-----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, GkXknlAUJKpdMB/dCCyjB1IZOpoTW5T3Ivw6KTMTsTgnW0orFrQWVyf1Zbvth6d+ +kWTI6weEQXpUzzapp7+Aw== 0000950136-03-003189.txt : 20031224 0000950136-03-003189.hdr.sgml : 20031224 20031224171952 ACCESSION NUMBER: 0000950136-03-003189 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 20031224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MILESTONE SCIENTIFIC INC/NJ CENTRAL INDEX KEY: 0000855683 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 133545623 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-110376 FILM NUMBER: 031074006 BUSINESS ADDRESS: STREET 1: 220 S ORANGE AVE STREET 2: LIVINGSTON CORPORATE PARK CITY: LIVINGSTON STATE: NJ ZIP: 07039 BUSINESS PHONE: 2013793171 MAIL ADDRESS: STREET 1: 44 KEAN ROAD STREET 2: 220 SOUTH ORANGE AVE CITY: LIVINGSTON STATE: NJ ZIP: 07039 FORMER COMPANY: FORMER CONFORMED NAME: U S OPPORTUNITY SEARCH INC DATE OF NAME CHANGE: 19920703 S-2/A 1 file001.txt AMENDMENT NO. 1 TO FORM S-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER , 2003 REGISTRATION NO. 333-110376 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- AMENDMENT NO. 1 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------- MILESTONE SCIENTIFIC INC. (Exact name of Registrant as specified in its charter) DELAWARE 13-3545623 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 220 SOUTH ORANGE AVENUE LIVINGSTON CORPORATE PARK LIVINGSTON, NJ 07039 (973) 535-2717 (Address, including zip code, and telephone number, including area code, of Registrant's executive offices) ----------------- LEONARD OSSER CHIEF EXECUTIVE OFFICER MILESTONE SCIENTIFIC INC. 220 SOUTH ORANGE AVENUE LIVINGSTON CORPORATE PARK LIVINGSTON, NJ 07039 (973) 535-2717 (Name, address, including zip code, and telephone number, including area code, of agent for service) ----------------- Copies to: STEPHEN A. ZELNICK, ESQ. MARK A. VON BERGEN, ESQ. MORSE, ZELNICK, ROSE & LANDER, LLP DAVID C. WANG, ESQ. 405 PARK AVENUE HOLLAND & KNIGHT LLP NEW YORK, NY 10022 2300 U.S. BANCORP TOWER (212) 838-8040 111 S.W. FIFTH AVENUE (212) 838-9190 FACSIMILE PORTLAND, OR 97204 (503) 243-2300 (503) 241-8014 FACSIMILE ----------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. [X] If the registrant elects to deliver its annual report to security holders, or a complete and legible facsimile thereof, pursuant to item 11(a)(1) of this form, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ----------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO RELAY 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 THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ CALCULATION OF REGISTRATION FEE
======================================================================================================================== AMOUNT PROPOSED PROPOSED MAXIMUM TITLE OF EACH CLASS OF TO BE MAXIMUM AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE PRICE (1)(2) REGISTRATION FEE - ------------------------------------------ ------------ ---------------- -------------------- ------------------ Units, consisting of two shares of common stock, $.001 par value, and one warrant to purchase one share of common stock 1,380,000 $ 6.67 $ 9,200,000 $ 846.40 - ------------------------------------------ --------- ------ ----------- ---------- Common stock included in the units 2,760,000 -- -- - ------------------------------------------ --------- ------ ----------- ---------- Warrants to purchase common stock included in the units 1,380,000 -- -- - ------------------------------------------ --------- ------ ----------- ---------- Common stock underlying the warrants included in the units(3) 1,380,000 $ 5.00 $ 6,900,000 $ 634.80 - ------------------------------------------ --------- ------ ----------- ---------- Representative's warrants(4) 120,000 - ------------------------------------------ --------- ------ ----------- ---------- Units issuable upon exercise of the representative's warrants 120,000 $ 8.00 $ 960,000 $ 88.32 - ------------------------------------------ --------- ------ ----------- ---------- Common stock included in the units underlying the representative's warrants(3) 240,000 -- -- - ----------- --------- ------ ----------- ---------- Warrants to purchase common stock included in units issuable upon exercise of the representative's warrants 120,000 -- -- - ------------------------------------------ --------- ------ ----------- ---------- Common stock underlying the warrants to purchase common stock included in units issuable upon exercise of the representative's warrants (3) 120,000 $ 5.00 $ 600,000 $ 55.20 - ------------------------------------------ --------- ------ ----------- ---------- Total $17,660,000 $ 1,624.72 ========================================================================================================================
(1) Estimated solely for purposes of calculating the amount of the registration fee paid pursuant to Rule 457(g) under the Securities Act. (2) Includes 180,000 units issuable upon exercise of underwriters' over-allotment option. (3) Pursuant to Rule 416 under the Securities Act, there are also being registered hereby such additional indeterminate number of shares as may become issuable as a result of stock splits, stock dividends or similar transactions pursuant to the antidilution provisions of the warrants. (4) In connection with the sale of the units, Milestone will issue to the representative of the underwriters warrants to purchase up to 120,000 units in the aggregate. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. PROSPECTUS (SUBJECT TO COMPLETION) DATED DECEMBER 24, 2003 1,200,000 UNITS [MILESTONE SCIENTIFIC LETTERHEAD OMITTED] EACH UNIT CONSISTING OF TWO SHARES OF COMMON STOCK AND ONE REDEEMABLE WARRANT TO PURCHASE ONE SHARE OF COMMON STOCK This is a public offering on a firm commitment basis of [1,200,000] units, each unit consisting of two shares of common stock and one warrant. Each warrant entitles its holder to purchase one share of common stock at an exercise price of $ [150% of the closing market price of our common stock on the pricing date of this offering]. The warrants are exercisable at any time after they become separately tradable until their expiration date, five years after the effective date of this prospectus. Beginning six months from the effective date of this offering, we may redeem some or all of the warrants at a price of $.25 per warrant, by giving not less than 30 days' notice to the holders of the warrants, which we may do at any time after the closing price for our stock on the principal exchange on which the stock trades, equals or exceeds $ [200% of the closing price of our common stock on The American Stock Exchange on the pricing date of this offering] for any five consecutive trading days. The common stock and the warrants will trade only as a unit for 30 calendar days following the date the units begin trading. After that date, the common stock and the warrants will both trade separately and trading in the units will cease. We expect to offer units at an aggregate offering price of $8,000,000, excluding units that may be sold on exercise of the representative's over-allotment option. The price of the units will be the price of two shares of common stock on The American Stock Exchange, or a small discount therefrom, as determined through negotiations between Milestone and the representative of the underwriters, after taking into account recent market activity and the price at which our stock will be trading on the American Stock Exchange immediately prior to this offering. [After giving effect to the proposed reverse split, it is expected that common stock will trade at $3.00 to $4.00 per share.] Our common stock is currently traded on American Stock Exchange under the symbol "MS." On , 2003, the last reported sale price of our common stock on the American Stock Exchange was $ per share. We are applying to the American Stock Exchange to also list the units and warrants under the symbols "MSU" and "MSW," respectively. INVESTING IN THESE UNITS INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 8 TO READ ABOUT RISKS YOU SHOULD CONSIDER BEFORE BUYING THESE UNITS. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE DISCLOSURES IN THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================ PER UNIT TOTAL - -------------------------------------------------------------------------------- Public offering price .................... $ $ - -------------------------------------------------------------------------------- Underwriting discount .................... $ $ - -------------------------------------------------------------------------------- Proceeds to us, before expenses .......... $ $ ================================================================================
* In addition we will issue to the representative of the underwriters, 5-year warrants to purchase 120,000 units, commencing one year after the effective date of the offering at price of [120% of the unit offering price]. Paulson Investment Company, Inc. is the representative of the underwriters of this offering. We have granted the representative a 45-day option to purchase up to additional 180,000 units to cover over-allotments. PAULSON INVESTMENT COMPANY, INC. S.W. BACH & COMPANY The date of this Prospectus is , 2003 Computer controlled local anesthetic delivery system with handpiece [COMPUDENT PHOTO OMITTED] We have rights to the following trademarks: CompuDent (Registered Trademark), CompuMed (Registered Trademark), The Wand (Registered Trademark), The WandPlus (Registered Trademark), CompuFlo (Trademark), SafetyWand (Trademark), and CoolBlue Wand (Trademark). We have also used trademarks, tradenames and service marks owned by others in this prospectus. All references in this prospectus to Milestone, "we," "us," or "our" refer to Milestone Scientific Inc., its wholly owned subsidiary, Sagacity I, Inc. and its 88.65% owned subsidiary, Spintech, Inc. ("Spintech"), unless the context otherwise indicates. Our web address is www.milesci.com. Information contained on our website is not part of this prospectus. PROSPECTUS SUMMARY This summary provides a brief overview of the key aspects of the offering. However, it is a summary and may not contain all of the information that is important to you. For a more complete understanding of this offering, we encourage you to read this entire prospectus, including our financial statements and the notes to those statements. Unless indicated to the contrary, all information in this prospectus has been retroactively adjusted to reflect a 1-for-3 reverse stock split effective on , 2003, [pursuant to a stockholders approval on December 9, 2003 to effect, at the discretion of the board, an up to one-for-ten reverse stock split]. MILESTONE SCIENTIFIC INC. OVERVIEW Milestone is a leader in advanced subcutaneous injection technology for dental and medical applications. Its principal product, CompuDent, a computer controlled, precision metered, local anesthetic injection system, together with its ergonomically designed, single patient use, disposable handpiece, The Wand, enables a dentist to consistently administer safe, effective and less painful injections. Since January 1998, Milestone has sold more than 24,000 CompuDent units and over 13 million single use handpieces in the United States and in over 25 other countries. CompuDent has been favorably evaluated in 18 peer reviewed, published clinical studies and over 25 other evaluative articles. The system provides these specific benefits: o CompuDent minimizes the pain associated with palatal and other injections, resulting in a more comfortable injection experience for the patient; o the pencil grip used with CompuDent's handpieces provides enhanced tactile sense and more accurate control; o new injections made possible with CompuDent eliminate collateral numbness of the tongue, lips and facial muscles; o bidirectional rotation of The Wand handpiece results in greater precision and more rapid onset of anesthesia by eliminating needle deflection in mandibular block injections; o the single patient use, disposable handpiece minimizes the risk of cross contamination; o the ergonomic design of The Wand makes an injection easier and less stressful to administer and lowers the risk of carpal tunnel syndrome to the dentist or hygienist; and o CompuDent can increase productivity in many dental procedures by eliminating the need for preliminary pain blocking injections, and reducing the waiting time required to see if the injection has taken effect. SAFETYWAND In September 2003, Milestone received FDA approval for a newly developed and patented disposable handpiece, the SafetyWand, that incorporates safety engineered sharps protection features to aid in the prevention of inadvertent needlesticks. Milestone believes that the SafetyWand is one of the first safety engineered injection devices that conforms with the regulations of the Occupational Safety and Health Administration of the U.S. Department of Labor ("OSHA") promulgated under the federal Needlestick Safety and Prevention Act ("the Needlestick Safety Act"), while also meeting the clinical needs of dentists. To date, these OSHA regulations have generally not been enforced against dentists by OSHA and similar local and state authorities due to lack of commercially available products that meet the special needs of dentistry. Milestone believes that the commercial availability of the SafetyWand will enable OSHA, and similar local and state authorities, to begin enforcement, or stricter enforcement, of the Needlestick Safety Act against dentists. Since the SafetyWand can only be 3 used with the CompuDent system, enforcement by OSHA could promote increased handpiece sales to current CompuDent users, while also providing impetus for the purchase of these systems by new users. In October 2003, we launched the SafetyWand at the American Dental Association Annual Meeting in California. The SafetyWand will be commercially available before the end of 2003. NEW MARKETING APPROACH In early 2003, Milestone began building a national sales force of highly trained independent representatives to provide sales coverage in urban areas in 12 states. To increase its ability to retain this sales force and to enhance its performance, Milestone: o increased its base price of CompuDent to new customers to provide sufficient gross profit to recruit and adequately compensate its sales force; o established a sales support staff to generate leads, set appointments, provide technical support and customer service and foster increased handpiece use; and o began distributing a new product used in repairing and whitening teeth, the CoolBlue Wand, to assist its sales force in gaining access to dental offices for sales of CompuDent. With a growing new sales force and the acquisition of rights to new products to facilitate access to dental offices, Milestone intends to direct its marketing efforts to capturing new customers, particularly from specialty practitioners, including periodontists, pedodontists, endodontists and cosmetic/restorative dentists. OTHER PRODUCTS AND TECHNOLOGIES To broaden the use of its anesthetic injection technology, in 2001 Milestone launched CompuMed, a system similar to CompuDent, for the medical market. To date, sales and marketing of CompuMed have been limited by financial constraints. Milestone is currently seeking distribution partners in a variety of discrete medical disciplines. Milestone has also developed CompuFlo, a prototype product embodying an advanced pressure sensing technology for subcutaneous injection of liquid medications and local anesthetics. CompuFlo enables health care practitioners to monitor and precisely control pressure, rate and volume during subcutaneous injections. Due to cash constraints, to date Milestone has conducted only limited research as to potential medical applications for this technology and has not yet begun development of commercial devices embodying this technology. Recently, a major medical center proposed the initiation of clinical trials to ascertain the efficacy, safety and suitability of CompuFlo in administering epidural injections for adults and children. No assurances can be given that these trials will be conducted or, if conducted, will be successful. CORPORATE INFORMATION Milestone was organized in August 1989 as a Delaware corporation under the name U.S. Opportunity Search, Inc. In 1996 we changed our name to Milestone Scientific Inc. Our executive office is located at 220 South Orange Avenue, Livingston Corporate Park, Livingston, New Jersey 07039. Our telephone number is (973) 535-2717. 4 THE OFFERING Securities offered............ 1,200,000 units, each unit consisting of two shares of common stock and one redeemable warrant to purchase one share of common stock. The common stock and the warrants will not trade separately until the 31st calendar day following the date the units begin trading. After that date the common stock and the warrants will both trade separately and trading in the units will cease. Shares of common stock to be outstanding after this offering................ 9,166,271(1) Warrants: Number to be outstanding after this offering......... 1,200,000 Exercise terms.............. The warrants are exercisable at any time after they become separately tradable, which will be the 31st calendar day following the date the units begin trading, until the expiration date. Each warrant entitles its holder to purchase one share of common stock at an exercise price equal to 150% of the closing market price of the common stock on the pricing date of this offering. Expiration date........... , 2008 Redemption.................. Beginning six months from the effective date of this offering, we may redeem some or all of the warrants, at a price of $0.25 per warrant, on 30 days notice to the holders. However, we may only redeem the warrants if the closing price for our stock, as reported on the principal exchange on which our stock trades, for any five consecutive trading days has equaled or exceeded 200% of the closing price of the common stock on the American Stock Exchange on the pricing date of this offering. AMEX symbols: Existing.................... Common Stock MS Proposed.................... Units MSU Warrants MSW Risk factors.................. Please refer to "Risk Factors" for a description of the risk factors you should consider. - ---------- (1) Including an estimated 653,594 shares constituting part of the units to be issued at the price of the units offered hereby to satisfy $2,179,734 of indebtedness, accrued interest, accounts payable and accrued compensation on the later of the date of this Prospectus or January 2, 2004 or, for 29,985 units ten days after the closing of this offering. 5 Unless otherwise stated, the information contained in this prospectus assumes no exercise of: o the warrants; o the over-allotment option to purchase up to 180,000 units; o warrants to purchase 120,000 units granted to the representative in connection with this offering; o outstanding compensatory options for 437,948 shares of common stock, exercisable at a weighted average price of $5.55 per share and outstanding warrants for 799,730 shares of common stock exercisable at a weighted average exercise price of $4.48 per share; or o conversion rights relating to convertible notes in the aggregate principal amount of $100,000 convertible into 70,709 shares of common stock and into shares of series A convertible preferred stock convertible into 4,381 shares of common stock. SUMMARY FINANCIAL INFORMATION
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30, --------------------------- ------------------------------- 2002 2001 2003 2002 ------------ ------------ -------------- -------------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues ................................... $ 4,074 $ 4,094 $ 3,101 $ 3,216 Gross profit ............................... $ 2,093 $ 2,120 $ 1,541 $ 1,717 Operating expenses ......................... $ 3,763 $ 5,321 $ 2,683 $ 2,777 Net loss ................................... $ (2,440) $ (3,991) $ (1,787) $ (1,604) Net loss per share--basic and diluted(1) ................................ $ (.59) $ (1.07) $ (.42) $ (.39) Weighted average number of shares outstanding--basic and diluted(1) ......... 4,156,558 3,714,197 4,217,185 4,084,342
- ---------- (1) The effect of options, warrants and convertible debt instruments has been excluded, as their effect is anti-dilutive. The table below sets forth a summary of our balance sheet data as of December 31, 2002 and as of September 30, 2003 on an actual basis, pro forma and pro forma as adjusted for this offering. Pro forma balance sheet data takes into account the following events occurring after September 30, 2003: o The issuance of additional 94,327 shares of common stock to the various noteholders mentioned above, as consideration for previously extending the maturity date on the notes, out of which 13,526 common shares were issued to Leonard Osser, our Chairman and Chief Executive Officer; o The issuance of 102,195 shares of common stock to vendors in payment of outstanding trade payables in the amount of approximately $503,000; o The issuance of 2,333 shares of common stock upon the exercise of options for an aggregate exercise price of $7,750; o The payment of $50,000 of outstanding debt due to the Chairman & Chief Executive Officer. o The issuance of 39,613 shares of common stock for a consideration, net of commissions and closing costs, of $217,485 under an equity put agreement; o The issuance of 16,667 shares of common stock to Leonard Osser, our Chairman and Chief Executive Officer, upon the exercise of options for an aggregate exercise price of $50,000; 6 o The issuance of 25,365 preferred shares in payment of $25,365 of outstanding debt, including principal and interest to a non-affiliate noteholder; o The expected issuance, on the later of January 2, 2004 or the date this offering becomes effective, of an estimated 239,241 units (assuming a unit price of $6.67), in payment of $1,595,734 of debt, including interest, to Leonard Osser, our Chairman and Chief Executive Officer and to a major stockholder; and o The expected issuance, on the later of January 2, 2004 or the date this offering becomes effective, of an estimated 57,571 units (assuming a unit price of $6.67), in payment of $384,000 of accrued compensation to Leonard Osser, our Chairman and Chief Executive Officer. o The expected issuance, ten days after the closing of this offering, of an estimated 29,985 units (assuming a unit price of $6.67) in payment of $200,000 of accrued liabilities for legal services. Pro forma as adjusted for this offering takes into account the pro forma data as well as the receipt of $6,500,000 of estimated net proceeds from this offering, the deduction of underwriting discounts and commissions and other estimated offering expenses to be paid by us.
DECEMBER 31, 2002 SEPTEMBER 30, 2003 (IN THOUSANDS) (UNAUDITED, IN THOUSANDS) ------------------- ---------------------------------------- PRO FORMA, ACTUAL PRO FORMA AS ADJUSTED ----------- ----------- ------------ BALANCE SHEET DATA: Current assets ............................ $ 893 $ 1,275 $1,500 $8,000 Working capital (deficiency) .............. (5,214) (1,449) 640 7,140 Total assets .............................. 1,241 1,514 1,739 8,239 Total liabilities ......................... 7,347 4,391 1,500 1,500 Stockholders' equity (deficiency) ......... (6,106) (2,877) 239 6,739
7 RISK FACTORS This offering involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus, including our financial statements and the notes to those statements, before you purchase any units. RISKS RELATED TO OUR BUSINESS WE HAVE NO HISTORY OF PROFITABLE OPERATIONS. CONTINUING LOSSES COULD EXHAUST OUR CAPITAL RESOURCES AND FORCE US TO DISCONTINUE OPERATIONS. Although our operations commenced in November 1995, until 1998 we had limited revenues. For the years ended December 31, 1998, 1999, 2000, 2001 and 2002, our revenues were approximately $8.8 million, $2.9 million, $5.7 million, $4.1 million and $4.1 million, respectively. In addition, we have had losses for each year since the commencement of operations, including net losses of approximately $2.5 million for 2002 and $1.8 million for the nine months ended September 30, 2003. At September 30, 2003, we had an accumulated deficit of approximately $43.6 million. Unless we can significantly increase sales of our CompuDent units, handpieces or other injection devices, we expect to incur losses for the foreseeable future. WE HAVE A SIGNIFICANT WORKING CAPITAL DEFICIT. AS A RESULT, WE HAVE NOT BEEN ABLE TO SUFFICIENTLY EXPAND OUR SALES AND MARKETING FORCE AND INCREASE OUR REVENUES. Our working capital deficit at September 30, 2003, after adjustment to reflect the subsequent repayment of $503,000 of trade payables through the issuance of common stock in October 2003, was approximately $946,000. This has impaired our ability to expand marketing and sales promotion and develop an adequate sales force, which in turn, had a negative impact on revenue growth. WE HAVE LIMITED FINANCIAL RESOURCES AND WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE. Our capital requirements have been and may continue to be significant. In the future, we may need to borrow funds or sell equity securities, or else curtail or reduce our activities. We have no current arrangements for future additional financing, except as disclosed herein. We cannot assure you that any sources of additional financing will be available on acceptable terms, or at all. To the extent that any future financing involves the sale of our equity securities, the ownership interest of our stockholders could be substantially diluted. WE CANNOT BECOME SUCCESSFUL UNLESS WE GAIN GREATER MARKET ACCEPTANCE FOR OUR PRODUCTS AND TECHNOLOGY. As with any new technology, there is substantial risk that the marketplace will not accept the potential benefits of this technology or be unwilling to pay for any cost differential with the existing technologies. Market acceptance of CompuDent, the SafetyWand, CompuMed and CompuFlo depends, in large part, upon our ability to educate potential customers of their distinctive characteristics and benefits and will require substantial marketing efforts and expense. More than 24,000 units of the CompuDent or its predecessor have been sold worldwide since 1998. Sales of disposable handpieces in 2002 reflect a moderate increase in usage of our dental and medical systems. We cannot assure you that our current or proposed products will be accepted by practitioners or that any of the current or proposed products will be able to compete effectively against current and alternative products. OUR LIMITED DISTRIBUTION CHANNELS MUST BE EXPANDED FOR US TO BECOME SUCCESSFUL. Our future revenues depend on our ability to market and distribute our anesthetic injection technology successfully. In the United States, we rely on a limited number of independent representatives and in-house sales people. Abroad, we lack distributors in many markets. To be successful we will need to retain and hire additional sales personnel, provide for their proper training and ensure adequate customer support. We cannot assure you that we will be able to hire and retain an adequate sales force or engage suitable distributors, or that our sales force or distributors will be able to successfully market and sell our products. 8 WE DEPEND ON TWO PRINCIPAL MANUFACTURERS. IF WE CANNOT MAINTAIN OUR EXISTING RELATIONSHIPS OR DEVELOP NEW ONES, WE MAY HAVE TO CEASE OUR OPERATIONS. We have informal arrangements with the manufacturer of our CompuDent and CompuMed units and the principal manufacturer of our handpieces for those units pursuant to which they manufacture these products under specific purchase orders but without any long-term contract or minimum purchase commitment. We have been supplied by these manufacturers since the commencement of production in 1998. However, termination of the manufacturing relationship with any of these manufacturers could significantly and adversely affect our ability to produce and sell our products. Though we have established an alternate source of supply for our handpieces in China and other alternate sources of supply exist, we would need to recover our existing tools or have new tools produced to establish relationships with new suppliers. Establishing new manufacturing relationships could involve significant expense and delay. Any curtailment or interruptions of the supply, whether or not as a result or termination of the relationship, would adversely affect us. WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT ARE NOT FULLY COVERED BY OUR INSURANCE AND THAT COULD PUT US UNDER A TREMENDOUS FINANCIAL STRAIN. We could be subject to claims for personal injury from the alleged malfunction or misuse of our dental and medical products. While we carry liability insurance that we believe is adequate, we cannot assure you that the insurance coverage will be sufficient to pay such claims should they be successful. A partially or completely uninsured claim, if successful and of significant magnitude, could have a material adverse effect on us. WE RELY ON THE CONTINUING SERVICES OF OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR OF CLINICAL AFFAIRS. We depend on the personal efforts and abilities of our Chairman and Chief Executive Officer, our President who was promoted to this position from that of Senior Vice President in September 2003, and our Director of Clinical Affairs. We maintain a key man life insurance policy in the amount of $1,000,000 on the life of our Chairman and Chief Executive Officer. However, the loss of his services or the services of each of our President or Director of Clinical Affairs, on whom we maintain no insurance, could have a materially adverse effect on our business. RISKS RELATED TO THIS OFFERING IF WE ARE UNABLE TO SATISFY THE AMERICAN STOCK EXCHANGE MAINTENANCE REQUIREMENTS, OUR COMMON STOCK MAY BE DELISTED FROM THE AMERICAN STOCK EXCHANGE AND, AS A RESULT, OUR LIQUIDITY AND THE VALUE OF OUR COMMON STOCK MAY BE IMPAIRED. Shares of our common stock are currently listed on the American Stock Exchange. Continued listing on the American Stock Exchange requires that we maintain at least $6,000,000 in stockholders' equity since we have sustained losses in our five most recent fiscal years. At December 31, 2002, Milestone had a total stockholders' deficit of approximately $6.1 million. On May 2, 2002, we received a letter from the American Stock Exchange advising us that we had fallen below the stockholders' equity criterion and requesting that we submit a recovery plan detailing any actions taken, or planned to be taken within the next 18 months, to bring us into compliance. On June 10, 2002, we submitted a detailed recovery plan to the American Stock Exchange, which, as supplemented on August 14, 2002, showed how we expect to achieve stockholders' equity of $6,000,000 by December 31, 2003. On August 23, 2002, the American Stock Exchange advised us that they had determined that the plan makes a reasonable demonstration of Milestone's ability to regain compliance with the continued listing standards by the conclusion of the plan period at the end of 2003. Since that date the continued listing of our securities on the American Stock Exchange has been subject to periodic review by the Exchange and the Exchange has accepted supplemental submissions by Milestone showing continued progress towards regaining compliance. However, on December 18, 2003 the Exchange informally advised Milestone that it had not demonstrated sufficient progress towards regaining compliance by the end of the plan period and further advised that it would shortly begin delisting proceedings. If such proceedings are initiated by the Exchange, Milestone intends to appeal such action and request 9 an oral hearing. At such hearing, Milestone would present the fact that at the conclusion of the offering covered by this prospectus, Milestone would again be in compliance with the Exchange's stockholder equity criterion. While we believe that completion of this offering is necessary to maintain our listing on the American Stock Exchange, no assurance can be given that listing will be continued until that time. If our securities are delisted from the American Stock Exchange, trading, if any, in the common stock and warrants would be conducted in the over the counter market in the so-called "pink sheets" or on the NASD's "OTC Bulletin Board." Consequently, the liquidity of our securities could be impaired, not only in the number of securities that could be bought and sold, but also through delays in the timing of transactions, reduction in security analysts and new media coverage of Milestone, and lower prices for our securities than might otherwise be obtained. IF OUR SHARES OF COMMON STOCK ARE REMOVED OR DELISTED FROM THE AMERICAN STOCK EXCHANGE, THE ABILITY OF STOCKHOLDERS TO SELL OUR COMMON STOCK AND WARRANTS IN THE SECONDARY MARKET COULD BE RESTRICTED. The Securities and Exchange Commission has adopted regulations which generally define "penny stock" to be an equity security that has a market price, as defined, of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions, including an exception of an equity security that is quoted on the American Stock Exchange. If our shares of common stock are removed or delisted from the American Stock Exchange, they may become subject to rules that impose additional sales practice requirements on broker-dealers who sell these securities. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchaser of such securities and have received the purchaser's written consent to the transactions prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a disclosure schedule prepared by the Securities and Exchange Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered underwriter, and current quotations for the securities, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, among other requirements, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. As such, the "penny stock" rules, if our securities are delisted from the American Stock Exchange, may restrict the ability to sell our common stock and warrants in the secondary market. THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE AND MAY CONTINUE TO FLUCTUATE SIGNIFICANTLY BECAUSE OF VARIOUS FACTORS, SOME OF WHICH ARE BEYOND OUR CONTROL. Our stock price has been extremely volatile, fluctuating over the last three years between closing prices of $.42 and $7.77. These fluctuations have been unrelated to or disproportionately affected by our operating performance. The market price of our common shares could continue to fluctuate significantly after this offering in response to a variety of factors, some of which may be beyond our control. THE EXISTENCE OF OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES MAY PRECLUDE US FROM OBTAINING ADDITIONAL EQUITY FINANCING. We currently have outstanding options, warrants,convertible debentures and series A convertible preferred stock to purchase 1,242,058 shares of our common stock at prices ranging from $.87 to $18.00 per share with a weighted average exercise or conversion price of $4.86. Holders of these warrants and options are given the opportunity to profit from a rise in the market price of our common stock and are likely to exercise their securities at a time when we would be able to obtain additional equity capital on more favorable terms. Thus, the terms upon which we will be able to obtain additional equity capital may be adversely affected, since the holders of outstanding options and warrants can be expected to exercise them at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable to us than the exercise terms provided by such outstanding securities. We have granted registration rights with respect to shares of our common stock covered by the warrants. The market price of our common shares has been volatile and may continue to fluctuate significantly because of various factors, some of which are beyond our control. 10 OUR STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION AND THE PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED BY THE ISSUANCE OF SHARES OF OUR COMMON STOCK UNDER AN EQUITY PUT AGREEMENT. After taking into account 39,613 shares sold in October and through December 15, 2003, under an equity put agreement expiring on May 10, 2004, we may sell up to an additional 660,387 shares of our common stock under that agreement. The price of our common stock may decrease as a result of the actual or potential sale of these shares into the market. We may sell shares of our common stock under the equity put agreement at a price that is below the market price of our stock at the time of the sale. These sales will dilute the interests of our existing stockholders. In that event, not only would you lose a portion of your investment, but we would probably find it more difficult to obtain additional financing. The more shares that are issued under the equity put, the more our shares will be diluted and the more our stock price may decrease. This may encourage short sales, which could place further downward pressure on the price of our common stock. WE ARE CONTROLLED BY A LIMITED NUMBER OF SHAREHOLDERS. Immediately after this offering (including an estimated 593,624 shares forming part of units to be issued to them in satisfaction of debt and accrued compensation), our principal shareholders, Leonard Osser and K. Tucker Andersen, will own 32.9% of the issued and outstanding shares of our common stock (31.7% if the over-allotment option is exercised in full). As a result, they will have the ability to exercise substantial control over our affairs and corporate actions requiring shareholder approval, including electing directors, selling all or substantially all of our assets, merging with another entity or amending our certificate of incorporation. This de facto control could delay, deter or prevent a change in control and could adversely affect the price that investors might be willing to pay in the future for our securities. IF WE DO NOT MAINTAIN AN EFFECTIVE REGISTRATION STATEMENT COVERING THE WARRANTS OR COMPLY WITH APPLICABLE STATE SECURITIES LAWS, YOU MAY NOT BE ABLE TO EXERCISE THEM. In order for you to exercise the warrants, the shares of common stock underlying them must be covered by an effective registration statement and, if the issuance of shares is not exempt under state securities laws, must be properly registered with state securities regulators. At present, we plan to have a registration statement current when the warrants are exercised and, to the extent that the underlying shares do not qualify for one or more exemptions under state securities laws, we intend to register the shares with the relevant authorities. However, we cannot provide absolute assurances that state exemptions will be available, the state authorities will permit us to register the underlying shares, or that an effective registration statement will be in place at the relevant time(s). These factors may have an adverse effect on the demand for the warrants and the prices that can be obtained from reselling them. THE WARRANTS MAY BE REDEEMED ON SHORT NOTICE. THIS MAY HAVE AN ADVERSE IMPACT ON THEIR PRICE. Beginning six months from the effective date of the offering, we may redeem the warrants for $0.25 per warrant on 30 days notice at any time after the closing price for our stock, as reported on its principal trading market, has, for any five consecutive trading days, equaled or exceeded 200% of the closing price of the common stock on the effective date of this offering. If we give notice of redemption, you will be forced to sell or exercise your warrants or accept the redemption price. The notice of redemption could come at a time when, under your personal circumstances, it is not advisable or possible for you to exercise the warrants or a current prospectus or exemption does not exist. FUTURE SALES OR THE POTENTIAL FOR SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK AND WARRANTS TO DECLINE AND COULD IMPAIR OUR ABILITY TO RAISE CAPITAL THROUGH SUBSEQUENT EQUITY OFFERINGS. Sales of a substantial number of shares of our common stock in the public markets, or the perception that these sales may occur, could cause the market price of our stock to decline and could materially impair our ability to raise capital through the sale of additional equity securities. Once this offering is completed, in addition to the 6,146,011 shares of common stock actually issued and the 11 6,112,678 outstanding, there will be another 4,378,706 shares of common stock reserved for future issuance as follows: o up to 1,200,000 shares underlying the warrants; o up to 540,000 shares underlying the over-allotment option, including the shares underlying the warrants included in that option; o up to 360,000 shares underlying the representative's warrants, including the shares underlying the warrants included in the representative's warrants; o up to 314,333 shares underlying stock options previously granted, or to be granted, under our Stock Option Plan; o up to 1,028,896 shares underlying other stock options and warrants that were granted and remained outstanding as of October 31, 2003; o up to 70,709 shares underlying 6% convertible notes in the aggregate principal amount of $100,000 and up to 4,381 shares of common stock underlying our series A convertible preferred stock; o up to 660,387 shares reserved for issuance, at our option, under an equity put agreement; and o up to 200,000 shares underlying other stock options approved to be granted on December 22, 2003. The common stock included in the units as well as the common stock underlying the warrants will be freely tradable without restriction. Before this offering, we had 6,112,678 shares of common stock outstanding, of which 2,762,934 are freely tradable. The remaining 3,349,744 shares are either held by "affiliates", as defined by the rules and regulations promulgated under the Securities Act of 1933, or are "restricted securities" as defined in Rule 144 promulgated under the Securities Act of 1933. Of this amount, 102,195 restricted shares not held by affiliates and 3,084,884 restricted or non- restricted shares held by "affiliates," can only be sold in compliance with the timing and volume limitations of Rule 144 promulgated under the Securities Act of 1933. The other 162,665 restricted shares may be sold without limitation under Rule 144(k). We have granted demand registration rights to holders of 155,614 shares of common stock including shares underlying warrants and piggyback registration rights to holders of convertible notes covering an aggregate of 70,709 shares of common stock. The holders of these shares can require us to register the shares for resale. While we, our executive officers and directors and stockholders holding 5% or more of our outstanding shares have agreed not to sell any shares of stock for a period of 90 days after this offering without the consent of the representative of the underwriters, the representative may waive that restriction at its sole discretion. MANAGEMENT HAS BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING. WE MAY USE THE PROCEEDS OF THIS OFFERING IN WAYS THAT DO NOT IMPROVE OUR OPERATING RESULTS OR THE MARKET VALUE OF OUR SECURITIES. While we have general expectations as to the allocation of the net proceeds of this offering, that allocation may change in response to a variety of unanticipated events, such as differences between our expected and actual revenues from operations or availability of commercial financing opportunities, unexpected expenses or expense overruns or unanticipated opportunities requiring cash expenditures. We have significant flexibility as to the timing and the use of the proceeds. You will rely on our judgment with only limited information about our specific intentions regarding the use of proceeds. We may spend most of the net proceeds of this offering in ways with which you may not agree. If we fail to apply these funds effectively, our business, results of operations and financial condition may be materially and adversely affected. FORWARD-LOOKING STATEMENTS Some of the statements made in this prospectus discuss future events and developments, including our future business strategy and our ability to generate revenue, income and cash flow and possible stricter enforcement of the Needlestick Safety Act. In some cases, you can identify forward-looking 12 statements by words or phrases such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," "our future success depends," "seek to continue," or the negative of these words or phrases, or comparable words or phrases. These statements are only predictions that are based, in part, on assumptions involving judgments about future economic, competitive and market conditions, regulatory enforcement and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various facts, including the risks outlined in this "Risk Factors" section. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We do not undertake to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results. RECENT DEVELOPMENTS Since October 1, 2003, we have entered into the following financing transactions: On October 2, 2003 we issued 1,646,419 shares of common stock in satisfaction of 6% / 12% Secured and Senior Secured Notes and other secured notes in the aggregate amount of approximately $5 million. We also committed to issue 25,365 shares of 8% convertible preferred stock in satisfaction of $25,365 of principal and accrued interest. The preferred stock will be convertible into common stock at the average closing price of our common stock in October 2003. Subsequently, we issued 94,327 additional shares of common stock to these former noteholders as consideration for their previous consent to extend the maturity date of these notes. On October 9, 2003 we reached an agreement to satisfy $1,192,873 of debt and accrued interest due to a major investor, K. Tucker Andersen, and $402,861 of debt and accrued interest and $384,000 of deferred compensation due to our Chief Executive Officer and Chairman, Leonard Osser, through the issuance of units, similar to the units offered in this offering, on the later of January 2, 2004 or the effective date of this offering. The units will be issued at the same price as offered in this offering. On October 21, 2003 we received $7,750 upon the exercise of options for 2,333 shares of common stock. On October 31, 2003 we issued 102,195 shares of our common stock to principal vendors, in satisfaction of trade payables in the aggregate amount of approximately $503,000. During October and through December 15, 2003 we issued an aggregate of 39,613 shares of common stock in consideration for a total of $217,500, after brokerage commissions and closing costs, under an equity put agreement. On December 15, 2003 we issued 16,666 shares of common stock upon the exercise of options by the CEO for an aggregate price of $50,000. In December 2003 we reached an agreement to satisfy $200,000 of accounts payable through the issuance of 29,985 units ten days after the closing of this offering. The units will be issued at the same terms and price as offered in this offering. USE OF PROCEEDS The principal purpose of this offering is to raise a sufficient amount of capital that will allow us to: o expand significantly our independent sales force and our sales support staff and provide for their proper training; o implement marketing and advertising campaigns directed at the dental market; o support the launch of the SafetyWand, including manufacturing and marketing costs; o expand our international sales including the hiring of three sales managers for Asia, Europe and South America; 13 o develop and commercialize our Periodontal Ligament or PDL Injector project; o to reestablish our dental and hygiene school program; o respond quickly to new competitive and business developments in the industries and markets in which we operate and compete; o qualify for continued listing on the American Stock Exchange; o repay a portion of the outstanding debt to two of our major shareholders; and o pay a portion of the accrued compensation to our Chief Executive Officer. Based on gross proceeds of $8 million, and after deducting $800,000 reflecting the estimated underwriting discount, a non-accountable expense allowance of $240,000, and other estimated offering expenses of $460,000 payable by us, the net proceeds to us from this offering will be approximately $6.5 million, or $7.54 million if the representative exercises the over-allotment option in full. The table below lists the specific uses of proceeds: s
APPROXIMATE APPROXIMATE USE OF CAPITAL AMOUNT PERCENTAGE - -------------- ------------- ------------ Sales and marketing ................................ $2,770,000 42.6% Product development ................................ $1,095,000 16.8% Non-sales personnel expense ........................ $ 235,000 3.6% Repayment of debt and accrued compensation ......... $ 525,000 8.0% Miscellaneous working capital ...................... $1,875,000 29.0% ---------- ----- Total ........................................... $6,500,000 100.0% ========== =====
Sales and marketing expenses. This amount consists of the costs we expect to incur to expand our independent and sales supportstaff, in the U.S. and internationally. It includes expenses relating to hiring and training additional sales and marketing personnel, consultant fees, and expenses relating to attending trade shows and conventions and producing marketing materials. Product development. This amount is required for further development of our PDL Injector Device and to develop additional clinical applications of the CompuFlo technology including epidural injections. Non-sales personnel expense. Prior to this offering, we have been operating with cash conservation as a dominant business objective. We expect that additional personnel will be required, primarily in financial, administrative and customer service areas, both to provide adequate support to operations on an ongoing basis and to support growth. Repayment of debt and accrued compensation. This amount includes repayment in cash of $91,680 out of $1,595,734 outstanding debt to two of our major shareholders, Leonard Osser, our Chairman and Chief Executive Officer, and K. Tucker Andersen, the beneficial owner of 20.7% of our outstanding shares of common stock, and the payment of $256,000 out of $640,000 of accrued compensation to our Chairman and Chief Executive Officer. The balance of the debt and accrued compensation will be paid by issuance of units on the effective date of this offering, valued at the same price as is offered to the public. The cash amounts represent estimated tax amounts due by these individuals for accrued interest on the debt and on payment of the accrued compensation. Miscellaneous working capital. These costs include general and administrative costs, including the cost of increasing our inventory, acquiring and enhancing our operating, support and management systems and capital expenditures for computers and other equipment. We may use the portion of the amount currently allocated to working capital and general corporate purposes to reduce our current liabilities. We may also use a portion of the net proceeds to license or acquire new products, technologies or intellectual property or to acquire or invest in businesses complementary to ours. If the representative exercises the over-allotment option, the additional net proceeds, approximately $1.2 million, will be added to working capital. The above information represents our best estimate of our capital requirements based upon the current status of our business. We will retain broad discretion in the allocation of the net proceeds 14 within the categories listed above. The amounts actually expended for these purposes may vary significantly and will depend on a number of factors, including our rate of revenue growth, cash generated by operations, evolving business needs and the other factors described in "Risk Factors." Pending their use, we intend to invest the net proceeds of this offering in interest bearing, investment grade securities. We expect that the net proceeds from this offering, when combined with the proceeds of other financing transactions and revenue from operations, will be sufficient to fund our operations and capital requirements for at least 12 months following this offering. We may be required to raise additional capital through the sale of equity or other securities sooner if our operating assumptions change or prove to be inaccurate. We cannot assure you that any financing of this type would be available. In the event of a capital inadequacy, we would be required to limit our growth and the expenditures described above. DIVIDEND POLICY We have not declared or paid any dividends and do not intend to pay any dividends in the foreseeable future. We intend to retain any future earnings for use in the operation and expansion of our business. Any future decision to pay dividends on common stock will be at the discretion of our board of directors and will be dependent upon our fiscal condition, results of operations capital requirements and other factors our board of directors may deem relevant. CAPITALIZATION The following table sets forth our capitalization as of September 30, 2003 on an actual basis, pro forma and pro forma as adjusted for this offering. Pro forma data takes into account the following events occurring after September 30, 2003: o The issuance of 94,327 additional shares of common stock to these debtholders as agreed remuneration for previously extending the maturity date of the notes, out of which 13,526 were issued to Leonard Osser, our Chairman and Chief Executive Officer; o The issuance of 102,195 shares of common stock as payment of approximately $503,000 due to principal vendors; o The issuance of 39,613 shares of common stock for a consideration, net of commission and closing costs of $217,075 under an equity put agreement; o The issuance of 2,333 shares of common stock upon the exercise of options for a total consideration of $7,750; o the payment of $50,000 of outstanding debt due to our Chairman and Chairman and Chief Executive Officer. o The issuance of 25,365 preferred shares in repayment of $25,365 of outstanding debt, including principal and interest amounts to a noteholder. o The issuance of 16,667 shares of common stock to Leonard Osser, our Chairman and Chief Executive Officer, upon the exercise of options for an aggregate exercise price of $50,000. o The expected issuance, on the later of January 2, 2004 or the date this offering becomes effective, of 239,214 units, in payment of $1,595,734 of debt, including interest, to Leonard Osser, our Chairman and Chief Executive Officer and to a major stockholder; and o The expected issuance, on the later of January 2, 2004 or the date this offering becomes effective, of 57,571 units, in payment of $384,000 of accrued compensation to Leonard Osser, our Chairman and Chief Executive Officer. o The expected issuance, ten days after the closing of this offering, of an estimated 29,985 units (assuming a unit price of $6.67) in payment of $200,000 of accrued liabilities for legal services. Pro forma as adjusted for this offering takes into account the pro forma data as well as the receipt of $6.5 million of estimated net proceeds from this offering, the deduction of underwriting discounts and commissions and other estimated offering expenses to be paid by us. 15
SEPTEMBER 30, 2003 ------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- ----------- ------------ (IN THOUSANDS) Accounts payable and accrued expenses ...................... $ 1,726 $ 1,125 $ 1,125 Notes payable including interest ........................... 2,105 151 151 Accrued compensation ....................................... 560 224 224 --------- --------- --------- Total debt ............................................... 4,391 1,500 1,500 --------- --------- --------- Stockholders' equity (deficiency): Common stock, $0.001 par value, 50,000,000 shares authorized, 5,890,875 shares issued and 5,857,542 outstanding, actual; 6,799,604 shares issued and 6,766,271 outstanding, pro forma; and 9,199,604 shares issued and 9,166,271 outstanding, pro forma as adjusted ............. 6 7 9 Preferred Stock, $.001 par value 5,000,000 shares authorized, no shares issued and outstanding, actual; 25,365 shares issued and outstanding, pro forma; and 25,365 shares issued and outstanding, pro forma as adjusted .................... Additional paid-in capital .................................. 41,623 44,738 51,236 Retained earnings (deficit) ................................. (43,574) (43,574) (43,574) Unearned compensation ....................................... (20) (20) (20) Treasury stock, at cost, 33 shares .......................... (912) (912) (912) --------- --------- --------- Total stockholders' equity (deficiency) ................... (2,877) 239 6,739 --------- --------- --------- Total capitalization ...................................... $ 1,514 $ 1,739 $ 8,239 ========= ========= =========
PRICE RANGES OF OUR COMMON STOCK The principal market on which our common stock is traded is the American Stock Exchange. The ticker symbol for our common stock is MS. The following table sets forth the high and low closing sales prices of our common stock, as quoted by the American Stock Exchange.
