton & Scripps, counsel for the Company, an opinion, addressed to the Representatives and dated such Closing Date, and in form and scope satisfactory to counsel for the Underwriters, with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: (i) The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware, with full corporate power and authority to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus. To the knowledge of such counsel, the Company has all necessary consents, authorizations, approvals, orders, certificates and permits of and from, and declarations and filings with, all federal, state, local and other governmental authorities and all courts and other tribunals, to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus. The Company is duly qualified to do business and is in good standing, in each state where the failure to be so qualified could have a material adverse effect on the operating condition (financial and otherwise) or business of the Company. The Company does not own, lease or license any property or conduct any business outside the United States of America. The Company has no subsidiary or subsidiaries and does not control, directly or indirectly, any corporation, partnership, joint venture, association or other business organization, except for those permitted to be excluded pursuant to Item 601, Exhibit 21 of Regulation S-K. (ii) The Company has authorized, issued and outstanding capital stock as set forth in the "actual" column of the capitalization table under the caption "Capitalization" in the Prospectus. The certificates evidencing the Shares are in due and proper legal form. Each outstanding share of Common Stock and Preferred Stock has been duly and validly authorized and issued, fully paid, and non-assessable, without any personal liability attaching to the ownership thereof, and has not been issued and is not owned or held in violation of any preemptive right of shareholders. To the knowledge of such counsel, there is no commitment, plan, or arrangement to issue, and no outstanding option, warrant, or other right calling for the issuance of, any share of capital stock of the Company or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for capital stock of the Company, except as may be properly described in the Prospectus. To the knowledge of such counsel, there is outstanding no security or other instrument which by its terms is convertible into, exercisable for or exchangeable for capital stock of the Company, except as may be properly described in the Prospectus. -14- 15 (iii) To the knowledge of such counsel, there is no litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation before any court or before any public body or board pending, threatened, or in prospect (or any basis therefor) with respect to the Company, or any of its operations, businesses, properties, assets, or financial condition except as may be properly described in the Prospectus or such as individually or in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, assets, or financial condition of the Company. To the knowledge of such counsel, the Company is not involved in any labor dispute, nor is such dispute threatened, which dispute would have a material adverse effect upon the operations, business, properties, assets or financial condition of the Company. The Company is not in violation of, or in default with respect to, any law, rule, regulation, order, judgment, or decree, except as may be properly described in the Prospectus or such as in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, assets, or financial condition of the Company; nor is the Company required to take any action in order to avoid any such violation or default. (iv) To the knowledge of such counsel, the Company, nor any other party is now or is expected by the Company to be in violation or breach of, or in default with respect to, complying with any term, obligation or provision of any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding which is material to the Company or by which any of its properties or businesses may be bound or affected and no event has occurred which with notice or lapse of time or both would constitute such a default. (v) The Company is not in violation or breach of, or in default with respect to, any term of its certificate of incorporation (or other charter document) or by-laws. (vi) The Company has all requisite power and authority to execute, deliver and perform this Agreement, to issue and sell the Shares and to issue the Representative's Warrants. All necessary corporate proceedings of the Company have been taken to authorize the execution, delivery and performance by the Company of the Company Documents. Each of the Company Documents has been duly authorized, executed and delivered by the Company, is the legal, valid and binding obligation of the Company and (subject to applicable bankruptcy, insolvency, and other laws affecting the enforceability of creditors' rights generally) is enforceable as to the Company in accordance with its terms. No consent, authorization, approval, order, license, certificate or permit of or from, or declaration or filing with, any federal state, local or other governmental authority or any court or other tribunal is required by the Company, for the execution, delivery or performance by the Company of the Company Documents (except filings under the Act which have been made prior to the Closing Date and consents -15- 16 consisting only of consents under "blue sky" or securities laws). To the knowledge of such counsel, no consent of any party to any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding to which the Company is a party, or to which any of its properties or assets are subject, is required for the execution, delivery or performance of the Company Documents; and the execution, delivery and performance of the Company Documents will not violate, result in a breach of, conflict with, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under any such contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding, in each case known to such counsel, or violate or result in a breach of any term of the certificate of incorporation (or other charter document) or by-laws of the Company, or violate, result in a breach of, or conflict with any law, rule, regulation, order, judgment, or decree binding on the Company or to which any of its operations, businesses, properties or assets are subject. (vii) The Firm Shares and the Option Shares are duly and validly authorized. Such opinion delivered at each of the Closing Dates shall state that each Share, as the case may be, to be delivered on that date is duly and validly issued, fully paid, and non-assessable, with no personal liability attaching to the ownership thereof, and is not issued in violation of any preemptive rights of shareholders, and the Underwriters have received good title to the Shares purchased by them, respectively, from the Company for the consideration contemplated herein and in good faith and without notice of any adverse claim within the meaning of the Uniform Commercial Code, free and clear of any liens, security interests, pledges, charges, encumbrances, shareholders' agreements, voting trusts and other claims. The Common Stock, the Preferred Stock, the Firm Shares and the Option Shares conform to all statements relating thereto contained in the Registration Statement or the Prospectus. (viii) The Representative's Warrants have been duly and validly authorized for issuance. Such opinion delivered at the Firm Shares Closing Date shall state that the Representative's Warrants to be delivered on that date have been duly and validly issued, fully paid, and non-assessable, with no personal liability attaching to the ownership thereof, and will not have been issued in violation of any preemptive rights of shareholders, optionholders, warrantholders and any other persons, and the holders of the Representative's Warrants will receive good title to the securities purchased by them, respectively, from the Company, for the consideration contemplated herein and in good faith and without notice of any adverse claim within the meaning of the Uniform Commercial Code, free and clear of any liens, security interests, pledges, charges, encumbrances, shareholders' agreements, voting trusts and other claims. The Representative's Warrants conform to all statements relating thereto contained in the Registration Statement or the Prospectus. -16- 17 (ix) The Warrant Stock is duly and validly authorized and reserved for issuance and, when issued and delivered upon exercise of the Representative's Warrants, will be duly and validly issued, fully paid and non-assessable, without any personal liability attaching to the ownership thereof, and will not be issued in violation of any preemptive rights of shareholders, optionholders, warrantholders and any other persons and the holders of the Representative's Warrants will receive good title to the securities purchased by them, respectively, from the Company, for the consideration contemplated herein and in good faith and without notice of any adverse claim within the meaning of the Uniform Commercial Code, free and clear of all liens, security interests, pledges, charges, encumbrances, shareholders' agreements and voting trusts and other claims. The Warrant Stock conforms to all statements relating thereto contained in the Registration Statement or the Prospectus. (x) All offers and sales of the Company's capital stock prior to the date hereof, were at all relevant times exempt from the registration requirements of the Act, and were the subject of an available exemption from the registration requirements of all applicable state securities or blue sky laws. (xi) To the knowledge of such counsel, any contract, agreement, instrument, lease or license required to be described in the Registration Statement or the Prospectus has been properly described therein. To the knowledge of such counsel, any contract, agreement, instrument, lease or license required to be filed as an exhibit to the Registration Statement has been filed with the Commission as an exhibit to or has been incorporated as an exhibit by reference into the Registration Statement. (xii) Insofar as statements in the Prospectus purport to summarize the status of litigation or the provisions of laws, rules, regulations, orders, judgments, decrees, contracts, agreements, instruments, leases or licenses, such statements have been prepared or reviewed by such counsel and to the knowledge of such counsel, accurately reflect the status of such litigation and provisions purported to be summarized and are correct in all material respects. (xiii) The Company is not an "investment company" as defined in Section 3(a) of the Investment Company Act and, if the Company conducts its business as set forth in the Prospectus, will not become an "investment company" and will not be required to be registered under the Investment Company Act. (xiv) To the knowledge of such counsel, no person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement except such persons or entities from whom written waivers of such rights have been received prior to the Closing Date. -17- 18 (xv) The Registration Statement has become effective under the Act. No Stop Order has been issued and no proceedings for that purpose has been instituted or are threatened, pending, or to such counsel's knowledge, contemplated. (xvi) The Registration Statement, any Rule 430A Prospectus, and the Prospectus, and any amendment or supplement thereto (other than financial statements and other financial data and schedules which are or should be contained in any thereof, as to which such counsel need express no opinion), comply as to form in all material respects with the requirements of the Act and the Regulations. The conditions for the use of Form S-1 have been satisfied with respect to the Registration Statement. (xvii) Such counsel has no reason to believe that any of the Registration Statement, any Rule 430A Prospectus, or the Prospectus, or any amendment or supplement thereto (other than financial statements and other financial data and schedules which are or should be contained in any thereof, as to which such counsel need express no opinion), contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (xviii) To the knowledge of such counsel, since the effective date of the Registration Statement, no event has occurred which should have been set forth in an amendment or supplement to the Registration Statement or the Prospectus which has not been set forth in such an amendment or supplement. (xix) The agreement of each officer, director and principal shareholder of the Company, stating that for a period of 180 days from the date on which the public offering of the Shares commences, such officer, director and principal shareholder will not, without the prior written consent of Rodman, on behalf of the Underwriters, offer, pledge, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Common Stock (or any other securities of the Company or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for shares of Common Stock or other securities of the Company, including, without limitation, any shares of Common Stock issuable under any employee stock options), beneficially owned by such individual, has been duly and validly authorized, executed and delivered by such individual and constitutes the legal, valid and binding obligation of such individual enforceable against such individual in accordance with its terms. In addition, such counsel shall state that such counsel has participated in the preparation of the Registration Statement and the Prospectus and in conferences with officers and other representatives of the Company, representatives of the Representatives and representatives of the independent accountants of the Company, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed -18- 19 and, although such counsel has not independently verified and is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus (except as specified in the foregoing opinion), on the basis of the foregoing and relying as to materiality upon the representations of executive officers of the Company after conferring with such executive officers, no facts have come to the attention of such counsel which lead such counsel to believe that the Registration Statement at the time it became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, except for the financial statements and other financial and statistical data included therein as to which counsel need express no opinion, as amended or supplemented on the date thereof contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering their opinion as aforesaid, counsel may rely upon an opinion or opinions, each dated the Closing Date, of other counsel retained by the Company as to laws of any jurisdiction other than the Federal laws of the United States, the General Corporate Law of the states of Delaware and New York, provided that (1) each such local counsel is reasonably acceptable to the Representatives and (2) such reliance is expressly authorized by each opinion so relied upon and a copy of each such opinion is addressed to the Representatives and is in form and substance reasonably satisfactory to them and their counsel. In addition, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company, provided that executed copies of such certificates are provided to the Representatives. (g) The Representatives shall have received on each Closing Date from [Luce, Forward, Hamilton & Scripps], patent counsel for the Company, an opinion, addressed to the Representatives and dated such Closing Date, and in form and scope satisfactory to counsel for the Representatives with respect to such patent matters as the Representatives may reasonably require. (h) The Representatives shall have received on each Closing Date from [ ], special regulatory counsel for the Company, an opinion, addressed to the Representatives and dated such Closing Date, and in form and scope satisfactory to counsel for the Representatives with respect to such regulatory and compliance matters as the Representatives may reasonably require. (i) All proceedings taken in connection with the sale of the Firm Shares and the Option Shares as herein contemplated shall be satisfactory in form and substance to the Representatives and its counsel, and the Underwriters shall have received from Squadron, Ellenoff, Plesent & Sheinfeld, LLP, a favorable opinion, addressed to the Representatives and dated such Closing Date, with respect to the Shares, the Registration Statement and the Prospectus, and such other related matters, as the Representatives may reasonably request, and the Company shall have furnished to Squadron, Ellenoff, Plesent & Sheinfeld, LLP, such documents -19- 20 as they may reasonably request for the purpose of enabling them to pass upon such matters. (j) On the Firm Shares Closing Date, the Company shall have issued to Rodman, the Representative's Warrants equal to 10% of the shares of Common Stock sold on the Firm Shares Closing Date. 6. Covenants of the Company. (a) The Company covenants and agrees as follows: (i) The Company shall use its best efforts to cause the Registration Statement to become effective as promptly as possible. If the Registration Statement has become or becomes effective with a form of prospectus omitting Rule 430A information, or filing of the Prospectus is otherwise required under Rule 424(b), the Company will file the Prospectus, properly completed, pursuant to Rule 424(b) within the time period prescribed and will provide evidence satisfactory to you of such timely filing. The Company shall notify you immediately, and confirm such notice in writing, (A) when the Registration Statement and any post-effective amendment thereto become effective, (B) of the receipt of any comments from the Commission or the "blue sky" or securities authority of any jurisdiction regarding the Registration Statement, any post-effective amendment thereto, the Prospectus, or any amendment or supplement thereto, and (C) of the receipt of any notification with respect to a Stop Order. The Company shall not file any amendment of the Registration Statement or supplement to the Prospectus unless the Company has furnished the Representatives a copy for their review prior to filing and shall not file any such proposed amendment or supplement to which the Representatives reasonably object. The Company shall use its best efforts to prevent the issuance of any Stop Order and, if issued, to obtain as soon as possible the withdrawal thereof. (ii) During the time when a Prospectus relating to the Shares is required to be delivered hereunder or under the Act or the Regulations, comply so far as it is able with all requirements imposed upon it by the Act, as now existing and as hereafter amended, and by the Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Shares in accordance with the provisions hereof and the Prospectus. If, at any time when a prospectus relating to the Shares is required to be delivered under the Act and the Regulations, any event as a result of which the Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or if it shall be necessary to amend or supplement the Prospectus to comply with the Act or the Regulations, the Company promptly shall prepare and file with the Commission, subject to the third sentence of paragraph (i) of this Section 6(a), an amendment or supplement which shall correct such -20- 21 statement or omission or an amendment which shall effect such compliance. (iii) The Company shall make generally available to its security holders and to the Representatives as soon as practicable, but not later than 45 days after the end of the 12-month period beginning at the end of the fiscal quarter of the Company during which the Effective Date (or 90 days if such 12-month period coincides with the Company's fiscal year), an earnings statement (which need not be audited) of the Company, covering such 12-month period, which shall satisfy the provisions of Section 11(a) of the Act or Rule 158 of the Regulations. (iv) The Company shall furnish to the Representatives and counsel for the Underwriters, without charge, signed copies of the Registration Statement (including all exhibits and amendments thereto) and to each other Underwriter a copy of the Registration Statement (without exhibits thereto) and all amendments thereof and, so long as delivery of a prospectus by an Underwriter or dealer may be required by the Act or the Regulations, as many copies of any preliminary prospectus and the Prospectus and any amendments thereof and supplements thereto as the Representatives may reasonably request. (v) The Company shall cooperate with the Representatives and its counsel in endeavoring to qualify the Shares for offer and sale under the laws of such jurisdictions as the Representatives may designate and shall maintain such qualifications in effect so long as required for the distribution of the Shares; provided, however, that the Company shall not be required in connection therewith, as a condition thereof, to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction or subject itself to taxation as doing business in any jurisdiction. (vi) For a period of five years after the date of this Agreement, the Company shall supply to the Representatives, and to each other Underwriter who may so request in writing, copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its capital stock and to furnish to the Representatives a copy of each annual or other report it shall be required to file with the Commission. (vii) Without the prior written consent of Rodman, on behalf of the Underwriters, for a period of 180 days from the date on which a public offering of the Shares commences, the Company shall not issue, sell or register with the Commission or otherwise dispose of, directly or indirectly, any securities of the Company (or any securities convertible into or exercisable or exchangeable for securities of the Company), except for the issuance of the Shares pursuant to the Registration Statement. -21- 22 (viii) If the Company elects to rely on Rule 462(b), the Company shall both file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 promulgated under the Act by the earlier of (i) 10:00 p.m. eastern time on the date of this Agreement and (ii) the time confirmations are sent or given, as specified by Rule 462(b)(2). (ix) On or before completion of this offering, the Company shall make all filings required under applicable securities laws and by the Nasdaq National Market. (x) Prior to each Closing Date and for a period of 25 days thereafter, you shall be given reasonable written prior notice of any press release or other direct or indirect communication and of any press conference with respect to the Company, the financial conditions, results of operations, business, properties, assets, liabilities of the Company, or this offering. (xi) Until expiration of the Representative's Warrants, the Company shall keep reserved sufficient shares of Common Stock for issuance upon exercise thereof. (xii) The Company shall use its reasonable efforts to assure that the restrictions set forth in the so-called "lock-up" agreements signed by certain shareholders of the Company are enforced. (xiii) The Company will make all filings required to be made under the Exchange Act and such filings shall comply in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder. (xiv) For a period of one year after the Firm Shares Closing Date, the Company shall grant Rodman, individually and not as representative of the Underwriters, a 30-day right of first negotiation to act as the Company's financial advisor or managing underwriter or exclusive placement agent, as the case may be, in connection with any sale of the Company (including the sale of a majority or controlling minority interest in the stock or assets of the Company), an acquisition or merger by the Company, or the raising of additional financing through either a public or private offering of securities. (b) The Company agrees to pay, or reimburse if paid by the Representatives, whether or not the transactions contemplated hereby are consummated or this Agreement is terminated, all costs and expenses relating to the registration and public offering of the Shares including those relating to: (i) the preparation, printing, filing and distribution of the Registration Statement including all exhibits thereto, each preliminary prospectus, the Prospectus, all amendments and supplements to the Registration Statement and the Prospectus, and any documents required to be delivered with any Preliminary Prospectus or the Prospectus, and the printing, filing and distribution of the Agreement Among -22- 23 Underwriters, this Agreement and related documents; (ii) the preparation and delivery of certificates for the Shares to the Underwriters; (iii) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the various jurisdictions referred to in Section 6(a)(v), including the fees and disbursements of counsel for the Underwriters in connection with such registration and qualification and the preparation, printing, distribution and shipment of preliminary and supplementary Blue Sky memoranda; (iv) the furnishing (including costs of shipping and mailing) to the Representatives and to the Underwriters of copies of each preliminary prospectus, the Prospectus and all amendments or supplements to the Prospectus, and of the several documents required by this Section to be so furnished, as may be reasonably requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold; (v) the filing fees of the National Association of Securities Dealers, Inc. in connection with its review of the terms of the public offering; (vi) the furnishing (including costs of shipping and mailing) to the Representatives and to the Underwriters of copies of all reports and information required by Section 6(a)(vi); (vii) inclusion of the Shares for quotation on the Nasdaq National Market; and (viii) all transfer taxes, if any, with respect to the sale and delivery of the Shares by the Company to the Underwriters. Except as otherwise contemplated by Section 9 hereof, the Underwriters will pay their own counsel fees and expenses to the extent not otherwise covered by clause (iii) above, and their own travel and travel-related expenses in connection with the distribution of the Shares. Without limiting the Company's obligations set forth above, it agrees to pay all of its other costs and expenses incident to the performance of its obligations under this Agreement and the sale of the Shares by it hereunder. 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any and all losses, claims, damages and liabilities, joint or several (including any reasonable investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted), to which they, or any of them, may become subject under the Act, the Exchange Act or other Federal or state law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment thereof or supplement thereto, or arise out of or are based upon any omission or alleged omission to state therein such fact required to be stated therein or necessary to make such statements therein not misleading. Such indemnity shall not inure to the benefit of any Underwriter (or any person controlling such Underwriter) on account of any losses, claims, damages or liabilities arising from the sale of the Shares to any person by such Underwriter if such untrue statement or omission or alleged untrue statement or omission was made in such preliminary prospectus, the Registration Statement or the Prospectus, or such amendment or supplement, in reliance upon and in -23- 24 conformity with information furnished in writing to the Company by the Representatives on behalf of any Underwriter specifically for use therein. In no event shall the indemnification agreement contained in this Section 7(a) inure to the benefit of any Underwriter on account of any losses, claims, damages, liabilities or actions arising from the sale of the Shares upon the public offering to any person by such Underwriter if such losses, claims, damages, liabilities or actions arise out of, or are based upon, a statement or omission or alleged omission in a preliminary prospectus and if, in respect to such statement, omission or alleged omission, the Prospectus differs in a material respect from such preliminary prospectus, such that the Prospectus does not contain such untrue statement or such omission or alleged untrue statement or omission, and a copy of the Prospectus has not been sent or given to such person at or prior to the confirmation of such sale to such person. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each director of the Company, and each officer of the Company who signs the Registration Statement, to the same extent as the foregoing indemnity from the Company to each Underwriter, but only insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which was made in any Preliminary Prospectus, any Rule 430A Prospectus, the Registration Statement or the Prospectus, or any amendment thereof or supplement thereto, which were made in reliance upon and in conformity with information furnished in writing to the Company by the Representatives on behalf of any Underwriter for specific use therein; provided, however, that the obligation of each Underwriter to indemnify the Company (including any controlling person, director or officer thereof) shall be limited to the net proceeds received by the Company from such Underwriter. For all purposes of this Agreement, the amounts of the selling concession and reallowance set forth in the Prospectus constitute the only information furnished in writing by or on behalf of any Underwriter expressly for inclusion in any Preliminary Prospectus, any Rule 430A Prospectus, the Registration Statement or the Prospectus or any amendment or supplement thereto. (c) Any party that proposes to assert the right to be indemnified under this Section will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section , notify each such indemnifying party of the commencement of such action, suit or proceeding, enclosing a copy of all papers served. No indemnification provided for in Section 7(a) or 7(b) shall be available to any party who shall fail to give notice as provided in this Section 7(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice but the omission so to notify such indemnifying party of any such action, suit or proceeding shall not relieve it from any liability that it may have to any indemnified party for contribution or otherwise than under this Section . In case any such -24- 25 action, suit or proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and the approval by the indemnified party of such counsel, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses, except as provided below and except for the reasonable costs of investigation subsequently incurred by such indemnified party in connection with the defense thereof. The indemnified party shall have the right to employ its counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of counsel by such indemnified party has been authorized in writing by the indemnifying parties, (ii) the indemnified party shall have reasonably concluded that there may be a conflict of interest between the indemnifying parties and the indemnified party in the conduct of the defense of such action (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party), or (iii) the indemnifying parties shall not have employed counsel to assume the defense of such action within a reasonable time after notice of the commencement thereof, in each of which cases the reasonable fees and expenses of counsel shall be at the expense of the indemnifying parties. An indemnifying party shall not be liable for any settlement of any action, suit, proceeding or claim effected without its written consent. 8. Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Sections 7(a) and (b) is due in accordance with its terms but for any reason is held to be unavailable from the Company or the Underwriters, the Company and the Underwriters shall contribute to the aggregate losses, claims, damages and liabilities (including any investigation, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting any contribution received by the Company from persons other than the Underwriters, such as persons who control the Company within the meaning of the Act, officers of the Company who signed the Registration Statement and directors of the Company, who may also be liable for contribution) to which the Company and one or more of the Underwriters may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares or, if such allocation is not permitted by applicable law or indemnification is not available as a result of the indemnifying party not having received notice as provided in Section 7 hereof, in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the Offering (net of underwriting discounts but before deducting expenses) received by the Company -25- 26 from the sale of the Shares, as set forth in the table on the cover page of the Prospectus (but not taking into account the use of the proceeds of such sale of Shares by the Company), bear to (y) the underwriting discount received by the Underwriters, as set forth in the table on the cover page of the Prospectus. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact related to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 8, (i) in no case shall any Underwriter (except as may be provided in the Agreement Among Underwriters) be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter hereunder and (ii) the Company shall be liable and responsible for any amount in excess of the underwriting discount; provided, however (i) that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as such Underwriter, and each person, if any, who controls the Company within the meaning of the Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to clauses (i) and (ii) in the immediately preceding sentence of this Section 8. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this Section , notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties from whom contribution may be sought shall not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have hereunder or otherwise than under this Section . No party shall be liable for contribution with respect to any action, suit, proceeding or claim settled without its written consent. The Underwriters' obligations to contribute pursuant to this Section 8 are several in proportion to their respective underwriting commitments and not joint. 9. Termination. This Agreement may be terminated with respect to the Shares to be purchased on any Closing Date by the Representatives by notifying the Company at any time prior to the purchase of the Shares: (a) in the absolute discretion of the Representatives at or before any Closing Date: (i) if on or prior to such date, any domestic or international event or act or occurrence has materially disrupted, or in the opinion of the Representatives will in the future materially disrupt, the securities markets; (ii) if there has occurred any new outbreak or material escalation of hostilities or other calamity or crisis the effect of which on the financial markets of the United States is such as to make it, in the judgment of the Representatives, inadvisable to proceed with -26- 27 the Offering; (iii) if there shall be such a material adverse change in general financial, political or economic conditions or the effect of international conditions on the financial markets in the United States such as to make it, in the judgment of the Representatives, inadvisable or impracticable to market the Shares; (iv) if trading in the Shares has been suspended by the Commission or trading generally on the New York Stock Exchange, Inc., the American Stock Exchange, Inc. or the Nasdaq National Market has been suspended or limited, or minimum or maximum ranges for prices for securities shall have been fixed, or maximum ranges for prices for securities have been required, by said exchanges or by order of the Commission, the National Association of Securities Dealers, Inc., or any other governmental or regulatory authority; or (v) if a banking moratorium has been declared by any state or federal authority, or (b) at or before any Closing Date, if any of the conditions specified in Section 5 shall not have been fulfilled when and as required by this Agreement. If this Agreement is terminated pursuant to any of its provisions, the Company shall not be under any liability to any Underwriter, and no Underwriter shall be under any liability to the Company, except that (y) if this Agreement is terminated by the Representatives or the Underwriters because of any failure, refusal or inability on the part of the Company or all of them to comply with the terms or to fulfill any of the conditions of this Agreement, the Company will reimburse the Underwriters for all out-of-pocket expenses (including the fees and disbursements of their counsel) incurred by them in connection with the proposed purchase and sale of the Shares or in contemplation of performing their obligations hereunder and (z) no Underwriter who shall have failed or refused to purchase the Shares agreed to be purchased by it under this Agreement, without some reason sufficient hereunder to justify cancellation or termination of its obligations under this Agreement, shall be relieved of liability to the Company or to the other Underwriters for damages occasioned by its failure or refusal. 10. Substitution of Underwriters. If one or more of the Underwriters shall fail (other than for a reason sufficient to justify the cancellation or termination of this Agreement under Section 9) to purchase on any Closing Date the Shares agreed to be purchased on such Closing Date by such Underwriter or Underwriters, the Representatives may find one or more substitute underwriters to purchase such Shares or make such other arrangements as the Representatives may deem advisable or one or more of the remaining Underwriters may agree to purchase such Shares in such proportions as may be approved by the Representatives, in each case upon the terms set forth in this Agreement. If no such arrangements have been made by the close of business on the business day following such Closing Date: (a) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall not exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then each of the nondefaulting Underwriters shall be obligated to purchase such Shares on the terms herein set forth in proportion to their respective obligations hereunder; provided, that in no event shall the maximum number of Shares that any Underwriter has agreed to purchase -27- 28 pursuant to Section 1 be increased pursuant to this Section 10 by more than one-ninth of such number of Shares without the written consent of such Underwriter, or (b) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then the Company shall be entitled to an additional business day within which it may, but is not obligated to, find one or more substitute underwriters reasonably satisfactory to the Representatives to purchase such Shares upon the terms set forth in this Agreement. In any such case, either the Representatives or the Company shall have the right to postpone the applicable Closing Date for a period of not more than five business days in order that necessary changes and arrangements (including any necessary amendments or supplements to the Registration Statement or Prospectus) may be effected by the Representatives and the Company. If the number of Shares to be purchased on such Closing Date by such defaulting Underwriter or Underwriters shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, and none of the nondefaulting Underwriters or the Company shall make arrangements pursuant to this Section within the period stated for the purchase of the Shares that the defaulting Underwriters agreed to purchase, this Agreement shall terminate with respect to the Shares to be purchased on such Closing Date without liability on the part of any nondefaulting Underwriter to the Company and without liability on the part of the Company, except in both cases as provided in Sections 6(b), 7, 8 and 9. The provisions of this Section shall not in any way affect the liability of any defaulting Underwriter to the Company or the nondefaulting Underwriters arising out of such default. A substitute underwriter hereunder shall become an Underwriter for all purposes of this Agreement. 11. Miscellaneous. The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers and of the Underwriters set forth in or made pursuant to this Agreement shall remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of the officers, directors or controlling persons referred to in Sections 7 and 8 hereof, and shall survive delivery of and payment for the Shares. The provisions of Sections 6(b), 7, 8 and 9 shall survive the termination or cancellation of this Agreement. This Agreement has been and is made for the benefit of the Underwriters, the Company and their respective successors and assigns and, to the extent expressed herein, for the benefit of persons controlling any of the Underwriters, or the Company, and directors and officers of the Company, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser of Shares from any Underwriter merely because of such purchase. All notices and communications hereunder shall be in writing and mailed or delivered, or by telefax or telegraph if subsequently confirmed by letter, (a) if to the Representatives, to Rodman & Renshaw, Inc., 225 Liberty Street, 2 World Financial Center, New York, New York 10281, Attention: John J. Borer III, Managing Director, telecopy: (212) 416-7439 and (b) if to the Company, to -28- 29 the Company's agent for service as such agent's address appears on the cover page of the Registration Statement. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflict of laws. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, singular or plural, as the identity of the person or persons or entity or entities require. All section headings herein are for convenience of reference only and are not part of this Agreement, and no construction or inference shall be derived therefrom. Please confirm that the foregoing correctly sets forth the agreement among us. Very truly yours, U.S. MEDICAL INSTRUMENTS, INC. By: --------------------------------- Name: Title: -29- 30 Confirmed on behalf of itself and as the Representatives of the several Underwriters named in Schedule I annexed hereto: RODMAN & RENSHAW, INC. By: -------------------------------- Name: John J. Borer III Title: Managing Director -30- 31 SCHEDULE I
Number of Firm Shares to be NAME OF UNDERWRITER Purchased - ------------------- -------------- Rodman & Renshaw, Inc. Total.......................................................... --------------
-31- EX-1.2 3 EXHIBIT 1.2 1 EXHIBIT 1.2 THE TRANSFER OF THIS WARRANT IS RESTRICTED AS DESCRIBED HEREIN. U.S. MEDICAL INSTRUMENTS, INC. Warrant for the Purchase of Common Shares No. R-1 [__________] Shares THIS CERTIFIES that, for receipt in hand of [$______] and other value received, Rodman & Renshaw, Inc. (the "Holder"), is entitled to subscribe for and purchase from U.S. Medical Instruments, Inc., a California corporation (the "Company"), upon the terms and conditions set forth herein, at any time or from time to time after one year after the effective date of the Registration Statement on Form S-1, and before 5:00 P.M. on five years after the effective date, New York time (the "Exercise Period"), ___________________ [equal to 10% of the number of shares of Common Stock in the Offering] shares of the Company's Common Shares, ("Common Stock"), at a price of $_____ per Share [120% of the Offering price] (the "Exercise Price"). This Warrant is the warrant or one of the warrants (collectively, including any warrants issued upon the exercise or transfer of any such warrants, in whole or in part, the "Warrants") issued pursuant to the Underwriting Agreement, dated __________, 1996, between Rodman & Renshaw, Inc., as representatives of the several Underwriters named therein, and the Company. This Warrant may not be sold, transferred, assigned or hypothecated until [one year after the effective date] except that it may be transferred, in whole or in part, to (i) one or more officers or partners of Rodman & Renshaw, Inc. (or the officers or partners of any such partner); (ii) any other underwriting firm or member of the selling group which participated in the public offering of Common Stock (the "Offering") which commenced on [effective date] (or the officers or partners of any such firm); (iii) a successor to Rodman & Renshaw, Inc., or the officers or partners of such successor; (iv) a purchaser of substantially all of the assets of Rodman & Renshaw, Inc.; or (v) by operation of law. The term the "Holder" as used herein shall include any transferee to whom this Warrant has been transferred in accordance with the above. The number of shares of Common Stock issuable upon exercise of the Warrants (the "Warrant Shares") and the Exercise Price may be adjusted from time to time as hereinafter set forth. 1. This Warrant may be exercised during the Exercise Period, as to the whole or any lesser number of whole Warrant Shares, by the surrender of this Warrant (with the election in the form attached hereto duly executed) to the Company at its office at 16825 Via Del Campo Court, San Diego, California 92127, or at such other place as is designated in writing by the Company, together with a certified or bank cashier's check payable to the order of the Company in an 2 amount equal to the Exercise Price multiplied by the number of Warrant Shares for which this Warrant is being exercised (the "Stock Purchase Price"). 2. (a) In lieu of the payment of the Stock Purchase Price, the Holder shall have the right (but not the obligation), to require the Company to convert this Warrant, in whole or in part, into shares of Common Stock (the "Conversion Right") as provided for in this Section 2. Upon exercise of the Conversion Right, the Company shall deliver to the Holder (without payment by the Holder of any of the Stock Purchase Price) that number of shares of Common Stock (the "Conversion Shares") equal to the quotient obtained by dividing (x) the value of this Warrant (or portion thereof as to which the Conversion Right is being exercised if the Conversion Right is being exercised in part) at the time the Conversion Right is exercised (determined by subtracting the aggregate Stock Purchase Price of the shares of Common Stock as to which the Conversion Right is being exercised in effect immediately prior to the exercise of the Conversion Right from the aggregate Current Market Price (as defined in Section 6(c) hereof) of the shares of Common Stock as to which the Conversion Right is being exercised immediately prior to the exercise of the Conversion Right) by (y) the Current Market Price of one share of Common Stock immediately prior to the exercise of the Conversion Right. (b) The Conversion Rights provided under this Section 2 may be exercised in whole or in part and at any time and from time to time while any Warrants remain outstanding. In order to exercise the Conversion Right, the Holder shall surrender to the Company, at its offices, this Warrant with the Notice of Conversion in the form attached hereto duly executed. The presentation and surrender shall be deemed a waiver of the Holder's obligation to pay all or any portion of the aggregate purchase price payable for the shares of Common Stock as to which such Conversion Right is being exercised. This Warrant (or so much thereof as shall have been surrendered for conversion) shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Warrant for conversion in accordance with the foregoing provisions. 3. Upon each exercise of the Holder's rights to purchase Warrant Shares or Conversion Shares, the Holder shall be deemed to be the holder of record of the Warrant Shares or Conversion Shares issuable upon such exercise or conversion, notwithstanding that the transfer books of the Company shall then be closed or certificates representing such Warrant Shares or Conversion Shares shall not then have been actually delivered to the Holder. As soon as practicable after each such exercise or conversion of this Warrant, the Company shall issue and deliver to the Holder a certificate or certificates for the Warrant Shares or Conversion Shares issuable upon such exercise or conversion, registered in the name of the Holder or its designee. If this Warrant should be exercised or converted in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the right of the Holder to purchase the balance of the Warrant Shares (or portions thereof) subject to purchase hereunder. 4. Any Warrants issued upon the transfer or exercise or conversion in part of this Warrant shall be numbered and shall be registered in a Warrant Register as they are issued. The Company shall be entitled to treat the registered holder of any Warrant on the Warrant Register as the owner in fact - 2 - 3 thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrant on the part of any other person, and shall not be liable for any registration or transfer of Warrants which are registered or to be registered in the name of a fiduciary or the nominee of a fiduciary unless made with the actual knowledge that a fiduciary or nominee is committing a breach of trust in requesting such registration or transfer, or with the knowledge of such facts that its participation therein amounts to bad faith. [This Warrant shall be transferable only on the books of the Company upon delivery thereof duly endorsed by the Holder or by his duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment, or authority to transfer.] In all cases of transfer by an attorney, executor, administrator, guardian, or other legal representative, duly authenticated evidence of his or its authority shall be produced. Upon any registration of transfer, the Company shall deliver a new Warrant or Warrants to the person(s) entitled thereto. This Warrant may be exchanged, at the option of the Holder thereof, for another Warrant, or other Warrants of different denominations, of like tenor and representing in the aggregate the right to purchase a like number of Warrant Shares (or portions thereof), upon surrender to the Company or its duly authorized agent. Notwithstanding the foregoing, the Company shall have no obligation to cause Warrants to be transferred on its books to any person if, in the opinion of counsel to the Company, such transfer does not comply with the provisions of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations thereunder. 5. The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of providing for the exercise of the rights to purchase all Warrant Shares and/or Conversion Shares granted pursuant to the Warrants, such number of shares of Common Stock as shall, from time to time, be sufficient therefor. The Company covenants that all shares of Common Stock issuable upon exercise of this Warrant, upon receipt by the Company of the full Exercise Price therefor, and all shares of Common Stock issuable upon conversion of this Warrant, shall be validly issued, fully paid, and nonassessable, without any personal liability attaching to the ownership thereof, and will not be issued in violation of any preemptive rights of stockholders, optionholders, warrantholders and any other persons and the Holders will receive good title to the securities purchased by them, respectively, free and clear of all liens, security interests, pledges, charges, encumbrances, stockholders' agreements and voting trusts which might be created by acts or omissions to act of the Company. 6. (a) In case the Company shall at any time after the date the Warrants were first issued (i) declare a dividend on the outstanding Common Stock payable in shares of its capital stock, (ii) subdivide the outstanding Common Stock, (iii) combine the outstanding Common Stock into a smaller number of shares, or (iv) issue any shares of its capital stock by reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then, in each case, the Exercise Price, and the number and kind of securities issuable upon exercise or conversion of this Warrant, in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination, or reclassification, shall be proportionately adjusted so that the Holder after such time shall be entitled to receive the aggregate number and kind of shares which, if such Warrant had been exercised or converted - 3 - 4 immediately prior to such time, he would have owned upon such exercise or conversion and been entitled to receive by virtue of such dividend, subdivision, combination, or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. (b) In case the Company shall distribute to all holders of Common Stock (including any such distribution made to the stockholders of the Company in connection with a consolidation or merger in which the Company is the continuing corporation) evidences of its indebtedness, cash (other than any cash dividend which, together with any cash dividends paid within the 12 months prior to the record date for such distribution, does not (on a per share basis) exceed 5% of the Current Market Price per share of Common Stock at the record date for such distribution) or assets (other than distributions and dividends payable in shares of Common Stock), or rights, options, or warrants to subscribe for or purchase Common Stock, or securities convertible into or exchangeable for shares of Common Stock, then, in each case, the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date for the determination of stockholders entitled to receive such distribution by a fraction, the numerator of which shall be the Current Market Price per share of Common Stock on such record date, less the fair market value (as determined in good faith by the board of directors of the Company, whose determination shall be conclusive absent manifest error) of the portion of the evidences of indebtedness or assets so to be distributed, or of such rights, options, or warrants or convertible or exchangeable securities, or the amount of such cash, applicable to one share, and the denominator of which shall be such Current Market Price per share of Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the record date for the determination of stockholders entitled to receive such distribution. (c) For the purpose of any computation under this Section 6, the Current Market Price per share of Common Stock on any date shall be deemed to be the average of the daily closing prices for the 30 consecutive trading days immediately preceding the date in question. The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such day, the closing bid price regular way, in either case on the principal national securities exchange (including, for purposes hereof, the NASDAQ National Market System) on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the highest reported bid price for the Common Stock as furnished by the National Association of Securities Dealers, Inc. through NASDAQ or a similar organization if NASDAQ is no longer reporting such information. If on any such date the Common Stock is not listed or admitted to trading on any national securities exchange and is not quoted by NASDAQ or any similar organization, the fair value of a share of Common Stock on such date, as determined in good faith by the board of directors of the Company, whose determination shall be conclusive absent manifest error, shall be used. (d) No adjustment in the Exercise Price shall be required if such adjustment is less than $.05; provided, however, that any adjustments which by reason of this Section 6 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under - 4 - 5 this Section 6 shall be made to the nearest cent or to the nearest one-thousandth of a share, as the case may be. (e) In any case in which this Section 6 shall require that an adjustment in the Exercise Price be made effective as of a record date for a specified event, the Company may elect to defer, until the occurrence of such event, issuing to the Holder, if the Holder exercised or converted this Warrant after such record date, the shares of Common Stock, if any, issuable upon such exercise or conversion over and above the shares of Common Stock, if any, issuable upon such exercise or conversion on the basis of the Exercise Price in effect prior to such adjustment; provided, however, that the Company shall deliver to the Holder a due bill or other appropriate instrument evidencing the Holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (f) Upon each adjustment of the Exercise Price as a result of the calculations made in Section 6(b) hereof, this Warrant shall thereafter evidence the right to purchase, at the adjusted Exercise Price, that number of shares (calculated to the nearest thousandth) obtained by dividing (i) the product obtained by multiplying the number of shares purchasable upon exercise of this Warrant prior to adjustment of the number of shares by the Exercise Price in effect prior to adjustment of the Exercise Price, by (ii) the Exercise Price in effect after such adjustment of the Exercise Price. (g) Whenever there shall be an adjustment as provided in this Section 6, the Company shall promptly cause written notice thereof to be sent by registered mail, postage prepaid, to the Holder, at its address as it shall appear in the Warrant Register, which notice shall be accompanied by an officer's certificate setting forth the number of Warrant Shares purchasable upon the exercise of this Warrant and the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment and the computation thereof, which officer's certificate shall be conclusive evidence of the correctness of any such adjustment absent manifest error. (h) The Company shall not be required to issue fractions of shares of Common Stock or other capital stock of the Company upon the exercise or conversion of this Warrant. If any fraction of a share would be issuable on the exercise or conversion of this Warrant (or specified portions thereof), the Company shall purchase such fraction for an amount in cash equal to the same fraction of the Current Market Price of such share of Common Stock on the date of exercise or conversion of this Warrant. 7. (a) In case of any consolidation with or merger of the Company with or into another corporation (other than a merger or consolidation in which the Company is the surviving or continuing corporation), or in case of any sale, lease, or conveyance to another corporation of the property and assets of any nature of the Company as an entirety or substantially as an entirety, such successor, leasing, or purchasing corporation, as the case may be, shall (i) execute with the Holder an agreement providing that the Holder shall have the right thereafter to receive upon exercise or conversion of this Warrant solely the kind and amount of shares of stock and other securities, property, cash, or any combination thereof receivable upon such consolidation, merger, sale, lease, or conveyance by a holder of the number of shares of Common Stock for which this Warrant might have been exercised or converted immediately prior to such - 5 - 6 consolidation, merger, sale, lease, or conveyance, and (ii) make effective provision in its certificate of incorporation or otherwise, if necessary, to effect such agreement. Such agreement shall provide for adjustments which shall be as nearly equivalent as practicable to the adjustments in Section 6. (b) In case of any reclassification or change of the shares of Common Stock issuable upon exercise or conversion of this Warrant (other than a change in par value or from no par value to a specified par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), or in case of any consolidation or merger of another corporation into the Company in which the Company is the continuing corporation and in which there is a reclassification or change (including a change to the right to receive cash or other property) of the shares of Common Stock (other than a change in par value, or from no par value to a specified par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), the Holder shall have the right thereafter to receive upon exercise or conversion of this Warrant solely the kind and amount of shares of stock and other securities, property, cash, or any combination thereof receivable upon such reclassification, change, consolidation, or merger by a holder of the number of shares of Common Stock for which this Warrant might have been exercised or converted immediately prior to such reclassification, change, consolidation, or merger. Thereafter, appropriate provision shall be made for adjustments which shall be as nearly equivalent as practicable to the adjustments in Section 6. (c) The above provisions of this Section 7 shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations, mergers, sales, leases, or conveyances. 8. In case at any time the Company shall propose (a) to pay any dividend or make any distribution on shares of Common Stock in shares of Common Stock or make any other distribution (other than regularly scheduled cash dividends which are not in a greater amount per share than the most recent such cash dividend) to all holders of Common Stock; or (b) to issue any rights, warrants, or other securities to all holders of Common Stock entitling them to purchase any additional shares of Common Stock or any other rights, warrants, or other securities; or (c) to effect any reclassification or change of outstanding shares of Common Stock, or any consolidation, merger, sale, lease, or conveyance of property, described in Section 7; or (d) to effect any liquidation, dissolution, or winding-up of the Company; or (e) to take any other action which would cause an adjustment to the Exercise Price; - 6 - 7 then, and in any one or more of such cases, the Company shall give written notice thereof, by registered mail, postage prepaid, to the Holder at the Holder's address as it shall appear in the Warrant Register, mailed at least 15 days prior to (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such dividend, distribution, rights, warrants, or other securities are to be determined, (ii) the date on which any such reclassification, change of outstanding shares of Common Stock, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution, or winding-up is expected to become effective, and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, change of outstanding shares, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution, or winding-up, or (iii) the date of such action which would require an adjustment to the Exercise Price. 9. The issuance of any shares or other securities upon the exercise or conversion of this Warrant, and the delivery of certificates or other instruments representing such shares or other securities, shall be made without charge to the Holder for any tax or other charge in respect of such issuance. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 10. (a) Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless each Eligible Holder, its officers, directors, partners, employees, agents, and counsel, and each person, if any, who controls any such person 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"), from and against any and all loss, liability, charge, claim, damage, and expense whatsoever (which shall include, for all purposes of this Section 10, but not be limited to, reasonable attorneys' fees and any and all reasonable 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) any untrue statement or alleged untrue statement of a material fact contained (A) in any registration statement, preliminary prospectus, or final prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, relating to the sale of any of the Underwriters' Securities, or (B) in any application or other document or communication (in this Section 10 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 any of the Underwriters' Securities under the securities or blue sky laws thereof or filed with the Commission or any securities exchange; or 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 with respect to - 7 - 8 such Eligible Holder by or on behalf of such person expressly for inclusion in any registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, as the case may be, or (ii) any breach of any representation, warranty, covenant, or agreement of the Company contained in this Warrant. The foregoing agreement to indemnify shall be in addition to any liability the Company may otherwise have, including liabilities arising under this Warrant. If any action is brought against any Eligible Holder or any of its officers, directors, partners, employees, agents, or counsel, or any controlling persons of such person (an "indemnified party") in respect of which indemnity may be sought against the Company pursuant to the foregoing paragraph, such indemnified party or parties shall promptly notify the Company in writing of the institution of such action (but the failure so to notify shall not relieve the Company from any liability pursuant to this Section 10(a)) and the Company 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 or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such action or the Company shall not have promptly employed counsel reasonably satisfactory to such indemnified party or parties to have charge of the defense of such action or such indemnified party or parties shall have reasonably concluded that there may be one or more legal defenses available to it or them or to other indemnified parties which are different from or additional to those available to the Company, in any of which events such fees and expenses shall be borne by the Company and the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties. Anything in this Section 10 to the contrary notwithstanding, the Company shall not be liable for any settlement of any such claim or action effected without its written consent, which shall not be unreasonably withheld. The Company shall not, without the prior written consent of each indemnified party that is not released as described in this sentence, settle or compromise any action, or permit a default or consent to the entry of judgment in or otherwise seek to terminate any pending or threatened action, in respect of which indemnity may be sought hereunder (whether or not any indemnified party is a party thereto), unless such settlement, compromise, consent, or termination includes an unconditional release of each indemnified party from all liability in respect of such action. (b) The Holder agrees to indemnify and hold harmless the Company, each director of the Company, each officer of the Company who shall have signed any registration statement covering Underwriters' Securities held by the Holder, 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, and its or their respective counsel, to the same extent as the foregoing indemnity from the Company to the Holder in Section 10(a), but only with respect to statements or omissions, if any, made in any registration statement, preliminary prospectus, or final prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, or in any application, in reliance upon and in conformity with written information furnished to the Company with respect to the Holder by or on behalf of the Holder expressly for inclusion in any such - 8 - 9 registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, as the case may be. If any action shall be brought against the Company or any other person so indemnified based on any such registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, and in respect of which indemnity may be sought against the Holder pursuant to this Section 10(b), the Holder shall have the rights and duties given to the Company, 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 10(a). (c) To provide for just and equitable contribution, if (i) an indemnified party makes a claim for indemnification pursuant to Section 10(a) or 11(b) (subject to the limitations thereof) 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 director of the Company, any officer of the Company who signed any such registration statement, any controlling person of the Company, and its or their respective counsel), as one entity, and the Eligible Holders of the Underwriters' Securities included in such registration in the aggregate (including for this purpose any contribution by or on behalf of an indemnified party), as a second entity, shall contribute to the losses, liabilities, claims, damages, and expenses whatsoever to which any of them may be subject, on the basis of relevant equitable considerations such as the relative fault of the Company and such Eligible Holders in connection with the facts which resulted in such losses, liabilities, claims, damages, and expenses. 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 such Eligible Holders, 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 Holder agree that it would be unjust and inequitable if the respective obligations of the Company and the Eligible Holders for contribution were determined by pro rata or per capita allocation of the aggregate losses, liabilities, claims, damages, and expenses (even if the Holder and the other indemnified parties were treated as one entity for such purpose) or by any other method of allocation that does not reflect the equitable considerations referred to in this Section 10(c). In no case shall any Eligible Holder be responsible for a portion of the contribution obligation imposed on all Eligible Holders in excess of its pro rata share based on the number of shares of Common Stock owned (or which would be owned upon exercise of all Underwriters' Securities) by it and included in such registration as compared to the number of shares of Common Stock owned (or which would be owned upon exercise of all Underwriters' Securities) by all Eligible Holders and included in such registration. No person guilty of a fraudulent misrepresentation (within the meaning of Section 10(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 10(c), each person, if any, who controls any Eligible Holder within the meaning of Section 15 of the Act or Section 20(a) of - 9 - 10 the Exchange Act and each officer, director, partner, employee, agent, and counsel of each such Eligible Holder or control person shall have the same rights to contribution as such Eligible Holder or control person 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, each officer of the Company who shall have signed any such registration statement, each director of the Company, and its or their respective counsel shall have the same rights to contribution as the Company, subject in each case to the provisions of this Section 10(c). Anything in this Section 10(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 10(c) is intended to supersede any right to contribution under the Act, the Exchange Act or otherwise. 13. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction, or mutilation of any Warrant (and upon surrender of any Warrant if mutilated), and upon reimbursement of the Company's reasonable incidental expenses, the Company shall execute and deliver to the Holder thereof a new Warrant of like date, tenor, and denomination. 14. The Holder of any Warrant shall not have, solely on account of such status, any rights of a stockholder of the Company, either at law or in equity, or to any notice of meetings of stockholders or of any other proceedings of the Company, except as provided in this Warrant. 15. This Warrant shall be construed in accordance with the laws of the State of New York applicable to contracts made and performed within such State, without regard to principles of conflicts of law. Dated: , 1996 U.S. MEDICAL INSTRUMENTS, INC. By: -------------------------------- [Seal] - ------------------------------ Secretary - 10 - 11 FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the attached Warrant.) FOR VALUE RECEIVED, hereby sells, assigns, and transfers unto a Warrant to purchase Common Shares of U.S. Medical Instruments, Inc. (the "Company"), together with all right, title, and interest therein, and does hereby irrevocably constitute and appoint attorney to transfer such Warrant on the books of the Company, with full power of substitution. Dated: ----------------------- Signature ------------------------- NOTICE The signature on the foregoing Assignment must correspond to the name as written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatsoever. - 11 - 12 To: U.S. Medical Instruments, Inc. 16825 Via Del Campo Court San Diego, CA 92127 ELECTION TO EXERCISE The undersigned hereby exercises his or its rights to purchase Warrant Shares covered by the within Warrant and tenders payment herewith in the amount of $ in accordance with the terms thereof, and requests that certificates for such securities be issued in the name of, and delivered to: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print Name, Address and Social Security or Tax Identification Number) and, if such number of Warrant Shares shall not be all the Warrant Shares covered by the within Warrant, that a new Warrant for the balance of the Warrant Shares covered by the within Warrant be registered in the name of, and delivered to, the undersigned at the address stated below. Dated: Name ---------------------------- ------------------------------- (Print) Address: ------------------------------------------------------------------------ ------------------------------- (Signature) - 12 - 13 To: U.S. Medical Instruments, Inc. 16825 Via Del Campo Court San Diego, CA 92127 CASHLESS EXERCISE FORM (To be executed upon conversion of the attached Warrant) The undersigned hereby irrevocably elects to surrender its Warrant for the number of Common Shares as shall be issuable pursuant to the cashless exercise provisions of the within Warrant, in respect of Common Shares underlying the within Warrant, and requests that certificates for such securities be issued in the name of and delivered to: - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ (Print Name, Address and Social Security or Tax Identification Number) and, if such number of shares shall not be all the shares exchangeable or purchasable under the within Warrant, that a new Warrant for the balance of the Warrant Shares covered by the within Warrant be registered in the name of, and delivered to, the undersigned at the addressed stated below. Dated: Name ---------------------------- ------------------------------- (Print) Address: ----------------------------------------------------------------------- ------------------------------- (Signature) - 13 - EX-3.1 4 EXHIBIT 3.1 1 EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF U.S. MEDICAL INSTRUMENTS, INC. The undersigned, Matthew S. Mazur and Carl R. Brown, hereby certify that: ONE: They are the duly elected and acting Chairman and Chief Executive Officer and Secretary, respectively, of this Corporation. TWO: The Articles of Incorporation of this Corporation shall be amended and restated to read in full as follows: ARTICLE I The name of this Corporation is U. S. Medical Instruments, Inc. ARTICLE II The purpose of this Corporation is to engage in any lawful act or activity for which a Corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III (A) Classes of Stock. This Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is Forty Million (40,000,000) shares. Twenty-eight Million (28,000,000) shares shall be Common Stock and Twelve Million (12,000,000) shares shall be Preferred Stock. (B) Rights, Preferences, Privileges and Restrictions of Preferred Stock. The Preferred Stock authorized by these Restated Articles of Incorporation may be issued from time to time in series. The rights, preferences privileges and restrictions granted to and imposed on the Series A Preferred Stock, which series shall consist of 1,332,000 shares, the Series B Preferred Stock, which series shall consist of 937,150 shares, the Series C Preferred Stock, which series shall consist of 222,020 shares, the Series D Preferred Stock, which series shall consist of 1,780,000 shares, the Series E Preferred Stock, which series shall consist of 2,500,000 shares and the Series F Preferred Stock, which Series shall consist of 3,000,000 shares are as set forth below in this Article III(B). Except as to the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock and except as otherwise provided in these Restated Articles of Incorporation, the Board of Directors is hereby authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued additional series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them. The Board of Directors, except as otherwise provided Articles of Incorporation Page 1 2 in these Articles of Incorporation, is also authorized to decrease the number of shares of any series, subsequent to the issuance of shares in that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. 1. Dividend Provisions. The holders of shares of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this Corporation) on the Common Stock of this Corporation, at the rate of $0.002, $0.21, $0.28, $0.56, $0.75 and $1.00 respectively, per share per annum or, if greater (as determined on an as-converted basis for the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock), an amount equal to that paid on any other outstanding shares of this Corporation whenever funds are legally available therefor, payable annually when, as and if declared by the Board of Directors. No dividend shall be declared and or paid with respect to any series of Preferred Stock unless a dividend is declared and or paid with respect to each series of outstanding Preferred Stock at a rate that is no less favorable to the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock than $0.002, $0.21, $0.28, $0.56, $0.75 and $1.00 for each share of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, respectively. Such dividends shall not be cumulative. 2. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of this Corporation, either voluntary or involuntary, the holders of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this Corporation to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to $0.02 for each share of Series A Preferred Stock (the "Original Series A Issue Price"), $2.10 per share of Series B Preferred Stock (the "Original Series B Issue Price"), $2.80 per share of Series C Preferred Stock (the "Original Series C Issue Price"), $5.60 per share of Series D Preferred Stock (the "Original Series D Issue Price"), $7.50 per share of Series E Preferred Stock (the "Original Series E Issue Price") and $10.00 per share of Series F Preferred Stock (the "Original Series F Issue Price") plus, in each case, an amount equal to all declared but unpaid dividends thereon. If, upon the occurrence of such an event, the assets and property thus distributed among the holders of the Series A, Series B, Series C and Series D, Series E and Series F Preferred Stock shall be insufficient to permit the payment to such holders of the full preferential amount, then the assets and property of the Corporation legally available for distribution shall be distributed pro rata among the holders of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock in proportion to the aggregate preferential amounts owed such holders of the outstanding Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock upon a liquidation, dissolution or winding up of the Corporation. (b) After the distributions described in subsection (a) above have been paid, the remaining assets of the Corporation available for distribution to shareholders shall be distributed Articles of Incorporation Page 2 3 among the holders of Common Stock pro rata, based on the number of shares of Common Stock held by each. (c) A merger of this Corporation with or into any other corporation or corporations, or a sale, conveyance or disposition of all or substantially all of the assets of this Corporation or the effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of, shall not be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2, but shall instead be treated pursuant to Section 5 hereof. 3. Redemption. (a) On or at any time after April 30, 1996 this Corporation may, at any time it may lawfully do so, at the option of the Board of Directors, redeem in whole or in part the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock by paying in cash therefor a sum per share equal to the Original Series A Issue Price, the Original Series B Issue Price, the Original Series C Issue Price, the Original Series D Issue Price, the Original Series E Issue Price or the Original Series F Issue Price, as the case may be, plus any declared but unpaid dividends on such shares to the Redemption Date (such total amount is hereinafter referred to as the "Redemption Price"). (b) (i) In the event of any redemption of only a part of the then outstanding Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, this Corporation shall redeem the same proportion of each outstanding series of Preferred Stock and, as to each such series, shall effect such redemption pro rata according to the number of shares held by each holder thereof. No redemption of any series of Preferred Stock shall occur, unless there is a pro rata redemption of all series of Preferred Stock in accordance with the foregoing. In the event of any redemption of all or part of the then outstanding Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, any holder thereof may avoid all or part of such redemption by converting into Common Stock, pursuant to Section 4 below, up to that number of shares of such holder's Preferred stock scheduled to be redeemed in such redemption. Such holder may condition such conversion on deposit by the Corporation of the Redemption Price for the shares to be redeemed pursuant to subsection 3 (b)(iv) below. (ii) At least 30 but no more than 60 days prior to the date fixed for any redemption of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock (the "Redemption Date"), written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series A, Series B, Series C, Series D and Series E Preferred Stock to be redeemed, at the address last shown on the records of this Corporation for such holder or given by the holder to this Corporation for the purpose of notice, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the Redemption Date, the Redemption Price, the place at which payment may be obtained and the date on which such holder's Conversion Rights (as hereinafter defined) as to such shares terminate and calling upon such holder to surrender to this Corporation, in the manner and at the place designated, his certificate or certificates representing the shares to be redeemed (the "Redemption Notice"). Except as provided in subsection 3(b)(iii), on or after the Redemption Date, each holder of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock to be redeemed Articles of Incorporation Page 3 4 shall surrender to this Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (iii) From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price, all dividends on the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock designated for redemption in the Redemption Notice shall cease to accrue, all rights of the holders of such shares as holders of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of this Corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the Corporation legally available for redemption of shares of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock on any Redemption Date are insufficient to redeem the total number of shares of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares in accordance with the provisions of paragraph 3(b)(i) hereof The shares of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the Company are legally available for the redemption of shares of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, such funds will immediately be used to redeem the balance of the shares which the Company has become obligated to redeem on any Redemption Date but which it has not redeemed. (iv) Three days prior to the Redemption Date: this Corporation shall deposit the Redemption Price of all outstanding shares of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock designated for redemption in the Redemption Notice, and not yet redeemed or converted, with a bank or trust company having aggregate capital and surplus in excess of $50,000,000 as a trust fund for the benefit of the respective holders of the shares designated for redemption and not yet redeemed. Simultaneously, this Corporation shall deposit irrevocable instruction and authority to such bank or trust company to publish the notice of redemption thereof (or to complete such publication if theretofore commenced) and to pay, on and after the date fixed for redemption or prior thereto, the Redemption Price of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock to the holders thereof upon surrender of their certificates. Any monies deposited by this Corporation pursuant to this subsection 3(b)(iv) for the redemption of shares which are thereafter converted into shares of Common Stock pursuant to Section 4 hereof no later than the close of business on the Redemption Date shall be returned to this Corporation forthwith upon such conversion. The balance of any monies deposited by this Corporation pursuant to this subsection 3 (b)(iv) remaining unclaimed at the expiration of two years following the Redemption Date shall thereafter be returned to this Corporation, provided that the shareholder to, which such money would be payable hereunder shall be entitled, upon proof of its ownership of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock and payment of any bond requested by the Company, to receive such monies but without interest from the Redemption Date. Articles of Incorporation Page 4 5 4. Conversion. The holders of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): Articles of Incorporation Page 5 6 (a) Right to Convert. (i) Subject to subsection (c), each share of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall be convertible, at the option of the holder thereof at any time after the date of issuance of such share and prior to the close of business on any Redemption Date as may have been fixed in any Redemption Notice with respect to such share, at the office of this Corporation or any transfer agent for the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $0.02 for each share of Series A Preferred Stock, $2.10 for each share of Series B Preferred Stock, $2.80 for each share of Series C Preferred Stock, $5.60 for each share of Series D Preferred Stock, $7.50 for each share of Series E Preferred Stock and $10.00 for each share of Series F Preferred Stock by the Conversion Price at the time in effect for such share. The initial Conversion Prices for shares of Preferred Stock shall be $0.02, $2.10, $2.80, $5.60, $7.50 and $10.00 per share for the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, respectively, provided, however, that such Conversion Prices shall be subject to adjustment as set forth in subsection 4(c). (ii) In the event of a call for redemption of any shares of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock pursuant to Section 3 hereof, the Conversion Rights shall terminate as to the shares designated for redemption at the close of business on the Redemption Date, unless default is made in payment of the Redemption Price. (iii) Each share of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock immediately upon the consummation of the Corporation's sale of its Common Stock in a bona fide, firm commitment underwriting pursuant to a registration statement under the Securities Act of 1933, as amended, which results in aggregate gross cash proceeds to this Corporation in excess of $3,000,000. (b) Mechanics of Conversion. Before any holder of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of this Corporation or of any transfer agent for the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, and shall give written notice by mail, postage prepaid, to this Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This Corporation shall, as soon as practicable thereafter, issue and deliver at such office such holder of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, the conversion will be Articles of Incorporation Page 6 7 conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, unless otherwise designated in writing by the holders of such Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock shall not be deemed to have converted such Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock until immediately prior to the closing of such sale of securities. (c) Conversion Price Adjustments of Preferred Stock. The Conversion Price of each series of Preferred Stock shall be subject to adjustment from time to time as follows: (i) In the event the Corporation should at any time or from time to time after the date of first issuance of shares of a particular series of Preferred Stock (the "Purchase Date" for such series of Preferred Stock) fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Prices of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase in outstanding shares. (ii) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Prices for the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (d) Other Distributions. In the event this Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 4(c)(i), then, in each such case for the purpose of this subsection 4(d), the holders of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (e) Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or Section 5) provision shall be made so that the holders of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall Articles of Incorporation Page 7 8 thereafter be entitled to receive upon conversion of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Prices then in effect and the number of shares purchasable upon conversion of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (f) No Impairment. This Corporation will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets consolidation, merger, dissolution, issue or sale of securities or any other voluntary action avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock against impairment. (g) No Fractional Shares and Certificate as to Adjustments. (i) No fractional shares shall be issued upon conversion of the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of any Conversion Price of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock pursuant to this Section 4, this Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This Corporation shall, upon the written request at any time of any holder of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Prices at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock. (h) Notices of Record Date. In the event of any taking by this Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or Articles of Incorporation Page 8 9 property, or to receive any other right this Corporation shall mail to each holder of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right and the amount and character of such dividend, distribution or right. (i) Reservation of Stock Issuable Upon Conversion. This Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, this Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. 5. Merger. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this Corporation. (a) At any time, in the event of: (i) any merger of the Corporation with or into any other corporation in which the Corporation shall not be the continuing or surviving entity of such merger or reorganization or any transaction or series of related transactions by the Corporation in which in excess of 50% of the Corporation's voting power is transferred, or (ii) a sale of all or substantially all of the assets of the Corporation, the documents effecting such transactions shall provide that: (A) The holders of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall first receive for each share of such stock, in cash or in securities received from the acquiring Corporation, or in a combination thereof, at the closing of any such transaction, an amount equal to the Original Series A, Series B, Series C, Series D, Series E or Series F Issue Price, as the case may be, together with an amount equal to all declared but unpaid dividends on each such share. If the aggregate cash value in such transaction otherwise available to holders of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock is insufficient to satisfy the aforementioned preference of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, then all such cash or securities shall be distributed ratably among the holders of the outstanding Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock in proportion to the aggregate preferential amounts owed such holders as set forth above. Articles of Incorporation Page 9 10 (B) After such distributions to the holders of Series A, Series B, Series C, Series D and Series E Preferred Stock have been paid, the remaining assets of the Corporation available for distribution to shareholders shall be distributed among the holders of Common Stock pro rata, based on the number of shares of Common Stock held by each. (b) Any securities to be delivered to the holders of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock pursuant to subsection 5(a) above shall be valued as follows: (i) Securities not subject to investment letter or other similar restrictions on free marketability: (A) If traded on a securities exchange, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the 30-day period ending three (3) days prior to the closing; (B) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid prices over the 30-day period ending three (3) days prior to the closing; and (C) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the Corporation and the holders of not less than a majority of the then outstanding shares of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock. (ii) The method of valuation of securities subject to investment letter of other restrictions on free marketability shall be to make an appropriate discount from the market value determined as above in (i) (A), (B) or (C) to reflect the approximate fair market value thereof, as mutually determined by the Corporation and the holders of a majority of the then outstanding shares of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock. (c) In the event the requirements of subsection 5(a) are not complied with, the Corporation shall forthwith either: (i) cause such closing to be postponed until such time as the requirements of this Section 5 have been complied with, or (ii) cancel such transaction, in which event the rights, preferences, privileges and restrictions of the holders of the Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall revert to and be the same as such rights, preferences, privileges and restrictions existing immediately prior to the date of the first notice referred to in subsection 5(d) hereof. (d) The Corporation shall give each holder of record of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock written notice of such impending transaction not later than twenty (20) days prior to the shareholders' meeting called to approve such transaction, or twenty (20) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the Articles of Incorporation Page 10 11 material terms and conditions of the impending transaction and the provisions of this Section 5, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after the Corporation has given the first notice provided for herein or sooner than ten (10) days after the Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of a majority of the shares of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock then outstanding. (e) The provisions of this Section 5 are in addition to the protective provisions of Section 7 hereof` 6. Voting Rights. The holder of each share of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock shall have the right to one vote for each share of Common Stock into which such Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any shareholders' meeting in accordance with the Bylaws of this Corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. 7. Protective Provisions. So long as shares of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock are outstanding, this Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock, voting together as one class except where otherwise required by law; (a) sell, convey, or otherwise dispose of or encumber all or substantially all of its property or business or merge into or consolidate with any other Corporation (other than a wholly owned subsidiary Corporation) or effect any transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of; (b) alter or change the rights, preferences, privileges or restrictions of the shares of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock so as to affect such shares adversely; (c) increase the authorized number of shares of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock; or (d) create any new class or series of stock or any other securities convertible into equity securities of the Corporation (i) having a preference over, or being on a parity with, the Series A; Series B, Series C, Series D, Series E or Series F Preferred Stock with respect to voting, dividends or upon liquidation, or (ii) having rights similar to any of the rights of the Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock under this Section 7. 8. Status of Converted or Redeemed Stock. In the event any shares of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock shall be redeemed or converted pursuant to Section 3 or Articles of Incorporation Page 11 12 Section 4 hereof, the shares so converted or redeemed shall be canceled and shall not be issuable by the Corporation, and the Articles of Incorporation of this Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. 9. Repurchase of Shares. In connection with repurchases by this Corporation of its Common Stock pursuant to its agreements with certain of the holders thereof providing for such repurchases in the event of the termination of the status of such holder as an employee, director or consultant to the Company, each holder of Series A, Series B, Series C, Series D, Series E or Series F Preferred Stock shall be deemed to have consented, for purposes of Sections 502, 503 and 506 of the California General Corporation Law, to distributions made by the Corporation with respect to such repurchases. (C) Common Stock. 1. Dividend Rights. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the Corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. Liquidation Rights. Upon the liquidation, dissolution or winding up of the Corporation, the assets of the Corporation shall be distributed as provided in Section 2 of Division (B) of this Article III. 3. Redemption. The Common Stock is not redeemable. 4. Voting Rights. The holder of each share of Common Stock shall have the right to one vote, and shall be entitled to notice of any shareholders meeting in accordance with the Bylaws of this Corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. ARTICLE IV (A) Limitation of Directors, Liability. The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. (B) Indemnification of Corporate Agents. This Corporation is authorized to indemnify the directors and officers of the Corporation to the fullest extent permissible under California law. (C) Reveal or Modification. Any repeal or modification of the foregoing provisions of this Article IV by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification." Articles of Incorporation Page 12 13 THREE: The foregoing amendment has been approved by the Board of Directors of this Corporation. FOUR: The foregoing amendment was approved by the holders of the requisite number of shares of this Corporation in accordance with Sections 902 and 903 of the California General Corporation Law. The total number of outstanding shares entitled to vote with respect to the foregoing amendment was 1,735,131 shares of Common Stock, 1,332,000 shares of Series A Preferred Stock, 779,195 shares of Series B Preferred Stock, 205,933 shares of Series C Preferred Stock, 1,718,552 shares of Series D Preferred Stock and 1,649,560 shares of Series E Preferred Stock. The number of shares voting in favor of the foregoing amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding Common Stock and Preferred Stock, each voting separately as a class. IN WITNESS WHEREOF, the undersigned have executed this certificate on August 1994. /s/ Matthew S. Mazur _________________________ Matthew S. Mazur Chairman /s/ Carl R. Brown _________________________ Carl R. Brown Secretary The undersigned certify under penalty of perjury that they have read the foregoing Amended and Restated Articles of Incorporation and know the contents thereof, and that the statements therein are true. Executed at San Diego, California, April 2, 1996. /s/ Matthew S. Mazur _________________________ Matthew S. Mazur Chairman /s/ Carl R. Brown _________________________ Carl R. Brown Secretary Articles of Incorporation page 13 EX-3.2 5 EXHIBIT 3.2 1 EXHIBIT 3.2 BYLAWS OF U.S. MEDICAL INSTRUMENTS, INC. A California Corporation ARTICLE I OFFICES Section 1. PRINCIPAL OFFICES. The Board of Directors shall fix the location of the principal executive office of the Corporation at any place within or outside the State of California. If the principal executive office is located outside this state, and the Corporation has one or more business offices in this state, the Board of Directors shall fix and designate a principal business office in the State of California. Section 2. OTHER OFFICES. The Board of Directors may at any time establish branch or subordinate offices at any place or places where the Corporation is qualified to do business. ARTICLE II MEETING OF SHAREHOLDERS Section 1. PLACE OF MEETINGS. Meetings of the Shareholders shall be held at any place within or outside of the State of California designated by the Board of Directors. In the absence of any such designation, Shareholders' meetings shall be held at the principal executive office of the Corporation. Section 2. ANNUAL MEETING. The annual meeting of Shareholders shall be held on the second Tuesday of May in each year at 8:00 a.m. However, if this day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At this meeting, directors shall be elected, and any other proper business may be transacted. Section 3. SPECIAL MEETING. A special meeting of the Shareholders may be called at any time by the Board of Directors, or by the Chairperson of the Board, or by the President, or by one or more Shareholders holding shares in the aggregate entitled to cast not less than 10% of the votes at that meeting. 1 2 If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the Chairperson of the Board, the President, any Vice President, or the Secretary of the Corporation. The officer receiving the request shall cause notice to be promptly given to the Shareholders entitled to vote, in accordance with the provisions of Sections 4 and 5 of this Article II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 3 shall be construed as limiting, fixing or affecting the time when a meeting of Shareholders called by action of the Board of Directors may be held. Section 4. NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of Shareholders shall be sent or otherwise given in accordance with Section 5 of this Article II not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, or (ii) in the case of the annual meeting, those matters which the Board of Directors, at the time of giving the notice, intends to present for action by the Shareholders. The notice of any meeting at which Directors are to be elected shall include the name of any nominee or nominees whom, at the time of the notice, management intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a Director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii) and amendment of the Articles of Incorporation, pursuant to Section 902 of that Code, (iii) a reorganization of the Corporation, pursuant to Section 1201 of that Code (iv) a voluntary dissolution of the Corporation, pursuant to Section 1900 of that Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 1007 of that Code, the notice shall also state the general nature of that proposal. Section 5. MANNER OF GIVING NOTICE: AFFIDAVIT OF NOTICE. Notice of any meeting of Shareholders shall be given either personally or by first-class mail or telegraphic or other written communication, charges pre-paid, addressed to the Shareholder at the address of that Shareholder appearing on the books of the Corporation or given by the Shareholder to the Corporation for the 2 3 purpose of notice. If no such address appears on the Corporation's books or is given, notice shall be deemed to have been given if sent to that Shareholder by first-class mail or telegraphic or other written communication to the Corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a Shareholder at the address of that Shareholder appearing on the books of the Corporation is returned to the Corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the Shareholder at that address, all future notices or reports shall be deemed to have been duly given without further mailing if these shall be available to the Shareholder on written demand of the Shareholder at the principal executive office of the Corporation for a period of one year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any Shareholders' meeting shall be executed by the Secretary, Assistant Secretary, or any transfer agent of the Corporation giving the notice, and shall be filed and maintained in The Minute Book of the Corporation. Section 6. QUORUM. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting of Shareholders shall constitute a quorum for the transaction of business. The Shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough Shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 7. ADJOURNED MEETING: NOTICE. Any Shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 6 of this Article II. When any meeting of Shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at a meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case the Board of Directors shall set a new 3 4 record date. Notice of any such adjourned meeting shall be given to each Shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 4 and 5 of this Article II. At any adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. Section 8. VOTING. The Shareholders entitled to vote at any meeting of the Shareholders shall be determined in accordance with the provisions of the Corporations Code of California (relating to voting shares held by a fiduciary, in the name of a Corporation, or in joint ownership). The Shareholders' vote may be by voice vote or by ballot; provided, however, that any election for Directors must be by ballot if demanded by any Shareholder before the voting has begun. On any matter other than elections of Directors, any Shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but if the Shareholder fails to specify the number of shares which the Shareholder is voting affirmatively, it will be conclusively presumed that the Shareholder's approving vote is with respect to all shares that the Shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter (other than the election of Directors) shall be the act of the Shareholders, unless the vote of a greater number of voting by classes is required by California General Corporation Law or by the Articles of Incorporation. At a Shareholders' meeting at which Directors are to be elected, no Shareholder shall be entitled to cumulate votes (i.e., cast for any one or more candidates a number of votes greater than the number of the Shareholder's shares) unless the candidates' names have been placed in nomination prior to commencement of the voting and a Shareholder has given notice prior to commencement of the voting and a Shareholder has given notice prior to commencement of the voting and a Shareholder has give notice prior to commencement of the voting of the Shareholder's intention to cumulate votes. If any Shareholder has given such a notice, then every Shareholder entitled to vote may cumulate votes for candidates in nomination and give one candidate a number of votes equal to the number of votes to which that Shareholder's shares are entitled, or distribute the Shareholder's votes on the same principle among any or all of the candidates as the Shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of Directors to be elected, shall be elected. Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The transactions of any meeting of Shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though there had been a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, 4 5 each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting or an approval of the Minutes. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or special meeting of the Shareholders, except that if action is taken or proposed to be taken for approval or any of those matters specified in the second paragraph of Section 4 of this Article II, the waiver of notice or consent shall state the .pa general nature of the proposal. All such waivers, consents, or approvals shall be filed with the corporate records or made a part of the Minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice of the meeting if that objection is expressly made at the meeting. Section 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may be taken at any annual or special meeting of Shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of Directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of Directors; provided, however, that a Director may be elected at any time to fill a vacancy on the Board of Directors that has not been filled by the Directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of Directors. All such consents shall be filed with the Secretary of the Corporation and shall be maintained in the corporate records. Any Shareholder giving a written consent, or the Shareholder's proxy holders, or a transferee of the shares or a personal representative of the Shareholder or their respective proxy holders or a transferee of the shares or personal representative, may revoke the consent by a writing received by the Secretary of the Corporation before written consents of the number of shares required to authorize the proposed action have been filed with the Secretary. If the consents of all Shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such Shareholders shall not have been received, the Secretary shall give prompt notice of the corporate action approved by the Shareholders without a meeting. This notice shall be given in the manner specified in Section 5 of this Article II. In the case of 5 6 approval of (i) contracts or transactions in which a Director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii) indemnification of agents of the corporation, pursuant to Section 317 of that Code, (iii) a reorganization of the Corporation, pursuant to Section 1201 of that Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. Section 11. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING CONSENTS. For purposes of determining the Shareholders entitled to notice of any meeting or to vote or entitled to give consent to corporate action without a meeting, the Board of Directors may fix, in advance, a record date, which shall not be more that sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in this event only Shareholders of record on the date so fixed are entitled to notice and to vote or to give consent, as the case may be, notwithstanding any transfer of shares on the books of the Corporation after the record date, except as otherwise provided in the California General Corporation Law. If the Board of Directors does not so fix a record date: (a) The record date for determining Shareholders entitled to a notice of or to vote at a meeting of Shareholders shall be at the close of business on the business day next preceding the day of which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (b) The record date for determining Shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the Board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action of the Board has been taken, shall be at the close of business on the day on which the Board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. Section 12. PROXIES. Every person entitled to vote for Directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary of the Corporation. A proxy shall be deemed signed if the Shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, or otherwise) by the Shareholder or the Shareholder's attorney in fact. A validly executed proxy which does not state that it is irrevocable shall 6 7 continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the Corporation stating that attendance at the meeting and voting in person by the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of the proxy is received by the Corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its facts that it is irrevocable shall be governed by the provisions of the Corporations Code of California. Section 13. INSPECTORS OF ELECTION. Before any meeting of Shareholders, the Board of Directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the Chairperson of the meeting may, and on the request of any Shareholder or a Shareholder's proxy shall, appoint inspectors at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more Shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the Chairperson of the meeting may, and upon the request of any Shareholder or Shareholder's proxy shall, appoint a person to fill that vacancy. These inspectors shall: (a) Determine the number of shares outstanding and the voting power of each, the share represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) Receive votes, ballots, or consents; (c) Hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) Count and tabulate all votes or consents; (e) Determine when the polls shall close; (f) Determine the result; and (g) Do any other acts that may be proper to conduct the election or vote with fairness to all Shareholders. 7 8 ARTICLE III DIRECTORS Section 1. POWERS. Subject to the provisions of the California General Corporation Law and any limitations in the Articles of Incorporation and these Bylaws relating to action required to be approved by the Shareholders or by the outstanding shares, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. Without prejudice to these general powers, and subject to the same limitations, the directors shall have the power to: (a) Select and remove all officers, agents, and employees of the corporation; prescribe any powers and duties for them that are consistent with law, with the articles of incorporation, and with these bylaws; fix their compensation; and require from them security for faithful service. (b) Change the principal executive office or the principal business office in the State of California from one location to another; cause the corporation to be qualified to do business in any other state, territory, dependency, or country and conduct business within or without the State of California; and designate any place within or without the State of California for the holding of any shareholders' meeting, or meetings, including annual meetings. (c) Adopt, make and use a corporate seal; prescribe the forms of certificates of stock; and alter the form of the seal and certificates. (d) Authorize the issuance of shares of stock of the corporation on any lawful terms, in consideration of money paid, labor done, services actually rendered, debts or securities cancelled, or tangible or intangible property actually received. (e) Borrow money and incur indebtedness on behalf of the corporation, and cause to be executed and delivered for the corporation's purposes, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations and other evidences of debt and securities. Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of Directors may be one (1), if there is only one (1) shareholder, or two (2) if there are only two (2) shareholders, or there shall be three (3) or more if there are three (3) or more shareholders until changed by a duly adopted Amendment to the Articles of Incorporation or by an Amendment to this Bylaw adopted 8 9 by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an Amendment reducing the number of Directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of action by written consent, are equal to more that 16-2/3% of the outstanding shares entitled to vote. Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be elected at each annual meeting of the Shareholders to hold office until the next annual meeting. Each Director, including a Director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. Section 4. VACANCIES. Vacancies in the Board of Directors may be filled by a majority of the remaining Directors, though less than a quorum, or by a sole remaining Director, except that a vacancy created by the removal of a Director by the vote or written consent of the Shareholders or by court order may be filled only by the vote of a majority of the Shareholders entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of holders of a majority of the outstanding shares entitled to vote. Each Director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies on the Board of Directors shall be deemed to exist in the event of the death, resignation, or removal of any Director, or if the Board of Directors by resolution declares vacant the office of a Director who has been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of Directors is increased, or if the Shareholder fail, at any meeting of Shareholders at which any Director to be voted for at that meeting. The Shareholders may elect a Director or Directors at any time to fill any vacancy or vacancies not filled by the Directors, by any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote. Any Director may resign effective on giving written notice to the Chairman of the Board, the President, the Secretary, or the Board of Directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a Director is effective at a future time, the Board of Directors may elect a successor to take office when the resignation becomes effective. No reduction of the authorized number of Directors shall have the effect of removing any Director before that Director's term of office expires. 9 10 Section 5. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. Regular meetings of the Board of Directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the Board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the Corporation. Special meetings of the Board shall be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, at the principal executive office of the Corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all Directors participating in the meeting can hear one another, and all such Directors shall be deemed to be present in person at the meeting. Section 6. ANNUAL MEETING. Immediately following each annual meeting of Shareholders, the Board of Directors shall hold a regular meeting for the purpose of organization, any desired election of officers, and the transaction of other business. Notice of this meeting shall not be required. Section 7. OTHER REGULAR MEETINGS. Other regular meetings of the Board of Directors shall be held without call at such time as shall from time to time be fixed by the Board of Directors. Such regular meetings may be held without notice. Section 8. SPECIAL MEETINGS. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the Chairman of the Board or the President or any Vice President or the Secretary or any two Directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each Director or sent by first class mail or telegram, charges prepaid, addressed to each Director at that Director's address as it is shown on the records of the Corporation. In case the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. In case the notice is delivered personally, or by telephone or telegram. It shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the Director or to a person at the office of the Director who the person giving the notice has reason to believe will promptly communicate it to the Director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of the Corporation. Section 9. QUORUM. A majority of the authorized number of Directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 12 of this Article III. Every act or decision done or made by a majority of 10 11 the Directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors, subject to the provisions of the Corporations Code of California, as to approval of contracts or transactions in which a Director has a direct or indirect material financial interest, as to the appointment of committees, as to indemnification of Directors. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of Directors, if any action taken is approved by at least a majority of the required quorum for that meeting. Section 11. WAIVER OF NOTICE. The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the Directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the Minutes. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the Minutes of the meeting. Notice of a meeting shall also be deemed given to any Director who attends the meeting without protesting before or at its commencement, the lack of notice of that Director. Section 12. ADJOURNMENT. A majority of the Directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. Section 13. NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than forty-eight (48) hours, in which case notice of the time and place shall be give before the time of the adjourned meeting, in the manner specified in Section 9 of this Article III, to the Directors who were not present at the time of the adjournment. Section 14. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board shall individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the Board of Directors. Such written consent or consents shall be filed with the Minutes of the proceedings of the Board. Section 15. FEES AND COMPENSATION OF DIRECTORS. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the Board of Directors. This Section 15 shall not be construed to preclude any Director from serving the Corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for those 11 12 services. ARTICLE IV COMMITTEES Section 1. COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution adopted by a majority of the authorized number of Directors, designate one or more committees, each consisting of two or more Directors, to serve at the pleasure of the Board. The Board may designate one or more Directors as alternative members of any committee, who may replace any absent member at any meeting of the committee. Any committee, to the extent provided in the resolution of the Board, shall have all the authority of the Board, except with respect to: (a) the approval of any action which, under the General Corporation Law of California, also requires Shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the Board of Directors or in any committee; (c) the fixing of compensation of the Directors for serving on the Board or on any committee; (d) the amendment or repeal of Bylaws or the adoption of new Bylaws; (e) the amendment or repeal, or any resolution of the Board of Directors which by its express terms is not so amendable or repealable; (f) a distribution to the Shareholders of the Corporation, except at a rate or in a periodic amount or within a price range determined by the Board of Directors; or (g) the appointment of any other committee of the Board of Directors or the members of these committees. Section 2. MEETING AND ACTION OF COMMITTEES. Meetings and action of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these Bylaws, Section 6 (place of meeting), 8 (regular meetings), 9 (special meetings and notice), 10 (quorum), 11 (waiver of notice), 12 (adjournment), 13 (notice of adjournment), and 14 (action without meeting), with such changes in the context of those Bylaws to substitute the committee and its members for the Board of Directors and its members, except that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee; special meetings of 12 13 committees may also be called by resolution of the Board of Directors; and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. ARTICLE V OFFICERS Section 1. OFFICERS. The officers of the Corporation shall be a President, a Secretary, and a Chief Financial Officer. The Corporation may also have, at the discretion of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article V. Any number of offices may be held by the same person. Section 2. ELECTION OF OFFICERS. The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article V, shall be chose by the Board of Directors, and each shall serve at the pleasure of the Board, subject to the rights, if any, of an officer under contract of employment. Section 3. SUBORDINATE OFFICERS. The Board of Directors may appoint, and may empower the President to appoint, such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the Board of Directors may from time to time determine. Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors, at any regular or special meeting of the Board, or, except in case of an officer chosen by the Board of Directors, by an officer upon whom such power of removal may be conferred by the Board of Directors. Any Officer may resign at any time by giving written notice to the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. 13 14 Section 5. VACANCIES IN OFFICE. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to that office. Section 6. CHAIRPERSON OF THE BOARD. The Chairperson of the Board, if such an officer be elected, shall, if present, preside at meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the Bylaws. If there is no President, the Chairperson of the Board shall in addition be the Chief Executive Officer of the Corporation and shall have the powers and duties prescribed in Section 7 of this Article V. Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairperson of the Board, if there be such an Officer, the President shall be the Chief Executive Officer of the Corporation and shall, subject to control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the Corporation. He shall preside at all meetings of the Shareholders and, in the absence of the Chairperson of the Board, or if there be none, at all meetings of the Board of Directors. He shall have the general powers and duties of management usually vested in the office of President of a Corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the Bylaws. Section 8. VICE PRESIDENT. In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or the Bylaws, and the President, or the Chairperson of the Board. Section 9. SECRETARY. The Secretary shall keep or cause to be kept, at the principal executive office or such other place as the Board of Directors may direct, a book of Minutes of all meetings and actions of Directors, committees of Directors, and Shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice given, the names of those present at Director's meetings or committee meetings, the number of shares present or represented at Shareholders' meetings, and the proceedings. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the Corporation's transfer agent or registrar, as by resolution of the 14 15 Board of Directors, a share register, or a duplicate share register, showing the names of all Shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the Shareholders and of the Board of Directors required by the Bylaws or by law to be given, and he shall keep the seal of the Corporation if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors, or by the Bylaws. Section 10. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any Director. The Chief Financial Officer shall deposit all moneys and other valuables in the name of the credit of the Corporation with such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the President and Directors, wherever they request it, an account of all of his transactions as Chief Financial Officer and of the financial condition of the Corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICER, EMPLOYEES AND OTHER AGENTS The Corporation shall, to the maximum extent permitted by the California General Corporation Law, indemnify each of its agents against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact any such person is or was an agent of the Corporation. For purposes of this Section, an "agent" of the Corporation includes any person who is or was a Director, officer or employee, or was a Director, officer, employee, or agent of a Corporation which was a predecessor Corporation of the Corporation or of another enterprise at the request of such predecessor Corporation. 