<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 1997
REGISTRATION NO. 333-5306-D
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
OSMOTICS CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2844 84-1287070
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
--------------
1125 17TH STREET, SUITE 2310
DENVER, COLORADO 80202
(303) 293-2087
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL
PLACE OF BUSINESS)
--------------
STEVEN S. PORTER
CHIEF EXECUTIVE OFFICER
OSMOTICS CORPORATION
1125 17TH STREET, SUITE 2310
DENVER, COLORADO 80202
(303) 293-2087
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
--------------
Copies to:
<TABLE>
<S> <C>
C. KEVIN KELSO, ESQ. ALAN I. ANNEX, ESQ.
MARK A. LEAHY, ESQ. ROBERT S. MATLIN, ESQ.
MARK PORTER, ESQ. CAMHY KARLINSKY & STEIN LLP
FENWICK & WEST LLP 1740 BROADWAY, 16TH FLOOR
TWO PALO ALTO SQUARE NEW YORK, NEW YORK 10019
PALO ALTO, CALIFORNIA 94306 (212) 977-6600
(415) 494-0600
</TABLE>
--------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=======================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share(2)...... 1,293,750 $8.50 $10,996,875 $3,333
- ---------------------------------------------------------------------------------------
Representative's
Warrants................ 112,500 $.0001 $11 (3)
- ---------------------------------------------------------------------------------------
Common Stock issuable upon
exercise of
Representative's
Warrants(4)............. 112,500 $10.20 $1,147,500 $348
- ---------------------------------------------------------------------------------------
Total.................. $3,681(5)
=======================================================================================
</TABLE>
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act.
(2) Includes 168,750 shares of Common Stock issuable upon exercise of the
Representative's Over-Allotment Option.
(3) No registration fee required pursuant to Rule 457 under the Securities
Act.
(4) Pursuant to Rule 416 of the Securities Act, there are also being
registered hereby such additional indeterminate number of shares of Common
Stock as may become issuable pursuant to the anti-dilution provisions of
the Representative's Warrants.
(5) Previously paid.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, MARCH 3, 1997
[LOGO OF OSMOTICS]
1,125,000 SHARES OF COMMON STOCK
-----------
This Prospectus relates to the offering (the "Offering") of 1,125,000 shares
(the "Shares") of common stock, $0.001 par value per share ("Common Stock"), by
Osmotics Corporation (the "Company"). All of the Shares offered hereby are
being sold by the Company.
Prior to this Offering, there has been no public market for the Common Stock,
and there can be no assurance that such a market will develop after the
completion of this Offering or, if developed, that it will be sustained. It is
currently estimated that the initial public offering price will be between
$7.50 and $8.50 per Share. For information regarding the factors considered in
determining the initial public offering price of the Shares, see "Risk Factors"
and "Underwriting." The Company has applied to have the Shares included for
quotation on the Nasdaq SmallCap Market under the symbol "OSMO" and listed on
The Boston Stock Exchange under the symbol "OSX".
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price of the Shares.
-----------
THE SHARES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE
6 AND "DILUTION" ON PAGE 18.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================
PRICE TO PUBLIC UNDERWRITING DISCOUNT(1) PROCEEDS TO COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $ $ $
- -------------------------------------------------------------------------------------------------------------
Total(3).................................. $ $ $
=============================================================================================================
</TABLE>
(1) Does not include additional compensation payable to National Securities
Corporation, the representative (the "Representative") of the several
underwriters (the "Underwriters"), in the form of a 3% non-accountable
expense allowance. In addition, see "Underwriting" for information
concerning indemnification and contribution arrangements with the
Underwriters and other compensation payable to the Representative.
(2) Before deducting estimated expenses of $750,000 payable by the Company,
excluding the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Underwriters an option exercisable within 45
days after the date of this Prospectus to purchase up to an aggregate of
168,750 additional shares of Common Stock upon the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
such over-allotment option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
-----------
The Shares are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, and subject to
approval of certain legal matters by their counsel and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
this Offering and to reject any order in whole or in part. It is expected that
delivery of the Shares offered hereby will be made against payment at the
offices of National Securities Corporation, Seattle, Washington on or about
, 1997.
NATIONAL SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[PICTURE OF ANTIOXIDANT SKIN CARE DERM PRODUCT]
Antioxidant Skin Care Derms transdermal cosmetic patches that deliver the
antioxidant Vitamin C to the skin to help reduce the appearance of fine lines
and wrinkles.
[OSMOTICS LOGO]
Other products sold under the Osmotics label include skin cleansers, hydrating
facial mists, facial moisturizers and alpha hydroxy acid products.
[PICTURE OF OTHER COMPANY PRODUCTS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET, ON
THE BOSTON STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. The Shares offered hereby involve a high degree of risk. See
"Risk Factors." Except where otherwise indicated, all share and per share data
in this Prospectus (including data with respect to options and warrants to
purchase shares of Common Stock) have been adjusted to reflect the
reincorporation of the Company from Colorado to Delaware pursuant to a merger
at an effective exchange ratio of one share of Common Stock of the Delaware
corporation for each 2.2 shares of common stock of the Colorado corporation and
associated changes in the Company's charter documents, to be effected before
the closing of this Offering. See "Description of Capital Stock." In addition,
unless otherwise indicated, all information in this Prospectus assumes that the
Underwriters' over-allotment option will not be exercised.
THE COMPANY
Osmotics Corporation ("Osmotics" or the "Company") develops and markets
cosmetic skin care products. The Company's current principal products are based
on technology combining the Company's transdermal cosmetic delivery skin
patches ("Patches") with a special formulation of ascorbic acid (vitamin C), an
antioxidant. The products, which currently include the Osmotics label
Antioxidant Skin Care Derms, the Spa-Sante Systeme C label Patch and The
Wrinkle Patch, are intended to reduce the appearance of fine facial lines and
wrinkles. The Patches are placed on targeted wrinkles on a person's face to
saturate the skin with the antioxidant. Antioxidants contained in certain
current skin care lotions, creams or oils are exposed to the atmosphere and
lose their antioxidant effectiveness, if not absorbed into the skin within a
relatively short time after application, estimated by the Company to be
approximately 40 minutes. In contrast, the Company's vitamin C formulation is
protected by the Patch from the atmosphere and, therefore, can be absorbed over
the recommended 10 hour period of treatment. Further, Patches maintain the
purity of the vitamin C formulation and deliver the formulation to specific
problem areas of the skin. Drug and Cosmetic Industry Magazine honored the
Antioxidant Skin Care Derms in its December 1995 issue in the cosmetic skin
care treatment packaging category. The Company has filed a U. S. patent
application relating to certain aspects of its Patches.
One industry source has estimated that revenues in the United States skin
care products market were approximately $5.12 billion in 1994, representing
approximately 24.6% of total revenues in the United States personal care
products market. The same source projected that revenues in the United States
skin care products market would be approximately $6.46 billion in 1997 and
approximately $9.31 billion in 2001, representing a compound annual growth rate
from 1994 to 2001 of 8.9%. The Company believes that a portion of the estimated
future growth in revenues will come from the sale of skin care products
containing vitamin ingredients, such as the Company's vitamin C formulation.
The Company believes that the reasons for this continued growth of sales in the
skin care products market include fundamental changes now taking place in
demographic (aging population) and environmental factors, which are stimulating
the need for innovative, more effective skin care products. The U.S. Bureau of
Census has estimated that between 1993 and 2020, the number of individuals age
45 and over in the United States will increase by 59%, while those under age 45
in the United States will increase by only 7%. Further, the first of the
approximately 76 million "baby boomers" in the United States who were born
between 1946 and 1960 turned 50 in 1996. The Company believes that the need for
new skin care products will increase as the population ages because concern
with the effects of aging on the skin increases with age.
The Company's objectives are to be the leader in the marketing of skin care
products that deliver antioxidants by means of skin patches, to remain the
leader in that market segment and to expand its product line of other skin care
products and compete in the cosmeceuticals market. The Company currently
markets cleansers, moisturizers, alpha hydroxy acid and lipsticks in the
upscale market under the Osmotics label product line, and skin creams and
hydrating moisture sprays in The Wrinkle Patch label product line. The Company
intends to develop and market additional product line extensions in the future.
3
<PAGE>
The Company first sold skin care products under the Osmotics label, including
Antioxidant Skin Care Derms, in April 1995 to certain Saks Fifth Avenue stores.
The Company commenced marketing its Spa-Sante label Patch in March 1996 through
spas, beauty salons and estheticians, and commenced marketing The Wrinkle Patch
in October 1995 through a direct sale catalog. The Company offers The Wrinkle
Patch label products to several direct sale catalogs, through TV home shopping
channels, through an infomercial and through the World Wide Web. The Company
has also agreed to supply to a third party skin patches for inclusion in
products to be sold by the third party under its own label in certain foreign
markets. The Company may seek to have its products marketed under additional
private labels.
Outside the United States, the Company launched Osmotics label products,
including Antioxidant Skin Care Derms, in the United Kingdom in May 1996 at six
House of Fraser stores located throughout the United Kingdom. In the fall of
1996, the Company launched products in Paris, France at a Galeries Lafayette
store and in Geneva, Switzerland at eight Pharmacies Principale stores. In
January 1997, the Company launched products in France at Le Printemps,
Samaritaine, Bon Marche and Perfumerie Sephora stores. In December 1996, the
Company introduced products in Brazil and Ecuador. The Company expects to
launch products in additional countries in Canada, South America, Europe and
Asia during 1997.
The predecessor entity to the Company was incorporated in Colorado in August
1993. Before the closing of this Offering, the Company intends to reincorporate
in Delaware by merging into a newly formed corporation incorporated in Delaware
in July 1996. The Company's principal executive offices are located at 1125
17th Street, Denver, Colorado 80202. Its telephone number is (303) 293-2087. In
this Prospectus, the terms "Company" and "Osmotics" refer to the Company and
its predecessors.
RISK FACTORS
The Shares offered hereby involve a high degree of risk. This Prospectus
contains forward-looking statements, including those discussed under
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Use of Proceeds." These forward-looking statements
involve a number of risks and uncertainties, including, but not limited to,
those discussed under "Risk Factors." The Company's actual results may differ
significantly from the results discussed in the forward-looking statements. See
"Risk Factors."
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company......... 1,125,000 shares
Common Stock to be outstanding after this
Offering................................... 2,603,299 shares(1)
Use of proceeds............................. For repayment of indebtedness
and general corporate purposes,
including marketing and sales
expenditures and working
capital. See "Use of Proceeds."
Proposed Nasdaq SmallCap Market symbol...... OSMO
Proposed Boston Stock Exchange symbol....... OSX
</TABLE>
- --------
(1) Based upon shares issued and outstanding as of December 31, 1996. Does not
include 272,000 shares of Common Stock issuable upon exercise of options
outstanding as of December 31, 1996 granted to directors, officers,
employees of, and consultants to, the Company, at a weighted average
exercise price of $2.42 per share; (ii) 150,000 shares of Common Stock
issuable upon exercise of options to be granted concurrently with the
effective date of this Offering, at an exercise price equal to 110% of the
initial public offering price of the Shares offered hereby; (iii) 200,000
additional shares of Common Stock reserved for future grants under the
Company's 1997 Directors Stock Option Plan and 1997 Equity Incentive Plan;
(iv) 73,036 shares of Common Stock issuable upon exercise of other options
and warrants outstanding as of December 31, 1996, at an exercise price of
$1.10 per share; (v) an estimated approximately 118,750 shares of Common
Stock issuable upon exercise of the Bridge Warrants at an exercise price of
$0.022 per share; and (vi) 112,500 shares of Common Stock issuable upon
exercise of the Representative's Warrants at an exercise price equal to
120% of the initial public offering price of the Shares offered hereby.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1995 1996
----- ------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................................................. $ 328 $1,255
Loss from operations........................................... (790) (1,401)
Net loss....................................................... (811) (1,842)
Net loss per share(1).......................................... (.68) (1.27)
Shares used in computing net loss per share(1)................. 1,187 1,446
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------
AS
ACTUAL ADJUSTED(2)
------ -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 91 $6,290
Current assets............................................ 869 7,068
Current liabilities....................................... 1,869 594
Total assets.............................................. 1,372 7,167
Long-term debt, less current portion...................... 39 39
Total stockholders' equity (deficit)...................... (536) 6,534
</TABLE>
- --------
(1) For an explanation of the determination of the number of shares used in per
share calculations, see Note 2 of Notes to the Company's financial
statements appearing at the end of this Prospectus (the "Financial
Statements").
(2) Adjusted to reflect the sale of 1,125,000 Shares by the Company hereby at
an assumed initial public offering price per Share of $8.00, and after
deducting the underwriting discounts and commissions and estimated offering
expenses and the application of the net proceeds therefrom. See
"Capitalization" and "Use of Proceeds."