HIGH LOW ---------- ---------- 2001 First Quarter ...................................... $ 6.00 $ 2.55 Second Quarter ..................................... $ 3.00 $ 1.86 Third Quarter ...................................... $ 5.25 $ 2.04 Fourth Quarter ..................................... $ 2.19 $ 1.50 2002 First Quarter ...................................... $ 2.04 $ 1.56 Second Quarter ..................................... $ 3.00 $ 1.74 Third Quarter ...................................... $ 2.04 $ .87 Fourth Quarter ..................................... $ 1.20 $ .63 2003 First Quarter ...................................... $ 1.02 $ .42 Second Quarter ..................................... $ 1.20 $ .54 Third Quarter ...................................... $ 4.98 $ .81 Fourth Quarter (through December 22, 2003) ......... $ 7.77 $ 3.15
According to the records of our transfer agent, there were approximately 3,000 holders of record of our common stock as of December 1, 2003. We have applied to the American Stock Exchange to list the units offered by this prospectus, as well as the warrants and common stock underlying those units. 16 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below should be read together with "Management's Discussion and Analysis or Plan of Operations" included elsewhere in this prospectus. The statement of operations data for each of the years in the two-year period ended December 31, 2002 and the balance sheet data at December 31, 2002 are derived from our financial statements, which have been audited by J.H. Cohn LLP, independent public accountants, and are included elsewhere in this prospectus. The statement of operations data for the nine-month periods ended September 30, 2003 and 2002 and the balance sheet data for September 30, 2003 are derived from our unaudited financial statements. The unaudited financial statements have been prepared on substantially the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. Historical results are not necessarily indicative of the results to be expected in the future, and the results of interim periods are not necessarily indicative of results for the entire year. STATEMENT OF OPERATIONS DATA:
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- ------------------------------- 2001 2002 2002 2003 ------------- ------------- -------------- -------------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Revenues .................................. $ 4,094 $ 4,074 $ 3,216 $ 3,101 Cost of sales ............................. 1,973 1,980 1,499 1,560 ---------- ---------- ---------- ---------- Gross profit .............................. 2,121 2,094 1,717 1,541 Selling, general and administrative expenses ................................. 5,271 3,589 2,713 2,492 Research and development .................. 50 148 64 112 Closing of Deerfield, IL facility ......... -- 26 -- 79 ---------- ---------- ---------- ---------- Loss from operations ...................... (3,200) (1,669) (1,060) (1,142) Sale of prophy angle business and related consulting income ................ 64 80 -- -- Other income .............................. -- -- 72 -- Interest expense, net ..................... (855) (851) (616) (645) ---------- ---------- ---------- ---------- Net loss .................................. $ (3,991) $ (2,440) $ (1,604) $ (1,787) ========== ========== ========== ========== Net loss per share -- basic and diluted .................................. $ (1.07) $ (.59) $ (.39) $ (.42) ========== ========== ========== ========== Weighted average number of shares outstanding -- basic and diluted .................................. 3,714,197 4,156,558 4,084,341 4,217,185 ========== ========== ========== ==========
BALANCE SHEET DATA:
(IN THOUSANDS) DECEMBER 31, SEPTEMBER 30, 2002 2003 -------------- -------------- Current assets ......................... $ 893 $ 1,275 Working capital ........................ $ (5,214) $ (1,449) Total assets ........................... $ 1,241 $ 1,514 Total liabilities ...................... $ 7,347 $ 4,391 Stockholders' equity (deficit) ......... $ (6,106) $ (2,877)
17 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS You should read the following discussions of our financial condition and results of operations in conjunction with the financial statements and the notes to those statements included elsewhere in this prospectus. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, such as those set forth under "Risk Factors" and elsewhere in this prospectus. OVERVIEW We have generated most of our revenues during our last two fiscal years and the interim period this year through sales of our CompuDent system and The Wand disposable handpiece used with that system. Revenues have been earned domestically and internationally through sales in more than 25 countries. During this period handpiece sales have provided a growing portion of our revenues, reflecting a growing base of new customers for our systems internationally and more intensive use of their systems by a relatively stagnant base of customers domestically. Though we have continued to sell new systems domestically, a large part of our domestic sales during this period represented the sale of upgraded units or additional units to our existing customer base. Our limited domestic sale of new systems reflects our limited sales and marketing efforts as a result of cash constraints. We expect to use a portion of the proceeds of this offering to increase sales and marketing expense and believe these increases should generate additional revenue. The following table shows a breakdown of our revenues, domestically and internationally, by product category, and the percentage of total revenue by each product category.
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------- 2003 2002 ------------------------ ------------------------ DOMESTIC CompuDent ..................... $ 524,566 25.4% $ 799,671 32.8% Handpieces .................... 1,398,347 67.7% 1,461,607 59.9% Other ......................... 141,417 6.9% 176,923 7.3% ---------- ----- ---------- ----- Total Domestic ................ $2,064,330 100.0% $2,438,201 100.0% ========== ===== ========== ===== INTERNATIONAL CompuDent ..................... $ 574,225 55.4% $ 436,228 56.1% Handpieces .................... 460,152 44.4% 337,714 43.4% Other ......................... 2,574 0.2% 3,764 0.5% ---------- ----- ---------- ----- Total International ........... $1,036,951 100.0% $ 777,706 100.0% ========== ===== ========== ===== DOMESTIC/INTERNATIONAL ANALYSIS Domestic ...................... $2,064,330 66.6 $2,438,201 75.8 International ................. 1,036,951 33.4 777,706 24.2 ---------- ----- ---------- ----- $3,101,281 100.0% $3,215,907 100.0% ========== ===== ========== ===== YEAR ENDED DECEMBER 31, ------------------------------------------------- 2002 2001 ------------------------ ------------------------ DOMESTIC CompuDent ..................... $ 956,275 30.1% $1,309,712 39.0% Handpieces .................... 1,999,050 63.0% 1,756,498 52.4% Other ......................... 219,605 6.9% 288,092 8.6% ---------- ----- ---------- ----- Total Domestic ................ $3,174,930 100.0% $3,354,302 100.0% ========== ===== ========== ===== INTERNATIONAL CompuDent ..................... $ 495,730 55.1% $ 519,089 70.2% Handpieces .................... 403,346 44.9% 192,271 26.0% Other ......................... 0 0.0% 28,048 3.8% ---------- ----- ---------- ----- Total International ........... $ 899,076 100.0% $ 739,408 100.0% ========== ===== ========== ===== DOMESTIC/INTERNATIONAL ANALYSIS Domestic ...................... $3,174,930 77.9% $3,354,302 81.9% International ................. 899,076 22.1% 739,408 18.1% ---------- ----- ---------- ----- $4,074,006 100.0% $4,093,710 100.0% ========== ===== ========== =====
We have earned gross profits of 51.8% and 51.4% in the years ended December 31, 2001 and 2002, respectively, and 53.4% and 49.7% in the nine-month periods ended September 30, 2002 and 2003, respectively. However, our revenues have been too low to support our overhead, research and development expense and interest on our debt. We have therefore reported substantial, though declining, losses for each of those periods. We have taken steps to cut our overhead, increase sales and reduce our interest expense. We took the following steps to reduce our operating overhead and improve our utilization of cash: o We reconfigured our sales force, commencing in 2001 and continuing through 2003, from a large internal force to independent sales representatives, distributors and a small sales support staff; o We closed our Deerfield, Illinois facility on January 31, 2003, resulting in a reduction of ten employees. Customer support, technical service and other back-office functions previously conducted at this location were consolidated into our New Jersey location; 18 o We outsourced to an independent warehouse located in Pennsylvania receiving, shipping and storage functions previously conducted at Deerfield; and o We cut marketing expense and limited our participation in trade shows, even though this had a further negative effect on sales. Next, we took steps to reduce our debt burden. We cut the interest rate on our Senior Secured and Secured Notes (after negotiation with our noteholders) from 20% per year to 12% per year (6% if we paid interest in cash) and extended the previously extended maturity date until July and August 2003. Then, in October 2003, we paid $5,014,014 of debt by issuing 1,646,419 shares of common stock and 25,365 shares of convertible preferred stock and satisfied approximately $503,000 of trade payable by issuing 102,195 shares of common stock. In October we also reached an agreement to satisfy, on the later of January 2, 2004 or the closing of this offering, an additional $1,979,734 of debt, accrued interest and accrued compensation through issuance of 296,812 units. In December 2003 we reached an agreement to satisfy, ten days after the closing of this offering, $200,000 of accounts payable through issuance of 29,895 units. Finally, at the beginning of 2003, we took steps to increase our revenues. In early 2003 we completed development of the SafetyWand, which incorporates safety engineered sharps protection features to aid in the prevention of inadvertent needlesticks. We believe that the SafetyWand is one of the first safety engineered injection devices that conforms with OSHA regulations under the federal Needlestick Safety Act, while also meeting the clinical needs of dentists. To date, these regulations have generally not been enforced against dentists by OSHA and similar local and state authorities due to lack of commercially available products that meet the special needs of dentistry. Milestone believes that the commercial availability of the SafetyWand will enable OSHA, and similar local and state authorities to begin enforcement, or stricter enforcement, of the Needlestick Safety Act against dentists. Since the SafetyWand can only be used with the CompuDent system, enforcement by OSHA could promote increased handpiece sales to current CompuDent users, while also providing impetus for the purchase of these systems by new users. In September 2003, we obtained FDA approval for SafetyWand. In October 2003, we launched the SafetyWand at the American Dental Association Annual Meeting in California. SafetyWand will be commercially available before the end of 2003. In early 2003, we adopted a new marketing approach and began building a national sales force of highly trained independent representatives to provide sales coverage in urban areas in 12 states. To increase our ability to retain this sales force and to enhance its performance, we: o increased the base price of our CompuDent unit to new customers to provide sufficient gross profit to recruit and adequately compensate our sales force; o established a sales support staff to generate leads, set appointments, provide technical support and customer service and foster increased handpiece use; and o began distributing a new product used in repairing and whitening teeth, the CoolBlue Wand, which also helps gaining access to dental offices. With a growing new sales force and the acquisition of rights to new products to facilitate access to dental offices, we intend to direct our marketing efforts to capturing new customers, particularly from specialty practitioners, including periodontists, pedodontists, endodontists and cosmetic/restorative dentists. The technology underlying our SafetyWand, the CompuFlo and an improvement to the controls for CompuDent were developed by our Director of Clinical Affairs and assigned to us. Upon sale of products using any such technology we will owe him a 5% royalty on the total sales price, or, if technology covered by other patents is also used by the product, on an allocated part of the sales price. In addition, he is granted, pursuant to the agreement, an option to purchase, at fair market value on the date of the grant, 25,000 of our common stock upon the issuance of each additional patent relating to these technologies. 19 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to accounts receivable, inventories, advances to our contract manufacturer, stock based compensation and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions. Inventory Inventories principally consist of finished goods and component parts stated at the lower of cost (first-in, first-out method) or market. Impairment of Long-Lived Assets We review long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered. Revenue Recognition Revenue is recognized when title passes at the time of shipment and collectibility is deemed probable. RESULTS OF OPERATIONS The results of operations for the year ended December 31, 2002, and nine months ended September 30, 2003, reflect our concentrated effort to reduce our overhead while slowly growing our user base in the dental market domestically and abroad. The loss for the year 2002, approximately $2.5 million, represents a 39% reduction from the same period in 2001. However, the net loss for the nine months ended September 30, 2003 was approximately $183,000 greater than the loss reported for the nine months ended September 30, 2002 as a result of a decline in sales volume and gross profit, coupled with increases in research and development expenses and interest expense. The following table sets forth for the periods presented, statement of operations data as a percentage of revenues. The trends suggested by this table may not be indicative of future operating results.
NINE-MONTH PERIODS ENDED SEPTEMBER 30, ------------------------------------------------------- 2003 2002 --------------------------- --------------------------- Net sales ................................ $ 3,101,281 100.0% $ 3,215,907 100.0% Cost of sales ............................ 1,560,288 50.3% 1,499,063 46.6% Gross profit ............................. 1,540,993 49.7% 1,716,844 53.4% Selling, general & administrative expense ................................. 2,491,737 80.3% 2,712,649 84.4% Closing of Deerfield, Il facility ........ 79,023 2.5% 0.0% Research and development ................. 112,158 3.6% 63,928 1.9% Loss from operations ..................... (1,141,925) (36.8)% (1,059,733) (32.9)% YEARS ENDED DECEMBER 31, ------------------------------------------------------- 2002 2001 --------------------------- --------------------------- Net sales ................................ $ 4,074,006 100.0% $ 4,093,710 100.0% Cost of sales ............................ 1,980,949 48.6% 1,973,156 48.2% Gross profit ............................. 2,093,057 51.4% 2,120,554 51.8% Selling, general & administrative expense ................................. 3,588,836 88.1% 5,271,032 128.8% Closing of Deerfield, Il facility ........ 26,067 0.6% 0.0% Research and development ................. 147,709 3.6% 49,943 1.2% Loss from operations ..................... (1,669,555) (41.0)% (3,200,421) (78.2)%
Fiscal year ended December 31, 2002 compared to fiscal year ended December 31, 2001 Net sales for the years ended December 31, 2002 and 2001 were $4,074,006 and $4,093,710, respectively. The $19,704 decrease is attributable primarily to a decrease in domestic sales of 20 CompuDent, $71,592 generated from prophy angle sales in 2001 before the sale of this product line in November 2001, and our decision to consolidate a $94,500 shipment to our South African distributor with its January 2003 order to lower freight charges. The decrease was partially offset by a 13% or $229,183 increase in domestic dental sales of The Wand handpieces, $207,000 increase in The Wand handpiece sales to foreign distributors, and CompuMed sales of approximately $163,000. The reduction in CompuDent sales domestically are the direct result of the downsizing of our sales and marketing effort in the U.S. Cost of sales for the years ended December 31, 2002 and 2001 were $1,980,949 and $1,973,156 respectively. The $7,793 increase is attributable primarily to product mix. For the year ended December 31, 2002, we generated a gross profit of $2,093,057 or 51.4% as compared to a gross profit of $2,120,554 or 51.8% for the year ended December 31, 2001. The decrease in gross profit is mainly attributable to an increase in sales revenue generated from sales to foreign distributors. The gross profit from these sales is lower than the aggregate gross profit generated from domestic sales. Selling, general and administrative expenses for the years ended December 31, 2002 and 2001 were $3,588,836 and $5,271,032, respectively. The $1,682,196 decrease is attributable primarily to an approximate $858,000 decrease in expenses associated with the sale and marketing of CompuDent units and The Wand handpieces due to the transitioning of its sales force to independent representatives and an approximate $293,700 decrease in legal fees. In addition, during 2001, we issued 242,308 shares as payment for services rendered in the amount of $247,649. We had incurred higher legal expenses in 2001 related to advertising agreements and patent registrations. In 2002, we incurred costs totaling $26,067 associated with the closing down of our Illinois facility. Research and development expenses for the years ended December 31, 2002 and 2001 were $147,709 and $49,943, respectively. The $97,766 increase is attributed to the development of the SafetyWand. Other income for the years ended December 31, 2002 and 2001, $80,000 and $64,487, respectively reflect the sale of our prophy angle business in 2001 and consulting services we provided during 2002, in connection with this sale. The loss from operations for the years ended December 31, 2002 and 2001 were $1,669,555 and $3,200,421, respectively. The $1,530,866 decrease in loss from operations is explained above. We incurred interest expense of $850,642 for the year ended December 31, 2002 as compared to $858,582 for the year ended December 31, 2001. The decrease of $7,940 is attributable to a lower average interest rate, which was partially offset by an increase in outstanding principal debt obligations. The net loss for the years ended December 31, 2002 was $2,440,197 as compared to a net loss of $3,991,580 for 2001. The $1,551,383 decrease in net loss is primarily attributable to a sharp decrease in selling and administrative expenses, including reduction in personnel. Nine months ended September 30, 2003 compared to nine months ended September 30, 2002 Net sales for the nine months ended September 30, 2003 and 2002 were $3,101,281 and $3,215,907, respectively. The $114,626 or 3.6% decrease is primarily related to an approximate $175,000 decrease in CompuDent and CompuMed domestic sales, a $63,000 decrease in domestic sales of the Wand handpieces. These decreases were partially offset by a $122,000 increase in foreign sales of the Wand handpiece. The decrease in Wand handpiece sales is the result of changing the primary vendor of the Wand handpiece, resulting in inconsistent inventory levels. Those transition issues have been resolved and are resulting in improved supply chain management. Cost of sales for the nine months ended September 30, 2003 and 2002 were $1,560,288 and $1,499,063, respectively. The $61,225 increase is attributable primarily to higher sales volume to foreign distributors. For the nine months ended September 30, 2003, Milestone generated a gross profit of $1,540,993 or 49.7% as compared to a gross profit of $1,716,844 or 53.4% for the nine months ended 21 September 30, 2002. The decrease in gross profit percentage is primarily attributable to increased sales to foreign distributors. Sales to foreign distributors are of higher volume but at a reduced margin. Selling, general and administrative expenses for the nine months ended September 30, 2003 and 2002 were $2,491,737 and $2,712,649, respectively. The $220,912 decrease is attributable primarily to an approximate $241,000 decrease in expenses associated with the sale and marketing of the Wand. An approximate $63,000 expense associated with the independent sales representative start up costs, was primarily offset by a commensurate amount of commissions earned during the similar period in the previous year. Milestone incurred costs totaling $79,023 relating to the closure of its Deerfield, IL facility. Research and development expenses for the nine months ended September 30, 2003 and 2002 were $112,158 and $63,928, respectively. These costs were related to the development of Milestone's SafetyWand. The loss from operations for the nine months ended September 30, 2003 and 2002 was $1,141,925 and $1,059,733, respectively. The $82,192 increase in loss from operations is explained above. Milestone generated $72,000 in income for the nine months ended September 30, 2002 as a result of a consulting contract which expired in October 2002. Interest expense of $645,457 was incurred for the nine months ended September 30, 2003 as compared to $616,519 for the nine months ended September 30, 2002. The increase is attributable to higher average borrowings in 2003. The net loss for the nine months ended September 30, 2003 was $1,787,382 as compared to a net loss of $1,604,252 for the nine months ended September 30, 2002. The $183,130 increase in net loss is explained above. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2002, as shown in the accompanying consolidated financial statements, we incurred net losses of approximately $2,440,000 and $3,992,000 and negative cash flows from operating activities of approximately $676,000 and $1,385,000 during 2002 and 2001, respectively. As a result, we had a cash balance of approximately $10,000, a working capital deficiency of approximately $5,214,000 and a stockholders' deficiency of approximately $6,106,000 as of December 31, 2002. These matters raise substantial doubt about our ability to continue as a going concern. At September 30, 2003, the accompanying condensed consolidated financial statements have been prepared assuming Milestone will continue as a going concern. However, as shown in the accompanying condensed consolidated financial statements, Milestone incurred net losses of approximately $1,787,000 and $1,604,000 and negative cash flows from operating activities of $861,000 and $418,000 during the nine months ended September 30, 2003 and 2002, respectively. As a result, Milestone had a cash balance of approximately $96,000, a working capital deficiency of approximately $1,449,000 and a stockholders' deficit of approximately $2,877,000 as of September 30, 2003. These matters raised substantial doubt about Milestone's ability to continue as a going concern. Management believes that its initial concerns about the Company's ability to continue as a going concern have been alleviated through the subsequent satisfaction of a substantial portion of its outstanding obligations, the introduction of new products and continuing efforts to reduce operating overhead. Nevertheless, management believes that it is probable that Milestone will continue to incur losses and negative cash flows from operating activities through at least September 30, 2004. During the year ended December 31, 2002, we reduced our average monthly cash used in operations to less than $60,000, completed a $4.1 million debt restructuring program, and obtained $785,000 in additional financing. This program included debt to equity conversions, deferring payment on a portion of our payables, restructuring our debt and outsourcing our sales force. Satisfaction of certain liabilities Agreements reached by Milestone in October 2003 will effectively eliminate the current stockholders' deficiency upon the later of completion of this offering or January 2, 2004. During the 22 month, Milestone satisfied $5,014,000 of secured debt including interest, through the issuance of 1,646,419 shares of common stock and $25,365 face amount of 8% cumulative convertible preferred stock. Also, approximately $503,000 of trade payables to principal vendors was satisfied through issuance of 102,195 shares of common stock valued at $4.92 per share, the approximate fair market value. Additionally, we reached agreements to satisfy, an aggregate amount of $1,963,000 of debt, accrued interest, and accrued compensation through the issuance of equity securities. Satisfaction of the secured debt for borrowed money to a major investor and to our Chairman and CEO and accrued compensation to our CEO will be on the later of January 2, 2004 or the effective date of the next public offering of our securities through the issuance of common stock and warrants at the same price as offered to the public. This settlement is contingent upon there being a public offering. Payment of this debt, following the conversion to equity in September 2003 of additional $5 million of debt will eliminate most of Milestone's funded debt and will remove almost all liens on its assets. Reduction of operating overhead To date, we have taken certain steps in order to reduce our operating overhead and use of cash. These steps includethe following: o Commencing in 2001 and continuing through 2003, we reconfigured our sales force from a large internal sales force to independent sales representatives, distributors and a small sales support staff; o On January 31, 2003, we completed the closing of the Deerfield, Illinois facility, resulting in the termination of ten employees. The customer support, technical service and other back-office functions previously conducted, in whole or in part, at this location were consolidated into our New Jersey location. The receiving, shipping and storage functions, which were also previously done at this location, are now outsourced to an independent warehouse located in Pennsylvania. On June 4, 2003, we borrowed $50,000 pursuant to a 6% secured convertible promissory note due November 27, 2004. At the option of the noteholder, the principal and interest are payable on the maturity date in common stock at a rate of one share of common stock for every $.936 of indebtedness. Additionally, we granted the investor warrants to purchase 53,419 of our common stock at a per share price of $1.56 with an estimated fair value of $14,423 at any time or from time to time during the period commencing June 4, 2003 and ending June 3, 2005. This resulted in an initial increase to debt discount and to additional paid-in capital. Cash flow results For the nine months ended September 30, 2003, the Company's net cash used in operating activities was $860,990. This was attributable primarily to a net loss of $1,787,382 adjusted for noncash items of $280,494 (of which $242,628 was for amortization of debt discount and deferred financing costs); a $372,167 increase in accounts receivable; an $135,997 increase in inventories; a $137,575 decrease in advances to contract manufacturer; a $3,341 decrease in prepaid expenses; an increase in accounts payable of $399,731 a $402,827 increase in accrued interest; a $29,412 decrease in accrued expenses; and an $240,000 increase in deferred compensation. For the nine months ended September 30, 2003, the Company used $15,817 in investing activities for capital expenditures. For the nine months ended September 30, 2003, the Company generated $962,994 from financing activities as it issued promissory notes to existing investors totaling $900,000, incurred $108,537 of net borrowings from its Chief Executive Officer, recorded $22,721 in deferred financing activities and incurred $22,500 in expenses in registering shares. RECENT ACCOUNTING PRONOUNCEMENT In December 2002, SFAS No.148, "Accounting for Stock-Based Compensation-Transition and Disclosure, an Amendment of SFAS No. 123" was issued. SFAS No. 148 amends SFAS No. 123, to 23 provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effects of the method used on reporting results. Milestone adopted SFAS No. 148, effective January 1, 2003 and it did not have any material impact on its consolidated financial statements. In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" was issued. The statement requires that an issuer classify financial instruments that are within its scope as a liability. Many of those instruments were classified as equity under previous guidance. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. We are currently evaluating the provisions of this statement, and do not believe that it will have an impact on our consolidated financial statements. 24 BUSINESS BACKGROUND Milestone is a leader in advanced subcutaneous injection technology for dental and medical applications. Its products improve the quality of patient care and comfort, while also addressing the health and safety needs of the practitioner. Milestone's principal product, CompuDent, was developed to replace the hypodermic syringe in dentistry. The hypodermic syringe has been little changed since its invention more than 150 years ago. A dentist using a syringe can generally administer an adequate volume of anesthetic to the intended target area to achieve the desired level of anesthesia. However, use of a syringe for this purpose, may result in a number of unintended consequences or collateral problems including: o high levels of patient pain in some procedures; o post-operative pain as a result of tissue tearing or distension; o necrosis as a consequence of tissue tearing and other damage; o failure to hit the intended nerve target because of needle deflection and the awkward manner in which the syringe must be held; o temporary paralysis of adjacent tissue such as the tongue, lips, and facial muscles; o fear reactions by the patient to the syringe; o carpal tunnel syndrome to the dentist or hygienist; o inability to inject sufficient anesthetic into dense tissue or tight spaces; and o use of unnecessarily high levels of anesthetic. DENTAL PRODUCTS CompuDent and the Wand Milestone's principal product, CompuDent, is a computer controlled, precision metered, local anesthetic injection system. The system, including its ergonomically designed, single patient use, disposable handpiece, The Wand, enables a dentist to consistently administer safe, effective and less painful injections. Since January 1998, Milestone has sold more than 24,000 CompuDent units and over 13 million single use handpieces in the United States and in over 25 other countries. CompuDent has been favorably evaluated in 18 peer reviewed, published clinical studies and over 25 other evaluative articles. The system provides these benefits: o minimizes the pain associated with palatal and other injections, resulting in a more comfortable injection experience for the patient; o the pencil grip used with The Wand handpiece provides enhanced tactile sense and more accurate control; o new injections made possible with CompuDent minimize collateral numbness of the tongue, lips and facial muscles; o bidirectional rotation of The Wand handpiece results in greater precision and more rapid onset of anesthesia by eliminating needle deflection in mandibular block injections; o the single patient use disposable handpiece minimizes the risk of cross contamination; o the ergonomic design of The Wand makes an injection easier, less stressful to administer and reduces the risk of carpal tunnel syndrome to the dentist or hygienist; and o CompuDent can increase productivity in many dental procedures by eliminating the need for preliminary pain blocking injections, and reducing the waiting time required to see if the injection has taken effect. 25 The system design allows a drop of anesthetic to always precede the needle tip, thus creating a pathway of already anesthetized tissue for the needle to penetrate. The system also eliminates the "bee-sting" effect, that is, the painful effect associated with a surge of fluid into a confined tissue area. Syringes do not allow sufficient control of the flow rate to achieve these benefits. With a syringe, the needle often enters tissue that has not yet been anesthetized. Further, dentists using a syringe do not have a solid resting point against which they may guide their hand while administering the injection, often resulting in uncontrolled and movement of the needle that causes pain for the patient. The slim, pencil-like, shape of The Wand handpiece is also more functional for the user and less ominous in appearance to the patient. The pencil grip provides enhanced tactile sense, more accurate control, and a greater level of stability for the user by preventing antagonistic movements. As a single patient use device, the handpiece also offers protection against patient cross-contamination. The design of The Wand handpiece allows the practitioner to use a new needle insertion technique called bidirectional rotational insertion that minimizes needle deflection. Contemporary dental anesthesia textbooks indicate that needle deflection is a source of anesthetic failures in mandibular blocks, the most common dental injection. Anesthetic blocks are missed 15% to 20% of the time because of needle deflection associated with hypodermic syringes. The bidirectional rotational insertion technique associated with The Wand handpiece addresses these failures. Further, the new technique also requires two to three times less force to penetrate tissue, which may lead to a less painful injection experience for the patient. We sell CompuDent units, together with an initial supply of 50 handpieces, in the U.S. for $1,995. However, discounts are offered for purchases of multiple units and on sales of additional units to existing customers. We sell The Wand for $75 and The Wand with bonded needle handpieces for $62.50, for a box of 50 handpieces, but offer discounts for participants in the Milestone Savings Plan and other periodic buying programs. Our international master distributors and direct distributors to whom we sell in a number of countries purchase units at a range of generally lower prices, depending upon the extent of the marketing, promotional, training and repair obligations which they assume. The SafetyWand In September 2003, we received FDA approval for the SafetyWand, an injection handpiece device that incorporates safety engineered sharps protection features. The SafetyWand was developed to address requirements of the Needlestick Safety Act, mandating the use of a safety engineered sharps device to eliminate inadvertent needle sticks. The Act was adopted in 2000 after it was found that U.S. healthcare workers suffer from an estimated 800,000 needle-stick injuries each year, some of which resulted in cases of HIV, Hepatitis B, Hepatitis C and other illnesses, costing taxpayers in excess of $2 billion annually, in testing and treatment. OSHA promulgates regulations under the Needlestick Safety Act. OSHA and corresponding authorities in some states are responsible for enforcing the Act and its regulations. OSHA and similar state and local authorities conduct enforcement actions on a state-by-state basis. While OSHA and these state and local authorities are empowered to levy substantial fines for failure to use these devices, we believe that they have largely been unable to enforce the law against dentists because of the inadequacy of existing devices to meet both the requirements of the law and the unique clinical needs of dentists. The SafetyWand is one of the first safety engineered injection devices that conforms with more than 30 parameters published by OSHA to be met by safety engineered products while also meeting the clinical needs of dental practitioners. It provides the practitioner with a safer retractable needle device, with single hand activation, which is reusable multiple times during a single patient visit, yet small and sleek enough not to obscure the dentist's often limited field of view. We believe that the commercial availability of the SafetyWand will enable OSHA and similar state and local authorities to begin enforcement, or stricter enforcement, of the Needlestick Safety Act against dentists. Since the SafetyWand can only be used with CompuDent, enforcement by OSHA could promote increased handpiece sales to current CompuDent users, while also providing significant 26 impetus for the purchase of these systems by new users. However, there are no assurances that the Act or related regulations will be strictly or consistently enforced or that this enforcement will result in increased sales of our products. We launched the SafetyWand at the American Dental Association Annual Meeting in California in October 2003. We expect to begin initial shipments of the SafetyWand before the end of 2003. The Wand Handpiece with Needle This handpiece was designed to eliminate the re-use of handpieces on multiple patients, a problem occurring primarily outside the United States. This product is The Wand handpiece with a needle permanently attached. The benefits of this product are three-fold: for the patient, the risk of contamination from a previously used needle is eliminated, for the practitioner, there is less preparation time needed, and for Milestone, it should increase overall handpiece sales as customers will now stock handpieces with different sized needles. In June 2003 we received our CE mark to sell The Wand Handpiece with Needle in Europe. Since June we have generated $130,000 in Wand Handpiece with Needle sales. CoolBlue Wand Dental Enhancement System In August 2003, we entered into an agreement with DaVinci Systems, granting us non-exclusive distribution rights for the CoolBlue Wand, manufactured by DaVinci. The CoolBlue Wand is a dental enhancement system that uses advanced blue light emitting diodes for faster curing of dental repair amalgams, trans-illumination of teeth and activation of whitening gels and pastes. The agreement also granted us exclusive worldwide distribution rights for a whitening head. Under a further understanding with DaVinci, these rights were expanded to include products for the consumer home market. We began selling the CoolBlue Wand at a dental trade show in late October 2003. Through December 15, 2003 we have sold $23,025 of these units and have received orders for an additional $20,130. Curing. Technological advances have allowed the introduction of a composite material that is soft and malleable and generally matches the color of teeth. Once applied, this composite is hardened through the use of a curing light. The first generation of curing lights used halogen lamps, which require several minutes of curing time and emitted a great deal of heat in the mouth. Newer curing lights use light emitting diodes ("LEDs") that reduce curing time and emit less heat. DaVinci's curing light uses shorter wavelength blue LEDs that cure faster, deeper and cooler than products using halogen lamps. Further, the design is versatile and allows optional attachments for trans-illumination to identify cracks in a tooth and for activating whitening gels and pastes. Whitening. The curing light may also be used as the base device for a whitening system employing a proprietary whitening head developed by DaVinci for Milestone, a dental office treatment kit, a take home kit provided by the dentist for follow-up, and a unique whitening rinse for long term maintenance. DaVinci will supply all components of the system to Milestone. Milestone is the exclusive worldwide distributor of the whitening head. All gels, pastes and rinse to be used with the whitening head will be supplied to Milestone by DaVinci at the lowest price provided to its customers. We are currently working with a manufacturer to complete development of packaging for the system. Concurrently, Milestone has engaged a creative firm to assist in the development of the launch materials, including naming, logo creation and promotional materials. We expect to launch the whitening system and to begin shipments of the product in the first quarter of 2004. We believe this product has an array of practitioner and patient benefits including lower cost and safety and which will allow the dentist to market take home consumables. For its assistance in arranging our distribution agreement with DaVinci, we agreed to pay Strider Inc., a commission of 5% of our gross revenues on all products purchased from DaVinci and resold to the professional dental market, and a commission of 2% of our gross revenues on all products purchased from DaVinci and resold to markets other than the professional dental market. 27 The Proposed PDL Injector Device The periodontal ligament injection, or PDL injection, is a site specific injection which is highly effective for single tooth anesthesia. During a PDL procedure, a dentist anesthetizes a single tooth without causing collateral anesthesia to the tongue, lip and cheek. However, due to the pain elicited from the high volume of drug required and the associated pressure, a PDL can only be used as a secondary injection once the patient has already been anesthetized. The traditional PDL injection is typically administered using a spring loaded, high pressure, trigger-activated injector, known as a PDL Injector. Using this device, anesthetic must be delivered into the PDL under extremely high pressure and force over a short period of time, resulting in rapid flow rates and high interstitial pressures in the PDL. A successful injection is only possible if the needle placement allows the proper flow of anesthetic into the PDL. If the needle is obstructed in any way, proper flow of the drug cannot occur and excessive pressure will result, possibly leading to persistent post operative pain and potential tissue necrosis. An independent clinical study conducted by the NYU College of Dentistry in 2000, demonstrated that when lower pressures are used over a longer period of time, larger volumes of anesthetic can be effectively delivered into the PDL space. These lower pressures are very difficult to produce with any handheld syringe and impossible to consistently produce with a PDL Injector. Our modified PDL injection, administered with the CompuDent, can be used on any tooth and differs significantly from the traditional PDL injection as administered with the PDL Injector or syringe. Using these devices requires the delivery of a relatively small volume of anesthetic solution under tremendous pressure while the CompuDent allows the operator to deliver a larger volume, under controlled pressure using a slow, controlled flow rate. The modified PDL injection can be used for primary anesthesia as well as the traditional supplementary injection to a mandibular block. Successful administration of the PDL also reduced the number of visits and time required for many procedures. While CompuDent has enhanced the practitioners' ability to perform a successful PDL injection, there is still one component missing -- the ability to know for certain that the needle is in the PDL. By using pressure/force feedback to control the flow rate, one could predictably produce successful PDL injections. We have reduced to practice the use of pressure/force feedback and control in our CompuFlo device discussed below. The proposed PDL Injector combines our computer controlled injection system from CompuDent with our patented pressure sensing technology to scientifically ensure a successful PDL injection. This pressure sensing technology provides real-time measurement during an injection that we believe will allow the practitioner to properly position the needle and inject a sufficient volume of anesthetic. We have begun discussions with a major international manufacturer of dental equipment for their distribution, on an exclusive worldwide basis of our proposed PDL Injector. Marketing of the proposed PDL Injector Device can begin once we obtain a 510(k) clearance the FDA, which we expect to apply for during the first half of 2004. MEDICAL PRODUCTS CompuMed In 2001 Milestone introduced CompuMed, an anesthetic injection system designed to meet the needs of the medical market. CompuMed provides benefits similar to CompuDent. CompuMed allows a number of medical procedures, now requiring IV sedation, to be performed with only local anesthesia because of the significantly reduced pain. Also, dosages of local anesthetic can often be significantly reduced, thus reducing side effects, accelerating recovery times, lowering costs and minimizing complications. CompuMed is now gaining acceptance in a variety of discrete medical applications including colorectal surgery, podiatry, dermatology, including Moh's surgery for the removal of basal cell carcinomas and other oncological dermatologic procedures, nasal and sinus surgery, including rhinoplasty, hair transplantation and plastic surgery. An independent clinical study conducted by researchers at the University of Southern California and published in May 2001, in colorectal surgery, confirmed that patients experienced significantly less 28 pain when the CompuMed system was used. The study was terminated before accruing its initial target number of patients because the researchers considered it unethical not to use CompuMed exclusively. In another clinical study conducted in 2001 by researchers at Scholl College of Podiatric Medicine in Chicago Illinois, which was presented as an abstract in the field of podiatry, CompuMed was compared with the traditional hypodermic syringe for obtaining regional anesthetics in the hallux. The results stated that the moderate pain associated with the traditional syringe decreased to nearly non-existent when using the CompuMed. Also, in 2002, we sold 21 units of CompuMed to a national hair restoration provider. PROPOSED PRODUCTS CompuFlo Milestone has developed CompuFlo, a prototype injection, perfusion and aspiration device, that embodies a new technology that Milestone believes, will provide it with entry into new markets, specifically the large hospital sector. CompuFlo provides a real time readout of pressures, fluid densities and flow rates in the delivery and removal of a wide array of liquid drugs and other fluids, including bodily fluids. Due to cash constraints, Milestone has not yet developed devices embodying this technology for specific applications. A major medical center has proposed the initiation of clinical trials, at the beginning of 2004, to ascertain the efficacy, safety and suitability of CompuFlo in administering epidural injections for adults and children and peripheral nerve blocks to adults. We can give no assurances that these trials will be conducted or, if conducted, will be successful. SafetyInfuse Wand Milestone has also developed SafetyInfuse Wand, a safety engineered IV catheter introducer. This product is designed to allow a practitioner to introduce an IV catheter into a vein using a single-handed, automatic safety engineered device. Protraction and retraction can be accomplished with a single hand, further enhancing the safety feature. It is a fail-safe device; that is, if the safety components break or fail to operate, then the needle moves into its protected state thus ensuring optimal safety to the end user. A major advantage of the SafetyInfuse Wand is that it can be used multiple times on a single patient, following a failure to introduce the catheter into the vein. Due to cash constraints, Milestone has not yet applied for 510(k) FDA marketing clearance for the SafetyInfuse Wand, but we expect to do so in 2004. MANUFACTURING CompuDent and CompuMed units are manufactured for us by Tricor Systems, Inc. ("Tricor") pursuant to specific purchase orders. In order to fund certain expenses of Tricor, we have advanced funds to Tricor. These advances are reduced as Tricor makes shipments to us. Net advances to Tricor as of December 31, 2001 and 2002 and September 30, 2003 were approximately $690,000, $398,000, and $250,000, respectively. The Wand disposable handpiece is manufactured for us in Mexico by Nypro Precision Assemblies ("NPA"), a subsidiary of Nypro Inc. Pursuant to scheduled production requirements. NPA utilizes molds, semi-automated assembly equipment and packaging equipment purchased by us. These products are sterilized in California and shipped to our fulfillment center in Pennsylvania. The Wand Handpiece with Needle is supplied to us by United Systems, which arranges for its manufacture by manufacturers in China. We may expand our relationship with this supplier to include production of other types of handpieces. All of the manufacturers for our products, including those supplying United Systems, are ISO compliant. MARKETING Marketing Background When we launched CompuDent in 1997, we relied on four major dental dealers to distribute our products. While this achieved broad access to dental offices, the nature of a typical sales visit by these 29 dealers' representatives proved to be counterproductive to the training requirements of CompuDent. Though more than 15,000 units were sold in the first quarter following launch, this distribution method distanced us from our customers and made it impossible to provide customer support and adequate clinical training. These factors, coupled with introduction problems typically associated with new technology and early product design problems, now resolved, led to disgruntled customers and limited handpiece use. Therefore, in 2000 we began selling directly to customers. We hired a sales manager and eleven direct sales representatives to cover major metropolitan areas. However, the then sales price for CompuDent was inadequate to cover our direct expenses, including compensation to our representatives. We also experienced difficulty gaining access to dental offices because the representatives had a single product and the technology was still new to the market. New Marketing Plan -- Dentistry -- Domestic In January 2003, we developed a new sales and marketing plan, which reflected five years of lessons learned in the marketplace. We increased the base price of CompuDent from $1,495 to $1,995 that allowed us to recruit and adequately compensate our sales force and support staff. We developed a comprehensive training plan to enable our reps to provide orientation and training to new customers, and to foster increased usage of disposable handpieces. By September 30, 2003, we had a force of 12 sales representatives providing sales coverage in urban areas in 12 states. The typical independent rep manages a territory of approximately 3,500 to 5,000 dentists within a large metropolitan area. We support these independent sales reps in several important ways: o our sales support staff set appointments to help the reps gain access to dental offices; o we generate sales leads for them through our attendance at an average of 20 trade shows a year and through limited advertising and direct mail campaigns; o we provide technical and service support; o we provide them with access to our existing customer base for the purpose of increasing utilization of handpieces as well as converting customers to a subscription program, the Milestone Saving Plan, under which they commit to the monthly purchase of handpieces at a discount from our regular prices; and o in September 2003, we began distributing the CoolBlue Wand which helps our sales force gain access to dental offices for sales of CompuDent. Also, in 2002 we entered into a non-exclusive distribution agreement with Benco Dental, granting them rights to distribute CompuDent and its handpieces in designated portions of the eastern U.S. Benco failed to achieve specified minimum purchase requirements and we now have the right to terminate the agreement upon notice to Benco. However, we continue to sell limited amounts of units and handpieces to Benco at a discount to our direct customers. With a growing new sales force and the acquisition of rights to new products to facilitate access to dental offices, we intend to direct our marketing efforts to capturing new customers from specialty practitioners, including periodontists, pedodontists, endodontists and cosmetic/restorative dentists. Dentistry -- International Marketing We manage the sales and marketing support for Canada, Mexico, Brazil and Japan. Throughout the rest of the world, we distribute our products through two master distributors who manage an extensive network of independent dealers. The role of these principal distributors, Milestone Medical Technologies ("MMT") and United Systems, Inc ("United"), includes identification of suitable local distributors, establishment of distribution arrangements, supporting local marketing efforts and acting as liaison with the parent company. International sales represented 18%, 22% and 33% of sales in 2001 and 2002, and the first six months of 2003, respectively. MMT is our principal distributor for Europe, Africa and the Middle East. MMT is our largest customer, representing 55%, 63% and 77% of our international revenues in 2001, 2002 and the first nine months of 2003, respectively, and 10%, 14% and 26% of total sales in those periods, respectively. 30 United Systems is our principal distributor in China, Taiwan, and South Korea. Handpiece use for these territories is less than in Europe and the US. In 2001, 2002 and the first nine months of 2003, respectively, sales to these territories represented fewer than 1% of our total revenues, for all those periods. In addition, sales to Yoshida Dental Manufacturing Company of Japan, Synca (our distributor in Canada) and Moyco (our distributor in Mexico) in 2001, 2002 and the first nine months of 2003, represented collectively, 7%, 8% and 6%, respectively. After this offering, we plan to hire a dedicated sales manager for each of the three major regions -- Europe, Asia and Latin America, to oversee the implementation of this sales and marketing strategy and to ensure that the distributors are provided with adequate training and technical support. We also plan to assist our master distributors to engage new distributors in major markets, to train existing and new distributors and to replace poor performing distributors. Proposed Expanded Marketing Program for Dental and Hygiene Schools More than 5,000 students graduate annually from dental schools in the U.S. We believe this presents a key opportunity for us to cultivate use of CompuDent early in the dentists' training. We expect to use a portion of the proceeds of this offering to offer special educational assistance programs to dental and hygiene schools in the U.S. and Canada. Our hope is that training in the use of CompuDent will be incorporated into the curriculum of the schools and that students will use the products throughout their training. As of September 30, 2003, CompuDent has been added to the curriculum of 8 U.S. and Canadian dental schools and 13 schools providing degrees in dental hygiene. Through our international distribution partners, training in the use of CompuDent systems has also become part of the curriculum in several international dental programs. To properly implement a program of this magnitude and potential importance, we may need to hire a dedicated Academic Director. This Academic Director, ideally either a retired dentist or hygienist, would be responsible for working with the staffs of the chosen institutions on incorporating the product into their curricula. COMPETITION Our anesthetic delivery systems compete with disposable and reusable syringes that generally sell at lower prices and that use established and well-understood methodologies and other local anesthetic delivery systems, in both the dental and medical marketplaces. Our systems compete on the basis of their performance characteristics and the benefits provided to both the practitioner and the patient. Clinical studies have shown that our systems reduce fear, pain and anxiety for some patients, and we believe that they can also reduce practitioner stress levels. CompuDent can be used for all local anesthesia techniques that can be performed with a syringe. CompuDent can also be used for new and modified techniques that cannot be performed with traditional syringes. These new techniques allow faster procedures, shorten chair time, while minimizing numbing of the lips and facial muscles, enhance productivity, reduce stress and virtually eliminate pain and anxiety. The Luer Lock needle, sold by Milestone, competes with dental needles produced and distributed by a number of major manufacturers and distributors and other producers or distributors of dental products, many of whom have significant competitive advantages because of their size, strength in the marketplace, financial and other resources and broad product lines. Milestone competes on the basis of convenience since it can package the product with an order for disposable handpieces. We face intense competition from many companies in the medical and dental device industry, including well-established academic institutions, possessing substantially greater financial, marketing, personnel, and other resources. Most of our competitors have established reputations, stemming from their success in the development, sale, and service of competing dental products. Further, rapid technological change and research may affect our products. Current or new competitors could, at any time, introduce new or enhanced products with features that render our products less marketable or 31 even obsolete. Therefore, we must devote substantial efforts and financial resources to improve our existing products, bring our products to market quickly, and develop new products for related markets. In addition, our ability to compete successfully requires that we establish an effective distribution network. New products must be approved by regulatory authorities before they may be marketed. We cannot assure you that we can compete successfully, that our competitors will not develop technologies or products that render our products less marketable or obsolete, or that we will succeed in improving our existing products, effectively develop new products, or obtain required regulatory approval for those products. PATENTS AND INTELLECTUAL PROPERTY We hold the following U.S. utility and design patents:
U.S. PATENT DATE OF NUMBER ISSUE --------------- ---------- COMPUDENT Hypodermic Anesthetic Injection Method ................................... 4,747,824 5/31/88 Hypodermic Anesthetic Injection Apparatus & Method ....................... 5,180,371 1/19/93 (CompuFlo, CompuMed, and CompuDent) ..................................... Dental Anesthetic and Delivery Injection Unit ............................ 6,022,337 2/8/00 Dental Anesthetic Delivery Injection Unit (continuation of No. 6,022,337) 6,152,734 11/28/00 Dental Anesthetic Delivery Injection Unit (continuation of No. 6,022,337) 6,132,414 10/17/00 Design for a Dental Anesthetic Delivery System Handle .................... D427,314 6/27/00 Design for a Dental Anesthetic Delivery System Holder .................... D422,361 4/4/00 Design for a Dental Anesthetic Delivery System Housing ................... D423,665 4/25/00 Handpiece for Injection Device with a Retractable and Rotating Needle .... 6,428,517 8/6/02 SAFETYWAND Dental Anesthetic and Delivery Injection Unit with Automated Rate Control ................................................................. 6,652,482 11/25/03 COMPUFLO Pressure/Force Computer Controlled Drug Delivery System .................. 6,200,289 3/13/01 OTHER Hypodermic Syringe and Method ............................................ 4,877,934 12/19/88 Apparatus and Method for Sterilizing, Destroying and Encapsulating Medical Implement Wastes ................................................ 4,992,217 2/12/91 Apparatus and Method for Verifiably Sterilizing Destroying and Encapsulating Regulated Medical Wastes .................................. 5,078,924 1/7/92 Apparatus and Method for Verifiably Sterilizing, Destroying and Encapsulating Regulated Medical Wastes .................................. 5,401,444 3/28/95 Self-Sterilizing Hypodermic Syringe and Method ........................... 5,512,730 4/30/96 Self-Sterilizing Hypodermic Syringe and Method ........................... 5,693,026 12/2/97
We also have several patent applications pending before the U.S. Patent and Trademark Office, and hold a number of corresponding patents in Europe and other major markets. During the 2002 and 2001 fiscal years, we expensed $147,709 and $49,943, respectively, on research and development activities. The higher costs incurred during 2002 were primarily associated with the development of the SafetyWand. We rely on a combination of patent, copyright, trade secret, and trademark laws and employee and third party nondisclosure agreements to protect our intellectual property rights. Despite the precautions taken by us to protect our products, unauthorized parties may attempt to reverse engineer, copy, or obtain and use products and information that we regard as proprietary, or may design products serving similar purposes that do not infringe on our patents. Litigation may be 32 necessary to protect our intellectual property rights and could result in substantial cost to us and diversion of our efforts by with no guarantee of success. Our failure to protect our proprietary information and the expenses of doing so could have a material adverse effect on our operating results and financial condition. While there are no current claims that our products infringe the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against us in the future with respect to current or future products or that any such assertion may not require us to cease selling such products, or to enter into arrangements that require us to pay royalties, or to engage in costly litigation. Although we have received no claims of infringement, it is possible that infringement of existing or future patents or proprietary rights of others may occur. In the event that our products infringe upon patent or proprietary rights of others, we may be required to modify our processes or to obtain a license. There can be no assurance that we would be able to do so in a timely manner, upon acceptable terms and conditions, or at all. The failure to do so would have a material adverse effect on us. GOVERNMENT REGULATION The FDA cleared CompuDent system and its disposable handpiece for marketing in the U.S., for dental applications in July 1996, the CompuMed system for marketing in the U.S. for medical applications in May 2001 and the SafetyWand for marketing in the U.S. for dental applications in September 2003. For us to commercialize our other products in the United States, we will have to submit additional 510(k) applications with the FDA. The manufacture and sale of medical devices and other medical products are subject to extensive regulation by the FDA pursuant to the FDC Act, and by other federal, state and foreign authorities. Under the FDC Act, medical devices must receive FDA clearance before they can be marketed commercially in the United States. Some medical products must undergo rigorous pre-clinical and clinical testing and an extensive FDA approval process before they can be marketed. These processes can take a number of years and require the expenditure of substantial resources. The time required for completing such testing and obtaining such approvals is uncertain, and FDA clearance may never be obtained. Delays or rejections may be encountered based upon changes in FDA policy during the period of product development and FDA regulatory review of each product submitted. Similar delays also may be encountered in other countries. Following the enactment of the Medical Device Amendments to the FDC Act in May 1976, the FDA classified medical devices in commercial distribution into one of three classes. This classification is based on the controls necessary to reasonably ensure the safety and effectiveness of the medical device. Class I devices are those devices whose safety and effectiveness can reasonably be ensured through general controls, such as adequate labeling, premarket notification, and adherence to the FDA's Quality System Regulation ("QSR"), also referred to as "Good Manufacturing Practices" ("GMP") regulations. Some Class I devices are further exempted from some of the general controls. Class II devices are those devices whose safety and effectiveness reasonably can be ensured through the use of special controls, such as performance standards, post-market surveillance, patient registries, and FDA guidelines. Class III devices are those which must receive premarket approval by the FDA to ensure their safety and effectiveness. Generally, Class III devices are limited to life-sustaining, life-supporting or implantable devices. If a manufacturer or distributor can establish that a proposed device is "substantially equivalent" to a legally marketed Class I or Class II medical device or to a Class III medical device for which the FDA has not required premarket approval, the manufacturer or distributor may seek FDA marketing clearance for the device by filing a 510(k) Premarket Notification. The 510(k) Premarket Notification and the claim of substantial equivalence may have to be supported by various types of data and materials, including test results indicating that the device is as safe and effective for its intended use as a legally marketed predicate device. Following submission of the 510(k) Premarket Notification, the manufacturer or distributor may not place the device into commercial distribution until an order is issued by the FDA. By regulation, the FDA has no specific time limit by which it must respond to a 510(k) Premarket Notification. At this time, the FDA typically responds to the submission of a 510(k) Premarket Notification within 90 days. The FDA response may declare that the device is substantially 33 equivalent to another legally marketed device and allow the proposed device to be marketed in the United States. However, the FDA may determine that the proposed device is not substantially equivalent or may require further information, such as additional test data, before the FDA is able to make a determination regarding substantial equivalence. Such determination or request for additional information could delay market introduction of our products and could have a material adverse effect on us. If a device that has obtained 510(k) Premarket Notification clearance is changed or modified in design, components, method of manufacture, or intended use, such that the safety or effectiveness of the device could be significantly affected, separate 510(k) Premarket Notification clearance must be obtained before the modified device can be marketed in the United States. If a manufacturer or distributor cannot establish that a proposed device is substantially equivalent to a legally marketed device, the manufacturer or distributor will have to seek premarket approval of the proposed device a more difficult procedure requiring extensive data, including pre-clinical and human clinical trial data, as well as extensive literature, to prove the safety and efficacy of the device. Though CompuDent, the SafetyWand and CompuMed have received FDA marketing clearance, there can be no assurance that any of our other products under development will obtain the required regulatory clearance on a timely basis, or at all. If regulatory clearance of a product is granted, such clearance may entail limitations on the indicated uses for which the product may be marketed. In addition, modifications may be made to our products to incorporate and enhance their functionality and performance based upon new data and design review. There can be no assurance that the FDA will not request additional information relating to product improvements, that any such improvements would not require further regulatory review thereby delaying the testing, approval and commercialization of our development products or that ultimately any such improvements will receive FDA clearance. Compliance with applicable regulatory requirements is subject to continual review and will be monitored through periodic inspections by the FDA. Later discovery of previously unknown problems with a product, manufacturer, or facility may result in restrictions on such product or manufacturer, including fines, delays or suspensions of regulatory clearances, seizures or recalls of products, operating restrictions and criminal prosecution and could have a material adverse effect on us. We are subject to pervasive and continuing regulation by the FDA, whose regulations require manufacturers of medical devices to adhere to certain QSR requirements as defined by the FDC Act. QSR compliance requires testing, quality control and documentation procedures. Failure to comply with QSR requirements can result in the suspension or termination of production, product recall or fines and penalties. Products also must be manufactured in registered establishments. In addition, labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. The export of devices is also subject to regulation in certain instances. The Medical Device Reporting ("MDR") regulation obligates us to provide information to the FDA on product malfunctions or injuries alleged to have been associated with the use of the product or in connection with certain product failures that could cause serious injury. If, as a result of FDA inspections, MDR reports or other information, the FDA believes that we are not in compliance with the law, the FDA can institute proceedings to detain or seize products, enjoin future violations, or assess civil and/or criminal penalties against us, its officers or employees. Any action by the FDA could result in disruption of our operations for an undetermined time. In June 2003 we received CE mark in the European Common Market for marketing in Europe of the SafetyWand and the Wand Handpiece with Needle. In July 2003, we obtained regulatory approval to sell CompuDent and its handpieces in Australia and New Zealand. PRODUCT LIABILITY Failure to use any of our products in accordance with recommended operating procedures potentially could result in subjecting users to health hazards or injury. Failures of our products to function properly could subject us to claims of liability. We maintain liability insurance in an amount that we believe is adequate. However, there can be no assurance that our insurance coverage will be 34 sufficient to pay product liability claims brought against us. A partially or completely uninsured claim, if successful and of significant magnitude, could have a material adverse effect on us. EMPLOYEES On November 30, 2003 Milestone had 11 full-time employees, including three executive officers, two customer service people, a national sales manager, four sales support staff and an administrative assistant and one part time employee. In addition, our Director of Clinical Affairs and 11 independent sales representatives provide us with their services on an independent basis. FACILITIES Our offices are located in Livingston Corporate Park in Livingston, New Jersey. We lease approximately 2,693 square feet of office space under a lease through March 2007, at a cost that we believe to be competitive. We may have to increase our office space in the future, and we believe that we will be able to find adequate premises at reasonable terms. A third party distribution and logistics center in Pennsylvania handles shipping and order fulfillment. 35 MANAGEMENT The current executive officers, directors and key personnel of Milestone and their respective ages as of September 30, 2003 are as follows:
DIRECTOR NAME AGE POSITION SINCE - ---- --- -------- ----- Leonard A. Osser .................. 56 Chairman and Chief Executive Officer 1991 Stuart J. Wildhorn ................ 46 President Thomas M. Stuckey ................. 49 Vice President and Chief Financial Officer Mark Hochman, D.D.S. .............. 45 Director of Clinical Affairs Eugene Casagrande, D.D.S. ......... 60 Director of Professional Relations Paul Gregory (2) .................. 68 Director 1997 Leonard M. Schiller(1)(2) ......... 62 Director 1997 Jeffrey Fuller(1) ................. 57 Director 2003 Leslie Bernhard(1) ................ 59 Director 2003
- ------------ (1) Member of the Audit Committee (2) Member of the Compensation Committee Leonard A. Osser has been our Chairman and Chief Executive Officer since July 1991. From 1980 until the consummation of Milestone's public offering in November 1995, he was engaged primarily as the principal owner and Chief Executive of U.S. Asian Consulting Group, Inc., a New Jersey based provider of consulting services in "work-out" and "turnaround" situations for publicly and privately owned companies in financial difficulty. Stuart J. Wildhorn has been our President since September 2003 and prior to that he had been our Senior Vice President since April 2001. From 1990 until April 2001, Mr. Wildhorn held progressive senior management positions with Datex-Ohmeda, a leading manufacturer of anesthesia and patient monitoring products. Thomas M. Stuckey has been our Vice President and Chief Financial Officer since May 1998. Mr. Stuckey is a CPA and CMA and holds a MS degree in Accounting from Syracuse University. Dr. Mark Hochman has been a clinical consultant to Milestone since 1997 and has served as the Director of Clinical Affairs and Director of Research and Development since 1999. He has a doctorate of dental surgery with advanced training in the specialties of periodontics and orthodontics from New York University College of Dentistry and has been practicing dentistry since 1984. He holds a faculty appointment as a clinical associate professor at NYU School of Dental Surgery. Dr. Hochman is a recognized world authority on advanced subcutaneous drug delivery systems, has published numerous articles in this area and is personally responsible for inventing much of the technology currently available from Milestone. Dr. Eugene Casagrande has been the Director of Professional Relations for Milestone since September 1998. In his capacity, Dr. Casagrande represents Milestone in a variety of clinical and industry related opportunities. Dr. Casagrande is the President and founder of Casagrande Consulting Services, an entity devoted to quality management to the dental industry. Paul Gregory has been a director of Milestone since April 1997. Mr. Gregory has been a business and insurance consultant at Innovative Programs Associates Inc. and Paul Gregory Associates Inc. since January 1995 and January 1986, respectively, where he services, among other entities, foreign and domestic insurance groups, law and accounting firms and international corporations. Leonard M. Schiller has been a director of Milestone since April 1997. Mr. Schiller has been a partner in the Chicago law firm of Schiller, Klein & McElroy, P.C. since 1977. He has also been President of The Dearborn Group, a residential property management and real estate acquisition company since 1980. 36 Jeffrey Fuller has been a director of Milestone since January 2003. Mr. Fuller has been president and owner of two municipal water supply systems, Hudson Valley Water Co. and Lake Lenape Water Co. since 1983 and in addition has been an executive recruiter since 1995. Leslie Bernhard has been a director of Milestone since May 2003. Ms. Bernhard co-founded AdStar, Inc., and since 1986 has been its president, chief executive officer and a director. AdStar is an application service provider for the newspaper classified advertising industry. All directors hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified. Officers are elected to serve, subject to the discretion of the Board of Directors, until their successors are appointed. Milestone's Board of Directors has established compensation and audit committees. The Compensation Committee reviews and recommends to the Board of Directors the compensation and benefits of all the officers of Milestone, reviews general policy matters relating to compensation and benefits of employees of Milestone, and administers the issuance of stock options to Milestone's officers, employees, directors and consultants. All compensation arrangements between Milestone and its directors, officers and affiliates are reviewed by the compensation committee, the majority of which is made up of independent directors. The Audit Committee meets with management and Milestone's independent auditors to determine the adequacy of internal controls and other financial reporting matters. LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION Our certificate of incorporation provides that a director will not be personally liable to us or to our stockholders for monetary damages for breach of the fiduciary duty of care as a director, including breaches which constitute gross negligence. This provision does not eliminate or limit the liability of a director: o for breach of his or her duty of loyalty to us or to our stockholders; o for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; o under Section 174 of the Delaware General Corporation Law (relating to unlawful payments or dividends or unlawful stock repurchases or redemptions); o for any improper benefit; or o for breaches of a director's responsibilities under the Federal securities laws. Our certificate of incorporation also provides that we indemnify and hold harmless each of our directors and officers to the fullest extent authorized by the Delaware General Corporation Law, against all expense, liability and loss (including attorney's fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons pursuant to our certificate of incorporation, Bylaws and the Delaware General Corporation Law, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy and is, therefore, unenforceable. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or controlling persons under our certificate of incorporation, we have been informed that, in the opinion of the SEC, indemnification is against public policy as expressed in the Securities Act and is unenforceable. 37 EXECUTIVE COMPENSATION The following Summary Compensation Table sets forth all compensation earned, in all capacities, during the fiscal years ended December 31, 2002, 2001, and 2000 by (i) Milestone's Chief Executive Officer and (ii) the most highly compensated executive officers, other than the CEO, who were serving as executive officers at the end of the 2002 fiscal year and whose salary as determined by Regulation S-B, Item 402, exceeded $100,000 (the individuals falling within categories (i) and (ii) are collectively referred to as the "Named Executives"). SUMMARY COMPENSATION TABLE
AWARDS ANNUAL COMMON STOCK COMPENSATION UNDERLYING SALARY OPTIONS NAME AND PRINCIPAL POSITION YEAR ($) (#) - ----------------------------- ------ ---------------- ------------- Leonard A. Osser ............ 2002 351,800(1) 16,667 Chief Executive 2001 350,967(2) 16,667 Officer and Chairman 2000 265,407(3) 16,667 Stuart J. Wildhorn .......... 2002 155,400 2,333 President 2001 93,750 16,667 Thomas A. Stuckey ........... 2002 136,267(4) 2,333 Chief Financial 2001 116,905 3,333 Officer and Vice President 2000 114,051 8,333
- ------------ (1) Includes $320,000 in deferred compensation but excludes $19,049 paid by Milestone to Marilyn Elson, a certified public account, who was employed by Milestone to render professional tax services. Ms. Elson is the wife of Mr. Osser. (2) Includes $350,000 in deferred compensation. The deferred compensation was paid subsequent to year end through the issuance of 208,333 units, each consisting of one share and one six-year warrant to purchase one share at prices ranging from $2.40-$6.00. It excludes $20,850 paid by Milestone to Marilyn Elson. (3) Includes $141,346 in deferred compensation. The deferred compensation was paid subsequent to year end through the issuance of 58,894 units, each consisting of one share and one six-year warrant to purchase one share at prices ranging from $2.40-$6.00. Reflects voluntary reduction of base salary, which commenced in July. (4) Includes a $20,000 bonus paid in 2002. 38 STOCK OPTIONS The following tables show certain information with respect to incentive and non-qualified stock options granted in 2002 to Named Executives under Milestone's 1997 Stock Option Plan and the aggregate value at December 31, 2003 of such options. In general, the per share exercise price of all options is equal to the fair market value of a share of Common Stock on the date of grant. No options granted to Named Executives have been exercised. OPTION GRANTS IN 2002 INDIVIDUAL GRANTS OF OPTIONS
NUMBER OF PERCENT OF TOTAL SHARES OF COMMON OPTIONS GRANTED STOCK UNDERLYING TO EMPLOYEES EXERCISE PRICE NAME OPTIONS IN 2002 ($/SH) EXPIRATION DATE - ---- ------------------ ----------------- --------------- ---------------- Leonard A. Osser ........... 16,667 (1) 28.9% $ 1.65 01-01-07 Stuart J. Wildhorn ......... 2,333 (2) 4.0% $ 2.25 07-27-07 Thomas M. Stuckey .......... 2,333 (2) 4.0% $ 2.25 07-27-07
- ------------ (1) Options vested January 1, 2003 (2) Two thirds have vested and one third will vest on July 27, 2004. AGGREGATED 2002 YEAR END OPTIONS VALUES FOR OPTIONS GRANTED PRIOR TO AND DURING 2002
NUMBER OF SHARES OF COMMON STOCK UNDERLYING VALUE OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT 12-31-2002 AT 12-31-2002(1) EXERCISABLE EXERCISABLE NAME UNEXERCISABLE UNEXERCISABLE - --------------------------------- ----------------------- --------------------- Leonard A. Osser ........... 0 / 66,667 $0 / $0 Stuart J. Wildhorn ......... 6,333 / 12,667 $0 / $0 Thomas M. Stuckey .......... 23,889 / 5,444 $0 / $0
- ------------ (1) Based on the closing price on December 31, 2002 of $.90 as quoted on the American Stock Exchange. EMPLOYMENT CONTRACTS As of January 1, 1998 Milestone entered into an Employment Agreement with Mr. Osser, which provides for an initial term expiring on December 31, 2002, with a two-year non-competition period at the end of the term. The term is automatically extended for successive one-year periods, unless prior to December 1 of any year either party notifies the other of its election not to extend the term. Neither party has given notice to the other. Under the Agreement Mr. Osser serves as our full-time Chief Executive Officer and receives annual base pay of $350,000, increasing to reflect cost of living adjustments commencing on January 1, 2001. In addition, during January 1998 and each of the next four Januarys Milestone shall grant Mr. Osser an option to purchase 16,667 shares of Common Stock exercisable only during the last 30 days of the five-year option term unless Milestone achieves certain financial goals to be specified annually by the Compensation Committee. Additionally, as soon as financial statements for each year commencing with 1998 are completed, Milestone shall grant the executive an additional option to purchase up to 16,667 shares depending upon the achievement of specified performance goals. Further, Mr. Osser shall receive the opportunity to earn cash bonuses of up to $200,000 per year depending upon the achievement of performance targets to be specified by the Option Committee. On July 7, 1998, at his sole discretion, Mr. Osser implemented a voluntary reduction of his annual base salary, reducing his annual base pay from $350,000 to $188,462. The voluntary reduction has been 39 described by Mr. Osser as being both temporary and having no effect upon his rights under his employment agreement with Milestone. Such reduction remained in effect until August 5, 2000. At that time, Mr. Osser began to defer his salary at the $350,000 annual base. At December 31, 2000, his deferred compensation was $141,346. In December 2001, Milestone reached an agreement with Mr. Osser to satisfy the $491,346 of unpaid salary. The agreement calls for the issuance of 204,728 units. Each unit consists of one share of Milestone common stock and one warrant to purchase an additional share of such common stock. The warrants will be exercisable at $2.40 per share through January 31, 2003, thereafter at $3.00 per share through January 31, 2004, and thereafter at $6.00 per share through January 31, 2007, at which time they will expire. On March 31, 2003, Mr. Osser signed an agreement deferring $640,000 of his annual salary until April 1, 2004. On October 9, 2003 Mr. Osser signed an agreement according to which he will receive, on the later of January 2, 2004 or the date this offering becomes effective, an estimated 50,375 units, in payment of $336,000 of accrued compensation. In December 2003 Milestone entered into a new employment agreement with Mr. Osser for a five-year term commencing January 1, 2004. Under the new agreement Mr. Osser will receive base compensation of $300,000 per year, payable one half in cash and one half in common stock valued at the average closing price of the common stock during the first 15 trading days in the month of December during each year of the term. While the number of shares to be issued will be determined each year, the stock will not be issuable until the end of the term of the agreement. In addition, Mr. Osser may earn annual bonuses up to an aggregate of $300,000, payable one half in cash and one half in common stock, contingent upon Milestone achieving predetermined annual operating cash flow, revenue and earnings targets. For 2004 he can earn a $150,000 bonus based on Milestone achieving break-even cash flow from operations, a $100,000 bonus based on Milestone achieving net revenues of $6,250,000 and a $50,000 bonus based on Milestone achieving break-even earnings, determined in accordance with generally accepted accounting principles. The cash flow bonus and the earnings bonus will not be payable to the extent that the payment thereof will reduce operating cash flow or earnings below break-even, respectively. For purposes of the agreement operating cash flow shall mean cash flow from operations adjusted for financing transactions plus accounts receivable increases and less accounts payable increases. Shares of common stock issued in partial payment of bonuses will be valued at the average closing price of the common stock during the first 15 trading days in the month of March during each year of the term. The stock portion of the bonus awards, if any, will be paid at the end of the term of the agreement. COMPENSATION OF DIRECTORS In 2003, each non-employee director was granted a five-year option to purchase 6,667 shares of our Common Stock at an exercise price of $1.50, a price above the fair market value of a share of our Common Stock on the date of grant. Directors receive no cash compensation. EQUITY COMPENSATION PLANS
NUMBER OF SECURITIES TO BE NUMBER OF ISSUED UPON WEIGHTED AVERAGE SECURITIES EXERCISE OF EXERCISE PRICE OF REMAINING AVAILABLE OUTSTANDING OUTSTANDING FOR FUTURE ISSUANCE OPTIONS AND OPTIONS AND UNDER EQUITY WARRANTS WARRANTS COMPENSATION PLANS ------------------ ------------------- -------------------- Equity compensation plans approved by stockholders (1): Grants under our 1997 Stock Option Plan ......... 208,781 $ 5.05 105,552 Equity compensation plans not approved by stockholders(2) Aggregate Individual Option Grants ............. 229,167 $ 6.00 Not Applicable Total ........................................ 437,948 $ 5.55
40 - ------------ (1) Consisting of our 1997 stock option plan covering a total of 333,333 common shares underlying options issuable to officers and other key employees and excluding 2,333 options which were exercised in October 2003 and 16,667 options which were exercised in December 2003. The plan has a term of 10 years and is administered by a committee appointed by the board of directors. The committee, in its sole discretion, determines who is eligible to receive these incentive stock options, how many options they will receive, the term of the options, the exercise price and other conditions relating to the exercise of the options. Stock options granted under the plan must be exercised within a maximum of 10 years from the date of grant at an exercise price that is not less than the fair market value of the common shares on the date of the grant. Options granted to shareholders owning more than 10% of our outstanding common shares must be exercised within five years from the date of grant and the exercise price must be at least 110% of the fair market value of the common shares on the date of the grant. (2) The aggregate individual option grants outside the Stock Option Plan referred to in the table above include options issued as payment for services rendered to us by outside consultants and providers of certain services. The aggregate individual warrant grants referred to in the table above include warrants granted to investors in Milestone as part of private placements and credit line arrangements. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS In December 2001, we reached an agreement with Mr. Osser to satisfy $491,346 of his deferred compensation through the issuance of 204,728 units, each unit consisted of one share of Milestone common stock and one warrant to purchase an additional share of common stock. These units were issued to Mr. Osser in January 2002. In January 2002, we issued 108,333 units to K. Tucker Andersen, a 5% or greater stockholder, each comprised of one share of common stock and one five-year warrant to purchase one share of common stock at prices increasing from $2.40 to $6.00, in consideration for $250,000. We also issued to Mr. Andersen, in January 2002, 11,280 additional units in repayment of interest in the amount of $27,072 accrued under a $500,000 line of credit. As of September 30 and November 10, 2003 we issued an aggregate of 147,011 shares of common stock to Mr. Osser in repayment of $404,638 of principal and accrued interest on the 6%/12% notes and the prior extension of these notes and an aggregate of 779,184 shares of common stock to K. Tucker Andersen, in satisfaction of $2,345,304 of principal and accrued interest on the 6%/12%, 8% and 10% notes and the prior extension of these notes. The shares issued to Messrs. Osser and Andersen represented their share of common stock issued to the holders of that debt in the aggregate amount of approximately $5 million, including accrued interest, and Messrs. Osser and Andersen received no extra or special benefit that was not shared on a pro rata basis by all of the holders of that debt. On October 9, 2003 we reached an agreement with Messrs. Osser and Andersen to satisfy $1,595,734 of debt, including interest, out of which approximately $402,861 is due to Mr. Osser and $1,192,873 is due to Mr. Andersen. In addition, $384,000 of deferred compensation is due to Mr. Osser because of his deferral of salary under his employment agreement. The debt of Messrs. Osser and Andersen and the deferred compensation to Mr. Osser will be paid through the issuance of units identical to those offered in this offering, on the later of January 2, 2004 or the effective date of this offering. The units will be valued at the initial unit price in this offering. We have adopted a policy that, in the future, the audit committee must review all transactions with any officer, director or 5% shareholder. 41 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information regarding the beneficial ownership of our common shares as of the date of this prospectus by: o each person, or group of affiliated persons, known by us to be the beneficial owner of more than 5% of our outstanding common shares; o each of our directors; o each Named Executive above; and o all of our directors and executive officers as a group. The following table does not take into account any common shares sold as a result of the exercise of the over-allotment option granted to the representative. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all of the common shares owned by them. The individual shareholders have furnished all information concerning their respective beneficial ownership to us.
SHARES OF COMMON STOCK BENEFICIALLY PERCENTAGE OF NAME OF BENEFICIAL OWNER (1) OWNED (2) OWNERSHIP - ---------------------------- -------------------- -------------- EXECUTIVE OFFICERS AND DIRECTORS Leonard Osser ......................... 1,306,725(3) 20.70% Stuart J. Wildhorn .................... 13,444(4) * Thomas M. Stuckey ..................... 20,989(5) * Paul Gregory .......................... 10,858(6) * Leonard M. Schiller ................... 30,339(7) * Jeffrey Fuller ........................ 6,667(8) * Leslie Bernhard ....................... 6,667(9) * All directors & executive officers as a group (7 persons) ................... 1,395,689(10) 21.81% 5% AND GREATER STOCKHOLDERS K. Tucker Andersen .................... 1,316,717(11) 21.54% Cumberland Associates, LLC ............ 660,258(12) 10.80%
- ------------ * Less than 1% (1) The addresses of the persons named in this table are as follows: Leonard A. Osser, Stuart Wildhorn and Thomas M. Stuckey are all at 220 South Orange Avenue, Livingston Corporate Park, Livingston, NJ 07039; Paul Gregory, Innovative Programs Associates Inc., 370 E. 76th Street, New York, New York 10021; Leonard M. Schiller, Schiller, Klein & McElroy, P.C., 33 North Dearborn Street, Suite 1030, Chicago, Illinois 60602; Jeffrey Fuller, Eagle Chase, Woodbury, NY 11797; Leslie Bernhard, AdStar, Inc., 4553 Glencoe Avenue, Suite 325, Marina del Rey, California 90292; K. Tucker Anderson, c/o Cumberland Associates LLC, 1114 Avenue of the Americas, New York, New York 10036; and Cumberland Associates, LLC, 1114 Avenue of the Americas, New York, New York. (2) A person is deemed to be a beneficial owner of securities that can be acquired by such person within 60 days from the filing of this proxy statement upon the exercise of options and warrants or conversion of convertible securities. Each beneficial owner's percentage ownership is determined by assuming that options, warrants and convertible securities that are held by such person (but not held by any other person) and that are exercisable or convertible within 60 days from the filing of this report have been exercise or converted. Except as otherwise indicated, and subject to applicable community property and similar laws, each of the persons named has sole voting and investment power with respect to the shares shown as beneficially owned. All percentages are determined based on the number of all shares, including those underlying 42 options exercisable within 60 days from the filing of this proxy statement held by the named individual, divided by 6,112,678 outstanding shares on December 15, 2003 and those shares underlying options exercisable within 60 days from the filing of this proxy statement, held by the named individual. (3) Includes (i) 204,728 shares issuable upon exercise of stock options within 60 days of the date hereof, which until January 31 are exercisable at $3.00, and beginning February 1, 2004 will be exercisable at $6.00 and (ii) warrants immediately exercisable to purchase 11,905 shares at $5.25 per share. (4) Includes 11,111 shares subject to stock options, exercisable within 60 days of the date hereof at $7.50 per share and 2,333 shares subject to stock options, exercisable within 60 days of the date hereof at $2.25 per share. (5) Includes 7,000 shares subject to stock options, exercisable within 60 days of the date hereof at $9.00 per share and 8,333 shares subject to stock options, exercisable within 60 days of the date hereof at $6.5625 per share, 2,222 shares subject to stock options exercisable within 60 days of the date hereof at $7.50 per share and 2,333 shares subject to stock options exercisable within 60 days of the date hereof at $2.25 per share. Mr. Stuckey disclaims beneficial ownership of (i) 3,333 shares which are held by his wife as custodian for their children, and (ii) 567 shares which are owned by his wife in her IRA. (6) Includes 50 shares held by Mr. Gregory's wife, 4,141 shares subject to stock options, exercisable within 60 days of the date hereof at $6.5625 per share, and 6,667 subject to stock options, exercisable within 60 days of the date hereof at $1.50 per share. (7) Includes 4,141 shares subject to stock options, exercisable within 60 days of the date hereof at $6.5625 per share, 6,667 shares subject to stock options, exercisable within 60 days of the date hereof at $1.50 per share and 19,531 shares subject to stock options exercisable within 60 days of the date hereof at $9.00 per share. (8) Includes 6,667 shares subject to stock options, exercisable within 60 days of the date hereof at $1.50 per share. (9) Includes 6,667 shares subject to stock options, exercisable within 60 days of the date hereof at $1.50 per share (10) Includes 244,787 shares subject to stock options, 11,905 shares subject to warrants all of which are exercisable within sixty (60) days of the date hereof and 30,667 shares to which he has shared voting and dispositive power. (11) Based solely upon an amendment to Schedule 13D filed by K. Tucker Andersen with the Securities and Exchange Commission on November 13, 2003. (12) Based solely upon Form 4 filed by Cumberland Associates, LLC with the Securities and Exchange Commission on November 5, 2003. All of the common shares set forth in the above table are covered by lock-up agreements prohibiting their sale, assignment or transfer for 90 days following the date of this prospectus without the prior written consent of the representative. 43 DESCRIPTION OF SECURITIES As of the date of this prospectus, our authorized capital stock consists of 55,000,000 shares consisting of 50,000,000 of common stock, par value $.001 per share and 5,000,000 shares of preferred stock par value $.001 per share. After this offering, we will have 9,199,604 shares of common stock issued and 9,166,271 outstanding (9,526,271 outstanding if the over-allotment option is exercised in full) and 25,356 shares of series A preferred stock. As of the date of this prospectus, we have 6,112,678 shares of common stock outstanding. UNITS Each unit consists of two shares of common stock and one warrant to purchase one share of common stock. The shares and the warrants included in the units will not trade separately until the 31st day following the effective date of this offering, unless the representative of the underwriters determines that separate trading of the public warrants shall occur earlier. At closing, we will deliver only unit certificates. An investor can request physical delivery of the certificate and can immediately request that the unit certificate can be exchanged for stock and unit certificates. If the investor does so before the stock and warrants trade separately, trades based on the stock and warrant certificates will mot clear until trading in those securities commences. COMMON STOCK The holders of outstanding shares of common stock are entitled to receive dividends out of legally available assets when and to the extent determined by our board of directors from time to time. Each stockholder is entitled to one vote for each share held by him on each matter submitted to a vote of stockholders. At an election of directors, each director is elected by a plurality of the voting shares of common stock. The shares of common stock are not entitled to preemptive rights and are not convertible or redeemable. In the case of a liquidation, dissolution or other termination of our business, the holders of common stock are entitled to share ratably in the distribution of all of our assets remaining available for distribution after all of our liabilities have been satisfied. Each outstanding share of common stock is, and all shares of common stock to be outstanding after this offering is completed will be, fully paid and nonassessable. WARRANTS General. The warrants issued in this offering may be exercised at any time beginning on the 31st calendar day after this offering and ending on , 2008. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $ per share [150%] of the closing market price of our common stock on the pricing date of this offering]. This exercise price will be adjusted if specific events, summarized below, occur. A holder of warrants will not be deemed a holder of the underlying stock for any purpose until the warrant is exercised. Redemption. Beginning six months after the effective date of this offering, we will have the right to redeem the warrants at a price of $0.25 per warrant, after providing 30 days' prior written notice to the warrantholders, at any time after the closing price for our common stock, as reported on the principal exchange on which our stock trades, was at or above [200% of the price of our common stock on the effective date of this offering] for any five consecutive trading days. We will send a written notice of redemption by first class mail to holders of the warrants at their last known addresses appearing on the registration records maintained by the transfer agent. No other form of notice or publication or otherwise will be required. If we call the warrants for redemption, the holders of the warrants will then have to decide whether to sell the warrants, exercise them before the close of business on the business day preceding the specified redemption date or hold them for redemption. If the warrants are not covered by a current registration statement or are not qualified for sale under the laws of the state in which you reside, you may not be able to exercise them. Exercise. The holders of the warrants may exercise them only if an appropriate registration statement is then in effect and if the common stock issuable upon their exercise are qualified for sale under the securities laws of the state in which the holder resides. To exercise a warrant, the holder 44 must deliver to our transfer agent the warrant certificate on or before the expiration date or the redemption date, as applicable, with the form on the reverse side of the certificate executed as indicated, accompanied by payment of the full exercise price for the number of warrants being exercised. Fractional shares of common stock will not be issued upon exercise of the warrants. Adjustments of exercise price. The exercise price of the warrants will be adjusted if we declare any stock dividend to stockholders or effect any split or share combination with regard to our common stock. If we effect any stock split or stock combination with regard to our common stock, the exercise price in effect immediately before the stock split or combination will be proportionately reduced or increased, as the case may be. Any adjustment of the exercise price will also result in an adjustment of the number of shares underlying a unit warrant or, if we elect, an adjustment of the number of warrants outstanding. In order for you to exercise the warrants, the shares of common stock underlying them must be covered by an effective registration statement and, if the issuance of shares is not exempt under state securities laws, must be properly registered with state securities regulators. At present, we plan to have a registration statement current when the warrants are exercised and, to the extent that the underlying shares do not qualify for one or more exemptions under state securities laws, we intend to register the shares with the relevant authorities. However, we cannot provide absolute assurances that state exemptions will be available, the state authorities will permit us to register the underlying shares, or that an effective registration statement will be in place at the relevant time(s). These factors may have an adverse effect on the demand for the warrants and the prices that can be obtained from reselling them. PREFERRED STOCK Under our Certificate of Incorporation, our board of directors has the authority, without further action by the stockholders, to issue from time to time up to 5,000,000 shares of preferred stock in one or more series. The board of directors may fix the number of shares, designations, preferences, powers and other special rights of each series of the preferred stock. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to holders of common stock, affect adversely the rights and powers, including voting rights, of the holders of common stock, or have the effect of delaying, deferring or preventing a change in control in Milestone. No shares of the preferred stock have yet been issued or designated. However, we are obligated to issue 25,356 shares of Series A convertible preferred stock to a non-affiliate noteholder who agreed to take these shares in exchange for his portion of approximately $5 million of secured debt. Initially these shares of the Series A preferred stock will be convertible into one share of common stock (three shares after giving effect to the proposed one-for-three reverse stock split). The Series A preferred stock will vote together with the common stock as a single class and will have one vote for each share of common stock into which it is convertible. It will have a liquidation preference of $1.00 per share and will be entitled to 8% cumulative annual dividends on the amount of its liquidation preference, in cash or common stock, at Milestone's option, until conversion. The Series A preferred stock will become convertible into common stock six months after the closing of this offering and unless converted earlier, will automatically convert to common stock on November 1, 2005. OPTIONS AND WARRANTS As of the date of this prospectus, we had outstanding 208,781 compensatory stock options granted to employees and directors. These options have exercise prices ranging from $.87 to $18.00 per share and expire between February 2005 and January 2008. Of these options, 121,226 are currently exercisable. As of the date of this prospectus, we had outstanding 229,167 compensatory stock options granted to non-employees. These options have exercise prices ranging from $1.50 to $13.50 per share and expire between July 2005 and May 2008. Of these options, 176,111 are currently exercisable. As of the date of this prospectus, we had outstanding 799,730 warrants. These options have exercise prices ranging from $1.56 to $9.00 per share and expire between February 2005 and January 2007. All of these options are currently exercisable. 45 REGISTRATION RIGHTS As of the date of this prospectus, 226,323 shares of common stock, including shares underlying warrants and convertible debentures are covered by registration rights agreements with the holders of these securities. Regarding 102,195 shares of common stock, there is an informal understanding that we will file a registration statement in connection with these shares. Regarding 53,419 shares, we have agreed to use our reasonable best efforts to file a registration statement covering these shares. The remaining 70,709 are covered by agreements according to which we will include them in the next Registration Statement on Form S-3 that we file with the SEC, provided they have not yet become eligible to sell their shares under Rule 144. AUTHORIZED BUT UNISSUED SHARES The authorized but unissued shares of common and preferred stock are available for future issuance without stockholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise. The Delaware General Corporation Law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or bylaws, unless the corporation's certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Our certificate of incorporation does not impose any supermajority vote requirements. TRANSFER AGENT, WARRANT AGENT AND REGISTRAR The transfer agent and registrar for our common stock and the warrant agent for the warrants is Continental Stock Transfer & Trust Company, located in New York, New York. UNDERWRITING The underwriters named below have severally agreed, subject to the terms and conditions contained in an underwriting agreement with us, to purchase [1,200,000] units, each unit consisting of two shares of common stock and one public warrant to purchase one share of common stock from us at the price set forth on the cover page of this prospectus, in accordance with the following table:
NUMBER OF UNDERWRITER SHARES - ----------- ------------ Paulson Investment Company, Inc. ......... S.W. Bach & Company ...................... ---------- Total .................................... ==========
Nature of Underwriting Commitment. The underwriting agreement provides that the underwriters are committed to purchase all the units offered by this prospectus if any units are purchased. This commitment does not apply to 180,000 units subject to the over-allotment option granted by us to the representative to purchase additional units in this offering. Conduct of the Offering. We have been advised by Paulson Investment Company, Inc., that the underwriters propose to offer the units to be sold in this offering directly to the public at the public offering price set forth on the cover page of this prospectus, and to certain securities dealers at that price less a concession of not more than $0. per share. The underwriters may allow, and those dealers may reallow, a concession not in excess of $0. per share to certain other dealers. After the shares are released for sale to the public, the underwriters may change the offering price and other selling terms from time to time. No change in those terms will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. 46 The underwriters have informed us that they do not expect to confirm sales of units offered by this prospectus to accounts over which they exercise discretionary authority without obtaining the specific approval of the account holder. Over-allotment Option. We have granted the underwriters an option, expiring 45 days after the date of this prospectus, to purchase up to 180,000 additional units from us on the same terms as set forth in this prospectus with respect to the 1,200,000 units. The underwriters may exercise this option, in whole or in part, only to cover over-allotments, if any, in the sale of the units offered by this prospectus. Offering Discounts. The following table shows the per unit and total underwriting discounts to be paid by us to the underwriters. These amounts are shown assuming no exercise and full exercise, respectively, of the underwriters' over-allotment option described above:
TOTAL WITHOUT TOTAL WITH OVER-ALLOTMENT OVER-ALLOTMENT PER UNIT OPTION OPTION ------------ ---------------- --------------- Total underwriting discount to be paid by us ......... $ $ $
Expense Allowance. We have agreed to pay to Paulson Investment Company, Inc., a non-accountable expense allowance equal to three percent of the aggregate public offering price of the units sold by us in this offering (including units sold on exercise of the underwriters' over-allotment option). Representative's Warrants. On completion of this offering, we will issue to the representative of the underwriters, Paulson Investment Company, Inc., warrants to purchase from us up to 120,000 units, for a price of $ per unit (120%). These warrants are exercisable during the four-year period beginning one year from the date of this prospectus. These warrants are not transferable or assignable for one year following the effective date of this prospectus, except to an individual who is an officer or partner of the underwriters and members of the selling group, by will or by the laws of descent and distribution, and are not redeemable. The holder of these warrants will have, in that capacity, no voting, dividend or other shareholder rights. Any profit realized on the sale of the units issuable upon exercise of these warrants may be deemed to be additional underwriting compensation. The securities underlying these warrants are being registered pursuant to the registration statement of which this prospectus is a part. During the term of these warrants, the holder thereof is given the opportunity to profit from a rise in the market price of our common stock. We may find it more difficult to raise additional equity capital while these warrants are outstanding. At any time at which these warrants are likely to be exercised, we may be able to obtain additional equity capital on more favorable terms. Indemnification. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make in respect thereof. Lock-up Agreements. Our officers, directors and the holders of 5% or more of our securities have agreed not to sell or transfer any shares of our common stock or equity securities for ninety days after the date of this public offering, without first obtaining the written consent of Paulson Investment Company, Inc. Specifically, these officers and directors have agreed not to, directly or indirectly: o sell or offer to sell any shares of our common stock or equity securities; o grant any option to sell any shares of our common stock or equity securities; o engage in any short sale of our common stock or equity securities; o pledge or otherwise transfer or dispose of any shares of our common stock or equity securities; or o publicly announce an intention to do any of the foregoing. These lock-up agreements presently apply to 3,084,884 shares of our common stock, 379,800 options or warrants to acquire shares of our common stock and 379,800 shares of common stock 47 underlying these options and warrants. These lock-up agreements apply to all such securities that are currently owned or later acquired either of record or beneficially by the persons executing the agreements. However, Paulson Investment Company, Inc. may, in its sole discretion and without notice, release some or all of the securities subject to these agreements at any time during the ninety-day period. Currently, there are no agreements by Paulson Investment Company, Inc. to release any of the securities from the lock-up agreements. Our officers, directors and the holders of 5% or more of our securities have agreed that, for a period of one year from the date of this prospectus, they will notify Paulson Investment Company, Inc. before they sell our common stock under Rule 144. Online Activities. Upon request, a prospectus in electronic format may be delivered via e-mail from one or more of the underwriters. However, neither of the underwriters on the cover of this prospectus will accept sales, orders, or indications of interest from or off of the internet. Stabilization and Other Transactions. The rules of the SEC generally prohibit the underwriters from trading in our securities on the open market during this offering. However, the underwriters are allowed to engage in some open market transactions and other activities during this offering that may cause the market price of our securities to be above or below that which would otherwise prevail in the open market. These activities may include stabilization, short sales and over-allotments, syndicate covering transactions and penalty bids. o Stabilizing transactions consist of bids or purchases made by the managing underwriter for the purpose of preventing or slowing a decline in the market price of our securities while this offering is in progress. o Short sales and over-allotments occur when the managing underwriter, on behalf of the underwriting syndicate, sells more of our shares than they purchase from us in this offering. In order to cover the resulting short position, the managing underwriter may exercise the over-allotment option described above and/or may engage in syndicate covering transactions. There is no contractual limit on the size of any syndicate covering transaction. The underwriters will deliver a prospectus in connection with any such short sales. Purchasers of shares sold short by the underwriters are entitled to the same remedies under the federal securities laws as any other purchaser of units covered by the registration statement. o Syndicate covering transactions are bids for or purchases of our securities on the open market by the managing underwriter on behalf of the underwriters in order to reduce a short position incurred by the managing underwriter on behalf of the underwriters. o A penalty bid is an arrangement permitting the managing underwriter to reclaim the selling concession that would otherwise accrue to an underwriter if the common stock originally sold by the underwriter was later repurchased by the managing underwriter and therefore was not effectively sold to the public by such underwriter. If the underwriters commence these activities, they may discontinue them at any time without notice. The underwriters may carry out these transactions on the American Stock Exchange, in the over-the-counter market or otherwise. LEGAL MATTERS The validity of the common shares offered by this prospectus will be passed upon for us by Morse, Zelnick, Rose & Lander LLP, New York, New York. Holland & Knight LLP will pass upon certain matters for the underwriters named in this prospectus in connection with this offering. Morse, Zelnick, Rose and Lander, LLP, legal counsel to Milestone and its affiliates are the holders of 158,463 shares of common stock and options to purchase 71,873 shares of Common Stock. In addition, Morse, Zelnick, Rose & Lander LLP will receive 29,985 units following ten days from the closing of this offering in payment of accrued legal fees pursuant to a March 2003 commitment. 48 EXPERTS The Consolidated Financial Statements as of December 31, 2002 and for the years ended December 31, 2001 and 2002, have been audited by J. H. Cohn LLP, independent public accountants, as set forth in their report. We have included these financial statements in the prospectus and elsewhere in the registration statement in reliance on J. H. Cohn LLP's report, given on their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION In connection with the units offered by this prospectus, we have filed a registration statement on Form S-2 under the Securities Act with the SEC. This prospectus, filed as part of the registration statement, does not contain all of the information included in the registration statement and the accompanying exhibits and schedules. For further information with respect to our units, shares and warrants, and us you should refer to the registration statement and the accompanying exhibits and schedules. Statements contained in this prospectus regarding the contents of any contract or any other document are not necessarily complete, and you should refer to the copy of the contract or other document filed as an exhibit to the registration statement, each statement being qualified in all respects by the actual contents of the contract or other document referred to. You may inspect a copy of the registration statement and the accompanying exhibits and schedules without charge at the Securities and Exchange Commission's public reference facilities, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices located at 233 Broadway, 16th Flr., New York, NY 10279, and you may obtain copies of all or any part of the registration statement from those offices for a fee. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The SEC maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically. The address of the site is http://www.sec.gov. We are registered under the Securities and Exchange Act of 1934 and we file with the SEC annual reports on Form 10-KSB and quarterly reports on Form 10-QSB. The following documents filed by us with the Securities and Exchange Commission are incorporated in this prospectus by reference: (1) Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002; (2) Quarterly Report on Form 10-QSB for the fiscal quarters ended March 31, 2003, June 30, 2003 and September 30, 2003; (3) Current Reports on Form 8-K filed on April 17, 2003, July 31, 2003 and July 23, 2003; and (4) Each document filed after the date of this prospectus pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act but before this offering terminates is incorporated in this prospectus by reference and is to be treated as part of this prospectus from the date it was filed. Any statement contained in a document incorporated or deemed to be incorporated in this prospectus by reference is modified or superseded to the extent that a statement contained in this prospectus or in any other subsequently filed document which is incorporated in this prospectus by reference modifies or supersedes such statement. Upon written or oral request, we will provide, without charge, to each person to whom a copy of this prospectus is delivered, a copy of any document incorporated by reference in this prospectus (other than exhibits, unless such exhibits are specifically incorporated by reference in such documents). Requests should be directed to Milestone Scientific Inc., 220 South Orange Avenue, Livingston, NJ 07039, (973) 535-2717 Attention: Leonard Osser, Chairman and Chief Executive Officer. We intend to furnish our shareholders with annual reports containing financial statements audited by our independent public accountants. This prospectus will not be accompanied by our latest annual report to shareholders. 49 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES INDEX
PAGE ---- Interim Financial Statements for the Nine Months Ended September 30, 2003 -- Condensed Consolidated Balance Sheets September 30, 2003 (Unaudited) and December 31, 2002 ............................ F-2 -- Condensed Consolidated Statements of Operations Nine Months Ended September 30, 2003 and 2002 (Unaudited) ....................... F-3 -- Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2003 and 2002 (Unaudited) ....................... F-4 -- Notes to Condensed Consolidated Financial Statements (Unaudited) ................ F-6 Financial Statements for the Year Ended December 31, 2002 -- Report of Independent Public Accountants ........................................ F-14 -- Consolidated Balance Sheet at December 31, 2002 ................................. F-15 -- Consolidated Statements of Operations years ended December 31, 2002 and 2001 .... F-16 -- Consolidated Statements of Changes in Stockholders' Deficiency years ended December 31, 2002 and 2001 ...................................................... F-17 -- Consolidated Statements of Cash Flows years ended December 31, 2002 and 2001 .... F-19 -- Notes to Consolidated Financial Statements ...................................... F-21
F-1 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
SEPTEMBER 30, DECEMBER 31, 2003 2002 --------------- ---------------- (UNAUDITED) ASSETS Current Assets: Cash ................................................................. $ 95,870 $ 9,683 Accounts receivable, net ............................................. 611,602 239,435 Inventories .......................................................... 255,288 119,291 Advances to contract manufacturer .................................... 250,360 300,000 Deferred debt financing costs, net ................................... -- 159,877 Prepaid expenses ..................................................... 61,611 64,952 ----------- ----------- Total current assets ........................................... 1,274,731 893,238 Equipment, net ........................................................ 205,158 227,207 Advances to Contract Manufacturer -- Long term ........................ -- 87,935 Deferred Debt Financing -- Long term .................................. 1,964 -- Other Assets .......................................................... 32,333 32,333 ----------- ----------- Totals ......................................................... $ 1,514,186 $ 1,240,713 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current Liabilities: Account payable, including $32,000 to related parties................. $ 1,177,061 $ 1,269,523 Accrued expenses ..................................................... 57,080 86,492 Accrued interest ..................................................... 197,585 169,519 Note payable net of debt discount .................................... 915,485 4,581,708 Notes payable-officer/stockholder .................................... 376,215 -- ----------- ----------- Total current liabilities ...................................... 2,723,426 6,107,242 Accounts payable, including $160,000 to related parties................ 492,193 -- Accrued interest ...................................................... 1,042 139,323 Deferred compensation payable to officer/stockholder .................. 560,000 320,000 Notes payable, net of debt discount ................................... 582,514 480,091 Notes payable -- officer/stockholder .................................. 32,000 300,000 ----------- ----------- Total liabilities .............................................. 4,391,175 7,346,656 ----------- ----------- Commitments and Contingencies Stockholders' Deficiency: Preferred stock, par value $.001; authorized 5,000,000 shares......... -- -- 8% Cumulative convertible preferred par value $.001; authorized and issued 25,365 shares; .............................................. 25 -- Common stock, par value $.001; authorized, 50,000,000 shares; 5,890,875 shares and 4,244,457 shares issued, at September 30, 2003 and December 31, 2002, respectively ................................ 5,891 4,244 Additional paid-in capital ........................................... 41,622,760 36,608,096 Accumulated deficit .................................................. (43,574,149) (41,786,767) Unearned compensation ................................................ (20,000) (20,000) Treasury stock, at cost, 33,333 shares ............................... (911,516) (911,516) ----------- ----------- Total stockholders' deficiency ................................. (2,876,989) (6,105,943) ----------- ----------- Totals ....................................................... $ 1,514,186 $ 1,240,713 =========== ===========
See Notes to Condensed Consolidated Financial Statements. F-2 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
2003 2002 ----------------- ----------------- Net sales ................................................................. $ 3,101,281 $ 3,215,907 Cost of sales ............................................................. 1,560,288 1,499,063 ------------- ------------- Gross profit .............................................................. 1,540,993 1,716,844 ------------- ------------- Selling, general and administrative expenses .............................. 2,491,737 2,712,649 Charge in connection with the closing of the Deerfield, IL facility ....... 79,023 -- Research and development expenses ......................................... 112,158 63,928 ------------- ------------- Totals ................................................................. 2,682,918 2,776,577 ------------- ------------- Loss from operations ...................................................... (1,141,925) (1,059,733) Other income .............................................................. -- 72,000 Interest, net ............................................................. (645,457) (616,519) ------------- ------------- Net loss .................................................................. $ (1,787,382) $ (1,604,252) ============= ============= Loss per share -- basic and diluted ....................................... $ (.42) $ (.39) ============= ============= Weighted average shares outstanding -- basic and diluted .................. 4,217,185 4,084,341 ============= =============
See Notes to Condensed Consolidated Financial Statements. F-3 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
2003 2002 ---------------- ---------------- Cash flows from operating activities: Net loss .............................................................. $ (1,787,382) $ (1,604,252) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation ........................................................ 26,618 41,672 Amortization of debt discount and deferred financing costs .......... 242,628 234,837 Loss on disposal of fixed assets .................................... 11,248 -- Amortization of advertising cost .................................... -- 24,803 Stock options issued for services ................................... -- 2,500 Changes in operating assets and liabilities: Increase in accounts receivable .................................... (372,167) (153,015) (Increase) decrease in inventories ................................. (135,997) 80,614 Decrease in advances to contract manufacturer ...................... 137,575 174,449 (Increase) decrease in prepaid expenses ............................ 3,341 (10,378) Increase in other assets ........................................... -- (19,971) Increase in accounts payable ....................................... 399,731 169,465 Increase in accrued interest ....................................... 402,827 381,682 Increase (decrease) in accrued expenses ............................ (29,412) 19,829 Increase in deferred compensation .................................. 240,000 240,000 ------------ ------------ Net cash used in operating activities ............................ (860,990) (417,765) ------------ ------------ Cash flows from investing activities-payment for capital expenditures .. (15,817) (69,691) ------------ ------------ Cash flows from financing activities: Expenses related to registering shares ................................ (22,500) -- Proceeds from note payable -- officer/stockholder ..................... 180,537 -- Payments to note payable -- officer/stockholder ....................... (72,322) -- Proceeds from issuance of notes payable ............................... 900,000 525,000 Payments for deferred financing costs ................................. (22,721) (40,538) ------------ ------------ Net cash provided by financing activities ........................ 962,994 484,462 ------------ ------------ Net increase (decrease) in cash ........................................ 86,187 (2,994) Cash, beginning of period .............................................. 9,683 15,742 ------------ ------------ Cash, end of period .................................................... $ 95,870 $ 12,748 ============ ============
See Notes to Condensed Consolidated Financial Statements. F-4 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) Supplemental schedule of noncash financing activities: In September 2003, the Company granted warrants to purchase 5,000 shares of common stock (with an estimated fair value of $10,400) in connection with a $50,000 credit facility provided by an existing investor. This resulted in an initial increase to debt discount and to additional paid-in capital. On September 30, 2003, in consideration for payment of $5,014,267 of aggregate debt and interest, the Company issued 1,646,419 shares of common stock and $25,365 face amount of 8% cumulative convertible preferred stock. In June 2003, we granted warrants to purchase 53,419 shares of common stock (with an estimated fair value of $14,423) in connection with a $50,000 credit facility provided by a major existing investor. This resulted in an initial increase to debt discount and to additional paid-in capital. During the nine months ended September 30, 2003, pursuant to the 6%/12% promissory note agreements, we converted $206,989 of accrued interest into additional principal. In January 2002, we issued 11,280 units consisting of one share of common stock and one warrant to purchase an additional share of common stock in exchange for payment of accrued interest totaling $27,072. In January 2002, in consideration for payment of $491,346 in deferred compensation, we issued 204,728 units (consisting of one share of common stock and one warrant to purchase an additional share of common stock).The warrants are exercisable at $2.40 per share through January 31, 2003; at $3.00 per share through January 31, 2004 and thereafter at $6.00 per share through January 31, 2007. In January 2002, pursuant to the 20% promissory note agreements, we converted $63,377 of accrued interest into additional principal. In April 2002, pursuant to the 20% promissory note agreements, we converted $65,168 of accrued interest into additional principal. In April 2002, pursuant to the debt restructuring, we recorded a deferred financing charge of $329,572. This resulted in an increase to notes payable of $140,203 and accrued interest of $189,369. In September 2002, pursuant to the 6%/12% promissory note agreements, the Company converted $41,512 of accrued interest into additional principal. In August 2002, the Company issued 66,667 shares of common stock in exchange for payment of $90,000 of outstanding legal fees. In July 2002, the Company issued 62,500 units consisting of one share of common stock and one warrant to purchase an additional share of common stock to a vendor as consideration for services rendered in accordance with the agreement valued at $150,000. F-5 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES The unaudited condensed consolidated financial statements of Milestone Scientific Inc. and Subsidiaries (the "Company" or "Milestone") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2002 included in our Annual Report on Form 10-KSB. The accounting policies used in preparing these unaudited condensed consolidated financial statements are the same as those described in the December 31, 2002 consolidated financial statements. In the opinion of Milestone, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring entries) necessary to present fairly the financial position as of September 30, 2003 and the results of operations for the nine months ended September 30, 2003 and 2002. The results reported for the nine months ended September 30, 2003 and 2002 are not necessarily indicative of the results of operations which may be expected for a full year. NOTE 2 -- BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared assuming Milestone will continue as a going concern. However, as shown in the accompanying condensed consolidated financial statements, Milestone incurred net losses of approximately $1,787,000 and $1,604,000 and negative cash flows from operating activities of approximately $861,000 and $418,000 during the nine months ended September 30, 2003 and 2002, respectively. As a result, Milestone had a cash balance of only approximately $96,000, a working capital deficiency of approximately $1,449,000 and a stockholders' deficiency of approximately $2,877,000 as of September 30, 2003. These matters raise substantial doubt about Milestone's ability to continue as a going concern. Management believes that its initial concerns about Milestone's ability to continue as a going concern have been alleviated by recent actions taken by Milestone as well as management's plans which are discussed below. Further, management believes that, in the absence of substantial increase in revenue, it is probable that Milestone will continue to incur losses and negative cash flows from operating activities through at least September 30, 2004 and that Milestone will need to obtain additional equity or debt financing, as well as to continue its ability to defer its obligations, to sustain its operations until it can expand its customer base and achieve profitability, if ever. REDUCTION OF OPERATING OVERHEAD To date, the Company has taken certain steps in order to reduce its operating overhead and utilization of cash. These steps include, amongst others, the following: o Commencing in 2001 and continuing through 2003, the Company reconfigured its sales force. The Company went from maintaining a large internal sales force to utilizing independent sales representatives and distributors. o The Company reduced administrative personnel and telemarketers by approximately ten people. F-6 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 2 -- BASIS OF PRESENTATION -- (CONTINUED) o On January 31, 2003, the Company completed the closing of the Deerfield, IL facility. The customer support, service and other back-office functions previously conducted, in whole or in part, at this location were consolidated into the Company's New Jersey location. The receiving, shipping and storage functions, which were also previously done at this location, are now outsourced to an independent warehouse located in Pennsylvania. RESTRUCTURING LIABILITIES AND PROFORMA IMPACT On September 30, 2003, the Company satisfied approximately $5,014,000 of secured debt including interest, through the issuance of 1,646,419 shares of Common Stock and $25,365 face amount of 8% cumulative convertible preferred stock. In addition, during October and November 2003, the Company took the following additional steps to restructure its liabilities and raise equity. o On October 31, 2003, the Company issued 102,195 shares of common stock to certain of its principal vendors having a fair value of approximately $502,800, in satisfaction of trade payables and future services in the aggregate amount of $502,800. o The Company has agreed to issue 94,327 shares of common stock having a fair value of $329,572 in satisfaction of $329,572 of deferred financing costs incurred in extending certain of its outstanding loans. o The Company issued 33,943 shares of common stock upon the receipt of approximately $189,000 upon exercising its rights to draw upon a private equity put facility. o The Company issued 2,333 shares of its common stock upon the exercise of options by an employee and the receipt of $7,750. o Additionally, the Company reached agreements with a major investor and the Company's chairman and chief executive officer to satisfy in the aggregate, an approximate $1,961,000 of debt, accrued interest and deferred compensation through the issuance of securities at fair value at the later of (i) the effective date of a public offering or (ii) January 2, 2004. These transactions have had or will have a significant impact on the Company's net worth. Presented below on a proforma basis is selected financial data, which gives effect to the aforementioned transactions as if they occurred on September 30, 2003.