15 16 ARTICLE VII RECORDS AND REPORTS Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The Corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the Board of Directors, a record of its Shareholders, giving the names and addresses of all Shareholders and the number and class of shares held by each Shareholder. A Shareholder or Shareholders of the Corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the Corporation may (i) inspect and copy the records of Shareholders' names and addresses and shareholdings during usual business hours on five (5) days prior written demand on the Corporation, and (ii) obtain from the transfer agent of the Corporation, on written demand and on the tender of such transfer agents usual charges for such list, a list of Shareholder's names and addresses, who are entitled to vote for the election of Directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the Shareholder after the date of demand. This list shall be made available to any such Shareholder by the transfer agent on or before the later of five (5) days after the demand is received or the date specified in he demand as the date as of which the list is to be compiled. The record of Shareholders shall also be open to inspection on the written demand of any Shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a Shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 1 may be made in person or by an agent or attorney of the Shareholder or holder of a voting trust certificate making the demand. Section 2. MAINTENANCE AND INSPECTION OF BYLAWS. The Corporation shall keep at its principal executive office, or if its principal executive office is not in the State of California, at its principal business office in this state, the original or a copy of the Bylaws as amended to date, which shall be open to inspection by the Shareholders at all reasonable times during office hours. If the principal executive office of the Corporation is outside of the State of California and the Corporation has no principal business office in this state, the Secretary shall, upon the written request of any Shareholder, furnish to the Shareholder a copy of the Bylaws as amended to date. Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The accounting books and records and Minutes of proceedings of the Shareholders and the Board of Directors and any 16 17 committee or committees of the Board of Directors shall be kept at such place or places designated by the Board of Directors, or, in the absence of such designation, at the principal executive office of the Corporation. The Minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The Minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a Shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. These rights of inspection shall extend to the records of each subsidiary corporation of the Corporation. Section 4. INSPECTION BY DIRECTORS. Every Director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind and the physical properties of the Corporation and each of its subsidiary Corporations. This inspection by a Director may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents. Section 5. ANNUAL REPORT TO SHAREHOLDERS. The Board of Directors shall cause an annual report to be sent to the Shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the Corporation. This report shall be sent at least fifteen (15) days before the annual meeting of Shareholders to be held during the next fiscal year and in the manner specified in Section 5 of Article II of these Bylaws for giving notice to Shareholders of the Corporation. The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial position for the fiscal year, accompanied by any report of independent accountants, or, if there is no such report, the certificates of an authorized officer of the Corporation that the statements were prepared without audit from the books and records of the Corporation. Section 6. FINANCIAL STATEMENT. A copy of any annual financial statement and any income statement of the Corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the Corporation as of the end of each such period, that has been prepared by the Corporation shall be kept on file in the principal executive office of the Corporation for twelve (12) months and each such statement shall be exhibited at all reasonable times to any Shareholders demanding an examination of any such statement or a copy shall be mailed to any such Shareholder. 17 18 If a Shareholder or Shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the Corporation makes a written request to the Corporation for an income statement of the Corporation for the three month, six month or nine month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and a balance sheet of the Corporation as of the end of that period, the Chief Financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the Corporation has not sent the Shareholders its annual report for the last fiscal year, this report shall likewise be delivered or mailed to the Shareholder or Shareholders within thirty (30) days after the request. The Corporation shall also, on the written request of any Shareholder, mail to the Shareholder a copy of the last annual, semi-annual, or quarterly income statement which it has prepared, and a balance sheet as of the end of that period. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of the independent accountants engaged by the Corporation or the certificate of an authorized officer of the Corporation that the financial statements were prepared without audit from the books and records of the Corporation. Section 7. ANNUAL STATEMENT OF GENERAL INFORMATION. The Corporation shall, within ninety (90) days after filing the Articles of Incorporation and annually by the end of the calendar month of the anniversary date of this incorporation, or when the agent for service of process or his address has been changed, file with the Secretary of State of the State of California, on the prescribed form, a statement setting forth the authorized number of Directors, the names and complete business or residence addresses of all incumbent Directors, the names and complete business or residence addresses of the Chief Executive Officer, Secretary, and Chief Financial Officer, the street address of its principal executive office or principal business office in the state, and the general type of business constituting the principal business activity of the Corporation, together with a designation of the agent of the Corporation, for the purpose of service of process, all in compliance with Section 1502 of the Corporations Code of California. ARTICLE VIII GENERAL CORPORATE MATTERS 18 19 Section 1. RECORD DATE FOR PURPOSE OTHER THAN NOTICE AND VOTING. For purposes of determining the Shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action (other than action by Shareholders by written consent without a meeting), the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action, and in that case only Shareholders of record on the date so fixed are entitled to receive the dividend, distribution, or allotment or rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date so fixed, except as otherwise provided in the California General Corporation Law. If the Board of Directors does not so fix a record date, the record date for determining Shareholders for any such purpose shall be at the close of business on the day on which the Board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts, or other orders for payment of money, notes, or other evidences of indebtedness, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. Section 3. CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED. The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation; and this authority may be general or confined to specific instances; and, unless so authorized or ratified by the Board of Directors or within the agency power or an officer, no officer, agent, or employee shall have any power or authority to bind the Corporation by any contract of engagement or to pledge its credit or to render it liable for any purpose or any amount. Section 4. CERTIFICATES FOR SHARES. A certificate or certificates for shares of the capital stock of the Corporation shall be issued to each Shareholder when any of these shares are fully paid, and the Board of Directors may authorize the issuance of certificates or shares as partly paid provided that these certificates shall state the amount of the consideration to be paid for them and the amount paid. All certificates shall be signed in the name of the Corporation by the Chairperson of the Board or Vice Chairperson of the Board or the President or Treasurer or the Secretary or any Assistant Secretary, certifying the number of shares and the class or series of shares owned by the Shareholder. Any or all of the signatures on the certificates may be facsimiles. In case any officer, transfer agent, or registrar who has signed or 19 20 whose facsimile signature has been placed on a certificate shall have ceased to be that officer, transfer agent, or registrar before that certificate is issued, it may be issued by the Corporation with the same effect as if that person were an officer, transfer agent, or registrar at the date of issue. Section 5. LOST CERTIFICATES. Except as provided in this Section 5, no new certificates for shares shall be issued to replace an old certificate unless the latter is surrendered to the Corporation and cancelled at the same time. The Board of Directors may, in case any share certificate or certificate for any other security is lost, stolen, or destroyed, authorize the issuance of a replacement certificate on such terms and conditions as the Board may require, including provision for indemnification of the Corporation secured by a bond or other adequate security sufficient to protect the Corporation against any claim that may be made against it, including any expenses or liability, on account of the alleged loss, theft, or destruction of the certificate or the issuance of the replacement certificate. Section 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chairperson of the Board, the President, or any Vice President, or any other person authorized by resolution of the Board of Directors or by any of the foregoing designated officers, is authorized to vote on behalf of the Corporation any and all shares of any other Corporation or Corporations, foreign or domestic, standing in the name of the Corporation. The authority granted to these officers to vote or represent on behalf of the Corporation any and all shares held by the Corporation in any other Corporation or Corporations may be exercised by any of these officers in person or by any person authorized to do so by a proxy duly executed by these officers. Section 7. CONSTRUCTION AND DEFINITIONS. Unless the context requires otherwise, the general provisions, rules and construction, and definitions in the California General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a Corporation and a natural person. ARTICLE IX AMENDMENTS Section 1. AMENDMENT BY SHAREHOLDERS. New Bylaws may be adopted or these Bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the Articles of Incorporation of the Corporation set forth the number of authorized 20 21 Directors of the Corporation, the authorized number of Directors may be changes only by an Amendment of the Articles of Incorporation. Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the Shareholders as provided in Section 1 of this Article IX, Bylaws, other than a Bylaw or an Amendment of a Bylaw changing the authorized number of Directors, may be adopted, amended, or repealed by the Board of Directors. 21 22 CERTIFICATE OF ADOPTION OF BYLAWS ADOPTION BY INCORPORATOR: The undersigned person appointed in the Articles of Incorporation to act as Incorporator of U.S. MEDICAL INSTRUMENTS, INC., hereby adopt the same as the bylaws of said corporation. EXECUTED this 13th day of November, 1991. ---- -------- /s/ Carl R. Brown ---------------------------- Carl R. Brown Incorporator THIS IS TO CERTIFY: That I am the duly-elected, qualified and acting Secretary of U.S. MEDICAL INSTRUMENTS, INC., that the foregoing Bylaws were adopted as the Bylaws of said Corporation on the date set forth above by the person(s) appointed in the Articles of Incorporation to act as the Incorporator of said Corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Corporate seal this 13th day of November, 1991. ---- -------- /s/ Carl R. Brown ---------------------------- Secretary 22 23 AMENDMENT TO BYLAWS OF U.S. MEDICAL INSTRUMENTS, INC. On February 20, 1995 the Board of Directors and the Shareholders of U.S. Medical Instruments, Inc. (the "Company") authorized the following amendment to the Company's Bylaws: The Article III, Section 2 of the Bylaws is hereby amended to read in its entirety as follows - "NUMBER AND QUALIFICATION OF DIRECTORS. The number of directors of the corporation shall be not less than five (5) and not more than (9). The exact number of directors within these limits shall be fixed and may be changed from time to time by the Board of Directors or shareholders in the manner provided in the Bylaws." EX-4.2 6 EXHIBIT 4.2 1 EXHIBIT 4.2 WARRANT TO PURCHASE SHARES OF SERIES E PREFERRED STOCK OF U.S. MEDICAL INSTRUMENTS, INC. 1. NUMBER AND PRICE OF SHARES SUBJECT TO WARRANT. Subject to the terms and conditions herein set forth, G.C. Investments, L.L.C. (the "Purchaser") or its assignee(s) in accordance with the terms hereof, is entitled to purchase from U.S. Medical Instruments Inc., a California corporation (the "Company"), at any time until January 31, 1998, One Hundred Six Thousand Six Hundred Sixty Seven (106,667) shares (which number of shares is subject to adjustment as described below) of fully paid and nonassessable shares of Series E Preferred Stock ("Stock") of the Company upon surrender hereof at the principal office of the Company and, at the election of the holder hereof, upon either payment of the purchase price at said office in cash or by check or the cancellation of any present or future indebtedness from the Company to the holder hereof in a dollar amount equal to the purchase price of the Stock for which the consideration is being given. Subject to adjustment as hereinafter provided, the purchase price of one share of Stock (or such securities as may be substituted for one share of Stock pursuant to the provisions hereinafter set forth), referred to herein as the "Warrant Price", is $7.50. 2. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number and kind of securities issuable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) ADJUSTMENT FOR DIVIDENDS IN STOCK OR OTHER SECURITIES OR PROPERTY. In case at any time or from time to time on or after the date hereof the holders of the Stock of the Company (or any shares of stock or other securities at the time receivable upon the exercise of this Warrant) shall have received, or, on or after the record date fixed from the determination of eligible shareholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (including cash) of the Company by way of dividend, then and in each case, the holder of this Warrant shall, upon the exercise hereof, be entitled to receive, in addition to the number of shares of Stock receivable thereupon, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property (including cash) of the Company which such holder would hold on the date of such exercise had it been the holder of record of Such Stock on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock available by it as aforesaid during such period, giving effect to all adjustments called for during such period by paragraphs (b) and (c) of this paragraph 2. 2 Where X = the number of shares of Stock to be issued to the Purchaser, Y = the number of shares of Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date of such calculation), A = the fair market value of one share of the Company's Stock (at the date of such calculation), and B = the Warrant Price (as adjusted to the date of such calculation). For purposes of the above calculation, fair market value of one share of Stock shall be determined by the Company's Board of Directors in good faith; provided, however, that where there exists a public market for the Stock at the time of such exercise, fair market value shall mean the average over the preceding twenty (20) trading days (or such fewer number of days as such public market has existed) of the mean of the high closing bid and asked prices on the over-the-counter market as reported by Nasdaq, or if then traded on a national securities exchange or the Nasdaq National Market, the average over the preceding twenty (20) trading days (or such fewer number of days as the Stock has been so traded) of the mean of the high and low prices on the principal national securities exchange or the National Market on which it is so traded. 7. TERM OF WARRANT. This Warrant expires and shall no longer be exercisable as of 11:59 p.m. Pacific standard time, January 31, 1998, and shall be void thereafter. 8. CERTIFICATE OF ADJUSTMENT. Whenever the Warrant Price or number or type of securities issuable upon exercise of this Warrant is adjusted, as herein provided. the Company shall promptly deliver to the record holder of this Warrant a certificate of an officer of the Company setting forth the nature of such adjustment and a brief statement of the facts requiring such adjustment. 9. TRANSFER OF WARRANT. This Warrant may be freely transferred or assigned by the Purchaser in whole or in part, subject to compliance with all federal and state securities laws by the transferor and the transferee. 10. REPLACEMENT OF WARRANTS. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 4 3 11. COMPLIANCE WITH SECURITIES LAWS. The Purchaser of this Warrant, by acceptance hereof, acknowledges that this Warrant and the shares of Series E Preferred Stock to be issued upon exercise hereof are being acquired solely for the Purchaser's own account and not as a nominee for any other party, and (or investment, and that the Purchaser will not offer, sell or otherwise dispose of this Warrant or any shares of Series E Preferred Stock to be issued upon exercise hereof except under circumstances that will not result in a violation of the Securities Act of 1933, as amended (the "Act"), or any state securities laws. Upon exercise of this Warrant, the Purchaser shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the shares of Series E Preferred Stock so purchased are being acquired solely for the Purchaser's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale. This warrant and all shares of Series E Preferred Stock issued upon exercise hereof shall be stamped or imprinted with a legend in substantially the following form (in addition to any legend required by state securities laws): THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES AND ANY SECURITIES OR SHARES ISSUED HEREUNDER OR THEREUNDER MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE SECURITIES AND RESTRICTING THEIR TRANSFER OF SALE MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD HEREOF TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY. 12. MISCELLANEOUS. This Warrant shall be governed by the laws of the State of California. The headings in this Warrant are for purposes of convenience and reference only, and shall not be deemed to constitute a part hereof. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally but only be an instrument in writing signed by the Company and the registered holder hereof. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, to the address furnished to the Company in writing by the last holder of this Warrant who shall have furnished an address to the Company in writing. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provisions. 5 4 13. TERMINATION. This Warrant (and the right to purchase securities upon exercise hereof) shall terminate on January 31, 1998. ISSUED this 31st day of January, 1995 U.S. MEDICAL INSTRUMENTS, INC. By: /s/ Matthew S. Mazur --------------------------------- Matthew S. Mazur, President 6 5 EXHIBIT A NOTICE OF INTENT TO EXERCISE (To be signed only upon exercise of Warrant) To: U.S. MEDICAL INSTRUMENTS, INC. The undersigned, the Holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, ______________________________________ ( ) shares of Stock of U.S. Medical Instruments, Inc. and herewith makes payment of ___________________ ($__________________) thereof, and requests that the certificates for such shares be issued in the name of, and delivered to _______________________ _____________ , whose address is ______________________. The undersigned represents that it is acquiring such Stock for its own account for investment and not with a view to or for sale in connection with any distribution thereof (subject, however, to any requirement of law that the disposition thereof shall at all times be within its control). DATED: ________ G.C. Investments, L.L.C. By: ________________________________ Address: ________________________________ ________________________________ ________________________________ EX-4.3 7 EXHIBIT 4.3 1 EXHIBIT 4.3 WARRANT TO PURCHASE _____ SHARES OF COMMON STOCK OF U.S. MEDICAL INSTRUMENTS, INC. 1. NUMBER AND PRICE OF SHARES SUBJECT TO WARRANT. Subject to the terms and conditions herein set forth, _____________ (the "Purchaser") is entitled to purchase from the Company, at any time until November 30, 1998, ______________ (_____) shares (which number of shares is subject to adjustment as described below) of fully paid and non assessable Common Stock ("Common Stock") of the Company upon surrender hereof at the principal office of the Company and, at the election of the holder hereof, upon either payment of the purchase price at said office in cash or by check or the cancellation of any present or future indebtedness from the Company to the holder hereof in a dollar amount equal to the purchase price of the Common Stock for which the consideration is being given. Subject to adjustment as hereinafter provided, the purchase price of one share of Common Stock (or such securities as may be substituted for one share of Common Stock pursuant to the provisions hereinafter set forth), referred to herein as the "Warrant Price", is $1.50. 2. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number and kind of securities issuable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) Adjustment for Dividends in Stock or Other Securities or Property. In case at any time or from time to time on or after the date hereof the holders of the Common Stock of the Company (or any shares of stock or other securities at the time receivable upon the exercise of this Warrant) shall have received, or, on or after the record date fixed from the determination of eligible shareholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash) of the Company by way of dividend, then and in each case, the holder of this Warrant shall, upon the exercise hereof, be entitled to receive, in addition to the number of shares of Common Stock receivable thereupon, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities of r property (other than cash) of the Company which such holder would hold on the date of such exercise had it been the holder of record of such Common Stock on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock available by it as aforesaid during such period, giving effect to all adjustments called for during such period by paragraphs (b) and (c) of this paragraph 2. (b) Adjustment for Reclassification, Reorganization or Merger. In case of any reclassification or change of the outstanding securities of the Company or of any reorganization of the Company (or any other corporation the stock or securities of which are at the time receivable upon the exercise of this Warrant) or any similar corporate reorganization on or after the date hereof, then and in each such case the holder of this Warrant, upon the exercise hereof at any time after the consummation of such reclassification, change, reorganization, merger or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which such holder would have been entitled upon such consummation if such holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in paragraphs (a) and (c); and in each such case, the terms of this paragraph 2 shall be applicable 2 to the shares of stock or other securities properly receivable upon the exercise of this Warrant after such consummation. (c) Stock Splits and Reverse Stock Splits. If at any time on or after the date hereof the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Warrant Price in effect immediately prior to such subdivision shall thereby be proportionately reduced and the number of shares receivable upon exercise of the Warrant shall thereby be proportionately increased; and, conversely, if at any time on or after the date hereof the outstanding number of shares of Common Stock shall be combined into a smaller number of shares, the Warrant Price in effect immediately prior to such combination shall thereby be proportionately increased and the number of shares receivable upon exercise of Warrant shall thereby be proportionately decreased. (d) Conversion or Redemption of Common Stock. If at the time of any exercise of this Warrant there are no other shares of Common Stock outstanding (such shares having been converted or redeemed), this Warrant shall be exercisable for Common Stock instead of Common Stock in the same amounts, for the same prices and on the same terms, and all references herein to "Common Stock" shall be changed to refer to "Common Stock." 3. NO FRACTIONAL SHARES. No fractional shares of Common Stock will be issued in connection with any subscription hereunder. In lieu of any fractional shares which would otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the fair market value of one share of Common Stock on the date of exercise, as determined in good faith by the Company's Board of Directors. 4. NO SHAREHOLDER RIGHTS. This Warrant shall not entitle its holder to any of the rights of a shareholder of the Company. 5. RESERVATION OF STOCK. The Company covenants that during the period this Warrant is exercisable, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the exercise of this Warrant. The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant. 6. EXERCISE OF WARRANT. This Warrant may be exercised by the holder hereof, in whole or in part, by the surrender of this Warrant and the Notice of Exercise attached hereto as Exhibit A duly completed and executed on behalf of the holder hereof, at the principal office of the Company, accompanied by payment in full of the Warrant Price then in effect as described above. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As promptly as practicable on or after such date and in any event within ten (10) days thereafter, the Company at its expense shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of full shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share as provided above. The shares of Common Stock issuable upon exercise hereof shall, upon their issuance, be fully paid and non assessable. In the event that this Warrant is 3 exercised in part, the Company at its expense will execute and deliver a new Warrant of like tenor exercisable for the number of shares for which this Warrant may then be exercised. 7. CERTIFICATE OF ADJUSTMENT. Whenever the Warrant Price or number or type of securities issuable upon exercise of this Warrant is adjusted, as herein provided, the Company shall promptly deliver to the record holder of this Warrant a certificate of an officer of the Company setting forth the nature of such adjustment and a brief statement of the facts requiring such adjustment. 8. TRANSFER OF WARRANT. This Warrant may be freely transferred or assigned by the Purchaser in whole or in part, subject to compliance with all federal and state securities laws by the transferor and the transferee. 9. REPLACEMENT OF WARRANTS. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 10. MISCELLANEOUS. This Warrant shall be governed by the laws of the State of California. The heading in this Warrant are for purposes of convenience and reference only, and shall not be deemed to constitute a part hereof. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally but only be an instrument in writing signed by the Company and the registered holder hereof. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, to the address furnished to the Company in writing by the last holder of this Warrant who shall have furnished an address to the Company in writing. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provisions. 11. TERMINATION. This Warrant (and the right to purchase securities upon exercise hereof) shall terminate on November 30, 1998. ISSUED this 30th day of November, 1995 U.S. MEDICAL INSTRUMENTS, INC. By: /s/ Matt Mazur -------------------------- Title: President ----------------------- 4 EXHIBIT A NOTICE OF INTENT TO EXERCISE (To be signed only upon exercise of Warrant) To: U.S. MEDICAL INSTRUMENTS The undersigned, the Holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, ____________ _____________ ( ) shares of Common Stock of U.S. Medical Instruments, Inc. and herewith makes payment of____________________ ($ ) thereof, and requests that the certificates for such shares be issued in the name of, and delivered to ___________ whose address is____________________ . The undersigned represents that it is acquiring such Common Stock for its own account for investment and not with a view to or for sale in connection with any distribution thereof (subject, however, to any requirement of law that the disposition thereof shall at all times by within its control). DATED: ____________ By: _____________________ Address: _________________________ _________________________ _________________________ EX-4.4 8 EXHIBIT 4.4 1 EXHIBIT 4.4 WARRANT TO PURCHASE SHARES OF COMMON STOCK OF U.S. MEDICAL INSTRUMENTS, INC. 1. NUMBER AND PRICE OF SHARES SUBJECT TO WARRANT. Subject to the terms and conditions herein set forth, Robert C. Siegel (the "Purchaser") or its assignee(s) in accordance with the terms hereof, is entitled to purchase from U.S. Medical Instruments, Inc., a California corporation (the "Company"), at any time until December 31, 1997, One Million Three Hundred Thousand (1,300,000) shares (which number of shares is subject to adjustment as described below) of fully paid and nonassessable shares of Common Stock ("Stock") of the Company upon surrender hereof at the principal office of the Company and, at the election of the holder hereof, upon either payment of the purchase price at said office by bank certified or cashier's check or by wire of immediately available funds. Subject to adjustment as hereinafter provided, the purchase price of one share of Stock (or such securities as may be substituted for one share of Stock pursuant to the provisions hereinafter set forth), referred to herein as the "Warrant Price", is $14.00. 2. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number and kind of securities issuable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) ADJUSTMENT FOR DIVIDENDS IN STOCK OR OTHER SECURITIES OR PROPERTY. In case at any time or from time to time on or after the date hereof the holders of the Stock of the Company (or any shares of stock or other securities at the time receivable upon the exercise of this Warrant) shall have received, or, on or after the record date fixed from the determination of eligible shareholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (including cash) of the Company by way of dividend, then and in each case, the holder of this Warrant shall, upon the exercise hereof, be entitled to receive, in addition to the number of shares of Stock receivable thereupon, and without payment of any additional consideration therefor, the amount of such dividend had it been the holder of record of such Stock on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock available by it as aforesaid during such period, giving effect to all adjustments called for during such period by paragraphs (b) and (c) of this paragraph 2. (b) ADJUSTMENT FOR RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any reclassification or change of the outstanding securities of the Company or of any reorganization of the Company (or any other corporation the stock or securities of which are at the time receivable upon the exercise of this Warrant) or any similar corporate reorganization on or after the date hereof, then and in each such case the holder of this Warrant, upon the exercise hereof at any time after the consummation of such reclassification, change, reorganization, merger or conveyance, shall be entitled to receive, in lieu of the Stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which such holder would have been entitled upon such consummation if such holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in paragraphs (a) and (c); and in each such case, the terms of this paragraph 2 shall be applicable to the shares of stock or other securities properly receivable upon the exercise of this Warrant after such consummation. 2 (c) STOCK SPLITS AND REVERSE STOCK SPLITS. If at any time on or after the date hereof the Company shall subdivide its outstanding shares of Stock into a greater number of shares, the Warrant Price in effect immediately prior to such subdivision shall thereby be proportionately reduced and the number of shares receivable upon exercise of the Warrant shall thereby be proportionately increased; and, conversely, if at any time on or after the date hereof the outstanding number of shares of Stock shall be combined into a smaller number of shares, the Warrant Price in effect immediately prior to such combination shall thereby proportionately increased and the number of shares receivable upon exercise of Warrant shall thereby be proportionately decreased. (d) NOTICE OF ADJUSTMENT. When any adjustment is required to be made in the number or kind of shares purchasable upon exercise of the Warrant, or in the Warrant Price, the Company shall promptly notify the Purchaser of such event and of the number of shares of Stock or other securities or property thereafter purchasable upon exercise of the Warrant. 3. NO FRACTIONAL SHARES. No fractional shares of Stock will be issued in connection with any subscription hereunder. In lieu of any fractional shares which would otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the fair market value of one share of Stock on the date of exercise, as determined in good faith by the Company's Board of Directors. 4. NO SHAREHOLDER RIGHTS. This Warrant shall not entitle its holder or any of the rights of a shareholder of the Company. 5. RESERVATION OF STOCK. The Company covenants that during the period this Warrant is exercisable, the Company will reserve from its authorized and unissued Stock a sufficient number of shares to provide for the issuance of Stock upon the exercise of this Warrant. The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Stock upon the exercise of this Warrant. 6. EXERCISE OF WARRANT. This Warrant may be exercised by the holder hereof, in whole or in part, by the surrender of this Warrant and the Notice of Exercise attached hereto as Exhibit A duly completed and executed on behalf of the holder hereof, at the principal office of the Company, accompanied by payment in full of the Warrant Price then in effect as described above. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Stock issuable upon such exercise shall be treated for all purposes as the holder of such shares of record as of the close of business on such date and in any event within ten (10) days thereafter, the Company at its expense shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of full shares of Stock issuable upon such exercise, together with cash in lieu of any fraction of a share as provided above. The shares of Stock issuable upon exercise hereof shall, upon their issuance, be fully paid and nonassessable. In the event that this Warrant is exercised in part, the Company at its expense will execute and deliver a new Warrant of like tenor exercisable for the number of shares for which this Warrant may then be exercised. (a) NET ISSUE EXERCISE. Notwithstanding any provisions herein to the contrary, in lieu of exercising this Warrant for cash, the Purchaser may elect to receive shares equal to the value (as determined below) of this Warrant or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with a properly endorsed notice of 3 exercise and notice of such election in which event the Company shall issue to Purchaser a number of shares of Stock computed using the following formula: X = Y(A-B) ------ A Where X = the number of shares of Stock to he issued to the Purchaser, Y = the number of shares of Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date of such calculation), A = the fair market value of one share of the Company's Stock at the date of such calculation), and B = the Warrant Price (as adjusted to the date of such calculation). For purposes of the above calculation, fair market value of one share of Stock shall be determined by the Company's Board of Directors in good faith; provided, however, that where there exists a public market for the Stock at the time of such exercise, fair market value shall mean the average over the preceding twenty (20) trading days (or such fewer number of days as such public market has existed) of the mean of the high closing bid and asked prices on the over-the- counter market as reported by NASDAQ, or if then traded on a national securities exchange or the NASDAQ National Market, the average over the preceding twenty (20) trading days (or such fewer number of days as the Stock has been so traded) of the mean of the high and low prices on the principal national securities exchange or the National Market on which it is so traded. 7. TERM OF WARRANT. This Warrant expires and shall no longer be exercisable as of 11:59 p.m. Pacific Standard Time, December 31, 1997 and shall be void thereafter. 8. CERTIFICATE OF ADJUSTMENT. Whenever the Warrant Price or number or type of securities unissuable upon exercise of this Warrant is adjusted, as herein provided, the Company shall promptly deliver to the record holder of this Warrant a certificate of an officer of the Company setting forth the nature of such adjustment and a brief statement of the facts requiring such adjustment. 9. TRANSFER OF WARRANT. This Warrant may be freely transferred or assigned by the Purchaser in whole or in part, subject to compliance with all federal and state securities laws by the transferor and the transferee. 10. REPLACEMENT OF WARRANTS. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 11. COMPLIANCE WITH SECURITIES LAWS. The Purchaser of this Warrant, by acceptance hereof, acknowledges that this Warrant and the shares of Common Stock to be issued upon exercise hereof are being acquired solely for the Purchaser's own account and not as a nominee for any other party and for investment and that the Purchaser will not offer sell or otherwise dispose of this Warrant or any shares of Common Stock to be issued upon exercise 4 hereof except under circumstances that will not result in a violation of the Securities Act of 1933, as amended (the "Act"), or any state securities laws. Upon exercise of this Warrant, the Purchaser shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the Shares of Common Stock so purchased are being acquired solely for the Purchaser's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale. This warrant and all shares of Common Stock issued upon exercise hereof shall be stamped or imprinted with a legend in substantially the following form (in addition to any legend required by state securities laws): THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES AND ANY SECURITIES OR SHARES ISSUED HEREUNDER OF THEREUNDER MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE SECURITIES AND RESTRICTING THEIR TRANSFER OF SALE MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD HEREOF TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL EXECUTIvE OFFICES OF THE COMPANY. 5 12. MISCELLANEOUS. This Warrant shall be governed by the laws of the State of California. The headings in this Warrant are for purposes of convenience and reference only, and shall not be deemed to constitute a part hereof. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally but only be an instrument in writing signed by the Company and the registered holder hereof. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, to the address furnished to the Company in writing by the last holder of this Warrant who shall have furnished an address to the Company in writing. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provisions. ISSUED this 30th day of December, 1995 U.S. MEDICAL INSTRUMENTS, INC. By: /s/ Matthew S. Mazur ------------------------------ Matthew S. Mazur, Chairman EX-4.5 9 EXHIBIT 4.5 1 EXHIBIT 4.5 WARRANT TO PURCHASE 50,000 SHARES OF COMMON STOCK OF U.S. MEDICAL INSTRUMENTS, INC. 1. NUMBER AND PRICE OF SHARES SUBJECT TO WARRANT. Subject to the terms and conditions herein set forth, George Schapiro (the "Purchaser") is entitled to purchase from the Company, at any time until August 13, 1999, Fifty Thousand (50,000) shares (which number of shares is subject to adjustment as described below) of fully paid and non assessable Common Stock ("Common Stock") of the Company upon surrender hereof at the principal office of the Company and at the election of the holder hereof, upon either payment of the purchase price at said office in cash or by check or the cancellation of any present or future indebtedness from the Company to the holder hereof in a dollar amount equal to the purchase price of the Common Stock for which the consideration is being given. Subject to adjustment as hereinafter provided, the purchase price of one share of Common Stock (or such securities as may be substituted for one share of Common Stock pursuant to the provisions hereinafter set forth), referred to herein as the "Warrant Price", is $3.50. The warrant shall be exercisable as to 50% immediately, and the remaining 50% monthly over the three years. so long as the Consultant Agreement remains effective. 2. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number and kind of securities issuable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) Adjustment for Dividends in Stock or Other Securities or Property. In case at any time or from time to time on or after the date hereof the holders of the Common Stock of the Company (or any shares of stock or other securities at the time receivable upon the exercise of this Warrant) shall have received, or, on or after the record date fixed from the determination of eligible shareholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash) of the Company by way of dividend then and in each case, the holder of this Warrant shall, upon the exercise hereof, be entitled to receive, in addition to the number of shares of Common Stock receivable thereupon. and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities of r property (other than cash) of the Company which such holder would hold on the date of such exercise had it been the holder of record of such Common Stock on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock available by it as aforesaid during such period. giving effect to all adjustments called for during such period by paragraphs (b) and (c) of this paragraph 2. (b) Adjustment for Reclassification, Reorganization or Merger. In case of any reclassification or change of the outstanding securities of the Company or of any reorganization of the Company (or any other corporation the stock or securities of which are at the time receivable upon the exercise of this Warrant) or any similar corporate reorganization on or after the date hereof, then and in each such case the holder of this Warrant, upon the exercise hereof at any time after the consummation of such reclassification, change, reorganization, merger or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which such holder would have been entitled upon such consummation if such holder 2 had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in paragraphs (a) and (c); and in each such case, the terms of this paragraph 2 shall be applicable to the shares of stock or other securities properly receivable upon the exercise of this Warrant after such consummation. (c) Stock Splits and Reverse Stock Splits. If at any time on or after the date hereof the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Warrant Price in effect immediately prior to such subdivision shall thereby be proportionately reduced and the number of shares receivable upon exercise of the Warrant shall thereby be proportionately increased; and, conversely, if at any time on or after the date hereof the outstanding number of shares of Common Stock shall be combined into a smaller number of shares, the Warrant Price in effect immediately prior to such combination shall thereby be proportionately increased and the number of shares receivable upon exercise of Warrant shall thereby be proportionately decreased. (d) Conversion or Redemption of Common Stock. If at the time of any exercise of this Warrant there are no other shares of Common Stock outstanding (such shares having been converted or redeemed), this Warrant shall be exercisable for Common Stock instead of Common Stock in the same amounts. for the same prices and on the same terms, and all references herein to "Common Stock" shall be changed to refer to "Common Stock." 3. NO FRACTIONAL SHARES. No fractional shares of Common Stock will be issued in connection with any subscription hereunder. In lieu of any fractional shares which would otherwise be issuable. the Company shall pay cash equal to the product of such fraction multiplied by the fair market value of one share of Common Stock on the date of exercise, as determined in good faith by the Company's Board of Directors. 4. NO SHAREHOLDER RIGHTS. This Warrant shall not entitle its holder to any of the rights of a shareholder of the Company. 5. RESERVATION OF STOCK. The Company covenants that during the period this Warrant is exercisable, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the exercise of this Warrant. The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant. 6. EXERCISE OF WARRANT. This Warrant may be exercised by the holder hereof, in whole or in part, by the surrender of this Warrant and the Notice of Exercise attached hereto as Exhibit A duly completed and executed on behalf of the holder hereof, at the principal office of the Company, accompanied by payment in full of the Warrant Price then in effect as described above. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As promptly as practicable on or after such date and in any event within ten (10) days thereafter, the Company at its expense shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of full shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share as provided above. The shares of Common Stock issuable upon exercise 3 hereof shall, upon their issuance, be fully paid and non assessable. In the event that this Warrant is exercised in part, the Company at its expense will execute and deliver a new Warrant of like tenor exercisable for the number of shares for which this Warrant may then be exercised. (a) NET ISSUE EXERCISE. Notwithstanding any provisions herein to the contrary, in lieu of exercising this Warrant for cash, the Purchaser may elect to receive shares equal to the value (as determined below) of this Warrant or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with a properly endorsed notice of exercise and notice of such election in which event the Company shall issue to Purchaser a number of shares of Stock computed using the following formula: X = Y(A-B) ------ A Where X = the number of shares of Stock to be issued to the Purchaser, Y = the number of shares of Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date of such calculation), A = the fair market value of one share of the Company's Stock at the date of such calculation), and B = the Warrant Price (as adjusted to the date of such calculation). For purposes of the above calculation, fair market value of one share of Stock shall be determined by the Company's Board of Directors in good faith; provided however, that where there exists a public market for the Stock at the time of such exercise, fair market value shall mean the average over the preceding twenty (20) trading days (or such fewer number of days as such public market has existed) of the mean of the high closing bid and asked prices on the over-the-counter market as reported by NASDAQ, or if then traded on a national securities exchange or the NASDAQ National Market, the average over the preceding twenty (20) trading days (or such fewer number of days as the Stock has been so traded) of the mean of the high and low prices on the principal national securities exchange or the National Market on which it is so traded. 7. CERTIFICATE OF ADJUSTMENT. Whenever the Warrant Price or number or type of securities issuable upon exercise of this Warrant is adjusted, as herein provided, the Company shall promptly deliver to the record holder of this Warrant a certificate of an officer of the Company setting forth the nature of such adjustment and a brief statement of the facts requiring such adjustment. 8. TRANSFER OF WARRANT. This Warrant may be freely transferred or assigned by the Purchaser in whole or in part, subject to compliance with all federal and state securities laws by the transferor and the transferee. 9. REPLACEMENT OF WARRANTS. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, 4 on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 10. MISCELLANEOUS. This Warrant shall be governed by the laws of the State of California. The heading in this Warrant are for purposes of convenience and reference only, and shall not be deemed to constitute a part hereof. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally but only be an instrument m writing signed by the Company and the registered holder hereof. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, to the address furnished to the Company in writing by the last holder of this Warrant who shall have furnished an address to the Company in writing. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provisions. 11. TERMINATION. This Warrant (and the right to purchase securities upon exercise hereof) shall terminate on November 13, 1999. ISSUED this 13 day of August, 1996 U.S. MEDICAL INSTRUMENTS, INC. By: _________________________ Title: _________________________ 5 EXHIBIT A NOTICE OF INTENT TO EXERCISE (To be signed only upon exercise of Warrant) To: U.S. MEDICAL INSTRUMENTS The undersigned, the Holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, _________________ ( ) shares of Common Stock of U.S. Medical Instruments, Inc. and herewith makes payment of__________________________ ($) thereof, and requests that the certificates for such shares be issued in the name of, and delivered to ______________ whose address is _____________________________________________________________. The undersigned represents that it is acquiring such Common Stock for its own account for investment and not with a view to or for sale in connection with any distribution thereof (subject, however, to any requirement of law that the disposition thereof shall at all times by within its control). DATED: _____________ _____________________________ By: Address: _____________________________ _____________________________ _____________________________ EX-4.6 10 EXHIBIT 4.6 1 EXHIBIT 4.6 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT TO PURCHASE 223,000 SHARES OF COMMON STOCK OF U.S. MEDICAL INSTRUMENTS, INC. 1. NUMBER AND PRICE OF SHARES SUBJECT TO WARRANT. Subject to the terms and conditions herein set forth, Robert C. Siegel and Doris Siegel UDT dated August 19, 1976 wherein Robert Siegel and Doris Siegel are trustees, or any successor thereunder (the "Purchaser") is entitled to purchase from U.S. Medical Instruments, Inc., a California Corporation (the "Company"), at any time for the period of five (5) years from the date of the First Claim, Two Hundred Twenty Three Thousand (223,000) shares (which number of shares is subject to adjustment as described below) of fully paid and non assessable Common Stock ("Common Stock") of the Company upon surrender hereof at the principal office of the Company and, at the election of the holder hereof, upon either payment of the purchase price at said office in cash or by check or the cancellation of any present or future indebtedness from the Company to the holder in a First Claim equal to the purchase price of the Common Stock for which the consideration is being given. Subject to adjustment as hereinafter provided, the purchase price of one share of Common Stock (or such securities as may be substituted for one share of Common Stock pursuant to the provisions hereinafter set forth), shall be $8.00. The purchase price of one share of Common Stock (or such securities as may be substituted for one share of Common Stock pursuant to the provisions hereinafter set forth) payable from time to time upon the exercise of this Warrant. 2. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number and kind of securities issuable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) Adjustment for Dividends in Stock or Other Securities or Property. In case at any time or from time to time on or after the date hereof the holders of the Common Stock of the Company (or any shares of stock or other securities at the time receivable upon the exercise of this Warrant) shall have received, or, on or after the record date fixed from the determination of eligible shareholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash) of the Company by way of dividend, then and in each case, the holder of this Warrant shall, upon the exercise hereof, be entitled to receive, in addition to the number of shares of Common Stock receivable thereupon, and without payment of any additional consideration therefor, the First Claim Holder of such other or additional stock or other securities or property (other than cash) of the Company which such holder would hold on the date of such exercise had it been the holder of record of such Common Stock on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock available by it as aforesaid during such period, giving effect to all adjustments called for during such period by paragraphs (b) and (c) of this paragraph 2. (b) Adjustment for Reclassification, Reorganization or Merger. In case of any reclassification or change of the outstanding securities of the Company or of any reorganization of the Company (or any other corporation the stock or securities of which are at the 1 2 time receivable upon the exercise of this Warrant) or any similar corporate reorganization on or after the date hereof, then and in each such case the holder of this Warrant, upon the exercise hereof at any time after the consummation of such reclassification, change, reorganization, merger or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which such holder would have been entitled upon such consummation if such holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in paragraphs (a) and (c); and in each such case, the terms of this paragraph 2 shall be applicable to the shares of stock or other securities properly receivable upon the exercise of this Warrant after such consummation. (c) Stock Splits and Reverse Stock Splits. If at any time on or after the date hereof the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Warrant Price in effect immediately prior to such subdivision shall thereby be proportionately reduced and the number of shares receivable upon exercise of the Warrant shall thereby be proportionately increased; and, conversely, if at any time on or after the date hereof the outstanding number of shares of Common Stock shall be combined into a smaller number of shares, the Warrant Price in effect immediately prior to such combination shall thereby be proportionately increased and the number of shares receivable upon exercise of Warrant shall thereby be proportionately decreased. (d) Conversion or Redemption of Common Stock. If at the time of any exercise of this Warrant there are no other shares of Common Stock outstanding (such shares having been converted or redeemed), this Warrant shall be exercisable for Common Stock, for the same prices and on the same terms, and all references herein to "Common Stock" shall be changed to refer to "Common Stock." 3. FRACTIONAL SHARES. Fractional shares of Common Stock will be issued in connection with any subscription hereunder. In lieu of any fractional shares which would otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the fair market value of one share of Common Stock on the date of exercise, as determined in good faith by the Company's Board of Directors. 4. NO SHAREHOLDER RIGHTS. This Warrant shall not entitle its holder to any of the rights of a shareholder of the Company. 5. RESERVATION OF STOCK. The Company covenants that during the period this Warrant is exercisable, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the exercise of this Warrant. The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant. 6. EXERCISE OF WARRANT. This Warrant may be exercised by the holder hereof, in whole or in part, by the surrender of this Warrant and the Notice of Exercise attached hereto as Exhibit A duly completed and executed on behalf of the holder hereof, at the principal office of the Company, accompanied by payment in full of the Warrant Price then in effect as described above. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As promptly as practicable on or after such date and in any event within ten (10) days thereafter, the Company at its expense shall 2 3 issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of full shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share as provided above. The shares of Common Stock issuable upon exercise hereof shall, upon their issuance, be fully paid and non assessable. In the event that this Warrant is exercised in part, the Company at its expense will execute and deliver a new Warrant of like tenor exercisable for the number of shares for which this Warrant may then be exercised. (a) NET ISSUE EXERCISE. Notwithstanding any provisions herein to the contrary, in lieu of exercising this Warrant for cash, the Purchaser may elect to receive shares equal to the value (as determined below) of this Warrant or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with a properly endorsed notice of exercise and notice of such election in which event the Company shall issue to Purchaser a number of shares of Stock computed using the following formula: X = Y(A-B) ------ A Where X = the number of shares of Stock to be issued to the Purchaser, Y = the number of shares of Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date of such calculation), A = the fair market value of one share of the Company's Stock at the date of such calculation), and B = the Warrant Price (as adjusted to the date of such calculation). For purposes of the above calculation, fair market value of one share of Stock shall be determined by the Company's Board of Directors in good faith; provided, however, that where there exists a public market for the Stock at the time of such exercise, fair market value shall mean the average over the preceding twenty (20) trading days (or such fewer number of days as such public market has existed) of the mean of the high closing bid and asked prices on the over-the- counter market as reported by NASDAQ, or if then traded on a national securities exchange or the NASDAQ National Market, the average over the preceding twenty (20) trading days (or such fewer number of days as the Stock has been so traded) of the mean of the high and low prices on the principal national securities exchange or the National Market on which it is so traded. 7. CERTIFICATE OF ADJUSTMENT. Whenever the Warrant Price or number or type of securities issuable upon exercise of this Warrant is adjusted, as herein provided, the Company shall promptly deliver to the record holder of this Warrant a certificate of an officer of the Company setting forth the nature of such adjustment and a brief statement of the facts requiring such adjustment. 8. TRANSFER OF WARRANT. This Warrant may be freely transferred or assigned by the Purchaser in whole or in part, subject to compliance with all federal and state securities laws by the transferor and the transferee. 9. REPLACEMENT OF WARRANTS. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant, on delivery of an indemnity agreement or security 3 4 reasonably satisfactory in form from the Holder to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 10. MISCELLANEOUS. This Warrant shall be governed by the laws of the State of California. The heading in this Warrant arc for purposes of convenience and reference only, and shall not be deemed to constitute a part hereof. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally but only be an instrument in writing signed by the Company and the registered holder hereof. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, to the address furnished to the Company in writing by the last holder of this Warrant who shall have furnished an address to the Company in writing. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provisions. 11. TERMINATION. This Warrant (and the right to purchase securities upon exercise hereof) shall terminate five (5) years from the date this agreement is executed. ISSUED this 6th day of August, 1996 U.S. MEDICAL INSTRUMENTS, INC. By: /s/ Matthew S. Mazur ---------------------------------- Matthew S. Mazur, Chairman & Chief Executive Officer 4 5 EXHIBIT C1 NOTICE OF INTENT TO EXERCISE (To be signed only upon exercise of Warrant) To: U.S. MEDICAL INSTRUMENTS The undersigned, the Holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, ______________ ( ) shares of Common Stock of U.S. Medical Instruments, Inc. and herewith makes payment of ________________________ ($ ) thereof, and requests that the certificates for such shares be issued in the name of, and delivered to _____________ whose address is ______________________. The undersigned represents that it is acquiring such Common Stock for its own account for investment and not with a view to or for sale in connection with any distribution thereof (subject, however, to any requirement of law that the disposition thereof shall at all times by within its control). DATED: _____________ __________________________________ Robert Siegel Address: __________________________________ __________________________________ __________________________________ 5 EX-4.10 11 EXHIBIT 4.10 1 EXHIBIT 4.10 AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT THIS AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT is made and entered into as of January 31, 1995 by and among U.S. Medical Instruments, Inc., a California corporation (the "Company"), The Medicine Partners ("Medicine Partners") and G.C. Investments, L.L.C. ("G.C. Investments") (together, the "Purchasers"), who are purchasers of the Company's Series E Preferred Stock and Series B Preferred Stock Warrants (the "Purchased Securities"), and Matthew S. Mazur ("Mazur"). RECITALS: WHEREAS, effective December 16, 1994, Medicine Partners purchased an aggregate of 533,334 shares of the Company's Series E Preferred Stock and, in connection with such issuance, the Company, Mazur and Medicine Partners entered into an Investor Rights Agreement dated as of December 16, 1994 providing substantially identical rights to those set forth herein (the "Original Investor Rights Agreement"); and WHEREAS, prior to the date hereof, G.C. Investments purchased and was the holder of 250,000 shares of the Company's Series E Preferred; and WHEREAS, as of the date hereof, G.C. Investments has acquired in a private non-issuer transaction an aggregate of 56,664 shares of the Company's Series E Preferred Stock from certain of the Company's Series E Preferred Stockholders, such that, following such transaction and the transaction described in the succeeding paragraph, G.C. Investments will own an aggregate of 533,334 shares of the Company's Series E Preferred Stock; and WHEREAS, as of the effective date of this Agreement, G.C. Investments is purchasing an additional 226,670 shares of the Company's Series E Preferred Stock, and as a condition to such additional investment, G.C. Investments has requested that (i) the Company extend to it a right of first refusal and certain other rights as set forth below and (ii) Mazur extend to it certain rights of co-sale as set forth below; and WHEREAS, the Company, Mazur and Medicine Partners are willing to amend and restate the Original Investor Rights Agreement to add G.C. Investments as a party and to extend substantially identical rights as set forth in the Original Investor Rights Agreement, to G.C. Investments; NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement and in the Stock and Warrant Purchase Agreement of even date herewith among the Company and the Purchaser (the "Purchase Agreement"), the parties mutually agree as follows: I GENERAL -1- 2 A. DEFINITIONS. As used herein: 1. The term "Securities Act" shall mean the Securities Act of 1933, as amended. 