----------------
The Osmotics(R) name logo and Antioxidant Skin Care Derms(R) are registered
U.S. trademarks of the Company. The Company has U.S. trademark applications
pending for AKA RED(TM), WRINKLE PATCH(TM), THE NIGHTIME MIRACLE(TM) and
SYSTEME C(TM). All other trademarks or trade names referred to in this
Prospectus are the property of their respective owners.
NOTICE TO CALIFORNIA INVESTORS
Each purchaser of Shares in California must meet one of the following
suitability standards: (1) any person who (a) has a net worth (excluding home,
furnishings and automobiles) of $250,000 or more and gross annual income of
$65,000 or more, or (b) has a net worth (excluding home, furnishings and
automobiles) of $500,000 or more; (2) any person who is an accredited investor
within the meaning of Regulation D under the Securities Act of 1933, as amended
(the "Securities Act"); (3) any entity that is a bank, savings and loan
association, trust company, insurance company, investment company registered
under the Investment Company Act of 1940, pension and profit sharing trust,
corporation or other entity, which together with the corporation's or other
entity's affiliates, has a net worth on a consolidated basis according to its
most recent regularly prepared statements (which shall have been reviewed, but
not necessarily audited, by outside accountants) of not less than $14,000,000
and subsidiaries of the foregoing; or (4) any person (other than a person
formed for the sole purpose of purchasing the Shares being offered hereby) who
purchases at least $1,000,000 aggregate amount of the Shares hereby offered.
5
<PAGE>
RISK FACTORS
An investment in the Shares offered hereby involves a high degree of risk.
In addition to the other information in this Prospectus, the following factors
should be considered carefully in evaluating an investment in the Shares. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in such forward-looking statements. Factors that may cause
such a difference include, but are not limited to, those discussed below and
elsewhere in this Prospectus.
Limited Operating History; History of Operating Losses; Going Concern
Opinion; Accumulated Deficit. The Company was organized in August 1993 and has
only a limited operating history upon which evaluation of its prospects can be
made. The Company has never been profitable and, at December 31, 1996, had a
working capital deficit of approximately $1,000,000 and an accumulated deficit
of approximately $2,733,000. In addition, the report of the Company's
independent public accountants accompanying the Financial Statements notes
that the Company's recurring losses from operations and net capital deficiency
raise substantial doubt about the Company's ability to continue as a going
concern, absent completion of this Offering. The Company began shipping its
first product, Antioxidant Skin Care Derms, in April 1995, and the Company's
limited operating history makes the prediction of future operating results
difficult. The Company does not believe that prior growth rates are
necessarily indicative of future operating results. Future operating results
will depend on many factors, including demand for the Company's products, the
level of product and price competition, the Company's success in expanding the
number of stores through which its products are sold and its other
distribution channels, the ability of the Company to develop and market line
extensions of its present products, the ability of the Company to control
costs, general economic conditions and other factors. There can be no
assurance that the Company will ever generate significant revenues or achieve
or sustain profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Product and Customer Concentration. Approximately 48% of the Company's
revenues from its inception in August 1995 to December 31, 1996 have been
derived from the sale of products to Saks Fifth Avenue stores located in the
United States, and revenues from sales to Saks Fifth Avenue stores accounted
for approximately 88% and 37% of the Company's revenues in 1995 and 1996,
respectively. The Company and Saks Fifth Avenue have not entered into a
written contract respecting the sale of products. Revenues from sales to Self
Care catalog accounted for approximately 12% and 16% of the Company's revenues
in 1995 and 1996, respectively. Further, revenues from sales to House of
Fraser stores accounted for approximately 18% of the Company's revenues in
1996. There can be no assurance that any Saks Fifth Avenue or House of Fraser
store or Self Care catalog will continue to purchase products from the
Company.
The Company currently expects that revenues attributable to Antioxidant Skin
Care Derms and other Osmotics label products will account for a significant
portion of the Company's revenues in 1997. As a result, the Company's future
operating results are dependent upon market acceptance of these products in
both domestic and international retail outlets. There can be no assurance that
the Company's products will achieve market acceptance or that the Company will
be successful in marketing its products. A decline in demand for, or market
acceptance of, Antioxidant Skin Care Derms, as a result of competition or
other factors, would have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Products."
Fluctuations in Quarterly Results; Seasonality. The Company's quarterly
operating results have varied in the past and may in the future vary
significantly, depending on factors such as the size and timing of customer
orders, price and other competitive conditions in the cosmetics industry and
the timing of new product announcements and releases by the Company and its
competitors. The Company operates with little order backlog, and substantially
all of its revenues in each quarter result from sales made in that quarter.
Accordingly, revenues for any future quarter are difficult to predict. It is
likely that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
the price of the Common Stock would likely be materially adversely affected.
6
<PAGE>
The Company believes that demand by retail department stores located in the
United States for cosmetic products, including those of the Company, is
generally greatest during the fall season and lowest during the summer months.
Since a large component of the Company's revenues are derived from sales to
retail department stores, the Company may in the future experience such
seasonality in its revenues. The Company intends to introduce additional
products, sell its products through additional distribution channels and sell
products in additional geographic regions. Each of these actions may have
different seasonal trends and may affect overall seasonality of the Company's
operating results. See "--Product and Customer Concentration" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Management of Growth. The Company's recent, and anticipated future, growth
has placed, and is expected to continue to place, a strain on the Company's
administrative, financial and operational resources. The size of the Company's
professional staff has increased from nine full-time employees at December 31,
1995 to 12 such employees at December 31, 1996. In addition, at December 31,
1995 and 1996, there were four and 11 persons, respectively, working in retail
stores for whom the Company was responsible for all or a portion of their
salary. Of those 11 persons, five were in the United States. The Company plans
to hire additional employees in 1997, including a Controller and additional
administrative, sales and marketing personnel. The Company's ability to manage
its growth effectively will require it to continue to improve its operational,
financial and management controls, reporting systems and procedures, to
install new management information and control systems and to train, motivate
and manage employees. If the Company is unable to manage growth effectively
and new employees are unable to achieve adequate performance levels, the
Company's business, operating results and financial condition could be
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Competition. The cosmetics, skin care and personal care business is highly
competitive. Increased competition could result in price reductions, reduced
transaction size, fewer customer orders and reduced gross margins, any of
which could have a material adverse effect on the Company's business,
operating results and financial condition. The Company believes that the
principal competitive factors affecting the cosmetics market include product
uniqueness, product performance, the effectiveness of sales and marketing
efforts and company reputation. There can be no assurance that the Company
will compete successfully in the future with respect to these or other
factors.
The Company believes that no other company is currently marketing products
using skin patch technology to deliver antioxidants to a person's skin for
cosmetic purposes, although certain products using gauze pads to deliver
antioxidants are presently sold by certain of the Company's competitors. The
Company believes that other products currently utilizing transdermal delivery
systems are sold primarily in prescription pharmaceutical markets for other
than cosmetic use. However, the FDA recently approved the marketing of a
consumer product, without the need for a prescription, for transdermal
delivery of nicotine using a patch. There can be no assurance that products
using skin patch technology to deliver antioxidants to a person's skin for
cosmetic purposes do not exist or are not under development by others.
Certain skin creams, lotions and oils currently sold by cosmetics companies,
including the Cellex-C brand antioxidant serum, compete with the Company's
comparable products. Additionally, Avon Products markets a vitamin C formula
under the brand name Anew, which Avon claims, among other things, minimizes
the appearance of fine lines and wrinkles. Some of the Company's current, and
many of the Company's potential, competitors have significantly greater
financial, marketing, product development, testing and other resources than
the Company and sell their products more widely than the Company. As a result,
they may have the capacity to respond more quickly to changes in customer
requirements or to devote greater resources to the development, testing,
promotion and sale of their products than the Company. It is possible that new
competitors may emerge and rapidly gain significant market share.
Additionally, it is possible current or new competitors might introduce
competitive products which also utilize skin patch technology or other
technology that produces results similar or superior to the Company's Patches
or which are sold at a lower price than the Company's products in similar
distribution channels. There can be no assurance that the Company will be able
to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not have a material adverse
effect on its business, operating results and financial condition. See
"Business--Competition."
7
<PAGE>
Changes in the Retail Industry. A significant portion of the Company's
revenues to date have been derived from the sale of products to certain Saks
Fifth Avenue stores located in the United States. The Company also sells
products to other retailers located in the United States and other countries.
The retail industry has periodically experienced consolidation and other
ownership changes. Major retailers in the United States and in foreign markets
may in the future consolidate, undergo restructurings or realign their
affiliations, which could decrease the number of stores that sell the
Company's products, increase the ownership concentration within the retail
industry or change the way in which the Company markets products. While such
changes in the retail industry to date have not had a material adverse effect
on the Company's business, operating results or financial condition, there can
be no assurance as to the future effect of any such changes. See "Business--
Sales and Marketing."
Brand Loyalty of Consumers of Cosmetics. The Company believes that consumers
of cosmetics products are increasingly less loyal to a particular brand name
and, as a result, are less likely to purchase multiple types of products
within a brand's product line unless those products satisfy specific needs of
the consumers. The Company believes that this trend may have aided the
Company's introduction of its Patches, but there can be no assurance that this
trend will aid the Company in the introduction of products in the future. See
"Business--Strategy."
Protection of Intellectual Property. The Company currently relies primarily
on a combination of trademark laws, trade secrets, confidentiality procedures
and contractual provisions to protect its technology. The Osmotics name logo
and Antioxidant Skin Care Derms are registered U.S. trademarks of the Company.
The Company has U.S. trademark applications pending for AKA RED, WRINKLE
PATCH, THE NIGHTIME MIRACLE and SYSTEME C. The United States Patent and
Trademark Office (the "PTO") has rejected the Company's U.S. trademark
application for Spa-Sante. The Company intends to challenge that rejection.
The Company has trademark applications pending in Japan for OSMOTICS, Spa
Sante, The Wrinkle Patch and SYSTEME C, in Korea for OSMOTICS and the Osmotics
label, Spa Sante, The Wrinkle Patch and SYSTEME C, in the European Community
for OSMOTICS and the Osmotics logo and in Ecuador for OSMOTICS. There can be
no assurance that any of these marks for which registration applications are
pending will be registered.
The Company filed one United States patent application in 1994 and filed a
continuation in part of that patent application in 1995. The PTO has rejected
all claims in these applications, alleging that the claimed inventions were
obvious. In response, the Company filed a continuation in part application in
1996, accumulating subject matter of both prior patent applications and
addressing, among other things, the use of the Patches as a method to deliver
antioxidants. The Company also has filed an application under an international
treaty designating various foreign countries for which the Company preserved
certain rights in the event it files patent applications in any of those
countries. The Company also intends to file additional patent applications in
the PTO on various features of its products in the future, if appropriate.
However, there can be no assurance that any patents will issue in any country
with respect to currently pending applications or any future patent
applications.
The validity and breadth of claims in patents involve complex legal and
factual questions and, therefore, may be highly uncertain. No assurance can be
given that any issued patent or patents based on the pending patent
applications or any future patent application will exclude competitors or
provide competitive advantages to the Company or that others will not claim
rights in or ownership of the Company's rights which it regards as
proprietary. Furthermore, there can be no assurance that others have not
developed or will not develop similar products, duplicate any of the Company's
products or design around any patents that may be issued in the future to the
Company. Since patent applications in the United States are maintained in
secrecy until patents issue, the Company also cannot be certain that others
did not first file applications for inventions covered by the Company's
pending patent applications, nor can the Company be certain that it will not
infringe any patents that may issue to others on such applications.
Despite the Company's efforts to protect its rights, unauthorized parties
may attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products may prove to be difficult, and, while the Company is
unable to
8
<PAGE>
determine the existence or amount of other products which now or in the future
illegally duplicate the Company's products, such other products can be
expected to be a persistent problem. In addition, the laws of many countries
do not protect the Company's rights which it regards as proprietary to as
great an extent as do the laws of the United States. There can be no assurance
that the Company's means of protecting its rights will be adequate or that the
Company's competitors will not independently develop similar products.
To date, the Company has not been notified that the Company's products
infringe the proprietary rights of third parties, but there can be no
assurance that third parties will not claim infringement by the Company with
respect to current or future products. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
See "Business--Intellectual Property and Other Proprietary Rights."
Dependence on Key Personnel. The Company's future success will depend in
large part upon its ability to attract, retain and motivate highly skilled
employees. The loss of any of the Company's senior management or other key
research, development, sales and marketing personnel, particularly if lost to
competitors, could have a material adverse effect on the Company's business,
operating results and financial condition, including its ability to attract
employees. In particular, the loss of Steven S. Porter, the Company's
President, Chief Executive Officer and Chairman of the Board, or Francine E.