SEPTEMBER 30, 2003 ----------------------- ACTUAL PROFORMA ----------- --------- (IN THOUSANDS) Total current assets ........................... $ 1,275 $1,643 Total current liabilities ...................... 2,724 1,301 Working capital (deficiency) ................... (1,449) 342 Total liabilities .............................. 4,391 1,768 Total stockholders equity (deficiency) ......... (2,877) 114
ADDITIONAL RESOURCES In April 2003, the Company received an additional $900,000 8% line of credit from a major investor which is scheduled to mature on January 1, 2005. As of September 30, 2003, $600,000 was outstanding on the aforementioned line of credit. EQUITY PUT FACILITY During October 2003 and through November 4, 2003, Milestone exercised its right to draw upon a private equity facility. In exchange of net proceeds of $189,440 the Company issued 33,943 shares of F-7 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 2 -- BASIS OF PRESENTATION -- (CONTINUED) common stock. The put facility was arranged in January 2001 under the terms of a three-year private equity line agreement with Hillgreen Investments Limited ("Hillgreen"), a British Virgin Islands corporation. Hillgreen is obligated to purchase, subject to the fulfillment of specified conditions, up to 700,000 shares of Milestone's common stock. Hillgreen has allocated $20,000,000 to fund its purchase obligations. The transaction was arranged by Jesup & Lamont Securities Corporation, a New York based investment banking firm. Milestone's right to draw upon this facility is subject to a number of limitations and conditions, including a limitation on the amounts sold to Hillgreen within specified periods. Subject to these and other conditions and limitations, Milestone will have full control over the timing of any financing under the equity line and is under no obligation to sell any shares to Hillgreen. All shares that are sold are priced at 87.5% of the volume weighted average market price of Milestone common stock during a fixed period prior to the sale. Milestone has discretion to establish a floor price below which shares will not be sold by Milestone to Hillgreen. EQUITY OFFERING On November 10, 2003, the Company filed with the Securities Exchange Commission a registration statement on Form S-2 (the "Registration Statement"). The Registration Statement covers the sale of units of common stock and warrants for an aggregate firm commitment gross offering price of $8,000,000 to $10,000,000. The warrants included in the units are exercisable at any time after they become separately tradable until their expiration date, five years after the date of the closing of the offering of an exercise price equal to 150% of the closing market price of our common stock on the pricing date of this offering. Some or all of the warrants may be redeemed by us at a price of $0.01 per warrant, by giving not less than 30 days notice to the holders of the warrants, which the Company may do at any time, beginning 6 months from the effective date of this offering after the closing price for the Company's common stock on the principal exchange on which it trades (i.e. AMEX) has equaled or exceeded 200% of the price of the Company's common stock on the effective date of this offering. The common stock included in the units and the warrants will trade only as a unit for 30 days following the closing date of the offering, unless the underwriter determines that separate trading should occur earlier. After that date, the common stock included in the units and the warrants will trade separately. The size of the offering, the number of units to be sold, the price per unit, the securities included in the units and the exercise price of the warrants are all subject to change. As currently contemplated, the gross proceeds of an $8,000,000 offering are expected to yield net proceeds, of $6,500,000 after taking into account underwriting discounts and commissions and estimated offering expenses. As set forth in the Registration Statement the net proceeds of the offering will be used primarily to expand and support sales and marketing efforts for CompuDent in the United States, including new marketing and advertising campaigns, support the launch of the recently announced SafetyWand product line, expand international sales efforts and develop commercial models of products using other new subcutaneous injection technology. We will retain broad discretion in the allocation of the net proceeds within the categories set forth above. The amounts actually expended within these categories may vary significantly and will depend on a number of factors, including our rate of revenue growth, cash generated by operations, evolving business needs and other factors. There are no assurances that the Company will be successful in raising the aforementioned amount of capital or any other amount. The accompanying unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern. F-8 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 3 -- LOSS PER SHARE The rights of the Company's preferred and common stockholders are substantially equivalent. The Company has included the 25,365 outstanding preferred shares from the date of issuance in the weighted average number of shares outstanding in the computation of basic loss per share for the three and nine months ended September 30, 2002 and 2003, in accordance with the "two class" method of computing earnings (loss) per share. Options and warrants to purchase 1,100,271 and 1,584,452 shares of common stock were outstanding as of September 30, 2003 and 2002, respectively, but were not included in September the computation of diluted loss per share because the effect would have been anti-dilutive. NOTE 4 -- SIGNIFICANT CUSTOMER We had one foreign customer who accounted for approximately 25% of our net sales for the nine months ended September 30, 2003 and approximately 18% for the nine months ended September 30, 2002. At June 30, 2003, receivables from this customer were approximately 70% of our total accounts receivable. NOTE 5 -- NOTES PAYABLE TO OFFICER/STOCKHOLDER Notes payable to officer/stockholder represent six obligations payable to our Chief Executive Officer ("CEO"), consisting of (i) $200,000 note payable, with interest payable at 9% per annum and having an original due date of January 2, 2003, (ii) a $100,000 line of credit with interest payable at 6% per annum having an original due date of April 2, 2003, and (iii) a $108,215 of notes payable on demand with interest payable at 6% per annum. The $108,215 arose when the Company's CEO provided the Company with a $57,322 short term loan on January 17, 2003 for the express purpose of purchasing Wand(R) handpieces from the Company's supplier. The Company repaid the loan in full by February 7, 2003. On February 12, 2003, April 7 and September 30, 2003, the Company's CEO provided additional demand loans of $38,215, $35,000 and $50,000, respectively. The loans for $38,215 and $35,000 were provided to fund operations. The loan for $50,000 was provided for the purpose of covering expenses relating to the further exploration of equity financing alternatives. As of September 30, 2003 and November 4, 2003, $108,215 remains outstanding. On April 1, 2003, the $200,000 and $100,000 notes were extended to April 1, 2004. On April 15, 2003, $32,000 of the $108,215 notes payable was extended to January 2, 2005. NOTE 6 -- NOTES PAYABLE 6%/12% PROMISSORY NOTES On September 30, 2003, the Company satisfied $5,014,014 of secured debt obligations including interest through the issuance of 1,646,419 shares of its Common stock and 25,365 of its Preferred Stock. These obligations consisted of the following: o 6%/12% Promissory Notes with an aggregate value of $2,822,959 o 8% Promissory Notes with an aggregate value of $1,604,315 o $500,000 line of credit and $86,740 of accrued interest F-9 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 6 -- NOTES PAYABLE -- (CONTINUED) As of September 30, 2003, short term notes payable, net of a $9,955 debt discount, consist of the following: $329,572 of additional consideration given to the original noteholder of the 6%/12% of promissory notes when they agreed to extend the obligations on April 15, 2002 until July 1, 2003. The $329,572 of the additional consideration was subsequently satisfied through the issuance of 94,327 shares of the Company's Common stock during October and November 2003 valued at $3.48 per share, the fair value. o $500,000 borrowed under the $1,000,000 6% credit facility. o $600,000 borrowed under the $900,000 8% credit facility. Agreements reached in October 2003 provide for the satisfaction of the obligations through the issuance of equity securities by January 2004. (See Note 2) Long term notes payables consist of $100,000 in 6% promissory notes and $500,000 of the 8% promissory note. Descriptions of the above obligations follow. (A) THE 6%/12% PROMISSORY NOTES CONSIST OF THE FOLLOWING ISSUANCES (i) On September 16, 2001, we restructured our obligations to the holders of its 10% Senior Secured Promissory Notes. Under the terms of the agreement, each of the noteholders agreed to exchange their 10% Notes for a new, zero coupon note (the "Zero Coupon Note"). As a result of us initially restructuring our obligations, the unamortized portion of the debt discount and deferred financing costs were amortized through June 30, 2002. The significant terms of the Restructuring Debt were (i) modification of the interest rate (ii) granting us the option to pay the debt with shares of common stock and (iii) repricing the warrants which were previously issued to the shareholders back to the initial exercise price of $5.25 per share. Subsequently, on April 15, 2002, the holders additionally agreed to extend the promissory notes to July 1, 2003 and to lower the interest rate to 6% if paid in cash or to 12% if paid in common stock. In connection with the extension, we recorded $16,215 in deferred financing charges relating to professional fees and $140,203 of deferred financing costs relating to consideration to the noteholders valued at $120 per share of our common stock for each $1,000 face amount outstanding at maturity which increased the aggregate carry value of the notes by $140,203. We were accruing interest expense at 12%. These deferred financing costs were being amortized through July 1, 2003. These obligations were satisfied as described above through the issuance of 390,374 shares of common stock and 25,365 of convertible preferred stock. To date and subsequent to September 30, 2003, the Company issued 40,262 shares of the common stock in satisfaction of the $140,212 of deferred financing costs. (ii) In August 2000, we borrowed $1,000,000 which consists of two loans from two funds managed by Cumberland Associates LLC, and bear interest at 20% per year and payable in cash or through the issuance of additional 20% notes on which both interest and principal are payable. The loans are secured by substantially all of our assets and are subordinated to the 6%/12% senior secured promissory notes that were amended April 15, 2002. We can prepay the loans in cash at any time. We can prepay the notes and accrued interest with common stock at its option. Stock issued in lieu of payment of the debt will be valued at 85% of the then market price. F-10 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 6 -- NOTES PAYABLE -- (CONTINUED) For the nine months ended September 30, 2003 and 2002, we converted into principal, accrued interest of $206,989 and $171,785, respectively. On April 12, 2002, Cumberland Associates LLC agreed to extend the maturity date of these loans through July 1, 2003 and to lower the interest rate from 20% to 6%, if paid in cash, or 12% if paid in common stock. We recorded $16,215 of deferred financing charges relating to professional fees and $189,369 relating to consideration issued to the noteholders valued at $120 per share of our common stock for each $1,000 face amount outstanding at maturity. We are currently accruing interest expense at 12%. Accordingly, the deferred financing costs and the unamortized financing charges were being amortized through July 1, 2003. These obligations were satisfied as described above through the issuance of 532,924 shares of common stock. From October 10, 2003 through November 10, 2003, the Company issued 54,066 shares of common stock in satisfaction of the $189,360 of deferred financing costs. (B) 8% PROMISSORY NOTES The 8% promissory notes consist of the following: On July 31, 2000, we established a $1,000,000 credit facility with a major existing investor. Initially, $500,000 was borrowed under the line, which was due on June 30, 2003. In December 2000 and January 2001, we borrowed under the credit facility an additional $400,000 and $100,000, respectively, due on December 31, 2003. In connection with the initial $500,000, the investor received five-year warrants to purchase 23,333 shares of our common stock, exercisable at $9.00 per share. In connection with the $400,000, the investor received five-year warrants to purchase 26,667 shares of our common stock exercisable at $3.75 per share. In connection with the $100,000, the investor received five-year warrants to purchase 6,667 shares of our common stock at $3.75 per share. On April 12, 2002, the investor agreed to extend the maturity date of the $500,000 to August 1, 2003. At our option, this $500,000 can be convertible into common stock. Accordingly, in connection with the extension, the unamortized debt discount is being amortized to August 1, 2003. On April 15, 2003, the investor agreed to extend the maturity date of the $500,000 and interest originally due December 31, 2003 to January 2, 2005. Accordingly, only $500,000 of loans have been recorded as long term debt in the accompanying consolidated financial statements. On July 1, 2003, the investor agreed to extend the maturity date of notes due August 1, 2003 until September 20, 2003. At the option of the Company, this $500,000 can be convertible into common stock. On September 30, 2003, the Company satisfied $500,000 of the obligation and $120,644 of related interest through the issuance of 204,833 shares of the Company common stock. During 2002 and through February 2003, we issued a total of $1,385,000 promissory notes to an existing investor. The notes bear interest at 8% if paid in cash and 10% if paid in stock and mature on September 30, 2003. At our option, the principal and interest are payable on the maturity date in common stock. During 2002 and through February 2003, the Company issued a total of $1,385,000 promissory notes to an existing investor maturing on September 30, 2003. At the option of the company, the notes bear interest of 8% if paid in cash and 10% if paid in stock. During the nine months ended September 30, 2003, the Company borrowed $600,000 under an $800,000, 8% credit facility from an existing investor. In October 2003, agreements were reached providing for the issuance of equity securities in satisfaction of these obligations and related interest. On September 30, 2003, the Company issued 324,644 shares of its common stock in consideration for payment of these promissory notes including interest. F-11 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 6 -- NOTES PAYABLE -- (CONTINUED) (C) $500,000 LINE OF CREDIT On March 9, 2001 the Company obtained from a major existing investor, a 10% $500,000 line of credit, which was to mature on August 31, 2002. Additionally, the Company pays a 2% facility fee on the line outstanding balance. In connection with obtaining the line of credit, the lender received warrants to purchase 33,333 shares of common stock at an exercise price of $3.30. The estimated fair value of the warrants, which amounted to $40,000 was recorded as a debt discount. In addition, the Company incurred deferred financing fees of $28,384 which was being amortized to August 31, 2002. On April 12, 2002 the investor agreed to extend the line of credit and payment for interest to August 1, 2003. Furthermore in July 2003, the investor agreed to extend the line of credit and payment for interest until September 30, 2003. In connection with each extension, amortization of unamortized debt discount and deferred financing costs were also extended. These obligations were satisfied as described above through the issuance of 193,644 shares of Common Stock. (D) 6% CONVERTIBLE PROMISSORY NOTES During June 2003 and September 2003, we issued $50,000 promissory notes to existing investors. The June note bears interest at 6% and matures on November 27, 2004. At our option, the principal and interest are payable on the maturity date in common stock at a rate of one share of our common stock for every $.936 of indebtedness. Additionally, Milestone granted the investor warrants to purchase 53,419 shares of our common stock at a per share price of $1.56 with an estimate fair value of $14,423 at any time or from time to time during the period commencing of June 4, 2003 and ending June 3, 2005. This resulted in an initial increase to debt discount and to additional paid-in capital of $14,423 equal to the estimated fair market value of the warrants. The note dated September 25, 2003 bears interest at 6% and matures on March 24, 2005. At the option of the Company, the principal and interest are payable on the maturity date in common stock at a rate of one share of common stock for every $3.30 of indebtedness. Additionally, Milestone granted the investor warrants to purchase 5,000 of common stock at a per share price of $6.00 with an estimate fair value of $14,423 at any time or from time to time during the period of June 4, 2003 through June 5, 2005. This resulted in an initial increase to debt discount and to additional paid-in capital. NOTE 7 -- ACCOUNTS PAYABLE -- LONG TERM In addition to the $160,000 of trade payables which had been previously extended to January 2005, the Company on October 3, 2003, reached agreements to satisfy $502,800 of trade payables including $187,000 of services not yet completed or billed through the issuance of 102,285 shares of Common stock valued at $4.92 per share. NOTE 8 -- LEGAL PROCEEDINGS On June 10, 2002, a former distributor, Henry Schein, Inc., sued Milestone in the Supreme Court of the State of New York for $110,851 claimed to be due them for returned merchandise. Milestone denies any liability. The parties are currently engaged in discovery. Milestone believes it has a meritorious defense to this complaint based, in part, on its position that the plaintiff had no right to return the goods. On May 9, 2003, Milestone was served with a Breach of Contract Complaint. In the complaint, the plaintiff, Korman/Lender Management (landlord of the facility in Deerfield, IL) seeks damages of $17,755 plus costs, including attorney's fees, interest and continuing rental obligation. We are in the process of preparing a response. F-12 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 9 -- EMPLOYEE STOCK OPTION PLAN As of September 30, 2003, there were 221,115 outstanding options granted under the Milestone 1997 Stock Option Plan. We account for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net loss, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and loss per share if we had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
NINE MONTHS ENDED SEPTEMBER 30 ----------------------------------- 2003 2002 ---------------- ---------------- Net loss, as reported ............................................ $(1,787,382) $(1,604,252) Deduct: Total stock-based employee compensation expenses determined under fair value based method for all awards ......... (168,462) (369,365) ----------- ----------- Net loss, pro forma .............................................. $(1,955,844) $(1,973,617) ----------- =========== Loss per share: Basic and diluted As reported ..................................................... $(.42) $(.39) ===== ===== Basic-pro forma ................................................. $(.45) $(.48) ===== =====
NOTE 10 -- CLOSING OF DEERFIELD, IL FACILITY In December 2002, Milestone initiated the transition of its customer service office to its corporate headquarters in Livingston, New Jersey and its distribution and logistics center to a third party, Design Centre of York, Pennsylvania. The resulting closing of the Deerfield location was completed during January 2003. The net book value of the facility's fixed assets transferred or disposed during January 2003 was $41,425 and $11,248, respectively. NOTE 11 -- SUBSEQUENT EVENTS POTENTIAL REVERSE STOCK SPLIT The Board of Directors adopted a resolution, which was approved by the shareholders on December 9, 2003, of an amendment to the Company's Certificate of Incorporation to effect a reverse stock split of its common stock. The ratio would be no greater than one-for-ten, at the sole discretion of the Company's board of directors, in connection with an underwritten public offering by the Company. The principal purpose of the reverse stock split is to facilitate the public offering, which, we believe, is necessary to maintain our listing on the American Stock Exchange. In order to maintain the listing, we must, among other requirements, maintain stockholders' equity of at least $6 million. On December 22, 2003, the Company formed a committee to determine the amount of the split, if any. Currently, it has been estimated that the ratio for the proposed reverse stock split will be set at 1-for-3. Accordingly, all share information in these unaudited condensed consolidated financial statements has been restated to retroactively reflect the 1-for-3 combination. F-13 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors Milestone Scientific, Inc. The reverse stock split described in Note Q to the consolidated financial statements has not been consummated as of December 23, 2003. When it has been consummated, we will be in a position to furnish the following report: "We have audited the accompanying consolidated balance sheet of MILESTONE SCIENTIFIC, INC. AND SUBSIDIARIES as of December 31, 2002, and the related consolidated statements of operations, changes in stockholders' deficiency and cash flows for the years ended December 31, 2002 and 2001. These consolidated financial statements are the responsibility of our management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Milestone Scientific, Inc. and Subsidiaries as of December 31, 2002, and their results of operations and cash flows for the years ended December 31, 2002 and 2001, in conformity with accounting principles generally accepted in the United States of America." J.H. Cohn LLP Roseland, New Jersey April 1, 2003, except for Notes B and H which are as of April 15, 2003 and Note Q which is as of December 22, 2003 F-14 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2002 ASSETS Current Assets: Cash ......................................................................... $ 9,683 Accounts receivable, net of allowance for doubtful accounts of $46,152........ 239,435 Inventories .................................................................. 119,291 Advances to contract manufacturer ............................................ 300,000 Deferred debt financing, net ................................................. 159,877 Prepaid expenses ............................................................. 64,952 ------------- Total current assets ....................................................... 893,238 Equipment, net ................................................................ 227,207 Advances to Contract Manufacturer -- Long term ................................ 87,935 Other Assets .................................................................. 32,333 ------------- Total ...................................................................... $ 1,240,713 ============= LIABILITIES AND STOCKHOLDERS DEFICIENCY Current Liabilities: Account payable, including $32,000 to related parties......................... $ 1,269,523 Accrued expenses ............................................................. 86,492 Accrued interest ............................................................. 169,519 Notes payable ................................................................ 4,581,708 ------------- Total current liabilities .................................................. 6,107,242 Accrued interest .............................................................. 139,323 Deferred compensation payable to officer/stockholder .......................... 320,000 Notes payable ................................................................. 480,091 Notes payable -- officer/stockholder .......................................... 300,000 ------------- Total liabilities .......................................................... 7,346,656 ------------- Commitments and Contingencies Stockholders Deficiency: Common stock, par value $.001; authorized, 50,000,000 shares; 4,244,457 shares issued ..................................................................... 4,244 Additional paid-in capital ................................................... 36,608,096 Accumulated deficit .......................................................... (41,786,767) Unearned compensation ........................................................ (20,000) Treasury stock, at cost, 33,333 shares ....................................... (911,516) ------------- Total stockholders' deficiency ............................................. (6,105,943) ------------- Total ...................................................................... $ 1,240,713 =============
The accompanying notes are an integral part of these statements. F-15 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31,
2002 2001 ----------------- ----------------- Net Sales ............................................................ $ 4,074,006 $ 4,093,710 Cost of sales ........................................................ 1,980,949 1,973,156 ------------- ------------- Gross profit ......................................................... 2,093,057 2,120,554 ------------- ------------- Selling, general and administrative expenses ......................... 3,588,836 5,271,032 Research and development expenses .................................... 147,709 49,943 Closing of Deerfield, IL facility .................................... 26,067 -- ------------- ------------- Totals ............................................................ 3,762,612 5,320,975 ------------- ------------- Loss from operations ................................................. (1,669,555) (3,200,421) Interest income ...................................................... -- 2,936 Interest expense ..................................................... (850,642) (858,582) Sale of prophy angle business and related consulting income .......... 80,000 64,487 ------------- ------------- Net Loss .......................................................... $ (2,440,197) $ (3,991,580) ============= ============= Loss per common share -- basic and diluted ........................... $ (.59) $ (1.07) ============= ============= Weighted-average shares outstanding -- basic and diluted ............. 4,156,558 3,714,197 ============= =============
The accompanying notes are an integral part of these statements. F-16 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY YEARS ENDED DECEMBER 31, 2002 AND 2001
COMMON STOCK ADDITIONAL ---------------------- PAID IN ACCUMULATED UNEARNED SHARES AMOUNT CAPITAL DEFICIT ADVERTISING ----------- -------- --------------- ----------------- ------------ Balance, January 1, 2001 .................... 3,584,299 $3,584 $34,591,642 $ (35,354,990) $ -- Warrants issued with draw-down on credit facility ............................ 23,400 Common stock issued for consideration for payment of accrued interest ............ 9,214 9 36,270 Warrants issued pursuant to a $500,000 line of credit ............................. 40,000 Common stock issued for services rendered ................................... 30,769 31 149,969 Warrants issued for unearned advertising fees ........................... 324,218 (324,218) Proceeds from sale of common stock, net of expenses ............................ 166,667 167 491,833 Warrants issued to consultants .............. 100,000 Stock options issued for services rendered ................................... 97,649 Amortization of unearned advertising expense .................................... 21,398 Amortization of deferred compensation........ Proceeds from sale of common stock yet to be issued, net of expenses .............. 243,167 Net loss .................................... (3,991,580) --------- ------ ----------- ------------- ---------- Balance, December 31, 2001 .................. 3,790,949 3,791 36,098,148 (39,346,570) (302,820) Common stock issued from the sale of common stock in 2001 ....................... 108,333 108 (108) Common stock issued for accrued interest ................................... 11,280 11 27,061 Common stock issued for deferred compensation ............................... 204,728 205 491,141 Common stock issued for payment of accounts payable ........................... 62,500 62 149,938 Amortization of unearned advertising expense .................................... 24,803 Expired warrants for unearned advertising ................................ (278,017) 278,017 Stock options issued for future services..... 30,000 Common stock issued for payment of accounts payable ........................... 66,667 67 89,933 Net loss .................................... (2,440,197) --------- ------ ----------- ------------- ---------- Balance, December 31, 2002 .................. 4,244,457 $4,244 $36,608,096 $ (41,786,767) $ -- ========= ====== =========== ============= ==========
F-17 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY YEARS ENDED DECEMBER 31, 2002 AND 2001
DEFERRED UNEARNED TREASURY COMPENSATION COMPENSATION STOCK TOTAL -------------- -------------- -------------- ---------------- Balance, January 1, 2001 .................... $ (31,055) $ -- $ (911,516) $ (1,702,335) Warrants issued with draw- down on credit facility ............................ 23,400 Common stock issued for consideration for payment of accrued interest ............ 36,279 Warrants issued pursuant to a $500,000 line of credit ............................. 40,000 Common stock issued for services rendered ................................... 150,000 Warrants issued for unearned advertising fees ........................... 0 Proceeds from sale of common stock, net of expenses ............................ 492,000 Warrants issued to consultants .............. 100,000 Stock options issued for services rendered ................................... 97,649 Amortization of unearned advertising expense .................................... 21,398 Amortization of deferred compensation........ 31,055 31,055 Proceeds from sale of common stock yet to be issued, net of expenses .............. 243,167 Net loss .................................... (3,991,580) --------- --------- ---------- ------------ Balance, December 31, 2001 .................. -- -- (911,516) (4,458,967) Common stock issued from the sale of common stock in 2001 Common stock issued for accrued interest ................................... 27,072 Common stock issued for deferred compensation ............................... 491,346 Common stock issued for payment of accounts payable ........................... 150,000 Amortization of unearned advertising expense .................................... 24,803 Expired warrants for unearned advertising ................................ 0 Stock options issued for future services..... (20,000) 10,000 Common stock issued for payment of accounts payable ........................... 90,000 Net loss .................................... (2,440,197) --------- --------- ---------- ------------ Balance, December 31, 2002 .................. $ -- $ (20,000) $ (911,516) $ (6,105,943) ========= ========= ========== ============
The accompanying notes are an integral part of these statements. F-18 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31,
2002 2001 ---------------- ---------------- Cash flows from operating activities: Net loss ............................................................. $ (2,440,197) $ (3,991,580) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation ........................................................ 53,052 75,990 Amortization of unearned advertising cost ........................... 24,803 21,398 Amortization of debt discount and deferred financing costs .......... 340,133 306,734 Common stock issued for services .................................... -- 150,000 Amortization of deferred compensation ............................... -- 31,055 Stock options and warrants issued to consultants .................... 10,000 197,649 Loss on disposal of fixed asset ..................................... 1,909 -- Changes in operating assets and liabilities: Decrease in accounts receivable ................................... 124,308 165,801 Decrease in inventories ........................................... 43,349 13,533 Decrease in advances to contract manufacturer ..................... 301,594 315,000 (Increase) decrease in prepaid expenses ........................... (33,967) 121,727 Decrease in other assets .......................................... (19,971) (2,044) Increase in accounts payable ...................................... 107,220 253,776 Increase in accrued interest ...................................... 510,508 551,847 Increase (decrease) in accrued expenses ........................... (18,918) 54,178 Increase in deferred compensation ................................. 320,000 350,000 ------------ ------------ Net cash used in operating activities: .............................. (676,177) (1,384,936) ------------ ------------ Cash flows from investing activities-payment for capital expenditures (74,344) (10,672) ------------ ------------ Cash flows from financing activities: Proceeds from sale of common stock, net of expenses ................. -- 492,000 Proceeds from note payable-- officer/stockholder .................... 100,000 -- Proceeds from line of credit ........................................ -- 500,000 Proceeds from issuance of notes payable ............................. 685,000 100,000 Proceeds from the sale of common stock yet to be issued ............. -- 243,167 Payments for deferred financing costs ............................... (40,538) (96,684) ------------ ------------ Net cash provided by financing activities ........................... 744,462 1,238,483 ------------ ------------ Net Decrease in Cash ................................................ (6,059) (157,125) Cash at beginning of year ............................................ 15,742 172,867 ------------ ------------ Cash at end of year .................................................. $ 9,683 $ 15,742 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the year for interest .............................. $ 0 $ 0 ============ ============ Cash paid during the year for taxes ................................. $ 0 $ 0 ============ ============
F-19 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED) Supplemental schedule of noncash financing activities: In January 2002, we issued 11,280 units consisting of one share of common stock and one warrant to purchase an additional share of common stock in exchange for payment of accrued interest totaling $27,072. In January 2002, we issued 204,728 units (consisting of one share of common stock and one warrant to purchase an additional share of common stock) for payment of $491,346 in deferred compensation. The warrants are exercisable at $2.40 per share through January 31, 2003; at $3.00 per share through January 31, 2004 and thereafter at $6.00 per share through January 31, 2007. In January 2002, pursuant to the 20% promissory note agreements, we converted $63,377 of accrued interest into additional principal. In April 2002, pursuant to the 6%/12% promissory note agreements, we converted $65,168 of accrued interest into additional principal. In April 2002, pursuant to the debt restructuring, we recorded a deferred financing charge of $329,572. This resulted in an increase to notes payable of $140,203 and accrued interest of $189,369. In July 2002, we issued 62,500 units consisting of one share of common stock and one warrant to purchase an additional share of common stock to a vendor in accordance with the agreement valued at $150,000 for payment of accounts payable. In August 2002, we issued 66,667 shares of common stock in exchange for payment of $90,000 of accounts payable. In September 2002, pursuant to the 6%/12% promissory note agreements, we converted $41,512 of accrued interest into additional principal. In January 2001, pursuant to the 20% promissory note agreements, we converted $51,111 of accrued interest into additional principal. In January 2001, we granted warrants to purchase 6,667 shares of common stock (with an estimated fair value of $23,400) in connection with $100,000 drawn from a $1,000,000 credit facility provided by a major existing investor. This resulted in an initial increase to debt discount and to additional paid-in capital. In February 2001, we issued 9,214 shares of common stock in exchange for payment of accrued interest totaling $36,279. In February 2001, we issued 30,769 shares of common stock with a value of $150,000 for services rendered. In March 2001, pursuant to a $500,000 line of credit agreement, we granted warrants to purchase 33,333 shares of common stock (with an estimated fair value of $80,000). This resulted in an initial increase to debt discount and in additional paid-in capital. In March 2001, we granted warrants to purchase 130,208 shares of common stock with an estimated fair value of $324,418 for advertising services. This amount was recorded in stockholders' deficiency as an increase to unearned advertising and to additional paid-in capital. In April 2001, pursuant to the 20% promissory note agreements, we converted $53,472 of accrued interest into additional principal. F-20 MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- ORGANIZATION Milestone Scientific Inc. (the "Company" or "Milestone") was incorporated in the State of Delaware in August 1989. Milestone has developed a proprietary, computer-controlled anesthetic delivery system, through the use of the Wand (Registered Trademark) , a single use disposable handpiece. The system is marketed in dentistry under the trademark CompuDent (Trade Mark) and Wand Plus (Registered Trademark) and in medicine under the trademark CompuMed (Trade Mark) .. CompuDent (Trade Mark) is suitable for all dental procedures that requires local anesthetic. CompuMed (Trade Mark) and Wand Plus (Registered Trademark) are suitable for many medical procedures regularly performed in Plastic Surgery, Hair Restoration Surgery, Podiatry, Colorectal Surgery, Dermatology, Orthopedics and a number of other disciplines. The systems are sold in the United States and in over 25 countries abroad. Our products are manufactured by third-party contract manufacturers. NOTE B -- BASIS OF PRESENTATION: The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. However, as shown in the accompanying consolidated financial statements, the Company incurred net losses of approximately $2,440,000 and $3,992,000 and negative cash flows from operating activities of approximately $676,000 and $1,385,000 during 2002 and 2001, respectively. As a result, the Company had a cash balance of approximately $10,000, a working capital deficiency of approximately $5,214,000 and a stockholders' deficiency of approximately $6,106,000 as of December 31, 2002. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management believes that, in the absence of a substantial increase in revenue, it is probable that the Company will continue to incur losses and negative cash flows from operating activities through at least December 31, 2003 and that the Company will need to obtain additional equity or debt financing, as well as to continue its ability to defer its obligations, to sustain its operations until it can expand its customer base and achieve profitability. To date, the Company has taken certain steps in order to reduce its operating expenses and utilization of cash. These steps include, amongst others, the following: o Commencing in 2001 and continuing through 2002, the Company reconfigured its sales force. The Company went from maintaining a large internal sales force to utilizing independent sales representatives and distributors. o The Company reduced administrative personnel and telemarketers by approximately ten people. o On January 31, 2003, the Company completed the closing of the Deerfield, IL facility. The customer support, service and other back-office functions previously conducted, in whole or in part, at this location were consolidated into the Company's New Jersey location. The receiving, shipping and storage functions, which were also previously done at this location, will be outsourced at an independent warehouse located in Pennsylvania. The closure of the Illinois facility will result in reductions in overhead and other costs, while improving operational efficiencies. o Obtained an agreement from its Chief Executive Officer/Stockholder to defer 2002 and 2003 compensation, aggregating $640,000 until April 2004. o Restructured and extended the maturity dates of its debt obligations (see Note H). Further, as part of the debt restructuring, the Company obtained agreements from certain of its note holders enabling it to convert debt and related interest aggregating approximately $4,751,000 into shares of common stock. It is the Company's intention to have this conversion completed sometime during the third quarter 2003. F-21 MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE B -- BASIS OF PRESENTATION -- (CONCLUDED) o Obtained an agreement from one of its attorneys to convert an additional $160,000 of the amount owed into shares of common stock. In addition, during February 2003, the Company received a $200,000 note payable from an existing investor. The note is convertible into shares of common stock, at the Company's option, which it plans to do during the third quarter of 2003. During April 2003, the Company received an additional $900,000 line of credit from the same investor, which is scheduled to mature on January 1, 2005, unless extended. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern. NOTE C -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and of its wholly-owned subsidiary and its majority-owned subsidiary, Spintech. All significant intercompany balances and transactions have been eliminated in consolidation. 2. CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. At December 31, 2002 and 2001, the Company did not have any cash equivalents. 3. INVENTORIES Inventories principally consist of finished goods and component parts stated at the lower of cost (first-in, first-out method) or market. 4. EQUIPMENT Equipment is recorded at cost, less accumulated depreciation. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 7 years. The costs of maintenance and repairs are charged to operations as incurred. 5. DEBT ISSUE COST AND DEBT DISCOUNT Debt issue costs are deferred and amortized to interest expense over the term of the related loan on a straight-line method, which approximates the interest method. Debt discounts are offset against the principal balance and amortized using the straight-line method over the term of the related loan. 6. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered. 7. REVENUE RECOGNITION Revenue is recognized when title passes at the time of shipment and collectibility is reasonably assured. F-22 MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE C -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) 8. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. 9. INCOME TAXES The Company uses the liability method of accounting for income taxes, as set forth in SFAS No. 109, "Accounting for Income Taxes." Under this method, deferred income taxes, when required, are provided on the basis of the difference between the financial reporting and income tax bases of assets and liabilities at the statutory rates enacted for future periods. 10. BASIC AND DILUTED NET LOSS PER COMMON SHARE Basic and diluted net loss per share are computed using the weighted-average number of shares of common stock outstanding during the period. Potentially dilutive securities have been excluded from the computation of diluted earnings per share, as their effect is antidilutive. If the Company had reported net income, diluted earnings per share would have included the shares used in the computation of net loss per share plus common equivalent shares related to 1,614,785 and 1,108,611 outstanding options and warrants for the years ended December 31, 2002 and 2001, respectively and the payment of the notes payable with shares of common stock. 11. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to the allowance for doubtful accounts, advances to contract manufacturer, inventory valuation allowances, and valuation allowances on deferred tax assets. Actual results could differ from those estimates. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the consolidated balance sheet for cash, accounts receivable, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments. Notes payable to officer/stockholder and long-term notes payable approximate fair value due to the fact that the effective interest rates are comparable among the various noteholders. 13. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company has adopted the disclosure provisions of Statements of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock Based Compensation," and therefore applies the intrinsic value method of accounting for employee stock options as prescribed under Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees." Under APB No. 25, when the exercise price of an employee stock option granted by the Company is equal to or greater than the market price of the underlying stock on the date of grant, no compensation expense is recognized. 14. CONCENTRATION OF CREDIT RISK The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and trade accounts receivable. The Company places its cash with high quality credit institutions. At times, such investments may be in excess of the Federal Deposit Insurance F-23 MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE C -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Corporation insurance limit. the Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable, as the Company does not require collateral or other securities to support customer receivables. NOTE D -- INVENTORIES Inventories consist of the following: The Wand (Registered Trademark) units and handpieces ......... $125,214 Component parts and other materials ........................... 104,558 -------- 229,772 Reserve ....................................................... 110,481 -------- $119,291 ========
NOTE E -- ADVANCES TO CONTRACT MANFACTURER Advances to contract manufacturer represents deposits to the Company's contract manufacturer to fund future inventory commitments. The aggregate amount of the advances amounted to $387,935 of which approximately $300,000 is estimated to be used in 2003. NOTE F -- EQUIPMENT Equipment consists of the following: Furniture and fixtures ................ $ 194,656 Office equipment ...................... 148,797 Tooling equipment ..................... 64,079 Trade show displays ................... 81,800 Computer servers and software ......... 125,341 ---------- 614,673 Less accumulated depreciation ......... (387,466) ---------- $ 227,207 ==========
NOTE G -- NOTES PAYABLE TO OFFICER/STOCKHOLDER Notes payable to officer/stockholder represent two obligations payable to the Company's Chief Executive Officer ("CEO"), consisting of (i) $200,000 note payable, with interest payable at 9% per annum having an original due date of January 2, 2003; and (ii) a $100,000 line of credit with interest payable at 6% per annum having an original due date of April 2, 2003. On April 1, 2003, the notes were extended to April 1, 2004. Interest expense for the years ended December 31, 2002 and 2001 amounted to $19,701 and $18,250, respectively. F-24 MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE H -- NOTES PAYABLE Notes payable consist of the following: Short term 6%/12% Promissory notes, due on August 1, 2003 (A) ...................................... $2,945,542 8% Line of credit for $500,000, originally due on August 31, 2002, extended to August 1, 2003, net of debt discount of $7,024 (B)................................................ 492,976 8% Promissory notes payable, $500,000 originally due June 30, 2003, extended to August 1, 2003 and $685,000 due August 1, 2003, net of debt discount of $41,810 (C)............... 1,143,190 ---------- Total ................................................................................ $4,581,708 ==========
Long Term (B) 8% Promissory note payable for $500,000 originally due December 31, 2003, extended to January 2, 2005, net of a debt discount of $19,909 totaling $480,091. (A) 6%/12% PROMISSORY NOTES The 6%/12% Promissory Notes consist of the following issuances: (i) On March 16, 2001, the Company restructured its obligations to the holders of its 10% Senior Secured Promissory Notes. Under the terms of the agreement, each of the noteholders agreed to exchange their 10% Notes for a new, zero coupon note (the "Zero Coupon Note"). As a result of the Company initially restructuring its obligations, the unamortized portion of the debt discount and deferred financing costs were amortized through March 31, 2002. The significant terms of the Restructuring Debt were (i) modification of the interest rate, (ii) granting the company the option to pay the debt with shares of common stock and (iii) repricing the warrants which were previously issued to the shareholders back to the initial exercise price of $5.25 per share. Subsequently, on April 15, 2002, the holders additionally agreed to extend the promissory notes to July 1, 2003 and to lower the interest rate to 6% if paid in cash or to 12% if paid in common stock. In connection with the extension, the Company recorded $16,215 in deferred financing charges relating to professional fees and $140,203 of deferred financing costs relating to consideration to the noteholders valued at $120 per share of the Company's common stock for each $1,000 face amount outstanding at maturity which increased the aggregate carry value of the notes by $140,203. The Company is accruing interest expense at 12%. These deferred financing costs are being amortized through July 1, 2003. (iii) In August 2000, the Company borrowed $1,000,000 which consists of two loans from two funds managed by Cumberland Associates LLC, and bear interest at 20% per year and payable in cash or through the issuance of additional 20% notes on which both interest and principal are payable. The loans are secured by substantially all assets of the Company and are subordinated to the 6%/12% senior secured promissory notes that were amended April 15, 2002. The Company can prepay the loans in cash at any time. The Company can prepay the notes and accrued interest with common stock at its option after March 31, 2001. Stock issued in lieu of payment of the debt will be valued at 85% of the then market price. For the year ended December 31, 2002, the Company converted $257,865 of accrued interest into F-25 MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE H -- NOTES PAYABLE -- (CONTINUED) principal. During 2001, the Company had previously converted $222,417 of accrued interest into principal. On April 12, 2002, Cumberland Associates LLC agreed to extend the maturity date of these loans through July 1, 2003 and to lower the interest rate from 20% to 6%, if paid in cash, or 12% if paid in common stock. The Company recorded $16,215 of deferred financing charges relating to professional fees and $189,369 relating to consideration issued to the noteholders valued at $120 per share of the Company's common stock for each $1,000 face amount outstanding at maturity. The Company is currently accruing interest expense at 12%. Accordingly, the deferred financing costs and the unamortized financing charges are being amortized through July 1, 2003. It is currently the Company's intention to satisfy these obligations with shares of common stock upon their maturity. (B) 8% PROMISSORY NOTES The 8% promissory notes consist of the following: On July 31, 2000, the Company established a $1,000,000 credit facility with a major existing investor. Initially, $500,000 was borrowed under the line, which was due on June 30, 2003. In December 2000, and January 2001, the Company borrowed under the credit facility an additional $400,000 and $100,000, respectively, due on December 31, 2003. In connection with the initial $500,000, the investor received five-year warrants to purchase 23,333 shares of the Company's common stock, exercisable at $9.00 per share. In connection with the $400,000, the investor received five-year warrants to purchase 26,667 shares of the Company's common stock exercisable at $3.75 per share. In connection with the $100,000, the investor received five-year warrants to purchase 6,667 shares of the Company's common stock at $3.75 per share. On April 12, 2002, the investor agreed to extend the maturity date of the $500,000 to August 1, 2003. At the option of the Company, this $500,000 can be convertible into common stock. Accordingly, in connection with the extension, the unamortized debt discount is being amortized to August 1, 2003. On April 15, 2003, the investor agreed to extend the maturity date of the $500,000 and interest originally due December 31, 2003 to January 2, 2005. Accordingly, only $500,000 of loans have been recorded as long term debt in the accompanying consolidated financial statements. (C) During 2002, the Company issued a total of $1,185,000 promissory notes to an existing investor. The notes bear interest at 8% if paid in cash and 10% if paid in stock and mature on August 1, 2003. At the option of the Company, the principal and interest are payable on the maturity date in common stock. Additionally, the note will automatically convert into the Company's common stock if the Company issues 333,333 shares or raises at least $1,000,000 from the sale of equities prior to August 1, 2003, at the market price in that transaction but not less than $.50 per common share, or more than $6.00 per share. The Company is accruing interest at 10%. NOTE I -- STOCK OPTION PLAN In 1997, the Board of Directors approved the adoption of the 1997 Stock Option Plan. The 1997 Stock Option Plan provides for the grant of options to purchase up to 166,667 shares of the Company's common stock. In 1999, the Plan was amended, providing for the grant of options to purchase up to 333,333 shares of the Company's common stock. Options may be granted to employees, officers, directors and consultants of the Company for the purchase of common stock of F-26 MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE I -- STOCK OPTION PLAN -- (CONTINUED) the Company at a price not less than the fair market value of the common stock on the date of the grant. In general, options become exercisable over a three-year period from the grant date and expire five years after the date of grant. The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation." SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. The Company applies the intrinsic value method prescribed under Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. If the Company had elected to recognize compensation expense based upon the fair value at the grant date, consistent with the methodology prescribed by SFAS No. 123, pro forma net loss and net loss per share to common stockholders for the years ended December 31, 2002 and 2001 would have increased to the following pro forma amounts:
DECEMBER 31, --------------------------------- 2002 2001 ---------------- ---------------- Net loss as reported ............... $ (2,440,197) $ (3,991,580) ============ ============ Pro forma net loss ................. $ (2,664,814) $ (4,484,067) ============ ============ Loss per share as reported ......... $ (.59) $ (1.07) ============ ============ Pro forma loss per share ........... $ (.64) $ (1.21) ============ ============
The weighted-average fair value of the individual options granted during 2002 and 2001 was estimated as $.66 and $5.37, respectively, on the date of grant. The fair value for 2002 and 2001 was determined using a Black-Scholes option-pricing model with the following assumptions:
DECEMBER 31, ---------------------- 2002 2001 --------- ---------- Volatility ...................... 71% 92.0% Risk-free interest rate ......... 4.5% 5.7% Expected life ................... 5 years 5 years
Stock option activity during 2002 and 2001 is summarized below:
SHARES OF WEIGHTED COMMON STOCK AVERAGE ATTRIBUTABLE EXERCISE TO OPTIONS PRICE OF OPTIONS -------------- ----------------- Options outstanding at January 1, 2001 ........... 309,703 $ 15.33 Granted .......................................... 46,667 6.96 Forfeited ........................................ (46,615) 9.06 ------- Options outstanding at December 31, 2001 ......... 309,755 15.48 Granted .......................................... 57,667 2.37 Forfeited ........................................ (120,141) 14.97 -------- Options outstanding at December 31, 2002 ......... 247,281 $ 12.24 ======== ========
F-27 MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE I -- STOCK OPTION PLAN -- (CONTINUED) The following table summarizes information concerning outstanding and exercisable options at December 31, 2002.