2. The term "SEC" or "Commission" means the Securities and Exchange Commission. 3. The term "Co-Sale Shares" shall mean shares of the Company's Equity Securities now owned or subsequently acquired by Mazur. 4. The term "Common Stock" shall mean the Company's common stock and shares of Common Stock issued or issuable upon conversion of the Company's outstanding preferred stock. 5. "Equity Securities". The term "Equity Securities" shall mean (i) Common Stock, rights, options or warrants to purchase Common Stock; (ii) any other instrument convertible into Common Stock; (iii) any security convertible into or exchangeable for any of the foregoing. 6. The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration or ordering of the effectiveness of such registration statement. 7. For the purposes hereof, the term "Registrable Securities" means shares of (i) any and all Common Stock of the Company issued or issuable upon conversion of shares of the Series B Preferred Stock of the Company issued to the Purchasers as of the date hereof; (ii) any and all Common Stock issued or issuable upon conversion of the Series E Preferred Stock issued upon exercise of the Warrants; (iii) stock issued with respect to or in any exchange for or in replacement of stock included in subparagraph (i) or (ii); (iv) stock issued in respect of the stock referred to in (i), (ii), or (iii) above as a result of a stock split, stock dividend, recapitalization or similar event or the like. 8. The term "Holder" means the Purchasers. 9. The term "Form S-3" means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. 10. The term "Warrants" means the Series E Preferred Stock Warrants of the Company issued to or held by the Purchasers as of the date hereof. II RIGHT OF FIRST REFUSAL -2- 3 If, at any time prior to the expiration of the period set forth in Article V(I) below, the company should desire to issue in any transaction not registered under the Securities Act, any Equity Securities, it shall give the Purchasers and Mazur (together, the Purchasers and Mazur shall be referred to in this Section II as "Shareholders") a first right of refusal to purchase such Shareholder's pro rata share of all of such offered Equity Securities on the same terms as the Company is willing to sell such Equity Securities to any other person. The Shareholder's pro rata share of the Equity Securities shall be equal to the percentage that the Equity Securities of the Company held by the Shareholder on an as-converted basis on the date of the Company's written notification referred to in subparagraph (A) below, bears to all outstanding Equity Securities of the Company on the date of such written notification. A. Notices. Prior to any sale or issuance by the Company of any Equity Securities, the company shall notify each Shareholder, in writing, of its bona fide intention to sell and issue such Equity Securities, setting forth any material terms under which it proposes to make such sale. Within fifteen (15) days after receipt of such notice, each Shareholder shall notify the Company whether the Shareholder exercises its option and elects to purchase the Shareholder's pro rata share (or any part hereof) of the Equity Securities so offered. B. Procedure. If any Shareholder has failed to exercise its option to purchase all of its pro rata portion of the Equity Securities upon the terms and conditions set forth in Subsection (A) notice, the Company may, during the period of ninety (90) days following the expiration of such option period, sell and issue such securities as to which such Shareholder has not exercised its option to any other person upon the same terms and conditions as those set forth in the notice to the Shareholders. In the event the Company has not sold the Equity Securities within said ninety (90) day period, the Company shall not thereafter issue or sell any Equity Securities without first offering such securities to the Shareholders in the manner provided above. C. Closing. If a Shareholder gives the Company notice that it desires to purchase any of the Equity Securities offered by the Company, payment for the Equity Securities shall be by check, or wire transfer, against delivery of the securities at the executive offices of the Company within ten (10) days after giving the Company such notice, or, if later, the closing date for the sale of such Equity Securities to third parties. The Company shall take all such action as may be required by any regulatory authority in connection with the exercise by the Shareholder of the right to purchase Equity Securities as set forth in this Section II. D. Exceptions. The right of first refusal contained in this Section II shall not apply to (i) the issuance by the Company of Equity Securities exclusively to employees or directors of, or consultants to the Company pursuant to the approval of the Board of Directors, (ii) the issuance of Common Stock of the Company upon conversion of Preferred Stock, (iii) the issuance of any Equity Securities in connection with any borrowings, direct or indirect, from financial institutions by the Company, whether or not presently authorized, (iv) the issuance of any Equity Securities in connection with leases by the Company of equipment, (v) Equity Securities issued to vendors or customers of the Company if such issuance is approved by the Board of Directors; or (vi) any Equity Securities issued in connection with an acquisition or SEC Rule 145 transaction. -3- 4 E. Assignment. A Shareholder's right to purchase any Equity Securities pursuant to this Section II may be assigned by the Shareholder to an affiliate of the Shareholder or the purchaser or substantially all of the assets or securities of the Shareholder. For the purposes of this subparagraph (E), an "affiliate" shall mean any partner or shareholder of the Shareholder, any person or entity that director or indirectly through one or more intermediaries controls or is controlled by or is under common control with a Shareholder. III RIGHT OF CO-SALE A. Right of Co-Sale. If Mazur proposes to sell or transfer any Co-Sale in one or more transactions which will result in the transfer of 200,000 or more shares of Equity Securities by Mazur, then Mazur shall promptly give written notice (the "Co-Sale Notice") to the Company and to the Purchasers at least 20 days prior to the closing of such sale or transfer. The Co-Sale Notice shall describe in reasonable detail the proposed sale or transfer, including the number of Co-Sale Shares to be sold or transferred (the "Noticed Co-Sale Shares"), the nature of such sale or transfer, the consideration to be paid, and the name and address of each prospective purchaser or transferee. In the event that the sale or transfer is being made pursuant to Subsection B below, the Co-Sale Notice shall state under which portion of such Subsection the sale or transfer is being made. 1. Each Purchaser shall have the right, exercisable upon written notice to Mazur within 15 days of the date of the Co-Sale Notice, to participate in such sale on the same terms and conditions specified in the Co-Sale Notice. 2. Each Purchaser may sell all or any part of that number of shares of Common Stock equal to the product obtained by multiplying (i) the aggregate number of Noticed Co-Sale Shares covered by the Co-Sale Notice, by (ii) a fraction the numerator of which is the number of shares of Common Stock owned by the Purchaser at the time of the sale or transfer and the denominator of which is the total number of shares of Common Stock owned by Mazur and the Purchasers at the time of the sale or transfer. 3. A purchaser electing to exercise the co-sale right provided in this section shall effect its participation in the sale by promptly delivering to Mazur for transfer to the prospective purchaser one or more certificates, properly endorsed for transfer, which represent: a. the type and number of shares of Common Stock which the Purchaser elects to sell; or b. that number of shares of Preferred Stock which is at such time convertible into the number of shares of Common Stock which the Purchaser elects to sell; provided, however, that if the prospective purchaser objects to the delivery of Preferred Stock in lieu of Common Stock, the Purchaser shall convert such Preferred Stock into Common Stock and deliver Common Stock as provided in subsection 3(a) above. The Company agrees to make any such conversion concurrent with the actual transfer of such shares to the purchaser. -4- 5 4. If the Purchasers do not participate in the sale of the Noticed Co-Sale Shares, Mazur may, not later than ninety (90) days following delivery to the Company and the Purchasers of the Co-Sale Notice, enter into an agreement providing for the closing of the transfer of the Noticed Co-Sale Shares within sixty (60) days of such agreement on terms and conditions not more favorable to the transferor than those described in the Co-Sale Notice. B. Exempt Transfers. Notwithstanding the foregoing, the provisions of this Article III shall not apply to (i) any transfer to the ancestors, descendants or spouse or to trusts for the benefit of such persons or Mazur; or (ii) any bona fide gift; provided that the pledgee, transferee or donee shall furnish the Purchasers with a written agreement to be bound by and comply with all provisions of this Article III. Such transferred shares remain "Co-Sale Shares" hereunder, and such pledgee, transferee or donee shall be treated equivalently to Mazur for purposes of this Agreement. In addition, the provisions of this Article III shall not apply to the sale of any Co-Sale Shares (i) to the public pursuant to a registration statement filed with, and declared effective by, the SEC; (ii) if prior to such sale Mazur (together with all of his transferees) held less than 5% of the Company's outstanding shares; or (iii) if prior to such sale Mazur (A) is no longer an officer or director of the Company or its affiliates, and (B) holds less than 50% of the outstanding securities of the Company, on a fully-diluted, as-converted-to Common Stock basis. C. Prohibited Transfers. In the event Mazur should sell any Co-Sale Shares in contravention of the co-sale rights of the Purchasers under this Agreement (a "Prohibited Transfer"), the Purchasers, in addition to such other remedies as may be available at law, in equity or hereunder, shall have the put option provided below, and Mazur shall be bound by the applicable provisions of such option. 1. In the event of a Prohibited Transfer, each Purchaser shall have the right to sell to Mazur the type and number of shares of Common Stock equal to the number of shares such Purchaser would have been entitled to transfer to the purchaser had the Prohibited Transfer been effected pursuant to and in compliance with the terms hereof. The price per share at which the shares are to be sold to Mazur shall be equal to the price per share paid by the purchaser to Mazur in the Prohibited Transfer. Within 90 days after the later of the dates on which the Purchaser (A) received notice of the Prohibited Transfer or (B) otherwise became aware of the Prohibited Transfer, the Purchaser shall, if exercising the option created hereby, deliver to Mazur the certificate or certificates representing shares to be sold, each certificate to be properly endorsed for transfer. Mazur shall, upon receipt of the certificate or certificates for the shares to be sold by the Purchaser pursuant to this subsection C, pay the aggregate purchase price therefor in cash or by other means acceptable to the Purchaser. 2. Notwithstanding the foregoing, any attempt by Mazur to transfer Co-Sale Shares in violation of this Agreement shall be void and the Company agrees it will not effect such a transfer nor will it treat any alleged transferee as the holder of such shares without the written consent of the Purchaser. -5- 6 D. Legend. Each certificate representing shares of stock now owned by Mazur or issued to any person in connection with a transaction pursuant to Article III(B) hereof shall be endorsed with the following legend: THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN INVESTOR RIGHTS AGREEMENT BY AND BETWEEN THE PURCHASER, THE COMPANY AND CERTAIN HOLDERS OF STOCK OF THE COMPANY. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY. IV S-3 REGISTRATION RIGHT A. Form S-3. After the Company has qualified for the use of Form S-3, or its successor form, the Holders of at least twenty percent (20%) of the outstanding Registrable Securities ("Initiating Holders") shall have the right to request one registration on Form S-3 (such request shall be in writing and shall state the number of shares of Registrable Securities to be disposed of (the "Offered Registrable Securities") and the intended method of disposition of shares by such Holder), subject only to the following: 1. The Company shall not be required to effect more than one such registration, except that the Company shall effect one additional Form S-3 registration at the request of the Holder, pursuant to all the terms and conditions of this Section IV, in the event that during the effective period of the first registration statement filed pursuant to this Section IV, the Holder has not sold at least 90% of the Offered Registrable Securities. Such additional S-3 registration shall cover only the Offered Registrable Securities not sold pursuant to the first registration under this Section. 2. The Company shall not be required to effect a registration unless the Initiating Holder seeks to register at least 50% of the Registrable Securities held by such Initiating Holder as of the date of this Agreement. The Company shall promptly give written notice to all Holders of Registrable Securities of the receipt of a request for registration pursuant to this section and shall provide a reasonable opportunity for other Holders to participate in the registration. The Company will use its best efforts to effect promptly the registration of all shares of Registrable Securities on Form S-3 to the extent requested by the Holder thereof for purposes of disposition; provided, however, that if the Company shall furnish to such Holders a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgement of the Board of Directors it would be seriously detrimental to the Company for such registration statement to be filed at the date filing would be required and it is therefore essential to defer the filing of such registration statement, the Company shall be entitled to delay the filing of such registration statement not more than once for an additional period of up to sixty (60) days. -6- 7 B. Expenses of Registration. All expenses incurred in connection with any registration, qualification or compliance pursuant to this Agreement, including without limitation, all registration, filing and qualification fees, printing expenses, fees and disbursements of counsel for the Company and expenses of any special audits incidental to or required by such registration, shall be borne by the Company except as follows: 1. The Company shall not be required to pay for expenses of any registration proceeding begun pursuant to this Section, the request for which has been subsequently withdrawn by the Initiating Holders, in which case, such expenses shall be borne by the Holders requesting withdrawal. Notwithstanding the foregoing, if at the time of such withdrawal (i) the Holder has learned of a material adverse change in the condition, business or prospects of the Company from that known to the Holder at the time of its request, and (ii) the Company knew or had reason to know of the likelihood of such material adverse change at the time of its request and did not inform the Holder thereof, then the Company shall be required to pay such expenses. 2. The Company shall pay the reasonable fees of a single counsel acting on behalf of all selling Holders. 3. The Company shall not be required to pay underwriters' fees, discounts or commissions relating to the Registrable Securities. C. Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this Agreement, the Company will keep each Holder participating therein advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense the Company will: 1. Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders offering Registrable Securities registered thereunder, keep such registration statement effective for up to one hundred eighty (180) days. 2. Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. 3. Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as it may reasonably request in order to facilitate the disposition of Registrable Securities owned by it. 4. Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as 8 shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. 5. In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each participating Holder shall also enter into and use best efforts to perform its obligations under such an agreement. 6. Notify the Holders offering securities pursuant to such Registration Statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 7. Furnish, at the request of any Holder, on the date that the securities are delivered to the underwriters for sale in connection with a registration being sold through underwriters, (i) an opinion, if any, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters and to the Holder and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holder. D. Indemnification. 1. The Company will indemnify and hold harmless each Holder, each of its officers, directors and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which such registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls any underwriter of the Registrable Securities held by or issuable to such Holder, against all claims, losses, expenses, damages and liabilities (or actions in respect thereto) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, preliminary or final prospectus, or any amendment or supplement thereto, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation or alleged violation by the Company relating to action or inaction required of the Company in connection with any rule or regulation promulgated under the Securities Act or any state securities law applicable to the Company and will reimburse each such Holder within the meaning of Section 15 of the Securities Act, each of its officers, directors and partners, and each person controlling each such Holder, each such underwriter and each person who controls any such underwriter, for -8- 9 any reasonable legal and any other expenses, as incurred, in connection with investigating, defending or settling any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company in an instrument duly executed by such Holder or underwriter specifically for use therein, and provided further that the agreement of the Company to indemnify any underwriter and any person who controls such underwriter contained herein with respect to any such preliminary prospectus shall not inure to the benefit of any underwriter, from whom the person asserting any such claim, loss, damage, liability or action purchased the stock which is the subject thereof, if at or prior to the written confirmation of the sale of such stock, a copy of the prospectus (or the prospectus as amended or supplemented) was not sent or delivered to such person, excluding the documents incorporated therein by reference, and the untrue statement or omission of a material fact contained in such preliminary prospectus was corrected in the prospectus (or the prospectus as amended or supplemented). 2. Each Holder will, if Registrable Securities held by or issuable to such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify and hold harmless the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company within the meaning of the Securities Act against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any preliminary or final prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such directors, officers, partners, persons or underwriters for any reasonable legal or any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document solely in reliance upon and in conformity with written information furnished to the Company in an instrument duly executed by such Holder specifically for use therein, and provided further that the agreement of such Holder to indemnify any underwriter and any person who controls such underwriter contained herein with respect to any such preliminary prospectus shall not inure to the benefit of any underwriter, from whom the person asserting any such claim, loss, damage, liability or action purchased the stock which is the subject thereof, if at or prior to the written confirmation of the sale of such stock, a copy of the prospectus (or the prospectus as amended or supplemented) was not sent or delivered to such person, excluding the documents incorporated therein by reference, and the untrue statement or omission of a material fact contained in such preliminary prospectus was corrected in the prospectus (or the prospectus as amended or supplemented). Notwithstanding the foregoing, in no event shall the indemnification provided by any Holder hereunder exceed the net proceeds received by such Holder for the sale of such Holder's securities pursuant to such registration. -9- 10 3. Each party entitled to indemnification under this Section ("Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought. The Indemnified Party shall promptly permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably be withheld). The Indemnified Party may participate in such defense and hire counsel at such party's own expense. The failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations hereunder, unless such failure is materially prejudicial to an Indemnifying Party's ability to defend such action. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of the Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Any Indemnified Party shall cooperate with the Indemnifying Party in the defense of any claim or litigation brought against such Indemnified Party. E. Lock-Up Provision. Upon receipt of a written request by the Company or by its underwriters, the Holders shall not sell, sell short, grant an option to buy, or otherwise dispose of shares of the Company's Common Stock or other securities (except for any such shares included in the registration) for a period of one hundred and eighty (180) days following the effective date of the initial registration of the Company's securities; provided, however, that the Holders shall have no obligation to enter into the agreement described in this Section IV(E) unless all executive officers, directors and holders of three percent (3%) or more of the outstanding voting securities of the Company and all other Holders and holders of other registration rights from the Company enter into similar agreements. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of said 180-day period. F. Information by Holder. The Holders included in any registration shall promptly furnish to the Company such information regarding such Holder or Holders and the distribution proposed by the Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to herein. G. Rule 144 Reporting. With a view to making available to Holders of Registrable Securities the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, at all times after 90 days after the effective date of the first registration filed by the Company for an offering of its securities to the general public the Company agrees to: 1. Make and keep public information available, as those terms are understood and defined in SEC Rule 144. -10- 11 2. File with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 3. So long as a Holder owns any Registrable Securities, to furnish to the Holder forthwith upon the Holder's request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the public) and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as the Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing the Holder to sell any such securities without registration. H. Transfer of Registration Rights. A Holder's rights under this Section IV may not be assigned by the Holder except that the Holder may assign such rights to a transferee of all of the Registrable Securities. No such transfer or assignment shall be effective until such transferee or assignee agrees in writing to become subject to the obligations of the transferring Holder hereunder. V WAIVER OF PRIOR RIGHT OF FIRST REFUSAL By their signatures below, Mazur and Medicine Partners waive their right of first refusal and all other rights pursuant to article II of the Original Investor Rights Agreement with respect to the issuance, as of the date of this Agreement, to G.C. Investments of 226,670 shares of the Company's Series E Preferred Stock and a Warrant to purchase 106,667 shares of the Company's Series E Preferred Stock and the shares of Series E Preferred Stock issuable upon conversion of such Warrant. VI MISCELLANEOUS A. Notices. All notices or other communications required or permitted to be delivered hereunder shall be in writing signed by the party giving the notice to the Company at 16825 Via Del Campo Court, San Diego, CA 92127, Attn: President, and to the Purchaser at the addresses set forth on the signature page of this Agreement. Any Purchaser may at any time change the address to which notice shall be mailed by giving notice of such change to the Company and to the other parties and such notice shall be deemed given when received by the other party hereto. B. Amendment. This Agreement may be amended with the written consent of the Company and the Purchasers, except that no amendment affecting Mazur shall be made to this Agreement without the prior written consent of Mazur. C. Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the matters contemplated herein. This Agreement supersedes any and all prior understandings as to the subject matter of this Agreement. Without limiting the -11- 12 generality of the foregoing, this Agreement replaces and supersedes the Original Investor Rights Agreement. D. Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the respective parties hereto, except that the Company shall not have the right to assign its rights hereunder or any interest herein, and, except as set forth in Section IV, the rights and interests of the Purchasers shall be assignable, without the consent of the Company, to any assignee. E. General. The headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. In this Agreement the singular includes the plural, the plural the singular, the masculine gender includes the neuter, masculine and feminine genders. This Agreement shall be governed by and construed under the laws of the State of California. F. Severability. If any provision of this Agreement shall be found by any court of competent jurisdiction to be invalid or unenforceable, the parties hereby waive such provision to the extent that it is found to be invalid or unenforceable. Such provision shall, to the maximum extent allowable by law, be modified by such court so that it becomes enforceable, and, as modified, shall be enforced as any other provision hereof, all the other provisions hereof continuing in full force and effect. G. Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute one and the same instrument. H. Dispute Resolution. The parties acknowledge and agree that time is of the essence in resolving any dispute that may arise in connection with this Agreement. Except as provided herein, any controversy or claim arising out of or relating to this Agreement, or the breach thereof, that cannot be resolved between the parties in a timely manner shall be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). The expenses of the arbitration, including the arbitrator's fees, expert witness fees, and attorneys' fees, may be awarded to the prevailing party, in the discretion of the arbitrator, or may be apportioned between the parties in any manner deemed appropriate by the arbitrator. Unless and until the arbitrator decides that one party is to pay for all (or a share) of such expenses, the parties shall each bear their own legal and accounting fees and costs arising in connection with enforcement of this Agreement or the Collateral Agreements. The parties shall keep confidential the decision of the arbitrator. Notwithstanding the foregoing, the parties may disclose information about such decision to persons who have a need to know, such as limited partners, directors, trustees, management employees, witnesses, experts, investors, attorneys, lenders, insurers, and others who may be affected. Once the arbitration award has become final, if the arbitration award is not promptly satisfied, then these confidentiality provisions shall no longer be applicable. Notwithstanding the foregoing, the parties will be entitled to enforce their rights under this Agreement specifically (without posting a bond or other security). The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and any party may in its sole discretion apply to any court of -12- 13 law or equity of competent jurisdiction for specific performance and/or injunctive relief in order to enforce or prevent any violation of the provisions of this Agreement. 1. Term of Agreement. Except with respect to Sections IV and V hereof, this Agreement shall terminate on the earlier of (a) the consummation by the Company of any underwritten public offering of the Company's securities in which the gross proceeds to the Company equal or exceed $15,000,000, (b) the sale of the Company (through a merger, consolidation, sale of all or substantially all of its assets or stock) or (c) the effective time of the liquidation of the Company. Section V shall terminate upon the termination of Section IV. Section IV shall terminate at such time as the Purchaser becomes eligible (or would become eligible if the Purchaser continued to hold Registrable Securities) to sell all its Registrable Securities pursuant to Rule 144(k). [REMAINDER OF PAGE INTENTIONALLY BLANK] -13- 14 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first above written. U.S. MEDICAL INSTRUMENTS, INC. a California corporation By: ------------------------------ Matthew S. Mazur, President G.C. Investments, L.L.C. By: /s/ ------------------------------ The Medicine Partners By: ------------------------------ -14- 15 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first above written. U.S. MEDICAL INSTRUMENTS, INC. a California corporation By: ------------------------------ Matthew S. Mazur, President G.C. Investments, L.L.C. By: ------------------------------ The Medicine Partners By: /s/ ------------------------------ General Partner -14- 16 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first above written. U.S. MEDICAL INSTRUMENTS, INC. a California corporation By: /s/ Matthew S. Mazur ------------------------------ Matthew S. Mazur, President G.C. Investments, L.L.C. By: ------------------------------ The Medicine Partners By: ------------------------------ -14- EX-10.1 12 EXHIBIT 10.1 1 EXHIBIT 10.1 AMENDMENT TO LICENSE AGREEMENT This Amendment to License Agreement ("Amendment") is entered into as of December 1, 1994 ("Effective Date") by and between Habley Medical Technology Corporation, a California corporation ("Habley") and U.S. Medical Instruments, Inc., a California corporation ("U.S. Medical"). RECITALS A. Habley and U.S. Medical are parties to that certain written License Agreement dated as of July 1, 1992 ("License Agreement"). Pursuant to the License Agreement, U.S. Medical obtained a license under certain Patents on the terms and conditions thereof. B. Habley and U.S. Medical wish to amend the License Agreement on the terms and conditions of this Amendment. In particular, the parties wish to provide U.S. Medical with the opportunity to obtain a paid up license under the Patents pursuant to the License Agreement on the occurrence of certain terms and conditions as set forth in this Amendment. C. As used in this Amendment, all defined terms are as set forth in the License Agreement. D. Except as expressly set forth herein, all terms and conditions of the License Agreement remain in full force and effect. 2 NOW, THEREFORE, for valuable consideration and the covenants and conditions herein, it is hereby mutually agreed: 1. Royalty on Sales. Paragraph 4.1 of the License Agreement is amended and supplemented with the following: The following shall apply to all sales of the Products made on or after the Effective Date of this Amendment: U.S. Medical shall pay to Habley a royalty in an amount equal to six percent (6%) of the Net Selling Price with respect to all sales of the Product(s) in countries with patent protection and Three percent (3%) of the Net Selling Price with respect to all sales of the Product in countries without patent protection where the Product(s) incorporate the Technical Data and/or Trade Styles. If any Product is sold in a package, bundle, set or otherwise together with, or as part of, any product or device not subject to royalty pursuant to this Agreement, the royalty due from U.S. Medical to Habley shall be based upon the usual Net Selling Price received upon comparable sales for the Products subject to this Agreement when sold alone and not the total price of the package, set or bundled product. 2. Minimum Royalty. Paragraph 4.2 of the License Agreement is amended and supplemented with the following: The minimum royalty to be paid by U.S. Medical to Habley with respect to sales of all Products in the Territory, exclusive of any Additional Territories, shall be Two Hundred Fifty Thousand U.S. Dollars ($250,000) for the contract calendar year commencing July 1, 1994 ("Second Period") and Three Hundred Thousand U.S. 2 3 Dollars ($300,000) for the contract calendar year commencing July 1, 1995 and for each contract calendar year thereafter during the term of this Agreement. 3. Conditions Precedent to Paid-Up License. U.S. Medical shall have a paid up, royalty free license for the Patents in the Field pursuant to and on the terms and conditions of the License Agreement, as amended by this Agreement, in the event that U.S. Medical is not in breach of the License Agreement (as Amended by this Amendment) and that U.S. Medical makes each of the following payments: 3.1 On or before December 31, 1994, U.S. Medical shall pay to Habley the sum of Seven Hundred Fifty Thousand Dollars ($750,000). 3.2 On or before June 30, 1995, U.S. Medical shall pay to Habley the sum of Two Hundred Twelve Thousand Five Hundred U.S. Dollars ($212,500). 3.3 On or before December 31, 1995, U.S. Medical shall pay to Habley the sum of Two Hundred Twelve Thousand Five Hundred U.S. Dollars ($212,500). 3.4 On or before June 30, 1996, U.S. Medical shall pay to Habley the sum of Two Hundred Twelve Thousand Five Hundred U.S. Dollars ($212,500). 3.5 On or before December 31, 1996, U.S. Medical shall pay to Habley the sum of Two Hundred Twelve Thousand Five Hundred U.S. Dollars ($212,500). Time is expressly declared to be of the essence with respect to each payment. In the event any payment described in this paragraph 3 is not made when due, U.S. 3 4 Medical shall have the right to cure its failure to make the payment by making the payment within 10 calendar days after written notice from Habley to U.S. Medical. If U.S. Medical fails to make any of the payments described in this Section 3 within ten (10) days after written notice to cure, U.S. Medical shall not have a paid up, royalty-free license. 4. Terms of Paid-Up License. If U.S. Medical obtains a paid-up license pursuant to paragraph 3 above, the License Agreement shall be amended as follows: 4.1 No royalties on sales shall thereafter be due pursuant to paragraph 4.1 of the License Agreement (as amended by this Amendment). 4.2 No minimum royalties shall thereafter be due pursuant to paragraph 4.2 of the License Agreement (as amended by this Amendment). 4.3 No reports shall thereafter be due pursuant to paragraphs 5.1, 5.2 and 5.3 of the License Agreement (as amended by this Amendment). 4.4 U.S. Medical shall, upon notice to Habley of the particular foreign jurisdiction involved, prosecute all foreign patent applications described in the definition of Patents in paragraph 1.0, in Habley's name, but at U.S. Medical's expense. This provision will supersede paragraphs 8.1 and 8.2 of the License Agreement. 4 5 4.5 If any of the claims in the Patents are infringed by a third party by the sale of a product within the field license of this Agreement, U.S. Medical shall have the exclusive right to institute suit under the Patents to enjoin the Infringement and for damages. Habley shall cooperate with U.S. Medical to the reasonable extent requested by U.S. Medical. U.S. Medical shall have the exclusive right to bring suit in the name of U.S. Medical as well as Habley, and to prosecute or settle the lawsuit. Habley shall have the right to be represented by legal counsel of its choice at its expense during the conduct of such infringement suit. Costs, expenses and/or damages recovered from the infringer for infringement of the licensed patents shall be used to pay U.S. Medical's expenses in prosecuting the lawsuit, and any remaining balance shall be apportioned, two thirds to U.S. Medical and one third to Habley Habley also agrees to reasonably cooperate with U.S. Medical in the defense of any patent infringement lawsuit filed by a third party against the Products defined in the License Agreement, with all out-of-pocket expenses incurred by Habley being paid by U.S. Medical within fifteen (15) days after receiving billing from Habley This provision will supersede paragraph 9 of the License Agreement. 4.6 Paragraph 2.1 of the License Agreement is amended and supplemented as follows: 2.1 License Grant. Habley hereby grants to U.S. Medical a paid up exclusive license under the Patents in the field to make, use and sell the product in the Territory. U.S. Medical shall 5 6 have the right to grant sublicenses or licenses or to sell, transfer, assign, mortgage, pledge or hypothecate, directly or indirectly, or by operation of law any rights whatsoever with respect to the License granted hereby. All sublicenses and assignees shall agree to be bound by all applicable provisions of this Agreement. This provision will supersede paragraphs 2.1, 2.2, 2.2.1, 2.2.2, 2.2.3, 2.2.4 and 2.4 of the License Agreement. 4.7 Paragraph 2.5 of the License Agreement is amended and supplemented as follows: 2.5 Limited Field of License Grant. Subject to the provisions of this paragraph, the License granted pursuant to Paragraph 2.1 is granted specifically and solely for applications within the medical field and for no other use or specification. Any manufacture, use or sale of Product(s) outside of the authorized field shall terminate this Agreement. Habley retains and shall have the non-exclusive right under the licensed patents to make, use and sell products which are not for administration or withdrawal of pharmaceuticals or other fluids by a syringe of the type generally described in claim 1 of U.S. Patent No. 4,710,170. U.S. Medical 6 7 covenants not to sue Habley and Habley's licensees (including sublicensees) and assignees under the licensed patents for making, using or selling products which are not for administration or withdrawal of pharmaceuticals or other fluids by a syringe of the type generally described in claim 1 of U.S. Patent No. 4,710,170. This provision will supersede Paragraph 2.5 of the License Agreement. 4.8 The following paragraphs of the License Agreement shall not be applicable: 7.4, 7.7, 10.0 and 16.0. 4.9 All other terms and conditions of the License Agreement shall continue in full force and effect. 5. Failure to Obtain Paid-Up License. In the event that U.S. Medical does not obtain a paid up license by complying with paragraph 3 above, from and after the date that U.S. Medical does not cure its failure to make any payment, the following provisions apply: 5.1 Habley shall keep all payments which have been made pursuant to paragraph 3 above. Such payments shall be (in part) in lieu of royalties during the period that paragraphs 4.0, 4.2.1, 4.2.2, 4.2.3, 4.2.4 and 5.1 of the License Agreement are suspended (pursuant to paragraph 6 below), but shall not otherwise 7 8 apply to or be credited against royalties, minimum royalties or any other amounts due to Habley from U.S. Medical. 5.2 All terms and conditions of the License Agreement including but not limited to paragraph 4.1 and 4.2 (as amended by paragraphs 1 and 2 above) and all rights and remedies of Habley for any breach or violation of the License Agreement shall remain in full force and effect. U.S. Medical's obligation to pay royalties shall be for sales on or after the date of the last payment to Habley pursuant to paragraph 3 above. U.S. Medical's obligation to pay minimum royalties shall be for the period commencing on the date of the last payment to Habley pursuant to paragraph 3 above. However, if U.S. Medical fails to make the payment due December 31, 1994, after the notice and ten (10) day cure period as set forth in paragraph 3 above, all royalties shall be due in accordance with paragraphs 4.1 and 4.2 as amended by paragraphs 1 and 2 above for the entire Second Period and thereafter. 6. Suspension of Certain Provisions. The following provisions in this paragraph 6 shall apply beginning on the Effective Date of this Amendment and for so long as U.S. Medical makes all timely payments to Habley pursuant to paragraph 3 above. At such time as U.S. Medical obtains a paid-up license pursuant to paragraph 3 above, the provisions of this paragraph 6 shall be superseded by the provisions of paragraph 4. If U.S. Medical does not obtain a paid up license pursuant to paragraph 3 above, the provisions of this paragraph 6 shall be superseded by the provisions of paragraph 5 above. 8 9 6.1 The following paragraphs of the License Agreement shall not be applicable: 4.0, 4.2.1, 4.2.2, 4.2.3, 4.2.4 and 5.1. 6.2 The obligations of U.S. Medical pursuant to paragraphs 5.2 and 5.3 of the License Agreement shall be modified, such that U.S. Medical shall continue to provide a quarterly certified written statement which shall set forth the amount of sales and the amount of royalty which would have been payable absent this Amendment. Habley shall continue to have verification rights pursuant to paragraph 5.3 as to the correctness of any such a report. 7. Affirmation. Except as expressly modified by this Amendment, all terms and provisions of the License Agreement remain in full force and effect. 8. Opinion Letter. Concurrently with the execution of this Amendment, U.S. Medical shall cause to be delivered to Habley an opinion letter from Brown, Martin, Haller & McClain, counsel for U.S. Medical, in a form reasonably satisfactory to Habley's counsel, as to the following: that this Amendment has been duly executed by U.S. Medical, that this Amendment is a duly authorized, valid and binding obligation of U.S. Medical, and that this Amendment and the License Agreement are valid, binding and enforceable in accordance with their terms. 9. All covenants, terms and conditions in this Amendment and the License Agreement shall be binding upon all successors and assignees of the parties hereto, whether directly, indirectly or by operation of law, including but not limited to all successors by merger, acquisition, consolidation, sale or assignment. 9 10 10. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. Dated: December 5th, 1994 HABLEY MEDICAL TECHNOLOGY CORPORATION By: /s/ Signature Illegible -------------------------------- Its: President ---------------------- Dated: December 8th, 1994 U.S. MEDICAL INSTRUMENTS, INC. By: /s/ Signature Illegible -------------------------------- Its: President ---------------------- 10 11 LICENSE AGREEMENT This License Agreement ("Agreement") is entered, made and dated as of the 1st day of July, 1992 ("Effective Date") by and between HABLEY MEDICAL TECHNOLOGY CORPORATION ("Habley"), a California corporation with its principal offices at 22982 Alcalde Drive, Laguna Hills, California 92653-1337 U.S.A., and U.S. MEDICAL INSTRUMENTS, INC., a California corporation ("U.S. Medical") with its principal offices at 3500 Estudillo Street, San Diego, California 92110. RECITALS: WHEREAS, Habley and U.S. Medical desire that certain rights with respect to the Products, hereinafter defined, be licensed to U.S. Medical on the terms and conditions of this Agreement; NOW, THEREFORE, for valuable consideration and exchange of other covenants and conditions, it is hereby mutually agreed: 1.0 Definitions. 1.1 "Net Selling Price" shall mean the stated aggregate gross selling price of all Products sold or the aggregate gross selling price of all Products for which no price is separately invoiced or otherwise stated to the customer, and not reimbursed, less, where reasonable and necessary, (i) freight and insurance charges (other than product liability) separately invoiced; (ii) sales and other excise taxes imposed directly upon the sale; and, to the extent actually incurred and availed of by the customer in the case of the following clauses (iii), (iv) and (v): (iii) trade, quantity, volume and cash discounts to customers; (iv) credits, allowances or refunds given on account of return or outdating of products; and (v) standard allowances to customers for the industry but excluding advertising allowances. The phrase "in combination with" shall mean attached to, supported by, or in any way manipulated by. 1.2 "Affiliate" shall mean a corporation or any other entity that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the designated party to this Agreement. 1.3 "Control" shall mean ownership of at least fifty one percent (51%) of the shares of stock entitled to vote for the election of directors in the case of a corporation and at least fifty one percent (51%) of the interest in profits in the case of a business entity other than a corporation. 1.4 "FDA" shall mean the Food and Drug Administration of the United States of America or any successor agency with legally-vested authority to perform the same function. - 1 - 12 1.5 "First Commercial Launch" shall mean, with respect to each of the Licensed Products, the date upon which U.S. Medical has first shipped any of such Products to one (1) or more of its dealers, distributors or end users. 1.6 "Product" shall mean the "ANSADA" device, or more specifically the "Anti-Needle Strike and Anti-Drug Abuse Syringe" (Attorney Docket No. HMTC-19, U.S. Patent Office Serial No. 14,270, U.S. Patent No. 4,710,170, filed February 12, 1987) and all other goods or products manufactured or sold which in any way, in whole or in part, incorporate any of the claims of the Patents or any rights licensed hereunder. 1.7 "Patents" shall mean (i) United States patent or applications entitled Anti-Needle Strike and Anti-Drug Abuse Syringe (Attorney Docket No. HMTC-19, U.S. Patent Office Serial No. 14,270, U.S. Patent No. 4,710,170 filed February 12,1987); and (ii) any and all Habley-invented United States and/or foreign patents which hereafter may be granted on any such applications (including modifications, combinations, reissues, divisions and extensions) which "read upon and infringe upon those patents or applications. 1.8 "Semi-Exclusive License" shall mean that Habley may directly or through importers, distributors, licensees or otherwise also sell such products in the Territory. 1.9 "Territory" shall mean the United States, Canada and Mexico and such Additional Territories as may be defined and added in accordance with the terms and conditions of Paragraph 1.14 herein. 1.10 "Term" shall mean the term as set forth in Paragraph 17.1. 1.11 "Technical Data" shall mean all information, know-how, technology or discoveries developed by Habley pertaining directly or indirectly to any of the Products. 1.12 "Trade Styles" shall mean the following trade names: ANSADA and any trade names or trademarks developed by Habley in connection with the Product(s). 1.13 "Advertising Materials" shall mean all Trade Styles, advertising, promotional or marketing copy, labeling, and logos including without limitation, advertisements, brochures, product inserts, promotions, give-aways, trade show displays and other displays, including all art boards therefore. 1.14 "Additional Territories" shall be those countries, in addition to the United States, Canada and Mexico, in which Habley now has patent protection for the Product or such other countries in which U.S. Medical, with Habley's consent, makes or sells the Product incorporating the Technical Data or Trade Styles. - 2 - 13 2.0 Grants. 2.1 License Grant. Habley hereby grants to U.S. Medical an exclusive license under the Patents and under the Technical Data and Trade Styles to make, use and sell the Product for those uses identified in Paragraph 2.5 hereof in the Territory. U.S. Medical shall have no right to grant sublicenses or licenses or to sell, transfer, assign, mortgage, pledge or hypothecate, directly or indirectly, or by operation of law any rights whatsoever with respect to the License granted hereby or with respect to the Trade Styles or Advertising Materials, and any such purported transfer shall be void except on the conditions set forth in Sections 2.2, 2.3 and 2.4 below. 2.2 Permitted Sublicenses. U.S. Medical may sublicense its rights under this Agreement only with the prior written consent of Habley, which shall not be unreasonably withheld. Unless otherwise consented to by Habley, without limitation, any permitted sublicense agreement shall be subject to the following: 2.2.1 The identity of the sublicensee must be approved by Habley. 2.2.2 The sublicensee shall agree to be bound by all applicable provisions of this Agreement. 2.2.3 U.S. Medical shall affirm its obligations to pay royalties to Habley for all products sold. 2.2.4 U.S. Medical and Habley shall agree as to a minimum royalty with respect to each sublicense. 2.3 Quality Assurance Validation. U.S. Medical shall maintain, at all times, such quality assurance, control and validation standards of compliance which shall be acceptable to Habley, Habley's approval for which shall not be unreasonably withheld. 2.4 Permitted Assignments. U.S. Medical may assign this Agreement only with the prior written consent of Habley, which shall not be unreasonably withheld. 2.5 Limited Field Of License Grant. The License granted pursuant to Paragraph 2.1 is granted specifically and solely for applications within the specific field of administration of pharmaceuticals or other fluids by syringe and for no other use or specification. Any manufacture, use or sale of Product(s) outside of the authorized field shall terminate this Agreement. 2.6 Rights Reserved. Except as specifically provided to the contrary in this Agreement, nothing contained in this Agreement shall be deemed to grant any license or other rights to either party under any patents, trademarks, trade names, copyrights, design rights or trade secrets of the other party. No rights of any nature or -3- 14 kind, other than those specifically enumerated in this Agreement under Sections 2.1 through 2.5, are granted or covenanted by either party to the other pursuant to this Agreement. Except as set forth in this Agreement, either party may freely develop, license, transfer or sell products not subject to this Agreement, to third parties at its sole and absolute discretion, without notice to the other. 2.7 Product Development. After the execution of this Agreement and during the term of this Agreement, as U.S. Medical reasonably requests, Habley shall transmit to U.S. Medical brief verbal reports of Technical Data concerning the Patents and Products as deemed by Habley to be reasonable, necessary and appropriate. In addition, if requested by U.S. Medical and if deemed solely by Habley to be within the scheduling priorities and prototype manufacturing capabilities of Habley and unless otherwise agreed upon, Habley shall supply to U.S. Medical, at Habley's fully- burdened cost of operation plus fifteen percent (15%), reasonable quantities of prototypes of the Products for confidential laboratory and/or confidential marketing analysis testing and/or clinical testing purposes only, in raw or finished package form, as reasonably requested by U.S. Medical and as agreed to and accepted by Habley. 3.0 Non-Refundable License Fee. In partial consideration for the license granted with respect to the Products, U.S. Medical shall pay to Habley a non- refundable fee, which shall not be applied as an advance against Royalties, payable as follows: 3.1 One Hundred Twenty-Five Thousand U.S. Dollars ($125,000.00) concurrently with the execution of this Agreement. 3.2 Sixty-Two Thousand Five Hundred U.S. Dollars ($62,500.00) within three calendar months of execution of this Agreement. 3.3 Sixty-Two Thousand Five Hundred U.S. Dollars ($62,500.00) within six calendar months of execution of this Agreement. If U.S. Medical shall fail to timely make any payment due pursuant to this Paragraph 3, this Agreement and all licenses and rights granted to U.S. Medical hereunder shall be terminated in accordance with Paragraph 17.2.1. No fees pursuant to this Paragraph 3.0 are refundable. 4.0 Royalty. 4.1 Amount. U.S. Medical shall pay to Habley a royalty in an amount equal to five percent (5%) of the Net Selling Price with respect to all sales of the Product(s) in countries with patent protection and two and one-half percent (2-1/2%) of the Net Selling Price with respect to all sales of the Product in countries without patent protection where the Product(s) incorporate the Technical Data and/or Trade Styles. If - 4 - 15 any Product is sold in a package, bundle, set or otherwise together with, or as a part of, any product or device not subject to royalty pursuant to this Agreement, the royalty due from U.S. Medical to Habley shall be based upon the usual Net Selling Price received upon comparable sales for the Product subject to this Agreement when sold alone and not the total price of the package, set or bundled product. 4.2 Minimum Sales/Royalty. 4.2.1 The minimum royalty to be paid by U.S. Medical to Habley with respect to sales of all Products in the Territory, exclusive of any Additional Territories, shall be One Hundred Thousand U.S. Dollars ($100,000.00) for the second full calendar year following the First Commercial Launch of the first of the Products, or beginning 12 months after the Effective Date, whichever event occurs first ("First Period"), One Hundred Fifty Thousand U.S. Dollars ($150,000.00) for the third full calendar year following the First Period of the first of the Licensed Products, or 24 months after the Effective Date, whichever event occurs first ("Second Period"), and Two Hundred Thousand U.S. Dollars ($200,000.00) for each full calendar year thereafter during the term of this Agreement ("Third Period"). 4.2.2 If the sales of the Products are not sufficient during the First Period and Second Period only, to satisfy the minimum royalty obligation set forth above, then U.S. Medical shall have the right of paying such minimum royalty amount to Habley. Beginning with the calendar year commencing on the expiration of the Second Period, minimum royalty amounts must be met only through income generated solely by bonafide actual sales of Products licensed herein by U.S. Medical. 4.2.3 If the Signator of this Agreement and/or chairman or president of U.S. Medical, if U.S. Medical is a corporation, resigns or is terminated subsequent to the execution of this Agreement but prior to the First Commercial Launch of any Product(s), without the prior written consent of Habley which shall not be unreasonably withheld, or dies, or is otherwise incapacitated, the Minimum Royalties due hereunder shall immediately become due and payable to Habley as set forth hereinabove in Paragraph 4.2. 4.2.4 If U.S. Medical shall fail to meet its obligations under Paragraph 4.2.1, 4.2.2, or 4.2.3 with respect to payments of minimum royalties or sales, all licenses and rights granted to U.S. Medical hereunder shall be terminated in accordance with Section 17.2.1. 4.3 Competition. If in any country or territory, including the United States, any product which is the same as any of the Products shall be sold by a third party licensed by reason of a law providing for compulsory licensing (and provided such compulsory licensing is not attributable to U.S. Medical's failure to use its best efforts to market, distribute and/or sublicense such of the Products in such country), then upon so notifying Habley, U.S. Medical shall have the right, as its sole and - 5 - 16 exclusive remedy, to reduce the royalty payable by U.S. Medical to Habley on the Net Selling Price of such of the Licensed Products in such country or territory pursuant to Section 4.1 to seventy-five percent (75%) of the rate specified in Section 4.1. 4.4 Expiration of Patents. Upon the expiration of each Patent for a Product licensed under this Agreement, or if all or substantially all of the patent claims obtained by Habley in the United States covering the manufacture or use of a Product are held invalid in a final judgment by a court of competent jurisdiction, U.S. Medical shall continue to have a Non-Exclusive License to make, use and sell the Product, if U.S. Medical is utilizing among other things, the Trade Styles and Technical Data in accordance with the provisions of this Agreement for the balance of the Term, and shall pay to Habley an amount equal to 50% of the royalty otherwise payable pursuant to this Paragraph 4 for the balance of the Term. For the purposes of this paragraph, the term "Non-Exclusive License" means that Habley will not make, use or sell the Products through importers, distributors, licensees or otherwise. 4.5 Material Change. Because the Patents give Habley a limited period of time in which to exclusively commercialize any products based thereon, Habley has taken particular care and attention to select the licensee as the entity to commercialize the Products, and particular attention to representations by U.S. Medical to Habley concerning U.S. Medical's management, control, ownership, resources, and business plan. In the event of any material change prior to First Commercial Launch, and prior to payment in full of Non-Refundable License Fee, as per Paragraph 3.0 hereinabove, whether voluntary or involuntary, in the management, control, ownership or resources of U.S. Medical, which adversely affects U.S. Medical's abilities to carry out its obligations under this Agreement, as determined in the sole reasonable discretion of Habley, Habley shall have the right to convert the License granted to U.S. Medical hereunder to a Semi-Exclusive License for the balance of the Term, in which case U.S. Medical shall pay to Habley an amount equal to 75% of the royalty otherwise payable pursuant to this Paragraph 4 for the balance of the Term. 4.6 Royalty-Free Promotional Samples. Such samples for the purpose of introducing the U.S. Medical syringe to end users may be supplied to such end users on a royalty free basis, providing said syringes are given by U.S. Medical free of any charge and that the total number of said promotional U.S. Medical syringes shall not exceed 10% of the total yearly production of U.S. Medical syringes which otherwise would be subject to this Agreement. This Paragraph 4.6 will be valid only for the first 12 months following execution of this Agreement and shall be discontinued at that time with no additional notice required. 5.0 Payments, Reports and Records. 5.1 Timing of Payment(s). Royalties shall be paid by U.S. Medical to Habley quarterly in an amount equal to not less than (i) twenty-five percent (25%) of the annual minimum royalty amounts set forth in Section 4.2.1 within ten (10) calendar - 6 - 17 days following the end of the calendar quarter to which the same is attributable until royalties paid exceed the annual minimum; and, (ii) the balance of the accrued royalty for such quarter within thirty (30) days following the end of such quarter. Royalties with respect to sales of Product(s) prior to commencement of Minimum Royalty payments shall be paid quarterly. 5.2 Statement. U.S. Medical will render to Habley with each such royalty payment a certified written statement setting forth all computational details of the royalties payable for such quarter and a certified statement from a corporate officer of U.S. Medical setting forth the amount of sales and that the amount of the royalty paid has been calculated in accordance with this Agreement. U.S. Medical will keep records in sufficient manner and detail to verify sales and to enable the royalties to be calculated. 5.3 Verification. Habley (and its employees, agents, contractors and accountants) shall, at reasonable times and with reasonable notice and at Habley's expense, have access to, and may make copies of, U.S. Medical's records concerning promotional distribution (as per Paragraph 4.6 hereinabove), sales and manufacturing of the Product(s) during normal business hours for the purpose of verifying for Habley, with respect to any calendar quarter ending not more than three (3) calendar years prior to the date of such request, the correctness of any report and/or payment due under this Agreement. 5.4 Method of Payment. 5.4.1 Exchange Rate. All royalties shall be paid to Habley in U.S. Dollars. As to any sales made by U.S. Medical in another currency, the amount of payment shall be determined by converting from the currency in which the sales are made at the rate of exchange quoted by the Wall Street Journal for the last business day of the calendar quarter to which the royalty payment pertains. 5.4.2 Taxes. Except as provided in this Paragraph 5.4.2, U.S. Medical shall be responsible for any taxes assessed on account of income, sales, use or inventory. Habley shall be responsible for any taxes on account of income by virtue of the license fees and royalty payments received from U.S. Medical. If any taxes are assessed against Habley on account of income earned in or royalty remittable from any country and for which provision is now or hereinafter made in the law for withholding from royalties to be remitted to Habley there shall, unless exemption has been obtained, be deducted from such royalty and shall be paid by U.S. Medical to the proper tax authorities the amount of such withholding required by the law, and U.S. Medical shall forthwith pay to Habley, in addition to any other amounts due from U.S. Medical to Habley, an amount equal to the payment withheld. Habley shall join with U.S. Medical, if U.S. Medical shall so reasonably request, at no expense to Habley, in applying for exemption from taxation upon royalties payable by U.S. Medical under this Agreement pursuant to any international convention or agreement. -7- 18 6.0 CONFIDENTIALITY. 