Porter, the Company's Executive Vice President and Treasurer, would have a
material adverse effect on the Company's development and marketing efforts.
The Company intends to obtain key man life insurance policies covering Steven
Porter and Francine Porter at the closing of this Offering. See "Business--
Sales and Marketing" and "Business--Employees."
Risks Associated with International Sales. Sales of the Company's products
outside of the United States have represented an increasingly greater portion
of total revenues. The Company intends to expand the sales of its products in
Europe and South America and to launch the sales of its products in Asia,
which efforts will require significant management attention and financial
resources. The Company has committed and continues to commit resources to
developing international sales. There can be no assurance that the Company's
efforts to develop international sales will be successful, and the failure of
such efforts could have a material adverse effect on the Company's business,
operating results and financial condition. International sales are subject to
a number of risks, including differing regulatory requirements which might
require the Company, among other things, to modify the formulation and
packaging of its products, unexpected changes in regulatory requirements,
longer payment cycles, import and export restrictions and tariffs, shipping
delays, difficulties in staffing and managing foreign operations, the burden
of complying with a variety of foreign laws, greater difficulty in accounts
receivable collection, potentially adverse tax consequences, currency
fluctuations and political and economic instability. Additionally, the
protection of intellectual property may be more difficult to enforce outside
of the United States. In the event that the Company is successful in expanding
its international operations, the imposition of exchange or price controls or
other restrictions on foreign currencies could materially adversely affect the
Company's business, operating results and financial condition. As the Company
increases its international sales, its total revenues may also be affected to
a greater extent by seasonal fluctuations resulting from lower sales that
typically occur during the summer months in Europe. See "Business--Strategy"
and "Business--Sales and Marketing."
Suppliers; Manufacturing Limitations. The Company currently obtains
ingredients, packaging and final formulations from several third party
suppliers and has not entered into a written agreement with any such supplier.
Although the Company believes that all ingredients are presently obtainable
and has identified additional third parties that could also supply such
ingredients, there can be no assurance that the Company will continue to be
able to obtain such ingredients, packaging or formulations from third parties
at all or in sufficient quantities and on terms and conditions acceptable to
the Company. The Company relies on a different third party to manufacture raw
products into finished products. The Company has entered into a written
agreement respecting confidentiality, but not supply requirements or
otherwise, with this manufacturer. The Company believes that if this
manufacturer were unexpectedly to stop manufacturing raw products into
finished products
9
<PAGE>
for the Company, there would be a temporary adverse effect on the Company's
ability to produce products on a timely basis, but that one or more other
third party manufacturers could be identified. The Company neither has nor
plans to acquire the equipment and facilities necessary to manufacture its
current and future products and is and will be dependent upon third party
contract manufacturers for such production. There can be no assurance that the
Company will continue to be able to obtain contract manufacturing on
commercially acceptable terms for products in the quantities currently
obtainable or that may be required in the future. Further, there can be no
assurance that manufacturing or quality control problems will not arise at the
manufacturing plant of the Company's present contract manufacturer. In
addition, if the Food and Drug Administration (the "FDA") were to determine
that any of the Company's cosmetic products, including products that contain
active sunscreen ingredients and are labeled with a sun protection factor, are
also drugs, those products would have to be manufactured in accordance with
the FDA's current good manufacturing practice ("GMP") requirements for
finished pharmaceuticals. The Company's present contract manufacturer produces
the Company's finished products at a GMP manufacturing facility, but there can
be no assurance of compliance or that, if the Company had to contract with a
different third party manufacturer, the GMP requirements, if applicable, would
be met. See "Business--Manufacturing."
Government Regulation. The Company and its cosmetic products are subject to
regulation by the FDA and the Federal Trade Commission (the "FTC") in the
United States, as well as by various other federal, state and local
authorities. Such regulation relates primarily to the ingredients, packaging,
labeling, advertising and marketing of the Company's products. Cosmetics do
not require premarket notification to, or premarket approval by, the FDA, but
must be properly labeled and manufactured. Failure to comply with FDA
requirements in such matters can result in severe civil and criminal
penalties, including seizure of product, injunction against production,
distribution, sales and marketing, and prosecution. The FTC oversees the
advertising of cosmetic products, and prohibits false or misleading
advertising. The FTC has a number of remedies available to it, including
preliminary injunctive relief based on its mere "reason to believe" that an
advertisement is false or misleading.
If the FDA were to determine that any of the Company's products are new
drugs (as well as or instead of cosmetics), the Company would not be able to
market such products without obtaining FDA approval of new drug applications
submitted by the Company or, alternatively in the case of certain over-the-
counter ("OTC") drug products, without complying with an FDA OTC monograph
setting out permissible ingredients and indications (claims), among other
requirements. The approval process for new drugs is lengthy, expensive and
uncertain. Securing FDA approvals requires the submission of extensive
preclinical (laboratory and animal) and clinical safety and effectiveness data
to the FDA, together with detailed manufacturing, labeling and other
supporting information. Gathering the requisite data and preparing the
requisite applications for marketing permits usually takes many years. The FDA
review process of such applications typically is lengthy, and there could be
no assurance as to when, if ever, the FDA approvals would be obtained. Such
determinations by the FDA could, depending on the products affected, have a
material adverse effect on the Company's business, operating results and
financial condition and on the market price of the Common Stock. There can be
no assurance that the Company's current or future products will not be
regulated by the FDA as new drugs, nor can there be any assurance that any
future requirements will not have a material adverse effect on the Company's
business, financial condition or results of operations or on the market price
of the Common Stock. See "Business--Government Regulation."
Risk of Product Liability; Limited Product Liability Insurance. The testing,
marketing and sale of cosmetic products entails an inherent risk of
allegations of product liability, and there can be no assurance that
substantial product liability claims will not be asserted against the Company.
The Company has obtained limited amounts of insurance for product liability
claims. However, there can be no assurance that the Company will be able to
obtain or maintain insurance on acceptable terms for its development, testing
and commercial activities or that any insurance obtained will provide adequate
protection against potential liabilities.
Control by Existing Stockholders. Upon completion of this Offering, the
directors, executive officers and principal stockholders of the Company and
their affiliates will, in the aggregate, beneficially own approximately 42.6%
of the Company's outstanding Common Stock (approximately 40.1% if the
Underwriters' over-allotment
10
<PAGE>
option is exercised in full), including shares issuable upon exercise of
outstanding options or warrants that are exercisable by such persons before
March 2, 1997. As a result, these stockholders, acting together, will possess
significant influence on stockholders of the Company, election of the
Company's Board of Directors and the approval of significant corporate
transactions. Such control could delay, defer or prevent a change in control
of the Company, impede a merger, consolidation, takeover or other business
combination involving the Company, or discourage a potential acquirer from
making a tender offer or otherwise attempting to obtain control of the
Company. See "Management" and "Principal Stockholders."
Future Additional Capital Requirements; No Assurance Future Capital Will be
Available. The Company's capital requirements will depend on numerous factors,
including the resources the Company devotes to the development, manufacture
and marketing of its products, including the launch of new product lines or
the launch of products into new distribution channels, both domestic and
international; market acceptance and demand for its products; and other
factors. While the timing and amount of such capital requirements cannot be
predicted with accuracy, the Company believes that the net proceeds of this
Offering, together with cash on hand, cash expected to be received upon
payment of outstanding accounts receivable as of December 31, 1996, and cash
expected to be generated from operations, will provide adequate funding for
the Company to hire additional personnel, launch new marketing and product
development programs, and otherwise conduct its anticipated business
activities through at least 12 months after the date of the closing of this
Offering. Nevertheless, the Company may be required to raise additional funds
through public or private debt or equity financings, collaborative
relationships, bank facilities or other arrangements. There can be no
assurance that the Company will not require additional funding sooner than
expected or that such additional funding, if needed, will be available on
terms attractive to the Company, or at all. Any additional equity financing
may be dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Exercise of Warrants and Options. As of December 31, 1996, 272,000 shares of
Common Stock were issuable upon exercise of outstanding employee, officer,
director or consultant stock options at a weighted average exercise price of
$2.42 per share and 73,036 shares of Common Stock were issuable upon exercises
of other outstanding options and warrants (excluding the Bridge Warrants) at a
weighted average exercise price of $1.10 per share. Further, upon the
effective date of this Offering, (i) 150,000 shares of Common Stock will be
issuable upon exercise of options to be granted concurrently with the
effective date of this Offering, at an exercise price equal to 110% of the
initial public offering price of the Shares offered hereby, (ii) 200,000
additional shares will be reserved for future grants under the Company's 1997
Directors Stock Option Plan and 1997 Equity Incentive Plan, (iii) an estimated
approximately 118,750 shares will be issuable upon exercise of the Bridge
Warrants at an exercise price of $.022 per share and (iv) 112,500 shares will
be issuable upon exercise of the Representative's Warrants at an exercise
price equal to 120% of the initial public offering price of the Shares offered
hereby. For the life of such options and warrants, the holders thereof will
have the opportunity to profit from a rise in the market price of the Common
Stock without assuming the risk of ownership of the shares of Common Stock
issuable upon exercise of such options and warrants, with the resulting
dilution in the interest of the Company's stockholders by reason of exercise
of such options and warrants at a time when the exercise price is less than
the market price for the Common Stock. Further, the terms on which the Company
could obtain additional capital during the life of such options and warrants
may be adversely affected. The holders of such options and warrants may be
expected to exercise such options and warrants at a time when the Company
would, in all likelihood, be able to obtain any needed capital by a new
offering of its securities on more favorable terms than those provided for by
those options and warrants.
Effect of Certain Charter Provisions and Agreements; Anti-Takeover Effects
of Delaware Law. Upon completion of the Offering, the Company's Board of
Directors will have the authority to issue up to 10,000,000 shares of
Preferred Stock and to determine the prices, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance
of Preferred Stock could adversely affect the voting power
11
<PAGE>
of holders of Common Stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation. Additionally, issuance of
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company. The Company has no current plans to issue shares
of Preferred Stock. Further, certain provisions of Delaware law could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company. These provisions are designed to reduce the
vulnerability of the Company to an unsolicited acquisition proposal. These
provisions are also intended to discourage certain tactics that may be used in
proxy fights. However, such provisions could have the effect of discouraging
others from making tender offers for the Company's shares, and, as a
consequence, they also may inhibit increases in the market price of the
Company's shares that could result from actual or rumored takeover attempts.
Such provisions also may have the effect of preventing changes in the
management of the Company. In addition, Section 203 of the Delaware General
Corporation Law (the "DGCL") restricts certain business combinations with any
"interested stockholder" as defined by such statute. The statute may have the
effect of delaying, deferring or preventing a change in control of the
Company. See "Description of Capital Stock."
As is permitted by the DGCL, the Company's charter documents provide that
the Company will indemnify its directors and officers, and advance certain
expenses to such persons in connection with certain legal proceedings, to the
maximum extent permitted by the DGCL. The Company will also enter into
indemnity agreements with each of its current directors and executive
officers. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. See "Management--Indemnification of
Directors and Executive Officers and Limitation of Liability."
Limits on Secondary Trading; Possible Illiquidity of Trading Market. The
Company has applied to have the Common Stock listed on the Nasdaq SmallCap
Market and The Boston Stock Exchange (the "BSE"), which may be significantly
less liquid markets than the Nasdaq National Market or other stock exchanges.
There can be no assurance that these applications will be accepted and that
Common Stock will be listed on the Nasdaq SmallCap Market or the BSE. If
neither application is accepted, or even if accepted, if the Company should be
unable to maintain the standards for continued quotation on the Nasdaq
SmallCap Market and the BSE, then trading, if any, in the Common Stock would
be conducted in the over-the-counter market on an electronic bulletin board
established for securities that do not meet the Nasdaq SmallCap Market or the
BSE's listing requirements or in what are commonly referred to as the "pink
sheets." As a result, an investor would find it more difficult to dispose of,
or to obtain accurate quotations as to the price of, the Common Stock. In
addition, depending on several factors including the future market price of
the Common Stock, the Common Stock could become subject to the so-called
"penny stock" rules that impose additional sales practice and market making
requirements on broker-dealers who sell and/or make a market in such
securities, which could affect the ability or willingness of broker-dealers to
sell and/or make a market in the Common Stock and the ability of purchasers of
the Common Stock to sell their shares in the secondary market.