REMAINING NUMBER CONTRACTUAL NUMBER EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISABLE - ----------------- ------------- -------------- ------------ $1.6500.......... 16,667 4.0 0 2.2500 ......... 20,333 4.0 6,778 2.6250 ......... 16,667 2.0 0 3.0000 ......... 16,667 1.0 0 3.6000 ......... 8,333 4.5 0 3.7500 ......... 1,667 1.7 1,667 3.7500 ......... 3,333 4.8 0 4.6875 ......... 1,667 0.7 1,667 4.8300 ......... 8,281 2.5 5,521 5.4375 ......... 2,333 2.1 1,555 6.0000 ......... 16,667 3.0 0 6.5625 ......... 27,000 2.5 18,000 7.5000 ......... 33,333 1.8 33,333 7.5000 ......... 26,667 3.6 8,889 9.0000 ......... 9,667 1.0 9,667 9.0000 ......... 1,500 1.5 1,500 12.0000 ......... 500 1.5 500 15.0000 ......... 500 1.5 500 18.0000 ......... 500 1.5 500 48.0000 ......... 16,666 0.0 0 47.5000 ......... 8,333 0.3 8,333 69.0000 ......... 10,000 0.2 10,000 ------ ------ 247,281 108,410 ======= =======
The weighted-average exercise price of options exercisable at December 31, 2002 is $15.90. The Company charged $10,000 to operations during the year ended December 31, 2002, representing the fair market value of 50,000 stock options issued to a customer. Furthermore, the Company charged $197,649 to operations during the year ended December 31, 2001, representing the fair market value of 110,000 common stock purchase warrants issued to consultants. NOTE J -- EMPLOYMENT CONTRACT AND DEFERRED COMPENSATION In January 1998, the Company entered into a five-year employment contract with its CEO providing for an annual base compensation of up to $350,000, plus stock options and cash bonuses based upon attaining certain earnings levels, which the Company has not yet achieved. In July 1998, the CEO agreed to a voluntary reduction of his annual base salary from $350,000 to approximately $188,000 that remained in effect through August 2000. At that time, the CEO agreed to defer his annual salary on a discretionary basis. Accordingly, the Company has recorded deferred compensation payable to the CEO in the amount of $491,346 at December 31, 2001. In January 2002, in consideration for payment of the deferred compensation, the Company issued 208,333 units. Each unit consisted of one share of the Company's common stock and one warrant to purchase an additional share of common stock. The warrants are exercisable at $2.40 per share F-28 MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE J -- EMPLOYMENT CONTRACT AND DEFERRED COMPENSATION (CONTINUED) through January 31, 2003 and then at $3.00 per share through January 31, 2004 and thereafter at $6.00 per share through January 31, 2007. Furthermore, on April 1, 2003, the CEO has agreed to defer payment on $640,000 of additional compensation relating to his salary for 2002 and 2003 until January 2, 2005. NOTE K -- SALES OF PROPHY ANGLES AND RELATED CONSULTING INCOME In November 2001, the Company sold certain tangible and intangible assets, rights and properties (which were fully amortized) relating to the SplatrFreeTM prophy angle to Smart Health, Inc. for $55,000. In addition, the Company entered into a 12 month consulting agreement with Smart Health for $96,000. The Company recorded consulting income of $80,000 for the year ended December 31, 2002. NOTE L -- INCOME TAXES Deferred tax attributes resulting from differences between financial accounting amounts and tax bases of assets and liabilities at December 31, 2002 and 2001 are as follows:
2002 2001 ---------------- ---------------- Current assets and liabilities Allowance for doubtful accounts .................... $ 18,000 $ 22,000 Inventory allowance ................................ 44,000 60,000 Warrants issued to consultants ..................... -- -- Other .............................................. -- -- Valuation allowance ................................... (62,000) (82,000) ------------- ------------- Current deferred tax asset ............................ $ -- $ -- ============= ============= Non-current assets and liabilities Depreciation ....................................... $ (60,000) $ (540,000) Asset impairment charge ............................ -- -- Net operating loss carryforward .................... 14,000,000 13,600,000 Warrants and options issued to consultants ......... 598,000 423,000 Accrued interest ................................... 347,000 177,000 Deferred compensation .............................. 128,000 -- ------------- ------------- 15,013,000 13,660,000 Valuation allowance ................................... (15,013,000) (13,660,000) ------------- ------------- Non-current deferred tax asset (liability) ......... $ -- $ -- ============= =============
For the years ended December 31, 2002 and 2001 the valuation allowance increased by $1,353,000 and $2,038,000 respectively. As of December 31, 2002, the Company has Federal and State net operating loss carryforwards of approximately $36,000,000 that will be available to offset future taxable income, if any through December 2022. The utilization of the Company's net operating losses may be subject to a substantial limitation due to the "change of ownership provisions" under Section 382 of the Internal Revenue Code and similar state provisions. Such limitation may result in the expiration of the net operating loss carryforwards before their utilization. The Company has established a 100% valuation allowance to reserve for all of its net deferred tax assets due to the significant uncertainty that their benefit will be realized in the future. F-29 MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE M -- PRODUCT SALES AND SIGNIFICANT CUSTOMERS The Company's sales by product and by geographical region are as follows:
DECEMBER 31, ----------------------------- 2002 2001 ------------- ------------- The Wand system kits ............ $1,452,005 $1,828,801 The Wand handpieces . ........... 2,402,396 1,948,769 Prophy angles ................... -- 71,592 Dental needles .................. 181,236 168,169 Other ........................... 38,369 76,379 ---------- ---------- $4,074,006 $4,093,710 ========== ========== Dental division ................. $3,892,069 $4,093,710 Medical division ................ 181,937 -- ---------- ---------- $4,074,006 $4,093,710 ========== ========== United States ................... $3,174,930 $3,354,302 Canada .......................... 215,722 173,729 Other foreign countries ......... 683,354 565,679 ---------- ---------- $4,074,006 $4,093,710 ========== ==========
During the years ended December 31, 2002 and 2001, the Company had sales to one customer (a worldwide distributor of the Company's products based in South Africa) of approximately $566,000 and $410,000, respectively. This represented 14% and 10% the total net sales for 2002 and 2001, respectively. Accounts receivable from this customer amounted to approximately $157,000, representing 65% of net accounts receivable at December 31, 2002. NOTE N -- COMMITMENTS AND CONTINGENCIES Lease Commitments The Company leases office space and warehouse facilities under noncancelable operating leases. These leases also provide for escalations of the Company's share of utilities and operating expenses, which expire through 2007. Aggregate minimum rental commitments under noncancelable operating leases are as follows:
YEAR ENDING DECEMBER 31, - -------------- 2003 ......... $123,000 2004 ......... 104,000 2005 ......... 72,000 2006 ......... 66,000 2007 ......... 21,000 -------- $386,000 ========
For the years ended December 31, 2002 and 2001, rent expense amounted to approximately $108,000 and $103,000 respectively. Contract Manufacturing Agreement The Company has informal arrangements for the manufacture of The Wand unit and system kit with Tricor Systems, Inc. ("Tricor") and for the manufacture of The Wand disposable handpiece by Nypro Inc. F-30 MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE N -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED) The termination of the manufacturing relationship with any of the above manufacturers could have a material adverse effect on the Company's ability to produce and sell its products. Although alternate sources of supply exist and new manufacturing relationships could be established, the Company would need to recover its existing tools or have new tools produced. Establishment of new manufacturing relationships could involve significant expense and delay. Any curtailment or interruption of the supply, whether or not as a result of termination of such a relationship, would adversely affect the Company. Contingencies In March 2001, the Company entered into an advertising agreement with News USA, Inc. and Vested Media Partners, Inc. (the "Agreement") to increase the awareness of healthcare professionals and the public to the benefits of The Wand and the CompuFlo technologies. Under the Agreement, News USA is required to prepare articles and advertisements for the Company's products and technologies and place them in newspapers and on radio stations. News USA had guaranteed 72,000 media placements during the 18-month term of the Agreement. In exchange for these services, the Company granted warrants to purchase 390,625 shares of common stock exercisable on the following dates and prices over the life of the Agreement: (1) $3.84 during the first 18 months, (2) $6.75 during the next year and (3) $9.00 during the next year. The Agreement provided for a termination clause in the fourth month if the Company's average closing stock price does not exceed $6.75 during the first ten days of the fourth month provided that the Company has received 24,000 publications. Accordingly, the remaining two-thirds of the warrants to purchase the Company's common stock would not become exercisable. However, the vendor can recommence producing the publications whenever the Company's average closing stock price for a ten day period exceeds $6.75. At the end of the ninth month, the vendors have the option to terminate the Agreement if the Company's stock price has not averaged $6.75 for a ten day period. Upon termination, two-thirds of the warrants remaining to purchase the Company's common stock will be forfeited unless the vendors resume fulfilling one-half of their obligation in three months and the remaining obligation in the next six months. In March 2001, the Company initially recorded unearned advertising cost of $324,218 which represents the estimated fair value of the 130,208 of the warrants for one-third of the total warrants granted based on the 24,000 minimum placements. The unearned advertising cost is being amortized as publications are received by the Company over the minimum placements. As of December 31, 2002, unearned advertising cost was $278,017 and during the year ended December 31, 2002, the Company recorded $24,803 in advertising expenses relating to placements during the year. The estimated fair value of the remaining warrants to purchase 260,417 of the Company's common stock have not been recorded in the Company's consolidated financial statements due to the likelihood that the Agreement will not be fulfilled. As of December 31, 2002, News USA did not meet the guaranteed media placements and accordingly the unearned advertising cost of $278,017 was reversed. NOTE O -- RELATED PARTY TRANSACTIONS The Company paid $137,500 and $72,500 during the years ended December 31, 2002 and December 31, 2001, respectively, to a law firm where one of the partners was previously on the Company's Board of Directors. At December 31, 2002 and 2001, the Company had accounts payable to the law firm of $389,181 and $302,866, respectively. On March 29, 2002, the Company entered into an agreement with the law firm deferring $272,866 of the accounts payable to January 2, 2003. The F-31 MILESTONE SCIENTIFIC INC. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE O -- RELATED PARTY TRANSACTIONS -- (CONTINUED) law firm and the former Director also participated in the February 2001 private placement, each purchasing $50,000 of 10% Senior Secured Promissory Notes and warrants to purchase 2,381 shares of the Company's Common Stock. The notes were extended to July 1, 2003. For the years ended December 31, 2002 and 2001, the Company paid $19,049 and $20,850 to the wife of Milestone's CEO. She was employed by Milestone to render professional services. At December 31, 2002, the Company had accounts payable totaling $32,000 to the Company's CEO and his wife. NOTE P -- STOCKHOLDERS' DEFICIENCY In January 2001, Milestone entered into a three-year private equity line agreement with Hillgreen Investments Limited ("Hillgreen"), a British Virgin Islands corporation, pursuant to which Hillgreen is obligated to purchase, subject to the fulfillment of specified conditions, up to 700,000 shares of Milestone common stock over the next 36 months. Hillgreen has allocated $20,000,000 to fund its purchase obligations. The transaction was arranged by Jesup & Lamont Securities Corporation, a New York based investment banking firm. Milestone's right to draw upon this facility is subject to a number of limitations and conditions, including a limitation on the amounts sold to Hillgreen within specified periods. Subject to these and other conditions and limitations, Milestone will have full control over the timing of any financing under the equity line and is under no obligation to sell any shares to Hillgreen. Any shares that are sold will be priced at 87.5% of the volume weighted average market price of Milestone common stock during a fixed period prior to the sale. Milestone has discretion to establish a floor price below which shares will not be sold by Milestone to Hillgreen. At April 11, 2003, without any restrictions and based on the closing stock price, the maximum proceeds that the Company could receive would be approximately $478,000. In August 2002, the Company issued 66,667 shares of common stock in exchange for payment of $90,000 of outstanding legal fees. NOTE Q -- SUBSEQUENT EVENTS On January 17, 2003, the Company's CEO provided the Company with a $57,322 short term loan for the express purpose of purchasing Wand handpieces from the Company's supplier. The Company repaid the loan in full by February 7, 2003. On February 12, 2003, the CEO provided the Company with a $38,215 loan for the same purposes as above. The loan is payable on demand and $33,215 remains outstanding as of March 31, 2003. On February 13, 2003, the Company received $200,000 from an existing investor that matures on August 1, 2003. At the option of the Company, the note and interest can be paid in common stock. On April 7, 2003, the CEO provided the Company with an additional $35,000 to use for the express purpose of contributing towards the Company's increased insurance premium. The Board of Directors adopted a resolution, which was approved by the shareholders on December 9, 2003, of an amendment to the Company's Certificate of Incorporation to effect a reverse stock split of its common stock. The ratio would be no greater than one-for-ten, at the sole discretion of the Company's board of directors, in connection with an underwritten public offering by the Company. The principal purpose of the reverse stock split is to facilitate the public offering, which, we believe, is necessary to maintain our listing on the American Stock Exchange. In order to maintain the listing, we must, among other requirements, maintain stockholders' equity of at least $6 million. On December 22, 2003, the Company formed a committee to determine the amount of the split, if any. Currently it has been estimated that the ratio for the proposed reverse stock split will be set at 1-for-3. Accordingly, all share information in these consolidated financial statements has been restated to retroactively reflect the 1-for-3 combination. F-32 [MILESTONE SCIENTIFIC LOGO OMITTED] SafetyWand (Trademark) SafetyWand (Trademark) [PHOTO OMITTED] [PHOTO OMITTED] SafetyWand (Trademark) handpiece with SafetyWand (Trademark) handpiece with needle, in the retracted safe position. needle, in the protraced position, ready for use. [PHOTO OMITTED] CoolBlue Wand (Trademark) Dental Enhancement System. ================================================================================ YOU MAY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON SHARES MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY OUR COMMON SHARES IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER OR SOLICITATION IS UNLAWFUL. ----------------------------------- TABLE OF CONTENTS
PAGE ----------- Prospectus Summary ............................ 3 Risk Factors .................................. 8 Forward Looking Statements .................... 12 Recent Developments ........................... 13 Use of Proceeds ............................... 13 Dividend Policy ............................... 15 Capitalization ................................ 15 Price Ranges of Our Common Stock .............. 16 Selected Consolidated Financial Data .......... 17 Management's Discussion and Analysis or Plan of Operations ...................... 18 Business ...................................... 25 Management .................................... 36 Limitation of Directors' Liability and Indemnification ............................ 37 Executive Compensation ........................ 38 Certain Relationships and Related Party Transactions ............................... 41 Security Ownership of Certain Beneficial Owners and Management ........... 42 Description of Securities ..................... 44 Underwriting .................................. 46 Legal Matters ................................. 48 Experts ....................................... 49 Where You Can Find More Information ................................ 49 Index to Financial Statements ................. F-1
================================================================================ ================================================================================ 1,200,000 UNITS [MILESTONE SCIENTIFIC LOGO OMITTED] ----------------- PROSPECTUS ----------------- PAULSON INVESTMENT COMPANY, INC. S.W. BACH & COMPANY , 2003 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS LIMITATION OF DIRECTOR LIABILITY; INDEMNIFICATION Our Certificate of Incorporation provides that a director will not be personally liable to us or to our stockholders for monetary damages for breach of the fiduciary duty of care as a director, including breaches which constitute gross negligence. This provision does not eliminate or limit the liability of a director: o for breach of his or her duty of loyalty to us or to our stockholders; o for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; o under Section 174 of the Delaware General Corporation Law (relating to unlawful payments or dividends or unlawful stock repurchases or redemptions), o for any improper benefit, or o for breaches of a director's responsibilities under the Federal securities laws. Our Certificate of Incorporation also provides that we indemnify and hold harmless each of our directors and officers to the fullest extent authorized by the Delaware General Corporation Law, against all expense, liability and loss (including attorney's fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons pursuant to our Certificate of Incorporation, Bylaws and the Delaware General Corporation Law, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy and is, therefore, unenforceable. The Underwriting Agreement provides for reciprocal indemnification between us and our controlling persons, on the one hand, and the underwriters and their respective controlling persons, on the other hand, against certain liabilities in connection with this offering, including liabilities under the Securities Act of 1933, as amended. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following are the expenses of the issuance and distribution of the securities being registered, other than underwriting commissions and expenses, all of which will be paid by the Company. Other than the SEC registration fee and the NASD filing fees all of such expenses are estimated. Registration fee ....................................... $ 1,625 NASD fee ............................................... $ 2,266 American Stock Exchange listing fee .................... $ 3,000 Printing expenses ...................................... $ 75,000 Accounting fees and expenses ........................... $100,000 Legal fees and expenses ................................ $250,000 Transfer agent and registrar fees and expenses ......... $ 10,000 Miscellaneous .......................................... $ 18,109 -------- Total .................................................. $460,000 ========
II-1 RECENT SALES OF UNREGISTERED SECURITIES. On January 31, 2000, Milestone issued five-year warrants to purchase an aggregate of 47,619 shares of Common Stock to holders of Milestone's 10% Secured Promissory Notes, including Cumberland Associates LLC, Strategic Restructuring Partnership L.P., a former principal of Cumberland Associates, two officers of the Corporation, an affiliate of one of its directors and six other individuals. The warrants were issued as consideration for the loans made by these investors to Milestone at the time of issuance. Each of the warrants, as originally issued, contained a provision gradually escalating its exercise price from $5.25 in 2000 to a maximum of $21.00 in 2004. However, in March 2001, the exercise price of these warrants was amended by agreement between Milestone and the warrant holders to provide for an exercise price of $5.25 per share up to the date of maturity. The warrants were issued pursuant to the exemption from registration under the Securities Act of 1933, as amended (the "Act"), provided by Sections 4(2) and 4(6) of the Act. Morse, Zelnick, Rose and Lander, LLP, legal counsel to Milestone, and its affiliates, are the holders of warrants to purchase 10,044 shares of Common Stock. On February 3, 2000, Milestone reduced the exercise price of all these warrants to $3.75 and extended their exercise period to February 2, 2005. Consideration for the amendments were legal services rendered to Milestone by Morse, Zelnick, Rose & Lander, LLP. The warrants originally were issued pursuant to the exemption from registration under the Act provided by Sections 4(2) and 4(6) of the Act. On December 7, 2000, and January 26, 2001, Milestone issued to K. Tucker Andersen, a major existing investor, warrants to purchase 26,667 and 6,667 shares of Common Stock, respectively, at an exercise price of $3.75 and $5.625 per share, respectively. Each of the aforementioned warrants are exercisable for five years from the date of issuance and were issued as consideration for loans of a total of $1,000,000 that the investor made to Milestone. The loans, which are evidenced by a senior secured promissory note, bear an 8% interest that is payable quarterly in arrears. Principal payments, in the amount of $500,000 each, are due on June 30, 2003, and December 31, 2003, respectively. The warrants were issued pursuant to the exemptions from registration under the Act provided by Sections 4(2) and 4(6) of the Act. On January 22, 2001, Milestone entered into an agreement to grant to Hillgreen Investments Limited ("Hillgreen") warrants to purchase 33,333 shares of Common Stock as consideration for opening an equity put agreement with Milestone. In addition, as consideration for the services rendered by Jesup & Lamont Securities Corporation ("Jesup & Lamont") as placement agent in connection with the equity put, Milestone granted to Jesup & Lamont warrants to purchase 25,000 shares of Common Stock. The warrants issued to Hillgreen and Jesup & Lamont are exercisable at any time prior to January 22, 2004 at a price of $5.58 per share, and were issued pursuant to the exemptions from registration under the Act provided by Sections 4(2) and 4(6) of the Act. On January 30, 2001, Milestone issued to Shaul Koren 30,769 shares of Common Stock, as payment for consulting services performed by Mr. Koren, pursuant to exemptions from registration under the Act provided by Sections 4(2) and 4(6) of the Act. On February 8, 2001, Milestone issued to Cumberland Associates LLC, Strategic Restructuring Partnership L.P., a former principal of Cumberland Associates, two officers of the Corporation, an affiliate of one of its directors and six other individuals, an aggregate of 9,214 shares of Common Stock in payment of interest on the 10% Secured Promissory Notes issued to these investors on January 31, 2000. The stock was issued pursuant to the exemption from registration under the Act provided by Sections 4(2) and 4(6) of the Act. On March 9, 2001, Milestone issued to K. Tucker Andersen, a major existing investor a warrant to purchase 33,333 shares of Common Stock, exercisable at any time for five years from the date of issuance at $3.30 per share, as consideration for opening a $500,000 line of credit. Milestone pays a 2% facility fee on the line of credit and interest at a rate of 10% per annum on monies borrowed. On December 28, 2001, Milestone signed an agreement to issue 11,280 units, consisting of one share and one warrant to purchase one share in payment of the $27,072 accrued interest through December 31, 2001. The warrants are exercisable at $2.40 per share through January 31, 2003, thereafter at $3.00 per II-2 share through January 31, 2004, and thereafter at $6.00 per share through January 31, 2007, at which time they will expire. All of these units and warrants were issued in January 2002 pursuant to the exemptions from registration under the Act provided by Sections 4(2) and 4(6) of the Act. In March 2001, Milestone signed an agreement with News USA, Inc. and Vested Media Partners, Inc. to increase the awareness of healthcare professionals and the public to the benefits of CompuDent(TM), CompuMed(TM), The Wand(R) and CompuFlo(TM) technologies. Under the agreement, News USA, Inc. is required to prepare, write and seek to place in newspapers and other media, articles about Milestone's products and technologies. As consideration for their services, Milestone granted to News USA, Inc. and Vested Media Partners, Inc. warrants to purchase an aggregate of approximately 390,667 shares of Milestone's Common Stock at prices increasing from $3.84, to $9.00 per share during the 3-year warrant term. The warrants were issued pursuant to the exemptions from registration under the Act provided by Sections 4(2) and 4(6) of the Act. On December 28, 2001, Milestone entered into an agreement with its CEO, Leonard Osser, to issue to him 204,728 units in payment of $491,346 in compensation, specifically, his salary as Chief Executive Officer of Milestone, which he voluntarily has deferred since August 5, 2000. In January 2002, the units were issued and each unit consists of one share of Milestone's common stock and one warrant to purchase an additional share of such common stock. The warrants are exercisable at $2.40 per share through January 31, 2003, thereafter at $3.00 per share through January 31, 2004, and thereafter at $6.00 per share through January 31, 2007, at which time they will expire. The warrants were issued pursuant to the exemptions from registration under the Act provided by Sections 4(2) and 4(6) of the Act. In December 2001, Milestone entered into an agreement with K. Tucker Andersen, an existing investor, to issue 108,333 units. The units, which were issued in January 2002, consist of one share of Milestone common stock and one warrant to purchase an additional share of such common stock. The warrants are exercisable at $2.40 per share through January 31, 2003, thereafter at $3.00 per share through January 31, 2004, and thereafter at $6.00 per share through January 31, 2007, at which time they will expire. The units were issued in exchange for $185,000 and the cancellation of a 10% convertible promissory note issued in October 2001, under which an amount of $75,000 was due at that time. In July 2002, we issued 62,500 units consisting of one share of common stock and one warrant to purchase an additional share of common stock to a vendor in accordance with the agreement valued at $150,000. In August 2002, we issued 66,667 shares of common stock in exchange for payment of $90,000 of outstanding legal fees. In June 2003 we issued a 6% convertible note in the amount of $50,000 and an 18 months warrant to purchase 53,419 shares of our common stock at $1.56 per share, in consideration for a $50,000 loan from an accredited investor. In September 2003 we issued a 6% convertible note in the amount of $50,000 and an 18 months warrant to purchase 5,000 shares of our common stock at $6.00 per share, in consideration for a $50,000 loan from an accredited investor. In October 2003 we issued 1,646,419 shares of common stock in satisfaction of 6% / 12% Secured and Senior Secured Notes in the aggregate amount of approximately $5 million. We also committed to issue 25,365 shares of 8% convertible preferred stock in satisfaction of $25,365 of principal and accrued interest. The preferred stock will be convertible into 4,381 common stock at $5.79. Subsequently, we issued 94,327 additional shares of common stock to these former noteholders as consideration for their previous consent to extend the maturity date of these notes. On October 31, 2003 we issued 102,195 shares of our common stock to principal vendors, in satisfaction of trade payables in the aggregate amount of approximately $503,000. The foregoing securities were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended, provided in Section 4(2) thereof, as a II-3 transaction by an issuer not involving a public offering. The registrant reasonably believed that each purchaser had such knowledge and experience in financial and business matters to be capable of valuating the merits and risks of the investment, each purchaser represented an intention to acquire the securities for investment only and not with a view to distribution thereof and appropriate legends were affixed to the stock certificates or warrants. No commissions were paid in connection with such issuances. EXHIBITS
EXHIBIT NO. DESCRIPTION - ---------- ----------- 1 Form of Underwriting Agreement 3.1 Certificate of Incorporation of Milestone (1) 3.2 Certificate of Amendment filed July 13, 1995 (2) 3.3 Certificate of Amendment filed December 6, 1996 (3) 3.4 Certificate of Amendment filed December 17, 1997 (6) 3.5 Certificate of Amendment filed July 23, 2003 3.6 By-laws of Milestone (1) 4.1 Specimen Stock Certificate (2) 4.2 Form of unit certificate (9) 4.3 Form of warrant agreement, including form of warrant 4.4 Form of representative's warrant 10.1 Lease dated November 25, 1996 between Livingston Corporate Park Associates, L.L.C. and Milestone. (3) 10.2 Intentionally Left Blank 10.5 Intentionally Left Blank 10.8 Agreement for The Wand Product dated December 1, 1996, between Spintech and Princeton PMC. (3) 10.10 Agreement between Milestone and Spintech dated December 21, 1994, and Amendment No. 1 thereto. (2) 10.11 Employment Agreement between Milestone and Leonard Osser dated January 1, 1998. (6) 10.12 Intentionally Left Blank 10.13 Intentionally Left Blank 10.14 Intentionally Left Blank 10.15 Private Equity Line of Credit Agreement between Milestone and Hillgreen Investments Limited dated January 22, 2001. (5) 10.16 Registration Rights Agreement, dated January 22, 2001, between Registrant and Hillgreen Investments Limited. (5) 10.17 Intentionally Left Blank 10.18 Intentionally Left Blank 10.19 Intentionally Left Blank 10.20 Intentionally Left Blank 10.21 Intentionally Left Blank 10.22 Intentionally Left Blank 10.23 Letter from Leonard Osser and Morse, Zelnick, Rose & Lander, LLP, dated April 9, 2000. (7) 10.24 Letter from Leonard Osser, dated March 28, 2002 deferring compensation payment.
II-4
EXHIBIT NO. DESCRIPTION - ---------- ----------- 10.25 Letter from Morse, Zelnick, Rose & Lander LLP, dated March 29, 2002, re-deferral of payment. 10.26 Letter from Leonard Osser, dated April 15, 2003 deferring payment. (9) 10.27 Letter from Morse, Zelnick, Rose & Lander LLP, dated March 2003 deferring payment. (9) 10.28 Line of Credit for $900,000 and extension of $500,000 line of credit, dated April 15, 2003. 10.29 Agreement with DaVinci Systems dated July 30, 2003. 10.30 Agreement with Mark Hochman and amendments thereto dated April 9, 1998, December 16, 1999, November 28, 2001 and October 2002. 10.31 Agreement with Strider dated September 2003. 10.32 Agreement with Len Osser and K. Tucker Andersen, dated October 9, 2003. 10.33 Agreement with Morse, Zelnick, Rose & Lander dated December 22, 2003. 10.34 Employment Agreement with Leonard Osser dated __________. (9) 21.1 Subsidiaries of the Registrant. (3) 23.1 Consent of J. H. Cohn LLP
- ---------- (1) Incorporated by reference to Milestone's Registration Statement on Form SB-2 No. 333-92324. (2) Incorporated by reference to Amendment No. 1 to Milestone's Registration Statement on Form SB-2 No. 333-92324. (3) Incorporated by reference to Milestone's Form 10-KSB for the year ended December 31, 1996. (4) Incorporated by reference to Milestone's Registration Statement on Form S-3 No. 333-39784. (5) Incorporated by reference to Milestone's Registration Statement on Form S-2 No. 333-54732. (6) Incorporated by reference to Milestone's Form 10-KSB for the year ended December 31, 1999. (7) Incorporated by reference to Milestone's Form 10-KSB for the year ended December 31, 2000. (8) Incorporated by reference to Milestone's Form 10-KSB for the year ended December 31, 2001. (9) To be provided. UNDERTAKINGS A. The undersigned 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 include any prospectus required by Section 10(a)(3) of the Securities Act; (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; and (iii) to include any additional or changed material information with respect to the plan of distribution disclosed in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon II-5 Rule 430A and contained in the 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 the registration statement as of the time it was declared effective. (5) For the purpose of determining any liability under the Securities Act, 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 may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer 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 small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer 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 small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-6 SIGNATURES In accordance with the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and authorized this Registration Statement to be signed on its behalf by the undersigned, in the City of New York, State of New York on December 22, 2003. MILESTONE SCIENTIFIC INC. By: /s/ Leonard Osser ---------------------------------------- Leonard Osser, Chief Executive Officer ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Leonard Osser his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all pre- or post-effective amendments to this Registration Statement, 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 or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities indicated on December 22, 2003.
SIGNATURE TITLE - -------------------------------- ------------------------------------- /s/ Leonard Osser* Chief Executive Officer and Chairman - -------------------------------- Leonard Osser of the Board of Directors /s/ Thomas M. Stuckey* Chief Financial Officer - -------------------------------- Thomas M. Stuckey /s/ Leonard Schiller* Director - -------------------------------- Leonard Schiller /s/ Paul Gregory* Director - -------------------------------- Paul Gregory /s/ Jeffrey Fuller* Director - -------------------------------- Jeffrey Fuller /s/ Leslie Bernhard* Director - -------------------------------- Leslie Bernhard
*By: /s/ Leonard Osser --------------------------- Leonard Osser II-7 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ---------- ----------- 1 Form of Underwriting Agreement 3.1 Certificate of Incorporation of Milestone (1) 3.2 Certificate of Amendment filed July 13, 1995 (2) 3.3 Certificate of Amendment filed December 6, 1996 (3) 3.4 Certificate of Amendment filed December 17, 1997 (6) 3.5 Certificate of Amendment filed July 23, 2003 3.6 By-laws of Milestone (1) 4.1 Specimen Stock Certificate (2) 4.2 Form of unit certificate (9) 4.3 Form of warrant agreement, including form of warrant 4.4 Form of representative's warrant 10.1 Lease dated November 25, 1996 between Livingston Corporate Park Associates, L.L.C. and Milestone. (3) 10.2 Intentionally Left Blank 10.5 Intentionally Left Blank 10.8 Agreement for The Wand Product dated December 1, 1996, between Spintech and Princeton PMC. (3) 10.10 Agreement between Milestone and Spintech dated December 21, 1994, and Amendment No. 1 thereto. (2) 10.11 Employment Agreement between Milestone and Leonard Osser dated January 1, 1998. (6) 10.12 Intentionally Left Blank 10.13 Intentionally Left Blank 10.14 Intentionally Left Blank 10.15 Private Equity Line of Credit Agreement between Milestone and Hillgreen Investments Limited dated January 22, 2001. (5) 10.16 Registration Rights Agreement, dated January 22, 2001, between Registrant and Hillgreen Investments Limited. (5) 10.17 Intentionally Left Blank 10.18 Intentionally Left Blank 10.19 Intentionally Left Blank 10.20 Intentionally Left Blank 10.21 Intentionally Left Blank 10.22 Intentionally Left Blank 10.23 Letter from Leonard Osser and Morse, Zelnick, Rose & Lander, LLP, dated April 9, 2000. (7) 10.24 Letter from Leonard Osser, dated March 28, 2002 deferring compensation payment. 10.25 Letter from Morse, Zelnick, Rose & Lander LLP, dated March 29, 2002, re-deferral of payment. 10.26 Letter from Leonard Osser, dated April 15, 2003 deferring payment. (9) 10.27 Letter from Morse, Zelnick, Rose & Lander LLP, dated March 2003 deferring payment. (9) 10.28 Line of Credit for $900,000 and extension of $500,000 line of credit, dated April 15, 2003. 10.29 Agreement with DaVinci Systems dated July 30, 2003.