6.1 GENERAL. U.S. Medical and Habley agree that any and all documents or information included in Technical Data and all of each parties' other information, specifications, data, know-how, materials and all other communications, oral or written, relating to the patents and Products (the "Information") shall be subject to the following obligations: 6.1.1 Each party will keep all Technical Data and Information confidential and will not, without the prior written consent of the other party, disclose any such Information. 6.1.2 Neither party shall use, directly or indirectly, any Technical Data or Information for any purpose other than for the purposes of this Agreement. 6.1.3 All officers, employees and contractors of U.S. Medical who have access to Technical Data and Information shall have signed written agreements, in form and substance reasonably satisfactory to Habley, providing that the officer/ employee/contractor shall not use or disclose the Technical Data or Information to anyone, and shall not use the Technical Data or Information except for the purposes of this Agreement. U.S. Medical shall take all reasonable steps to ensure that Technical Data or Information is not used or disclosed by its employees, officers or contractors except as permitted by this Agreement, both during and subsequent to their term of employment. U.S. Medical shall take all reasonable steps to ensure that its officers, employees and contractors know that the Technical Data and Information is confidential. In the event of a breach of confidentiality by any officer, employee or contractor of U.S. Medical, notwithstanding any rights or remedies which Habley may have against U.S. Medical, U.S. Medical shall, at U.S. Medical's sole cost and expense, take all necessary actions to prevent any further breach of the confidentiality provisions and to obtain all copies of documents which embody or refer to the Technical Data or Information. 6.1.4 If any subpoena or request is received seeking production or disclosure of any Technical Data or Information, the party receiving such subpoena, process or request shall (a) immediately notify the other party in writing; and, (b) decline to produce or discharge the Technical Data or Information under applicable trade secret privileges. If one party desires to produce or discharge the Technical Data or Information, but the other party objects, the objecting party shall immediately take such steps as are necessary to obtain a final court determination. Pending final court determination, no Technical Data or Information shall be produced or disclosed (except to a judge for the purpose of ruling upon the trade secret claim if that procedure is allowed by applicable law and utilized by the judge presiding). -8- 19 6.1.5 Except as otherwise be provided herein, all Technical Data and Information including, without limitation, monographs, specifications, flow sheets, descriptions, data, samples and other tangible material pertaining thereto shall be the property of Habley. Upon termination of this Agreement, U.S. Medical shall deliver to Habley all Technical Data and Information, in whatever form, and all copies thereof, with the exception that U.S. Medical may retain one, strictly confidential, single copy in its U.S.A. headquarters in specially secured legal files solely for the purpose of identifying its obligations under this Agreement, which copy shall continue to be deemed "TECHNICAL DATA" and "INFORMATION" and shall continue to be subject to the confidentiality provisions of this Section 6. 6.1.6 The foregoing obligations of confidentiality shall not apply to: a) Information known to the receiving party prior to the date of its disclosure pursuant to this Agreement (as evidenced by written documentation of such prior knowledge submitted to the disclosing party in confidence by the receiving party within a reasonable time thereafter but not to exceed ten (10) calendar days) and not obtained or derived directly or indirectly from the disclosing party; b) Information which lawfully is or becomes public, or available to the general public otherwise than through an act or default of any party to this Agreement; or, c) Information disclosed to a party by a third party having the legal and lawful right to do so. 6.2 WRITTEN DISCLOSURES. All written disclosures of Technical Data or Information shall be confidential and shall bear the notation "CONFIDENTIAL". All non-written disclosures of Technical Data or Information considered confidential by the disclosing party shall be confirmed in a document reduced to writing within three (3) business days following the non-written disclosure to the other party and transmitted to the other party within five (5) days thereafter. The written confirmation shall bear clearly the notation "CONFIDENTIAL", shall identify the particular Technical Data or Information that is considered confidential, and shall be addressed to the officers and/or employees of a receiving party known or believed by the submitting party to be the persons who received the non-written disclosure of confidential Technical Data or Information. 6.3 NOT IN THE PUBLIC DOMAIN. For the purposes of this Agreement, specifics disclosed as part of Technical Data or Information shall not be deemed to be in the public domain, or in the prior possession of a party merely because it is embraced by more general information in the public domain, or by more general information in the prior possession of a party. -9- 20 6.4 ENTIRE CONFIDENTIALITY AGREEMENT. This Agreement supersedes any prior Confidentiality Agreements between the parties with respect to this subject matter. 7.0 OBLIGATIONS OF U.S. MEDICAL. 7.1 BEST EFFORTS. U.S. Medical shall use its best efforts to expeditiously commercialize the Products and to maximize and promote sales of the Products. 7.2 REGULATORY. U.S. Medical shall strictly comply with all applicable laws, rules and regulations of all applicable jurisdictions (including but not limited to the FDA) in connection with the Products, including but not limited to those relating to the manufacturing, labeling, packing, shipping, storage, sales, distribution and support of Products. 7.3 RESOURCES. U.S. Medical shall at all limes use its best efforts to have and maintain adequate financial and other resources specifically dedicated and approved for the purposes of this Agreement to enable U.S. Medical to perform all of its obligations under this Agreement. 7.4 ACCESS. U.S. Medical, shall, upon prior notice and at reasonable times, allow Habley (and its agents, and confidential representatives) access to any of U.S. Medical's plants, manufacturing facilities and warehouses to confidentially observe and inspect them for compliance with the terms of this Agreement. 7.5 ENGINEERING DRAWINGS. (a) Engineering Drawings ("Drawings") created by Habley and furnished to U.S. Medical are, and will remain, the sole and complete property of Habley. Such Drawings are integral to, part of and subject to all provisions, including but not limited to, the provisions of Paragraph 6 pertaining to confidentiality of this Agreement. (b) Drawings shall not under any circumstances whatsoever, unless prior written authorization is granted by Habley, be redrawn, reproduced, distributed, altered or in any way modified, in whole or in part, by U.S. Medical. Only Habley shall have the authority to redraw, reproduce, distribute, alter or modify Drawings. (c) In order to maintain continuity, consistency and functional ability of Products described by Drawings, any and all changes, revisions, and/or modifications to Drawings will be made solely by Habley. (d) If U.S. Medical shall modify any of the Drawings, Habley, in its sole and absolute discretion, may terminate this Agreement and the license and all rights of U.S. Medical hereunder. - 10 - 21 (e) Reasonable requests by U.S. Medical for distribution and/or modification of engineering Drawings by Habley will receive prompt and reasonable consideration by Habley, and if accepted by Habley, will be promptly implemented by Habley, at the cost of U.S. Medical. (f) Habley will be provided with an ongoing record, updated with reasonable frequency, documenting the receipt of such modified engineering drawings as well as all distributions of same. 7.6 MANUFACTURING COMPLIANCE. The patent notification shall be displayed upon each Product or on labels or packaging containing the Product(s) as required by patent law. 7.7 ADVERTISING. U.S. Medical shall keep Habley apprised of and supply Habley with copies of Advertising Materials pertaining to Products. 8.0 PROSECUTION OF PATENT APPLICATIONS AND 510-K APPLICATIONS. 8.1 PROSECUTION OF PATENT APPLICATIONS BY HABLEY. The definition of Patents in Paragraph 1.7 and in Exhibit "A" attached hereto, contains a description of those of Habley's United States and foreign patents and patent applications covered by this Agreement. Habley agrees to diligently prosecute said United States applications and any and all United States patent applications which may hereafter be filed (subsequent to the execution of this Agreement) relating to the Products ("Additional Patent Application"), and to keep U.S. Medical reasonably advised as to all material developments in connection with the prosecution of said applications in a timely manner after such developments are known to, and evaluated by, Habley. With respect to the Patent licensed hereunder, U.S. Medical shall see and assure that any applicable requirements for the affixing of notices on the Products are met. U.S. Medical shall pay to Habley within thirty (30) days of billing an amount equal to fifty percent (50%) of the actual expenses, for drafting, filing, and maintenance of such Additional United States Patent Applications. U.S. Medical shall pay to Habley within thirty (30) days of billing an amount equal to one hundred percent (100%) of the actual expenses for drafting, filing, prosecution, maintenance and enforcement of any corresponding foreign patent applications whose filing is approved in advance by U.S. Medical. U.S. Medical acknowledges that Habley may, in its sole and absolute discretion, file foreign patent applications on a country-by-country basis directly in each country. U.S. Medical further acknowledges that Habley may, at its sole and absolute discretion, file a separate patent application for each claim made in the patents in Japan so as to maximize patent protection under Japan's narrow claim interpretation practices. U.S. Medical shall not be responsible for the costs of any individual patent application in excess of Three Hundred Thousand Dollars ($300,000.00) unless approved by U.S. Medical in writing prior to its filing. U.S. Medical's obligations under this Paragraph 8.1 shall be limited to One Hundred and Fifty Thousand Dollars - 11 - 22 ($150,000.00) per annum, adjusted upwardly each year pursuant to the "Cost of Living Index," as established for the Orange County, California location, or as the parties mutually agree. Prototypes which Habley in its sole opinion deems necessary for the "reduction to practice" of such patent application shall be deemed an actual expense subject to reimbursement as set forth in this Paragraph 2.6 on a fully-burdened time and materials basis plus fifteen percent (15%). 8.2 PROSECUTION OF PATENT APPLICATIONS BY U.S. MEDICAL IN HABLEY'S NAME. U.S. Medical shall, upon notice from Habley of the particular foreign jurisdiction involved, prosecute all foreign patent applications described in the definition of Patents in Paragraph 1.7, in Habley's name, but at U.S. Medical's expense. In addition, U.S. Medical shall, upon notice from Habley of the particular foreign jurisdiction involved, prosecute all additional foreign patent applications required by Habley, in Habley's name, at U.S. Medical's expense, for any Additional Territories. U.S. Medical shall employ only such agents or attorneys as may be approved in advance and in writing by Habley and shall not transmit any proprietary information to any agent or attorney until receipt of such written approval. In the event that U.S. Medical shall not prosecute any patent in a foreign jurisdiction, Habley may notify U.S. Medical of its intent to prosecute such patent in such jurisdiction at U.S. Medical's expense, which costs and expenses U.S. Medical shall reimburse to Habley within fifteen (15) days of receipt of an invoice. 9. PATENT INFRINGEMENT. If any of the claims in the Patents are infringed by a third party by the sale of a product Habley shall have the exclusive right to institute suit under the Patents to enjoin the infringement and for damages for a period of one hundred and twenty (120) days after Habley receives notice of the infringement from U.S. Medical. If Habley brings suit: U.S. Medical shall cooperate with Habley to a reasonable extent requested by Habley, Habley shall have the right to bring suit in the name of U.S. Medical as well as Habley, U.S. Medical shall have the right to be represented by legal counsel of its choice at its expense during the conduct of such infringement suit, costs, expenses and/or damages recovered from the infringer shall first be applied to reimburse Habley for Habley's reasonable costs and expenses actually incurred and the remainder of such recovery shall be paid to Habley on account of loss of royalty, and any additional recovery shall be shared by the parties fifty percent (50%) for Habley and fifty percent (50%) for the U.S. Medical. If Habley shall fail to institute suit to enjoin such infringement within one hundred and twenty (120) days after written notification thereof by U.S. Medical, then U.S. Medical shall have the right, at its sole and complete expense, to bring suit in its own name and in the name of Habley. During the period in which U.S. Medical is bringing suit in accordance with this Paragraph 9, U.S. Medical may apply up to fifteen percent (15%) of the royalties payable to Habley for such time period under applicable terms of this Agreement, after the first actual appearance or filing of papers in court, to the payment of its reasonable costs and expenses of prosecuting the infringement action. - 12 - 23 If U.S. Medical shall recover costs, expenses and/or damages, from the infringer, such recovery shall be retained by U.S. Medical to the extent of U.S. Medical's reasonable costs and expenses actually incurred and the remainder of any such recovery shall be shared equally between U.S. Medical and Habley up to, but not further than, Habley's loss of royalty under this Paragraph 9. The recovery in excess of Habley's loss of royalty shall be shared by the parties fifty percent (50%) for Habley and fifty percent (50%) for U.S. Medical. Habley shall cooperate with U.S. Medical to a reasonable extent requested by U.S. Medical and Habley shall have the right to be represented by legal counsel of its choice at its sole expense during the conduct of such infringement suit. 10.0 COMPETITIVE PRODUCTS. U.S. Medical represents and warrants to Habley that it does not manufacture, sell or have any rights to manufacture or sell, directly or indirectly, any safety syringe product which is used for the same or similar purpose as any of the Products and that it has no intention or plans at the present time to make, sell or have any rights in any product which is used for the same or similar purpose as any of the Products. If U.S. Medical shall make, have made for it, use and/or sell or obtain any rights in or to any safety syringe product which is used for the same or similar purpose as any of the Products then all licenses and rights granted to U.S. Medical in this Agreement shall, immediately and without notice, thereupon become Semi-Exclusive Licenses for the balance of the Term, in which case U.S. Medical shall continue to pay to Habley all royalties pursuant to Paragraphs 4.1 through 4.4. 11.0 REPRESENTATIONS. 11.1 REPRESENTATIONS OF HABLEY. Habley hereby represents and warrants to U.S. Medical: (a) This Agreement represents a duly authorized and enforceable obligation of Habley and has been duly approved by Habley's directors, except as such enforcement may be limited by applicable laws of bankruptcy, insolvency and equitable enforcement of judgments. When executed and delivered to U.S. Medical by Habley, this Agreement will be legally binding on Habley to the extent herein set forth. (b) Habley is a corporation duly authorized and validly existing and in good standing under the laws of the State of California. To the best knowledge of Habley, there is no suit, action or investigation of any type which is pending, threatened or contemplated to liquidate or dissolve Habley or to declare any of its corporate rights, powers, privileges or license to be null and void or otherwise in less than full force and effect, to declare that Habley or any of its directors, officers, agents or employees have exceeded or violated any of their respective rights, powers or privileges or to obtain any decree, order, judgment or any other judicial determination or administration or other - 13 - 24 ruling that will or may materially impede or detract from any of the corporate rights, powers or privileges now vested in Habley. (c) The execution, delivery and performance of this Agreement by Habley will not conflict with, or result in a breach of, the articles of incorporation or bylaws of Habley, or any agreement, document or other instrument or understanding to which Habley is a party or by which it is bound, or to the best knowledge of Habley any decree or order of any court or administrative or governmental body. (d) No representation, warranty, statement or information made or furnished by Habley to U.S. Medical, including but not limited to, those contained in this Agreement and the other statements or other information furnished by Habley, contains any false or misleading statement of any material fact, nor has Habley failed to state any material fact or information known to it which would make such representation, statement or information misleading. (e) The definition of "Patents" in Paragraph 1.7 includes all patents and applications for any patents (both domestic and foreign) relating to the Products and, to the extent indicated in such definition, such patents and patent applications have been duly registered in, filed in, or issued by the offices indicated therein: (i) Habley is the sole and exclusive owner of the Patents and the Technical Data and has the right to use, license or sublicense the use of the Patents and the Technical Data; and, (ii) to Habley's knowledge, no proceedings have been instituted during the last five years, are pending or are threatened which challenge the rights of Habley or any Affiliate of Habley in respect thereto or the validity thereof. (f) Habley has not received notice from the FDA or any other federal, state or foreign governmental agency claiming that any of the Products is in any way not in full compliance with the requirements of the FDA or any other laws, rules or regulations. (g) To Habley's knowledge there are no claims or lawsuits (including, without limitation, personal injury and product liability claims or lawsuits) pending or, to the knowledge of Habley, threatened against Habley involving any of the Products, nor have there been any such claims or lawsuits. (h) Neither Habley nor any of its officers or directors has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the transactions set forth in this Agreement. 11.2 REPRESENTATIONS OF U.S. MEDICAL. U.S. Medical represents and warrants to Habley: - 14 - 25 (a) This Agreement represents a duly authorized and enforceable obligation of U.S. Medical and has been approved by all requisite corporate action on the part of U.S. Medical except as such enforcement may be limited by applicable laws of bankruptcy, insolvency and equitable enforcement of judgments. When executed and delivered to Habley by U.S. Medical, this Agreement will be legally binding on U.S. Medical to the extent set forth herein. (b) U.S. Medical is a corporation duly authorized and validly existing and in good standing under the laws of the State of California. To the best knowledge of U.S. Medical, there is no suit, action or investigation of any type which is pending, threatened or contemplated to liquidate or dissolve U.S. Medical, or to declare any of its corporate rights, powers, privileges or licenses to be null and void or otherwise in less than full force and effect, or obtain any decree, order, judgment or any other judicial determination or administrative or other ruling that will or may materially impede or detract from any of the corporate rights, powers or privileges now vested in U.S. Medical, which in the case of any of the foregoing will have a material and adverse impact on U.S. Medical's ability to perform under this Agreement. (c) The execution, delivery and performance of this Agreement by U.S. Medical will not conflict with, or result in a breach of, the articles of incorporation or bylaws of U.S. Medical or to the best knowledge of U.S. Medical, of any agreement, document, or other instrument or understanding to which U.S. Medical is a party or by which it is bound any decree or order of any court or administrative or governmental body. (d) No representation, warranty, statement or information made or furnished by U.S. Medical to Habley, including but not limited to those contained in this Agreement and the other statements or other information furnished by U.S. Medical, contains any false or misleading statement of any material fact nor has U.S. Medical failed to state any material fact or information known to it which would make such representation, statement or information misleading. (e) Neither U.S. Medical nor any of its officers or directors have employed any broker or finder or incurred any liability regarding brokerage fees, commissions or finder's fees in connection with the transactions contemplated and set forth in this Agreement. 11.3 NO WARRANTY. Habley makes no representation or warranty as to whether or not the Patent and other intellectual property being licensed by this Agreement is subject to claims of infringement by third parties. U.S. Medical assumes any and all risk of such claims. U.S. Medical has conducted its own independent infringement search through its own independent patent counsel. - 15 - 26 12.0 INDEMNITY. 12.1 U.S. MEDICAL INDEMNITY. U.S. Medical shall indemnify and hold Habley harmless from any and all loss, liability, claims, demands, fees, costs, damages, judgments and/or expenses, including but not limited to the legal defense of Habley in connection with any claim, suit, action, proceeding (including administrative proceedings) arising out of or resulting from (i) any regulatory approval obtained by U.S. Medical, (ii) the breach of any representation, warranty or obligation made by U.S. Medical in this Agreement or in any document delivered pursuant hereto, or (iii) the design, engineering, manufacture, use and/or sale of the Products. 12.2 HABLEY INDEMNITY. Habley shall indemnify and hold U.S. Medical harmless from any and all loss, liability, claims, demands, fees, costs, damages, judgments and/or expenses, including but not limited to the legal defense of U.S. Medical in connection with any claim, suit, action, proceeding (including administrative proceedings), arising out of or resulting from (i) the breach of any representation or warranty made by Habley in this Agreement or in any document delivered pursuant hereto, or (ii) Habley's design, development and engineering of the Products. Any non-Habley executed design, development and/or engineering of the Products will nullify and void this indemnification. 13.0 INSURANCE. At all times during the Term of this Agreement, U.S. Medical shall have in effect, at U.S. Medical's sole cost, a policy or policies of general liability insurance, including product liability providing for payment of defense costs and damage claims arising out of the design, manufacture, sale and use of the Products, with limits of liability of not less than $1 million per occurrence and $3 million cumulative with an insurance company or companies duly licensed in California and rated Best's A-15 or higher. For any products that incorporate or use the Technical Data or Trade Styles, the limits of liability shall not be less than $2.5 million per occurrence and $5 million cumulative. 14.0 LICENSE-RELATED CONSULTING. If requested by U.S. Medical, Habley may, at its sole and complete discretion, provide to U.S. Medical consulting and technical services with respect to the Products for a period which at Habley's sole and complete discretion shall not exceed three (3) working days per month, during the first six (6) months after the Effective Date, for a total of eighteen (18) days, as reasonably requested by U.S. Medical with reasonable prior notice of request to Habley at locations reasonably requested by U.S. Medical and accepted by Habley at such time as the parties shall mutually agree. U.S. Medical shall pay to Habley the sum of Two Hundred Eighty Dollars ($280.00) per hour for such services within five (5) days of receipt by U.S. Medical of an invoice for such services. In addition, U.S. Medical will reimburse Habley for all reasonable expenses incurred in connection with such consultation including travel-related expenses. Habley will be acting as an independent contractor and not as an agent or representative of U.S. Medical. - 16 - 27 15.0 FURTHER ASSURANCES. Each of the parties hereto hereby agrees to take or cause to be taken such further actions, to execute, deliver and file or cause to be executed, delivered and filed, such further documents and instruments, and to use best efforts to obtain such consents, as may be necessary or as may be reasonably requested in order to fully effectuate the purposes, terms and conditions of this Agreement. 16.0 PROGRESS REPORTS. U.S. Medical will provide Habley with accurate and complete written Progress Reports at least every ninety (90) days after the Effective Date. Progress Reports shall accurately and completely summarize the current status and future plans for manufacturing and sales of Product(s), and any activity relating to the Patent. In addition, if requested by Habley, U.S. Medical shall respond in writing to questions relating to the manufacture of the Product(s) including but not be limited to, the following subjects: design, development and subcontract production tooling; marketing, planning and distribution schedules as well as ongoing updates and/or modifications of same, agreements with vendors, regulatory matters, and foreign patent-related matters including, but not limited to, information regarding the drafting, filing, prosecution, issuance, infringement and enforcement of foreign patents. In addition, if requested by Habley, U.S. Medical shall provide Habley with copies of relevant agreements and documentation, including but not limited to, agreements with vendors, regulatory applications, submittals, approvals and correspondence, and marketing, planning and distribution schedules. 17.0 TERM AND TERMINATION. 17.1 TERM. This Agreement, unless otherwise earlier terminated pursuant to the terms hereof, shall remain effective for the term of the last to expire of the Patents, except that the term as it relates to Technical Data or Trade Styles shall continue for ninety-nine (99) years from the Effective Date. 17.2 TERMINATION/BREACH. This Agreement shall terminate immediately and without further notice upon the occurrence of any of the following: 17.2.1 U.S. Medical shall fail to pay to Habley, when due, any portion of any licensing fee, royalty or minimum royalty as required pursuant to Paragraphs 3 or 4, which remains uncured for more than ten (10) days after written notice from Habley. 17.2.2 U.S. Medical shall fail to accomplish First Commercial Launch within two years of the Effective Date. 17.2.3 U.S. Medical shall fail to timely perform any other obligation of U.S. Medical contained in this Agreement which remains uncured more than thirty - 17 - 28 (30) days after written notice from Habley. 17.2.4 U.S. Medical shall (a) become insolvent, or cease, be unable, or admit in writing its inability to pay its debts as they mature, or make a general assignment for the benefit of, or enter into any compromise or arrangement with, creditors; (b) apply for, or consent (by admission of material allegations of a petition or otherwise) to, the appointment of a receiver, trustee or liquidator of it or a substantial part of its assets, or authorize such application or consent (or proceeding seeking such appointment shall be commenced against it without such authorization, consent or application and continue undismissed for a period of sixty (60) days); (c) authorize or file a voluntary petition under or apply for or consent (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, readjustment of debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction, or authorize such application or consent (or proceedings to such end shall be instituted against it without such authorization, application or consent, and remain undismissed for sixty (60) days, or result in the entry of an order for relief or adjudication of insolvency); or (d) permit or suffer all of or any substantial part of its property to be sequestered or attached by court order and such order remains undismissed for sixty (60) days. 17.3 EFFECT OF TERMINATION. Upon termination pursuant to Paragraph 17.2, or as otherwise provided in this Agreement, and without further notice: 17.3.1 The grant of license set forth in Paragraph 2 hereof shall be terminated and of no further force or effect, and without limitation U.S. Medical shall have no right to manufacture, sell or use the Products except as set forth in this Paragraph 17.3. 17.3.2 U.S. Medical shall have the right to sell such quantities of the Products as U.S. Medical may have on hand at the time of such termination only at a price equal to or greater than the average selling price of the Products over the previous six (6) month period, subject to the payment of any royalty to Habley with respect thereto as provided herein; provided, however, that if Habley gives notice in writing to U.S. Medical, U.S. Medical shall sell to Habley all of the then-existing inventory at U.S. Medical's cost (and no royalties shall be due to Habley on account of such transaction). 17.3.3 U.S. Medical shall grant to Habley an exclusive 99 year royalty free license to any Habley-produced product-specific Trade Styles and Advertising Materials in favor of Habley, and U.S. Medical shall not continue to use such rights or materials. U.S. Medical shall deliver to Habley, FOB from U.S. Medical's facilities, all such product-specific Advertising Materials and all copies thereof. 17.3.4 U.S. Medical shall remain liable to Habley for any royalties due and for any other damages recoverable by Habley from U.S. Medical. - 18 - 29 18.0 FORCE MAJEURE. Each party shall be excused from the performance of its obligations hereunder for a reasonable time in the event such performance is prevented by force majeure. For the purposes of this Agreement, force majeure shall mean causes beyond the reasonable control of the party seeking to be excused including without limitation, acts of God, war, earthquake or storm, epidemic and complete failure of public utilities or common carriers and specifically excluding bankruptcy. 19.0 NON-ASSIGNMENT. Except as otherwise specifically provided in this Agreement, neither party shall assign or delegate any of its rights, duties or obligations to any other person without the prior written consent of the other party, and any such assignment or delegation shall be void. 20.0 MISCELLANEOUS. 20.1 ENTIRE AGREEMENT. There are no oral agreements between the parties hereto affecting this Agreement. This Agreement constitutes the entire Agreement between Habley and U.S. Medical relating to the subject matter hereof and supersedes and replaces all prior writings, discussions and rights relating to the subject matter hereof. This Agreement supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and/or understandings, if any, between the parties hereto or displayed with respect to the subject matter thereof. In the event the terms and conditions of this Agreement shall conflict with the terms and conditions contained on any purchase or order form, invoice, etc., the terms and conditions of this Agreement shall govern and control unless such document is signed by both parties and clearly indicates that the parties intend to vary the terms of this Agreement. All negotiations and oral agreements have been merged into and are included herein. In entry into this Agreement, neither party is relying upon any statement, condition, act, representation or warranty not set forth in this Agreement. 20.2 AMENDMENT. This Agreement may only be amended or modified only by a written document signed by the party to be charged. 20.3 GOVERNING LAW AND VENUE. This Agreement shall be governed by and construed in accordance with the laws of the State of California. Proper venue for this Agreement is the County of Orange, State of California, U.S.A. - 19 - 30 20.4 PERFORMANCE. This Agreement is entered into and is expressly to be performed in Orange County, California. 20.5 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together or separately shall constitute one and the same instrument. 20.6 HEADINGS. The Paragraph headings contained in this Agreement have been inserted for identification and reference purposes only and shall not determine the construction or interpretation of this Agreement. 20.7 NOTICES. Any notice required or permitted to be given hereunder shall be deemed sufficient if mailed by registered or certified mail (return receipt requested), or delivered by overnight courier or messenger (i.e., Federal Express) to the party to whom such notice is being given. If delivered by hand or by mail, any such notice shall be considered given when received. If delivered by overnight courier or messenger, any such notice shall be considered given two (2) business days after given to the delivery service. All notices to Habley shall be addressed as follows: HABLEY MEDICAL TECHNOLOGY CORPORATION 22982 Alcalde Drive, Building 100 Laguna Hills, CA 92653-1337. Attention: Terry McGovern Haber President and Chairman with a copy to Habley's legal counsel at: BIDNA & KEYS 1401 Dove Street Newport Beach, CA 92660 Attention: Howard M. Bidna and a copy to Habley's patent counsel at: TOWNSEND & TOWNSEND Steuart Street Tower One Market Plaza San Francisco, CA 94105 Attention: Georg Seka All notices to U.S. Medical shall be addressed as follows: U.S. MEDICAL INSTRUMENTS, INC. 3500 Estudillo Street San Diego, California 92110 Attention: Matthew S. Mazur, President - 20 - 31 With a copy to U.S. Medical's legal counsel at: BROWN, MARTIN, HALLER & MCCLAIN 110 West "C" Street San Diego, CA 92101 Attention: Carl R. Brown Either party may change the address or person to which notice to it is to be given by providing the other party ten (10) days prior notice of such change of address. 20.8 SURVIVAL OF REPRESENTATIONS. The warranties and representations contained in this Agreement shall survive the execution and delivery of this Agreement. 20.9 WAIVER. Waiver of any breach or failure of any term or condition of this Agreement shall not be construed as a waiver of a subsequent breach or failure of the same term or condition or a waiver of any other term or condition of this Agreement. Delay or failure to exercise any right or remedy hereunder shall not impair such right or remedy or be construed as a waiver thereof or as acquiescence in a default. 20.10 SEVERABILITY. If any provision of this Agreement as applied to either party or to any circumstance shall be adjudged to be void and unenforceable, the same shall in no way affect: 20.10.1 Any other provision in this Agreement; 20.10.2 The application of such provision in any other circum- stances; or, 20.10.3 The validity or enforceability of the Agreement as a whole. 20.11 MUTUAL CONTRIBUTION. Each party hereto and its counsel have mutually contributed to the preparation and drafting of this Agreement, and no provision hereof shall be construed against any party on the grounds that that party or its counsel drafted any provision set forth in this Agreement. 20.12 DISCLOSURE. Neither party shall make any public disclosure regarding the specific contractual subject matter hereof without prior written consent of the other party except as required by applicable laws and regulations. 20.13 THIRD PARTIES. The Agreement is not intended to confer upon persons who are not parties hereto any rights, remedies or benefits. 20.14 BINDING ARBITRATION. Any dispute arising out of, relating to or involving this Agreement, including but not limited to, any questions of acts in the - 21 - 32 inducement, performance, breach, termination, damages, and amounts owing shall be resolved only by binding arbitration, pursuant to the provisions of the California Arbitration Act, California Code of Civil Procedure Section 1280. et seq., before one of the retired judges on the panel of the Judicial Arbitration and Mediation Service, Inc. Arbitration shall be conducted in Orange County, California. In the event that, for any reason, the Judicial Arbitration and Mediation Service, Inc. is unable to provide the arbitrator, one party, or the other, or both, shall apply to Orange County Superior Court to appoint one person to act as the arbitrator. Neither party shall institute any action in any court (state, federal or in a foreign jurisdiction) in any way relating to this Agreement. In the event either party institutes any court action, such action shall immediately be dismissed or stayed, except for actions to appoint an arbitrator or to confirm an arbitration award pursuant to this Paragraph 20.14. The arbitrator shall decide all issues subject to the arbitration without a jury. Habley and U.S. Medical hereby expressly waive any right, whether under the Federal or State Constitution, or otherwise, to a jury trial, and represent to one another that this waiver is made voluntarily and after consulting with an attorney of choice. 20.15 ATTORNEY'S FEES. Should any litigation or arbitration be commenced between the parties hereto or should any party institute any proceedings in a bankruptcy or similar court affect any provisions of this Agreement or the rights and duties of any person or entity in relation thereto, the party prevailing in such litigation or arbitration shall be entitled, in addition to such other relief as may be granted, to a reasonable sum as and for its attorney's fees and court costs which shall be determined by the court or arbitrator in such litigation or arbitration, as the case may be. 20.16 ADVICE OF COUNSEL. Each of the parties represent and warrants that it has had a full and fair opportunity to review this Agreement and that it has been negotiated and reviewed by legal counsel of its own choosing. 20.17 FEES AND EXPENSES. Each party to this Agreement shall bear its own attorneys' fees, costs and expenses incurred in connection with the negotiation of and entry into this Agreement. 20.18 LEGAL RELATIONSHIP. Nothing contained in this Agreement, or the actions of the parties in carrying out this Agreement, shall be construed to create any partnership, joint venture or any other legal relationship between Habley and U.S. Medical except that of parties to a contract. Neither party has the power or authority to act for, bind or commit the other party, except as expressly set forth in the Agreement. 20.19 FURTHER ASSURANCES. Habley and U.S. Medical agree to do all acts and to make, execute, and deliver such written instruments, or other documents, as shall from time to time be reasonably necessary to carry out the terms and provisions of this Agreement. - 22 - 33 20.20 TIME. Time is of the essence with respect to the performance of each of the covenants, conditions, obligations and agreements contained herein. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day above written. HABLEY MEDICAL U.S. MEDICAL INSTRUMENTS, INC. TECHNOLOGY CORPORATION By: /s/ Can't Read By: /s/ Matt Mazur -------------------------------- -------------------------------- Title: President Title: President -------------------------------- -------------------------------- Date: Mon 29 Jun 1992 Date: 6/29/92 -------------------------------- -------------------------------- Habley Medical Witness: U.S. Medical Witness: /s/ Lisa Loo -------------------------------- -------------------------------- Date: Mon 29 Jun '92 Date: -------------------------------- -------------------------------- NOTARY SEAL & JURAT - 23 - 34 EXHIBIT "A" LIST OF PATENTS UNITED STATES U.S. Patent No. 4,710,170 FOREIGN FILINGS Mexico No. 161093 Australia No. 613892 European Patent Office Application No. 88101958.2 - 24 - EX-10.2 13 EXHIBIT 10.2 1 EXHIBIT 10.2 STANDARD INDUSTRIAL LEASE -- MULTI-TENANT AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION [LOGO] 1. Parties. This Lease, dated, for reference purposes only, November ___, 19 __, is made by and between McDonnell Douglas Technologies, Inc., a Delaware corporation (herein called "Lessor") and U.S. Medical Instruments, Inc., a California corporation (herein called "Lessee"). 2. Premises, Parking and Common Areas. 2.1 Premises. Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental, and upon all of the conditions set forth herein, real property situated in the County of San Diego, State of California commonly known as 16825 Via del Campo Court, San Diego and described as See Addendum to Paragraph 1 for description of Premises. herein referred to as the "Premises", as may be outlined on an Exhibit attached hereto, including rights to the Common Areas as hereinafter specified but not including any rights to the roof of the Premises or to any Building in the Industrial Center. The Premises are within a building, herein referred to as the "Building." The Premises, the Building, the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Industrial Center." 2.2 Vehicle Parking. Lessee shall be entitled to * vehicle parking spaces, unreserved and unassigned, on those portions of the Common Areas designated by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used only for parking by vehicles no larger than full size passenger automobiles or pick-up trucks, herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles." *See Addendum Paragraph 2. 2.2.1 Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. 2.2.2 If Lessee permits or allows any of the prohibited activities described in paragraph 2.2 of this Lease, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.3 Common Areas -- Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center that are provided and designed by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and of other lessees of the Industrial Center and their respective employees, suppliers, shippers, customers and invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 2.4 Common Areas -- Lessee's Rights. Lessor hereby grants to Lessee, for the benefit or Lessee and its employees, suppliers, shippers, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.5 Common Areas -- Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable rules and regulations with respect thereto. Lessee agrees to abide by and conform to all such rules and regulations, and to cause its employees, suppliers, shippers, customers, and invitees to so abide by and conform. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees of the Industrial Center. 2.6 Common Areas -- Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas and walkways: (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available: (c) To add improvements to the Common Areas: (d) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof: (e) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Lessor may, in the exercise of sound business judgment, deem to be appropriate; provided, however, that Lessor will use reasonable efforts to minimize interference with Lessee's operations at the Premises. 3. Term. 3.1 Term. The term of this Lease shall be for five (5) years commencing on January 1, 1994 and ending on __________________ unless sooner terminated pursuant to any provision hereof. See Addendum Paragraph 3. 3.2 Delay in Possession. Notwithstanding said commencement date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof, but in such case, Lessee shall not be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease, except as may be otherwise provided in this Lease, until possession of the Premises is tendered to Lessee; provided, however, that if Lessor shall not have delivered possession of the Premises within sixty (60) days from said commencement date, Lessee may, at Lessee's option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided further, however, that if such written notice of Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. 3.3 Early Possession. If Lessee occupies the Premises prior to said commencement date, such occupancy shall be subject to all provisions of this Lease, such occupancy shall not advance in the termination date. See Addendum Paragraph 4. 4. Rent. 4.1 Base Rent. Lessee shall pay to Lessor, as Base Rent for the Premises, without any offset or deduction, except as may be otherwise expressly provided in this Lease, on the _____ day of each month of the term hereof, monthly payments in advance of $ ________________. See Addendum Paragraph 5. Lessee shall pay Lessor upon execution hereof $ N/A as Base Rent for N/A. Rent for any period during the term hereof which is for less than one month shall be a pro rata portion of the Base Rent. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. 4.2 Operating Expenses. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share, as hereinafter defined, of all Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions: (a) "Lessee's Share" is defined, for purposes of this lease, as * percent. *See Addendum Paragraph 6. (b) "Operating Expenses" is defined, for purposes of this Lease, as all costs incurred by Lessor, if any, for: (i) The operation, repair and maintenance, in neat, clean, good order and condition, of the following: (aa) The Common Areas, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities and fences and gates: (bb) Trash disposal services: (cc) Tenant directories: (dd) Fire detection systems including sprinkler system maintenance and repair: (copyright) American Industrial MULTI TENANT -- MODIFIED NET Real Estate Association 1981 2 (ee) Security services: (ff) Any other service to be provided by Lessor that is elsewhere in this Lease stated to be an "Operating Expense;" (ii) Any deductible portion of an insured loss concerning any of the items or matters described in this paragraph 4.2; (iii) The cost of the premiums for the liability and property insurance policies to be maintained by Lessor under paragraph 8 hereof; (iv) The amount of the real property tax to be paid by Lessor under paragraph 10.1 hereof; (v) The cost of water, gas and electricity to service the Common Areas. (c) The inclusion of the improvements, facilities and services set forth in paragraph 4.2(b)(i) of the definition of Operating Expenses shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Industrial Center already has the same. Lessor already provides the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them. (d) Lessee's Share of Operating Expenses shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time of Lessee's Share of annual Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate, during each twelve-month period of the Lease term, on the same day as the Base Rent is due hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of Operating Expenses as aforesaid. Lessor shall deliver to Lessee within sixty (60) days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the actual Operating Expenses incurred during the preceding year. If Lessee's payments under this paragraph 4.2(d) during said preceding year exceed Lessee's Share as indicated on said statement, Lessee shall be entitled to credit the amount of such overpayment against Lessee's Share of Operating Expenses next falling due. If Lessee's payments under this paragraph during said preceding year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof $60,000 as security for Lessee's faithful performance of Lessee's obligations hereunder. If lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default or for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount then required of Lessee. If the monthly rent shall, from time to time, increase during the term of this Lease, Lessee shall, at the time of such increase, deposit with Lessor additional money as a security deposit so that the total amount of the security deposit held by Lessor shall at all times bear the same proportion to the then current Base Rent as the initial security deposit bears to the initial Base Rent set forth in paragraph 4. Lessor shall not be required to keep said security deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not theretofore been applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. 6. Use. See Addendum Paragraph 7. 6.1 Use. 6.2 Compliance with Law. (a) Lessor warrants to Lessee that to the actual knowledge of Lessor's officers the Premises, in the state existing on the date that the Lease term commences, but without regard to the use for which Lessee will occupy the Premises, does not violate any covenants or restrictions of record, or any applicable building code, regulation or ordinance in effect on such Lease term commencement date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such violation. In the event Lessee does not give to Lessor written notice of the violation of this warranty within six months from the date that the Lease term commences, the correction of same shall be the obligation of the Lessee at Lessee's sole cost. The warranty contained in this paragraph 6.2(a) shall be of no force or effect if, prior to the date of this Lease, Lessee was an owner or occupant of the Premises and, in such event, Lessee shall correct any such violation at Lessee's sole cost. (b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing, during the term or any part of the term hereof, relating in any manner to the Premises and the occupation and use by Lessee of the Premises and of the Common Areas. Lessee shall not use nor permit the use of the Premises or the Common Areas in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Industrial Center. 6.3 Condition of Premises. See Addendum Paragraph 8. (a) Lessor shall deliver the Premises to Lessee clean and free of debris on the Lease commencement date (unless Lessee is already in possession) and Lessor warrants to Lessee that the plumbing, lighting, air conditioning, heating, TES System and loading doors in the Premises shall be in good operating condition on the Lease commencement date. In the event that it is determined that this warranty has been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly, at Lessor's sole cost, rectify such violation. Lessee's failure to give such written notice to Lessor within 90 days after the Lease commencement date shall cause the conclusive presumption that Lessor has complied with all of Lessor's obligations hereunder. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises in their condition existing as of the Lease commencement date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that neither Lessor nor Lessor's agent has made any representation or warranty as to the present or future suitability of the Premises for the conduct of Lessee's business. 7. Maintenance, Repairs, Alterations and Common Area Services. See Addendum Paragraph 9. 7.1 Lessor's Obligations. Subject to the provisions of paragraphs 4.2 (Operating Expenses), 6(Use), 7.2 (Lessee's Obligations) and 9 (Damage or Destruction) and except for damage caused by any negligent or intentional act or omission of Lessee, Lessee's employees, suppliers, shippers, customers, or invitees, in which event Lessee shall repair the damage, Lessor, at Lessor's expense, subject to reimbursement pursuant to paragraph 4.2, shall keep in good condition and repair the foundations, exterior walls, structural condition of interior bearing walls, and roof of the Premises, as well as the parking lots, walkways, driveways, landscaping, fences, signs and utility installations of the Common Areas and all parts thereof. Lessor shall not, however, be obligated to paint the exterior or interior surface of exterior walls, nor shall Lessor be required to maintain, repair or replace windows, doors or plate glass of the Premises. Lessor shall have no obligation to make repairs under this paragraph 7.1 until a reasonable time after receipt of written notice from Lessee of the need for such repairs. Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. Lessor shall not be liable for damages or loss of any kind or nature by reason of Lessor's failure to furnish any Common Area Services when such failure is caused by accident, breakage, repairs, strikes, lockout, or other labor disturbances or disputes of any character, or by any other cause beyond the reasonable control of Lessor. 7.2 Lessee's Obligations. See Addendum Paragraph 10. (a) Subject to the provisions of paragraphs 6 (Use), 7.1 (Lessor's Obligations), and 9 (Damage or Destruction), Lessee, at Lessee's expense, shall keep in good order, condition and repair the Premises and every part thereof (whether or not the damaged portion of the Premises or the means of repairing the same are reasonably or readily accessable to Lessee) including, without limiting the generality of the foregoing, all plumbing, heating, ventilating and air conditioning systems (Lessee shall procure and maintain, at Lessee's expense, a ventilating and air conditioning system maintenance contract), electrical and lighting facilities and equipment within the Premises, fixtures, interior walls and interior surfaces of exterior walls, ceilings, windows, doors, plate glass, and skylights located within the Premises. Lessor reserves the right to procure and maintain the ventilating and air conditioning system maintenance contract and if Lessor so elects, Lessee shall reimburse Lessor, upon demand, for the cost thereof. (b) If Lessee fails to perform Lessee's obligations under this paragraph 7.2 or under any other paragraph of this Lease, Lessor may enter upon the Premises after ten (10) days' prior written notice to Lessee (except in the case of emergency, in which no notice shall be required), perform such obligations on Lessee's behalf and put the Premises in good order, condition and repair, and the cost thereof together with interest thereon at the maximum rate then allowable by law shall be due and payable as additional rent to Lessor together with Lessee's next Base Rent installment. (c) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in good condition, ordinary wear and tear and any casualty or other condition which is not the obligation of Lessee hereunder excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alterations, furnishings and equipment. Notwithstanding anything to the contrary otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing and fencing on the Premises in good operating condition. 7.3 Alterations and Additions. See Addendum Paragraph 11. (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions, or Utility Installations in, on or about the Premises, or the Industrial Center, except for nonstructural alterations to the Premises not exceeding $10,000 for any cost or group of related costs during the term of this Lease. In any event, whether or not in excess of $10,000, Lessee shall make no change or alteration to the 3 exterior of the Premises nor the exterior of the Building nor the Industrial Center without Lessor's prior written consent. As used in this paragraph 7.3 the term "Utility Installation" shall mean carpeting, window coverings, air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing, and fencing. Lessor may require that Lessee remove any or all of said alterations, improvements, additions or Utility Installations at the expiration of the term, and restore the Premises and the Industrial Center to their prior condition. As to any work or related items of work costing in excess of $50,000 and/or including the initial tenant improvement work. Lessee will insure that general contractor and sub-contractor will provide lien releases to lessor. Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor. Lessor may, at any time during the term of this Lease, require that Lessee remove any or all of the same. (b) Any alterations, improvements, additions or Utility Installations in or about the Premises or the Industrial Center that Lessee shall desire to make and which requires the consent of the Lessor shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from appropriate governmental agencies, the furnishing of a copy thereof to Lessor prior to the commencement of the work and the compliance by Lessee of all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises, or the Industrial Center, or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises or the Industrial Center, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises and the Industrial Center free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys fees and costs in participating in such action if Lessor shall decide it is to Lessor's best interest to do so. (d) All alterations, improvements, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which may be made on the Premises, shall be the property of Lessor and shall remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a). Notwithstanding the provisions of this paragraph 7.3(d), Lessee's machinery and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises, and other than Utility Installations, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2. 7.4 Utility Additions. Lessor reserves the right to install new or additional utility facilities throughout the Building and the Common Areas for the benefit of Lessor or Lessee, or any other lessee of the Industrial Center, including, but not by way of limitation, such utilities as plumbing, electrical systems, security systems, communication systems, and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. Insurance; Indemnity. 8.1 Liability Insurance -- Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Property Damage insurance insuring Lessee and Lessor against any liability arising out of the use, occupancy or maintenance of the Premises and the Industrial Center. Such insurance shall be in an amount not less than $500,000.00 per occurrence. The policy shall insure performance by Lessee of the indemnity provisions of this paragraph 8. The limits of said insurance shall not, however, limit the liability of Lessee hereunder. 8.2 Liability Insurance -- Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Property Damage Insurance, insuring Lessor, but not Lessee, against any liability arising out of the ownership, use, occupancy or maintenance of the Industrial Center in an amount not less than $500,000.00 per occurrence. 8.3 Property Insurance. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Industrial Center improvements, but not Lessee's personal property, fixtures, equipment or tenant improvements, in an amount not to exceed the full replacement value thereof, as the same may exist from time to time, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, flood (in the event same is required by a lender having a lien on the Premises) special extended perils ("all risk", as such term is used in the insurance industry), plate glass insurance and such other insurance as Lessor deems advisable. In the event that the Premises shall suffer an insured loss as defined in paragraph 9.1(g) hereof, the deductible amounts under the casualty insurance policies relating to the Premises shall be paid by Lessee. 8.4 Payment of Premium Increase. (a) After the term of this Lease has commenced, Lessee shall not be responsible for paying Lessee's Share of any increase in the property insurance premium for the Industrial Center specified by Lessor's insurance carrier as being caused by the use, acts or omissions of any other lessee of the Industrial Center, or by the nature of such other lessee's occupancy which create an extraordinary or unusual risk. (b) Lessee, however, shall pay the entirety of an increase in the property insurance premium for the Industrial Center over what it was immediately prior to the commencement of the term of this Lease if the increase is specified by Lessor's insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. 8.5 Insurance Policies. Insurance required hereunder shall be in companies holding a "General Policyholders Rating" of at least B plus, or such other rating as may be required by a lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies carried by Lessor, Lessee shall delivery to Lessor copies of liability insurance policies required under paragraph 8.1 or certificates evidencing the existence and amounts of such insurance within seven (7) days after the commencement date of this Lease. No such policy shall be cancellable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with renewals or "binders" thereof. 8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recovery against the other for loss or damage arising out of or incident to the perils insured against which perils occur in, on or about the Premises, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. Lessee and Lessor shall, upon obtaining the policies of insurance required give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 8.7 Indemnity. Lessee shall indemnify and hold harmless Lessor from and against any and all claims arising from Lessee's use of the Industrial Center, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises or elsewhere and shall further indemnify and hold harmless Lessor from and against any and all claims arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or omission of Lessee, or any of Lessee's agents, contractors, or employees, and from and against all costs, attorney's fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon; and in case any action or proceeding be brought against Lessor by reason of any such claim, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and lessor shall cooperate with Lessee in such defense. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons, in, upon or about the Industrial Center arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. See Addendum Paragraph 13. 8.8 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises or the Industrial Center, nor shall Lessor be liable for injury to the person of Lessee. Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Industrial Center, or from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Lessee. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or user of the Industrial Center, nor from the failure of Lessor to enforce the provisions of any other lease of the Industrial Center. 9. Damage or Destruction. See Addendum Paragraph 14. 9.1 Definitions. (a) "Premises Partial Damage" shall mean if the Premises are damaged or destroyed to the extent that the cost of repair is less than fifty percent of the then replacement cost of the Premises. (b) "Premises Total Destruction" shall mean if the Premises are damaged or destroyed to the extent that the cost of repair is fifty percent or more of the then replacement cost of the Premises. (c) "Premises Building Partial Damage" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is less than fifty percent of the then replacement cost of the Building. (d) "Premises Building Total Destruction" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent or more of the then replacement cost of the Building. (e) "Industrial Center Buildings" shall mean all of the buildings on the Industrial Center site. (f) "Industrial Center Buildings Total Destruction" shall mean if the Industrial Center Buildings are damaged or destroyed to the extent that the cost of repair is fifty percent or more of the then replacement cost of the Industrial Center Buildings. 