No Prior Public Market; Possible Volatility of Stock Price. Before this
Offering, there has been no public market for the Common Stock, and there can
be no assurance that any broker-dealer will act as a market maker for the
Common Stock or that an active public market for the Common Stock will develop
or be sustained after this Offering. The initial public offering price for the
Common Stock will be determined by negotiation among the Company and the
Representative based upon a number of factors and may not be an indication of
the market price of the Common Stock following this Offering. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price of the Common Stock. The trading prices of the
Common Stock could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of new products by the Company
or its competitors, changes in financial estimates by securities analysts and
other events or factors. In addition, the Company believes that the stock
market has experienced volatility that has affected the market prices of
equity securities of many cosmetics companies and that
12
<PAGE>
sometimes has been unrelated or disproportionate to the operating performance
of such companies. These broad market fluctuations may adversely affect the
market price of the Common Stock.
Shares Eligible for Future Sale. Sales of a substantial number of shares of
Common Stock in the public market following this Offering could adversely
affect the market price for the Company's Common Stock. The number of shares
of Common Stock available for sale in the public market is limited by
restrictions under the Securities Act and lock-up agreements providing that
the holders of such shares will not directly or indirectly sell, contract to
sell, grant any option to purchase or otherwise transfer or dispose of any
securities of the Company until one year from the closing of this Offering
without the prior written consent of the Representative.
Based on shares issued and outstanding as of December 31, 1996, as a result
of the foregoing lock-up agreements and securities law restrictions, 30,000
shares of Common Stock other than the 1,125,000 Shares offered hereby will be
eligible for resale without restriction immediately after the effectiveness of
this Offering pursuant to Rule 144 or Rule 144(k), 6,818 shares of Common
Stock will be eligible for resale commencing in June 1997 pursuant to Rule
144, and approximately 1,441,481 additional shares of Common Stock will be
eligible for resale, pursuant to either Rule 701 or Rule 144, beginning one
year from the closing of this Offering. The Company also intends to register
on a registration statement on Form S-8, following the effective date of this
Offering, a total of 622,000 shares of Common Stock (assuming no exercise of
options or warrants after December 31, 1996) subject to certain outstanding
options or reserved for issuance under the Company's 1997 Equity Incentive
Plan and 1997 Directors Stock Option Plan. Additional shares of Common Stock
issuable upon the exercise of certain outstanding options and warrants will
become eligible for public sale as a result of registration rights agreements
with the Company or the Company otherwise agreeing to register such shares.
See "Description of Capital Stock--Registration Rights" and "Shares Eligible
for Future Sale."
Representative's Warrants. At the closing of this Offering, the Company will
sell to the Representative for nominal consideration the Representative's
Warrants to purchase up to 112,500 shares of Common Stock. The
Representative's Warrants will be exercisable for a period of four years
commencing 12 months after the date of this Prospectus, at an exercise price
equal to 120% of the initial public offering price per Share. As long as the
Representative's Warrants or other outstanding warrants remain unexercised,
the Company's ability to obtain additional capital might be adversely
affected. Moreover, the Representative or other holders of outstanding
warrants may be expected to exercise such warrants at a time when the Company
would, in all likelihood, be able to obtain any needed capital by a new
offering of its securities on terms more favorable than those provided by the
warrants. Holders of the Representative's Warrants and holders of other
warrants have certain registration rights with respect to shares of Common
Stock underlying those warrants. See "Description of Capital Stock--Other
Securities," "Description of Capital Stock--Registration Rights" and
"Underwriting."
Immediate and Substantial Dilution. Investors participating in this Offering
will incur immediate, substantial dilution of $5.50 per share. To the extent
options and warrants to purchase Common Stock are exercised, there will be
further dilution. See "Dilution."
Legal Proceedings. From October through December 1996, in additional
closings of the Bridge Financing, the Company issued Bridge Notes in the
aggregate principal amount of $250,000 and additional Bridge Warrants to
purchase an estimated approximately 31,250 shares of Common Stock. Such
issuances may not have complied with all applicable requirements to satisfy
exemptions from the registration or qualification requirements under
securities laws of the United States and certain states in which those
securities were issued. The Bridge Notes will, however, be repaid in full at
the closing of this Offering, and to date no purchaser has made a claim for
rescission or other remedies. As a result, the Company believes that even if
such transactions were found to have violated federal or state securities
laws, such violations would not have a material adverse effect on the
Company's business, operating results or financial condition, although there
can be no assurances that this would be the case.
A dispute exists between the Company and a third party under an infomercial
production and product management agreement concerning the Company's
obligations under that agreement. The Company is also subject to various
claims and business disputes in the ordinary course of business; however, the
Company is unaware of any present claims or disputes which would have a
material adverse effect on the Company's business, operating results or
financial condition. See "Business--Legal Proceedings."
13
<PAGE>
USE OF PROCEEDS
The gross proceeds to the Company from the sale of 1,125,000 Shares offered
by the Company hereby are estimated to be $9,000,000 ($10,350,000 if the
Underwriters' over-allotment option is exercised in full). The net proceeds to
the Company are estimated to be approximately $7,080,000 ($8,254,500 if the
Underwriters' over-allotment option is exercised in full), after deducting
estimated underwriting discounts and commissions of approximately $1,170,000
($1,345,500 if the Underwriters' over-allotment option is exercised in full)
and offering expenses of approximately $750,000. The Company currently expects
to use the estimated net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
DOLLAR PERCENTAGE OF
APPLICATION OF NET PROCEEDS AMOUNT NET PROCEEDS
--------------------------- ----------- -------------
<S> <C> <C>
Repayment of outstanding debt(1)...................... $1,078,500 15.2%
Payment of outstanding consultants' fees(2)........... 121,000 1.7
Marketing and sales of the Company's products(3)...... 3,800,000 53.7
Working capital and general corporate purposes........ 2,080,500 29.4
</TABLE>
- --------
(1) The Company intends to apply these proceeds to repay approximately
$950,000 payable under the notes issued in the Bridge Financing (which
have interest rates ranging from 12% to 15% per annum), $107,500 payable
under the notes issued in the 1995 Note Financing (which have an interest
rate of 10.0% per annum) and $21,000 relating to an unsecured promissory
note (which has an interest rate of 10.0% per annum). See
"Capitalization--Recent Financing Transactions" and "Certain
Transactions."
(2) The Company intends to apply these proceeds to pay certain outstanding
consultants' fees, royalties and commissions.
(3) The Company intends to apply these proceeds to the marketing of the
Company's products to upscale retail stores located in the United States,
the anticipated launch of products in other countries and the pursuit of
other marketing and sales opportunities. See "Business--Sales and
Marketing."
The foregoing represent estimates only, and the actual amounts expended by
the Company for these purposes and the timing of such expenditures will depend
on numerous factors. The Company may use a portion of the net proceeds to
acquire businesses or companies complementary to the Company's business,
although the Company currently has no specific plans or commitments to acquire
any business or companies, from affiliates of the Company or any other party.
The terms of any such acquisition from an affiliate of the Company will be no
less favorable to the Company than could be obtained from unaffiliated third
parties. Pending use of the net proceeds for the above purposes, the Company
intends to invest such funds in short-term, interest-bearing, investment-grade
obligations and federally insured certificates of deposit.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently anticipates that it will retain all future
earnings for use in its business and does not anticipate paying any cash
dividends in the foreseeable future. The payment of any future dividends will
be at the discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, operations, capital requirements, the
general financial condition of the Company, general business conditions and
contractual restrictions on payment of dividends, if any.
14
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1996, (1) the actual
capitalization of the Company, (2) the pro forma capitalization of the Company
to reflect (a) the closing of $200,000 of additional Bridge Financing in
January 1997 and (b) the reincorporation of the Company in Delaware and
concurrent changes to the Company's authorized capital stock, and (3) further
adjustment of the pro forma capitalization to give effect to the sale of
1,125,000 Shares offered hereby at an assumed initial public offering price of
$8.00 per Share, after deducting underwriting discounts and commissions and
other estimated expenses of this Offering.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------
ACTUAL PRO FORMA AS ADJUSTED(5)
------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes and capital lease payable(1)(2)........ $ 844 $ 944 $ 55
Stockholders' equity(3):
Preferred stock, par value $.001 per share,
no shares authorized actual, 10,000,000
shares authorized pro forma and as
adjusted, no shares issued or outstanding
pro forma and as adjusted.................
Common stock, no par value actual, par
value $.001 per share pro forma and as
adjusted:
Authorized shares--6,000,000 actual,
15,000,000 pro forma and as adjusted....
Issued and outstanding shares--1,478,299,
1,478,299 and 2,676,335,
respectively(4)(5)...................... 1,816 1 3
Additional paid-in capital(6).............. -- 1,815 8,979
Warrants(1)(5)............................. 381 481 475
Accumulated deficit........................ (2,733) (2,733) (2,923)
------- ------- -------
Total stockholders' equity (deficit)....... (536) (436) 6,534
------- ------- -------
Total capitalization................... $ 308 $ 508 $ 6,589
======= ======= =======
</TABLE>
- --------
(1) The Bridge Financing (see "--Recent Financing Transactions") is accounted
for as a borrowing and a sale of equity securities (the Bridge Warrants).
The $950,000 gross proceeds of the Bridge Financing (including the
$200,000 received in January 1997) is allocated between the Bridge Notes
and the Bridge Warrants based on their relative fair values at the date of
issuance. The Bridge Warrants are exercisable at a nominal amount of $.022
per share. Consequently, their fair value was deemed to be $950,000, the
fair value of the Common Stock issuable upon exercise of the Bridge
Warrants. The estimated fair value of the Bridge Notes is also $950,000,
which is their principal amount and which will be repaid upon closing of
this Offering. The Bridge Warrants are reflected above at a discounted
amount of $475,000. The Bridge Notes issued during 1996 were initially
recorded at a discounted amount of $375,000 (principal amount of $750,000,
less discount of $375,000). At December 31, 1996, those Bridge Notes are
reflected in the balance sheet at $660,000 ($750,000, less unamortized
discount of $90,000). The pro forma amounts also include the additional
$200,000 of proceeds received in January 1997, allocated $100,000 to
additional Bridge Warrants and $100,000 to the discounted value of the
additional Bridge Notes. Unamortized discount at December 31, 1996, of
$90,000 and additional discount for Bridge Notes issued in January 1997 of
$100,000, are shown in the As Adjusted amounts as an increase to the
accumulated deficit.
(2) Loans to the Company (excluding the Bridge Notes) in the aggregate
principal amount of $128,500 outstanding at December 31, 1996, are also
due upon closing of this Offering.
(3) Before closing of this Offering, the Company will reincorporate in
Delaware and change its authorized capital to consist of 15,000,000 shares
of $.001 par value common stock and 10,000,000 shares of $.001 par value
preferred stock.
(4) Based upon shares issued and outstanding as of December 31, 1996. Does not
include 272,000 shares of Common Stock issuable upon exercise of options
outstanding as of December 31, 1996 granted to directors,
15
<PAGE>
officers, employees of, and consultants to, the Company, at a weighted
average exercise price of $2.42 per share; (ii) 150,000 shares of Common
Stock issuable upon exercise of options to be granted concurrently with the
effective date of this Offering, at an exercise price equal to 110% of the
initial public offering price of the Shares offered hereby; (iii) 200,000
additional shares of Common Stock reserved for future grants under the
Company's 1997 Directors Stock Option Plan and 1997 Equity Incentive Plan;
(iv) 73,036 shares of Common Stock issuable upon exercise of other options
and warrants outstanding as of December 31, 1996, at an exercise price of
$1.10 per share; (v) an estimated approximately 118,750 shares of Common
Stock issuable upon exercise of the Bridge Warrants at an exercise price of
$0.022 per share; and (vi) 112,500 shares of Common Stock issuable upon
exercise of the Representative's Warrants at an exercise price equal to 120%
of the initial public offering price of the Shares offered hereby.
(5) Options (which are included as "Warrants" in the above table) to purchase
73,036 shares of Common Stock, issued by the Company in connection with
certain loans to the Company, are exercisable only through the effective
date of an initial public offering. Because the exercise price of $1.10 per
share under such options are significantly less than the estimated initial
public offering price of the Shares offered hereby, it is assumed for the
As Adjusted calculations that all such options will be exercised for
aggregate net proceeds to the Company of $80,344. However, the holders of
such options may allow any or all of the options to expire without
exercise.
(6) The As Adjusted calculations are net of underwriting discounts and
commissions and other estimated expenses of this Offering in the aggregate
of $1,920,000.
RECENT FINANCING TRANSACTIONS
Common Stock Private Placements. From May 1, 1996 to June 30, 1996, the
Company sold a total of approximately 121,106 shares of Common Stock in a
private placement transaction to a limited number of investors at a price of
$4.40 per share. Such sales were made in reliance on Section 4(2) of the
Securities Act. See "Description of Capital Stock."
In November and December 1996, the Company sold a total of 70,000 shares of
Common Stock in a private placement transaction to two investors at $5.94 per
share. Such sales were made in reliance on Regulation S of the Securities Act.
In connection with such sales, the Company paid placement fees to the
Representative of $49,897 and the net proceeds from such sales were $365,903.