EXHIBIT NO. DESCRIPTION - ---------- ----------- 10.30 Agreement with Mark Hochman and amendments thereto dated April 9, 1998, December 16, 1999, November 28, 2001 and October 2002. 10.31 Agreement with Strider dated September 2003. 10.32 Agreement with Len Osser and K. Tucker Andersen, dated October 9, 2003. 10.33 Agreement with Morse, Zelnick, Rose & Lander dated December 22, 2003. 10.34 Employment Agreement with Leonard Osser dated __________. (9) 21.1 Subsidiaries of the Registrant. (3) 23.1 Consent of J. H. Cohn LLP
- ---------- (1) Incorporated by reference to Milestone's Registration Statement on Form SB-2 No. 333-92324. (2) Incorporated by reference to Amendment No. 1 to Milestone's Registration Statement on Form SB-2 No. 333-92324. (3) Incorporated by reference to Milestone's Form 10-KSB for the year ended December 31, 1996. (4) Incorporated by reference to Milestone's Registration Statement on Form S-3 No. 333-39784. (5) Incorporated by reference to Milestone's Registration Statement on Form S-2 No. 333-54732. (6) Incorporated by reference to Milestone's Form 10-KSB for the year ended December 31, 1999. (7) Incorporated by reference to Milestone's Form 10-KSB for the year ended December 31, 2000. (8) Incorporated by reference to Milestone's Form 10-KSB for the year ended December 31, 2001. (9) To be provided. EX-1 3 file002.txt UNDERWRITING AGREEMENT 1,150,000 Units Milestone Scientific Inc. UNDERWRITING AGREEMENT ___________, 2003 Paulson Investment Company, Inc. As Representative of the Several Underwriters 811 SW Naito Parkway, Suite 200 Portland, Oregon 97204 Gentlemen: Milestone Scientific Inc., a Delaware corporation (the "Company"), proposes to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as Representative (the "Representative") an aggregate of 1,000,000 Units (the "Firm Units"). Each Unit will consist of two shares ("Share") of the common stock, par value $0.001 of the Company ("Common Stock") and one warrant (individually, a "Warrant" and, collectively, the "Warrants") each to purchase one share of Common Stock. The Warrants are to be issued under the terms of a Warrant Agreement (the "Warrant Agreement") by and between the Company and [______________], as warrant agent (the "Warrant Agent"), in each case substantially in the form most recently filed as an exhibit to the Registration Statement (hereinafter defined). The respective number of the Firm Units to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto. The Company also proposes to grant to the Representative an option to purchase in aggregate up to 150,000 additional Units, identical to the Firm Units (the "Option Units"), as set forth below. As the Representative, you have advised the Company (a) that you are authorized to enter into this Agreement for yourself as Representative and on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Units set forth opposite their respective names in Schedule I. The Firm Units and the Option Units (to the extent the aforementioned option is exercised) are herein collectively called the "Units." In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1 1. Representations and Warranties of the Company. The Company represents and warrants to each of the Underwriters as follows: (a) A registration statement on Form S-2 (File No. __________) with respect to the Units has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462(b) of the Act, herein referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means (i) the form of prospectus first filed with the Commission pursuant to Rule 424(b) or (ii) the last preliminary prospectus included in the Registration Statement filed prior to the time it becomes effective or filed pursuant to Rule 424(a) under the Act that is delivered by the Company to the Underwriters for delivery to purchasers of the Units, together with the term sheet or abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." (b) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. Except as described in the Registration Statement, the Company does not own a controlling interest in any other corporation or other business entity that has any material assets, liabilities or operations. Each entity that the Registration Statement discloses as being controlled by the Company (each a "Subsidiary" and, collectively, the "Subsidiaries") has been duly organized and is validly existing under the laws of its jurisdiction of organization and has the necessary legal power and authority to own or lease its properties and to conduct its business as described in the Registration Statement. The Company and each Subsidiary is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification. (c) The outstanding shares of each class or series of capital stock or other equity interests of the Company and each Subsidiary have been duly authorized and validly issued and are fully paid and non-assessable and, except as disclosed in the Registration Statement, have been issued and sold by the Company or the Subsidiary in compliance in all material respects with applicable securities laws; the issuance and sale of the Units have been duly authorized by all necessary corporate action and, when issued and paid for as contemplated herein, the Units will be validly issued, fully paid and non-assessable; and no preemptive rights of shareholders exist with respect to any security of the Company or the issue and sale thereof. Except as set forth in the Registration Statement, neither the filing of the Registration Statement nor the offering or sale of the Units as contemplated by this Agreement gives rise to any rights, 2 other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock or other securities of the Company. The Company has duly and validly reserved, out of its authorized and unissued Common Stock, for issuance upon exercise of Warrants a number of shares sufficient for such purposes, including Warrants included in the Option Units and Units obtainable on exercise of the Representative's Warrants issuable as described in Section 2(d) (the "Representative's Warrants"). (d) The information set forth under the caption "Capitalization" in the Prospectus is true and correct. The Common Stock conforms and the Warrants and the Representative's Warrants will conform to the description thereof contained in the Registration Statement. The forms of certificates for the Common Stock, the Warrants and the Representative's Warrants conform to the requirements of the corporate law of Delaware. (e) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Units nor instituted proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements that are required to be stated therein by the Company and will conform to the requirements of the Act and the Rules and Regulations. The Registration Statement and any amendment thereto do not contain, and will not contain, any untrue statement of a material fact and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendments and supplements thereto do not contain, and will not contain, any untrue statement of material fact; and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representative, specifically for use in the preparation thereof. (f) The consolidated financial statements of the Company, together with related notes and schedules as set forth in the Registration Statement, present fairly the consolidated financial position and the results of operations and cash flows of the Company and its consolidated subsidiaries at the indicated dates and for the indicated periods. The impact of each material accounting judgment made in the preparation of the financial statements included in the Registration Statement has been fairly and adequately disclosed in the notes thereto or elsewhere in the Registration Statement. Such financial statements and related schedules have been prepared in accordance with generally accepted principles of accounting, consistently applied throughout the periods involved, except as disclosed herein and in the Registration Statement, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary financial and statistical data of the Company included in the Registration Statement presents fairly the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the Company. (g) J.H. Cohn LLP, who have certified certain of the financial statements filed with the Commission as part of the Registration Statement, are independent public accountants 3 as required by the Act and the Rules and Regulations. There are no facts or circumstances that would cause the selection and/or engagement of J.H. Cohn LLP as auditors of the Company's financial statements included in the Registration Statement or the Prospectus to constitute a violation of Title II of the Sarbanes-Oxley Act of 2002 or any rules adopted or proposed to be adopted pursuant thereto. (h) There is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary before any court or administrative agency or otherwise which if determined adversely to the Company or such Subsidiary might result in any material adverse change in the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company or prevent the consummation of the transactions contemplated hereby, except as set forth in the Registration Statement. (i) The Company and each Subsidiary either has, or has disposed of in the ordinary course of business since December 31, 2002, good and marketable title to all of its properties and assets, tangible and intangible, reflected in the consolidated balance sheet of the Company and its consolidated Subsidiaries as of that date that is a part of the financial statements included in the Registration Statement, and has good and marketable title to all other property described in the Registration Statement as owned by the Company or a Subsidiary, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material. All of the leases and subleases under which the Company or any Subsidiary holds properties are in full force and effect (with only such exceptions as are commonly accepted by prudent companies engaged in the business of the Company or such Subsidiary) and neither the Company nor any Subsidiary has received notice of any claim that is materially adverse to the rights of the Company or any Subsidiary under any of such leases or subleases. (j) The Company, for itself and its Subsidiaries that have been consolidated for tax purposes, has filed all federal, state, local and foreign income tax returns which have been required to be filed and has paid all taxes indicated by said returns and all assessments received by it to the extent that such taxes have become due and are not being contested in good faith. All tax liabilities have been adequately provided for in the financial statements of the Company. Except as described in the Registration Statement, all of the Subsidiaries are consolidated with the Company for tax purposes. (k) Since the respective dates as of which information is given in the Registration Statement, as it may have been amended or supplemented, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise), or prospects of the Company or any Subsidiary, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into or any material transaction that is probable of being entered into by the Company or any Subsidiary, other than transactions in the ordinary course of business and changes and transactions described in the Registration Statement, as it may be amended or supplemented. Neither the Company nor any Subsidiary has any material contingent obligations which are not 4 disclosed in the Company's financial statements included in the Registration Statement or elsewhere in the Prospectus. (l) Neither the Company nor any Subsidiary is, nor, with the giving of notice or lapse of time or both, will any such entity be, in violation of or in default under its Certificate of Incorporation or Bylaws or other charter documents or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and which default is of material significance in respect of the condition, financial or otherwise of the Company or such Subsidiary or the business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company or such Subsidiary. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which any member of the Company is a party, or of the Certificate of Incorporation or Bylaws of the Company or any order, rule or regulation applicable to the Company of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (m) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission, the National Association of Securities Dealers, Inc. (the "NASD") or such additional steps as may be necessary to qualify the Units for public offering by the Underwriters under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. (n) The Company or a Subsidiary holds all patents, patent rights, trademarks, trade names, copyrights, trade secrets and licenses of any of the foregoing (collectively, "Intellectual Property Rights") that are necessary to the conduct of its businesses; there is no claim pending or, to the best knowledge of the Company, threatened against the Company or any Subsidiary or any of their respective officers, directors or employees alleging any infringement of Intellectual Property Rights, or any violation of the terms of any license relating to Intellectual Property Rights, nor does the Company know of any basis for any such claim. The Company knows of no infringement by others of Intellectual Property Rights owned by or licensed to the Company or a Subsidiary. The Company or a Subsidiary has obtained, is in compliance in all material respect with and maintains in full force and effect all material licenses, certificates, permits, orders or other, similar authorizations granted or issued by any governmental agency (collectively "Government Permits") required to conduct its business as it is presently conducted. No proceeding to revoke, limit or otherwise materially change any Government Permit has been commenced or, to the Company's best knowledge, is threatened against the Company or any Subsidiary, and the Company has no reason to anticipate that any such proceeding will be commenced against the Company or any Subsidiary. Except as disclosed or contemplated in the Prospectus, the Company has no reason to believe that any pending application for a Government Permit will be denied or limited in a manner inconsistent with the Company's business plan as described in the Prospectus. 5 (o) The Company and each Subsidiary is in all material respects in compliance with all applicable Environmental Laws. The Company has no knowledge of any past, present or, as anticipated by the Company, future events, conditions, activities, investigation, studies, plans or proposals that (i) would interfere with or prevent compliance with any Environmental Law by the Company or any Subsidiary or (ii) could reasonably be expected to give rise to any common law or other liability, or otherwise form the basis of a claim, action, suit, proceeding, hearing or investigation, involving the Company or any Subsidiary and related to Hazardous Substances or Environmental Laws. Except for the prudent and safe use and management of Hazardous Substances in the ordinary course of the Company's business, (i) no Hazardous Substance is or has been used, treated, stored, generated, manufactured or otherwise handled on or at any Facility and (ii) to the Company's best knowledge, no Hazardous Substance has otherwise come to be located in, on or under any Facility. No Hazardous Substances are stored at any Facility except in quantities necessary to satisfy the reasonably anticipated use or consumption by the Company. No litigation, claim, proceeding or governmental investigation is pending regarding any environmental matter for which the Company or any Subsidiary has been served or otherwise notified or, to the knowledge of the Company, threatened or asserted against the Company or any Subsidiary, or the officers or directors of the Company or any Subsidiary in their capacities as such, or any Facility or the Company's business. There are no orders, judgments or decrees of any court or of any governmental agency or instrumentality under any Environmental Law which specifically apply to the Company or any Subsidiary, any Facility or any of the Company's or any Subsidiary's operations. Neither the Company nor any Subsidiary has received from a governmental authority or other person (i) any notice that it is a potentially responsible person for any Contaminated site or (ii) any request for information about a site alleged to be Contaminated or regarding the disposal of Hazardous Substances. There is no litigation or proceeding against any other person by the Company or any Subsidiary regarding any environmental matter. The Company has disclosed in the Prospectus or made available to the Underwriters and their counsel true, complete and correct copies of any reports, studies, investigations, audits, analyses, tests or monitoring in the possession of or initiated by the Company or any Subsidiary pertaining to any environmental matter relating to the Company, any Subsidiary, their past or present operations or any Facility. For the purposes of the foregoing paragraph, "Environmental Laws" means any applicable federal, state or local statute, regulation, code, rule, ordinance, order, judgment, decree, injunction or common law pertaining in any way to the protection of human health or the environment, including without limitation, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Toxic Substances Control Act, the Clean Air Act, the Federal Water Pollution Control Act and any similar or comparable state or local law; "Hazardous Substance" means any hazardous, toxic, radioactive or infectious substance, material or waste as defined, listed or regulated under any Environmental Law; "Contaminated" means the actual existence on or under any real property of Hazardous Substances, if the existence of such Hazardous Substances triggers a requirement to perform any investigatory, remedial, removal or other response action under any Environmental Laws or if such response action legally could be required by any governmental authority; "Facility" means any property currently owned, leased or occupied by the Company. (p) Neither the Company, nor to the Company's best knowledge, any of its affiliates, has taken or intends to take, directly or indirectly, any action which is designed to 6 cause or result in, or which constitutes or might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock or the Warrants to facilitate the sale or resale of the Units. (q) The Company is not an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder. (r) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company has adopted Disclosure Controls and Procedures, as defined in Section 13a-14(c) of the rules and regulations adopted under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") and has implemented such procedures as adopted and has evaluated the effectiveness of such Disclosure Controls and Procedures. (s) The Company and each Subsidiary carries, or is covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar industries. (t) The Company and each Subsidiary is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company or any Subsidiary would have any liability; neither the Company nor any Subsidiary has incurred and the Company does not expect that it or any Subsidiary will incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company or any Subsidiary would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (u) The Company and each Subsidiary is in material compliance with all laws, rules, regulations, orders of any court or administrative agency, operating licenses or other requirements imposed by any governmental body applicable to it, including, without limitation, all applicable laws, rules, regulations, licenses or other governmental standards applicable to the its business; and the conduct of the business of the Company and each Subsidiary, as described in the Prospectus, will not cause the Company or such Subsidiary to be in violation of any such requirements. 7 (v) Each of the Warrants and the Representative's Warrants have been authorized for issuance to the purchasers thereof or to the Representative or its designees, as the case may be, and will, when issued, possess rights, privileges, and characteristics as represented in the most recent form of Warrant Agreement or Representative's Warrants, as the case may be, filed as an exhibit to the Registration Statement; the securities to be issued upon exercise of the Warrants and the Representative's Warrants, when issued and delivered against payment therefor in accordance with the terms thereof, will be duly and validly issued, fully paid, nonassessable and free of preemptive rights, and all corporate action required to be taken for the authorization and issuance of the Warrants and the Representative's Warrants, and the securities to be issued upon their exercise, have been validly and sufficiently taken. The execution by the Company of the Warrant Agreement and the Representative's Warrants has been duly authorized by all required action of the Company and, when so executed and delivered (and assuming due and valid execution by the Warrant Agent, in the case of the Warrant Agreement) will constitute the valid an binding obligations of the Company, enforceable against the Company in accordance with their respective terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. (w) Except as disclosed in the Prospectus, neither the Company nor any of its officers, directors or affiliates have caused any person, other than the Underwriters, to be entitled to reimbursement of any kind, including, without limitation, any compensation that would be includable as underwriter compensation under the NASD's Corporate Financing Rule with respect to the offering of the Units, as a result of the consummation of such offering based on any activity of such person as a finder, agent, broker, investment adviser or other financial service provider. (x) Except as described in the Prospectus, the Company does not directly or indirectly control or have a material interest in any other business entity. (y) The Units, the Common Stock and the Warrants have been approved for listing on the American Stock Exchange ("AMEX") upon the effectiveness of the Registration Statement and the Company has satisfied all of the requirements of AMEX for such listing and for the trading of its Common Stock, Units and Warrants on AMEX. (z) The Company has adopted organizational structures and policies sufficient to comply with the requirements of the AMEX corporate governance rules in effect as of the date hereof and as proposed to be amended in accordance with any proposed rules of AMEX published for comment as of the date hereof (collectively, the "AMEX Corporate Governance Rules"). Without limiting the generality of the foregoing, the Company's Board of Directors has validly appointed an Audit Committee and a Compensation Committee whose composition satisfies the requirements of the AMEX Corporate Governance Rules. The Board of Directors and/or the Audit Committee or Compensation Committee, as the case may be, has adopted a charter governing the respective activities of the Audit and Compensation Committees that satisfies the requirements of the AMEX Corporate Governance Rules. The Audit Committee and the Compensation Committee have each acted in accordance with the provisions of their respective charters, as amended from time to time. 8 (aa) Neither the Board of Directors nor the Audit Committee has been informed, nor is any director of the Company aware, of (i) any significant deficiencies in the design or operation of the Company's internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data or any material weakness in the Company's internal controls; or (ii) any fraud, whether or not material, that involves management or other employees of the Company who have a significant role in the Company's internal controls. (bb) Each of the certifications made by the principal executive and principal financial officers of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and the rules and regulations adopted thereunder was correct in all material respects when made. (cc) The Company and each Subsidiary has complied with all provisions of Section 517.075 Florida Statutes, relating to doing business with the Government of Cuba or with any person or affiliate located in Cuba. 2. Purchase, Sale and Delivery of the Units. (a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of [$____] per Unit, the number of Firm Units set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. (b) Payment for the Firm Units to be sold hereunder is to be made in New York Clearing House funds and, at the option of the Representative, by bank wire to an account specified by the Company, certified or bank cashier's checks drawn to the order of the Company, against either uncertificated delivery of Firm Units or of certificates therefor (which delivery, if certificated, shall take place in such location in New York, New York as may be specified by the Representative) to the Representative for the several accounts of the Underwriters. Such payment is to be made at the offices of the Representative at the address set forth on the first page of this agreement, at 7:00 a.m., Pacific time, on the third business day after the date of this Agreement or at such other time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and not permitted by law or executive order to be closed.) Except to the extent uncertificated Firm Units are delivered at closing, the certificates for the Firm Units will be delivered in such denominations and in such registrations as the Representative requests in writing not later than the second full business day prior to the Closing Date, and will be made available for inspection by the Representative at least one business day prior to the Closing Date. (c) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters to purchase the Option Units at the price per Unit as set forth in Section 2(a). The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) only once thereafter within 45 days after 9 the date of this Agreement, by the Representative to the Company setting forth the number of Option Units as to which the Underwriters are exercising the option, the names and denominations in which the Option Units are to be registered and the time and date at which certificates representing such Units are to be delivered. The time and date at which certificates for Option Units are to be delivered shall be determined by the Representative but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The option with respect to the Option Units granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Units by the Underwriters. The Representative may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Units shall be made on the Option Closing Date in New York Clearing House funds and, at the option of the Representative, by bank wire to an account specified by the Company, or certified or bank cashier's check drawn to the order of the Company for the Option Units to be sold by the Company in consideration either of uncertificated delivery of Option Units or delivery of certificates therefor (which delivery, if certificated, shall take place in such location in New York, New York as may be specified by the Representative) to the Representative for the several accounts of the Underwriters. Except to the extent uncertificated Option Units are delivered at closing, the certificates for the Option Units will be delivered in such denominations and in such registrations as the Representative requests in writing not later than the second full business day prior to the Option Closing Date, and will be made available for inspection by the Representative at least one business day prior to the Option Closing Date. (d) In addition to the sums payable to the Representative as provided elsewhere herein, the Representative shall be entitled to receive at the Closing, for itself alone and not as Representative of the Underwriters, as additional compensation for its services, Representative's Warrants for the purchase of up to 100,000 Units at a price of [$____] per Unit, upon the terms and subject to adjustment and conversion as described in the form of Representative's Warrants filed as an exhibit to the Registration Statement. 3. Offering by the Underwriters. (a) It is understood that the several Underwriters are to make a public offering of the Firm Units as soon as the Representative deems it advisable to do so. The Firm Units are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representative may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Units are purchased pursuant to Section 2 hereof, the Representative will offer them to the public on the foregoing terms. It is further understood that you will act as the Representative for the Underwriters in the offering and sale of the Units in accordance with an Agreement Among Underwriters entered into by you and the several other Underwriters. 4. Covenants of the Company. The Company covenants and agrees with the several Underwriters that: 10 (a) The Company will (i) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Rules and Regulations is followed, to prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the Representative containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representative shall not previously have been advised and furnished with a copy or to which the Representative shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations. (b) The Company will advise the Representative promptly (i) when the Registration Statement or any post-effective amendment thereto shall have become effective, (ii) of receipt of any comments from the Commission, (iii) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (c) The Company will cooperate with the Representative in endeavoring to qualify the Units for sale under the securities laws of such jurisdictions as the Representative may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representative may reasonably request for distribution of the Units. (d) The Company will deliver to, or upon the order of, the Representative, from time to time, as many copies of any Preliminary Prospectus as the Representative may reasonably request. The Company will deliver to, or upon the order of, the Representative during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representative may reasonably request. The Company will deliver to the Representative at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representative such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested), and of all amendments thereto, as the Representative may reasonably request. (e) The Company will comply with the Act and the Rules and Regulations, and the Exchange Act, and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Units as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the 11 Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances existing at the time the Prospectus is so delivered, be misleading, or so that the Prospectus will comply with the law. (f) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earning statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. (g) The Company will, for a period of five years from the Closing Date, deliver to the Representative copies of annual reports and copies of all other documents, reports and information furnished by the Company to its stockholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Exchange Act. The Company will deliver to the Representative similar reports with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. (h) The Company will make no offering, sale, short sale or other disposition of any shares of Common Stock of the Company or other securities convertible into or exchangeable or exercisable for shares of Common Stock or derivatives of Common Stock (or agreement therefor), directly or indirectly, for a period of ninety days after the date of this Agreement otherwise than hereunder, or pursuant to contractual obligations existing on the date hereof or pursuant to employee benefit plans in effect on the date hereof, or with the prior written consent of the Representative, which consent will not be unreasonably withheld. (i) The Company will use its best efforts to list, subject to notice of issuance of the Units, the Common Stock and the Warrants on the AMEX and to cause such listing to remain in effect with respect to each such security unless and until (i) such security expires; (ii) such security is listed on another exchange of at least comparable reputation; or (iii) the Company is no longer required to file reports under Section 12 of the Exchange Act. (j) The Company has caused each officer and director and each person who owns, beneficially or of record, shares of the Common Stock constituting 5% or more of the Common Stock outstanding immediately prior to the date hereof to furnish to you, on or prior to the date of this agreement, a letter or letters, in form and substance satisfactory to the Underwriters ("Lock-up Agreements"), pursuant to which each such person has agreed not to offer, sell, sell short or otherwise dispose of any shares of Common Stock or other capital stock of the Company, or any other securities convertible, exchangeable or exercisable for Common Stock or derivatives of Common Stock owned by such person or request the registration for the 12 offer or sale of any of the foregoing (or as to which such person has the right to direct the disposition) for a period of 90 days after the date of this Agreement, directly or indirectly, except with the prior written consent of the Representative. (k) The Company shall apply the net proceeds of its sale of the Units as set forth in the Prospectus and shall file such reports with the Commission with respect to the sale of the Units and the application of the proceeds therefrom as may be required in accordance with Rule 463 under the Act. (l) The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Units in such a manner as would require the Company to register as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). (m) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock, and shall comply with the provisions of the Warrant Agreement with respect to the appointment and maintenance of a Warrant Agent for the Warrants. (n) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. 5. Costs and Expenses. (a) The Representative shall be entitled to reimbursement from the Company, for itself alone and not as Representative of the Underwriters, to a non-accountable expense allowance equal to 3.0% of the aggregate initial public offering price of the Firm Units and any Option Units purchased by the Underwriters. The Representative shall be entitled to withhold this allowance on the Closing Date related to the purchase of the Firm Units or the Option Units, as the case may be. (b) In addition to the payment described in Paragraph (a) of this Section 5, the Company will pay all costs, expenses and fees incident to the performance of the obligations of the Company under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the AMEX listing application, the costs of due diligence investigation of the principals of the Company, the Blue Sky Survey and any supplements or amendments thereto; the filing fees of the Commission; the filing fees and expenses (including any fees and disbursements of counsel for the Underwriters) incident to securing the required review by the NASD Regulation, Inc. of the underwriting terms and arrangements; the AMEX listing fee; and the expenses, including the fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Units under state securities or Blue Sky laws. Any transfer taxes imposed on the sale of the Units to the several Underwriters will be paid by the Company. The Company agrees to pay all costs and expenses of the Underwriters, including the fees and disbursements of 13 counsel for the Underwriters, incident to the offer and sale of directed Units by the Underwriters to employees and persons having business relationships with the Company. The Company shall not, however, be required to pay for any of the Underwriters' expenses (other than those related to qualification under NASD regulation and state securities or Blue Sky laws) except that, if this Agreement shall not be consummated, then the Company shall reimburse the several Underwriters for accountable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Units or in contemplation of performing their obligations hereunder; but the Company shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Units. 6. Conditions of Obligations of the Underwriters. The several obligations of the Underwriters to purchase the Firm Units on the Closing Date and the Option Units, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company contained herein, and to the performance by the Company of their covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representative and complied with to their reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission and no injunction, restraining order, or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Units. The Representative shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Morse, Zelnick, Rose & Lander LLP, counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. (ii) Each Subsidiary has been duly organized and is validly existing as a business entity in good standing under the laws of its jurisdiction of formation with all requisite power and authority under the laws governing such entities to own or lease its properties and conduct its business as described in the Registration Statement. (iii) The Company and each Subsidiary is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification, or in 14 which the failure to qualify would have a material adverse effect upon the business of the Company. (iv) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and non-assessable; all of the securities of the Company conform to the description thereof contained in the Prospectus; the certificates for the Common Stock and the Warrants are in due and proper form; no preemptive rights of shareholders exist with respect to any of the Common Stock or the issuance or sale thereof pursuant to any applicable statute or the provisions of the Company's Articles of Incorporation or Bylaws or, to such counsel's best knowledge, pursuant to any contractual obligation. The Company's ownership interest in each Subsidiary is, in all material respects, as described in the Registration Statement. (v) Except as described in or contemplated by the Prospectus, to the knowledge of such counsel, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the knowledge of such counsel, no holder of any securities of the Company or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Units or the right to have any Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company. (vi) The Warrant Agreement and the Warrants have been duly authorized by the Company. When duly executed, authenticated, issued and delivered as contemplated in the Registration Statement and the Warrant Agreement, the Warrant Agreement and the Warrants will constitute legally binding obligations of the Company, enforceable against it in accordance with their terms and, in the case of the Warrants, entitled to the benefits of the Warrant Agreement subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. (vii) The Warrants are exercisable to purchase Common Stock in accordance with the terms of the Warrant Agreement; the shares of Common Stock initially issuable upon exercise of the Warrants (including Warrants comprising the Option Units and Warrants issuable on exercise of the Representative's Warrants) have been duly authorized and reserved for issuance upon such conversion or exercise, as the case may be, and, when issued upon such conversion or exercise in accordance with the terms of the Warrant Agreement will be validly issued, fully paid and nonassessable. (viii) The Representative's Warrants have been duly authorized by the Company. When duly executed, issued and delivered as contemplated in the Registration 15 Statement, the Representative's Warrants will constitute the legally binding obligation of the Company, enforceable against it in accordance with its terms subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. (ix) The Registration Statement has become effective under the Act and, to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. (x) The Registration Statement, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules therein). (xi) The statements under the captions "Business-Patents and Intellectual Property," "Business-Government Regulation," "Shares Eligible for Future Sale," "Description of Securities" and _______________________ in the Prospectus and in Items __ and __ of the Registration Statement, insofar as such statements constitute a summary of documents referred to therein or matters of law, fairly summarize in all material respects the information called for with respect to such documents and matters. (xii) Such counsel does not know of any contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. (xiii) Such counsel knows of no material legal or governmental proceedings pending or threatened against the Company or any Subsidiary. (xiv) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Certificate of Incorporation or Bylaws of the Company, as amended, or any agreement or instrument known to such counsel to which the Company is a party or by which the Company may be bound. (xv) Each of this Agreement and the Warrant Agreement has been duly authorized, executed and delivered by the Company. (xvi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD, as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. (xvii) The Company is not, and will not become, as a result of the consummation of the transactions contemplated by this Agreement, and application of the net 16 proceeds therefrom as described in the Prospectus, required to register as an investment company under the 1940 Act. In rendering such opinion, such counsel may rely as to matters governed by the laws of states other than Oregon, or federal laws on local counsel in such jurisdictions, provided that in each case such counsel shall state that they believe that they and the Underwriters are justified in relying on such other counsel. In addition to the matters set forth above, the opinion of Morse, Zelnick, Rose & Lander LLP shall also include a statement to the effect that nothing has come to the attention of such counsel that has caused them to believe that (i) the Registration Statement, at the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an 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, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). (b) The Representative shall have received from Holland & Knight LLP, counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect specified in subparagraphs (ix) and (x) of Paragraph (b) of this Section 6. In rendering such opinion Holland & Knight LLP may rely as to all matters governed other than by the laws of the State of Oregon or Federal laws on the opinion of counsel referred to in Paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel that has caused them to believe that (i) the Registration Statement, or any amendment thereto, as of the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an 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, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Holland & Knight LLP may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (c) The Representative shall have received at or prior to the Closing Date from Holland & Knight LLP a memorandum or summary, in form and substance satisfactory to the Representative, with respect to the qualification for offering and sale by the Underwriters of the Units under the state securities or Blue Sky laws of such jurisdictions as the Representative may reasonably have designated to the Company. 17 (d) The Representative, on behalf of the several Underwriters, shall have received, on each of the dates hereof, the Closing Date and the Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to the Representative, of J.H. Cohn LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and Prospectus. (e) The Representative shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to his or her knowledge, contemplated by the Commission; (ii) The representations and warranties of the Company contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be; (iii) All filings required to have been made pursuant to Rules 424 or 430A under the Act have been made; (iv) He or she has carefully examined the Registration Statement and the Prospectus and, in his or her opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct, and such Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment; and (v) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company, whether or not arising in the ordinary course of business. 18 (f) The Company shall have furnished to the Representative such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Representative may reasonably have requested. (g) The Common Stock and the Warrants have been approved for listing upon notice of issuance of the Units on AMEX. (h) The Lock-up Agreements described in Section 4(j) are in full force and effect. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representative and to Holland & Knight LLP, counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representative by notifying the Company of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. Conditions of the Obligations of the Company. The obligations of the Company to sell and deliver the portion of the Units required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. 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 the Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each Underwriter and each such controlling person upon demand for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Units, whether or not such Underwriter or controlling person is a party to any action or proceeding; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue 19 statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representative specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter severally and not jointly will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representative specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such 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 therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or within 30 days of presentation) the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any 20 impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party shall have failed to assume the defense and employ counsel acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by you in the case of parties indemnified pursuant to Section 8(a) and by the Company in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) 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 Units. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits 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 or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bears to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other 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 contributions pursuant to this Section 8(d) 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 21 which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Units purchased by such Underwriter, and (ii) 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. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. (f) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Units and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. 9. Default by Underwriters. If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Units which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company), you, as Representative of the Underwriters, shall use reasonable efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company such amounts as may be agreed upon and upon the terms set forth herein, the Firm Units or Option Units, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as such Representative, shall not have procured such other Underwriters, or any others, to purchase the Firm Units or Option Units, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of Units with respect to which such default shall occur does not exceed 10% of the Firm Units or Option Units, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion 22 to the respective numbers of Firm Units or Option Units, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Units or Option Units, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of Firm Units or Option Units, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Units or Option Units, as the case may be, covered hereby, the Company or you as the Representative of the Underwriters will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Company except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representative, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. Notices. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied or telegraphed and confirmed as follows: if to the Underwriters, to Paulson Investment Company, Inc. 811 SW Naito Parkway, Suite 200 Portland, Oregon 97204 Attention: Chester L.F. Paulson with a copy, which shall not constitute notice, to Holland & Knight LLP 111 SW Fifth Avenue, Suite 2300 Portland, Oregon 97204 Attention: Mark A. von Bergen if to the Company, to Milestone Scientific Inc. 220 South Orange Avenue Livingston, New Jersey 07039 Attention: Leonard Osser with copy, which shall not constitute notice, to Morse, Zelnick, Rose & Lander LLP 405 Park Avenue New York, New York 10022 Attention: Stephen A. Zelnick 23 11. Termination. This Agreement may be terminated by you by notice to the Company as follows: (a) at any time prior to the earlier of (i) the time the Units are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on the first business day following the date of this Agreement; (b) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company, the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make it impracticable to market the Units or to enforce contracts for the sale of the Units, (iii) the Dow Jones Industrial Average shall have fallen by 15 percent or more from its closing price on the day immediately preceding the date that the Registration Statement is declared effective by the Commission, (iv) suspension of trading in securities generally on the New York Stock Exchange or AMEX or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (v) the enactment, publication, decree or other promulgation of any statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects or may materially and adversely affect the business or operations of the Company, (vi) declaration of a banking moratorium by United States or New York State authorities, (vii) any downgrading in the rating of the Company's debt securities by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Exchange Act); (viii) the suspension of trading of the Common Stock or the Warrants by the Commission or AMEX, or (ix) the taking of any action by any governmental body or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or (c) as provided in Sections 6 and 9 of this Agreement. 12. Successors. This Agreement has been and is made solely for the benefit of the Underwriters, the Company and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Units from any Underwriter shall be deemed a successor or assign merely because of such purchase. 13. Information Provided by Underwriters. The Company and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any 24 Underwriter to the Company for inclusion in the Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), legends required by Item 502(b) of Regulation S-B under the Act and the information under the caption "Underwriting" in the Prospectus. 14. Miscellaneous. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Units under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Oregon. All disputes relating to this Underwriting Agreement shall be adjudicated before a court located in Multnomah County, Oregon to the exclusion of all other courts that might have jurisdiction. (Remainder of page intentionally left blank; signature page follows) 25 If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters in accordance with its terms. Very truly yours, MILESTONE SCIENTIFIC INC. By: ______________________________________ Name: Title: The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. PAULSON INVESTMENT COMPANY, INC. As Representative of the several Underwriters listed on Schedule I By: ______________________________________ Name: Title: 26 SCHEDULE I Schedule of Underwriters Number of Firm Units Underwriter to Be Purchased - ------------------------------------------ ------------------------------- Paulson Investment Company, Inc. Total # 1331484_v1 EX-3.5 4 file003.txt CHARTER AMENDMENT CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF MILESTONE SCIENTIFIC, INC. (PURSUANT TO SECTION 242 OF THE DELAWARE GENERAL CORPORATION LAW) ---------------------------- It is hereby certified that: 1. The name of the corporation is Milestone Scientific Inc (the "Corporation"). 2. The Certificate of Incorporation of the Corporation was filed by the Department of State on August 17, 1989 (under the name "U.S. Opportunity Search, Inc.") and subsequent amendments thereto were filed on July 13, 1995, December 6, 1996 and, December 17, 1997. 3. The Certificate of Incorporation of the Corporation is hereby amended to increase the total number of shares of common stock and to add a new class of preferred stock, which the Corporation shall have authority to issue. 4. To accomplish the foregoing amendments, a Article FOURTH of the Certificate of Incorporation is amended to read in its entirety as follows: "FOURTH: The total number of shares which this corporation shall have authority to issue is 55,000,000 shares, consisting of (i) 50,000,000 shares of common stock, $.001 par value per share (the "Common Stock") and (ii) 5,000,000 shares of preferred stock, $.001 par value per share (the "Preferred Stock"). The Board of Directors, in the exercise of its discretion, is authorized to issue the undesignated Preferred Stock in one or more series, to determine the powers, preferences and rights, and qualifications, limitations or restrictions, granted to or imposed upon any wholly unissued series of undesignated Preferred Stock, and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by the stockholders." 5. The Amendments herein certified have been duly adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law. 6. This Certificate of Amendment shall become effective upon the filing hereof in the Office of the Secretary of State of the State of Delaware. Executed on this 24th day of July 2003 /s/ Leonard Osser ----------------- Leonard Osser President and Chief Executive Officer 2 EX-4.3 5 file004.txt WARRANT AGREEMENT WARRANT AGREEMENT BETWEEN MILESTONE SCIENTIFIC INC. AND ____________________ DATED AS OF ___________ __, 2003 WARRANT AGREEMENT This Agreement, dated as of ____________ __, 2003, is between Milestone Scientific Inc., a Delaware corporation (the "Company") and _____________, a ______________, (the "Warrant Agent"). The Company, at or about the time that it is entering into this Agreement, proposes to issue and sell to public investors up to 1,150,000 Units (together with the additional units issuable as provided herein, the "Units"). Each Unit consists of one share of common stock, $0.001 par value, of the Company and one warrant (collectively, the "Warrants"). Each Warrant is exercisable to purchase one share of Common Stock upon the terms and conditions and subject to adjustment in certain circumstances, all as set forth in this Agreement. The Company proposes to issue to the Representative of the Underwriters in the public offering of Units referred to above warrants to purchase up to 100,000 additional Units. The Company wishes to retain the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing so to act, in connection with the issuance, transfer, exchange and replacement of the certificates evidencing the Warrants to be issued under this Agreement (the "Warrant Certificates") and the exercise of the Warrants; The Company and the Warrant Agent wish to enter into this Agreement to set forth the terms and conditions of the Warrants and the rights of the holders thereof ("Warrantholders") and to set forth the respective rights and obligations of the Company and the Warrant Agent. Each Warrantholder is an intended beneficiary of this Agreement with respect to the rights of Warrantholders herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: 1. Appointment of Warrant Agent. The Company appoints the Warrant Agent to act as agent for the Company in accordance with the instructions in this Agreement and the Warrant Agent accepts such appointment. 2. Date, Denomination and Execution of Warrant Certificates. (a) The Warrant Certificates (and the Form of Election to Purchase and the Form of Assignment to be printed on the reverse thereof) shall be in registered form only and shall be substantially of the tenor and purport recited in Exhibit A hereto, and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law, or with any rule or regulation made pursuant thereto, or with any rule or regulation of any stock exchange on which the Common Stock or the Warrants may be listed or any automated quotation system, or to conform to usage. Each Warrant Certificate shall entitle the registered holder thereof, subject to the provisions of this Agreement and of the Warrant Certificate, to purchase, on or after ____________, 2003 and on or before the close of business on _________, 2008 (the "Expiration Date"), one fully paid and non-assessable share of 1 Common Stock for each Warrant evidenced by such Warrant Certificate for $_____. The exercise price of the Warrants (the "Exercise Price") is subject to adjustments as provided in Section 6 hereof. Each Warrant Certificate issued as a part of a Unit offered to the public as described in the recitals, above, shall be dated _____________, 2003; each other Warrant Certificate shall be dated the date on which the Warrant Agent receives valid issuance instructions from the Company or a transferring holder of a Warrant Certificate or, if such instructions specify another date, such other date. (b) For purposes of this Agreement, the term "close of business" on any given date shall mean 5:00 p.m., Eastern time, on such date; provided, however, that if such date is not a business day, it shall mean 5:00 p.m., Eastern time, on the next succeeding business day. For purposes of this Agreement, the term "business day" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in New York, New York or in the State in which the Warrant Agent maintains the principal office in which it conducts business related to the Warrants are authorized or obligated by law to be closed. (c) Each Warrant Certificate shall be executed on behalf of the Company by the Chairman of the Board or its President or a Vice President, either manually or by facsimile signature printed thereon, and have affixed thereto the Company's seal or a facsimile thereof which shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. Each Warrant Certificate shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any Warrant Certificate shall cease to be such officer of the Company before countersignature by the Warrant Agent and issue and delivery thereof by the Company, such Warrant Certificate, nevertheless, may be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificate had not ceased to be such officer of the Company. 3. Subsequent Issue of Warrant Certificates. Subsequent to their original issuance, no Warrant Certificates shall be reissued except (i) Warrant Certificates issued upon transfer thereof in accordance with Section 4 hereof, (ii) Warrant Certificates issued upon any combination, split-up or exchange of Warrant Certificates pursuant to Section 4 hereof, (iii) Warrant Certificates issued in replacement of mutilated, destroyed, lost or stolen Warrant Certificates pursuant to Section 5 hereof, (iv) Warrant Certificates issued upon the partial exercise of Warrant Certificates pursuant to Section 7 hereof, and (v) Warrant Certificates issued to reflect any adjustment or change in the Exercise Price or the number or kind of shares purchasable thereunder pursuant to Section 22 hereof. The Warrant Agent is hereby irrevocably authorized to countersign and deliver, in accordance with the provisions of said Sections 4, 5, 7 and 22, the new Warrant Certificates required for purposes thereof, and the Company, whenever required by the Warrant Agent, will supply the Warrant Agent with Warrant Certificates duly executed on behalf of the Company for such purposes. 4. Transfers and Exchanges of Warrant Certificates. (a) The Warrant Agent will keep or cause to be kept books for registration of ownership and transfer of the Warrant Certificates issued hereunder. Such registers shall show 2 the names and addresses of the respective holders of the Warrant Certificates and the kind and number of Warrants evidenced by each such Warrant Certificate. (b) The Warrant Agent shall, from time to time, register the transfer of any outstanding Warrants upon the books to be maintained by the Warrant Agent for that purpose, upon surrender of the Warrant Certificate evidencing such Warrants, with the Form of Assignment duly filled in and executed with such signature guaranteed by a banking institution or NASD member and such supporting documentation as the Warrant Agent or the Company may reasonably require, to the Warrant Agent at its stock transfer office in __________ at any time on or before the Expiration Date of such Warrant, and upon payment to the Warrant Agent for the account of the Company of an amount equal to any applicable transfer tax. Payment of the amount of such tax may be made in cash, or by certified or official bank check, payable in lawful money of the United States of America to the order of the Company. (c) Upon receipt of a Warrant Certificate, with the Form of Assignment duly filled in and executed, accompanied by payment of an amount equal to any applicable transfer tax, the Warrant Agent shall promptly cancel the surrendered Warrant Certificate and countersign and deliver to the transferee a new Warrant Certificate for the number of full Warrants transferred to such transferee; provided, however, that in case the registered holder of any Warrant Certificate shall elect to transfer fewer than all of the Warrants evidenced by such Warrant Certificate, the Warrant Agent in addition shall promptly countersign and deliver to such registered holder a new Warrant Certificate or Certificates for the number of full Warrants not so transferred. (d) Any Warrant Certificate or Certificates may be exchanged at the option of the holder thereof for another Warrant Certificate or Certificates of different denominations, of like tenor and representing in the aggregate the same kind and number of Warrants, upon surrender of such Warrant Certificate or Certificates, with the Form of Assignment duly filled in and executed, to the Warrant Agent, at any time or from time to time after the close of business on the date hereof and prior to the close of business on the Expiration Date relating to such Warrant. The Warrant Agent shall promptly cancel the surrendered Warrant Certificate and deliver the new Warrant Certificate pursuant to the provisions of this Section. 5. Mutilated, Destroyed, Lost or Stolen Warrant Certificates. Upon receipt by the Company and the Warrant Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of any Warrant Certificate, and in the case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and reimbursement to them of all reasonable expenses incidental thereto, and, in the case of mutilation, upon surrender and cancellation of the Warrant Certificate, the Warrant Agent shall countersign and deliver a new Warrant Certificate of like tenor for the same kind and number of Warrants. 