4 (g) "Insured Loss" shall mean damage or destruction which was covered by an event required to be covered by the insurance described in paragraph 8. The fact that an Insured Loss has a deductible amount shall not make the loss an uninsured loss. (h) "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring excluding all improvements made by lessees. 9.2 PREMISES PARTIAL DAMAGE; PREMISES BUILDING PARTIAL DAMAGE. (a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is an Insured Loss and which falls into the classification of either Premises Partial Damage or Premises Building Partial Damage, then Lessor shall, but only to the extent of actual insurance proceeds, repair such damage to the Premises, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. (b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Partial Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from using the Premises. Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage. In the event Lessor elects to give such notice of Lessor's intention to cancel and terminate this Lease. Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's intention to repair such damage at Lessee's expense, without reimbursement from Lessor, in which event this Lease shall continue in full force and effect, and Lessee shall proceed to make such repairs as soon as reasonably possible. If Lessee does not give such notice within such 10-day period this Lease shall be cancelled and terminated as of the date of the occurrence of such damage. 9.3 PREMISES TOTAL DESTRUCTION; PREMISES BUILDING TOTAL DESTRUCTION; INDUSTRIAL CENTER BUILDINGS TOTAL DESTRUCTION. (a) Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage, whether or not it is an Insured Loss, and which falls into the classifications of either (i) Premises Total Destruction, or (ii) Premises Building Total Destruction, or (iii) Industrial Center Buildings Total Destruction, then Lessor may at Lessor's option either (i) repair such damage or destruction, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible at Lessor's expense, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case this Lease shall be cancelled and terminated as of the date of the occurrence of such damage. 9.4 DAMAGE NEAR END OF TERM. (a) Subject to paragraph 9.4(b), if at any time during the last six months of the term of this Lease there is substantial damage, whether or not an Insured Loss, which falls within the classification of Premises Partial Damage, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within 30 days after the date of occurrence of such damage. (b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to extend or renew this Lease, and the time within which said option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an Insured Loss falling within the classification of Premises Partial Damage during the last six months of the term of this Lease. If Lessee duly exercises such option during said twenty (20) day period, Lessor shall, to the extent otherwise required under Paragraph 9.2(a) at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option during said twenty (20) day period, then Lessor may at Lessor's option terminate and cancel this Lease as of the expiration of said twenty (20) day period by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of said twenty (20) day period, notwithstanding any term or provision in the grant of option to the contrary. 9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) Lessee shall have no claim against Lessor for any damage suffered by reason of any damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this paragraph 9 and shall not commence such repair or restoration within ninety (90) days after such obligation shall accrue and Lessor has obtained immediate access to sufficient insurance proceeds to complete the repair and restoration. Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. 9.6 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. 9.7 WAIVER. Lessor and Lessee waive the provisions of any statute which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. 10. REAL PROPERTY TAXES. 10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as defined in paragraph 10.3, applicable to the Industrial Center subject to reimbursement by Lessee of Lessee's Share of such taxes in accordance with the provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2. 10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for paying Lessee's Share of any increase in real property tax specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Industrial Center by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Lessee shall, however, pay to Lessor at the time that Operating Expenses are payable under paragraph 4.2(c) the entirety of any increase in real property tax if assessed solely by reason of additional improvements placed upon the Premises by Lessee or at Lessee's request. 10.3 DEFINITION OF "REAL PROPERTY TAX." As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Industrial Center or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor in the Industrial Center or in any portion thereof, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Industrial Center. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy assessment or charge hereinabove included within the definition of "real property tax," or (ii) the nature of which was hereinbefore included within the definition of "real property tax," or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a result of a transfer, either partial or total, of Lessor's interest in the Industrial Center or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such transfer, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof. 10.4 JOINT ASSESSMENT. If the Industrial Center is not separately assessed, Lessee's Share of the real property tax liability shall be an equitable proportion of the real property taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 PERSONAL PROPERTY TAXES. (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause said trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. (b) If any of Lessee's said personal property shall be assessed Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to the Premises. Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises in the Building. 12. ASSIGNMENT AND SUBLETTING. See Addendum Paragraph 15. 12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premises, without Lessor's prior written consent, which Lessor shall not unreasonably withhold. Lessor shall respond to Lessee's request for consent hereunder in a timely manner and any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void, and shall constitute a breach of this Lease without the need for notice to Lessee under paragraph 13.1. 12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof, without Lessor's consent, to any corporation which controls, is controlled by or is under common control with Lessee, or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, all of which are referred to as "Lessee Affiliate," provided that before such assignment shall be effective said assignee shall assume, in full, the obligations of Lessee under this Lease. Any such assignment shall not, in any 5 way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of whom shall not be necessary. 12.3 TERMS AND CONDITIONS OF ASSIGNMENT. Regardless of Lessor's consent, no assignment shall release Lessee of Lessee's obligations hereunder or alter the primary liability of Lessee to pay the Base Rent and Lessee's Share of Operating Expenses, and to perform all other obligations to be performed by Lessee hereunder. Lessor may accept rent from any person other than Lessee pending approval or disapproval of such assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of rent shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions of this paragraph 12 or this Lease. Consent to one assignment shall not be deemed consent to any subsequent assignment. In the event of default by any assignee of Lessee or any successor of Lessee, in the performance of any of the terms hereof, Lessor may proceed directly against Lessee without the necessity of exhausting remedies against said assignee. Lessor may consent to subsequent assignments of this Lease or amendments or modifications to this Lease with assignees of Lessee, without notifying Lessee, or any successor of Lessee, and without obtaining its or their consent thereto and such action shall not relieve Lessee of liability under this Lease. 12.4 TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. Regardless of Lessor's consent, the following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be included in subleases: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a default shall occur in the performance of Lessee's obligations under this Lease, Lessee may receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a default exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents due and to become due under the sublease. Lessee agrees that such sublessee shall have the right to rely upon any such statement and request from Lessor, and that such sublessee shall pay such rents to Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against such sublessee or Lessor for any such rents so paid by said sublessee to Lessor. (b) No sublease entered into by Lessee shall be effective unless and until it has been approved in writing by Lessor. In entering into any sublease, Lessee shall use only such form of sublease as is satisfactory to Lessor, and once approved by Lessor, such sublease shall not be changed or modified without Lessor's prior written consent. Any sublessee shall, by reason of entering into a sublease under this Lease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every obligation herein to be performed by Lessee other than such obligations as are contrary to or inconsistent with provisions contained in a sublease to which Lessor has expressly consented in writing. (c) If Lessee's obligations under this Lease have been guaranteed by third parties, then a sublease, and Lessor's consent thereto, shall not be effective unless said guarantors give their written consent to such sublease and the terms thereof. (d) The consent by Lessor to any subletting shall not release Lessee from its obligations or alter the primary liability of Lessee to pay the rent and perform and comply with all of the obligations of Lessee to be performed under this Lease. (e) The consent by Lessor to any subletting shall not constitute a consent to any subsequent subletting by Lessee to any assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent and such action shall not relieve such persons from liability. (f) In the event of any default under this Lease, Lessor may proceed directly against Lessee, any guarantors or any one else responsible for the performance of this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (g) In the event Lessee shall default in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of Lessee under such sublease from the time of the exercise of said option to the termination of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to Lessee or for any other prior defaults of Lessee under such sublease. (h) Each and every consent required of Lessee under a sublease shall also require the consent of Lessor. (i) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (j) Lessor's written consent to any subletting of the Premises by Lessee shall not constitute an acknowledgement that no default then exists under this Lease of the obligations to be performed by Lessee nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise stated by Lessor at the time. (k) With respect to any subletting to which Lessor has consented, Lessor agrees to deliver a copy of any notice of default by Lessee to the sublessee. Such sublessee shall have the right to cure a default of Lessee within ten (10) days after service of said notice of default upon such sublessee, and the sublessee shall have a right of reimbursement and offset from and against Lessee for any such defaults cured by the sublessee. 12.5 ATTORNEY'S FEES. In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of Lessor for any act Lessee proposes to do then Lessee shall pay Lessor's reasonable attorneys fees incurred in connection therewith, such attorneys fees not to exceed $350.00 for each such request. 13. DEFAULT; REMEDIES. 13.1 DEFAULT. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee: (a) The vacating or abandonment of the Premises by Lessee. (b) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. (c) Except as otherwise provided in this Lease, the failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee, other than described in paragraph (b) above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. To the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable Unlawful Detainer statutes. (d) (i) The making by Lessee of any general arrangement or general assignment for the benefit of creditors; (ii) Lessee becomes a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days. In the event that any provision of this paragraph 13.1(d) is contrary to any applicable law, such provision shall be of no force or effect. (e) The discovery by Lessor that any financial statement given to Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any successor in interest of Lessee or any guarantor of Lessee's obligation hereunder, was materially false. 13.2 REMEDIES. In the event of any such material default by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorney's fees, and any real estate commission actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided; that portion of the leasing commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have vacated or abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. 13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. -5- 6 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent. Lessee's Share of Operating Expenses or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Property. Accordingly, if any installment of Base Rent, Operating Expenses, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of any of the aforesaid monetary obligations of Lessee, then Base Rent shall automatically become due and payable quarterly in advance, rather than monthly, notwithstanding paragraph 4.1 or any other provision of this Lease to the contrary. 14. CONDEMNATION. If the Premises or any portion thereof or the Industrial Center are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent of the floor area of the Premises, or more than twenty-five percent of that portion of the Common Areas designated as parking for the Industrial Center is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing only within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the premises remaining, except that the rent shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. No reduction of rent shall occur if the only area taken is that which does not have the Premises located thereon. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any award for loss of or damage to Lessee's trade fixtures and removable personal property. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 15. BROKER'S FEE. (a) Upon execution of this Lease by both parties, Lessor shall pay to Grubb & Ellis Company Licensed real estate broker(s), a fee as set forth in a separate agreement between Lessor and said broker(s), for brokerage services rendered by said broker(s) to Lessor in this transaction. (b) Lessor agrees to pay said fee not only on behalf of Lessor but also on behalf of any person, corporation, association, or other entity having an ownership interest in said real property or any part thereof, when such fee is due hereunder. Any transferee of Lessor's interests in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this paragraph 15. Said broker shall be a third party beneficiary of the provisions of this paragraph 15. 16. ESTOPPEL CERTIFICATE. (a) Each party (as "responding party") shall at any time upon not less than ten (10) days prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises or of the business of the requesting party. (b) At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect, without modification except as may be represented by the requesting party, (ii) there are no uncured defaults in the requesting party's performance, and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. (c) If Lessor desires to finance, refinance, or sell the Property, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the owner or owners, at the time in question, of the fee title or a lessee's interest in a ground lease of the Industrial Center, and except as expressly provided in paragraph 15, in the event of any transfer of such title or interest. Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. SEVERABILITY. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate then allowable by law from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease; provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 20. TIME OF ESSENCE. Time is of the essence with respect to the obligations to be performed under this Lease. 21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to Lessee's Share of Operating Expenses and insurance and tax expenses payable shall be deemed to be rent. 22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in paragraph 15 hereof nor any cooperating broker on this transaction nor the Lessor or any employee or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises or the Property and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease except as otherwise specifically stated in this Lease. 23. NOTICES. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified mail, and if given personally or by mail, shall be deemed sufficiently given if addressed to Lessee or to Lessor at the address noted below the signature of the respective parties, as the case may be. Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. 24. WAIVERS. No waiver by Lessor or any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a "short form" memorandum of this Lease for recording purposes. 26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee, but all Options, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. INITIALS: /s/ WRP ------- MULTI TENANT -- MODIFIED NET (c) AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1981 ------- -6- 7 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State where the Industrial Center is located and any litigation concerning this Lease between the parties hereto shall be initiated in the county in which the Industrial Center is located. 30. SUBORDINATION. (a) This Lease, and any Option granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Industrial Center and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease and any Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. (b) Lessee agrees to execute any documents required to effectuate an attornment, a subordination or to make this Lease or any Option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within ten (10) days after written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 30(b). 31. ATTORNEY'S FEES. If either party or the broker(s) named herein bring an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, on trial or appeal, shall be entitled to his reasonable attorney's fees to be paid by the losing party as fixed by the court. The provisions of this paragraph shall inure to the benefit of the broker named herein who seeks to enforce a right hereunder. 32. LESSOR'S ACCESS. Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are part as Lessor may deem necessary or desirable. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the same. See Addendum Paragraph 16. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the Premises or the Industrial Center without Lessor's prior written consent. Under no circumstances shall Lessee place a sign on any roof of the Industrial Center. See Addendum Paragraph 17. 35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. CONSENTS. Except for paragraph 33 hereof, wherever in this Lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld or delayed. 37. GUARANTOR. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Property. 39. OPTIONS. See Addendum Paragraph 3. 39.1 DEFINITION. As used in this paragraph the word "Option" has the following meaning: (1) the right or option to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (2) the option or right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other space within the Industrial Center or other property of Lessor or the right of first offer to lease other space within the Industrial Center or other property of Lessor; (3) the right or option to purchase the Premises or the Industrial Center, or the right of first refusal to purchase the Premises or the Industrial Center, or the right of first offer to purchase the Premises or the Industrial Center, or the right or option to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor or the right of first offer to purchase other property of Lessor. 39.2 OPTIONS. The Options, if any, herein granted to Lessee are not assignable separate and apart from this Lease, nor may any Option be separated from this Lease in any manner, either by reservation or otherwise. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple options to extend or renew this Lease a later option cannot be exercised unless the prior option to extend or renew this Lease has been so exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary, (i) during the time commencing from the date Lessor gives to Lessee a notice of default pursuant to paragraph 13.1(b) or 13.1(c) and continuing until the noncompliance alleged in said notice of default is cured, or (ii) during the period of time commencing on the date after a monetary obligation to Lessor is due from Lessee and unpaid (without any necessity for notice thereof to Lessee) and continuing until the obligation is paid, or (iii) at any time after an event of default described in paragraphs 13.1(a), 13.1(d), or 13.1(e) (without any necessity of Lessor to give notice of such default to Lessee), nor (iv) in the event that Lessor has given to Lessee three or more notices of default under paragraph 13.1(b), or paragraph 13.1(c), whether or not the defaults are cured, during the 12 month period of time immediately prior to the time that Lessee attempts to exercise the subject Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option. If, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to cure a default specified in paragraph 13.1(c) within thirty (30) days after the date that Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to diligently prosecute said cure to completion, or (iii) Lessee commits a default described in paragraph 13.1(a), 13.1(d) or 13.1(e) (without any necessity of Lessor to give notice of such default to Lessee), or (iv) Lessor gives to Lessee three or more notices of default under paragraph 13.1(b), or paragraph 13.1(c), whether or not the defaults are cured. 40. SECURITY MEASURES. Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Industrial Center. Lessee assumes all responsibility for the protection of Lessee, its agents, and invitees and the property of Lessee and of Lessee's agents and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option, from providing security protection for the Industrial Center or any part thereof, in which event the cost thereof shall be included within the definition of Operating Expenses, as set forth in paragraph 4.2(b). 41. EASEMENTS. Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights, dedications, Maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. Initials: WRP MULTI TENANT - MODIFIED NET ----- (c) American Industrial Real Estate Association 1981 ----- -7- 8 43. AUTHORITY. If Lessee is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, delivery to Lessor evidence of such authority satisfactory to Lessor. 44. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions. 45. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease. This Lease shall become binding upon Lessor and Lessee only when fully executed by Lessor and Lessee. 46. ADDENDUM. Attached hereto is an addendum or addenda containing paragraphs 1 through 18 which constitute a part of this Lease. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. THIS LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO: THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. LESSOR LESSEE McDONNELL DOUGLAS TECHNOLOGIES, INC., U.S. MEDICAL INSTRUMENTS, INC., a Delaware corporation a California corporation - ------------------------------------ -------------------------------------- By By /s/ Name Illegible, President ---------------------------------- ----------------------------------- By By /s/ Name Illegible, Sr. VP ---------------------------------- ----------------------------------- Executed on Executed on 11/9/93 ------------------------ ------------------------- (Corporate Seal) (Corporate Seal) ADDRESS FOR NOTICES AND RENT ADDRESS 16761 Via del Campo Court 16825 Via del Campo Court - ------------------------------------ -------------------------------------- San Diego, CA 92127-1785 San Diego, CA 92127-1785 - ------------------------------------ -------------------------------------- - ------------------------------------ -------------------------------------- NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345 So. Figueroa St., M-1, Los Angeles, CA 90071. (213) 687-8777. 9 ADDENDUM TO LEASE 1. Premises. The Industrial Center is located at 16825 Via del Campo Court, San Diego, California and is more particularly described on Exhibit A attached hereto. The Premises includes the entire Building and is divided into the "First Premises" and "Second Premises". The First Premises consists of the entire Building, excluding therefrom the Second Premises. The approximately 34,000 rentable square foot portion of the Building contained within the First Premises is shown crosshatched on Exhibit A-1 attached hereto, including approximately 4,000 square feet of unimproved space (the "Unimproved Portion"). The Second Premises consists of approximately 17,956 rentable square feet of unimproved space in the Building and is shown as not crosshatched on Exhibit A-1 attached hereto. Upon the commencement of this Lease, Lessee shall lease the First Premises. Lessee shall have the option to lease the Second Premises and include it in the Premises at any time by giving Lessor sixty (60) days' prior irrevocable written notice (the "Option Notice"); provided, however, if Lessee has not given the Option Notice to Lessor on or before April 1, 1995, (i) Lessee shall pay Lessor $21,000 on or before June 1, 1995 to reimburse Lessor for a portion of Lessor's lost revenues and other costs of holding the Second Premises off the market and available for Lessee's rental, (ii) at any time after April 1, 1995 that Lessee has not given the Option Notice to Lessor, Lessor may terminate Lessee's option and all other rights to lease the Second Premises by written notice to Lessee given at any time; and (iii) in the event Lessor has not given such written notice by May 31, 1996 and Lessee has not given the Option Notice by May 31, 1996, Lessee's option and all other rights to lease the Second Premises shall terminate. All references in this Lease to the "Premises" shall mean and refer to only the First Premises unless and until the Second Premises becomes leased by Lessee pursuant to this paragraph, and shall mean and refer collectively to the First Premises and the Second Premises if and after the Second Premises has become leased by Lessee. In the event Lessee's option to lease the Second Premises terminates pursuant to clause (iii) above in this paragraph, this Lease shall terminate on June 30, 1996 as to the approximately 4,000 square foot Unimproved Portion of the First Premises, and thereafter the approximately 30,000 square foot remainder of the First Premises shall constitute the Premises under this Lease. In the event this Lease terminates as to the Unimproved Portion pursuant to the immediately preceding sentence, Lessee shall surrender and vacate the Unimproved Portion on June 30, 1996 pursuant to Paragraph 7.3, and all other provisions of this Lease applicable to a termination of this Lease shall be applicable to such partial termination as to the Unimproved Portion. Upon the termination of this Lease with respect to the Unimproved Portion, the Base Rent for the First Premises, as indicated in the table set forth in Section 5 below, shall be reduced as of the later of July 1, 1996 or the date upon which Lessee surrenders the Unimproved Portion to Lessor pursuant to the provisions of this Lease, to $18,000 per month for the remainder of 1996, subject to further escalation of Base Rent pursuant to the provisions of Section 5 below. 2. Parking. Lessee shall be entitled to three (3) vehicle parking spaces per 1,000 square feet of the Premises pursuant to Paragraph 2.2 and the other provisions of this Lease. Lessor shall not be responsible for any changes in laws or any act by any third party that may restrict the actual or practical utilization by Lessee of the vehicle parking spaces allocated to Lessee as set forth above, nor shall any such changes in laws or any act by any third party give rise to any right by Lessor to terminate this Lease, abate any rent hereunder or otherwise receive any accommodation from Lessor. 3. Options to Extend. Subject to the provisions of Paragraph 39 of this Lease, Lessee shall have two (2) successive options to extend the term of this Lease for a period of three (3) years each, by giving Lessor irrevocable written notice of Lessee's 10 election to extend on or before April 1, 1998 as to the first extension period, and April 1, 2001 as to the second extension period. 4. Early Occupancy. Lessee's right to occupy the First Premises (except for the approximately 4,000 square feet of unimproved space) prior to the January 1, 1994 commencement date of this Lease shall commence on the date thirty (30) days after execution of this Lease by both Lessor and Lessee. Lessee shall not be required to pay Base Rent or Lessee's Share of Operating Expenses (except for Lessee's Share of utilities costs) for the period of occupancy prior to the commencement date, but shall be required to fulfill all of Lessee's other obligations under this Lease. 5. Rent. Base Rent for the Premises shall be as follows:
Months First Premises Second Premises ------ -------------- --------------- (per month) (per month, as applicable) Initial Term January-December 1994 $15,000 $7,182.40 January-May 1995 $16,500 $7,182.40 June-December 1995 $18,100 $7,182.40 January-December 1996 $19,800 $8,080.20 January-December 1997 CPI* CPI* January-December 1998 CPI* CPI* First Extension Term January-December 1999 CPI* CPI* January-December 2000 CPI* CPI* January-December 2001 CPI* CPI* Second Extension Term January-December 2002 CPI* CPI* January-December 2003 CPI* CPI* January-December 2004 CPI* CPI*
Notwithstanding the amounts set forth in the foregoing table, provided Lessee is not in default under any of the provisions of this Lease, Base Rent shall be abated for the months of January through March, 1994 and January through March, 1995. *Commencing on January 1, 1997 and on each January 1 thereafter throughout the remaining initial term and the extension term(s) of this Lease (each, a "Rental Adjustment Date"), Base Rent shall be increased as to each of the First Premises and Second Premises, respectively, by the percentage increase, if any, in the Consumer Price Index All Items -- All Urban Consumers, Riverside-Long-Beach-Anaheim Average (Reference Base Year 1988 = 100), as published by the United States Department of Labor, Bureau of Labor Statistics or its successor (the "Index"), as follows: the Base Rent in effect immediately prior to the applicable Rental Adjustment Date (the "Comparison Monthly Rent") shall be increased by the percentage that the Index has increased from the Index published most recently prior to the month in which the first payment of the Comparison Monthly Rent commenced through the Index published most recently prior to the month in which the applicable Rental Adjustment Date occurs; provided, however, in no event shall the Comparison Monthly Rent ever be increased on any particular Rental Adjustment Date by reason of the computations set forth above by less than three percent (3%) or more than six percent (6%). If the Index ceases to be published or is published less frequently or is altered in any material respect, then the parties shall adopt a substitute index or substitute procedure which 2 11 reasonably reflects and monitors changes in consumer prices. Lessor shall notify Lessee of the new Base Rent as soon as practicable following Lessor's determination thereof as set forth above in this paragraph. If Lessor has not given such notice prior to the applicable Rental Adjustment Date, Lessee shall pay Base Rent at the Comparison Monthly Rent rate until Lessor so notifies Lessee of the new amount of Base Rent; provided that, after Lessor provides such notice, Lessee shall immediately pay Lessor any additional amounts owed based upon the new amount of Base Rent payable pursuant to this Lease. 6. Lessee's Share of Operating Expenses. So long as the Premises includes only the First Premises, Lessee's Share of Operating Expenses, as set forth in Paragraph 4.2 of this Lease, shall be 100%; provided, however, that Lessee's Share as to costs for insurance required pursuant to Paragraphs 8.2 and 8.3 of the Lease and as to Real Property Taxes described in Paragraph 10 of the Lease shall be 88%; and provided further that Lessor shall be responsible for $125 per month toward the payment of all other Operating Expenses as Lessor's full share allocable to the Second Premises prior to Lessee's leasing thereof. After Lessee expands into the Second Premises (i.e., such that the Premises then includes the entire Building), Lessee's Share of Operating Expenses shall be 100% without exception. Operating Expenses also shall include an administrative fee to Lessor in the amount of the lesser of $1,000 per month or five percent (5%) of all Operating Expenses other than such administrative fee and any other Operating Expense incurred by Lessor to a third party and as to which Lessor pays such third parties a management or administrative fee. Notwithstanding the foregoing, in the event Lessor actually occupies any portion of the Building not included within the Premises from time to time, Lessor shall bear all increases in Operating Expenses attributable to such use or occupancy by Lessor. Notwithstanding the provisions of Paragraph 4.2 of this Lease or this Section, in no event shall Lessee have any obligation to pay directly, or reimburse Lessor for, all or any portion of the following (except if incurred as a result of Lessee's breach of any provision of this Lease or the negligent or other wrongful conduct of Lessee or its employees, agents, contractors or invitees): a. costs occasioned by the wrongful act, omission of applicable rules, regulations, statutes, ordinances, laws and building codes by Lessor or any occupant of the Industrial Center or their respective agents, employees or contractors (other than Lessee or its employees, agents, contractors or invitees); b. costs occasioned by fire, acts of God or other casualties, or by the exercise of the power of eminent domain, to the extent that Lessor is compensated therefor through the proceeds of insurance or condemnation awards; c. costs of a capital nature, including, but not limited to, capital improvements and equipment, all as determined in accordance with generally accepted accounting principles and sound management practices, except any cost of a capital nature that is made to comply with laws or governmental requirements (provided such improvement or equipment is not required to cure a breach of Lessor's representations or covenants under this Lease) or for the purpose of reducing Operating Expenses (and, as to the latter, with a reasonable belief by Lessor that such improvement or equipment will reduce Operating Expenses by more than the amount of such capital cost over the useful life of such improvement or equipment), the amount of such costs to be amortized on a straight-line basis over the useful life of the improvement or equipment in question as Lessor shall reasonably determine; d. costs for which Lessor is entitled to 3 12 reimbursement from others; e. costs of correcting any construction defect in the Premises or the Industrial Center existing on the date of this Lease; f. costs of any renovation, improvement, painting or redecorating of any portion of the Industrial Center not made available for Lessee's Use; g. any costs or other disbursements incurred in connection with negotiations or disputes with any occupant of the Industrial Center (other than Lessee), and the costs arising from the violation by Lessor or any occupant of the Industrial Center (other than Lessee or its employees, agents, contractors or invitees) of the terms or conditions of any Lease or other agreement; h. depreciation, amortization or other expense reserves; i. interest, charges and fees incurred on debt, and payments on mortgages and rent under ground leases; j. increases in insurance premiums or costs caused by the activities of other occupants of the Industrial Center (other than Lessee or its employees, agents, contractors or invitees); k. any costs associated with hazardous or toxic materials, except to the extent caused by the storage, use or disposal of hazardous materials by Lessee or its employees, agents, contractors or invitees; l. any costs properly attributable to property owned or operated by Lessor outside of the physical boundaries of the Industrial Center; m. leasing commissions, attorneys' fees, costs and disbursements and other expenses incurred in connection with negotiations or disputes with tenants or other occupants or prospective tenants or other occupants of the Building; or n. any amount that would constitute a "double recovery" by Lessor (i.e., in excess of 100% of the costs incurred by Lessor, plus Lessor's administrative fee). 7. Use. The Premises may be used and occupied for any lawful use in compliance with all covenants, conditions and restrictions affecting the Industrial Center, except that the Premises shall not be used for the manufacturing, design, research, development or sale of aerospace products or related uses. 8. Hazardous Materials; As-Is Condition. Lessor represents and warrants to Lessee that, to the actual knowledge of the officers of Lessor, upon the date of this Lease (i) the Industrial Center is not contaminated by wastes or other materials in a manner and in concentrations and formulations that are currently generally recognized as being injurious to public health or safety, and (ii) Lessor has not manufactured, stored or generated any such materials or wastes at the Industrial Center, except in accordance with all applicable law and commercially reasonable standards. In the event that it is determined that Lessor's warranties set forth in this Section have been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly rectify such violation at Lessor's sole cost. Except for the responsibility of Lessor for the condition of the Premises expressly assumed pursuant to Paragraphs 6.2 and 6.3 of this Lease and this Section 8, Lessee agrees that it is leasing 4 13 the Premises "AS IS AND WITH ALL FAULTS." 9. Lessor's Maintenance Obligations. Notwithstanding the provisions of Paragraph 7.1 of this Lease, in the event Lessee does not desire to wait for Lessor to perform one or more of its obligations within the period of time permitted under Paragraph 7.1 of this Lease, or in the event of an emergency, Lessee shall have the right to perform Lessor's obligation(s) under Paragraph 7.1 at Lessee's expense, provided that (except in an emergency) Lessee informs Lessor in writing of Lessee's intention to perform Lessor's obligation(s) and Lessor does not inform Lessee within five (5) days after receipt of Lessee's notice that Lessor will commence to perform such obligation(s) within ten (10) days after Lessor's receipt of such notice from Lessee. At any time and from time to time during the term of this Lease, Lessor shall have the right to turn over to Lessee all or any portion of Lessor's obligations pursuant to Paragraph 7.1 of this Lease by giving written notice of such election to Lessee, upon which notice Lessee shall be deemed to have assumed all of Lessor's obligations as to which such election applies. In addition, at any time if and after the Premises is expanded to include the Second Premises, Lessee shall have the right to assume all (but not part) of Lessor's obligations under Paragraph 7.1 of this Lease not previously turned over by Lessor to Lessee by giving irrevocable written notice of such election to Lessor, provided that Lessee reasonably satisfies Lessor that Lessee will fully satisfy the provisions of Paragraph 7.1. If, at any time after Lessee has assumed Lessor's obligations under Paragraph 7.1 pursuant to this Section, Lessee fails to fulfill the obligations so assumed, Lessor shall have the right to perform all or any portion of such obligations on Lessee's behalf as permitted under Paragraph 7.2(b) with respect to Lessee's obligations under Paragraph 7.2. 10. Thermal Energy Storage System. Lessor and Lessee acknowledge that there is installed in the Building a Thermal Energy Storage System ("TES System"). Lessee acknowledges that Lessor's warranty as to the TES System set forth in paragraph 6.3 of this Lease shall not constitute any guaranty or warranty as to the energy output, specifications or quality of performance of the TES System or its sufficiency to meet Lessee's needs. Lessor shall maintain and repair the TES System throughout the term of this Lease, all costs of which shall be considered Operating Expenses to be reimbursed by Lessee pursuant to the Provisions of Paragraph 4.2 of this Lease and Section 6 above. 11. Lessee's Improvements. Lessee agrees to make the interior improvements to the Premises substantially in accordance with Exhibit B attached hereto (the "Tenant Improvements"). Lessee agrees to diligently prosecute all required governmental approvals for the Tenant Improvements. Lessee shall deliver to Lessor complete plans and specifications for the Tenant Improvements on or before March 1, 1994, which shall be subject to the approval of Lessor pursuant to the provisions of paragraph 7.3 of this Lease, which approval by Lessor shall not be unreasonably withheld. Lessor shall have fifteen (15) days after receipt of such complete plans and specifications to approve or disapprove them; provided, however, that such plans and specifications shall be deemed approved unless Lessor gives notice of disapproval within such fifteen-day period. If Lessor disapproves of any plans or specifications, Lessor shall give reasons for such disapproval and Lessor and Lessee shall negotiate in good faith to address Lessor's reasonable objections. All plans and specifications shall be prepared by a duly licensed or registered architect or engineer, as the case may be (except, however, any nonstructural conceptual space and interior design plans may be prepared by a reputable space planner or interior designer). All contractors employed by Lessee to make structural alterations shall be approved by Lessor, which approval shall not be unreasonably withheld. Within thirty (30) days after receipt by Lessee of all necessary governmental approvals for the Tenant Improvements and Lessor's approval of 5 14 Lessee's plans and specifications, Lessee shall commence and diligently prosecute the Tenant Improvements in accordance with the approved plans and specifications and all governmental approvals and otherwise in accordance with this Lease and applicable law. Lessee shall cause completion of the Tenant Improvements to occur on or before the later of July 31, 1994 or within sixty (60) days after commencement of on-site demolition or construction activities. During the construction period, Lessee shall not block or otherwise interfere with the use of any traffic or parking improvements or fire lanes, except as specifically permitted by Lessor and the City of San Diego during the process of obtaining approvals for the Tenant Improvements. In addition, Lessee shall repair and restore all damage to the Common Areas or other facilities located on or about the Industrial Center caused in accordance with Lessee's construction activities, including, but not limited to, landscaping, lighting and paving. Lessee shall not allow work to cease during the construction period for longer than five (5) business days at a time or twenty (20) business days in the aggregate. Notwithstanding the foregoing, in the event Lessee is unable to commence or complete construction of the Tenant Improvements in accordance with the foregoing terms due to events beyond Lessee's control, the time period for commencing or completing the Tenant Improvements, as the case may be, shall be extended by a period of time equal to the duration of such events. Events beyond Lessee's control include, but shall not be limited to, acts of God, civil commotion, fire, flood or other casualty, shortages of labor or materials and governmental prohibition or moratorium. 12. Removal of Equipment and Improvements. Notwithstanding the provisions of Paragraph 7.3(a) of this Lease, Lessor shall not have the right to require Lessee to remove, and Lessee shall not have the right to remove, (i) any of the Tenant Improvements described in Section 11 above, and (ii) as to any other alteration, improvement, addition or Utility Installation Lessee is required to obtain, actually obtains Lessor's approval unless, at the time that Lessor gives such approval, Lessor notifies Lessee in writing that Lessor may require remove of such alteration, improvement, addition or Utility Installation upon expiration of this Lease. For the purposes of Paragraph 7.3 of this Lease, Lessor and Lessee agree that the Novatech materials handling system to be installed by Lessee shall be equipment that Lessee may remove upon expiration of this Lease (subject to Lessee's repair obligations and other applicable provisions of this Lease), and that all improvements, systems, equipment, machinery, materials and finishes pertaining to the "clean rooms" to be constructed by Lessee as part of the Tenant Improvements shall constitute improvements that may not be removed by Lessee at any time. 13. Indemnity. Notwithstanding anything to the contrary in this Lease, Lessee shall neither release nor indemnify Lessor from any damages, liabilities, judgements, actions, claims, attorneys' fees, consultants' fees, payments, costs or expenses arising from (i) the negligence or willful misconduct of Lessor or its employees, agents, contractors or invitees, (ii) Lessor's violation of laws or (iii) any breach by Lessor of its obligations, representations or warranties under this Lease. 14. Damage or Destruction. Notwithstanding the provisions of Paragraph 9.2 of this Lease, in the event the Premises or the Building is damaged or destroyed at any time prior to December 31, 1997 to the extent that the cost of repair is equal to or greater than fifty percent (50%) of the then replacement costs of the Premises or the Building, respectively, but less than seventy percent (70%) of such respective replacement cost, such damage or destruction shall be considered to be "Premises Partial Damage" or "Premises Building Partial Damage", as the case may be, provided that, within thirty (30) days after the occurrence of such damage or destruction, Lessee shall give Lessor unconditional and 6 15 irrevocable written notice to exercise immediately both options to extend this Lease as set forth in Section 3 above (to the extent not already exercised), and provided further that the Premises then include the Second Premises or, if it does not and such damage or destruction has occurred prior to March 1, 1995, Lessee shall give Lessor the Option Notice pursuant to Section 1 above within thirty (30) days after the occurrence of such damage or destruction. Notwithstanding the provisions of Paragraph 9.2 of this Lease, in the event the Premises or the Building is damaged or destroyed at any time after December 31, 1997 and before December 31, 1999 to the extent that the cost of repair is equal to or greater than fifty percent (50%) of the then replacement costs of the Premises or the Building, respectively, but less than sixty percent (60%) of such respective replacement cost, such damage or destruction shall be considered to be "Premises Partial Damage" or "Premises Building Partial Damage", as the case may be, provided that, within thirty (30) days after the occurrence of such damage or destruction, Lessee shall give Lessor unconditional and irrevocable written notice to exercise immediately both options to extend this Lease as set forth in Section 3 above (to the extent not already exercised), and provided further that the Premises then includes the Second Premises. 15. Assignment and Subleasing. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet or otherwise transfer or encumber all or any part of Lessee's interest in this Lease or in the Premises to any company domiciled, or engaged in business primarily, outside of the United States of America, or to any party whom Lessee has reason to believe will violate or seek to violate the use restrictions set forth in Section 7 above or any other applicable provision of this Lease. Any attempt at any such transfer by Lessee shall be void and shall constitute an incurable default under this Lease by Lessee. 16. Lessor's Access. All entries into the Premises by Lessor shall be made during normal business hours upon at least twenty-four (24) hours' prior notice to Lessee, except in the case of an emergency in which case no prior notice shall be required. 17. Signage. Lessee has received and reviewed a copy of the Declaration of Covenants, Conditions and Restrictions, together with sign criteria for the Industrial Center adopted in connection therewith, and acknowledges that they contain restrictions regarding the placement of signs on or about the Property. Lessor's approval of all signage pursuant to paragraph 34 of this Lease shall extend to both the design and location of all signage, which approval shall not be unreasonably withheld. Lessee shall be responsible for the entire cost of all installation, maintenance and repair of its signage. Lessee shall move all of its signage upon termination of this Lease and shall return the Premises to their condition prior to the placement or erection of all such signage. Subject to the foregoing, Lessee shall have the sole right to use of building and monument signage at the Industrial Center. 18. Lessee's Right of First Offer/Refusal. (a) Initial Negotiation. At least thirty (30) days before Lessor undertakes any effort to market, sell, exchange or otherwise voluntarily transfer (any such transaction described above shall be referred to as a "Transfer") all or any portion of the Industrial Center, Lessor shall deliver to Lessee a written offer setting forth the proposed price and other terms on which Lessor is willing to sell the entire Industrial Center to Lessee. Lessee shall have thirty (30) days following its receipt of Lessor's offer (the "Negotiating Period") in which to negotiate with Lessor to purchase the entire Industrial Center and to enter into a binding contract with Lessor for the purchase and sale of the entire Industrial Center. At the end of the Negotiating 7 16 Period, and in the event Lessor and Lessee do not enter into a binding contract for such purchase and sale, Lessor shall prepare a document setting forth all of the final terms offered by Lessor and rejected by Lessee (the "Final Rejected Offer"), which both Lessor and Lessee shall acknowledge in writing. The Final Rejected Offer shall serve as the basis against which it shall be determined whether the terms of any subsequent proposed offer or agreement regarding the Transfer of the Industrial Center are materially less favorable to the Lessor. (b) Transfers During Following Year. In the event Lessor and Lessee do not enter into a binding contract for the purchase and sale of the entire Industrial Center during the Negotiating Period, Lessor may enter into an agreement to make a Transfer of all or any portion of the Industrial Center during the 12-month period immediately following the Negotiating Period for a total consideration of not less than ninety-five percent (95%) of that specified in the Final Rejected Offer and with other material financial terms not materially less favorable to the Lessor than those contained in the Final Rejected Offer; provided that any such agreement may contain financing terms materially different from those of the Final Rejected Offer, provided the purchase price is paid over a period of not more than ten (10) years and the interest rate to Lessor is at least equal to the "prime" or "reference" rate of major banks. Other terms, such as a longer escrow period, more or different contingencies in favor of the proposed buyer, guaranties or indemnities offered by Lessor and the inclusion of other transactions in the purchase and sale transaction, shall not be considered financial terms for the purposes of this paragraph. Any Transfer permitted pursuant to the foregoing provisions of this paragraph is referred to as a "Permitted Transaction". If Lessor does not enter into a binding agreement for a Permitted Transaction during the 12-month period following the expiration of the Negotiating Period as permitted pursuant to this paragraph, and if Lessor thereafter wishes to undertake further efforts to make a Transfer of all or any portion of the Industrial Center, Lessor first may repeat the procedures set forth in Section 18(a) above. (c) Right of First Refusal. No interest in all or any portion of the Industrial Center, except pursuant to a Permitted Transaction under Section 18(b) above, shall be conveyed to any person or entity, either voluntarily or involuntarily, without Lessor's first offering such interest (the "Offered Interest") to Lessee on the same terms and conditions proposed between Lessor and the third party. Lessor shall deliver to Lessee a written offer specifying the materials terms of the proposed conveyance of the offered interest and naming the proposed transferee (the "Offer Notice"). A letter attaching the written offer or proposed agreement between Lessor and the proposed transferee shall be a sufficient Offer Notice. Lessor's delivery of an Offer Notice shall constitute a representation by Lessor that the proposed conveyance referred to in the Offer Notice is a bonafide transaction negotiated at arms' length with an independent transferee who is unaffiliated with Lessor. The offer made to Lessee by delivery of the Offer Notice shall be irrevocable for a period of five (5) days after receipt by Lessee, during which the offer may be accepted or rejected by Lessee. In the event Lessee accepts the offer within such five (5) day period, Lessor and Lessee shall consummate the transfer of the Offered Interest in accordance with the terms set forth in the Offer Notice. In the event, within five (5) days after Lessee's receipt of the Offer Notice, Lessee does not accept the offer unconditionally and irrevocably in writing on the exact terms and conditions set forth in the Offer Notice, Lessee shall be deemed to have rejected the offer and waived its right of first refusal as to the proposed Transfer evidenced by the Offer Notice (including any changes thereto other than changes to material financial terms that are materially less favorable to Lessor). To the extent the following are consistent with, or not addressed by, the terms and conditions specified in the Offer Notice: (i) Lessee shall have thirty (30) 8 17 days after its acceptance of the offer in which to arrange financing for its acquisition of the Offered Interest, (ii) the transfer of the Offered Interest shall take place through an escrow with a title insurance company reasonably acceptable to Lessor and Lessee, (iii) the closing of the transfer of the Offered Interest shall occur within sixty (60) days after Lessee's receipt of the Offer Notice, (iv) if the Offered Interest is a fee interest in the Industrial Center, the transfer shall be made by grant deed, and (v) costs and expenses in connection with the transfer of the Offered Interest to Lessee shall be allocated between Lessor and Lessee as is customary in San Diego County. Notwithstanding any provision of this paragraph to the contrary, Lessee's right of first refusal shall not apply to any conveyance or hypothecation of all of any portion of the Industrial Center in connection with Lessor's obtaining a bonafide loan, or any conveyance of the Industrial Center by private sale pursuant to the provisions of, upon foreclosure of, or by deed in lieu of foreclosure with respect to, any deed of trust or security instrument given to secure any such loan; provided, however, that Lessee shall be given notice of, and the right to cure, any default under any deed of trust or other security instrument. Notwithstanding any provision of this paragraph, Lessor shall at all times have the free right to make any Transfer to any entity controlling, controlled by or under common control with Lessor, or any person or entity that may succeed to the interests of Lessor by merger or consolidation or by purchase of all or substantially all of the assets of Lessor. For the purposes of this paragraph, a person or entity shall be deemed to control every entity in which he or it owns a majority interest or holds majority voting power, or both. Lessee's right of first refusal granted pursuant to this paragraph shall terminate upon the expiration or earlier termination of this Lease. IN WITNESS WHEREOF, Lessor and Lessee have executed this Addendum as a part of the Lease to which this Addendum is attached, effective as of the date of such Lease. LESSOR: McDONNELL DOUGLAS TECHNOLOGIES, INC., a Delaware corporation By: ------------------------------- Its: --------------------------- By: ------------------------------- Its: --------------------------- LESSEE: U.S. MEDICAL INSTRUMENTS, INC., a California corporation By: /s/ Matt Mazur ------------------------------- Its: President By: /s/ ------------------------------- Its: SR VP/CPO/COO 9 EX-10.3 14 EXHIBIT 10.3 1 EXHIBIT 10.3 AGREEMENT BETWEEN U.S. MEDICAL INSTRUMENTS, INC. (PURCHASER) AND NYPRO PRECISION ASSEMBLIES, INC. (SUPPLIER) This Agreement is made by and between U.S. Medical Instruments, Inc., a California Corporation, ("USMI"), and Nypro Precision Assemblies, Inc. ("NPA"), a California Corporation. In consideration set forth below it is agreed: 1. CUSTOMER'S MINIMUM VOLUME COMMITMENT In consideration for the favorable maximum average pricing offered by NPA under this Agreement, and USMI commitments to process products as set forth in this Agreement, USMI agrees to purchase non-sterile assembled syringe products from NPA in annual volumes no less than the "Minimum Volume Commitments", specified on Schedule B attached hereto. 2. SERVICES Specifications listing and specifying in detail each of USMI products (the "PRODUCTS") to be assembled by NPA, are attached hereto as Schedule C or are contained in the USMI Quality Assurance Procedure and Instruction Manuals (the "Manuals"), which are incorporated herein by reference. NPA will assemble, process and care for the PRODUCTS in accordance with Schedule C and the Manuals. NPA will render such services at the facility or facilities set forth on Schedule B, or at such other facilities as USMI and NPA may hereafter agree. NPA will comply with all current Good Manufacturing Practices ("GMP") requirements applicable to processing the PRODUCTS at the NPA facilities. USMI shall be entitled to perform a GMP audit of NPA facilities with or without notice to NPA to assure compliance with all requirements. NPA shall supply documentation and upon request, will provide USMI all routine documentation regarding assembly, assembly validations and ongoing quality control functions of the products, including, but not limited to, Certificates of Registration as a medical device manufacturer, material handling records, and quality control and testing documentation. Any changes to the contents of the Schedules shall be by mutual agreement and with the written consent of both parties. In the event NPA wishes to make changes to the content of any of the Schedules, USMI reserves the right to make appropriate changes to this Agreement, including but not limited to, changes in the maximum annual average prices specified on Schedule A. 2 3. FORECASTS For NPA's planning purposes, and to insure timely processing of USMI's Products in accordance with this Agreement, USMI agrees to provide, at the time this Agreement is executed, and on no less than a quarterly basis thereafter throughout the term of this Agreement, twelve month forecasts of its monthly volume requirements with a three month firm requirement. At USMI's discretion the product may be any size syringe manufactured by USMI. 4. SCHEDULING AND DELIVERY (a) PURCHASE ORDERS. USMI shall provide purchase order(s) to NPA in advance of USMI requested delivery dates, which purchase order(s) shall include delivery instructions for each of the PRODUCTS to be processed. Each order, including USMI requested delivery dates specified therein, is subject to acceptance by NPA. (b) TIME OF DELIVERY. NPA shall be obligated to accept all of USMI purchase orders for processing the PRODUCTS listed on Schedule A provided that USMI is not in default under any term of this Agreement. NPA shall make best efforts to comply with the requested delivery dates on such orders. (c) DELIVERY OF PROCESSED PRODUCTS FROM NPA TO USMI. NPA shall deliver the Products to USMI packed in double bagged clear plastic bags placed in shipping containers to be provided by USMI. The PRODUCTS will be bagged and labeled with USMI's part number, lot number, quantity and placed in the containers in such a way as to protect the PRODUCTS from damage during reasonable handling and shipment. Each container shall be labeled with USMI's part number, lot number and quantity to match the PRODUCTS labeling. The exterior of each container shall be labeled "NON-STERILE PRODUCT AWAITING FURTHER PROCESSING". Each shipment of PRODUCTS from NPA shall be accompanied by shipping papers, including but not limited to certification of materials, manufacturing process, lot history records, all inspection data and non-conforming material reports. Upon receipt of a shipment, USMI will complete a Receiving Report on the shipment. If there is any discrepancy between the USMI Receiving Report and the NPA shipping papers, USMI will promptly notify NPA of the discrepancies. NPA shall be responsible for conducting a reconciliation to correct any discrepancies and to locate any lost PRODUCTS, provided traceability is maintained. USMI and NPA shall agree on a case by case basis on necessary timeframes to remedy any such discrepancies. NPA will notify USMI of the results of this reconciliation verbally and in writing in order to adjust USMI and/or NPA records. USMI will be bound to payment for only the quantity of PRODUCTS verified as received in the USMI Receiving Report. In the event of such discrepancy, USMI shall not release any portion of the received product for shipment until such discrepancy is resolved. AGREEMENT JULY, 1994 USMI/NPA PAGE 2 3 (d) TERMS OF PURCHASE ORDERS. In the event any purchase order for services subject to this Agreement is inconsistent with the terms of this Agreement, the terms of this Agreement shall control. 