Bridge Financing Transaction. In a July 1996 private placement, the Company
issued $500,000 principal amount of 12% nonconvertible promissory notes (the
"Bridge Notes") and warrants (the "Bridge Warrants") to acquire shares (the
"Bridge Shares") of Common Stock to a small number of sophisticated investors
(the "Bridge Investors"). The exercise price of the Bridge Warrant issued to
each Bridge Investor is $0.022 per Bridge Share. Net proceeds were
approximately $427,500. In additional closings ("Additional Closings") of the
Bridge Financing from October through December 1996, the Company issued
additional Bridge Notes in the aggregate principal amount of $250,000 and
additional Bridge Warrants. The Bridge Warrants issued in the Additional
Closings are not exercisable until one year following the effective date of
this Offering. Net proceeds from such Additional Closings was approximately
$250,000. In January 1997, the Company issued additional Bridge Notes in the
aggregate principal amount of $200,000 and additional Bridge Warrants, in
reliance on Regulation S of the Securities Act. The Bridge Warrants entitle the
holders to acquire a number of Bridge Shares equal to the principal amount of
the holder's Bridge Note ($950,000 in the aggregate) divided by the initial
public offering price of one Share. If this Offering is not consummated before
one year following the date of issuance of a Bridge Warrant, then that Bridge
Warrant will entitle the holder to acquire a number of Bridge Shares equal to
the principal amount of the holder's Bridge Note divided by $4.40 per share.
Interest on the outstanding principal balance of each Bridge Note accrues at a
rate of 12% per annum until six months following its issuance and 15% per annum
thereafter until maturity. Principal and interest under each Bridge Note is due
in four equal quarterly installments beginning nine months following its
issuance, unless an initial public offering becomes effective before that date,
at which time principal will be due five business days after the Company
receives funds from such an offering. If the Company defaults in the payment of
any of these installments, then holders
16
<PAGE>
of approximately 884,074 shares of Common Stock have agreed to vote their
shares in favor of the directors designated by a representative of the Bridge
Investors, and the Company has agreed in certain circumstances to cause
additional shares to become subject to the voting agreement so that the
representative of the Bridge Investors can elect a majority of the directors
of the Company. The Bridge Notes are secured by a security interest, granted
to a representative of the Bridge Investors, in substantially all of the
assets of the Company, including its intellectual property. The rights of the
Bridge Investors in the collateral, and the procedures governing the Bridge
Investors' rights to act with respect to the collateral, are governed by a
security agreement. Upon repayment of the Bridge Notes following the closing
of this Offering or otherwise at maturity or prepayment, the collateral will
be released in full.
The Company intends to repay the Bridge Notes out of a portion of the net
proceeds of this Offering. See "Use of Proceeds." As a result, after the
closing of this Offering no Bridge Notes will remain outstanding. The Company
has the option to prepay the Bridge Notes at any time upon notice to the
holders.
The Company has agreed to file a registration statement no later than nine
months after the effectiveness of this Offering registering the resale of the
Bridge Shares, and the Bridge Investors have certain additional piggyback
registration rights. See "Description of Capital Stock--Registration Rights."
The Bridge Warrants issued in the Bridge Financing have been valued at
issuance for financial statement purposes at their estimated relative fair
market value, and this amount will represent a discount from the principal
amount of the Bridge Notes. The amount of the discount is being amortized to
interest expense over the contractual maturity of the Bridge Notes.
In connection with the Bridge Financing and all Additional Closings
thereunder, the Company paid placement fees and legal fees to third parties of
a total of $72,500.
The transactions described above in which Bridge Notes and Bridge Warrants
were issued are referred to in this Prospectus as the "Bridge Financing."
17
<PAGE>
DILUTION
The net negative tangible book value of the Company as of December 31, 1996
was approximately $(956,000) or $(0.65) per share of Common Stock. Net
tangible book value per share is determined by dividing the amount of total
tangible assets of the Company less total liabilities by the number of shares
of Common Stock outstanding at that date. After giving effect to the sale of
the 1,125,000 Shares offered by the Company hereby (at an assumed initial
public offering price of $8.00 per Share and after deducting the estimated
underwriting discounts and commissions and offering expenses), the adjusted
net tangible book value of the Company as of December 31, 1996 would have been
approximately $6,521,000 or $2.50 per share. This represents an immediate
increase in net tangible book value of $3.15 per share to existing
stockholders and an immediate dilution of $5.50 per share to new investors
purchasing Shares at the initial public offering price. The following table
illustrates the per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $8.00
-----
Net tangible book value per share at December 31, 1996.......... $(.65)
-----
Increase in net tangible book value per share attributable to
new investors.................................................. 3.15
-----
Pro forma net tangible book value per share after this Offering... 2.50
-----
Net tangible book value dilution per share to new investors....... $5.50
=====
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1996, the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share paid by the existing
stockholders and by the new investors purchasing Shares in this Offering
(before deduction of estimated underwriting discounts and commissions and
offering expenses), based upon an assumed initial public offering price of
$8.00 per Share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
--------- ------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 1,478,299 56.8% $ 1,986,186 18.1% $1.34
New investors............. 1,125,000 43.2 9,000,000 81.9 8.00
--------- ----- ----------- -----
Totals.................. 2,603,299 100.0% $10,986,186 100.0%
========= ===== =========== =====
</TABLE>
The foregoing table assumes no exercise of the Underwriters' over-allotment
option and no exercise of outstanding stock options and warrants. As a
consequence, the foregoing table does not include (i) 345,036 shares of Common
Stock issuable upon exercise of stock options and warrants outstanding as of
December 31, 1996, at a weighted average exercise price of $2.14 per share;
(ii) 150,000 shares of Common Stock issuable upon exercise of options to be
granted concurrently with the effective date of this Offering, at an exercise
price equal to 110% of the initial public offering price of the shares offered
hereby; (iii) 200,000 additional shares of Common Stock reserved for future
grants under the Company's 1997 Directors Stock Option Plan and 1997 Equity
Incentive Plan; (iv) an estimated approximately 118,750 shares of Common Stock
issuable upon exercise of the Bridge Warrants, at an exercise price of $0.022
per share and (v) 112,500 shares of Common Stock issuable upon exercise of the
Representative's Warrants at an exercise price equal to 120% of the initial
public offering price of the Shares offered hereby. To the extent that any of
these options or warrants are exercised, there will be further dilution to new
investors. See "Capitalization," "Management--Employee Benefit Plans" and
"Description of Capital Stock."
18
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Prospectus.
The statement of operations data for the years ended December 31, 1995 and
1996, and the balance sheet data at December 31, 1995 and 1996, are derived
from and qualified by reference to the Financial Statements included elsewhere
in this Prospectus. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1995 1996
----- -------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................................... $ 328 $ 1,255
Cost of products sold........................................ 160 435
----- -------
Gross profit............................................... 168 820
Operating expenses:
General and administrative................................. 293 542
Selling and marketing...................................... 600 1,588
Product management......................................... 66 91
----- -------
Loss from operations......................................... (791) (1,401)
Other income (expenses):
Interest expense........................................... (20) (443)
Other income............................................... -- 2
----- -------
Net loss..................................................... $(811) $(1,842)
===== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------ -------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash.................................................... $ 37 $ 91
Current assets.......................................... 280 869
Current liabilities..................................... 558 1,869
Total assets............................................ 291 1,372
Notes payable and capital leases........................ 200 844
Accumulated deficit..................................... (890) (2,733)
Total stockholders' deficit............................. (273) (536)
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from the results discussed in such forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed below and elsewhere in this Prospectus, particularly in "Risk
Factors."
GENERAL
The Company was formed in August 1993 for the purpose of developing and
marketing cosmetic skin care products, including its Patches. The Company will
reincorporate in Delaware before the closing of this Offering.
The Company has never been profitable and, at December 31, 1996, had a
working capital deficit of $999,973 and an accumulated deficit of $2,732,654.
The Company began shipping its first product, Antioxidant Skin Care Derms, in
April 1995, and the Company's limited operating history makes the prediction
of future operating results difficult. The Company does not believe that prior
growth rates are necessarily indicative of future operating results. Future
operating results will depend on many factors, including demand for the
Company's products, the level of product and price competition, the Company's
success in expanding the number of stores through which its products are sold
and its other distribution channels, the ability of the Company to develop and
market line extensions of its present products, the ability of the Company to
control costs, general economic conditions and other factors. See "Risk
Factors--Limited Operating History; History of Operating Losses; Going Concern
Opinion; Accumulated Deficit."
Approximately 48% of the Company's revenues from initial shipments in April
1995 to December 31, 1996 have been derived from the sale of products to Saks
Fifth Avenue stores located in the United States, and revenues from sales to
Saks Fifth Avenue stores accounted for approximately 37% of the Company's
revenues for 1996. Revenues from sales to Self Care catalog accounted for
approximately 12% and 16% of revenues in 1995 and 1996, respectively. In 1996
total catalog sales amounted to 21% of total Company revenues. Further,
revenues from sales to House of Fraser, United Kingdom accounted for
approximately 18% of the Company's revenues in 1996. Total foreign sales
accounted for 32% of the Company's revenues in 1996. The Company currently
expects that revenues attributable to Antioxidant Skin Care Derms and other
Osmotics label products will account for a significant portion of the
Company's revenues in 1997. As a result, the Company's future operating
results are dependent upon market acceptance of these products in both
domestic and international retail outlets. There can be no assurance that the
Company's products will achieve market acceptance or that the Company will be
successful in marketing its products. A decline in demand for, or market
acceptance of, Antioxidant Skin Care Derms, as a result of competition or
other factors, would have a material adverse effect on the Company's business,
operating results and financial condition. However, the Company began
marketing products under the Wrinkle Patch label in October 1995 and began
marketing the Spa-Sante label Patch in March 1996. Sales from these products
accounted for approximately 26% of the Company's revenues for 1996. In 1995,
revenues from sales of The Wrinkle Patch accounted for approximately 12% of
total revenues. The Company expects that the ratio of revenues from sales to
Saks Fifth Avenue stores to its total revenues will continue to decrease. See
"Risk Factors--Product and Customer Concentration" and "Business--Strategy."
The cosmetics, skin care and personal care business is highly competitive.
Increased competition could result in price reductions, reduced transaction
size, fewer customer orders and reduced gross margins, any of which could have
a material adverse effect on the Company's business, operating results and
financial condition. See "Risk Factors--Competition."
RESULTS OF OPERATIONS
Years ended December 31, 1995 and 1996
Revenues. Total revenues for 1996 were $1,254,800, compared with $328,465
for 1995. A major component of the increase was an increase in the volume of
domestic retail sales of Osmotics label products.
20
<PAGE>
These revenues increased even though the Company engaged in only limited
advertising during 1996. The Company also benefited from greater market
awareness of the Company's products, stimulated in part by non-Company
sponsored articles in television and print media about the Company's products.
Another major component of the increase in revenues was revenues from sales of
new products, primarily The Wrinkle Patch and, to a lesser extent, Spa Sante
label products. Revenues from international sales also contributed to the
increase in 1996 compared to 1995. The Company did not have any revenues from
international sales in 1995.
Cost of Products Sold. Cost of products sold were $435,201 for 1996 compared
to $160,000 for 1995. The increase was due primarily to the increase in volume
of sales. Cost of products sold as a percentage of revenues was 34.7% for 1996
compared to 48.7% for 1995, due to the costs not increasing proportionately
with higher volume of sales. The Company expects that the dollar amount of
costs of products sold will increase with increases in product sales; however,
there can be no assurance that margins with respect to increased sales will
continue at the levels experienced to date. Margins will vary with the mix of
products sold, unit sales prices, and actual material and manufacturing costs
negotiated with vendors.
Production Management. While the Company's products are manufactured by
third parties, the Company is responsible for purchasing and procurement of
inventory, arranging for product storage and coordination of shipments to
customers. Primary components of production management include expenses
relating to wages and salaries of the Company's personnel engaged in operating
activities, payroll related costs, and travel. Production management expenses
were $90,889 for 1996 compared to $66,059 for 1995. The increase was primarily
due to increase in salary and salary-related items.
Selling and Marketing. Selling and marketing expenses were $1,587,765 for
1996 compared to $600,087 for 1995. Major selling and marketing expenses
include, among other things, development expenses relating to the Company's
products, salaries, fringe benefits, public relations, advertising, trade
shows and travel costs. The increase was primarily due to increase in
personnel, accelerated travel requirements, promotional and advertising
efforts, including attendance at trade shows, to introduce the Company's
products, and greater sample costs. Selling and marketing expenses are
expected to increase significantly after this Offering as a result of
increased marketing efforts, both domestic and international, increased
salaries and hiring of personnel, advertising and promotion and new product
introductions and are expected to initially increase substantially as a
percentage of the Company's revenues until sales volume increases, if any, are
achieved.