6. Adjustments of Number and Kind of Shares Purchasable and Exercise Price. The number and kind of securities or other property purchasable upon exercise of a Warrant shall be subject to adjustment from time to time upon the occurrence, after the date hereof, of any of the following events: 3 (a) In case the Company shall (1) pay a dividend in, or make a distribution of, shares of capital stock on its outstanding Common Stock, (2) subdivide its outstanding shares of Common Stock into a greater number of such shares or (3) combine its outstanding shares of Common Stock into a smaller number of such shares, the total number of shares of Common Stock purchasable upon the exercise of each Warrant outstanding immediately prior thereto shall be adjusted so that the holder of any Warrant Certificate thereafter surrendered for exercise shall be entitled to receive at the same aggregate Exercise Price the number of shares of capital stock (of one or more classes) which such holder would have owned or have been entitled to receive immediately following the happening of any of the events described above had such Warrant been exercised in full immediately prior to the record date with respect to such event. Any adjustment made pursuant to this Subsection shall, in the case of a stock dividend or distribution, become effective as of the record date therefor and, in the case of a subdivision or combination, be made as of the effective date thereof. If, as a result of an adjustment made pursuant to this Subsection, the holder of any Warrant Certificate thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock of the Company, the Board of Directors of the Company (whose determination shall be conclusive and shall be evidenced by a Board resolution filed with the Warrant Agent) shall determine the allocation of the adjusted Exercise Price between or among shares of such classes of capital stock. (b) In the event of a capital reorganization or a reclassification of the Common Stock (except as provided in Subsection (a) above or Subsection (e) below), any Warrantholder, upon exercise of Warrants, shall be entitled to receive, in substitution for the Common Stock to which he would have become entitled upon exercise immediately prior to such reorganization or reclassification, the shares (of any class or classes) or other securities or property of the Company (or cash) that he would have been entitled to receive at the same aggregate Exercise Price upon such reorganization or reclassification if such Warrants had been exercised immediately prior to the record date with respect to such event; and in any such case, appropriate provision (as determined by the Board of Directors of the Company, whose determination shall be conclusive and shall be evidenced by a certified Board resolution filed with the Warrant Agent) shall be made for the application of this Section 6 with respect to the rights and interests thereafter of the Warrantholders (including but not limited to the allocation of the Exercise Price between or among shares of classes of capital stock), to the end that this Section 6 (including the adjustments of the number of shares of Common Stock or other securities purchasable and the Exercise Price thereof) shall thereafter be reflected, as nearly as reasonably practicable, in all subsequent exercises of the Warrants for any shares or securities or other property (or cash) thereafter deliverable upon the exercise of the Warrants. (c) Whenever the number of shares of Common Stock or other securities purchasable upon exercise of a Warrant is adjusted as provided in this Section 6, the Company will promptly file with the Warrant Agent a certificate signed by a Chairman or co-Chairman of the Board or the President or a Vice President of the Company and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company setting forth the number and kind of securities or other property purchasable upon exercise of a Warrant, as so adjusted, stating that such adjustments in the number or kind of shares or other securities or property conform to the requirements of this Section 6, and setting forth a brief statement of the facts accounting for such adjustments. Promptly after receipt of such certificate, the Company, or the Warrant Agent at the Company's request, will deliver, by first-class, postage prepaid mail, 4 a brief summary thereof (to be supplied by the Company) to the registered holders of the outstanding Warrant Certificates; provided, however, that failure to file or to give any notice required under this Subsection, or any defect therein, shall not affect the legality or validity of any such adjustments under this Section 6; and provided, further, that, where appropriate, such notice may be given in advance and included as part of the notice required to be given pursuant to Section 12 hereof. (d) In case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, the corporation formed by such consolidation or merger or the corporation which shall have acquired such assets, as the case may be, shall execute and deliver to the Warrant Agent a supplemental warrant agreement providing that the holder of each Warrant then outstanding shall have the right thereafter (until the expiration of such Warrant) to receive, upon exercise of such Warrant, solely the kind and amount of shares of stock and other securities and property (or cash) receivable upon such consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock of the Company for which such Warrant might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrant agreement shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided in this Section. The above provision of this Subsection shall similarly apply to successive consolidations, mergers, sales or transfers. The Warrant Agent shall not be under any responsibility to determine the correctness of any provision contained in any such supplemental warrant agreement relating to either the kind or amount of shares of stock or securities or property (or cash) purchasable by holders of Warrant Certificates upon the exercise of their Warrants after any such consolidation, merger, sale or transfer or of any adjustment to be made with respect thereto, but subject to the provisions of Section 20 hereof, may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, a certificate of a firm of independent certified public accountants (who may be the accountants regularly employed by the Company) with respect thereto. (e) Irrespective of any adjustments in the number or kind of shares issuable upon exercise of Warrants, Warrant Certificates theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Warrant Certificates initially issuable pursuant to this Warrant Agreement. (f) The Company may retain a firm of independent public accountants of recognized standing, which may be the firm regularly retained by the Company, selected by the Board of Directors of the Company or the Executive Committee of said Board, and not disapproved by the Warrant Agent, to make any computation required under this Section, and a certificate signed by such firm shall, in the absence of fraud or gross negligence, be conclusive evidence of the correctness of any computation made under this Section. (g) For the purpose of this Section, the term "Common Stock" shall mean (i) the Common Stock or (ii) any other class of stock resulting from successive changes or 5 reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at any time as a result of an adjustment made pursuant to this Section, the holder of any Warrant thereafter surrendered for exercise shall become entitled to receive any shares of capital stock of the Company other than shares of Common Stock, thereafter the number of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this Section, and all other provisions of this Agreement, with respect to the Common Stock, shall apply on like terms to any such other shares. (h) The Company may, from time to time and to the extent permitted by law, reduce the Exercise Price of the Warrants by any amount for a period of not less than 20 days. If the Company so reduces the Exercise Price of such Warrants, it will give not less than 15 days' notice of such decrease, which notice may be in the form of a press release, and shall take such other steps as may be required under applicable law in connection with any offers or sales of securities at the reduced price. 7. Exercise and Redemption of Warrants. Unless the Warrants have been redeemed as provided in this Section 7, the registered holder of any Warrant Certificate may exercise the Warrants evidenced thereby, in whole at any time or in part from time to time at or prior to the close of business, on the Expiration Date relating to such Warrant, subject to the provisions of Section 9, at which time the Warrant Certificates shall be and become wholly void and of no value. Warrants may be exercised by their holders or redeemed by the Company as follows: (a) Exercise of Warrants shall be accomplished upon surrender of the Warrant Certificate evidencing such Warrants, with the Form of Election to Purchase on the reverse side thereof duly filled in and executed, to the Warrant Agent at its stock transfer office in ______________, together with payment to the Company of the Exercise Price (as of the date of such surrender) of the Warrants then being exercised and an amount equal to any applicable transfer tax and, if requested by the Company, any other taxes or governmental charges which the Company may be required by law to collect in respect of such exercise. Payment of the Exercise Price and other amounts may be made by wire transfer of good funds, or by certified or bank cashier's check, payable in lawful money of the United States of America to the order of the Company. No adjustment shall be made for any cash dividends, whether paid or declared, on any securities issuable upon exercise of a Warrant. (b) Upon receipt of a Warrant Certificate, with the Form of Election to Purchase duly filled in and executed, accompanied by payment of the Exercise Price of the Warrants being exercised (and of an amount equal to any applicable taxes or government charges as aforesaid), the Warrant Agent shall promptly request from the Transfer Agent with respect to the securities to be issued and deliver to or upon the order of the registered holder of such Warrant Certificate, in such name or names as such registered holder may designate, a certificate or certificates for the number of full shares of the securities to be purchased, together with cash made available by the Company pursuant to Section 8 hereof in respect of any fraction of a share of such securities otherwise issuable upon such exercise. If the Warrant is then exercisable to purchase property other than securities, the Warrant Agent shall take appropriate steps to cause such property to be delivered to or upon the order of the registered holder of such Warrant 6 Certificate. In addition, if it is required by law and upon instruction by the Company, the Warrant Agent will deliver to each Warrantholder a prospectus which complies with the provisions of Section 9 of the Securities Act of 1933, as amended, and the Company agrees to supply Warrant Agent with sufficient number of prospectuses to effectuate that purpose. (c) In case the registered holder of any Warrant Certificate shall exercise fewer than all of the Warrants evidenced by such Warrant Certificate, the Warrant Agent shall promptly countersign and deliver to the registered holder of such Warrant Certificate, or to his duly authorized assigns, a new Warrant Certificate or Certificates evidencing the number of Warrants that were not so exercised. (d) Each person in whose name any certificate for securities is issued upon the exercise of Warrants shall for all purposes be deemed to have become the holder of record of the securities represented thereby as of, and such certificate shall be dated, the date upon which the Warrant Certificate was duly surrendered in proper form and payment of the Exercise Price (and of any applicable taxes or other governmental charges) was made; provided, however, that if the date of such surrender and payment is a date on which the stock transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares as of, and the certificate for such shares shall be dated, the next succeeding business day on which the stock transfer books of the Company are open (whether before, on or after the Expiration Date relating to such Warrant) and the Warrant Agent shall be under no duty to deliver the certificate for such shares until such date. The Company covenants and agrees that it shall not cause its stock transfer books to be closed for a period of more than 20 consecutive business days except upon consolidation, merger, sale of all or substantially all of its assets, dissolution or liquidation or as otherwise provided by law. (e) Beginning on ____________, 2004, the Warrants outstanding at the time of a redemption may be redeemed at the option of the Company, in whole or in part on a pro-rata basis, by giving not less than 30 days prior notice as provided in Section 7(f) below, which notice may not be give before, but may be given at any time after, the closing price of the Common Stock on the principal exchange on which it is then traded has equaled or exceeded $______ per share on each of five consecutive trading days that occur subsequent to the date of this Warrant Agreement. The price at which Warrants may be redeemed (the "Redemption Price") is $0.01 per Warrant. On and after the redemption date the holders of record of redeemed Warrants shall be entitled to payment of the Redemption Price upon surrender of such redeemed Warrants to the Company at the office of the Warrant Agent designated for that purpose. (f) Notice of redemption of Warrants shall be given at least 30 days prior to the redemption date by mailing, by registered or certified mail, return receipt requested, a copy of such notice to the Warrant Agent and to all of the holders of record of Warrants at their respective addresses appearing on the books or transfer records of the Company or such other address designated in writing by the holder of record to the Warrant Agent not less than 40 days prior to the redemption date. (g) From and after the redemption date, all rights of the Warrantholders (except the right to receive the Redemption Price) shall terminate, but only if (i) no later than one 7 day prior to the redemption date the Company shall have irrevocably deposited with the Warrant Agent as paying agent a sufficient amount to pay on the redemption date the Redemption Price for all Warrants called for redemption and (ii) the notice of redemption shall have stated the name and address of the Warrant Agent and the intention of the Company to deposit such amount with the Warrant Agent no later than one day prior to the redemption date. (h) On the Redemption Date, the Warrant Agent shall pay to the holders of record of redeemed Warrants all monies received by the Warrant Agent for the redemption of Warrants to which the holders of record of such redeemed Warrants who shall have surrendered their Warrants are entitled. The Warrant Agent shall have no obligation to pay for the redemption of the warrants except to the extent that funds for such payment have been provided to it by the Company. (i) Any amounts deposited with the Warrant Agent that are not required for redemption of Warrants may be withdrawn by the Company. Any amounts deposited with the Warrant Agent that shall be unclaimed after six months after the redemption date shall be redelivered back to the Company, and thereafter the holders of the Warrants called for redemption for which such funds were deposited shall look solely to the Company for payment. The Company shall be entitled to the interest, if any, on funds deposited with the Warrant Agent and the holders of redeemed Warrants shall have no right to any such interest. At the instruction of the Company, the Warrant agent shall deposit or invest any and all funds deposited with it by the Company in connection with any redemption in federally insured, interest bearing accounts with a financial institution or institutions designated by the Company but shall have no liability with respect to the performance of any such investments other than, in the case of funds deposited in accounts maintained by the Warrant Agent, the liability of the Warrant Agent to its depositors in such accounts, generally. (j) If the Company fails to make a sufficient deposit with the Warrant Agent as provided above, the holder of any Warrants called for redemption may at the option of the holder (i) by notice to the Company declare the notice of redemption a nullity as to such holder, or (ii) maintain an action against the Company for the Redemption Price. If the holder brings such an action, the Company will pay reasonable attorneys' fees of the holder. If the holder fails to bring an action against the Company for the Redemption Price within 60 days after the redemption date, the holder shall be deemed to have elected to declare the notice of redemption to be a nullity as to such holder and such notice shall be without any force or effect as to such holder. Except as otherwise specifically provided in this Paragraph 7(j), a notice of redemption, once mailed by the Company as provided in Paragraph F shall be irrevocable. 8. Fractional Interests. The Company shall not be required to issue any Warrant Certificate evidencing a fraction of a Warrant or to issue fractions of shares of securities on the exercise of the Warrants. If any fraction (calculated to the nearest one-hundredth) of a Warrant or a share of securities would, except for the provisions of this Section, be issuable on the exercise of any Warrant, the Company shall, at its option, either purchase such fraction for an amount in cash equal to the current value of such fraction computed on the basis of the closing market price (as quoted on the American Stock Exchange) on the trading day immediately preceding the day upon which such Warrant Certificate was surrendered for exercise in accordance with Section 7 hereof or issue the required fractional Warrant or share. By accepting 8 a Warrant Certificate, the holder thereof expressly waives any right to receive a Warrant Certificate evidencing any fraction of a Warrant or to receive any fractional share of securities upon exercise of a Warrant, except as expressly provided in this Section 8. 9. Reservation of Equity Securities. The Company covenants that it will at all times reserve and keep available, free from any pre-emptive rights, out of its authorized and unissued equity securities, solely for the purpose of issue upon exercise of the Warrants, such number of shares of equity securities of the Company as shall then be issuable upon the exercise of all outstanding Warrants ("Equity Securities"). The Company covenants that all Equity Securities which shall be so issuable shall, upon such issue, be duly authorized, validly issued, fully paid and non-assessable. The Company covenants that if any equity securities, required to be reserved for the purpose of issue upon exercise of the Warrants hereunder, require registration with or approval of any governmental authority under any federal or state law before such shares may be issued upon exercise of Warrants, the Company will use all commercially reasonable efforts to cause such securities to be duly registered, or approved, as the case may be, and, to the extent practicable, take all such action in anticipation of and prior to the exercise of the Warrants, including, without limitation, filing any and all post-effective amendments to the Company's Registration Statement on Form S-2 (Registration No. 333-_____) necessary to permit a public offering of the securities underlying the Warrants at any and all times during the term of this Agreement, provided, however, that in no event shall such securities be issued, and the Company is authorized to refuse to honor the exercise of any Warrant, if such exercise would result in the opinion of the Company's Board of Directors, upon advice of counsel, in the violation of any law; and provided further that, in the case of a Warrant exercisable solely for securities listed on a securities exchange or for which there are at least three independent market makers, in lieu of obtaining such registration or approval, the Company may elect to redeem Warrants submitted to the Warrant Agent for exercise for a price equal to the difference between the aggregate low asked price, or closing price, as the case may be, of the securities for which such Warrant is exercisable on the date of such submission and the Exercise Price of such Warrants; in the event of such redemption, the Company will pay to the holder of such Warrants the above-described redemption price in cash within 10 business days after receipt of notice from the Warrant Agent that such Warrants have been submitted for exercise. 10. Reduction of Conversion Price Below Par Value. Before taking any action that would cause an adjustment pursuant to Section 6 hereof reducing the portion of the Exercise Price required to purchase one share of capital stock below the then par value (if any) of a share of such capital stock, the Company will use its best efforts to take any corporate action which, in the opinion of its counsel, may be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of such capital stock. 11. Payment of Taxes. The Company covenants and agrees that it will pay when due and payable any and all federal and state documentary stamp and other original issue taxes which may be payable in respect of the original issuance of the Warrant Certificates, or any shares of Common Stock or other securities upon the exercise of Warrants. The Company shall not, however, be required (a) to pay any tax which may be payable in respect of any transfer involved in the transfer and delivery of Warrant Certificates or the issuance or delivery of certificates for 9 Common Stock or other securities in a name other than that of the registered holder of the Warrant Certificate surrendered for purchase or (b) to issue or deliver any certificate for shares of Common Stock or other securities upon the exercise of any Warrant Certificate until any such tax shall have been paid, all such tax being payable by the holder of such Warrant Certificate at the time of surrender. 12. Notice of Certain Corporate Action. In case the Company after the date hereof shall propose (a) to offer to the holders of Common Stock, generally, rights to subscribe to or purchase any additional shares of any class of its capital stock, any evidences of its indebtedness or assets, or any other rights or options or (b) to effect any reclassification of Common Stock (other than a reclassification involving merely the subdivision or combination of outstanding shares of Common Stock) or any capital reorganization, or any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or any sale, transfer or other disposition of its property and assets substantially as an entirety, or the liquidation, voluntary or involuntary dissolution or winding-up of the Company, then, in each such case, the Company shall file with the Warrant Agent and the Company, or the Warrant Agent on its behalf, shall mail (by first-class, postage prepaid mail) to all registered holders of the Warrant Certificates notice of such proposed action, which notice shall specify the date on which the books of the Company shall close or a record be taken for such offer of rights or options, or the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, voluntary or involuntary dissolution or winding-up shall take place or commence, as the case may be, and which shall also specify any record date for determination of holders of Common Stock entitled to vote thereon or participate therein and shall set forth such facts with respect thereto as shall be reasonably necessary to indicate any adjustments in the Exercise Price and the number or kind of shares or other securities purchasable upon exercise of Warrants which will be required as a result of such action. Such notice shall be filed and mailed in the case of any action covered by clause (a) above, at least ten days prior to the record date for determining holders of the Common Stock for purposes of such action or, if a record is not to be taken, the date as of which the holders of shares of Common Stock of record are to be entitled to such offering; and, in the case of any action covered by clause (b) above, at least 20 days prior to the earlier of the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, voluntary or involuntary dissolution or winding-up is expected to become effective and the date on which it is expected that holders of shares of Common Stock of record on such date shall be entitled to exchange their shares for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, voluntary or involuntary dissolution or winding-up. Failure to give any such notice or any defect therein shall not affect the legality or validity of any transaction listed in this Section 12. 13. Disposition of Proceeds on Exercise of Warrant Certificates, etc. The Warrant Agent shall account promptly to the Company with respect to Warrants exercised and concurrently pay to the Company all moneys received by the Warrant Agent for the purchase of securities or other property through the exercise of such Warrants. The Warrant Agent shall keep copies of this Agreement available for inspection by 10 Warrantholders during normal business hours at its stock transfer office. Copies of this Agreement may be obtained upon written request addressed to the Warrant Agent at its stock transfer office in ______________. 14. Warrantholder Not Deemed a Stockholder. No Warrantholder, as such, shall be entitled to vote, receive dividends or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise of the Warrants represented thereby for any purpose whatever, nor shall anything contained herein or in any Warrant Certificate be construed to confer upon any Warrantholder, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, merger, conveyance or otherwise), or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 12 hereof), or to receive dividend or subscription rights, or otherwise, until such Warrant Certificate shall have been exercised in accordance with the provisions hereof and the receipt of the Exercise Price and any other amounts payable upon such exercise by the Warrant Agent. 15. Right of Action. All rights of action in respect to this Agreement are vested in the respective registered holders of the Warrant Certificates; and any registered holder of any Warrant Certificate, without the consent of the Warrant Agent or of any other holder of a Warrant Certificate, may, in his own behalf for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company suitable to enforce, or otherwise in respect of, his right to exercise the Warrants evidenced by such Warrant Certificate, for the purchase of shares of the Common Stock in the manner provided in the Warrant Certificate and in this Agreement. 16. Agreement of Holders of Warrant Certificates. Every holder of a Warrant Certificate by accepting the same consents and agrees with the Company, the Warrant Agent and with every other holder of a Warrant Certificate that: (a) the Warrant Certificates are transferable on the registry books of the Warrant Agent only upon the terms and conditions set forth in this Agreement; and (b) the Company and the Warrant Agent may deem and treat the person in whose name the Warrant Certificate is registered as the absolute owner of the Warrant (notwithstanding any notation of ownership or other writing thereon made by anyone other than the Company or the Warrant Agent) for all purposes whatever and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. 17. Cancellation of Warrant Certificates. In the event that the Company shall purchase or otherwise acquire any Warrant Certificate or Certificates after the issuance thereof, such Warrant Certificate or Certificates shall thereupon be delivered to the Warrant Agent and be canceled by it and retired. The Warrant Agent shall also cancel any Warrant Certificate delivered to it for exercise, in whole or in part, or delivered to it for transfer, split-up, combination or exchange. Warrant Certificates so canceled shall be delivered by the Warrant 11 Agent to the Company from time to time, or disposed of in accordance with the instructions of the Company. 18. Concerning the Warrant Agent. The Company agrees to pay to the Warrant Agent from time to time, on demand of the Warrant Agent, reasonable compensation for all services rendered by it hereunder and also its reasonable expenses, including counsel fees, and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Warrant Agent for, and to hold it harmless against, any loss, liability or expense, incurred without gross negligence, bad faith or willful misconduct on the part of the Warrant Agent, arising out of or in connection with the acceptance and administration of this Agreement. 19. Merger or Consolidation or Change of Name of Warrant Agent. Any corporation into which the Warrant Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Warrant Agent shall be a party, or any corporation succeeding to the corporate trust business of the Warrant Agent, shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor warrant agent under the provisions of Section 21 hereof. In case at the time such successor to the Warrant Agent shall succeed to the agency created by this Agreement, any of the Warrant Certificates shall have been countersigned but not delivered, any such successor to the Warrant Agent may adopt the countersignature of the original Warrant Agent and deliver such Warrant Certificates so countersigned; and in case at that time any of the Warrant Certificates shall not have been countersigned, any successor to the Warrant Agent may countersign such Warrant Certificates either in the name of the predecessor Warrant Agent or in the name of the successor Warrant Agent; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement. In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrant Certificates shall have been countersigned but not delivered, the Warrant Agent may adopt the countersignature under its prior name and deliver Warrant Certificates so countersigned; and in case at that time any of the Warrant Certificates shall not have been countersigned, the Warrant Agent may countersign such Warrant Certificates either in its prior name or in its changed name; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement. 20. Duties of Warrant Agent. The Warrant Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Warrant Certificates, by their acceptance thereof, shall be bound: (a) The Warrant Agent may consult with counsel satisfactory to it (who may be counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Warrant Agent as to any action taken, suffered or omitted by it in good faith and in accordance with such opinion; provided, however, that the Warrant Agent shall have exercised reasonable care in the selection of such counsel. Fees and expenses of such counsel, to the extent reasonable, shall be paid by the Company. 12 (b) Whenever in the performance of its duties under this Agreement, the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by a Chairman or co-Chairman of the Board or the President or a Vice President or the Secretary of the Company and delivered to the Warrant Agent; and such certificate shall be full authorization to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Warrant Agent shall be liable hereunder only for its own gross negligence, bad faith or willful misconduct. (d) The Warrant Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Warrant Certificates (except its countersignature on the Warrant Certificates and such statements or recitals as describe the Warrant Agent or action taken or to be taken by it) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Warrant Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Warrant Agent) or in respect of the validity or execution of any Warrant Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Warrant Certificate; nor shall it be responsible for the making of any change in the number of shares of Common Stock for which a Warrant is exercisable required under the provisions of Section 6 or responsible for the manner, method or amount of any such change or the ascertaining of the existence of facts that would require any such adjustment or change (except with respect to the exercise of Warrant Certificates after actual notice of any adjustment of the Exercise Price); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock to be issued pursuant to this Agreement or any Warrant Certificate or as to whether any shares of Common Stock will, when issued, be validly issued, fully paid and non-assessable. (f) The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or take any other action likely to involve expense unless the Company or one or more registered holders of Warrant Certificates shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrants or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of judgment shall be for the ratable benefit of the registered holders of the Warrant Certificates, as their respective rights or interests may appear. (g) The Warrant Agent and any stockholder, director, officer or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the 13 Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to or otherwise act as fully and freely as though it were not Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. (h) The Warrant Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from a Chairman or co-Chairman of the Board or President or a Vice President or the Secretary or the Controller of the Company, and to apply to such officers for advice or instructions in connection with the Warrant Agent's duties, and it shall not be liable for any action taken or suffered or omitted by it in good faith in accordance with instructions of any such officer. (i) The Warrant Agent will not be responsible for any failure of the Company to comply with any of the covenants contained in this Agreement or in the Warrant Certificates to be complied with by the Company. (j) The Warrant Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys, agents or employees and the Warrant Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys, agents or employees or for any loss to the Company resulting from such neglect or misconduct; provided, however, that reasonable care shall have been exercised in the selection and continued employment of such attorneys, agents and employees. (k) The Warrant Agent will not incur any liability or responsibility to the Company or to any holder of any Warrant Certificate for any action taken, or any failure to take action, in reliance on any notice, resolution, waiver, consent, order, certificate, or other paper, document or instrument reasonably believed by the Warrant Agent to be genuine and to have been signed, sent or presented by the proper party or parties. (l) The Warrant Agent will act hereunder solely as agent of the Company in a ministerial capacity, and its duties will be determined solely by the provisions hereof. The Warrant Agent will not be liable for anything which it may do or refrain from doing in connection with this Agreement except for its own gross negligence, bad faith or willful conduct. 21. Change of Warrant Agent. The Warrant Agent may resign and be discharged from its duties under this Agreement upon 30 days' prior notice in writing mailed, by registered or certified mail, to the Company. The Company may remove the Warrant Agent or any successor warrant agent upon 30 days' prior notice in writing, mailed to the Warrant Agent or successor warrant agent, as the case may be, by registered or certified mail. If the Warrant Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Warrant Agent and shall, within 15 days following such appointment, give notice thereof in writing to each registered holder of the Warrant Certificates. If the Company shall fail to make such appointment within a period of 15 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent, then the Company agrees to perform the duties of the Warrant Agent hereunder until a successor Warrant Agent is appointed. After appointment and 14 execution of a copy of this Agreement in effect at that time, the successor Warrant Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed; but the former Warrant Agent shall deliver and transfer to the successor Warrant Agent, within a reasonable time, any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Failure to give any notice provided for in this Section, however, or any defect therein shall not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of the successor warrant agent, as the case may be. 22. Issuance of New Warrant Certificates. Notwithstanding any of the provisions of this Agreement or the several Warrant Certificates to the contrary, the Company may, at its option, issue new Warrant Certificates in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Exercise Price or the number or kind of shares purchasable under the several Warrant Certificates made in accordance with the provisions of this Agreement. 23. Notices. Notice or demand pursuant to this Agreement to be given or made on the Company by the Warrant Agent or by the registered holder of any Warrant Certificate shall be sufficiently given or made if sent by first-class or registered mail, postage prepaid, addressed (until another address is filed in writing by the Company with the Warrant Agent) as follows: Milestone Scientific Inc. 220 South Orange Ave. Livingston, New Jersey 07039 Attention: President Subject to the provisions of Section 21, any notice pursuant to this Agreement to be given or made by the Company or by the holder of any Warrant Certificate to or on the Warrant Agent shall be sufficiently given or made if sent by first-class or registered mail, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company) as follows: __________________________ __________________________ __________________________ Any notice or demand authorized to be given or made to the registered holder of any Warrant Certificate under this Agreement shall be sufficiently given or made if sent by first-class or registered mail, postage prepaid, to the last address of such holder as it shall appear on the registers maintained by the Warrant Agent. 24. Modification of Agreement. The Warrant Agent may, without the consent or concurrence of the Warrantholders, by supplemental agreement or otherwise, concur with the Company in making any changes or corrections in this Agreement that the Warrant Agent shall have been advised by counsel (who may be counsel for the Company) are necessary or desirable to cure any ambiguity or to correct any defective or inconsistent provision or clerical omission or mistake or manifest error herein contained, or to make any other provisions in regard to matters 15 or questions arising hereunder and which shall not be inconsistent with the provisions of the Warrant Certificates and which shall not adversely affect the interests of the Warrantholders. As of the date hereof, this Agreement contains the entire and only agreement, understanding, representation, condition, warranty or covenant between the parties hereto with respect to the matters herein, supersedes any and all other agreements between the parties hereto relating to such matters, and may be modified or amended only by a written agreement signed by both parties hereto pursuant to the authority granted by the first sentence of this Section. 25. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. 26. Governing Law. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of _________ , and for all purposes shall be construed in accordance with the laws of said State. All disputes relating to this Agreement and each Warrant Certificate issued hereunder shall be adjudicated in a court located in ________________, __________ to the exclusion of all other courts that might have jurisdiction. 27. Termination. This Agreement shall terminate as of the close of business on the Expiration Date, or such earlier date upon which all Warrants shall have been exercised or redeemed, except that the Warrant Agent shall account to the Company as to all Warrants outstanding and all cash held by it as of the close of business on the Expiration Date. 28. Benefits of this Agreement. Nothing in this Agreement or in the Warrant Certificates shall be construed to give to any person or corporation other than the Company, the Warrant Agent, and their respective successors and assigns hereunder and the registered holders of the Warrant Certificates any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent, their respective successors and assigns hereunder and the registered holders of the Warrant Certificates. 29. Descriptive Headings. The descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. 30. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute one and the same instrument. (Remainder of page intentionally left blank; signature page follows) 16 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, all as of the day and year first above written. MILESTONE SCIENTIFIC INC. By: ______________________________________ Name: Title: [WARRANT AGENT] By: ______________________________________ Name: Title: 17 EXHIBIT A VOID AFTER 5 P.M. PACIFIC TIME ON _________________, 2008 WARRANTS TO PURCHASE COMMON STOCK W_____ _________ Warrants Milestone Scientific Inc. CUSIP ___________ THIS CERTIFIES THAT or registered assigns, is the registered holder of the number of Warrants ("Warrants") set forth above. Each Warrant, unless and until redeemed by the Company as provided in the Warrant Agreement, hereinafter more fully described (the "Warrant Agreement") entitles the holder thereof to purchase from Milestone Scientific Inc., a corporation incorporated under the laws of the State of Delaware (the "Company"), subject to the terms and conditions set forth hereinafter and in the Warrant Agreement, at any time on or after ___________, 2003 and before the close of business on ________, 2008 ("Expiration Date"), one fully paid and non-assessable share of Common Stock of the Company ("Common Stock") upon presentation and surrender of this Warrant Certificate, with the instructions for the registration and delivery of Common Stock filled in, at the stock transfer office in ______________, of ______________, Warrant Agent of the Company ("Warrant Agent") or of its successor warrant agent or, if there be no successor warrant agent, at the corporate offices of the Company, and upon payment of the Exercise Price (as defined in the Warrant Agreement) and any applicable taxes paid either in cash, or by certified or official bank check, payable in lawful money of the United States of America to the order of the Company. Each Warrant initially entitles the holder to purchase one share of Common Stock for $____. The number and kind of securities or other property for which the Warrants are exercisable are subject to adjustment in certain events, such as mergers, splits, stock dividends, splits and the like, to prevent dilution. Beginning on _____________, 2004, the Company may redeem any or all outstanding and unexercised warrants by giving not less than 30 days prior notice at any time after the closing price of the Common Stock on the principal exchange on which it is traded has equaled or exceeded $______ per share on each of five consecutive trading days subsequent to _________, 2003. The Redemption Price is $0.01 per Warrant. All Warrants not theretofore exercised will expire on the Expiration Date. 1 This Warrant Certificate is subject to all of the terms, provisions and conditions of the Warrant Agreement, dated as of ________________, 2003, between the Company and the Warrant Agent, to all of which terms, provisions and conditions the registered holder of this Warrant Certificate consents by acceptance hereof. The Warrant Agreement is incorporated herein by reference and made a part hereof and reference is made to the Warrant Agreement for a full description of the rights, limitations of rights, obligations, duties and immunities of the Warrant Agent, the Company and the holders of the Warrant Certificates. Copies of the Warrant Agreement are available for inspection at the stock transfer office of the Warrant Agent or may be obtained upon written request addressed to the Company at Milestone Scientific Inc., 220 South Orange Ave., Livingston, New Jersey 07039, Attention: President. The Company shall not be required upon the exercise of the Warrants evidenced by this Warrant Certificate to issue fractions of Warrants, Common Stock or other securities, but shall make adjustment therefor in cash on the basis of the current market value of any fractional interest as provided in the Warrant Agreement. In certain cases, the sale of securities by the Company upon exercise of Warrants would violate the securities laws of the United States, certain states thereof or other jurisdictions. The Company has agreed to use all commercially reasonable efforts to cause a registration statement to continue to be effective during the term of the Warrants with respect to such sales under the Securities Act of 1933, and to take such action under the laws of various states as may be required to cause the sale of securities upon exercise to be lawful. However, the Company will not be required to honor the exercise of Warrants if, in the opinion of the Board of Directors, upon advice of counsel, the sale of securities upon such exercise would be unlawful. In certain cases, the Company may, but is not required to, purchase Warrants submitted for exercise for a cash price equal to the difference between the market price of the securities obtainable upon such exercise and the exercise price of such Warrants. This Warrant Certificate, with or without other Certificates, upon surrender to the Warrant Agent, any successor warrant agent or, in the absence of any successor warrant agent, at the corporate offices of the Company, may be exchanged for another Warrant Certificate or Certificates evidencing in the aggregate the same number of Warrants as the Warrant Certificate or Certificates so surrendered. If the Warrants evidenced by this Warrant Certificate shall be exercised in part, the holder hereof shall be entitled to receive upon surrender hereof another Warrant Certificate or Certificates evidencing the number of Warrants not so exercised. No holder of this Warrant Certificate, as such, shall be entitled to vote, receive dividends or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose whatever, nor shall anything contained in the Warrant Agreement or herein be construed to confer upon the holder of this Warrant Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof or give or withhold consent to any corporate action (whether upon any matter submitted to stockholders at any meeting thereof, or give or withhold consent to any merger, recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, conveyance or otherwise) or to receive notice of meetings or other actions affecting stockholders (except as provided in the Warrant Agreement) or to receive 2 dividends or subscription rights or otherwise until the Warrants evidenced by this Warrant Certificate shall have been exercised and the Common Stock purchasable upon the exercise thereof shall have become deliverable as provided in the Warrant Agreement. If this Warrant Certificate shall be surrendered for exercise within any period during which the transfer books for the Company's Common Stock or other class of stock purchasable upon the exercise of the Warrants evidenced by this Warrant Certificate are closed for any purpose, the Company shall not be required to make delivery of certificates for shares purchasable upon such transfer until the date of the reopening of said transfer books. Every holder of this Warrant Certificate by accepting the same consents and agrees with the Company, the Warrant Agent, and with every other holder of a Warrant Certificate that: (a) this Warrant Certificate is transferable on the registry books of the Warrant Agent only upon the terms and conditions set forth in the Warrant Agreement, and (b) the Company and the Warrant Agent may deem and treat the person in whose name this Warrant Certificate is registered as the absolute owner hereof (notwithstanding any notation of ownership or other writing thereon made by anyone other than the Company or the Warrant Agent) for all purposes whatever and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. The Company shall not be required to issue or deliver any certificate for shares of Common Stock or other securities upon the exercise of Warrants evidenced by this Warrant Certificate until any tax which may be payable in respect thereof by the holder of this Warrant Certificate pursuant to the Warrant Agreement shall have been paid, such tax being payable by the holder of this Warrant Certificate at the time of surrender. This Warrant Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Warrant Agent. (Remainder of page intentionally left blank; signature page follows) 3 WITNESS the facsimile signatures of the proper officers of the Company and its corporate seal. Dated: _______________ MILESTONE SCIENTIFIC INC. By: ___________________________________ Name: Title: Attest: ______________________________ Secretary Countersigned: By: ______________________________________ Authorized Officer # 1337391_v1 4 EX-4.4 6 file005.txt PURCHASE WARRANT THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND IS NOT TRANSFERABLE EXCEPT AS PROVIDED HEREIN MILESTONE SCIENTIFIC INC. PURCHASE WARRANT Issued to: PAULSON INVESTMENT COMPANY, INC. Exercisable to Purchase 100,000 Units of MILESTONE SCIENTIFIC INC. Void after ____________, 2008 This is to certify that, for value received and subject to the terms and conditions set forth below, the Warrantholder (hereinafter defined) is entitled to purchase, and the Company promises and agrees to sell and issue to the Warrantholder, at any time on or after _____________, 2004 and on or before ____________, 2008, up to 100,000 Units (hereinafter defined) at the Exercise Price (hereinafter defined). This Warrant Certificate is issued subject to the following terms and conditions: 1. Definitions of Certain Terms. Except as may be otherwise clearly required by the context, the following terms have the following meanings: (a) "Act" means the Securities Act of 1933, as amended. (b) "Cashless Exercise" means an exercise of Warrants in which, in lieu of payment of the Exercise Price, the Holder elects to receive a lesser number of Securities such that the value of the Securities that such Holder would otherwise have been entitled to receive but has agreed not to receive, as determined by the closing price of such Securities on the date of exercise or, if such date is not a trading day, on the next prior trading day, is equal to the Exercise Price with respect to such exercise. A Holder may only elect a Cashless Exercise if Securities issuable by the Company on such exercise are publicly traded securities. (c) "Closing Date" means the date on which the Offering is closed. (d) "Commission" means the Securities and Exchange Commission. (e) "Common Stock" means the common stock, par value $0.001, of the Company. (f) "Company" means Milestone Scientific Inc., a Delaware corporation. (g) "Company's Expenses" means any and all expenses payable by the Company or the Warrantholder in connection with an offering described in Section 6 hereof, except Warrantholder's Expenses. (h) "Effective Date" means the date on which the Registration Statement is declared effective by the Commission. (i) "Exercise Price" means the price at which the Warrantholder may purchase one Unit upon exercise of Warrants as determined from time to time pursuant to the provisions hereof. The initial Exercise Price is $________ per Unit. (j) "Offering" means the public offering of Units made pursuant to the Registration Statement. (k) "Participating Underwriter" means any underwriter participating in the sale of the Securities pursuant to a registration under Section 6 of this Warrant Certificate. (l) "Registration Statement" means the Company's registration statement (File No. 333 -___________) as amended on the Closing Date. (m) "Rules and Regulations" means the rules and regulations of the Commission adopted under the Act. (n) "Securities" means the securities obtained or obtainable upon exercise of the Warrant or securities obtained or obtainable upon exercise, exchange, or conversion of such securities. (o) "Unit" means one share of Common Stock and one Unit Warrant. (p) "Unit Warrant" means a warrant to purchase one share of Common Stock issued pursuant to the Warrant Agreement. (q) "Warrant Agreement" means that certain Warrant Agreement, dated as of ______________, 2003, by and between the Company and __________________ relating to the issuance of Unit Warrants. (r) "Warrant Certificate" means a certificate evidencing the Warrant. (s) "Warrantholder" means a record holder of the Warrant or Securities. The initial Warrantholder is Paulson Investment Company, Inc. (t) "Warrantholder's Expenses" means the sum of (i) the aggregate amount of cash payments made to an underwriter, underwriting syndicate, or agent in connection with an offering described in Section 6 hereof multiplied by a fraction the numerator of which is the aggregate sales price of the Securities sold by such underwriter, underwriting syndicate, or agent in such offering and the denominator of which is the aggregate sales price of all of the securities sold by such underwriter, underwriting syndicate, or agent in such offering and (ii) all out-of-pocket expenses of the Warrantholder, except for the fees and disbursements of one firm retained as legal counsel for the Warrantholder that will be paid by the Company. (u) "Warrant" means the warrant evidenced by this certificate, any similar certificate issued in connection with the Offering, or any certificate obtained upon transfer or partial exercise of the Warrant evidenced by any such certificate. 2. Exercise of Warrant. All or any part of the Warrant represented by this Warrant Certificate may be exercised commencing on the first anniversary of the Effective Date and ending at 5 p.m. Pacific Time on the fifth anniversary of the Effective Date by surrendering this Warrant Certificate, together with appropriate instructions, duly executed by the Warrantholder or by its duly authorized attorney, at the office of the Company at Milestone Scientific Inc., 220 South Orange Ave., Livingston, New Jersey 07039, Attention: President; or at such other office or agency as the Company may designate. The date on which such instructions are received by the Company shall be the date of exercise. If the Holder has elected a Cashless Exercise, such instructions shall so state. Upon receipt of notice of exercise, the Company shall immediately instruct its transfer agent to prepare certificates for the Securities to be received by the Warrantholder upon completion of the Warrant exercise. When such certificates are prepared, the Company shall notify the Warrantholder and deliver such certificates to the Warrantholder or as per the Warrantholder's instructions immediately upon payment in full by the Warrantholder, in lawful money of the United States, of the Exercise Price payable with respect to the Securities being purchased, if any. If the Warrantholder shall represent and warrant that all applicable registration and prospectus delivery requirements for their sale have been complied with upon sale of the Securities received upon exercise of the Warrant, such certificates shall not bear a legend with respect to the Securities Act of 1933, as amended. If fewer than all the Securities purchasable under the Warrant are purchased, the Company will, upon such partial exercise, execute and deliver to the Warrantholder a new Warrant Certificate (dated the date hereof), in form and tenor similar to this Warrant Certificate, evidencing that portion of the Warrant not exercised. The Securities to be obtained on exercise of the Warrant will be deemed to have been issued, and any person exercising the Warrants will be deemed to have become a holder of record of those Securities, as of the date of the payment of the Exercise Price. 3. Adjustments in Certain Events. The number, class, and price of Securities for which this Warrant Certificate may be exercised are subject to adjustment from time to time upon the happening of certain events as follows: (a) If the outstanding shares of the Company's Common Stock are divided into a greater number of shares or a dividend in stock is paid on the Common Stock, the number of shares of Common Stock for which the Warrant is then exercisable will be proportionately increased and the Exercise Price will be proportionately reduced; and, conversely, if the outstanding shares of Common Stock are combined into a smaller number of shares of Common Stock, the number of shares of Common Stock for which the Warrant is then exercisable will be proportionately reduced and the Exercise Price will be proportionately increased. The increases and reductions provided for in this Section 3(a) will be made with the intent and, as nearly as practicable, the effect that neither the percentage of the total equity of the Company obtainable on exercise of the Warrants nor the price payable for such percentage upon such exercise will be affected by any event described in this Section 3(a). (b) In case of any change in the Common Stock through merger, consolidation, reclassification, reorganization, partial or complete liquidation, purchase of substantially all the assets of the Company, or other change in the capital structure of the Company, then, as a condition of such change, lawful and adequate provision will be made so that the holder of this Warrant Certificate will have the right thereafter to receive upon the exercise of the Warrant the kind and amount of shares of stock or other securities or property to which he would have been entitled if, immediately prior to such event, he had held the number of shares of Common Stock obtainable upon the exercise of the Warrant. In any such case, appropriate adjustment will be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the Warrantholder, to the end that the provisions set forth herein will thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. The Company will not permit any change in its capital structure to occur unless the issuer of the shares of stock or other securities to be received by the holder of this Warrant Certificate, if not the Company, agrees to be bound by and comply with the provisions of this Warrant Certificate. (c) When any adjustment is required to be made in the number of shares of Common Stock, other securities, or the property purchasable upon exercise of the Warrant, the Company will promptly determine the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (i) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (ii) cause a copy of such statement to be mailed to the Warrantholder within thirty (30) days after the date of the event giving rise to the adjustment. (d) No fractional shares of Common Stock or other securities will be issued in connection with the exercise of the Warrant, but the Company will pay, in lieu of fractional shares, a cash payment therefor on the basis of the mean between the bid and asked prices of the Common Stock in the over-the-counter market or the last sale price of the Common Stock on the principal exchange or other trading facility on which the Common Stock is traded on the day immediately prior to exercise. (e) If securities of the Company or securities of any subsidiary of the Company are distributed pro rata to holders of Common Stock, such number of securities will be distributed to the Warrantholder or its assignee upon exercise of its rights hereunder as such Warrantholder or assignee would have been entitled to if this Warrant Certificate had been exercised prior to the record date for such distribution. The provisions with respect to adjustment of the Common Stock provided in this Section 3 will also apply to the securities to which the Warrantholder or its assignee is entitled under this Section 3(e). (f) Notwithstanding anything herein to the contrary, there will be no adjustment made hereunder on account of the sale by the Company of the Common Stock or other Securities purchasable upon exercise of the Warrant. (g) If, immediately prior to any exercise of Warrants, there shall be outstanding no securities of a class or series that, but for the provisions of this Section 3, would be issuable upon such exercise (the "Formerly Issuable Securities"), then, upon such exercise, and in lieu of the Formerly Issuable Securities, the Company shall issue that number and kind of other securities or property for which the Formerly Issuable Securities were most recently exercisable or into which the Formerly Issuable Securities were most recently convertible, as the case may be. 4. Reservation of Securities. The Company agrees that the number of shares of Common Stock or other Securities sufficient to provide for the exercise of the Warrant upon the basis set forth above will at all times during the term of the Warrant be reserved for exercise. 5. Validity of Securities. All Securities delivered upon the exercise of the Warrant will be duly and validly issued in accordance with their terms, and the Company will pay all documentary and transfer taxes, if any, in respect of the original issuance thereof upon exercise of the Warrant. 6. Registration of Securities Issuable on Exercise of Warrant Certificate. (a) The Company will register the Securities with the Commission pursuant to the Act so as to allow the unrestricted sale of the Securities to the public from time to time commencing on the first anniversary of the Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of the Effective Date (the "Registration Period"). The Company will also file such applications and other documents necessary to permit the sale of the Securities to the public during the Registration Period in those states in which the Units were qualified for sale in the Offering or such other states as the Company and the Warrantholder agree to. In order to comply with the provisions of this Section 6(a), the Company is not required to file more than one registration statement. No registration right of any kind, "piggyback" or otherwise, will last longer than five years from the Effective Date. (b) The Company will pay all of the Company's Expenses and each Warrantholder will pay its pro rata share of the Warrantholder's Expenses relating to the registration, offer, and sale of the Securities. (c) Except as specifically provided herein, the manner and conduct of the registration, including the contents of the registration, will be entirely in the control and at the discretion of the Company. The Company will file such post-effective amendments and supplements as may be necessary to maintain the currency of the registration statement during the period of its use. In addition, if the Warrantholder participating in the registration is advised by counsel that the registration statement, in their opinion, is deficient in any material respect, the Company will use its best efforts to cause the registration statement to be amended to eliminate the concerns raised. (d) The Company will furnish to the Warrantholder the number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as it may reasonably request in order to facilitate the disposition of Securities owned by it. (e) The Company will, at the request of Warrantholders holding at least 50 percent of the then outstanding Warrants, (i) furnish an opinion of the counsel representing the Company for the purposes of the registration pursuant to this Section 6, addressed to the Warrantholders and any Participating Underwriter, (ii) furnish an appropriate letter from the independent public accountants of the Company, addressed to the Warrantholders and any Participating Underwriter, and (iii) make representations and warranties to the Warrantholders and any Participating Underwriter. A request pursuant to this subsection (e) may be made on three occasions. The documents required to be delivered pursuant to this subsection (e) will be dated within ten days of the request and will be, in form and substance, equivalent to similar documents furnished to the underwriters in connection with the Offering, with such changes as may be appropriate in light of changed circumstances. 7. Indemnification in Connection with Registration. (a) If any of the Securities are registered, the Company will indemnify and hold harmless each selling Warrantholder, any person who controls any selling Warrantholder within the meaning of the Act, and any Participating Underwriter against any losses, claims, damages, or liabilities, joint or several, to which any Warrantholder, controlling person, or Participating Underwriter may be subject under the Act or otherwise; and it will reimburse each Warrantholder, each controlling person, and each Participating Underwriter for any legal or other expenses reasonably incurred by the Warrantholder, controlling person, or Participating Underwriter in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities, joint or several (or actions in respect thereof), arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained, on the effective date thereof, in any such registration statement or any preliminary prospectus or final prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any case to the extent that any loss, claim, damage, or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any registration statement, preliminary prospectus, final prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished by a Warrantholder for use in the preparation thereof. The indemnity agreement contained in this subparagraph (a) will not apply to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Company, such approval not to be unreasonably withheld. (b) Each selling Warrantholder, as a condition of the Company's registration obligation, will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed any registration statement or other filing or any amendment or supplement thereto, and any person who controls the Company within the meaning of the Act, against any losses, claims, damages, or liabilities to which the Company or any such director, officer, or controlling person may become subject under the Act or otherwise, and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in said registration statement, any preliminary or final prospectus, or other filing, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in said registration statement, preliminary or final prospectus, or other filing, or amendment or supplement, in reliance upon and in conformity with written information furnished by such Warrantholder for use in the preparation thereof; provided, however, that the indemnity agreement contained in this subparagraph (b) will not apply to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Warrantholder, such approval not to be unreasonably withheld. (c) Promptly after receipt by an indemnified party under subparagraphs (a) or (b) above of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, notify the indemnifying party of the commencement thereof; but the omission to notify the indemnifying party will not relieve it from any liability that it may have to any indemnified party otherwise than under subparagraphs (a) and (b). (d) If any such action is brought against any indemnified party and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; and after notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. 8. Restrictions on Transfer. This Warrant Certificate and the Warrant may not be sold, transferred, assigned or hypothecated for a one-year period after the Effective Date except to underwriters of the Offering or to individuals who are either a partner or an officer of such an underwriter or by will or by operation of law. The Warrant may be divided or combined, upon request to the Company by the Warrantholder, into a certificate or certificates evidencing the same aggregate number of Warrants. 