5. RAW MATERIAL AND COMPONENT PACKAGING AND HANDLING (a) USMI shall deliver all raw materials and components to NPA Facilities packed in double bagged clear plastic bags labeled with USMI part number, lot number and quantity therein. USMI will package the raw materials and components to withstand all reasonable handling. NPA may refuse to accept or process any damaged or improperly packaged raw materials and components. Each shipment of raw materials and components from USMI shall be accompanied by shipping papers specifying the quantity and content of such shipment, NPA will complete a Receiving Report on the shipment. If there is any discrepancy between the Receiving Report and the shipping papers, NPA shall promptly notify USMI. It shall be USMI's responsibility to reconcile any such discrepancies and to locate lost items and, if necessary, to notify all government agencies. In the event of such discrepancy, NPA shall not assemble any portion of the shipment until such discrepancy is resolved, or until it has received express written instructions from USMI to do so. (b) ALL RAW MATERIALS, COMPONENTS, and EQUIPMENT shall be supplied by USMI to NPA on a consignment basis during the duration of this Agreement. (c) USMI agrees to supply all material required not less than one week prior to the scheduled assembly week. 6. PRICE For the services to be rendered pursuant to this Agreement, and assuming that USMI meets its Minimum Volume Commitment as specified on Schedule A, USMI shall pay NPA annual average prices no greater than as specified on Schedule A. Actual prices to be charged for processing of USMI's Products shall be in accordance with the "Step Pricing Schedule" set forth on Schedule A. In the event USMI fails to meet its Minimum Volume Commitment during any month that this Agreement is in effect, NPA may reserve the right to adjust the prices specified on Schedule A. 7. TERMS OF PAYMENT Payment shall be made within thirty (30) days of invoice date which date shall not precede the shipment date. Each shipment shall be considered a separate and independent transaction, and payment therefor shall be made accordingly. AGREEMENT JULY, 1994 USMI/NPA PAGE 3 4 8. INSURANCE; MUTUAL INDEMNIFICATION (a) INSURANCE. USMI shall maintain at all times insurance protecting all of the Products to be assembled by NPA from any loss, casualty, or damage occurring in transit, and while at any NPA facility, and shall also maintain product liability insurance covering injuries, economic losses and other damages resulting from the use of the Products. NPA shall responsibility for damage to USMI's products while in process at any NPA facility. It shall be NPA's responsibility to reprocess products at NPA's expense that are a result of poor workmanship by NPA. (b) MUTUAL INDEMNIFICATION. Both parties shall indemnify, hold harmless, and defend each other from and against any and all settlements, judgments, fines, expenses (including, without limitation, attorneys' fees and expense incurred in seeking indemnification pursuant to the paragraph) and other amounts actually and reasonably incurred in connection with any threatened, pending, or completed action or proceeding relating to any claim for which either of the parties would be found ultimately liable as a matter of and on account of which the other party has been made a party defendant pursuant to the relationship between the parties under this contract. It is understood by the parties that this paragraph does not create new claims of liabilities in either of the parties, but is intended exclusively to (a) guarantee that the legal liability that may arise for either of the parties on account of that party's conduct under this contract is ultimately borne by that party, regardless of which of the two is subjected to suit and (b) encourage either party to take reasonable steps to cure or mitigate any liability that may arise without, by virtue of that act alone, if taken reasonably, creating new liabilities or a shift in liabilities that otherwise would lie. 9. FDA REQUIREMENTS USMI and NPA agree to comply with all state, federal and FDA requirements. 10. TERM AND TERMINATION (a) YEAR-TO-YEAR TERM. Unless otherwise specified on Schedule A, this Agreement will commence on the date executed by USMI (provided the Agreement is also executed by NPA) and will continue for an initial term of one (1) year from such date. Whatever initial term is established by USMI and NPA, all other provisions of this Section 10 shall be applicable. After the initial term, this Agreement shall be renewed automatically for successive one year periods unless USMI or NPA provides written notice to the other party, at least sixty (60) days prior to the end of the initial or any renewal term, that the Agreement shall not be renewed. (b) TERMINATION FOR DEFAULT. If either party is in material default of its obligations under this Agreement, the other party may give written notice that the Agreement will be terminated if the default is not cured or commenced to be cured within sixty (60) days. If such notice is given and the default is not cured or commenced to be AGREEMENT JULY, 1994 USMI/NPA PAGE 4 5 cured during the sixty (60) day period, then the Agreement shall terminate at the end of such period. (c) TERMINATION. In the event of a premature termination by USMI, NPA shall be entitled to full compensation resulting from any outstanding USMI purchase order commitments. 11. TITLE TO PRODUCTS Title to Product, both processed and unprocessed, shall remain with USMI at all times. 12. GENERAL (a) CHOICE OF LAW. This Agreement shall be governed and interpreted according to the substantive law of the State of California without regard to conflict of law principles or doctrines. (b) NOTICES. Any notice or other communication required or permitted hereunder shall be deemed to be properly given upon personal delivery or five (5) days after being sent registered or certified mail, postage prepaid, to the addressee set forth below. Such addresses may be changed by either party upon notice to the other in writing in the manner permitted by this section. (c) ASSIGNMENT. This Agreement may not be assigned nor may any duty hereunder be delegated without the express written consent of the other party and any such attempted assignment or delegation shall be void; provided, however, either party may assign this Agreement to any entity that acquires all or substantially all of the assets to which this Agreement relates. Subject to the foregoing, this Agreement shall inure to the benefit of and be binding upon each party and its successors and assigns. (d) SEVERABILITY. If any provision of this Agreement shall be held to be invalid, illegal, or unenforceable for any reason whatsoever, such holding shall not render this Agreement unenforceable or invalid as a whole, and, in such event, such provision shall be changed and interpreted so as to best accomplish the net economic effect of such unenforceable or invalid provision within the limits of applicable law. (e) ENTIRE AGREEMENT. This Agreement, together with the Schedule(s) hereto, constitutes the entire agreement between the parties. This Agreement supersedes, and the terms of this Agreement govern, any prior, contemporaneous, or collateral agreements between the parties. USMI acknowledges that it has not entered into this Agreement in reliance upon any representation or warranty by any person or entity except for such representations or warranties as are specifically set forth herein. This Agreement may only by changed by the mutual written agreement of authorized representatives of the parties. AGREEMENT JULY, 1994 USMI/NPA PAGE 5 6 (f) ATTORNEY'S FEES. In the event of any litigation, arbitration or other proceeding arising out of or in connection with this Agreement, each party shall bear the respective costs related to such litigation. (g) NO AGENCY. Nothing contained herein shall be construed as creating an agency, partnership, or other form of joint enterprise between the parties. (h) FORCE MAJEURE. Neither USMI nor NPA shall be responsible for any loss, damages or penalty resulting from delay in delivery when such delay is due to causes beyond the reasonable control of such party, including but not limited to, labor, unrest, shortages, riots, insurrection, fires, flood, storm, earthquake, act of God, explosion, war, terrorism or governmental action. (i) WAIVER. No delay, omission, or failure to exercise any right or remedy provided for in this Agreement shall be deemed to be a waiver thereof or an acquiescence in the event giving rise to such right or remedy, but every such right or remedy may be exercised, from time to time, as may be deemed expedient by the party exercising such right or remedy. Any waiver by either party of a breach of any provision of this Agreement must be made in writing signed by an authorized representative of the waiving party, and any such waiver shall not be construed as a waiver of any continuing or subsequent breach. (j) WARRANTY. NPA warrants that the Products assembled by NPA shall be assembled properly in accordance with USMI's specifications set forth on Schedule C. Except for the express warranty set forth herein, NPA grants no other warranties, express or implied, by statute or otherwise, regarding the products, including without limitation their fitness for any purpose or their merchantability. (k) LIMITATION OF LIABILITY. In no event shall USMI's liability under this Agreement exceed the amounts paid by USMI to NPA hereunder. In no event shall either party be liable to the other party or any other entity for any special, consequential, incidental, punitive or indirect damages, however caused and on any theory of liability, arising out of this Agreement. These limitations shall apply notwithstanding any failure of essential purpose of any limited remedy. AGREEMENT JULY, 1994 USMI/NPA PAGE 6 7 Dated: 8/10/94 NYPRO PRECISION ASSEMBLIES, INC. --------- a California Corporation 505 Otay Valley Road, Suite A Chula Vista, California 91911 /s/ Fernando Velazquez ------------------------------------ Fernando Velazquez President Dated: 8/10/94 U.S. MEDICAL INSTRUMENTS, INC. --------- a California Corporation 16825 Via del Campo Court San Diego, California 92127 /s/ Matthew Mazur ------------------------------------ Matthew Mazur President AGREEMENT JULY, 1994 USMI/NPA PAGE 7 EX-10.4 15 EXHIBIT 10.4 1 EXHIBIT 10.4 [MERRILL LYNCH LOGO] NO. 272-07763 ================================================================================ WCMA(R) NOTE AND LOAN AGREEMENT WCMA NOTE AND LOAN AGREEMENT ("Loan Agreement") dated as of August 9, 1996, between U.S. MEDICAL INSTRUMENTS, INC., a corporation organized and existing under the laws of the State of California having its principal office at 16825 Via Del Campo Court, San Diego, CA 92127 ("Customer"), and MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a corporation organized and existing under the laws of the State of Delaware having its principal office at 33 West Monroe Street, Chicago, IL 60603 ("MLBFS"). In accordance with that certain WORKING CAPITAL MANAGEMENT(R) ACCOUNT AGREEMENT NO. 272-07763 ("WCMA Agreement") between Customer and MLBFS' affiliate, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED ("MLPF&S"). Customer has subscribed to the WCMA Program described in the WCMA Agreement. The WCMA Agreement is by this reference incorporated as a part hereof. In conjunction therewith and as part of the WCMA Program, Customer has requested that MLBFS provide, and subject to the terms and conditions herein set forth MLBFS has agreed to provide, a commercial line of credit for Customer (the "WCMA Line of Credit"). Accordingly, and in consideration of the premises and of the mutual covenants of the parties hereto, Customer and MLBFS hereby agree as follows: 1. DEFINITIONS (a) SPECIFIC TERMS. In addition to terms defined elsewhere in this Loan Agreement, when used herein the following terms shall have the following meanings: (i) "Activation Date" shall mean the date upon which MLBFS shall cause the WCMA Line of Credit to be fully activated under MLPF&S' computer system as part of the WCMA Program (ii) "Additional Agreements" shall mean all agreements, instruments, documents and opinions other than this Loan Agreement, whether with or from Customer or any other party, which are contemplated hereby or otherwise reasonably required by MLBFS in connection herewith, or which evidence the creation, guaranty or collateralization of any of the Obligations or the granting or perfection of liens or security interests upon any collateral for the Obligations. (iii) "Business Day" shall mean any day other than a Saturday, Sunday, federal holiday or other day on which the New York Stock Exchange is regularly closed. (iv) "Commitment Expiration Date" shall mean September 9, 1996. (v) "General Funding Conditions" shall mean each of the following conditions to any WCMA Loan by MLBFS hereunder: (A) no Event of Default, or event which with the giving of notice, passage of time, or both, would constitute an Event of Default, shall have occurred and be continuing or would result from the making of any WCMA Loan hereunder by MLBFS; (B) there shall not have occurred any material adverse change in the business or financial condition of Customer, (C) all representations and warranties of Customer herein or in any Additional Agreements shall then be true and correct in all material respects; (D) MLBFS shall have received this Loan Agreement and all of the Additional Agreements, duly executed and filed or recorded where applicable, all of which shall be in form and substance reasonably satisfactory to MLBFS; (E) MLBFS shall have received evidence reasonably satisfactory to it as the ownership of and the perfection and priority of MLBFS' liens and security interests on any collateral for the Obligations furnished pursuant to any of the Additional Agreements; and (F) any additional conditions specified in the "WCMA Line of Credit Approval" 2 letter executed by MLBFS with respect to the transactions contemplated hereby shall have been met to the reasonable satisfaction of MLBFS. (vi) "Interest Rate" shall mean a variable per annum rate of interest equal to the sum of 2.65% and the 30- Day Commercial Paper Rate. The "30-Day Commercial Paper Rate" shall mean, as of the date of any determination, the interest rate from time to time published in the "Money Rates" section of The Wall Street Journal for 30-day high-grade unsecured notes sold through dealers by major corporations. The Interest Rate will change as of the date of publication in The Wall Street Journal of a 30-Day Commercial Paper Rate that is different from that published on the preceding Business Day. In the event that The Wall Street Journal shall, for any reason, fail or cease to publish the 30-Day Commercial Paper Rate, MLBFS will choose a reasonably comparable index or source to use as the basis for the Interest Rate. (vii) "Line Fee" shall mean a fee of $12,500.00 payable to MLBFS in connection with the WCMA Line of Credit for the period from the Activation Date to the Maturity Date. (viii) "Maturity Date" shall mean August 31, 1997, or Such later date as may be consented to in writing by MLBFS. (ix) "Maximum WCMA Line of Credit" shall mean an amount equal to the lesser of: (i) the cash surrender value of that certain Flexible Benefit Annuity No. 540717 issued by TMG Life Insurance Company to Robert Siegel (the "Annuity"), and collaterally assigned by Robert Siegel to MLBFS in connection herewith. or (ii) $2,325,000.00. (x) "Obligations" shall mean all liabilities, indebtedness and other obligations of Customer to MLBFS, howsoever created, arising or evidenced, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, due or to become due, primary or secondary or point or several, and, without limiting the foregoing, shall include interest accruing after the filing of any petition in bankruptcy, and all present and future liabilities, indebtedness and obligations of Customer under this Loan Agreement. (xi) "WCMA Account" shall mean and refer to the Working Capital Management Account of Customer with MLPF&S identified as Account No. 272-07763. (xii) "WCMA Loan" shall mean each advance made by MLBFS pursuant to this Loan Agreement. (b) OTHER TERMS. Except as otherwise defined herein: (i) all terms used in this Loan Agreement which are defined in the Uniform Commercial Code of Illinois ("UCC") shall have the meanings set forth in the UCC, and (ii) capitalized terms used herein which are defined in the WCMA Agreement shall have the meaning set forth in the WCMA Agreement. 2. WCMA PROMISSORY NOTE FOR VALUE RECEIVED, Customer hereby promises to pay to the order of MLBFS, at the times and in the manner set forth in this Loan Agreement, or in such other manner and at such place MLBFS may hereafter designate in writing, the following: (a) on the Maturity Date, the aggregate unpaid principal amount of all WCMA Loans (the "WCMA Loan Balance"); (b) Interest at the Interest Rate on the outstanding WCMA Loan Balance, from and including the date on which the initial WCMA Loan is made until the date of payment of all WCMA Loans in full; and (c) on demand, all other sums payable pursuant to this Loan Agreement, including, but not limIted to, the Line Fee and any late charges. Except as otherwise expressly set forth herein, Customer hereby waives presentment, demand for payment, protest and notice of protest, notice of dishonor, notice of acceleration, notice of intent to accelerate and all other notices and formalities in connection with this WCMA Promissory Note and this Loan Agreement. 3. WCMA LOANS (a) Activation Date. Provided that: (i) the Commitment Expiration Date shall not then have occurred, and (ii) Customer shall have subscribed to the WCMA Program and its subscription to the WCMA Program shall then be in effect, the Activation Date shall occur on or promptly after the date following the acceptance of -2- 3 this Loan Agreement by MLBFS at its office in Chicago, Illinois, upon which each of the General Funding Conditions shall have been met or satisfied to the reasonable satisfaction of MLBFS. No activation by MLBFS of the WCMA Line of Credit for a nominal amount shall be deemed evidence of the satisfaction of any of the conditions herein set forth, or a waiver of any of the terms or conditions hereof. (b) WCMA LOANS. Subject to the terms and conditions hereof, during the period from and after the Activation Date to the Maturity Date: (i) MLBFS will make WCMA Loans to Customer in such amounts as Customer may from time to time request in accordance with the terms hereof, up to an aggregate outstanding amount not to exceed the Maximum WCMA Line of Credit, and (ii) Customer may repay any WCMA Loans in whole or in part at any time without premium or penalty, and request a re-borrowing of amounts repaid on a revolving basis. Customer may request WCMA Loans by use of WCMA Checks, FTS, Visa(R) charges, wire transfers, or such other means of access to the WCMA Line of Credit as may be permitted by MLBFS from time to time; it being understood that so long as the WCMA Line of Credit shall be in effect, any charge or debit to the WCMA Account which but for the WCMA Line of Credit would under the terms of the WCMA Agreement result in an overdraft, shall be deemed a request by Customer for a WCMA Loan. (c) CONDITIONS OF WCMA LOANS. Notwithstanding the foregoing, MLBFS shall not be obligated to make any WCMA Loan, and may without notice refuse to honor any such request by Customer, if at the time of receipt by MLBFS of Customer's request: (i) the making of such WCMA Loan would cause the Maximum WCMA Line of Credit to be exceeded; or (ii) the Maturity Date shall have occurred, or the WCMA Line of Credit shall have otherwise been terminated in accordance with the terms hereof; or (iii) Customer's subscription to the WCMA Program shall have been terminated; or (iv) an event shall have occurred and is continuing which shall have caused any of the General Funding Conditions to not then be met or satisfied to the reasonable satisfaction of MLBFS. The making by MLBFS of any WCMA Loan at a time when any one or more of said conditions shall not have been met shall not in any event be construed as a waiver of said condition or conditions or of any Event of Default, and shall not prevent MLBFS at any time thereafter while any condition shall not have been met from refusing to honor any request by Customer for a WCMA Loan. (d) FORCE MAJEURE. MLBFS shall not be responsible, and shall have no liability to Customer or any other party, for any delay or failure of MLBFS to honor any request of Customer for a WCMA Loan or any other act or omission of MLBFS, MLPF&S or any of their affiliates due to or resulting from any system failure, error or delay in posting or other clerical error, loss of power, fire, Act of God or other cause beyond the reasonable control of MLBFS, MLPF&S or any of their affiliates unless directly arising out of the willful wrongful act or active gross negligence of MLBFS. In no event shall MLBFS be liable to Customer or any other party for any incidental or consequential damages arising from any act or omission by MLBFS, MLPF&S or any of their affiliates in connection with the WCMA Line of Credit of this Loan Agreement. (e) INTEREST. The WCMA Loan Balance shall bear interest at the Interest Rate Interest shall be computed for the actual number of days elapsed on the basis of a year consisting of 360 days Notwithstanding any provision to the contrary in this Agreement or any of the Additional Agreements, no provision of this Agreement or any of the Additional Agreements shall require the payment or permit the collection of any amount in excess of the maximum amount of interest permitted to be changed by law ("Excess Interest"). If any Excess Interest is provided for, or is adjudicated as being provided for, in this Agreement or any of the Additional Agreements, then (a) Customer shall not be obligated to pay any Excess Interest; and (b) any Excess Interest that MLBFS may have received hereunder or under any of the Additional Agreements shall, at the option if MLBFS, be: (i) applied as a credit against the then unpaid balance of the WCMA Line of Credit, (ii) refunded to the payer thereof, or (iii) any combination of the foregoing. Except as otherwise provided herein, accrued and unpaid interest on the WCMA Loan Balance shall be payable monthly on the last Business Day of each calendar month, commencing with the last Business Day of the calendar month in which the Activation Dale shall occur. Customer hereby irrevocably authorizes and directs MLPF&S to pay MLBFS such accrued interest from any available free credit balances in the WCMA Account, and if such available free credit balances are insufficient to satisfy any interest payment due, to liquidate any investments in the Money Accounts (other than any investments constituting any Minimum Money Accounts Balance under the WCMA Directed Reserve program) in an amount up to the balance of such accrued interest, and pay to MLBFS the available proceeds on account thereof. If available free credit balances in the WCMA Account and available proceeds of the Money Accounts are insufficient to pay the entire balance of accrued interest, and Customer -3- 4 otherwise fails to make such payment when due, MLBFS may, in its sole discretion, make a WCMA Loan in an amount equal to the balance of such accrued interest and pay the proceeds of such WCMA Loan to itself on account of such interest. The amount of any such WCMA Loan will be added to the WCMA Loan Balance. If MLBFS declines to extend a WCMA Loan to Customer under these circumstances, Customer hereby authorizes and directs MLPF&S to make all such interest payments to MLBFS from any Minimum Money Accounts Balance. If there is no Minimum Money Accounts Balance, or it is insufficient to pay all such interest, MLBFS will invoice Customer for payment of the balance of the accrued interest, and Customer shall pay such interest as directed by MLBFS within 5 Business Days or receipt of such invoice. (f) PAYMENTS. All payments required or permitted to be made pursuant to this Loan Agreement shall be made in lawful money of the United States. Unless otherwise directed by MLBFS, payments on account of the WCMA Loan Balance may be made by the delivery of checks (other than WCMA Checks), or by means of FTS or wire transfer of funds (other than funds from the WCMA Line of Credit) to MLPF&S for credit to Customer's WCMA Account. Notwithstanding anything in the WCMA Agreement to the contrary, Customer hereby irrevocably authorizes and directs MLPF&S to apply available free credit balances in the WCMA Account to the repayment of the WCMA Loan Balance prior to application for any other purpose. Payments to MLBFS from funds in the WCMA Account shall be deemed to be made by Customer upon the same basis and schedule as funds are made available for investment in the Money Accounts in accordance with the terms of the WCMA Agreement. All funds received by MLBFS from MLPF&S pursuant to the aforesaid authorization shall be applied by MLBFS to repayment of the WCMA Loan Balance. The acceptance by or on behalf of MLBFS of a check or other payment for a lesser amount than shall be due from Customer, regardless of any endorsement or statement thereon or transmitted therewith, shall not be deemed an accord and satisfaction or anything other than a payment on account, and MLBFS or anyone acting on behalf of MLBFS may accept such check or other payment without prejudice to the rights of MLBFS to recover the balance actually due or to pursue any other remedy under this Loan Agreement or applicable law for such balance. All checks accepted by or on behalf of MLBFS in connection with the WCMA Line of Credit are subject to final collection. (g) EXCEEDING THE MAXIMUM WCMA LINE OF CREDIT. In the event that the WCMA Loan Balance shall at any time exceed the Maximum WCMA Line of Credit, Customer shall within 1 Business Day of the first to occur of (i) any request or demand of MLBFS, or (ii) receipt by Customer of a statement from MLPF&S showing a WCMA Loan Balance in excess of the Maximum WCMA Line of Credit, deposit sufficient funds into the WCMA Account to reduce the WCMA Loan Balance below the Maximum WCMA Line of Credit. (h) LINE FEE; EXTENSIONS. (i) In consideration of the extension of the WCMA Line of Credit by MLBFS to Customer during the period from the Activation Date to the Maturity Date, Customer has paid or shall pay the Line Fee to MLBFS. If such fee has not heretofore been paid by Customer, Customer hereby authorizes MLBFS, at its option, to either cause said fee to be paid with a WCMA Loan which is added to the WCMA Loan Balance, or invoice Customer for said fee (in which event Customer shall pay said fee within 5 Business Days after receipt of such invoice). No delay in the Activation Date, howsoever caused shall entitle Customer to any rebate or reduction in the Line Fee or extension of the Maturity Date. (ii) In the event MLBFS and Customer, in their respective sole discretion, agree to renew the WCMA Line of Credit beyond the current Maturity Date, Customer agrees to pay a renewal Line Fee or Line Fees (if the Maturity Date is extended for more than one 12-month period), in the amount per 12-month period or other applicable period then set forth in the writing signed by MLBFS which extends the Maturity Date; it being understood that any request by Customer for a WCMA Loan or failure of Customer to pay any WCMA Loan Balance outstanding on the immediately prior Maturity Date, after the receipt by Customer of a writing signed by MLBFS extending the Maturity Date, shall be deemed a consent by Customer to both the renewal Line Fees and the new Maturity Date. If no renewal Line Fees are set forth in the writing signed by MLBFS extending the Maturity Date, the renewal Line Fee for each 12-month period shall be deemed to be the same as the immediately preceding periodic Line Fee. Each such renewal Line Fee, at the option of MLBFS, either be paid with a WCMA Loan which is added to the WCMA Loan Balance or invoiced to Customer, as aforesaid, on or at any time after the first Business Day of the first month of the 12-month period for which such fee is due. -4- 5 (i) STATEMENTS. MLPF&S will include in each monthly statement it issues under the WCMA Program information with respect to WCMA Loans and the WCMA Loan Balance. Any questions that Customer may have with respect to such information should be directed to MLBFS; and any questions with respect to any other matter in such statements or about or affecting the WCMA Program should be directed to MLPF&S. (j) USE OF LOAN PROCEEDS; SECURITIES TRANSACTIONS. The proceeds of each WCMA Loan shall be used by customer solely for working capital in the ordinary course of is business, or, with the prior written consent of MLBFS, for other lawful business purposes of Customer not prohibited hereby. Customer agrees that under no circumstances will funds borrowed from MLBFS through the WCMA line of credit be used: (i) for personal, family or household purposes of any person whatsoever, (ii) to purchase, carry or trade in securities, including shares of the money accounts, or (iii) to repay debt incurred to purchase, carry or trade in securities; nor will any such funds be remitted, directly or indirectly, to MLPF&S or any other broker or dealer in securities, by WCMA check, check, FTC, wire transfer, or otherwise. 4. REPRESENTATIONS AND WARRANTIES Customer represent and warrants to MLBFS that: (a) ORGANIZATION AND EXISTENCE. Customer is a corporation, duly organized and validly existing in good standing under the laws of the State of California and is qualified to do business and in good standing in each other state where the nature of its business or the property owned by it make such qualification necessary. (b) EXECUTION, DELIVERY AND PERFORMANCE. The execution, delivery and performance by Customer of this Loan Agreement and such of the Additional Agreements to which it is a party: (i) have been duly authorized by all requisite action, (ii) do not and will not violate or conflict with any law or other governmental requirement, or any of the agreements, instruments or documents which formed or govern Customer, and (iii) do not and will not breach or violate any of the provisions of, and will not result in a default by Customer under, any other agreement, instrument or document to which it is a party or by which it or its properties are bound. (c) NOTICES AND APPROVALS. Except as may have been given or obtained, no notice to or consent or approval of any governmental body or authority or other third party whatsoever (including, without limitation, any other creditor) is required in connection with the execution, delivery or performance by Customer of such of this Loan Agreement and the Additional Agreements to which it is a party. (d) ENFORCEABILITY. This Loan Agreement and such of the Additional Agreements to which it is a party are the legal, valid and binding obligations of Customer, enforceable against it in accordance with their respective terms, except as enforceability may be limited by bankruptcy and other similar laws affecting the rights of creditors generally or by general principles of equity. (e) FINANCIAL STATEMENTS. Except as expressly set froth in Customer's financial statements, all financial statements of Customer furnished to MLBFS have been prepared in conformity with generally accepted accounting principles, consistently applied, are true and correct, and fairly present the financial condition of it as at such dates and the results of its operations for the periods then ended; and since the most recent date covered by such financial statements, there has been no material adverse change in any such financial condition or operation. (f) LITIGATION. No litigation, arbitration, administrative or governmental proceedings are pending or, to the knowledge of Customer, threatened against Customer, which would, if adversely determined, materially and adversely affect the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or the continued operations of Customer. (g) TAX RETURNS. All federal, state and local tax returns, reports and statements required to be filed by Customer have been filed with the appropriate governmental agencies and all taxes due and payable by -5- 6 Customer have been timely paid (except to the extent that any such failure to file or pay will not materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer, or the continued operations of Customer). Each of the foregoing representations and warranties are continuing and shall be deemed remade by Customer concurrently with each request for a WCMA Loan. 5. FINANCIAL AND OTHER INFORMATION Customer shall furnish or cause to be furnished to MLBFS during the term of this Loan Agreement all of the following: (a) ANNUAL FINANCIAL STATEMENTS. Within 120 days after the closing of each fiscal year of Customer, Customer shall furnish or cause to be furnished to MLBFS a copy of the annual audited financial statements of Customer consisting of at least a balance sheet as at the close of such fiscal year and related statements of income, retained earnings and cash flows, certified by its current independent certified public accountants or other independent certified public accountants reasonably acceptable to MLBFS. (b) INTERIM FINANCIAL STATEMENTS. Within 45 days after the close of each fiscal quarter of Customer, Customer shall furnish or cause to be furnished to MLBFS: (i) a statement of profit and loss for the fiscal quarter then ended, and (ii) a balance sheet as at the close of such fiscal quarter, all in reasonable detail and certified by its chief financial officer. (c) SEC REPORTS. Customer shall furnish MLBFS with a copy of each 10-K and 10-Q report filed with the SEC not later than 10 days after the date filed with the SEC. (d) MONTHLY ANNUITY STATEMENTS. Within 15 days after the end of each calendar month during the term hereof, Customer shall cause TMG Life Insurance Company to furnish to MLBFS a statement setting forth the cash surrender value of the Annuity as of the last day of the preceding calendar month. (e) OTHER INFORMATION. Customer shall furnish or cause to be furnished to MLBFS such other information as MLBFS may from time to time reasonably request relating to Customer. 6. OTHER COVENANTS Customer further agrees during the term of this Loan Agreement that: (a) FINANCIAL RECORDS; INSPECTION. Customer will: (i) maintain at its principal place of business complete and accurate books and records, and maintain all of its financial records in a manner consistent with the financial statements heretofore furnished to MLBFS, or prepared on such other basis as may be approved in writing by MLBFS; and (ii) permit MLBFS or its duly authorized representatives, upon reasonable notice and at reasonable times, to inspect its properties (both real or personal), operations, books and records. (b) TAXES. Customer will pay when due all taxes, assessments and other governmental charges, howsoever designated, and all other liabilities and obligations, except to the extent that any such failure to pay will not materially and adversely affect either any liens and security interests of MLBFS under any Additional Agreements, the financial condition of Customer or the continued operations of Customer. (c) COMPLIANCE WITH LAWS AND AGREEMENTS. Customer will not violate any law, regulation or other governmental requirement, any judgment or order of any court or governmental agency or authority, or any agreement, instrument or document to which it is a party or by which it is bound, if any such violation will materially and adversely affect either any liens and security interests of MLBFS under any Additional Agreements, or the financial condition or the continued operations of Customer. (d) CONTINUITY. Except upon the prior written consent of MLBFS, which consent will not be unreasonably withheld: (i) Customer will not be a party to any merger or consolidation with or purchase or otherwise -6- 7 acquire all or substantially all of the assets or stock of, or any material partnership or joint venture interest in, any person or entity, or sell, transfer or lease all or any substantial part of its assets if any such action causes a material change in its control or principal business, or a material adverse change in its financial condition or operations; (ii) Customer will preserve its existence and good standing in the jurisdictions of establishment and operation, and will not operate in any material business other than a business substantially the same as its business as of the date of application by Customer for credit from MLBFS; and (iii) Customer will not cause or permit any material change in its controlling ownership, controlling senior management or, except upon not less than 30 days prior written notice to MLBFS, its name or principal place of business. (e) ANNUITY. So long as this Loan Agreement shall be in effect or there are any Obligations, Customer shall cause the Annuity to remain in effect. 7. EVENTS OF DEFAULT The occurrence of any of the following events shall constitute an "Event of Default" under this Loan Agreement: (a) FAILURE TO PAY. Customer shall fail to pay to MLBFS or deposit into the WCMA Account when due any amount owing or required to be deposited by Customer under this Loan Agreement, or shall fail to pay when due any other Obligations, and any such failure shall continue for more than 5 Business Days after written notice thereof shall have been given by MLBFS to Customer. (b) FAILURE TO PERFORM. Customer shall default in the performance or observance of any covenant or agreement on its part to be performed or observed under this Loan Agreement or any of the Additional Agreements (not constituting an Event of Default under any other clause of this Section), and such default shall continue unremedied for 10 Business Days after written notice thereof shall have been given by MLBFS to Customer. (c) BREACH OF WARRANTY. Any representation or warranty made by Customer contained in this Loan Agreement or any of the Additional Agreements shall at any time prove to have been incorrect in any material respect when made. (d) DEFAULT UNDER OTHER AGREEMENT. A default or Event of Default by Customer shall occur under the terms of any other agreement, instrument or document with or intended for the benefit of MLBFS, MLPF&S or any of their affiliates, and any required notice shall have been given and required passage of time shall have elapsed. (e) BANKRUPTCY, ETC. A proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt or receivership law or statute shall be filed by Customer, or any such proceeding shall be filed against Customer and shall not be dismissed or withdrawn within 60 days after filing, or Customer shall make an assignment for the benefit of creditors, or Customer shall become insolvent or generally fail to pay, or admit in writing its inability to pay, its debts as they become due. (f) MATERIAL IMPAIRMENT. Any event shall occur which shall reasonably cause MLBFS to in good faith believe that the prospect of payment or performance by Customer has been materially impaired. (g) ACCELERATION OF DEBT TO OTHER CREDITORS. Any event shall occur which results in the acceleration of the maturity of any indebtedness of $100,000.00 or more of Customer to another creditor under any indenture, agreement, undertaking, or otherwise. 8. REMEDIES (a) REMEDIES UPON DEFAULT. Upon the occurrence and during the continuance of any Event of Default, MLBFS may at its sole option do any one or more or all of the following, at such time and in such order as MLBFS may in its sole discretion choose: -7- 8 (i) TERMINATION. MLBFS may without notice terminate the WCMA Line of Credit and all obligations to provide the WCMA Line of Credit or otherwise extend any credit to or for the benefit of Customer; and upon any such termination MLBFS shall be relieved of all such obligations. (ii) ACCELERATION. MLBFS may declare the principal of and interest on the WBMA Loan Balance, and all other Obligations to be forthwith due and payable, whereupon all such amounts shall be immediately due and payable, without presentment, demand for payment, protest and notice of protest, notice of dishonor, notice of acceleration, notice of intent to accelerate or other notice or formality of any kind, all of which are hereby expressly waived. (b) SET-OFF. MLBFS shall have the further right upon the occurrence and during the continuance of an Event of Default to set-off, appropriate and apply toward payment of any of the Obligations, in such order of application as MLBFS may from time to time and at any time elect, any cash, credit, deposits, accounts, securities and any other property of Customer which is in transit to or in the possession, custody or control of MLBFS, MLPF&S or any agent, bailee, or affiliate of MLBFS or MLPF&S, including, without limitation, the WCMA Account and any Money Accounts, and all cash and securities therein or controlled thereby, and all proceeds thereof. Customer hereby collaterally assigns and grants to MLBFS a security interest in all such property as additional security for the Obligations. Upon the occurrence and during the continuance of an Event of Default, MLBFS shall have all rights in such property available to collateral assignees and secured parties under all applicable laws, including, without limitation, the UCC. (c) REMEDIES ARE SEVERABLE AND CUMULATIVE. All rights and remedies of MLBFS herein are severable and cumulative and in addition to all other rights and remedies available in the Additional Agreements, at law or in equity, and any one or more of such rights and remedies may be exercised simultaneously or successively. 9. MISCELLANEOUS (a) NON-WAIVER. No failure or delay on the part of MLBFS in exercising any right, power or remedy pursuant to this Loan Agreement or any of the Additional Agreements shall operate as a waiver thereof, and no single or partial exercise of any such right, power or remedy shall preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. Neither any waiver of any provision of this Loan Agreement or any of the Additional Agreements, nor any consent to any departure by Customer therefrom, shall be effective unless the same shall be in writing and signed by MLBFS. Any waiver of any provision of this Loan Agreement or any of the Additional Agreements and any consent to any departure by Customer from the terms of this Loan Agreement or any of the Additional Agreements shall be effective only in the specific instance and for the specific purpose for which given. Except as otherwise expressly provided herein, no notice to or demand on Customer shall in any case entitle Customer to any other or further notice or demand in similar or other circumstances. (b) DISCLOSURE. Customer hereby irrevocably authorize MLBFS and each of its affiliates, including without limitation MLPF&S, to at any time (whether or not an Event of Default shall have occurred) obtain from and disclose to each other any and all financial and other information about Customer. (c) COMMUNICATIONS. All notices and other communications required or permitted hereunder shall be in writing, and shall be either delivered personally, mailed by postage prepaid certified mail or sent by express overnight courier or by facsimile. Such notices and communications shall be deemed to be given on the date of personal delivery, facsimile transmission or actual delivery of certified mail, or one Business Day after delivery to an express overnight courier. Unless otherwise specified in a notice sent or delivered in accordance with the terms hereof, notices and other communications in writing shall be given to the parties hereto at their respective addresses set forth at the beginning of this Loan Agreement, or, in the case of facsimile transmission, to the parties at their respective regular facsimile telephone number. (d) COSTS, EXPENSES AND TAXES. Customer shall upon demand pay or reimburse MLBFS for: (i) all Uniform Commercial Code filing and search fees and expenses incurred by MLBFS in connection with the verification, perfection or preservation of MLBFS' rights hereunder or in any collateral for the Obligations; (ii) any and all stamp, transfer and other taxes and fees payable or determined to be payable in connection with -8- 9 the execution, delivery and/or recording of this Loan Agreement or any of the Additional Agreements; and (iii) all reasonable fees and out-of-pocket expenses (including, but not limited to, reasonable fees and expenses of outside counsel) incurred by MLBFS in connection with the enforcement of this Loan Agreement or any of the Additional Agreements or the protection of MLBFS' rights hereunder or thereunder, excluding, however, salaries and expenses of MLBFS' employees. The obligations of Customer under this paragraph shall survive the expiration or termination of this Loan Agreement and the discharge of the other Obligations. (e) RIGHT TO PERFORM OBLIGATIONS. If Customer shall fail to do any act or thing which it has covenanted to do under this Loan Agreement or any representation or warranty on the part of Customer contained in this Loan Agreement shall be breached, MLBFS may, in its sole discretion, after 5 days written notice is sent to Customer (or such lesser notice, including no notice, as is reasonable under the circumstances), do the same or cause it to be done or remedy any such breach, and may expend its funds for such purpose. Any and all reasonable amounts so expended by MLBFS shall be repayable to MLBFS by Customer upon demand, with interest at the Interest Rate during the period from and including the date funds are so expended by MLBFS to the date of repayment, and all such amounts shall be additional Obligations. The payment or performance by MLBFS of any of Customer's obligations hereunder shall not relieve Customer of said obligations or of the consequences of having failed to pay or perform the same, and shall not waive or be deemed a cure of any Event of Default. (f) LATE CHARGE. Any payment required to be made by Customer pursuant to this Loan Agreement not paid within 10 days of the applicable due date shall be subject to a late charge in an amount equal to the lesser of: (i) 5% of the overdue amount, or (ii) the maximum amount permitted by applicable law. Such late charge shall be payable on demand, or, without demand, may in the sole discretion of MLBFS be paid by WCMA Loan and added to the WCMA Loan Balance in the same manner as provided herein for accrued interest. (g) FURTHER ASSURANCES. Customer agrees to do such further acts and things and to execute and deliver to MLBFS such additional agreements, instruments and documents as MLBFS may reasonably require or deem advisable to effectuate the purposes of this Loan Agreement or any the Additional Agreements. (h) BINDING EFFECT. This Loan Agreement and the Additional Agreements shall be binding upon, and shall inure to the benefit of MLBFS. Customer and their respective successors and assigns. Customer shall not assign any of its rights or delegate any of its obligations under this Loan Agreement or any of the Additional Agreements without the prior written consent of MLBFS. Unless otherwise expressly agreed to in a writing signed by MLBFS, no such consent shall in any event relieve Customer of any of its obligations under this Loan Agreement or the Additional Agreements. (i) HEADINGS. Captions and section and paragraph headings in this Loan Agreement are inserted only as a matter of convenience, and shall not affect the interpretation hereof. (j) GOVERNING LAW. This Loan Agreement, and, unless otherwise expressly provided therein, each of the Additional Agreements, shall be governed in all respects by the laws of the State of Illinois. (k) SEVERABILITY OF PROVISIONS. Whenever possible, each provision of this Loan Agreement and the Additional Agreements shall be interpreted in such manner as to be effective and valid under applicable law. Any provision of this Loan Agreement or any of the Additional Agreements which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Loan Agreement and the Additional Agreements or affecting the validity or enforceability of such provision in any other jurisdiction. (l) TERM. This Loan Agreement shall become effective on the date accepted by MLBFS at its office in Chicago, Illinois, and, subject to the terms hereof, shall continue in effect so long thereafter as the WCMA Line of Credit shall be in effect or there shall be any Obligations outstanding. (m) INTEGRATION. THIS LOAN AGREEMENT, TOGETHER WITH THE ADDITIONAL AGREEMENTS, CONSTITUTES THE ENTIRE UNDERSTANDING AND REPRESENTS THE FULL AND FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND -9- 10 MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR WRITTEN AGREEMENTS OR PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. Without limiting the foregoing, Customer acknowledges that: (1) no promise or commitment has been made to it by MLBFS, MLPF&S or any of their respective employees, agents or representatives to extend the availability of the WCMA Line of Credit or the due date of the WCMA Loan Balance beyond the current Maturity Date, or to Increase the Maximum WCMA Line of Credit, or otherwise extend any other credit to Customer or any other party; (ii) no purported extension of the Maturity Date, Increase in the Maximum WCMA Line of Credit or other extension or agreement to extend credit shall be valid or binding unless expressly set forth in a written instrument signed by MLBFS; and (iii) except as otherwise expressly provided herein, this Loan Agreement supersedes and replaces any and all proposals, letters of intent and approval and commitment letters from MLBFS to Customer, none of which shall be considered an Additional Agreement. No amendment or modification of this Agreement or any of the Additional Agreements to which Customer is a party shall be effective unless in writing signed by both MLBFS and Customer. (n) Jurisdiction; Waiver. CUSTOMER ACKNOWLEDGES THAT THIS LOAN AGREEMENT IS BEING ACCEPTED BY MLBFS IN PARTIAL CONSIDERATION OF MLBFS' RIGHT AND OPTION, IN ITS SOLE DISCRETION, TO ENFORCE THIS LOAN AGREEMENT AND THE ADDITIONAL AGREEMENTS IN EITHER THE STATE OF ILLINOIS OR IN ANY OTHER JURISDICTION WHERE CUSTOMER OR ANY COLLATERAL FOR THE OBLIGATIONS MAY BE LOCATED. CUSTOMER CONSENTS TO JURISDICTION IN THE STATE OF ILLINOIS AND VENUE IN ANY STATE OR FEDERAL COURT IN THE COUNTY OF COOK FOR SUCH PURPOSES, AND CUSTOMER WAIVES ANY AND ALL RIGHTS TO CONTEST SAID JURISDICTION AND VENUE. CUSTOMER FURTHER WAIVES ANY RIGHTS TO COMMENCE ANY ACTION AGAINST MLBFS IN ANY JURISDICTION EXCEPT IN THE COUNTY OF COOK AND STATE OF ILLINOIS. MLBFS AND CUSTOMER HEREBY EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES AGAINST THE OTHER PARTY WITH RESPECT TO ANY MATTER RELATING TO, ARISING OUT OF OR IN ANY WAY CONNECTED WITH THE WCMA LINE OF CREDIT, THIS LOAN AGREEMENT, ANY ADDITIONAL AGREEMENTS AND/OR ANY OF THE TRANSACTIONS WHICH ARE THE SUBJECT MATTER OF THIS LOAN AGREEMENT. IN WITNESS WHEREOF, this Loan Agreement has been executed as of the day and year first above written. U.S. MEDICAL INSTRUMENTS, INC. By:[X]_______________________________________________________________ Signature (1) Signature (2) _____________________________________________________________________ Printed Name Printed Name ____________________________________________________________________ Title Title Accepted at Chicago, Illinois: MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. By:__________________________________ -10- 11 [MERRILL LYNCH Logo] - -------------------------------------------------------------------------------- CERTIFICATE OF SECRETARY (WCMA LINE OF CREDIT) THE UNDERSIGNED HEREBY CERTIFIES that the undersigned is the duly appointed and acting Secretary (or Assistant Secretary) of U.S. MEDICAL INSTRUMENTS, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of California, and that the following is a true, accurate and compared transcript of resolutions duly, validly and lawfully adopted on the _____ day of ________________, 1996 by the Board of Directors of said corporation acting in accordance with the laws of the state of incorporation and the charter and by-laws of said corporation: "Resolved, that it is advisable and in the best interests of this Corporation that in connection with Working Capital Management Account No. 272-07763 that this Corporation is subscribing from Merrill Lynch, Pierce, Fenner & Smith Incorporated it obtain from MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. ("MLBFS") a commercial line of credit referred to by MLBFS as a "WCMA Line of Credit", and "FURTHER RESOLVED, that the President, any Vice President, Treasurer, Secretary or other officer of this Corporation, or any one or more of them, be and each of them hereby is authorized and empowered for and on behalf of this Corporation to: (a) execute and deliver to MLBFS: (i) a WCMA Note and Loan Agreement and all other agreements, instruments and documents required by MLBFS in connection with said Line of Credit; and (ii) any present or future extensions of and amendments to any of the foregoing; all in such form as such other shall approve, as conclusively evidenced by his signature thereon; (b) grant to MLBFS such liens and security interests on any of the assets of this Corporation as collateral therefor and/or the other obligations of this Corporation to MLBFS as may be required by MLBFS; and (c) do and perform all such acts and things deemed by any such officer to be necessary or advisable to carry out and perform the undertakings and agreements of this Corporation in connection therewith; and all prior acts of said officers in these premises are hereby ratified and confirmed; and "FURTHER RESOLVED, that MLBFS is authorized to rely upon the foregoing resolutions until it receives written notice of any change or revocation, which change or revocation shall not in any event affect the obligations of this Corporation with respect to any transaction committed to by MLBFS or having its inception prior to the receipt of such notice by MLBFG." THE UNDERSIGNED FURTHER CERTIFIES that the foregoing resolutions have not been rescinded, modified or repealed in any manner and are in full force and effect as of the date of this Certificate, and that the following individuals are now the duly elected and acting officers of said corporation: President: ------------------------------------------- Vice President: -------------------------------------- Secretary: ------------------------------------------- Treasurer: ------------------------------------------- IN WITNESS WHEREOF, the undersigned has executed this Certificate and has affixed the seal of said corporation hereto, pursuant to due authorization, all as of this _____ day of ____________________, 1996. [(CORPORATE SEAL)] --------------------------------------- Secretary --------------------------------------- Printed Name EX-10.5 16 EXHIBIT 10.5 1 EXHIBIT 10.5 MEMO OF UNDERSTANDING (MOU) FIRST CLAIM AND WARRANT PURCHASE AGREEMENT This First Claim and Warrant Purchase Agreement (the "Agreement") is made and entered into as of the 7th day of August, 1996 by and between U.S. Medical Instruments, Inc., a California corporation (the "Company") and Robert Siegel ("First Claim Holder"). RECITALS A. Robert Siegel is a shareholder of the Company. B. Robert Siegel has agreed to pledge certain assets to help the Company secure a line of credit of up to $5,000,000, and in consideration therefore, the Company has agreed to grant a warrant for the exercise of 223,000 shares of Common Stock of the Company to Mr. Siegel. In consideration of the mutual promises contained herein, the parties hereto agree as follows: 1. SECURED FIRST CLAIM. The parties hereby agree that Siegel shall pledge certain assets as collateral as consideration to help the Company secure a line of credit of up to $5,000,000. Immediately after the execution of the Agreement the Company shall issue a Secured First Claim pursuant to the terms in the form attached as Exhibit A. In addition, at such time, the Company shall grant to Mr. Siegel a one-time warrant for the purchase of 223,000 shares of the Company's Common Stock at an exercise price of $8.00 per share in the form attached as Exhibit C. The warrant shall terminate five years from the date of grant. 2. MISCELLANEOUS. This Agreement may only be amended, waived, discharged or terminated by means of an agreement in writing signed by the Company and Robert Siegel. This Agreement represents the entire agreement between the Company and Mr. Siegel and supersedes all prior agreements and understandings. This Agreement shall bind and benefit the successors, assigns, heirs, executors and administrators of the parties (including, without limitation, any successor to the Company). The rights and obligations of Mr. Siegel under this Agreement may not be assigned without the written consent of the Company, which shall not be unreasonably withheld. This Agreement shall be governed in all respects by the laws of the State of California. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 3. RELEASE OF COLLATERAL. A. The Company will release all pledged collateral at the earlier of: the consummation of a sale or merger, an initial public offering, private sale of equity ill excess of $5,000,000 or any debt offering in excess of $5,000,000. If on December 15, 1996, the Company still owes a Claim under this First Claim, the Company shall release the First Claim Holder's collateral in full on that date. Upon such release, the First Claim Holder will release the First Claim against all Company pledged assets simultaneously. B. All Claims due under this First Claim may be prepaid at the time of merger/consolidation or the replacement of senior indebtedness. The Company shall grant the First Claim holder a one time warrant to purchase 223,000 shares of Common Stock at a price of $8.00 per share. 2 4. SECURITY. This First Claim shall be secured pursuant to the terms of a Security Agreement of even date herewith executed by First Claim Holder and the Company attached hereto as Exhibit A (the "First Claim Agreement"). Additional rights of the holder of this First Claim are set forth in the First Claim Agreement. 5. ADJUSTMENTS AND OTHER PROVISIONS. 5.1 ADJUSTMENTS FOR DIVIDENDS, COMBINATIONS, CONSOLIDATIONS, OR SUBDIVISIONS. In the event (a) the holders of outstanding shares of the Company's Common Stock shall receive, or become entitled to receive, without payment therefor, other or additional Common Stock of the Company or (b) the outstanding shares of the Company's Common Stock shall be combined, consolidated or subdivided, by reclassification, exchange, substitution or otherwise, into a lesser (or greater) number of shares of Common Stock, the number of shares of Common Stock into which the attached Warrant Agreement Exhibit C will be convertible immediately prior to such dividend, combination, consolidation or subdivision will, concurrently with the effectiveness of such dividend, combination, consolidation or subdivision, be proportionately adjusted. 5.2 NO IMPAIRMENT. Except and to the extent waived or consented to by the Holder, the Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company but will at all times in good faith assist in the carrying out of all the provisions of this Agreement and in taking of all such actions as may be necessary or appropriate in order to protect the rights of the First Claim Holder against impairment. 5.3 NOTICES OF RECORD DATE. Until the close of business on the earlier of the three year Maturity Date or the date of the release of this First Claim, if the Company fixes a record date for the purpose of determining the holders of any class or series of securities who are entitled to receive any dividend (other than a cash dividend which is the same as cash dividends paid in previous quarters) or other distribution, the Company will mail to the First Claim Holder, at least ten (10) days prior to such record date a notice specifying the record date and the matter pursuant to which such record date has been set. 6. ACCELERATION. Unless otherwise prohibited by law, if the Company fails to meet any covenanted payment when due or upon the occurrence of any event of default as defined in the Agreement, the holder of this First Claim shall have the option, upon demand or notice, to declare the entire First Claim, together with all interest accrued thereon, to be immediately due and payable. 2 3 7. INDEMNIFICATION. The Company agrees to indemnify Siegel for any and all tax liabilities that result from the grant of this warrant. The Company also agrees to pay up to two-thirds of the total taxes not to exceed a maximum tax bracket of forty eight percent (48%) of the Three Hundred Fifty Five Thousand Four Hundred Twenty Four Dollars and Ninety Nine Cents ($355,424.99) that will be taxable upon the pledge of the collateral herein agreed to. $355,424.99 X 48% = $170,604.00 $170,604.00 /2/3 = $113,736.00 The Company agrees to pay $113,736.00 on or before September 30, 1996. In the event that the Company's two-thirds portion of the realized taxation is less than the $113,736 agreed to, Siegel agrees to reimburse the Company of the difference within thirty days of realizing such an event. This provision represents the entire indemnification of Siegel relating to this Agreement. 8. SECOND CLAIM. At the Company's discretion the Company may pledge a second claim or position in the Company's assets secured by Siegel. 9. GENERAL PROVISIONS. This First Claim shall be governed by and construed in accordance with the laws of the State of California. The Company hereby waives presentment for payment, protest and demand, notice of protest, demand and dishonor and nonpayment of this First Claim. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first set forth above. U.S. MEDICAL INSTRUMENTS, INC. /s/ Matthew S. Mazur ------------------------------------ By: Matthew S. Mazur Chairman and Chief Executive Officer ROBERT SIEGEL /s/ Robert Siegel ------------------------------------ By: Robert Siegel 3 4 EXHIBIT A - FIRST CLAIM AGREEMENT FIRST CLAIM AGREEMENT THIS FIRST CLAIM AGREEMENT (the "Agreement") is entered into by and between U.S. Medical Instruments, Inc., a California corporation (the "Company") and Robert Siegel (the "Secured First Claim Party") as of August 7th, 1996. RECITALS. A. Robert Siegel has agreed on behalf of the Company to pledge certain assets to help enable the Company to secure a line of credit. B. As consideration for Mr. Siegel making this pledge of certain assets, the Company has agreed to issue Mr. Siegel a First Claim Security Interest in the amount equal to the pledged collateral by Mr. Siegel. In consideration of the mutual promises contained herein, and as an inducement to the Company to release the collateral reflected by the First Claim (as defined below), the parties agree as follows: 1. CREATION OF A SECURITY INTEREST. As security for the pledge of certain assets due under the Secured First Claim of the Company of even date herewith (the "First Claim") when and as due, the Company hereby grants the Secured First Claim Party a security interest in the collateral described in Section 2 below (the "Collateral"). The security interest granted hereby shall be and remain a first claim and prior security interest in all of the Collateral herein-mentioned. 2. COLLATERAL. The Collateral that is subject to the security interest created hereby consists of patents and plastic injection molds as described in attached EXHIBIT B1. 3. COMPANY'S OBLIGATIONS. The Company will release to the First Claim Party all collateral due and owing to the First Claim Party in respect of the First Claim in accordance with the terms of same, when and as the same become due. 4. DEFAULT. The following shall be defined as events of default under this First Claim Agreement; (a) If the Company has not released all of Siegel pledged assets on or before December 15, 1996. (b) The Company shall have ten (10) days to remedy any breach of this contract. 4 5 5. RIGHTS OF FIRST CLAIM PARTY. (a) Upon the occurrence of any event of default, the First Claim Party shall be entitled to declare the remaining balance on the First Claim immediately due and payable. In addition to the right of acceleration granted herein and in the First Claim, and all other rights of the First Claim Party, the First Claim Party shall be entitled to any and all remedies available under the Uniform Commercial Code in force in he State of California as of the date hereof. (b) First Claim Party shall give the Company notice of the time and place of any public sale of the Collateral or of the time on or after which any private sale or other intended disposition is to be consummated, which notice shall be mailed, by first class mail, postage prepaid, to the Company in the manner set forth in Section 8(b) hereof at least ten days prior to the time of such sale or other intended disposition. (c) Each purchaser at any sale of the Collateral shall hold the property sold absolutely free from any claim or right on the part of the Company, and the Company hereby waives, to the extent permitted by law, all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted and, to the extent permitted by law, any right which it may have to demand a hearing or other judicial or administrative proceeding prior to the enforcement by First Claim Party of any of its rights and remedies hereunder. Any public or private sale of the Collateral or any part of it shall be held at such time or times within ordinary business hours and at such place or places as First Claim Party may fix in the notice of sale, and at any such sale the Collateral, or the portion thereof to be sold, may be sold in one lot, as an entirety or in separate parcels, as First Claim Party (in its sole and absolute discretion) may determine. If permitted by law, First Claim Party may bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) for the purchase of the Collateral. (d) First Claim Party shall not be obligated to make any sale of the Collateral, or any part of it, if it determines not to do so, regardless, of the fact that notice of sale of the Collateral may have been given. First Claim Party may, without notice or publication, adjourn a public or private sale of the Collateral, or cause the same to be adjourned from time to time by announcement, at the time and place fixed for sale, and such sale may, without further notice be made at the time and place to which the same was so adjourned. 6. APPLICATION OF PROCEEDS. All proceeds of any sale of the Collateral by First Claim Party pursuant to section 5 shall be applied as follows: First, to the payment of all fees and expenses incurred by First Claim Party in connection with any such sale, including, but not limited to, the expenses of taking, advertising, processing, preparing and storing the Collateral to be sold, all court costs and reasonable fees of counsel for First Claim Party in connection therewith; Second, the amounts due to the lending institution due to any outstanding balances associated with the line of credit; Third, to the Company. 7. FURTHER ASSURANCES. At the request of the First Claim Party, the Company will promptly make, execute, deliver, record, register or file all such financing statement (including UCC-1's), continuation statements and amendments thereto, and other instruments, acts, pledges, 5 6 assignments and transfers (or cause the same to be done) and will deliver to the First Claim Party such instruments constituting or evidencing items of the Collateral as may be requested by the First Claim Party to better assure it with respect to the security interests granted pursuant to this Agreement. The Company will cause all security instruments, notices and financing statements to be duly registered, recorded and filed and to be duly re-registered, re-recorded and refiled at the time and in the places now or hereafter required by all applicable laws for the proper maintenance of the validity and priority of the security interests and liens given as described above, and will pay all fees, charges, or taxes imposed with respect to any such registration, recording or filing. 8. TERMINATION. Upon complete payment of all amounts due under the First Claim, this Agreement shall terminate and First Claim Party shall cooperate with Company and its counsel to promptly make, execute, deliver, record, register or file a UCC-2 removing any liens on the Collateral. 9. MISCELLANEOUS. (a) Neither this Agreement, nor any term hereof, may be amended, waived, discharged or terminated except by means of an agreement in writing signed by the Company and the First Claim Party. (b) All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered or mailed by first- class mail, postage prepaid, to the parties at the addresses set forth below (or such other address as shall be given in writing by either party to the others). (c) This First Claim Agreement shall bind and inure to the benefit of the parties their legal representatives, successors and assigns. (d) This First Claim Agreement and its performance shall be governed by the laws of the State of California. (e) This First Claim Agreement may be executed in counterparts, all of which taken together shall constitute on and the same instrument by signing any such counterpart. (f) This First Claim Agreement and the security interest created hereby are for the sole and exclusive benefit of the First Claim Party and its assignees and shall not operate to the benefit of any other third party. 6 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date first above written. The Company: U.S.. MEDICAL INSTRUMENTS., INC. Address 16825 Via del Campo Court San Diego, CA 92127 By: /s/ Matthew S. Mazur ------------------------------------ Matthew S. Mazur Chairman and Chief Executive Officer First Claim Party: ROBERT SIEGEL Address: 503 Vista Bella Suite #9 Oceanside, CA 92057 By: /s/ Robert Siegel ------------------------------------- Robert Siegel 7 8 EXHIBIT B1 - COLLATERAL PATENTS U.S. Patent No. 4,710,170 Haber et al. Dec. 1, 1987 Anti-Needle Strike Syringe U.S. Patent No. 5,205,824 Mazur Apr.27, 1993 Retractable Syringe W/Closed Barrel U.S. Patent No. 5,308,329 Mazur May 3, 1994 Retractable Syringe W/Closed Barrel INJECTION MOLDS 3 Cavity Family 1991 1 Cavity Plunder 1991 1 Cavity 2-Lobe 1991/92 5cc 4 Cavity C-Clip 1991/92 5cc 4 Cavity Plunger 1992/93 5cc 4 Cavity Needle Carrier 1992/93 5cc 8 Cavity Barrel 1992/93 5cc 48 Cavity C-Clip 1994 3cc 32 Cavity Barrel 1994 3cc 32 Cavity Plunger 1994 3cc 16 Cavity Needle Carrier 1994 3cc 16 Cavity Needle Carrier 1994 3cc 48 Cavity Seal 1994 3cc 48 Cavity 2-Lobe 1994 3cc 8 Cavity Barrel 1994 10cc 8 Cavity Needle Carrier 1994 5cc 8 Cavity Needle Carrier 1994 10cc 8 Cavity Plunger 1994 10cc 6 Cavity C-Clip 1994 10cc 6 Cavity 2-Lobe 1994 10cc 4 Cavity 2-Lobe 1994 1cc 56 Cavity 0-Ring 1995 10cc 8 Cavity Plunger 1995 10cc 25 Cavity 0-Ring 1995 1cc 4 Cavity Barrel 1995 1cc