General and Administrative. General and administrative costs were $541,600
for 1996 compared to $292,742 for 1995. The increase was primarily due to
increased expenses in the areas of salaries and salary related costs of
personnel engaged in administrative functions, accounting and general services
and costs such as rent, insurance, telephone, legal, postage, depreciation and
financing expenses.
The Company's operating expenses are expected to increase significantly as
the result of anticipated increases in marketing efforts in the United States
and internationally, introduction of the Company's products in a larger number
of stores and through a greater number of channels, increases in personnel
costs associated with the anticipated expansion in the Company's business and
new costs related to being a public company (including directors and officers
liability insurance and increased professional fees).
Interest. Interest expenses increased to $443,480 for 1996 from $20,285 for
1995 primarily because of interest relating to promissory notes executed in
1994 and 1995, and amortization of the discount related to the Bridge Notes.
As a result of the issuance of the Bridge Notes and Bridge Warrants, for
financial statement purposes the estimated fair market value of the Bridge
Warrants will represent a discount from the principal amount of the Bridge
Notes. The amount of the discount has been amortized to interest expense over
the contractual maturity of the Bridge Notes. Consequently, because the Bridge
Notes will be repaid out of a portion of the net proceeds of this Offering,
the Company will expense any remaining unamortized discount in the quarter in
which this Offering is consummated. The amount of such expense, which will be
a one-time charge, is expected to be approximately $190,000 and will cause the
Company's reported net income for such quarter to be significantly lower (or
reported net loss to be significantly higher) than it otherwise would be.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in August 1993, the Company has financed its activities
through the issuance of debt instruments and equity in private placement
transactions and, to a lesser degree, from sales of products, which commenced
in April 1995. From inception to December 31, 1996, the Company had received
approximately $2,961,000 from debt and equity transactions, while sales in the
same period were approximately $1,583,000. At December 31, 1996, the Company
had approximately $91,000 in cash.
Cash used in the Company's operations was $1,667,690 in 1996 compared to $
735,081 in 1995. The increase in cash used in the Company's operations was
primarily due to expansion of the Company's organization and increased sales.
The Company did not have any material capital expenditures for 1995. Capital
expenditures for 1996 consisted primarily of furniture and fixtures and
computer equipment, which together totaled approximately $93,000.
From inception through December 31, 1996, the Company reported losses of
$2,732,654. At December 31, 1996 the Company had a working capital deficit of
$999,973. In the absence of this Offering, the Company needs additional
funding to continue its operations through the remainder of 1997.
Consequently, there is substantial doubt as to the ability of the Company to
continue as a going concern. The Company's financial statements have been
prepared assuming that the Company will continue as a going concern and do not
include any adjustments that might result from the outcome of this
uncertainty. If this Offering is delayed or suspended, other financing sources
will be needed. The Company has no credit facility with a bank or other
financial institution and no in-place source of capital. The Company intends
to use a portion of the net proceeds of this Offering to repay the Bridge
Notes and other outstanding indebtedness. See "Use of Proceeds." While the
timing and amount of cash requirements cannot be predicted with certainty, the
Company believes that the net proceeds from this Offering, together with cash
on hand, cash expected to be received upon payment of outstanding accounts
receivable as of December 31, 1996, and cash expected to be generated from
operations, will provide adequate funding for the Company to hire additional
personnel, launch new marketing and product development programs, and
otherwise conduct its business activities through at least 12 months from the
effective date of this Offering. However, the Company's future liquidity and
capital requirements will depend upon numerous factors, including the
Company's success in increasing sales of existing products and introducing new
products, expanding the channels through which the Company's products are
sold, and operational cost controls. In general, however, the Company's cash
requirements are expected to increase significantly over the next several
years to meet new product development and implementation programs, and to fund
anticipated marketing and sale activities associated with expanded domestic
and international opportunities. The Company may be required to raise
additional funds through public or private debt or equity financing,
collaborative relationships, bank facilities or other arrangements. There can
be no assurance that the Company will not require additional funding sooner or
that such additional funding, if needed, will be available on terms attractive
to the Company, or at all. Any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants. See "Use of Proceeds" and "Risk Factors--Future Additional Capital
Requirements; No Assurance Future Capital Will be Available."
At December 31, 1996, the Company had net operating loss carryforwards
(NOLs) for federal tax purposes of approximately $2,200,000. The Company's
ability to use these NOLs to offset future taxable income may be subject to
future restrictions under applicable provisions of the Internal Revenue Code
of 1986, as amended (the "Code").
22
<PAGE>
BUSINESS
The Company develops and markets cosmetic skin care products. The Company's
current principal products are based on technology combining Patches with a
special formulation of ascorbic acid (vitamin C), an antioxidant. The
products, which currently include the Osmotics label Antioxidant Skin Care
Derms, the Spa-Sante label Systeme C Patch and The Wrinkle Patch, are intended
to reduce the appearance of fine facial lines and wrinkles. The Patches are
placed on targeted wrinkles on a person's face to saturate the skin with the
antioxidant. Antioxidants contained in certain current skin care lotions,
creams or oils are exposed to the atmosphere and lose their antioxidant
effectiveness, if not absorbed into the skin within a relatively short time
after application, estimated by the Company to be approximately 40 minutes. In
contrast, the Company's vitamin C formulation is protected by the Patch from
the atmosphere and, therefore, can be absorbed over the recommended 10 hour
period of treatment. Further, Patches maintain the purity of the vitamin C
formulation and deliver the formulation to specific problem areas of the skin.
Drug and Cosmetic Industry Magazine honored the Antioxidant Skin Care Derms in
its December 1995 issue in the cosmetic skin care treatment packaging
category. The Company has filed a U.S. patent application relating to certain
aspects of its Patches.
The Company believes that the skin care segment of the cosmetics market is
large and growing. One industry source has estimated that revenues in the
United States skin care products market were approximately $5.12 billion in
1994, representing approximately 24.6% of total revenues in the United States
personal care products market. The same source projected that revenues in the
United States skin care products market would be approximately $6.46 billion
in 1997 and approximately $9.31 billion in 2001, representing a compound
annual growth rate from 1994 to 2001 of 8.9%. The Company believes that a
significant portion of recent past growth in revenues has come from the
proliferation of alpha hydroxy acid ("AHA") products, which are not
antioxidants. The Company believes that a portion of the future growth in
revenues projected by the industry source will come from the sale of skin care
products containing vitamin ingredients, such as the Company's vitamin C
formulation. In the markets in which the Company intends to compete, the
Company believes that the United States market typically comprises a
significant portion of the overall worldwide market.
The Company believes that the reasons for this continued growth of sales in
the skin care products market include fundamental changes now taking place in
demographic (aging population) and environmental factors, which are
stimulating the need for innovative, more effective skin care products. The
U.S. Bureau of Census has estimated that between 1993 and 2020, the number of
individuals age 45 and over in the United States will increase by 59%, while
those under age 45 in the United States will increase by only 7%. Furthermore,
the first of the approximately 76 million "baby boomers" in the United States
who were born between 1946 and 1960 turned 50 in 1996. The Company believes
that the need for new skin care products will increase as the population ages
because concern with the effects of aging on the skin increases with age.
BACKGROUND
Skin wrinkles are caused by, among other things, free radicals. A free
radical is an unstable oxygen molecule seeking, at the molecular level, to
pair up with an electron. Free radicals can be created in the atmosphere by
the exposure of oxygen to sunlight and pollution. Free radicals can also be
created within a person's skin by natural metabolic processes. A free radical
from the atmosphere can penetrate the top layer of a person's skin, called the
lipid layer, and combine with a molecule in the next layer of skin which
supports the lipid layer, called the collagen, thereby damaging the collagen.
The collagen is weakened over time by this process, causing the lipid layer to
lose its support and the skin to become more wrinkled. Antioxidants are
molecules which can combine with and, as a result, neutralize free radicals.
Antioxidants which are absorbed into a person's skin can thereby neutralize
free radicals and reduce the appearance of fine lines and wrinkles in the
skin.
When exposed to the atmosphere, antioxidants can combine with free radicals
in the atmosphere and lose their beneficial effect, or bioavailability, on the
skin. Antioxidants contained in certain current skin care lotions,
23
<PAGE>
creams or oils are exposed to the atmosphere and as a result lose their
bioavailability, if not absorbed into the skin within a relatively short time
after application, estimated by the Company to be approximately 40 minutes.
SOLUTION
The Company's current principal products, Antioxidant Skin Care Derms, the
Spa-Sante label Patch and The Wrinkle Patch, combine transdermal cosmetic
delivery skin patches ("Patches") with a special formulation of ascorbic acid
(vitamin C), an antioxidant. The Patches are placed on targeted skin wrinkles
to saturate the skin with the antioxidant. The vitamin C formulation, upon
absorption into a person's skin, can neutralize damaging free radicals and,
therefore, reduce the appearance of fine lines and wrinkles in the skin.
Vitamin C is an unstable compound and loses bioavailability if exposed in
solution form to the atmosphere. However, in powder form, vitamin C maintains
bioavailability for up to five years. The Company's Patches store the vitamin
C formulation in powder form, thereby extending its bioavailability. The
vitamin C formulation is suspended in the raw polymer base of the Patches
through a fabrication process that creates a porous matrix effect (a lattice
work of interconnecting bonds) within the resulting Patch material. The
vitamin C formulation mixes with the moisture of a person's skin and is
absorbed into the skin. The vitamin C formulation is protected by the Patch
from the atmosphere and, therefore, can be absorbed over the recommended 10
hour period of treatment. The Company recommends that each Patch be discarded
after a single use and that a Patch be applied to the target area of skin
three times a week.
Skin patches sold by certain companies to deliver nicotine, estrogen or
nitroglycerin can sometimes cause skin irritation from the penetration
enhancers which they contain as well as from both the compounds in their
adhesives and the strength of the adhesives (which can sometimes cause
irritation when the patch is removed from the skin). However, the Company's
Patches cause little skin irritation because they use lighter adhesives and do
not contain penetration enhancers. Additionally, the Company provides an oil
based formulation to aid in the removal of its Patches.
STRATEGY
The Company's objectives are to be the leader in the marketing of skin care
products that deliver antioxidants by means of skin patches, to remain the
leader in that market segment and to expand its product line of other skin
care products and compete in the cosmeceuticals market. The key elements of
the Company's strategy to achieve this objective are as follows:
Initial Product Launch into the Upscale Retail Market. The Company initially
developed a product line, marketed under the Osmotics label, for the upscale
retail market consisting of several products, including the Antioxidant Skin
Care Derms. These products were initially launched into the upscale retail
market in order to derive the credibility and prestige for the Osmotics brand
customarily associated with success in that market. Antioxidant Skin Care
Derms were introduced in April 1995 exclusively at certain Saks Fifth Avenue
stores located in the United States. Saks Fifth Avenue provided support for
the launch of this product. Introduction of the Company's products into the
upscale market has been accompanied by positive media exposure in fashion
magazines and newspapers, such as Elle, Self and Allure, from national and
international beauty editors, who generally write about prestige market
brands.
Broader Channels of Distribution and Sales. The Company's strategy also
includes marketing and selling products through a broader number of retail
channels. The Company markets the Spa-Sante and The Wrinkle Patch labels to
the broader retail market, but through different channels. The Spa-Sante label
Patch is marketed to spas, beauty salons and estheticians and was introduced
at the International Beauty Show in New York City, a large industry trade
show, in March 1996. The Wrinkle Patch was first offered in October 1995 in
Self Care catalog. The Company offers The Wrinkle Patch label products to
several direct sale catalogs, through TV home shopping channels, through an
infomercial, and through the World Wide Web. The Company also has entered in
an agreement with a third party for private label sales by the third party,
and is pursuing opportunities to enter agreements with other third parties for
private label sales. The Company anticipates that it may ultimately sell a
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larger volume of products through these channels than through the upscale
retail market, and that at some future date a greater portion of its total
revenues may be comprised of sales of products through these channels compared
to sales of products to the upscale retail market.
Product Line Extensions. The Company believes that, if and as consumer
awareness of its products using Patches increases, consumers may be more
likely to try other related products sold by the Company. The Company
currently markets several products as part of its different product lines. See
"--Products." The Company expects to develop and market additional line
extensions for all its various labels in the future, which might include,
among others, (1) products using Patches to deliver stronger or different
antioxidants than delivered by the Company's present products, (2) products
using Patches to deliver antioxidants to different parts of a person's body,
(3) products used to pre-treat the areas of skin to which Patches are to be
applied, which, the Company believes, will enhance the effect of the
antioxidants contained in the Patch and (4) hair and body products.