9. No Rights as a Shareholder. Except as otherwise provided herein, the Warrantholder will not, by virtue of ownership of the Warrant, be entitled to any rights of a shareholder of the Company but will, upon written request to the Company, be entitled to receive such quarterly or annual reports as the Company distributes to its shareholders. 10. Notice. Any notices required or permitted to be given hereunder will be in writing and may be served personally or by mail; and if served will be addressed as follows: If to the Company: Milestone Scientific Inc. 220 South Orange Ave. Livingston, New Jersey 07039 Attention: President If to the Warrantholder: AT THE ADDRESS FURNISHED BY THE WARRANTHOLDER TO THE COMPANY FOR THE PURPOSE OF NOTICE. Any notice so given by mail will be deemed effectively given 48 hours after mailing when deposited in the United States mail, registered or certified mail, return receipt requested, postage prepaid and addressed as specified above. Any party may by written notice to the other specify a different address for notice purposes. 11. Applicable Law. This Warrant Certificate will be governed by and construed in accordance with the laws of the State of Oregon, without reference to conflict of laws principles thereunder. All disputes relating to this Warrant Certificate shall be tried before the courts of Oregon located in Multnomah County, Oregon to the exclusion of all other courts that might have jurisdiction. Dated as of ______________, 2003 MILESTONE SCIENTIFIC INC. By: _________________________________ Name: Title: Agreed and Accepted as of ________________, 2003 PAULSON INVESTMENT COMPANY, INC. By: _________________________________ Name: Title: EX-10.24 7 file006.txt LETTER FROM LEONARD OSSER DATE 3/28/02 LEONARD OSSER 110 EAST 71ST STREET NEW YORK, NY 10022 March 28, 2002 Milestone Scientific Inc. 220 South Orange Avenue Livingston, New Jersey 07039 ATTN: THOMAS STUCKEY, CHIEF FINANCIAL OFFICER RE: MILESTONE SCIENTIFIC INC. 9% SECURED PROMISSORY NOTE Dear Sir: Please be advised that I hereby agree to defer until January 2, 2003 the payment of all principal and interest owed to me under the Milestone Scientific Inc. 9% Secured Promissory Note issued to me in July 2000. I hereby also agree, during the period ending January 1, 2003 to advance to Milestone up to an additional amount of $200,000 on the same terms as specified in the 9% Secured Promissory Note, as amended hereby. Very truly yours, /s/ Leonard Osser cc: J. H. Cohn LLP 75 Eisenhower Parkway Roseland, NJ 07068-1697 Attn: Alan J. Markowitz EX-10.25 8 file007.txt LETTER FROM MORSE, ZELNICK, ROSE & LANDER MORSE, ZELNICK, ROSE & LANDER A LIMITED LIABILITY PARTNERSHIP 450 PARK AVENUE NEW YORK, NEW YORK 10022-2605 212-838-1177 FAX. 212-838-9190 March 29, 2002 WRITER'S DIRECT LINE (212) 838-8040 Mr. Thomas Stuckey Milestone Scientific, Inc. 220 South Orange Avenue Livingston, New Jersey 07039 Dear Tom: This will confirm that we have agreed to defer payment of the current balance of fees due us for legal services rendered through February 28, 2002 ($320,866.01) until January 2, 2003, except out of the proceeds of new equity financings, provide that Milestone pays us $2,500 per month in reduction of this accumulated balance. Very truly yours, /s/ Stephen A. Zelnick cc: Mr. Leonard Osser EX-10.26 9 file008.txt LETTER FROM LEONARD OSSER DATED 4/5/2003 LEONARD OSSER 110 E. 71ST STREET NEW YORK, NY 10021 April 15, 2003 Milestone Scientific Inc. 220 South Orange Avenue Livingston, NJ 07039 Attn: Thomas Stuckey-Chief Financial Officer RE: Milestone Scientific Inc. Deferral of Payment of $32,000 Dear Sirs: Please be advised that I hereby agree to defer until January 2, 2005 the payment of principal and any interest on a $32,000 loan I have made to Milestone Scientific Inc. in January 2003. Very truly yours, /s/ Leonard Osser EX-10.28 10 file009.txt LINE OF CREDIT April 15, 2003 (212) 838-8040 Mr. K. Tucker Andersen 61 Above All Road Warren, CT 06754 New Line of Credit for $900,000 and Extension of Maturity Date on $500,000 Owed Under 2001 Line of Credit Dear Tucker: This will confirm that you have opened a new line of credit for Milestone Scientific Inc., in the aggregate amount of $900,000. Borrowings under line will bear interest at the rate of 8% per annum and will be evidenced by a promissory note in usual form. Monies may be drawn by Milestone under the line upon 10 days' written notice to you from either Milestone's Chief Executive Officer or Chief Financial Officer. The line will expire and borrowings under the line and interest thereon will be payable in cash on January 2, 2005. This will also confirm that you have agreed to further extend the payment date of the $500,000 owed under the Line of Credit dated January 29, 2001, which is not now payable in stock at Milestone's election, from December 31, 2003 until January 2, 2005. This letter replaces and cancels the commitment in our earlier letter dated April 8, 2003 which you countersigned. If this conforms with your understanding with Milestone please countersign and return the copy of this letter. Very truly yours /s/ Stephen A. Zelnick Accepted and agreed to this 15th day of April, 2003 /s/ K. Tucker Andersen EX-10.29 11 file010.txt AGREEMENT WITH DA VINCI SYSTEMS [MILESTONE SCIENTIFIC LOGO] July 30, 2003 Alan A. Creamer, CEO Da Vinci Systems, Inc. 9885 Mesa Rim Road Suite 216 San Diego, CA 92121 Dear Alan: This will confirm the agreement under which we will support your development of a whitening system head (the "Product") and you will grant us distribution rights to the Product and all pastes, gels or other disposables or consumables ("Ancillary Products") and to your "Nova Cordless Curing Light" (the "Curing Light", see Paragraph 3). 1. We will reimburse you for the development cost of the Product, up to an aggregate of $25,500, as follows: $7,000 for the conceptual design and prototype engineering and $18,500 for the development of CAD files, tooling and proto-typing. You will bear any costs in excess of these amounts. If, at any time, you cease work on the development project or if development is not completed within 28 days of the approval of Phase 1 (Conceptual Design and Engineering) or by October 1, 2003, at the latest, then we shall have the option to assume control of the development project at our expense. If we assume control of the development project, you shall cooperate fully with us and shall turn over to us all work previously completed, including the results of any tests or submissions to focus groups. Any costs we incur, in excess of $25,500, shall be credited against our obligations to pay for future units of Product, Ancillary Products and the Curing Light. 2. We shall be the exclusive worldwide distributor for the Product and those Ancillary Products, if any, made exclusively for use with the Product. You shall meet our requirements for Product and such Ancillary Products, including related packaging, at a price per unit found in the attached Exhibit A. The prices found in Exhibit A represent the maximum transfer price. Any reductions from the product cost will be shared equally between Da Vinci and Milestone. All orders will be filled within 30 days of a Purchase Order accompanied by a 50% deposit. The remaining balance is to be paid net 30 days, F.O.B. manufacturer. In connection with our activities as a distributor, you hereby grant us, a limited, exclusive worldwide license, to use your intellectual property, including any patents, in connection with the marketing and sale of the Product and any Ancillary Products made exclusively for use with the Product. 3. We shall also be a non-exclusive worldwide distributor of (i) Ancillary Products not made exclusively for use with the Product and (ii) the Curing Light. The Ancillary Products and the Curing Light [MILESTONE SCIENFITIC LOGO] Page 2 of 5 shall be provided as attached in Exhibit A, provided that such price shall not be higher than the lowest price at which such products are provided to other distributors or dealers. The prices found in Exhibit A represent the maximum transfer price. Any reductions from the product cost will be shared equally between Da Vinci and Milestone. All orders will be filled within 30 days of a Purchase Order accompanied by a 50% deposit. The remaining balance is to be paid net 30 days, F.O.B. manufacturer. 4. You will prepare and submit to us, within 15 days after the end of each calendar quarter, a report setting forth the fully loaded manufacturing costs for all products sold to us in the previous quarter, broken down by types of products and a calculation of the prices due and/or collected on such products for such period (the "Report"). The Report shall be certified by an officer of Da Vinci to be true and correct. We shall have the right to audit your books and records, to the extent necessary to determine compliance with this Section and Sections 2 and 3, during normal business hours and upon reasonable notice. In the event the audit reveals any discrepancies, the price paid for products shall be retroactively readjusted to reflect the audit results and if the discrepancy is more than 15% of your cost, you shall reimburse us for the cost of the audit. 5. We shall have the right to use our own trademarks or brand names on the Product and any Ancillary Product and you shall mark each unit and any packaging utilized in connection therewith with such mark or marks as we direct. 6. You will, at our reasonable request, provide us with reasonable quantities of samples of the Product and Ancillary Products for the purpose of performing quality control procedures and tests. We shall have the right to inspect, not more than once every quarter, any of your manufacturing facilities pertaining to the Product or Ancillary Products during regular business hours and upon reasonable notice. 7. You represent and warrant that all Product and Ancillary Product units produced by you shall comply with all federal, state and local laws, ordinances, rules, regulations and orders and shall be manufactured in accordance with the FDA's GMP standards and comparable regulations of the European Community. You further represent and warrant that all Product and Ancillary Product units produced by you shall be of merchantable quality and free from defects. You shall keep your manufacturing and packaging records and data for the Products in accordance with G.M.P standards. We shall have access to such information upon reasonable notice during business hours and we shall be entitled to make copies thereof at our cost. 8. You shall defend and indemnify us and hold us harmless against all damages, claims, costs and expenses (including reasonable attorneys' fees) arising out of or resulting from any product liability claims relating to products produced by you. The obligation for indemnification set forth above shall be contingent upon giving you timely notice of any claim or loss. You shall carry and keep in force throughout the term of this Agreement Comprehensive General Liability Insurance, including Products Liability combined single limit in the amount of [$2,000,000], naming us as an additional insured party: 9. All data, inventions, discoveries, product designs, know-how, formulae, studies, reports, documents, publications, software, computer programs, source codes and the like relating to the Products or Ancillary Products, as well as concepts and thoughts, shall be your sole and exclusive property. [MILESTONE SCIENFITIC LOGO] Page 3 of 5 10. You shall disclose to us any intellectual property relating to the Product or Ancillary Products and assist us in applying for, maintaining, or otherwise securing legal protection for the same. We agree to execute any papers, documents or letters necessary to vest title in these materials in your name. You shall take all appropriate action to defend the intellectual property and any patents issued with respect thereto. 11. In the event of any dispute between us, we agree that it shall be resolved through arbitration in New York under the regulations of the American Arbitration Association, within ninety (90) days following termination of this Agreement. Any award rendered shall be final and conclusive upon the parties. This Agreement shall be construed under the laws of the State of New York. 12. At all times during the term of this Agreement, we shall act as independent contractor, and neither the making of this Agreement nor the performance of any of the provisions hereof shall be construed to make us your agent or legal representative of Da Vinci for any purpose, nor shall this Agreement be deemed to establish a joint venture or partnership. Neither of us shall have the power or authority to bind or obligate the other party in any way by any of its acts. 13. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be valid and sufficient if dispatched by registered mail, postage prepaid, addressed to the address indicated in this Agreement or to such other address as the addressee shall have theretofore furnished to the addressor as indicated below [MILESTONE SCIENFITIC LOGO] Page 4 of 5 14. This agreement represents the entire agreement between the parties and may not be changed, amended or modified except by a writing signed by both parties. Very truly yours, MILESTONE SCIENTIFIC INC. by:/s/ Leonard Osser ----------------------------- Leonard Osser, CEO Accepted and agreed to the 30th day of July 2003 DA VINCI SYSTEMS, INC. By: /s/ Alan Creamer ----------------- Alan A. Creamer, CEO By:___________________________ Alan A. Creamer [MILESTONE SCIENFITIC LOGO] Page 5 of 5 EXHIBIT A
PRODUCT TRANSFER PRICE Curing Light with head (Curing or Whitening): $350.00 Whitening Head, Interproximal Tip and Diagnostic Tip $75.00 Amber Light Shields, minimum quantity 100 $22.00 Custom Barrier Sheaths $36.00 per box of 500 Per Patient Whitening Kit (In-office and take home included): $14.00
EX-10.30 12 file011.txt THIRD AMENDMENT TO TECHNOLOGY SALE AGREEMENT THIRD AMENDMENT TO TECHNOLOGY SALE AGREEMENT THIRD AMENDMENT TO TECHNOLOGY SALE AGREEMENT, dated October ___, 2002, between MILESTONE SCIENTIFIC INC., a Delaware corporation ("Milestone") and CLAUDIA HOCHMAN and MARK HOCHMAN (collectively the "Sellers"). WITNESSETH WHEREAS, Milestone and Sellers entered into a Technology Sale Agreement dated April 9, 1998, as amended on December 16, 1999 and November 28, 2001, governing Sellers' sale to Milestone of their inventions, of (i) a "Pressure/Force Computer Controlled Drug Delivery System", (ii) a "Universal Syringe Holder Enhancement" consisting of a unique Disposable Syringe and a Unique Syringe Holder, (iii) a Non-deflecting, Non-clogging Single Use Disposable Hypodermic Needle for use as a separate drug delivery or aspiration system or as an adjunct to Milestone's computer controlled anesthesia system known as "The CompuMed/Wand(TM)", (iv) a Hand-piece For Injection Device With A Retractable And Rotating Needle (U.S. Patent No. 6,428,517 B1), Anti-Deflection / Force Reduction Rotating Needle Handpiece device, Anti-Deflection/Force Reduction Rotating Syringe (Reg No. 29,876), for use as separate drug delivery or aspiration system or as an adjunct to Milestone's computer controlled anesthesia system known as "The CompuMed/Wand(TM)", and (v) a Local Anesthetic and Delivery Injection Unit with Automated Rate Control; WHEREAS, the Sellers have now invented a Safety IV Catheter Infusion Device (U.S. Utility Patent App. Serial No. 10/174,246) ("IV Catheter") for use as a separate drug delivery catheter device or as an adjunct to Milestone's existing technologies; WHEREAS, subject to the conditions contained in the Technology Sale Agreement, Sellers desire to sell and Milestone desires to purchase the IV Catheter ; and WHEREAS, Sellers and Milestone desire to further amend the Technology Sale Agreement to allow for the sale of the IV Catheter to be governed by the terms of the Technology Sale Agreement and to effect such additional terms and provisions that the parties deem necessary all as are set forth below. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Technology Sale Agreement as previously amended is hereby further amended as follows: 1. The definition of "Intellectual Property" shall include new subpoints (vi) and (vii) set forth below: "(vi) the Safety IV Catheter Infusion Device (U.S. Utility Patent Application Serial No. 10/174,246); and (vii) any and all other patent submissions, past, present and future, that bear the name of one or both of the Sellers, including all divisional patents, primary patents and secondary patents." 2. Section 4 shall be amended to read as follows: "4. ISSUANCE OF OPTIONS. Milestone agrees that for each future patent issued, relating to the Proprietary Rights, Milestone will, as soon as practicable thereafter, issue to Sellers, five year options to purchase an aggregate of 25,000 shares of Milestone Common Stock at an exercise price per share equal to the fair market value of a share on the date of grant." 2 3. Section 11 shall be amended to read as follows: "11. BINDING EFFECT. This Technology Sale Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors, assigns and/or legal representatives. In the event that the obligations under this Technology Sale Agreement, do not, for any reason, automatically survive a sale or transfer of all or a significant part of Milestone's business or assets to a third party (the "Transferee"), Milestone shall cause the Transferee to assume all of Milestone's obligations under this Technology Sale Agreement, as amended from time to time. If the undertaking of these obligations, whether by way of automatic survival or by way of assumption, in their entirety or in part, is impossible, impracticable or of significantly different economic impact on Sellers, Milestone shall use its best efforts to cause the Transferee to provide the Sellers with alternatives that are essentially equivalent in value to the existing obligations of Milestone under this Technology Sale Agreement, as amended." IN WITNESS WHEREOF, the parties hereto have executed this Third Amendment to the Technology Sale Agreement as of the day and year first above written; MILESTONE SCIENTIFIC, INC. By:____________________________________ Leonard Osser, CEO By:_____________________________________ Mark N. Hochman, DDS By:_____________________________________ Claudia B. Hochman, DDS 3 AMENDMENT TO TECHNOLOGY SALE AGREEMENT WHEREAS, MILESTONE SCIENTIFIC, INC., a Delaware corporation ("Milestone"), and MARK HOCHMAN AND CLAUDIA HOCHMAN (collectively the "Sellers") entered into a "Technology Sale Agreement" made as of the 9th of April 1998, governing Sellers sale to Milestone of their invention of (i) a "Pressure/Force Computer Controlled Drug Delivery System", (ii) a "Universal Syringe Holder Enhancement" consisting of a unique Disposable Syringe and a Unique Syringe Holder and (iii) a Non-deflecting, Non-clogging Single Use Disposable Hypodermic Needle for use as a separate drug delivery or aspiration system or as an adjunct to Milestone's computer controlled anesthesia system known as "The ComuMed/Wand(TM)"; and amended as of the 16th of December, 1999, to include a Hand-piece For Injection Device With A Retractable And Rotating Needle (U.S. Patent No. 6,428,517 B1), Anti-Deflection / Force Reduction Rotating Needle Handpiece device, Anti-Deflection/Force Reduction Rotating Syringe (Reg No. 29,876), for use as separate drug delivery or aspiration system or as an adjunct to Milestone's computer controlled anesthesia system known as "The ComuMed/Wand(TM)"; be governed by the terms of the Technology Sale Agreement; WHEREAS, the Sellers also invented a Safety IV Catheter Infusion Device (U.S. Utility Patent App. Serial No. 10/174,246) for use as a separate drug delivery catheter device or as an adjunct to Milestone's existing technologies; WHEREAS, subject to the conditions contained in the Technology Sale Agreement made as of the 9th of April, 1998, Sellers desire to sell and Milestone desires to purchase the Safety IV Catheter Infusion Device (U.S. Utility Patent App. Serial No. 10/174,246). WHEREAS, Sellers and Milestone desire to amend the Technology Sale Agreement made as of the 9th of April, 1998, so that the sale by Sellers to Milestone of Safety IV Catheter Infusion Device (U.S. Utility Patent App. Serial No. 10/174,246) be governed by the terms of the Technology Sale Agreement dated 9th of April, 1998. WHEREAS, the terms governed by the Technology Sale Agreement dated 9th, of April, 1998 Milestone gives further consideration of the sales transaction of a Safety IV Catheter Infusion Device (U.S. Utility Patent App. Serial No. 10/174,246), to include the following transaction and agreements set forth below between the parties herein entered the following: Issuance of Options Upon Grant of Patent: Milestone agrees that if one or more patents issues with respect to pending or future patent application relating to said Safety IV Catheter Infusion Device (U.S. Utility Patent App. Serial No. 10/174,246) and the Proprietary Rights of this technology, Milestone will, as soon as practicably thereafter, issue Sellers five year options to purchase 25,000 shares of Milestone Common Stock at an exercise price per share equal to the fair market value of a share on the date of grant. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the definition of "Intellectual Property" under the Technology Sale Agreement made as of the 9th of April, 1998, amended as of the 16th of December, 1999, is hereby subsequently amended to include the Safety IV 2 Catheter Infusion Device (U.S. Utility Patent App. Serial No. 10/174,246), Hand-piece For Injection Device With A Retractable And Rotating Needle (U.S. Patent No. 6,428,517 B1), Anti-Deflection / Force Reduction Rotating Needle Handpiece device, Anti-Deflection/Force Reduction Rotating Syringe, "Pressure/Force Computer Controlled Drug Delivery System (U.S. Patent No. 6,200,289), "Universal Syringe Holder Enhancement", "Non-deflecting, Non-clogging Single Use Disposable Hypodermic Needle. IN WITNESS WHEREOF, the parties hereto have executed the Amendment to the Technology Sale Agreement as of the day and year first above written; MILESTONE SCIENTIFIC, INC. By:__________________________________________ _____________ Leonard Osser, CEO Date ACKNOWLEDGEMENT TAKEN IN NEW YORK STATE State of New York County of : On the _____Day of _________ in the year 2002 before me, _____________________ the, undersigned, personally appeared OSSER, LEONARD personally know to me or proved to me on the basis of satisfactory evidence to be the individual whose name is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s) or the person upon behalf of which the individual(s) acted, executed the instrument. - ----------------------- NOTARY PUBLIC 3 IN WITNESS WHEREOF, the parties hereto have exexcuted the Amendment to the Technology Sale Agreement as of the day and year first above written; SELLERS By:_____________________________________ _____________ Mark N. Hochman, DDS Date By:_____________________________________ _____________ Claudia B. Hochman, DDS Date ACKNOWLEDGEMENT TAKEN IN NEW YORK STATE State of New York County of : On the _____Day of _________ in the year 2002 before me, _____________________ the, undersigned, personally appeared HOCHMAN, MARK and HOCHMAN, CLAUDIA personally know to me or proved to me on the basis of satisfactory evidence to be the individual whose name is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s) or the person upon behalf of which the individual(s) acted, executed the instrument. - ----------------------- NOTARY PUBLIC 4 EX-10.31 13 file012.txt STRIDER AGREEMENT [MILESTONE SCIENTIFIC LETTERHEAD] September 3, 2003 Strider 106 Hart Road Gaithersburg, MD 20878 Attn: Richard Brown Dear Richard: This will confirm our agreement to pay you commissions for any future sales made by us of products purchased from Da Vinci Systems ("Da Vinci") including the "Nova Cordless Curing Light" (the "Products"). 1. In consideration for your assistance in reaching a distribution agreement between Da Vinci and us, we hereby agree to pay you the following commissions: 1.1 We will pay 2% of net sales (less returns, discounts and allowances) on all Products purchased from Da Vinci and resold by us directly, or indirectly to dentists, hygienists or other health care professionals providing dental services ("Professional Dental Market"), including sales through distributors, agents or wholesale suppliers. 1.2 We will pay 5% of net sales (less returns, discounts and allowances) on all Products purchased from Da Vinci and resold by us directly, or indirectly for use in any other market other than the Professional Dental Market, including sales through distributors, agents or wholesale suppliers. 2. In consideration for your assistance in financing the final development of the whitening head product with Da Vinci and us, we hereby agree to pay you the following: 2.1 We will pay an additional 2% of net sales on Products purchased from Da Vinci and resold by us directly, or indirectly to dentists, hygienists or other health care professionals providing dental services and 5% of net sales on all Products purchased from Da Vinci and resold by us directly, or indirectly for use in any other market other than the Professional Dental Market until such time as a total amount of $25,500 is attained. Payments will be made within 30 days following the end of each calendar quarter, with respect to all revenues collected by us from Product sales during the previous calendar quarter. Page 2 of 2 [MILESTONE SCIENTIFIC LOGO] 3. The term of this agreement shall be for seven years beginning on the date hereof. 4. All notices or other communications given with respect to this agreement shall be in writing and shall be valid and sufficient if dispatched by registered mail, postage prepaid, addressed to the address indicated in this Agreement or to such other address as the addressee shall have theretofore furnished to the addressor as indicated below. 5. This agreement represents the entire agreement between the parties and may not be changed, amended or modified except by a writing signed by both parties. 6. In the event of any dispute between us, we agree that it shall be resolved through arbitration in New York under the regulations of the American Arbitration Association, within ninety (90) days following termination of this Agreement. Any award rendered shall be final and conclusive upon the parties. This Agreement shall be construed under the laws of the State of New York. Very truly yours, MILESTONE SCIENTIFIC INC. by: /s/ Leonard Osser ----------------- Leonard Osser, CEO Accepted and agreed to the 8th day of September 2003 Strider by: /s/ Richard Brown ----------------- Richard Brown EX-10.32 14 file013.txt AGREEMENT WITH LEONARD OSSER AGREEMENT, dated as of October 9, 2003 among Milestone Scientific Inc. (the "Company"), a Delaware corporation with its principal place of business at Livingston Corporate Park, 220 South Orange Avenue, Livingston, New Jersey, on the one hand and Leonard Osser ("Osser"), an individual having an address at 101 John Dietz Road, Callicoon Center, New York 12724 and K. Tucker Andersen ("Andersen" and together with Osser, the "Creditors"), an individual with an address at c/o Cumberland Partners, 1114 Avenue of the Americas, New York, New York 10036. W I T N E S S E T H: - - - - - - - - - - WHEREAS, Osser is the chief executive officer as well as a principal shareholder of the Company; and WHEREAS, Schedule A-1 annexed hereto sets forth in detail the amounts owed by the Company to Osser as deferred compensation and for money borrowed (the "Osser Indebtedness"); and WHEREAS, Andersen is a principal shareholder of the Company; and WHEREAS, Schedule A-2 annexed hereto sets forth in detail the amounts owed by the Company to Andersen for money borrowed (the "Andersen Indebtedness"): and WHEREAS, the Company has entered into a Letter of Intent, dated September 23, 2003, with Paulson Investment Company, Inc. ("Paulson"), pursuant to which Paulson has agreed to act as underwriter in connection with a registered public offering to be undertaken by the Company (the "Public Offering"); and WHEREAS, the Company has reached an agreement in principal with certain investors (the "Investors") who will lend $400,000 to the Company before it files a registration statement with the United States Securities and Exchange Commission (the "SEC") covering the securities to be sold in the Public Offering. NOW, THEREFORE, in consideration of the premises set forth above and the agreements, covenants, representations and warranties set forth below and for other good and valuable consideration, the sufficiency of which is hereby acknowledge, the parties hereto hereby agree as follows: 1. Satisfaction of Debt. (a) On the Satisfaction Date (as defined below), the Company shall transfer to Andersen the following: (i) cash in an amount equal to 40% of the accrued interest (through the Satisfaction Date) on the Andersen Indebtedness; and (ii) securities (as more particularly described below in paragraph (c) of this Section 1) of the Company having a value equal to the equal to the sum of (x) the principal amount of the Andersen Indebtedness and (y) 60% of the accrued interest (through the Satisfaction Date) on the Andersen Indebtedness. (b) On the Satisfaction Date, the Company shall transfer to Osser the following: (i) cash in an amount equal to 40% of the sum of the (x) deferred compensation portion of the Osser Indebtedness (as set forth on Schedule A-1) and (y) accrued interest (through the Satisfaction Date) on the Osser Indebtedness; and (ii) securities (as more particularly described below in paragraph (c) of this Section 1) of the Company having a value equal to the equal to the sum of (x) the principal amount of the Osser Indebtedness and (y) 60% of the accrued interest (through the Satisfaction Date) on the Osser Indebtedness and (z) 60% of the deferred compensation portion of the Osser Indebtedness. (c) The securities of the Company to be issued to Andersen and Osser pursuant to paragraphs (a)(ii) and (b)(ii), respectively, of this Section 1 shall be identical in all material respects to the securities sold by the Company in the Public Offering. For purposes of calculating the value of such securities, they shall be deemed to have a value equal to the public offering price as set forth in the final prospectus, filed under Rule 424(b) promulgated by the SEC under the Securities Act of 1933, as amended (the "Act") in connection with the Public Offering (the "Final Prospectus"). (d) The Satisfaction Date shall be the date that is the later of (i) the effective date of the Public Offering (i.e., the date of the Final Prospectus) and (ii) January 2, 2004. 2. REPRESENTATIONS AND WARRANTIES OF THE CREDITORS. Each Creditor, solely for himself and not with respect to the other Creditor, represents and warrants to the Company that: (a) INVESTMENT PURPOSE. He is acquiring the securities described in Section 1 hereof and any and all other securities of the Company underlying or covered by such securities and any securities issuable upon exercise of any rights to purchase or to convert such securities or any securities underlying such securities (collectively, the "Securities") for his own account and not with a present view towards the public sale or distribution thereof, except pursuant to sales registered or exempted from registration under the Act; provided, however, that by making the representations herein, subject to any agreement to the contrary contemplated hereby, he does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the Act. (b) ACCREDITED INVESTOR STATUS. He is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D (an "Accredited Investor"). (c) RELIANCE ON EXEMPTIONS. He understands that the Securities are being issued to him in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and 2 accuracy of, and his compliance with, the representations, warranties, agreements, acknowledgments and understandings set forth herein in order to determine the availability of such exemptions and his eligibility to acquire the Securities. (d) INFORMATION. He, or his advisors, if any, has been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities that he has or they have requested. He, or his advisors, if any, has been afforded the opportunity to ask questions of the Company. Neither such inquiries nor any other due diligence investigation conducted by him or any of his advisors shall modify, amend or affect his right to rely on the Company's representations and warranties contained in Section 3 below. He understands that his investment in the Securities involves a significant degree of risk. (e) GOVERNMENTAL REVIEW. He understands that no United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Securities. (f) TRANSFER OR RE-SALE. He understands that (i) except as set forth in Section 4(b) below, the sale or re-sale of the Securities has not been is not and will not being registered under the Act or any applicable state securities laws, and the Securities may not be transferred unless (a) the Securities are sold pursuant to an effective registration statement under the Act, (b) he has delivered to the Company an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration, (c) the Securities are sold or transferred to an "affiliate" (as defined in Rule 144 promulgated under the Act (or a successor rule) ("Rule 144")) who agrees to sell or otherwise transfer the Securities only in accordance with this Section 2(f) and who is an Accredited Investor, or (d) the Securities are sold pursuant to Rule 144; (ii) any sale of Securities made in reliance on Rule 144 may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any re-sale of such Securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Act) may require compliance with some other exemption under the Act or the rules and regulations of the SEC thereunder; and (iii) other than as set forth in Section 4(b) below), neither the Company nor any other person is under any obligation to register such Securities under the Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. (g) LEGENDS. He understands that, until such time as the Securities have been registered under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, the certificates evidencing the Securities shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates for such Securities): "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended. The securities may not be sold, transferred or assigned in the absence of 3 an effective registration statement for the securities under said Act, or an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, that registration is not required under said Act or unless sold pursuant to Rule 144 under said Act." The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of any Security upon which it is stamped, if, unless otherwise required by applicable state securities laws, (a) such Security is registered for sale under an effective registration statement filed under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, or (b) such holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Security may be made without registration under the Act, including pursuant to the provisions of Rule 144 and such sale or transfer is effected. The Creditor agrees to sell all Securities, including those represented by a certificate(s) from which the legend has been removed, in compliance with applicable prospectus delivery requirements, if any. This paragraph (g) shall apply separately with respect to each security included in the definition of Securities. (h) AUTHORIZATION; ENFORCEMENT. This Agreement has been duly executed and delivered by or on behalf of the Creditor, and constitutes, and upon execution and delivery by the Creditor will constitute, a valid and binding agreement of the Creditor enforceable in accordance with its terms. (i) RESIDENCY. He is a resident of New York State. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Creditors that: (a) ORGANIZATION AND QUALIFICATION. The Company and each of its Subsidiaries (as defined below), if any, is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, with full power and authority (corporate and other) to own, lease, use and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted. The Company and each of its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership or use of property or the nature of the business conducted by it makes such qualification necessary except where the failure to be so qualified or in good standing would not have a Material Adverse Effect. "Material Adverse Effect" means any material adverse effect on the business, operations, assets, financial condition or prospects of the Company or its Subsidiaries, if any, taken as a whole, or on the transactions contemplated hereby or by the agreements or instruments to be entered into in connection herewith. "Subsidiaries" means any corporation or other organization, whether incorporated or unincorporated, in which the Company owns, directly or indirectly, any equity or other ownership interest. 4 (b) AUTHORIZATION; ENFORCEMENT. (i) The Company has all requisite corporate power and authority to enter into and perform and to consummate the transactions contemplated hereby and to issue the Securities, in accordance with the terms hereof, (ii) the execution and delivery of this Agreement by the Company and the consummation by it of the transactions contemplated hereby (including without limitation, the issuance of the Securities) have been duly authorized by the Company's board of directors (the "Board") and no further consent or authorization of the Company, the Board, or its stockholders is required, (iii) this Agreement has been duly executed and delivered by the Company, and (iv) this Agreement constitutes, and upon its execution and delivery by the Company, will constitute a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. (c) ISSUANCE OF SHARES. Any shares of the Company's common stock, par value $ .001 per share (the "Common Stock") issuable upon the exercise of any rights set forth in any of the Securities are (or shall be as of the Satisfaction Date) duly authorized and reserved for issuance and, upon issuance in accordance with the terms of the Securities to which they relate will be validly issued, fully paid and non-assessable, and free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of stockholders of the Company and will not impose personal liability upon the holder thereof. (d) NO CONFLICTS. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) conflict with or result in a violation of any provision of the Certificate of Incorporation or Bylaws of the Company or (ii) violate or conflict with, or result in a breach of any provision of, or constitute a default (or an event which with notice or lapse of time or both could become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture, patent, patent license or instrument to which the Company or any of its Subsidiaries is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and regulations of any self-regulatory organizations to which the Company or its securities are subject) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect). Neither the Company nor any of its Subsidiaries is in violation of its Certificate of Incorporation, Bylaws or other organizational documents and neither the Company nor any of its Subsidiaries is in default (and no event has occurred which with notice or lapse of time or both could put the Company or any of its Subsidiaries in default) under, and neither the Company nor any of its Subsidiaries has taken any action or failed to take any action that would give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party or by which any property or assets of the Company or any of its Subsidiaries is bound or affected, except for possible defaults as would not, individually or in the aggregate, have a Material Adverse Effect. The businesses of the Company and its Subsidiaries, if any, are not being conducted, and shall not be conducted so long as the Creditors owns any of the Securities, in violation of any law, ordinance or regulation of any governmental entity where such violation would have a Material Adverse Effect. Except 5 as specifically contemplated by this Agreement and as required under the Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court, governmental agency, regulatory agency, self regulatory organization or stock market or any third party in order for it to execute, deliver or perform any of its obligations under this Agreement. Except as disclosed in SCHEDULE 3(F), all consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company is not in violation of the listing requirements of the American Stock Exchange. (e) ACKNOWLEDGMENT REGARDING SECURITIES. The Company acknowledges and agrees that each Creditor is acting solely in the capacity of an arm's length purchaser with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that neither Creditor is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any statement made by a Creditor or any of its respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation and is merely incidental to his acquisition of the Securities. The Company further represents to the Creditors that its decision to enter into this Agreement has been based solely on the independent evaluation by the Company and its representatives. 4. COVENANTS. (a) FORM D; BLUE SKY LAWS. The Company agrees to file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof to the Creditors promptly after such filing. The Company shall, on or before the Satisfaction Date, take such action as the Company shall reasonably determine is necessary to qualify the Securities for sale to the Creditors pursuant to this Agreement under applicable securities or "blue sky" laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken to the Creditor on or prior to the Satisfaction Date. (b) REGISTRATION RIGHTS. The Company will use its commercially reasonable best efforts to file with the SEC a registration statement covering the resale of the Common Stock included in the Securities within 30 days of the effective date (as described in Section 1(d)) of the Public Offering and to cause such registration statement to be effective as promptly as possible thereafter. The Creditors hereby covenant and agree to provide the Company with such information as the Company shall need about the Creditors and their proposed plan of distribution in order to file such resale registration statement. (c) RESERVATION OF SHARES. The Company shall at all times have authorized, and reserved for the purpose of issuance, a sufficient number of shares of Common Stock to provide for the full conversion or exercise of the outstanding Securities. The Company will promptly take all corporate action necessary to authorize and reserve a sufficient number of shares, including, without limitation, calling a special meeting of stockholders to authorize additional shares to meet the Company's obligations under this Section 4(c), in the case of an insufficient number of authorized shares, and using its best efforts to obtain stockholder approval of an increase in such authorized number of shares. 6 (d) LOCK-UP AGREEMENT. Each Creditor agrees that he will execute a lock-up agreement with Paulson (the "Paulson Lock-Up Agreement") for a period not to exceed one hundred and eighty (180) days from the effective date (as described in Section 1(d)) of the Public Offering; provided, however, in no event shall the Paulson Lock-Up Agreement be more restrictive than that offered to any of the Company's officers, directors or holders of five percent (5%) or more of the outstanding shares of the Company's Common Stock. In addition, if Paulson consents to any less restrictive modification or waiver of the terms of any such agreement with one or more of the Company's officers, directors or holders of five percent (5%) or more of the outstanding shares of the Company's Common Stock, then the Paulson Lock-Up Agreement shall be similarly modified or waived. (e) INTERCREDITOR AGREEMENT. Each Creditor agrees that, upon request, he shall execute and deliver an agreement with the Investors, pursuant to which the Creditors shall agree that (a) notwithstanding the order in which any UCC financing statements would have filed, the lien to be given to the Investors to secure their loan to the Company shall be senior and superior to the lien granted to the Creditors to secure their respective indebtedness, (b) so long as the loan from the Investors remains outstanding, the Creditors will not accept any payments from the Company with respect to the Osser Indebtedness or the Andersen Indebtedness, (c) the Creditors will not commence any action to collect their debt or enforce their security interest until the Investors have been in full and (d) such other terms and conditions as may be customary in agreements of this type among creditors. 5. GOVERNING LAW; MISCELLANEOUS. (a) GOVERNING LAW. THIS AGREEMENT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE PARTIES HERETO HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS AGREEMENT, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. THE PARTIES HERETO IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. THEY FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT A PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. THE PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY THAT DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS AGREEMENT SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SCH DISPUTE. 7 (b) COUNTERPARTS; SIGNATURES BY FACSIMILE. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. (c) HEADINGS. The headings of this Agreement are for convenience of reference only and shall not form part of, or affect the interpretation of, this Agreement. (d) SEVERABILITY. In the event that any provision of this Agreement is invalid or enforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. (e) ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. (f) NOTICES. Any notices required or permitted to be given under the terms of this Agreement shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile and shall be effective five days after being placed in the mail, if mailed by regular United States mail, or upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to a party. The addresses for such communications shall be: If to the Company: Milestone Scientific Inc. Livingston Corporate Park 220 South Orange Avenue Livingston, New Jersey 07039 Attention: Chief Financial Officer Telephone: 973-535-2717 Facsimile: 973-535-2829 8 With copy to: Morse, Zelnick, Rose & Lander, LLP 405 Park Avenue, Suite 1401 New York, New York 10022 Attention: Stephen A. Zelnick, Esq. Telephone: 212-838-8040 Facsimile: 212-838-9190 If to the Creditors: Mr. K. Tucker Andersen c/o Cumberland Partners 1114 Avenue of the Americas New York, New York 10036 Telephone: 212-536-9703 Facsimile: 212-575-2007 Mr. Leonard Osser 101 John Dietz Road Callicoon Center, New York 12724 Telephone: 845-482-3792 Facsimile: 212-717-5684 Each party shall provide notice to the other party of any change in address. (g) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. Except as may otherwise be permitted by Section 2(f) hereof, no party hereto may assign this Agreement or any rights or obligations hereunder without the prior written consent of the other parties. (h) THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any other person enforce any provision hereof. (i) SURVIVAL. The representations and warranties of the Company and the agreements and covenants set forth herein shall survive until the Satisfaction Date. (j) FURTHER ASSURANCES. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. (k) NO STRICT CONSTRUCTION. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. 9 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. MILESTONE SCIENTIFIC INC. By: /s/ Thomas M. Stuckey Chief Financial Officer /s/ K. TUCKER ANDERSEN /s/ LEONARD OSSER 10 EX-10.33 15 file014.txt AGREEMENT WITH MORSE, ZELNICK, ROSE & LANDER AGREEMENT, dated as of December 22, 2003 between Milestone Scientific Inc. (the "Company"), a Delaware corporation with its principal place of business at Livingston Corporate Park, 220 South Orange Avenue, Livingston, New Jersey, and Morse, Zelnick, Rose & Lander, LLP, a law firm and a creditor of the Company having an address at 405Park Avenue, New York, NY 10022 ("MZRL" or the "Creditor." W I T N E S S E T H: - - - - - - - - - - WHEREAS, THE COMPANY IS INDEBTED TO MZRL FOR LEGAL SERVICES RENDERED DURING THE PAST 3 YEARS IN AN AMOUNT IN EXCESS OF $500,000; AND WHEREAS, MZRL HAS AGREED TO ACCEPT IN SATISFACTION OF $200,000 OF THE INDEBTEDNESS OF THE COMPANY TO IT, UNITS VALUED AT THEIR INITIAL OFFERING PRICE PURSUANT TO THE LETTER OF INTENT DATED SEPTEMBER 23, 2003 WITH PAULSON INVESTMENT COMPANY, INC. AND THE COMPANY FOR A $6 MILLION PUBLIC OFFERING (THE "PUBLIC OFFERING"). NOW, THEREFORE, in consideration of the premises set forth above and the agreements, covenants, representations and warranties set forth below and for other good and valuable consideration, the sufficiency of which is hereby acknowledge, the parties hereto hereby agree as follows: 1. Satisfaction of Debt. (a) On the Satisfaction Date (as defined below), the Company shall issue to MZRL securities (as more particularly described below in paragraph (c) of this Section 1) of the Company having a value equal to $200,000. (b) The securities of the Company to be issued to MZRL pursuant to paragraphs (a) of this Section 1 shall be identical in all material respects to the securities sold by the Company in the Public Offering. For purposes of calculating the value of such securities, they shall be deemed to have a value equal to the public offering price as set forth in the final prospectus, filed under Rule 424(b) promulgated by the SEC under the Securities Act of 1933, as amended (the "Act") in connection with the Public Offering (the "Final Prospectus"). (c) The Satisfaction Date shall be 10 days after the closing of the Public Offering. 2. REPRESENTATIONS AND WARRANTIES OF THE CREDITORS. The Creditor represents and warrants to the Company that: (A) INVESTMENT PURPOSE. It is acquiring the securities described in Section 1 hereof and any and all other securities of the Company underlying or covered by such securities and any securities issuable upon exercise of any rights to purchase or to convert such securities or any securities underlying such securities (collectively, the "Securities") for its own account and not with a present view towards the public sale or distribution thereof, except pursuant to sales registered or exempted from registration under the Act; provided, however, that by making the representations herein, subject to any agreement to the contrary contemplated hereby, he does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the Act. (b) ACCREDITED INVESTOR STATUS. It is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D (an "Accredited Investor"). (c) RELIANCE ON EXEMPTIONS. It understands that the Securities are being issued to it in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and its compliance with, the representations, warranties, agreements, acknowledgments and understandings set forth herein in order to determine the availability of such exemptions and its eligibility to acquire the Securities. (d) INFORMATION. It, or its advisors, if any, has been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities that he has or they have requested. It, or its advisors, if any, has been afforded the opportunity to ask questions of the Company. Neither such inquiries nor any other due diligence investigation conducted by him or any of its advisors shall modify, amend or affect its right to rely on the Company's representations and warranties contained in Section 3 below. It understands that its investment in the Securities involves a significant degree of risk. (e) GOVERNMENTAL REVIEW. It understands that no United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Securities. (f) TRANSFER OR RE-SALE. It understands that (i) except as set forth in Section 4(b) below, the sale or re-sale of the Securities has not been is not and will not being registered under the Act or any applicable state securities laws, and the Securities may not be transferred unless (a) the Securities are sold pursuant to an effective registration statement under the Act, (b) he has delivered to the Company an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration, (c) the Securities are sold or transferred to an "affiliate" (as defined in Rule 144 promulgated under the Act (or a successor rule) ("Rule 144")) who agrees to sell or otherwise transfer the Securities only in accordance with this Section 2(f) and who is an Accredited Investor, or (d) the Securities are sold pursuant to Rule 144; (ii) any sale of Securities made in reliance on Rule 144 may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any re-sale of such Securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Act) may require compliance with some other exemption under the Act or the rules and regulations of the SEC thereunder; and (iii) other than as set forth in Section 4(b) below), neither the Company nor any other person is under any obligation to register such Securities under the Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. 2 (g) LEGENDS. It understands that, until such time as the Securities have been registered under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, the certificates evidencing the Securities shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates for such Securities): "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended. The securities may not be sold, transferred or assigned in the absence of an effective registration statement for the securities under said Act, or an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, that registration is not required under said Act or unless sold pursuant to Rule 144 under said Act." The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of any Security upon which it is stamped, if, unless otherwise required by applicable state securities laws, (a) such Security is registered for sale under an effective registration statement filed under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, or (b) such holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Security may be made without registration under the Act, including pursuant to the provisions of Rule 144 and such sale or transfer is effected. The Creditor agrees to sell all Securities, including those represented by a certificate(s) from which the legend has been removed, in compliance with applicable prospectus delivery requirements, if any. This paragraph (g) shall apply separately with respect to each security included in the definition of Securities. (h) AUTHORIZATION; ENFORCEMENT. This Agreement has been duly executed and delivered by or on behalf of the Creditor, and constitutes, and upon execution and delivery by the Creditor will constitute, a valid and binding agreement of the Creditor enforceable in accordance with its terms. (i) RESIDENCY. It is a resident of New York State. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Creditors that: (a) ORGANIZATION AND QUALIFICATION. The Company and each of its Subsidiaries (as defined below), if any, is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, with full power and authority (corporate and other) to own, lease, use and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted. The Company and each of its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership or use of property or the nature of the 3 business conducted by it makes such qualification necessary except where the failure to be so qualified or in good standing would not have a Material Adverse Effect. "Material Adverse Effect" means any material adverse effect on the business, operations, assets, financial condition or prospects of the Company or its Subsidiaries, if any, taken as a whole, or on the transactions contemplated hereby or by the agreements or instruments to be entered into in connection herewith. "Subsidiaries" means any corporation or other organization, whether incorporated or unincorporated, in which the Company owns, directly or indirectly, any equity or other ownership interest. (b) AUTHORIZATION; ENFORCEMENT. (i) The Company has all requisite corporate power and authority to enter into and perform and to consummate the transactions contemplated hereby and to issue the Securities, in accordance with the terms hereof, (ii) the execution and delivery of this Agreement by the Company and the consummation by it of the transactions contemplated hereby (including without limitation, the issuance of the Securities) have been duly authorized by the Company's board of directors (the "Board") and no further consent or authorization of the Company, the Board, or its stockholders is required, (iii) this Agreement has been duly executed and delivered by the Company, and (iv) this Agreement constitutes, and upon its execution and delivery by the Company, will constitute a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. (c) ISSUANCE OF SHARES. Any shares of the Company's common stock, par value $ .001 per share (the "Common Stock") issuable upon the exercise of any rights set forth in any of the Securities are (or shall be as of the Satisfaction Date) duly authorized and reserved for issuance and, upon issuance in accordance with the terms of the Securities to which they relate will be validly issued, fully paid and non-assessable, and free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of stockholders of the Company and will not impose personal liability upon the holder thereof. (d) NO CONFLICTS. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) conflict with or result in a violation of any provision of the Certificate of Incorporation or Bylaws of the Company or (ii) violate or conflict with, or result in a breach of any provision of, or constitute a default (or an event which with notice or lapse of time or both could become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture, patent, patent license or instrument to which the Company or any of its Subsidiaries is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and regulations of any self-regulatory organizations to which the Company or its securities are subject) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect). Neither the Company nor any of its Subsidiaries is in violation of its Certificate of Incorporation, Bylaws or other organizational documents and neither the Company nor any of its Subsidiaries is in default (and no event has occurred which with notice or lapse of time or both could put the Company or 4 any of its Subsidiaries in default) under, and neither the Company nor any of its Subsidiaries has taken any action or failed to take any action that would give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party or by which any property or assets of the Company or any of its Subsidiaries is bound or affected, except for possible defaults as would not, individually or in the aggregate, have a Material Adverse Effect. The businesses of the Company and its Subsidiaries, if any, are not being conducted, and shall not be conducted so long as the Creditors owns any of the Securities, in violation of any law, ordinance or regulation of any governmental entity where such violation would have a Material Adverse Effect. Except as specifically contemplated by this Agreement and as required under the Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court, governmental agency, regulatory agency, self regulatory organization or stock market or any third party in order for it to execute, deliver or perform any of its obligations under this Agreement. Except as disclosed in SCHEDULE 3(F), all consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company is not in violation of the listing requirements of the American Stock Exchange. (e) ACKNOWLEDGMENT REGARDING SECURITIES. The Company acknowledges and agrees that each Creditor is acting solely in the capacity of an arm's length purchaser with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that neither Creditor is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any statement made by a Creditor or any of its respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation and is merely incidental to its acquisition of the Securities. The Company further represents to the Creditors that its decision to enter into this Agreement has been based solely on the independent evaluation by the Company and its representatives. 4. COVENANTS. (a) FORM D; BLUE SKY LAWS. The Company agrees to file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof to the Creditors promptly after such filing. The Company shall, on or before the Satisfaction Date, take such action as the Company shall reasonably determine is necessary to qualify the Securities for sale to the Creditors pursuant to this Agreement under applicable securities or "blue sky" laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken to the Creditor on or prior to the Satisfaction Date. (b) REGISTRATION RIGHTS. The Company will use its commercially reasonable best efforts to file with the SEC a registration statement covering the resale of the Common Stock included in the Securities within 30 days of the effective date of the Public Offering and to cause such registration statement to be effective as promptly as possible thereafter. The Creditors hereby covenant and agree to provide the Company with such information as the Company shall need about the Creditors and their proposed plan of distribution in order to file such resale registration statement. 5 (c) RESERVATION OF SHARES. The Company shall at all times have authorized, and reserved for the purpose of issuance, a sufficient number of shares of Common Stock to provide for the full conversion or exercise of the outstanding Securities. The Company will promptly take all corporate action necessary to authorize and reserve a sufficient number of shares, including, without limitation, calling a special meeting of stockholders to authorize additional shares to meet the Company's obligations under this Section 4(c), in the case of an insufficient number of authorized shares, and using its best efforts to obtain stockholder approval of an increase in such authorized number of shares. 5. GOVERNING LAW; MISCELLANEOUS. (a) GOVERNING LAW. THIS AGREEMENT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE PARTIES HERETO HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS AGREEMENT, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. THE PARTIES HERETO IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. THEY FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT A PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. THE PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY THAT DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS AGREEMENT SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE. (b) COUNTERPARTS; SIGNATURES BY FACSIMILE. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. (c) HEADINGS. The headings of this Agreement are for convenience of reference only and shall not form part of, or affect the interpretation of, this Agreement. (d) SEVERABILITY. In the event that any provision of this Agreement is invalid or enforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform 6 with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. (e) ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. (f) NOTICES. Any notices required or permitted to be given under the terms of this Agreement shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile and shall be effective five days after being placed in the mail, if mailed by regular United States mail, or upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to a party. The addresses for such communications shall be: If to the Company: Milestone Scientific Inc. Livingston Corporate Park 220 South Orange Avenue Livingston, New Jersey 07039 Attention: Chief Financial Officer Telephone: 973-535-2717 Facsimile: 973-535-2829 If to MZRL: Morse, Zelnick, Rose & Lander, LLP 405 Park Avenue, Suite 1401 New York, New York 10022 Attention: Stephen A. Zelnick, Esq. Telephone: 212-838-8040 Facsimile: 212-838-9190 Each party shall provide notice to the other party of any change in address. (g) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. Except as may otherwise be permitted by Section 2(f) hereof, no party hereto may assign this Agreement or any rights or obligations hereunder without the prior written consent of the other parties. (h) THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any other person enforce any provision hereof. 7 (i) SURVIVAL. The representations and warranties of the Company and the agreements and covenants set forth herein shall survive until the Satisfaction Date. (j) FURTHER ASSURANCES. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. (k) NO STRICT CONSTRUCTION. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. MILESTONE SCIENTIFIC INC. /s/ Leonard Osser, CEO MORSE, ZELNICK, ROSE & LANDER /s/ Stephen A. Zelnick, General Partner 8 EX-23.1 16 file015.txt CONSENT Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS The reverse stock split described in Note Q to the consolidated financial statements has not been consummated as of December 23, 2003. When it has been consummated, we expect to be in a position to furnish the following consent: "We consent to the inclusion in this Amendment No. 1 to the registration statement on Form S-2 (File No. 333-110376) of our report dated April 1, 2003, except for Notes B and H which are as of April 15, 2003 and Note Q which is as of December 22, 2003, on our audits of the consolidated financial statements of Milestone Scientific, Inc. and Subsidiaries as of December 31, 2002 and for the years ended December 31, 2002 and 2001. We also consent to the references to our Firm under the captions "Experts" and "Selected Consolidated Financial Data"." /s/ J.H. Cohn LLP Roseland, New Jersey December 23, 2003 -----END PRIVACY-ENHANCED MESSAGE-----