8 EX-10.6 17 EXHIBIT 10.6 1 EXHIBIT 10.6 NOTE AND WARRANT PURCHASE AGREEMENT This Note and Warrant Purchase Agreement (the "Agreement") is made and entered into as of the day of ___ June 1993 by and between U.S. Medical Instruments, Inc., a California corporation (the "Company" and Eldridge R. Fridge. RECITALS A. Eldridge R. Fridge is a shareholder of the Company. B. The Company has agreed to purchase from Caco Pacific Corporation seven (7) plastic injection molds as described in the Caco Purchase Order #768-B attached as Exhibit A for a total aggregate purchase price of $1,121,284.22. C. Eldridge R. Fridge has agreed on behalf of the Company to pay $900,000 of the purchase price of the molds in accordance with the Caco Purchase Order #788-B Payment Schedule attached as Exhibit B (the "Payment Schedule") and in consideration therefore, the Company has agreed to issue a Secured Promissory Note in the amount of $900,000 and grant a warrant for the exercise of 50,000 shares of Series D Preferred Stock of the Company to Mr. Fridge. In consideration of the mutual promises contained herein, the parties hereto agree as follows: 1. Caco Pacific Payments. The parties hereby agree that Eldridge R. Fridge pay $900,000 to Caco Pacific Corporation towards the purchase price of the molds pursuant to the Caco Purchase Order #768-B Payment Schedule attached as Exhibit B. Immediately after the final payment has been made to Caco Pacific by Eldridge R. Fridge, the Company shall issue a Secured Promissory Note to Mr. Fridge in the form attached as Exhibit C. The Secured Promissory Note shall be secured pursuant to the terms of a Security Agreement in the form attached as Exhibit D. In addition, at such time, the Company shall grant to Mr. Fridge a warrant for the purchase of 50,000 shares of the Company's Series D Preferred Stock at an exercise price of $5.60 per share in the form attached as Exhibit E. The warrant shall terminate five years from the date of grant. 2. Miscellaneous. This Agreement only may be amended, waived, discharged or terminated by means of an agreement in writing signed by the Company and Eldridge R. Fridge. This Agreement represents the entire agreement between the Company and Mr. Fridge and supersedes all prior agreements and understandings. This Agreement shall bind and benefit the successors, assigns, heirs, executors and administrators of the parties (including, without limitation, any successor to the Company). The rights and obligations or Mr. Fridge under this Agreement may not be assigned without the written consent of the Company. This Agreement shall be governed in all respects by the laws of the State of California. This Agreement may be 2 executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first set forth above. U.S. MEDICAL INSTRUMENTS, INC. /s/ George A. Schapiro ----------------------------------- By: George A. Schapiro President and Chief Operating Officer Address: 3500 Estudillo Street San Diego, California 92110 ELDRIDGE R. FRIDGE /s/ Eldridge R. Fridge ----------------------------------- By: Eldridge R. Fridge Address: 6816 Elm Creek Drive, #201 Las Vegas, Nevada 89108 -2- EX-10.7 18 EXHIBIT 10.7 1 EXHIBIT 10.7 U.S. MEDICAL INSTRUMENTS, INC. 1993 STOCK PLAN 1. Purposes of the Plan. The purposes of this 1993 Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. Options granted under the Plan may be incentive stock options (as defined under Section 422 of the Code) or non-statutory stock options, as determined by the Administrator at the time of grant of an option and subject to the applicable provisions of Section 422 of the Code, as amended, and the regulations promulgated thereunder. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees appointed pursuant to Section 4 of the Plan. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Committee" means the Committee appointed by the Board of Directors in accordance with Section 4 of the Plan. (e) "Common Stock" means the Common Stock of the Company. (f) "Company" means U.S. Medical Instruments, Inc., a California corporation. (g) "Consultant" means any person, including an advisor, who is engaged by the Company or any parent or Subsidiary to render services and is compensated for such services, and any director of the Company whether compensated for such services or not, provided that if and in the event the Company registers any class of any equity security pursuant to the Exchange Act, the term Consultant shall thereafter not include directors who are not compensated for their services or are paid only a director's fee by the Company. (h) "Continuous Status as an Employee or Consultant" means that the employment or consulting relationship is not interrupted or terminated by the Company, any Parent or Subsidiary. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of: (i) any leave of absence approved by the Company, including sick leave, military leave, 2 or any other personal leave; provided, however, that for purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract (including certain Company policies) or statute; provided, further, that on the ninety-first (91st) day of any such leave (where reemployment is not guaranteed by contract or statute) the Optionee's Incentive Stock Option shall automatically convert to a Nonstatutory Stock Option, or (ii) transfers between locations of the Company or between the Company, its Parent, its Subsidiaries or its successor. (i) "Employee" means any person, including officers and directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. (j) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (k) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported, as quoted on such system or exchange, or the exchange with the greatest volume of trading in Common Stock) for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof, or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (l) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. -2- 3 (m) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (n) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (o) "Option" means a stock option granted pursuant to the Plan. (p) "Optioned Stock" means the Common Stock subject to an Option or a Stock Purchase Right. (q) "Optionee" means an Employee or Consultant who receives an Option or a Stock Purchase Right. (r) "Parent" means a "parent corporation", whether now or hereafter existing, as defined in Section 424(e) of the Code. (s) "Plan" means this 1993 Stock Plan. (t) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 10 below. (u) "Share" means a share of the Common Stock, as adjusted in accordance with Section 12 of the Plan. (v) "Stock Purchase Right" means the right to purchase Common Stock pursuant to Section 10 below. (w) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of shares that may be optioned and sold under the Plan is 1,400,000 shares of Common Stock. The shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. 4. Administration of the Plan. (a) Initial Plan Procedure. Prior to the date, if any, upon which the Company becomes subject to the Exchange Act, the -3- 4 Plan shall be administered by the Board or a committee appointed by the Board. (b) Plan Procedure After the Date, if any, upon Which the Company becomes Subject to the Exchange Act. (i) Administration With Respect to Directors and Officers. With respect to grants of Options or Stock Purchase Rights to Employees who are also officers or directors of the Company, the Plan shall be administered by (A) the Board if the Board may administer the Plan in compliance with Rule 16b-3 promulgated under the Exchange Act or any successor thereto ("Rule 16b-3") with respect to a plan intended to qualify thereunder as a discretionary plan, or (B) a committee designated by the Board to administer the Plan, which committee shall be constituted in such a manner as to permit the Plan to comply with Rule 16b-3 with respect to a plan intended to qualify thereunder as a discretionary plan. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Rule 16b-3 with respect to a plan intended to qualify thereunder as a discretionary plan. (ii) Multiple Administrative Bodies. If permitted by Rule 16b-3, the Plan may be administered by different bodies with respect to directors, non-director officers and Employees who are neither directors nor officers. (iii) Administration With Respect to Consultants and Other Employees. With respect to grants of Options or Stock Purchase Rights to Employees or Consultants who are neither directors nor officers of the Company, the Plan shall be administered by (A) the Board or (B) a committee designated by the Board, which committee shall be constituted in such a manner as to satisfy the legal requirements relating to the administration of incentive stock option plans, if any, of [state] corporate and securities laws, of the Code, and of any applicable stock exchange (the "Applicable Laws"). Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws. -4- 5 (c) Powers of the Administrator. Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, including the approval, if required, of any stock exchange upon which the Common Stock is listed, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(k) of the Plan; (ii) to select the Consultants and Employees to whom Options and Stock Purchase Rights may from time to time be granted hereunder; (iii) to determine whether and to what extent Options and Stock Purchase Rights or any combination thereof are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each such award granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder; (vii) to determine whether and under what circumstances an Option may be settled in cash under subsection 9(f) instead of Common Stock; (viii) to determine the terms and restrictions applicable to Stock Purchase Rights and the Restricted Stock purchased by exercising such Stock Purchase Rights; and (x) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan. (d) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options or Stock Purchase Rights. 5. Eligibility. (a) Nonstatutory Stock Options and Stock Purchase Rights may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees. An Employee or Consultant who has been granted an Option or Stock Purchase Right may, if -5- 6 he is otherwise eligible, be granted additional Options or Stock Purchase Rights. (b) Each Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of the Shares with respect to which Options designated as Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatu- tory Stock Options. (c) For purposes of Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (d) The Plan shall not confer upon any Optionee any right with respect to continuation of employment with the Company, nor shall it interfere in any way with such Optionee's right or the Company's right to terminate his or her employment at any time, with or without cause. (e) The following limitations shall apply to grants of Options to Officers: (i) No Officer shall be granted, in any fiscal year of the Company, Options to purchase more than 1,300,000 Shares; and (ii) Over the remaining term of the Plan, no Officer shall be granted Options to purchase more than 1,300,000 Shares. The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 11(a). The limitations set forth in this Section 5(e) are intended to satisfy the requirements applicable to Options intended to qualify as "performance-based compensation" (within the meaning of Section 162(m) of the Code). In the event the Administrator determines that such limitations are not required to qualify Options as performance-based compensation, the Administrator may modify or eliminate such limitations. 6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company as described in Section 19 of the Plan. It shall continue in effect for a term of -6- 7 ten (10) years unless sooner terminated under Section 15 of the Plan. 7. Term of Option. The term of each Option shall be the term stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. However, in the case of an Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. 8. Option Exercise Price and Consideration. (a) The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option (A) granted to a person who, at the time of the grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of the grant. (B) granted to any person, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an -7- 8 Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares that (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price, or (6) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 9. Exercise of Option. (a) Procedure for Exercise: Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Board, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and the Company has received full payment for the Shares with respect to which the Option is exercised. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under Section 8(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares that thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. -8- 9 (b) Termination of Employment or Consulting Relationship. In the event of termination of an Optionee's Continuous Status as an Employee or Consultant with the Company (but not in the event of an Optionee's change of status from Employee to Consultant (in which case an Employee's Incentive Stock Option shall automatically convert to a Nonstatutory Stock Option on the day three months and one day following such change of status) or from Consultant to Employee), such Optionee may, but only within such period of time as is determined by the Administrator, of at least thirty (30) days, with such determination in the case of an Incentive Stock Option not exceeding three (3) months after the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent that Optionee was entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of such termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. In the event of termination of an Optionee's consulting relationship or Continuous Status as an Employee as a result of his or her disability, Optionee may, but only within six (6) months from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. In the event that the disability for which the Optionee is terminated is not a "total and permanent disability" (as such term is defined in Section 22(e)(3) of the Code), the Incentive Stock Option at issue will be treated as a Nonstatutory Stock Option on and after the day three months and one day following such termination. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. In the event of the death of an Optionee, the Option may be exercised at any time within six (6) months following the date of death (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the Optionee was entitled to exercise the Option at the date of death. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall immediately revert to the Plan. If, after death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or -9- 10 inheritance does not exercise the Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Rule 16b-3. Options granted to persons subject to Section 16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. (f) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 10. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer, which shall in no event exceed thirty (30) days from the date upon which the Administrator made the determination to grant the Stock Purchase Right. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator. Shares purchased pursuant to the grant of a Stock Purchase Right shall be referred to herein as "Restricted Stock." (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine, but at a minimum rate of 20% per year. (c) Other Provisions. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions -10- 11 of Restricted Stock purchase agreements need not be the same with respect to each purchaser. (d) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 12 of the Plan. 11. Stock Withholding to Satisfy Withholding Tax Obligations. At the discretion of the Administrator, Employees or Consultants may satisfy withholding obligations as provided in this paragraph. When an Employee or Consultant incurs tax liability in connection with an Option or Stock Purchase Right, which tax liability is subject to tax withholding under applicable tax laws, and the Employee or Consultant is obligated to pay the Company an amount required to be withheld under applicable tax laws, the Employee or Consultant may satisfy the withholding tax obligation by one or some combination of the following methods: (i) by cash payment, or (ii) out of Employee's or Consultant's current compensation, (iii) if permitted by the Administrator, in its discretion, by surrendering to the Company Shares that (a) in the case of Shares previously acquired from the Company, have been owned by the Employee or Consultant for more than six months on the date of surrender, and (b) have a fair market value on the date of surrender equal to or less than Employee's or Consultant's marginal tax rate times the ordinary income recognized, or (iv) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option, or the Shares to be issued in connection with the Stock Purchase Right, if any, that number of Shares having a fair market value equal to the amount required to be withheld. For this purpose, the fair market value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). If the Employee or Consultant is subject to Section 16 of the Exchange Act (an "Insider"), any surrender of previously owned Shares to satisfy tax withholding obligations arising upon exercise of this Option must comply with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3") and shall be subject to such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. All elections by an Employee or Consultant to have Shares withheld to satisfy tax withholding obligations shall be made in writing in a form acceptable to the Administrator and shall -11- 12 be subject to the following restrictions: (a) the election must be made on or prior to the applicable Tax Date; (b) once made; the election shall be irrevocable as to the particular Shares of the Option or Stock Purchase Right as to which the election is made; (c) all elections shall be subject to the consent or disapproval of the Administrator; (d) if the Employee or Consultant is an Insider, the election must comply with the applicable provisions of Rule 16b-3 and shall be subject to such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. In the event the election to have Shares withheld is made by an Employee or Consultant and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Employee or Consultant shall receive the full number of Shares with respect to which the Option or Stock Purchase Right is exercised but such Employee or Consultant shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 12. Adjustments Upon Changes in Capitalization or Merger. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, and the number of shares of Common Stock that have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or that have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities -12- 13 convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation, or Asset Sale. In the event of the proposed dissolution or liquidation of the Company, or the sale of all or substantially all of the Company's assets, the Administrator shall notify the persons holding Options or Stock Purchase Rights at least fifteen (15) days prior to such proposed action. To the extent it has not been previously exercised, the Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) Merger. In the event of a merger of the Company with or into another corporation, the Option or Stock Purchase Right shall be assumed or an equivalent option or right shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation. If, in such event, the Option or Stock Purchase Right is not assumed or substituted, the Option or Stock Purchase Right shall terminate as of the date of the closing of the merger. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger, the option or right confers the right to purchase, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger, the consideration (whether stock, cash, or other securities or property) received in the merger by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger was not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger. 13. Non-Transferability of Options and Stock Purchase Rights. Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 14. Time of Granting Options and Stock Purchase Rights. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determi- -13- 14 nation granting such Option or Stock Purchase Right, or such other date as is determined by the Board. Notice of the determination shall be given to each Employee or Consultant to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 15. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or discontinue the Plan, but no amendment, alteration, suspension or discontinuation shall be made that would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act or with Section 422 of the Code (or any other applicable law or regulation, including the requirements of the NASD or an established stock exchange), the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required. (b) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 16. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 17. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. -14- 15 The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 18. Agreements. Options and Stock Purchase Rights shall be evidenced by written agreements in such form as the Board shall approve from time to time. 19. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under applicable state and federal law and the rules of any stock exchange upon which the Common Stock is listed. 20. Information to Optionees and Purchasers. The Company shall provide to each Optionee and to each individual who acquired Shares pursuant to the Plan, during the period such Optionee or purchaser has one or more Options or Stock Purchase Rights outstanding, and in the case of an individual who acquired Shares pursuant to the Plan, during the period such individual owns such Shares, (i) copies of all annual reports and other information which are provided to all shareholders of the Company and (ii) at least annually, financial statements of the Company, including a statement of operations for the most recent fiscal year and a balance sheet as of the end of such fiscal year. The Company shall not be required to provide such information to key employees whose duties in connection with the Company assure their access to equivalent information. -15- EX-10.8 19 EXHIBIT 10.8 1 EXHIBIT 10.8 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into this 15th day of October, 1993, by and between U.S. Medical Instruments, Inc., a California corporation (the "Company"), and Matthew S. Mazur (the "Executive"). RECITAL The parties desire to set forth the terms of Executive's employment with the Company. NOW, THEREFORE, the parties hereto agree as follows: 1. Employment. The Company hereby employs the Executive and the Executive hereby accepts employment upon the terms and conditions herein set forth. 2. Term. (a) Basic Rule. The Company agrees to employ the Executive, and the Executive agrees to remain in the employment with the Company, from the effective date of this Agreement (the "Commencement Date") until the date when the Executive's employment terminates pursuant to the provisions of this Agreement. (b) Early Termination. The Company may terminate the Executive's employment by giving the Executive thirty (30) days' advance notice in writing. If the Company terminates the Executive's employment for any reason other than Cause or Disability, both as defined below, the provisions of Section 6(a) shall apply. The Executive may terminate his employment by giving the Company thirty (30) days' advance notice in writing. If the Executive terminates his employment under the preceding sentence, the provisions of Section 6(b) shall apply. The Executive's rights under any applicable benefit plans or programs shall be determined under the provisions of those plans or programs. Any waiver of notice shall be valid only if it is made in writing and expressly refers to the applicable notice requirement of this subsection 2(b). (c) Death. The Executive's employment shall terminate in the event of his death. The Company shall have no obligation to pay or provide any compensation or benefits on account of the Executive's death, or for periods following the Executive's death. The Executive's rights under the benefit plans and programs of the Company in the event of the Executive's death shall be determined under the provisions of those plans and programs. (d) Cause. The Company may terminate the Executive's employment for cause by giving the Executive thirty (30) days' advance notice in writing. For all purposes under this Agreement, "Cause" shall mean (i) a willful failure by the Executive to substantially perform his duties hereunder, other than a failure resulting from the Executive's complete or partial incapacity due to physical or mental illness or impairment, (ii) a willful act by the Executive which constitutes gross misconduct and which is injurious to the Company, (iii) a willful breach by the Executive of a material provision of this Agreement, or (iv) a material and willful violation of a 2 federal or state law or regulation applicable to the business of the Company. No act, or failure to act, by the Executive shall be considered "willful" unless committed without good faith without a reasonable belief that the act or omission was in the Company's best interest. No compensation or benefits will be paid or provided to the Executive on account of a termination for Cause, or for periods following the date when such a termination of employment is effective. The Executive's rights under the benefit plans or programs of the Company shall be determined under the provisions of those plans or programs. (e) Disability. The Company may terminate the Executive's employment for Disability by giving the Executive thirty (30) days' advance notice in writing. For all purposes under this Agreement, "Disability" shall mean that the Executive, at the time notice is given, has been unable to substantially perform his duties under this Agreement for a period of not less than six (6) consecutive months as the result of his incapacity due to physical or mental illness. In the event that the Executive resumes the performance of substantially all of his duties hereunder before the termination of his employment under this subsection (e) becomes effective, the notice of termination shall automatically be deemed to have been revoked. No compensation or benefits will be paid or provided to the Executive on account of termination for Disability, or for periods following the date when such a termination of employment is effective. The Executive's rights under the benefit plans or programs of the Company shall be determined under the provisions of those plans or programs. 3. Duties. (a) Position. The Executive shall be employed as President and Chief Executive Officer of the Company. Under the direction of the Company's Board of Directors, the Executive shall have such authority and shall perform such duties as are customary for the office to which he has been appointed, including without limitation the full authority to conduct and direct the day-to-day operations of the Company; subject, however, to such limitations, instructions, directions and control as the Company's Board of Directors may specify from time to time. The Executive shall also be nominated, and the Company shall use its best efforts to elect the Executive, to the Company's Board of Directors. (b) Obligations. The Executive shall devote his entire business time, attention and energies to the business of the Company during the term of the Executive's employment with the Company. The foregoing, however, shall not preclude the Executive from engaging in appropriate civic, charitable or religious activities or from devoting a reasonable amount of time to private investments or from serving on the boards of directors of other entities, as long as such activities and service do not interfere or conflict with his responsibilities to the Company. (c) Location. The Executive's services shall be performed primarily at the Company's principal executive offices at 3500 Estudillo Street, San Diego, California 92210. The parties acknowledge, however, that the Executive may be required to travel in connection with the performance of his duties hereunder. -2- 3 4. Compensation. The Company shall compensate the Executive for all services rendered under this Agreement as follows: (a) Base Compensation. The Company shall pay the Executive a base salary at the annual rate of $180,000, less applicable withholding, payable in accordance with the Company's normal payroll practices. For so long as the Executive remains an employee of the Company, the Executive's base salary shall be reviewed, no less often than annually, and will be adjusted accordingly (the annual compensation specified in this subsection (b), together with any changes in such compensation that the Company's Board of Directors may approve from time to time, is referred to in this Agreement as "Base Compensation.") (b) Annual Bonus. For the Company's fiscal year ending on January 31, 1994, the Company will pay the Executive an annual bonus of $150,000. Future bonuses shall be determined by the Company's Board of Directors. (c) Expenses. The Executive shall be reimbursed for all reasonable business expenses incurred by him in the performance of his duties. The Company shall reimburse the Executive for such expenses upon presentation of an itemized account and appropriate supporting documentation, all in accordance with the Company's generally applicable policies. 5. Employee Benefits. (a) Life Insurance. The Company will pay premiums on a life insurance policy in the amount of $1,000,000, the beneficiary of which will be designated by the Executive. (b) Disability Insurance. The Company will pay or reimburse the Executive for premiums for disability insurance that will cover [80]% of the Executive's base salary. The premiums will be considered compensation and will be shown as compensation on your normal paychecks, subject to withholding. (c) Other Benefits. The Company will also make available to the Executive standard vacation, medical and dental insurance benefits and other employee benefit plans or programs of the Company, if any, to the extent that his position, tenure, salary, age, health and other qualifications make him eligible to participate, subject to the rules and regulations applicable thereto. In addition, the Company currently indemnifies all officers and directors to the maximum extent permitted by law, in which the Executive will be included. The Company will commit contractually to advance any expenses for which indemnification is available to the extent allowed by applicable law. 6. Severance Benefits. If the Company terminates the Executive's employment or if the Executive resigns his employment with the Company at any time during the term of this Agreement then, except as otherwise provided in Section 2 in connection with a termination of the Executive's employment with the Company for Cause or as a result of the Executive's Disability or death, the Executive shall be entitled to receive severance benefits as follows: -3- 4 (a) Involuntary Termination. If the Executive's employment is terminated by the Company, then the Executive (i) shall be entitled to receive severance pay in an amount equal to thirty-six (36) months' Base Compensation; provided, however, that such payments shall be reduced to the extent of any other compensation that the Executive receives from a subsequent employer, and the Company's obligation to pay severance shall cease in the event the Executive obtains comparable new employment prior to the end of thirty-six (36) months. Such payments shall be in lieu of any other severance or severance-type benefits to which the Executive may be entitled under the Company's then existing benefit plans and programs. Any severance payments to which the Executive is entitled pursuant to this subsection (a) shall be paid periodically in accordance with the Company's normal payroll. (b) Resignation. In the event the Executive resigns his employment with the Company, the Executive shall not be entitled to any severance or other benefits except as may be payable to the Executive under the Company's then existing benefit plans or programs. (c) Survival. The Executive's obligations under Sections 9 and 10 hereof shall survive and continue in effect following any termination of the Executive's employment. 7. Successors. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption agreement prior to the effectiveness of any such succession shall entitle the Executive to the benefits described in subsection 6(a) of this Agreement, subject to the terms and conditions therein. 8. Arbitration/Governing Law. To the fullest extent permitted by law, any dispute, claim or controversy of any kind (including but not limited to tort, contract and statute) arising under, in connection with, or relating to this Agreement or the Executive's employment, shall be resolved exclusively by binding arbitration in San Diego, California in accordance with the commercial rules of the American Arbitration Association then in effect. The Company and the Executive agree to waive any objection to personal jurisdiction or venue in any forum located in San Diego, California. No claim, lawsuit or action of any kind may be filed by either party to this Agreement; arbitration is the exclusive dispute resolution mechanism between the parties hereto. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The validity, interpretation, effect and enforcement of this Agreement shall be governed by the laws of the State of California. 9. Proprietary Information. The Executive agrees to execute confidentiality agreements as requested by the Company. 10. Non-Solicit. The Executive covenants and agrees with the Company that during his employment with the Company and for a period expiring one (1) year after the date of termination of such employment, he will not solicit any of the Company's then-current employees to terminate -4- 5 their employment with the Company or to become employed by any firm, company or other business enterprise with which the Executive may then be connected. 11. Right to Advice of Counsel. The Executive acknowledges that he has consulted with counsel and is fully aware of his rights and obligations under this Agreement. 12. Miscellaneous. (a) Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and sent by registered mail to the Executive at his residence as set forth on the Company's records, or to the Company at its address set forth above, or such other addresses as either party shall notify the other in accordance with the above procedure. (b) Integration. This Agreement and the Exhibits hereto represent the entire agreement and understanding between the parties as to the subject matter hereof and supersede all prior or contemporaneous agreements whether written or oral. No waiver, alteration, or modification of any of the provisions of this Agreement shall be binding unless in writing and signed by duly authorized representatives of the parties hereto. (c) Waiver. Failure or delay on the part of either party hereto to enforce any right, power, or privilege hereunder shall not be deemed to constitute a waiver thereof. Additionally, a waiver by either party of a breach of any promise hereof by the other party shall not operate as or be construed to constitute a waiver of any subsequent waiver by such other party. (d) Savings Clause. If any term, covenant, or condition of this Agreement or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant, or condition of this Agreement shall be valid and enforced to the fullest extent permitted by law. (e) Absence of Conflict. The Executive represents and warrants that his employment by the Company as described herein shall not conflict with and will not be constrained by any prior employment or consulting agreement or relationship. (f) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -5- 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day herein first above written. U.S. MEDICAL INSTRUMENTS, INC. By: /s/ Carl R. Brown ------------------------------ Carl R. Brown, Director EXECUTIVE: By: /s/ Matthew S. Mazur ------------------------------ Matthew S. Mazur -6- EX-10.9 20 EXHIBIT 10.9 1 EXHIBIT 10.9 U.S. MEDICAL INSTRUMENTS, INC. CONSULTING AGREEMENT This Consulting Agreement ("Agreement") is made and entered into as of the first day of August 1996 by and between U.S. Medical Instruments, Inc., a California corporation, (the "Company") and George Schapiro ("Consultant"). The Company desires to retain Consultant as an independent contractor to perform consulting services for the Company and consultant is willing to perform such services, on terms set forth more fully below. In consideration of the mutual promises contained herein, the parties agree as follows: 1. SERVICES Consultant agrees to perform for the company customary consulting services as follows: Consulting with the company with respect to planning, promotion. marketing and exploitation of all aspects of the Company, including, but not limited to identifying and consulting with the Company as to various strategic alliances, investment banking / offering relationships, and consulting with the Company as to manufacturing, marketing, advertising and other issues related to leveraging the Company's proprietary technology ("Services"). 2. COMPENSATION (a) During the term of this Agreement, in consideration of the performance by Consultant of his obligations under this Agreement, the Company agrees to compensate Consultant an annual salary of sixty thousand dollars ($60,000), payable quarterly beginning October 31, 1996. Effective November 1, 1996, such quarterly payments will be due at the beginning of the quarter. The initial two quarterly payments will be for $12,000, while the subsequent two payments will be for $18,000. Thereafter payments of $15,000 will be made quarterly. (b) Expenses. You will be reimbursed for all reasonable business expenses incurred in the performance of your duties. The Company will reimburse you for such expenses upon presentation of an itemized account and appropriate supporting documentation, all in accordance with the Company's generally applicable policies. (c) Warrant. You will be granted a one time warrant to purchase 50,000 shares of the Company's Common Stock, in the form attached. 3. CONFIDENTIALITY (a) "Confidential Information" means any Company proprietary information, technical data, trade secrets or know-how, including, but not limited to, marketing, finances or other business information disclosed by the company either directly or indirectly, in writing, orally, or by drawings or inspection of parts or equipment. (b) Consultant will only, during or subsequent to the term of this Agreement, use the Company's Confidential Information for the performance of the Services on behalf of the Company. It is understood that said Confidential Information shall remain the sole property of the Company and Consultant will not disclose such Confidential Information to any third party. Consultant further agrees to take all reasonable precautions to prevent any unauthorized disclosure of such Confidential Information 2 and acknowledges that this Agreement covers its employees and affiliates. Confidential Information does not include information which (i) is known to consultant at the time of disclosure to Consultant by the Company as evidenced by written records of Consultant, (ii) has become publicly known and made generally available through no wrongful act of Consultant, or (iii) has been rightfully received by Consultant from a third party who is authorized to make such disclosure. (c) Upon the termination of this Agreement, or upon Company's earlier request, Consultant will deliver to the Company all of the Company's property or Confidential Information in tangible form that Consultant may have in consultant's possession or control. 4. OWNERSHIP (a) Consultant agrees that any materials, inventions and trade secrets conceived, made or discovered by Consultant in connection with this Agreement, solely or in collaboration with others, during the period of this Agreement which relate in any manner to the business of the Company that Consultant may be directed to undertake, investigate or experiment with, or which Consultant may become associated with in work, investigation or experimentation in the line of business of the Company in performing the Services hereunder, are the sole property of the Company. In addition, any inventions that constitute copyrightable subject matter shall be considered "works made for hire" and that term is defined in the United States Copyright Act. Consultant further agrees to assign (or cause to be assigned) and does hereby assign fully to the Company all such inventions and any copyrights, patents, mask work rights or other intellectual property rights relating thereto. (b) Consultant agrees that if in the course of performing the Services, Consultant incorporates into any invention developed hereunder any invention, improvement, development, concept, discovery or other proprietary information owned by Consultant or in which Consultant has an interest, the Company is hereby granted and shall have a non-exclusive, royalty-free, perpetual, irrevocable, worldwide license to make, have made, modify, use and sell such item as part of or in connection with such Invention. 5. CONFLICTING OBLIGATIONS Consultant certifies that Consultant has no outstanding agreement or obligation that is in conflict with any of the provisions of this Agreement, or that would preclude Consultant from complying with the provisions hereof, and further certifies that Consultant will not enter into any such conflicting agreement during the term of this Agreement. The company agrees that its sole remedy for the breach of this Section 5 is the termination of this Agreement. 6. TERM AND TERMINATIONS (a) This Agreement will commence on the date first written above and will continue for one (1) year or until terminated as provided below. At the end of the one (1) year term. the Agreement will automatically renew for successive one (1) year periods, unless either party delivers to the other ninety (90) days' notice of termination prior to the commencement of the extension period. Either party may terminate this agreement at any time, with 30 days written notice. (b) The Company may terminate this Agreement immediately and without prior notice if consultant refuses to or is unable to perform the Services or is in breach of any material provision of this Agreement. CONSULTING AGREEMENT PAGE 2 3 (c) Upon such termination all rights and duties of the parties toward each other shall cease and the Company shall not be obliged to pay the consultant under Section 2(a) for amounts due in payment of the retainer after the date of termination provided that any consulting fees earned pursuant to Section 2 prior to termination will be paid to Consultant. The Company will promptly pay any sums due but not yet paid for prior period. (d) Sections 3 (Confidentiality), 4 (ownership) and 8 (Independent Contractor) shall survive termination of this Agreement. (e) The binding nature of this Agreement is subject to the approval of the Board of Directors of the Company. 7. ASSIGNMENT Neither this Agreement nor any right hereunder or interest herein may be as assigned or transferred by Consultant without the express written consent of the Company. 8. INDEPENDENT CONTRACTOR Nothing in this Agreement shall in any way be construed to constitute consultant as an agent, employee or representative of the Company, but Consultant shall perform the Services hereunder as an independent contractor. 9. ARBITRATION The Company and Consultant agree that any dispute or controversy arising out of or relating to any interpretation, construction, performance or breach of this Agreement, shall be settled by arbitration to be held in San Diego County, California, in accordance with the rules then in effect of the American Arbitration Association. 10. GOVERNING LAW This Agreement shall be governed by the laws of the State of California an applied to agreements entered into and performed within California by residents of that state. 11. ENTIRE AGREEMENT This Agreement forms the entire agreement of the parties and supersedes any prior agreements between them with respect to the subject matter hereof. CONSULTING AGREEMENT PAGE 3 4 12. WAIVER Waiver of any term or provision of this Agreement or forbearance to enforce any term or provision by either party shall not constitute a waiver as to any subsequent breach or failure of the same term or provision or a waiver of any other term or provision of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. "CONSULTANT" "COMPANY" GEORGE SCHAPIRO U.S. MEDICAL INSTRUMENTS, INC. By: /s/ George Schapiro By: /s/ Matthew S. Mazur ------------------------ ----------------------------- George Schapiro Matthew S. Mazur, Chairman ________________________ _________________________________ Date Date CONSULTING AGREEMENT PAGE 4 EX-10.10 21 EXHIBIT 10.10 1 EXHIBIT 10.10 AGREEMENT MEMORANDUM OF AGREEMENT made and entered into this 1st day of August 1991, by and between Matthew S. Mazur, and individual residing at 2366 Columbia Street, San Diego, California 92103, hereinafter referred to as "Licensor," and U.S. Medical Instruments, Inc., a California corporation, having a principal office at 8950 Villa La Jolla Drive, Suite 220, San Diego, California 92037, hereinafter referred to as "Licensee." WITNESSETH: WHEREAS, Licensor is the owner of an application for United States Patent for a Retractable Syringe With a Closed Barrel, (hereinafter referred to as the Patent), which is listed on the attached Exhibit "A", and WHEREAS, Licensee desires to acquire exclusive rights and ownership in the application for patent and any patents that may issue therefrom, including patents for improvements in syringe products, under terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and mutual considerations herein set forth, the parties have agreed and do hereby agree as follows: I. GRANT OF RIGHTS IN PATENTS Licensor hereby grants to Licensee the worldwide exclusive right and license to manufacture, have manufactured, use and sell, together with the right to sublicense, products and methods disclosed in or covered by the application (applications) for patent and patents that issue therefrom, including patents issued on improvements in syringe products and methods. Such products and methods hereinafter being referred to as the --Covered Products--. Any subsequent patent applications filed that come under this Agreement shall be added to Exhibit "A." II. ROYALTIES A. Licensee shall pay to Licensor a royalty of six percent (6%) of the net selling price of the Covered Products until a total sum of Seven Hundred and Fifty Thousand Dollars ($750,000.00) has been paid. The royalty thereafter shall become three percent (3%). 1 2 B. The minimum royalty per fiscal year under this Agreement shall be three percent (3%) of the sales of the Covered Products for the previous fiscal year, which minimum royalties shall begin with the date of this Agreement and continue throughout the life of this Agreement. The minimum royalty herein specified shall be paid by Licensee to Licensor each year even though actual royalty sales for the respective year may be less. This minimum royalty may be changed, from time to time, by agreement of the parties. C. The term "net selling price" is defined as the selling price not including use, sales, excise or similar taxes imposed on the finished products. A sale shall be deemed complete when the Covered Products are billed out upon or after shipment. Credit for royalties paid or payable shall be allowed to Licensee for defective or repossessed goods for which payment is credited or returned to the purchaser. Where there is no bona fide sale or the Covered Products are leased by Licensee, fair market value shall be substituted for net sales price herein, or Licensee shall pay royalties on the lease income, whichever shall be elected by Licensor. III. ASSIGNMENT A. At any time at Licensor's sole election, Licensor shall have the right to sell and assign all right, title and interest in said application for patent, see Exhibit "A," and any patents issuing therefrom, to Licensee under the Assignment form attached hereto as Exhibit "B." B. Upon any such assignment, Licensor waives the right to payment of royalties under Article II. ROYALTIES of this Agreement, and in place thereof shall receive a payment of one million dollars ($1,000,000) U.S., which amount shall be paid by Licensee to Licensor in a lump sum within three (3) years from the date of this Agreement, or at the election of Licensee shall be paid in eight (8) yearly installments of one hundred and twenty-five thousand dollars ($125,000) U.S. per year with each installment being paid on the 2nd day of January of each year, with interest on the unpaid balance being paid each year at two points above prime. C. If the installment payment plan is elected by Licensee, then the first payment of one hundred and twenty-five thousand dollars ($125,000) U.S. shall be paid on January 2, 1994, with interest on the unpaid balance beginning on that date. IV. SUBLICENSES In exercising its right to sublicense under this Agreement, Licensee shall be obligated to Licensor solely to the extent that sales made by the sublicensee shall constitute sales subject to the royalty provisions of this Agreement and such sales shall be included in the quarterly reports rendered by Licensee. 2 3 V. RECORDS AND REPORTS Licensee agrees to keep true and full records of the Covered Products manufactured and sold which records shall be open to inspection by Licensor at reasonable times. Licensee agrees to render to Licensor a statement within thirty (30) days of one January, one April, one July and one October of each year setting forth the Covered Products sold during the quarterly period terminating on the first day of said months, this statement to be rendered even though no sales, leases or uses were made during such quarterly period. Licensee agrees to pay concurrently with the rendition of said statement the royalties accruing during the particular quarterly period. VI. BUSINESSLIKE EFFORTS Licensee agrees to exert reasonable businesslike efforts to promote the sale of Covered Products and actively engage in the manufacture and sale thereof and satisfy the demand therefor. The amount of minimum royalties paid under Paragraph II.B shall not, by itself, satisfy this requirement of exerting reasonable businesslike efforts. VII. TERM This Agreement shall extend to the full term of any of the subject patents in Exhibit "A" unless earlier terminated in accordance with the provision hereof. VIII. SUIT OF INFRINGERS Licensor grants to Licensee the right to bring suit for any patent infringement relating to the Covered Products. In any such suit, Licensor agrees to assist Licensee in any way deemed necessary by Licensee toward the successful prosecution of the litigation. The expenses of such litigation shall be borne by Licensee and any proceeds or damages recovered in the litigation shall be divided equally between the parties. IX. TERMINATION It is mutually agreed and understood that Licensor and Licensee shall have the right to terminate this Agreement in the event of the failure of either party to perform any and all obligations by it to be performed hereunder, by notice in writing, but only if such default or breach shall not have been remedied by the defaulting party within sixty (60) days after the giving of such notice. Such termination shall not release Licensee from the payment of royalties accrued up to the date of termination. 3 4 It is mutually agreed and understood that in the event of termination by either party, Licensee shall have the right to sell Covered Products on hand at the time of termination or for which contractual commitments have been made, but shall be required to pay the royalties and render the reports enumerated in this Agreement. It is mutually agreed and understood that this Agreement automatically terminates, unless Licensor otherwise elects, immediately upon Licensee filing a petition in bankruptcy or insolvency, or upon or after any adjudication that Licensee is bankrupt or insolvent, or upon Licensee making any assignment or attempted assignment for the benefit of creditors. X. MARKING Licensee agrees to place proper statutory patent notices on Covered Products. XI. APPLICABLE LAW This Agreement shall be deemed to have been entered into in the State of California and shall be interpreted and governed under the laws of the State of California. XII. WAIVER Waiver of any breach of this Agreement shall not constitute a waiver of any recurring subsequent or other breach. XIII. INTEGRATION This Agreement represents the entire understanding between the parties and integrates all oral discussion and writings prior to the execution hereof. XIV. SUCCESSORS AND ASSIGNS This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. IN WITNESS WHEREOF, the parties hereto have set their hands as of the date and year first above written. By: /s/ Matt Mazur By: /s/ Matt Mazur ------------------------------- ------------------------------- Matthew S. Mazur U.S. Medical Instruments, Inc. 4 5 EXHIBIT "A" ----------- 1. U.S. Patent Application SN 07/714,431 filed June 13, 1991 for Retractable Syringe With a Closed Barrel. 5 6 EXHIBIT "B" ----------- ASSIGNMENT TO WHOM IT MAY CONCERN: For the sum of One Dollar and other valuable consideration to me in hand paid, receipt of which is hereby acknowledged, be it known that I, MATTHEW S. MAZUR, a citizen of the United States, having a place of residence in San Diego, California, have sold, assigned and transferred and by these presents do sell, assign, transfer and set over unto U.S. MEDICAL INSTRUMENTS, INC., a California corporation, having a place of business at __________________________ ____________________________________, its successors, legal representatives, or assigns, the whole right, title and interest in and to a certain invention relating to a RETRACTABLE SYRINGE WITH A CLOSED BARREL and the application for United States Patent Serial No. 07/714,431 filed June 13, 1991 in the United States Patent and Trademark Office, and all original and reissue patents granted thereof, and all divisions and continuations thereof, including the subject-matter of any and all claims which may be obtained in every such patent, and all foreign rights to said invention, and covenant that I have full right to do so, and agree that I will communicate to said corporation or its representatives all facts known to me respecting said invention, whenever requested, and testify in any legal proceedings, sign all lawful papers, make all rightful oaths and generally do everything possible to aid said corporation, its successors, assigns, and nominees to obtain and enforce proper patent protection for said invention in all countries. The Commissioner of Patents and Trademarks is requested to issue the Letters Patent which may be granted for said invention or any part thereof unto the said corporation in keeping with this Assignment. 6 7 Done at _________________, __________________, this ______ day of ___________________, 19__. --------------------------------- Matthew S. Mazur 7 8 BILL OF SALE The undersigned, MATTHEW S. MAZUR, for a valuable consideration, namely 552,000 shares of no par common stock in U.S. MEDICAL INSTRUMENTS, INC., a California Corporation, receipt of which is hereby acknowledged, does sell to U.S. MEDICAL INSTRUMENTS, INC. the personal property described as the sole proprietorship of Matthew S. Mazur d.b.a. U.S. Medical Instruments, Inc. including all assets and obligations. The seller does, for his heirs, executors, administrators and successors, covenant and agree to warrant and defend the title to the property hereby conveyed, against the just and lawful claims and demands of all persons whomsoever. /s/ Matthew S. Mazur ----------------------------- Matthew S. Mazur Dated: November 13, 1991 EX-23.1 22 EXHIBIT 23.1 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated August 14, 1996, relating to the financial statements of U.S. Medical Instruments, Inc., which appears in such Prospectus. We also consent to the reference to us under the headings "Experts" and "Selected Financial Data" in such Prospectus. However, it should be noted that Price Waterhouse LLP has not prepared or certified such "Selected Financial Data." /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP San Diego, California September 5, 1996 EX-23.2 23 EXHIBIT 23.2 1 Exhibit 23.2 CONSENT OF LUCE, FORWARD, HAMILTON & SCRIPPS LLP We hereby consent to the reference to this firm under the caption "Experts" in the Prospectus included in the Registration Statement. LUCE, FORWARD, HAMILTON & SCRIPPS LLP September 9, 1996 EX-27.1 24 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE U.S. MEDICAL INSTRUMENTS, INC. FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 31, 1996 AND FOR THE 3 MONTHS ENDED APRIL 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN THE U.S. MEDICAL INSTRUMENTS, INC. REGISTRATION STATEMENT ON FORM S-1. 1,000 YEAR 3-MOS JAN-31-1996 JAN-31-1996 FEB-01-1995 FEB-01-1996 JAN-31-1996 APR-30-1996 0 0 0 0 258 18 34 10 2,451 2,860 2,752 2,953 9,605 9,613 1,371 1,725 12,543 12,352 2,921 4,042 0 0 0 0 28,057 29,604 687 687 1,467 1,480 8,234 8,073 372 222 372 222 4,966 937 8,420 1,910 0 0 0 0 765 33 (8,813) (1,721) 0 0 (8,813) (1,721) 0 0 0 0 0 0 (8,813) (1,721) 0 0 0 0 CURRENT ASSETS INCLUDES 77 OF OTHER CURRENT ASSETS CURRENT ASSETS INCLUDES 85 OF OTHER CURRENT ASSETS
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