The Company believes that consumers of cosmetics products are increasingly
less loyal to a particular brand name and, as a result, are less likely to
purchase multiple types of products within a brand's product line unless those
products satisfy specific needs of the consumers. The Company believes that
this trend may have aided the Company's introduction of its Patches, but there
can be no assurance that this trend will aid the Company's introduction of
products in the future. See "Risk Factors--Brand Loyalty of Consumers of
Cosmetics."
International Distribution. The Company markets its products outside of the
United States. As in the United States, the Company expects that ordinarily it
will launch its products in a country by first selling products to upscale
retailers, and then selling products into alternative retail channels. The
Company launched its Osmotics label products, including Antioxidant Skin Care
Derms, in the United Kingdom in May 1996 through the Dickins & Jones store
located on Regent Street in London, England, a member of the House of Fraser
group, which the Company believes serves the upscale retail market, and at
five other House of Fraser stores, and has since launched products in other
stores located in Europe and South America. The Company expects to launch
products in other international locations during 1997. See "--Sales and
Marketing."
PRODUCTS
Products Using Patches. The Company's current primary products are
Antioxidant Skin Care Derms, Spa-Sante label Patches and The Wrinkle Patch.
These products are Patches containing a special formulation of ascorbic acid
(vitamin C), an antioxidant. Each of these Patches has a unique shape that
covers the fine lines around a person's eyes ("crow's feet") and saturates the
skin with the antioxidant. This vitamin C formulation reduces the appearance
of fine lines and wrinkles in a person's skin.
The Spa-Sante label Patches and The Wrinkle Patch contain the same amount of
vitamin C formula and have the same shape, but contain less vitamin C formula
and have a slightly different shape than Antioxidant Skin Care Derms.
Products Sold Under the Osmotics Label. The following products, in addition
to the Antioxidant Skin Care Derms, are sold under the Osmotics label:
. Hydrating Cleanser, which is a facial cleanser for normal, dry and
sensitive skin types and contains humectants to help retain moisture in
the skin.
. Balancing Cleanser, which is a facial cleanser for normal and oily skin
types and contains antibacterial agents, vitamin B6, and humectants for
acne breakout.
. Firming Tonic Facial Mist, which is a product containing natural
botanicals and oils sprayed on the face to firm, tone and hydrate dry,
mature skin.
. Balancing Tonic Facial Mist, which is a product containing natural
botanicals and oils sprayed on the face to regulate oil control, tone,
and hydrate normal to oily skin.
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. Hydrating Complex SPF 15, which is a skin lotion containing vitamins A,
C and E that replenishes moisture with hyaluronic acid and other
moisturizers and contains active sunscreen ingredients.
. Balancing Complex SPF 15, which is a skin lotion containing vitamins A,
B6, C, and E that replenishes moisture without oils and contains active
sunscreen ingredients.
. Intensive Moisture Therapy, which is a skin cream that hydrates dry,
damaged or dehydrated skin.
. Antioxidant Eye Therapy, which is an eye gel containing botanicals to
moisturize and diminish puffiness and dark circles under the eye.
. Daily Eye Protection SPF 15, which is a skin cream designed to
moisturize and protect skin around the eyes and contains active
sunscreen ingredients.
. Facial Renewal, which is a product to be applied at night containing
alpha hydroxy acids, derived from sugarcane, buttermilk and citrus
fruit, used to remove dry, dead surface cells.
. Antioxidant Body Complex, which is a skin cream for the body with
kalaya oil and antioxidant vitamins that moisturizes, firms, and
strengthens the skin.
. Lip Colors, which are treatment lipsticks available in six shades
containing antioxidant vitamins, moisturizers and active sunscreen
ingredients.
Products Sold Under The Wrinkle Patch Label. The following products, in
addition to The Wrinkle Patch, are sold under that label:
. Tonic Facial Mist, which is a product sprayed on the face to firm, tone
and hydrate dry, mature skin.
. Two in One Cream, which is a skin cream containing Emu oil, alpha
hydroxy acids and antioxidants.
Product Development. The Company has completed the final formulation of, and
is now in the testing and evaluation process for, emollients to be sold under
the Spa-Sante line, which are to be used to pre-treat areas of the skin to
which Patches are to be applied. The Company believes that use of these
emollients will enhance the effect of the antioxidants contained in Patches
subsequently applied to the target area. The Company designs and develops the
concepts for new products internally. After developing the concept for a
possible new product, the Company generally contracts with third party
chemists and consultants to develop the specific formula for the possible new
product. The Company tests that formula internally and then coordinates with
such third parties to finalize the formulation for the potential product.
SALES AND MARKETING
Antioxidant Skin Care Derms. The Company currently sells in the United
States Antioxidant Skin Care Derms and line extensions of that product,
including cleansers, moisturizers, toners, alpha hydroxy acid, and lipsticks
under the Osmotics label to certain Saks Fifth Avenue, Neiman Marcus and
Nordstrom stores.
Outside the United States, the Company launched Osmotics label products,
including Antioxidant Skin Care Derms, in the United Kingdom in 1996 at six
House of Fraser stores located throughout the United Kingdom. In the fall of
1996, the Company launched products in Paris, France at a Galeries Lafayette
store and in Geneva, Switzerland at eight Pharmacies Principale stores. In
January 1997, the Company launched products in France at Le Printemps,
Samaritaine, Bon Marche and Perfumerie Sephora stores. In December 1996, the
Company introduced products in Brazil and Ecuador. The Company expects to
launch products in additional countries in Canada, South America, Europe and
Asia during 1997.
The Company has entered into an agreement with a third party whereby the
third party has the exclusive right to market and sell in France products
manufactured by the Company under the Osmotics label. This agreement
terminates in January 2000, and is renewable for successive three-year periods
unless either party elects otherwise. The agreement is subject to earlier
termination if the third party distributor fails to satisfy certain
performance goals.
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The Spa-Sante Line. The Spa-Sante label Patch is, and other products to be
sold under the line by the Company are to be, directed at spas, beauty salons
and estheticians. The Company has entered into an agreement with a third party
whereby the third party has the exclusive right to market, sell and distribute
all skin care products manufactured by the Company under the brand name Spa-
Sante to professional beauty establishments, including spas and beauty salons,
located in North America, Central America, Europe, the Middle East and Africa.
The third party distributor will market, sell and distribute the products on
behalf of the Company and retain a percentage of the selling price of the
products sold. Beginning in 1997, the third party has agreed to pay all costs
of sales. This agreement terminates in July 2001, and is renewable at the
third party distributor's election for two successive five-year periods. The
agreement is subject to earlier termination if the third party distributor
fails to satisfy certain performance goals.
The Company has entered into an agreement with a different party, who holds
45,454 shares of Common Stock, whereby the third party has the exclusive right
to market, sell and distribute all products manufactured by the Company in
Japan, China, Korea, Taiwan, Hong Kong, Singapore, Thailand, Vietnam,
Australia, New Zealand, the Philippines, Malaysia, Indonesia and all other
Southeast Asian countries. The third party distributor will purchase for
resale the products from the Company. This agreement terminates in December
2001, and is renewable at the third party distributor's election for two
successive five-year periods. The agreement is subject to earlier termination
if the third party distributor fails to satisfy certain purchase or
performance goals, and the Company is currently reviewing the third party's
performance under the agreement, including whether the third party has
satisfied the required purchase or performance goals.
The Wrinkle Patch. The Wrinkle Patch was first offered in Self Care catalog
and is now offered in several direct sale catalogs, including The Sharper
Image Spa. The Company is also in the process of offering that product through
TV home shopping channels, through an infomercial and through the World Wide
Web. The Company offered The Wrinkle Patch on Q2 Shopping Channel in February
1996, and on QVC in November 1996. The Company expects to offer The Wrinkle
Patch in 1997 to self-select retail stores (stores where consumers select
their own purchases without assistance of an in-store demonstrator).
A thirty minute infomercial has been produced offering The Wrinkle Patch,
which was shown first on United States regional cable television stations in
September 1996. Sales of The Wrinkle Patch resulting from the airings, before
the date of this Prospectus, of that infomercial were less than the Company
expected. The Company expects to dub this infomercial into various foreign
languages and show it in other countries. Additionally, pursuant to an
Infomercial Production and Product Management Agreement, dated as of March 5,
1996, between the Company and VideOne Marketing, Inc. (as amended, the
"VideOne Agreement"), VideOne, the third party producer of the infomercial,
has the exclusive right worldwide, subject to certain exceptions, (i) to
manage the direct response marketing and airing of the infomercial and (ii) to
distribute The Wrinkle Patch, including updates and revisions, in certain
direct response media categories. Notwithstanding VideOne's exclusive rights,
the Company may seek an agreement with any other third party in these direct
response media categories consistent with a general marketing plan developed
by the Company and VideOne, but VideOne has a right of first refusal to enter
into an agreement with the Company on the same terms. This exclusivity
terminates in March 1997, and is automatically renewable for two successive
one-year periods provided certain stated performance goals are satisfied. The
infomercial was financed in part by a third party, who is entitled to receive
certain royalties from sales of the product from the infomercial.
Licensing. The Company has agreed to supply on a non-exclusive basis to a
third party skin patches for inclusion in products to be sold by the third
party under its own label in all countries, other than countries located in
the Pacific Rim. The third party has agreed not to market and sell such
products in the upscale market (which is defined in the contract), and the
Company has agreed not to sell skin patches under the Osmotics trademark
except in the upscale market. This agreement terminates in January 2002, and
is renewable for successive five-year periods unless either party elects
otherwise. The Company is pursuing additional opportunities to enter into
agreements with third parties for private label sales by the third parties.
The Company anticipates that as part of such arrangements, the third parties
would pay the costs of any new product development. The Company expects to
receive royalty fees from such licenses. There can be no assurance that the
Company will be able to enter into
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any such additional licenses on terms attractive to the Company, and the
Company does not anticipate receiving any royalty revenues from such licenses,
if at all, until at least 1998.
Public Relations. The Company's marketing efforts also include establishing
and maintaining media relations with fashion magazines and other media
outlets. News of the Company's products has been featured internationally as
well as on several United States broadcasts. To date, the Company has received
write-ups in over 25 United States publications and 20 foreign publications,
including: Longevity, World Class, New Woman, The Rose Sheet, Women's Wear
Daily, Beauty Fashion, Glamour, Beverly Hills, Harper's Bazaar, Self, Elle and
Rocky Mountain News.
MANUFACTURING
The Company currently obtains ingredients, packaging and final formulations
from several third party suppliers and has not entered into a written
agreement with any such supplier. Although the Company believes that all
ingredients are presently obtainable and has identified additional third
parties that could also supply such ingredients, there can be no assurance
that the Company will continue to be able to obtain such ingredients from
third parties at all or in sufficient quantities and on terms and conditions
acceptable to the Company. The Company relies on a different third party,
named Franklin Medical, to manufacture raw products into finished products.
The Company has entered into a written agreement respecting confidentiality,
but not supply requirements or otherwise, with this manufacturer. The Company
believes that if this manufacturer were unexpectedly to stop manufacturing raw
products into finished products for the Company, there would be a temporary
adverse effect on the Company's ability to produce products on a timely basis,
but that one or more other third party manufacturers could be identified. The
Company neither has nor plans to acquire the equipment and facilities
necessary to manufacture its current and future products and is and will be
dependent upon third party contract manufacturers for such production. There
can be no assurance that the Company will continue to be able to obtain
contract manufacturing on commercially acceptable terms for products in the
quantities currently obtainable or that may be required in the future.
Further, there can be no assurance that manufacturing or quality control
problems will not arise at the manufacturing plant of the Company's present
contract manufacturer. In addition, if the FDA were to determine that any of
the Company's cosmetic products, including products that contain active
sunscreen ingredients and that are labeled with a sun protection factor, are
also drugs, those products would have to be manufactured in accordance with
the FDA's current good manufacturing practice ("GMP") requirements for
finished pharmaceuticals. See "Risk Factors--Suppliers; Manufacturing
Limitations."
COMPETITION
The cosmetics, skin care and personal care business is highly competitive.
Increased competition could result in price reductions, reduced transaction
size, fewer customer orders, and reduced gross margins, any of which could
have a material adverse effect on the Company's business, operating results
and financial condition. The Company believes that the principal competitive
factors affecting the cosmetics market include product uniqueness, product
performance, the effectiveness of sales and marketing efforts and company
reputation. There can be no assurance that the Company will compete
successfully in the future with respect to these or other factors.
The Company believes that no other company is currently marketing products
using skin patch technology to deliver antioxidants to a person's skin for
cosmetic purposes, although certain products using gauze pads to deliver
antioxidants are presently sold by certain of the Company's competitors. The
Company believes that other products currently utilizing transdermal delivery
systems are sold primarily in prescription pharmaceutical markets for other
than cosmetic use. However, the FDA recently approved the marketing of a
consumer product, without the need for a prescription, for transdermal
delivery of nicotine using a patch. There can be no assurance that products
using patch technology to deliver antioxidants to a person's skin for cosmetic
purposes do not exist or are not under development by others.
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Certain skin creams, lotions and oils currently sold by cosmetics companies,
including the Cellex-C brand antioxidant serum, compete with the Company's
comparable products. Additionally, Avon Products markets a vitamin C formula
under the brand name Anew, which Avon claims, among other things, minimizes
the appearance of fine lines and wrinkles. Some of the Company's current, and
many of the Company's potential, competitors have significantly greater
financial, marketing, product development, testing and other resources than
the Company and sell their products more widely than the Company. As a result,
they may have the capacity to respond more quickly to changes in customer
requirements or to devote greater resources to the development, testing,
promotion and sale of their products than the Company. It is possible that new
competitors may emerge and rapidly gain significant market share.
Additionally, it is possible current or new competitors might introduce
competitive products which also utilize skin patch technology or other
technology that produces results similar or superior to the Company's Patches
or which are sold at a lower price than the Company's products in similar
distribution channels. There can be no assurance that the Company will be able
to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not have a material adverse
effect on its business, operating results and financial condition. See "Risk
Factors--Competition."
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company currently relies primarily on a combination of trademark laws,
trade secrets, confidentiality procedures and contractual provisions to
protect its technology. The Osmotics word logo and Antioxidant Skin Care Derms
are registered U.S. trademarks of the Company. The Company has U.S. trademark
applications pending for AKA RED, WRINKLE PATCH, THE NIGHTIME MIRACLE and
SYSTEME C. The PTO has rejected the Company's trademark application for Spa-
Sante. The Company intends to challenge that rejection. The Company has
trademark registrations pending in Japan for OSMOTICS, Spa Sante, The Wrinkle
Patch and SYSTEME C, in Korea for OSMOTICS and the Osmotics label, Spa Sante,
The Wrinkle Patch and SYSTEME C, in the European Community for OSMOTICS and
the Osmotics logo and in Eucador for OSMOTICS. There can be no assurance that
any of these marks for which registration applications are pending will be
registered.
The Company filed one United States patent application in 1994 and filed a
continuation in part of that patent application in 1995. The PTO has rejected
all claims in these applications, alleging that the claimed inventions were
obvious. In response, the Company filed a continuation in part application in
1996, accumulating subject matter of both prior patent applications and
addressing, among other things, the use of the Patches as a method to deliver
antioxidants. The Company also has filed an application under an international
treaty designating various foreign countries for which the Company preserved
certain rights in the event it files patent applications in any of those
countries. The Company also intends to file additional patent applications in
the PTO on various features of its products in the future, if appropriate.
However, there can be no assurance that any patents will issue in any country
with respect to currently pending applications or any future patent
applications.
The validity and breadth of claims in patents involve complex legal and
factual questions and, therefore, may be highly uncertain. No assurance can be
given that any issued patent or patents based on the pending patent
application or any future patent application will exclude competitors or
provide competitive advantages to the Company or that others will not claim
rights in or ownership of the Company's rights which it regards as
proprietary. Furthermore, there can be no assurance that others have not
developed or will not develop similar products, duplicate any of the Company's
products or design around any patents that may be issued in the future to the
Company. Since patent applications in the United States are maintained in
secrecy until patents issue, the Company also cannot be certain that others
did not first file applications for inventions covered by the Company's
pending patent applications, nor can the Company be certain that it will not
infringe any patents that may issue to others on such applications.
Despite the Company's efforts to protect its rights, unauthorized parties
may attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products may prove to be difficult, and, while the Company is
unable to
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determine the existence or amount of other products which now or in the future
illegally duplicate the Company's products, such other products can be
expected to be a persistent problem. In addition, the laws of many countries
do not protect the Company's rights which it regards as proprietary to as
great an extent as do the laws of the United States. There can be no assurance
that the Company's means of protecting its rights will be adequate or that the
Company's competitors will not independently develop similar products.
To date, the Company has not been notified that the Company's products
infringe the proprietary rights of third parties, but there can be no
assurance that third parties will not claim infringement by the Company with
respect to current or future products. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
See "Risk Factors--Protection of Intellectual Property."
GOVERNMENT REGULATION
The Company and its cosmetic products are subject to regulation by the FDA
and the Federal Trade Commission (the "FTC") in the United States, as well as
by various other federal, state and local authorities. Such regulation relates
primarily to the ingredients, packaging, labeling, advertising and marketing
of the Company's products. Cosmetics do not require premarket notification to,
or premarket approval by, the FDA, but must be properly labeled and
manufactured. Failure to comply with FDA requirements in such matters can
result in severe civil and criminal penalties, including seizure of product,
injunction against production, distribution, sales, and marketing, and
prosecution. The FTC oversees the advertising of cosmetic products, and
prohibits false or misleading advertising. The FTC has a number of remedies
available to it, including preliminary injunctive relief based on its "reason
to believe" that an advertisement is false or misleading. See "Risk Factors--
Governmental Regulation."
The Company believes that its products are cosmetics under the Federal Food,
Drug, and Cosmetic Act (the "FDC Act"), because the Company, as shown by its
labeling, advertising, promotional, and other activities, intends that its
products be applied to the body to cleanse, beautify, promote attractiveness
or temporarily alter appearance. Such products meet the statutory definition
of cosmetic. By contrast, the Company believes that its products are not drugs
as defined in the FDC Act, because the Company, as shown by its labeling,
advertising, promotional, and other activities, does not intend that they
cure, mitigate, treat or prevent disease, or have other than a temporary
effect on the structure or function of the body.
There can be no assurance, however, that the FDA will not determine that
some or all of the Company's products are new drugs (as well as or instead of
cosmetics) based on ingredients, their concentrations or labeling,
advertising, or promotional material. In particular, the FDA could determine
that the Company's cosmetic products that contain active sunscreen ingredients
and that are labeled with a sun protection factor ("SPF") are also drugs. Most
over-the-counter ("OTC") drugs are marketed in the United States without FDA
prior approval under FDA regulations that permit such OTC marketing if the FDA
has issued a monograph with respect to that drug (including its ingredients
and indication(s) (claims)), and the product and its labeling comply with that
monograph. In a 1993 proposal to establish a monograph for OTC sunscreen drug
products, the FDA tentatively concluded that the use of the term "sunscreen"
on the label of a product causes it to be a drug, and that the use of the term
SPF in the labeling of a product is a basis for the product to be considered a
drug. The FDA also proposed that any final monograph based on the proposal be
made effective twelve months after the date of publication of the final
monograph. If the FDA adopts these tentative conclusions and finalizes the
proposed monograph for OTC sunscreen drug products, the Company's products
that contain active sunscreen ingredients and that are labeled with an SPF
will have to (i) comply with the monograph with respect to ingredients (or
remove ingredients not covered by the monograph), indications (claims) and
labeling, among other things, (ii) be covered by individual marketing
approvals from the FDA (as discussed below), (iii) be relabeled to eliminate
any mention of SPF, sunscreen or the like, or (iv) be removed from the market.
The Company believes that any changes to its products, ingredients,
indications or labeling resulting from the FDA's issuance at a future date of
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a final monograph, if it applies to the Company's products in question, would
not have a material adverse effect on its business, operating results or
financial condition.
The preclinical and clinical testing, manufacture, labeling, distribution,
sale, advertising, and marketing of new drugs are subject to extensive and
rigorous regulation by the FDA, and before they can be marketed new drugs must
undergo an extensive regulatory approval process. This process, the successful
completion of which cannot be assured in a timely manner or at all, includes
preclinical studies and clinical trials of each compound to establish its
safety and effectiveness and confirmation by the FDA that good laboratory,
clinical and manufacturing practices were maintained during testing and
manufacturing. The process can take many years and requires the expenditure of
substantial resources. There can be no assurance as to when, if ever, any
required FDA approvals would be obtained. There can be no assurance that the
Company's current or future products will not be regulated by the FDA as new
drugs, nor can there be any assurance that any future requirements will not
have a material adverse effect on the Company's business, financial condition
or results of operations or on the market price of the Common Stock.
Following drug discovery, the steps required before a new pharmaceutical
product may be marketed in the United States include (1) preclinical
laboratory and animal tests, (2) the submission to the FDA of an application
for an investigational new drug ("IND"), (3) clinical and other studies to
assess safety and parameters of use, (4) adequate and well-controlled clinical
trials to establish the safety and effectiveness of the drug, (5) the
submission of a new drug application ("NDA") to the FDA and (6) FDA approval
of the NDA prior to any commercial sale or shipment of the drug.
Typically, preclinical studies are conducted in the laboratory and in animal
model systems to gain preliminary information on the drug's pharmacology and
toxicology and to identify any potential safety problems that would preclude
testing in humans. The results of these studies are submitted to the FDA as
part of the IND application. Testing in humans may commence 30 days after
submission of the IND by the FDA unless the FDA objects, although companies
typically wait for affirmative approval from the FDA before commencing such
testing. A three phase clinical trial program is usually required for FDA
approval of a pharmaceutical product. Phase I clinical trials are designed to
determine the metabolism and pharmacologic effects of the drug in humans, the
side effects associated with increasing doses, and possibly, to obtain early
indication of efficacy. Phase II studies are conducted in an expanded
population to evaluate the effectiveness of the drug for a particular
indication and thus involve patients with the condition under study. These
studies are also intended to elicit additional safety data on the drug,
including evidence of the short-term side effects and other risks associated
with the drug. Phase III studies are generally designed to provide the
substantial evidence of safety and effectiveness of a drug required to obtain
FDA approval. The designation of a clinical trial as being of a particular
phase is not necessarily indicative that such a trial will be sufficient to
satisfy the requirements of a particular phase. For example, no assurance can
be given that a Phase III clinical trial will be sufficient to support an NDA
without further clinical trials. The FDA monitors and inspects the progress of
each of the three phases of clinical testing and may alter, suspend or
terminate the trials based on the data that have been accumulated to that
point and its assessment of the risk/benefit ratio to the patient. The total
time required for completing such clinical testing typically is many years.
Upon completion of clinical testing which the sponsor believe demonstrate that
the product is safe and effective for a specific indication, an NDA may be
submitted to the FDA. This application includes details of the manufacturing
and testing processes, preclinical studies and clinical trials. FDA approval
of the NDA is required before the applicant may market the new product in the
United States. The FDA may refuse to approve an NDA if applicable statutory
and/or regulatory criteria are not satisfied, or may require additional
testing or information.
Even after initial FDA approval had been obtained, further studies may be
required to provide additional data on safety or to gain approval for the use
of a product as a treatment in clinical indications other than those for which
the product was initially tested. The FDA may also require post-marketing
testing and surveillance programs to monitor the drug's effects.
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Once the sale of a product is approved, the FDA regulates production,
distribution, marketing, advertising and other activities under the FDC Act
and the FDA's implementing regulations. All manufacturing facilities, methods
and controls used for the manufacturing, processing, packing or holding of
drug products must be operated in conformity with FDA's GMP requirements. A
post-marketing testing, surveillance and reporting program may be required to
continuously monitor the product's usage and effects. Product approvals may be
withdrawn, or other actions may be ordered, or sanctions imposed if compliance
with regulatory requirements is not maintained.
In addition to regulations enforced by the FDA, the Company also is subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation
and Recovery Act and other similar federal, state and local regulations
governing permissible laboratory activities, waste disposal handling of toxic,
dangerous or radioactive materials and other matters. The Company believes
that it is in compliance in all material respects with such regulations.
EMPLOYEES
At December 31, 1996, the Company had 12 full-time employees, including
three persons engaged in direct sales functions at retail store locations. The
remaining nine persons are engaged in various corporate functions. In
addition, at December 31, 1996, there were 11 persons working in retail stores
for whom the Company was responsible for all or a portion of their salary. Of
those 11 persons, five were in the United States. The Company plans to hire
additional employees in 1997, including a Controller and additional
administrative, sales and marketing personnel.
The loss of any of the Company's senior management or other key research,
development, sales and marketing personnel, particularly if lost to
competitors, could have a material adverse effect on the Company's business,
operating results and financial condition, including its ability to attract
employees. In particular, the loss of Steven S. Porter, who is the Company's
President, Chief Executive Officer and Chairman of the Board, or Francine E.
Porter, who is the Company's Executive Vice President and Treasurer, would
have a material adverse effect on the Company's development and marketing
efforts. None of the Company's employees is represented by a labor union or is
the subject of a collective bargaining agreement with respect to his or her
employment by the Company. The Company has never experienced a work stoppage
and believes that its employee relations are good. See "Risk Factors--
Management of Growth" and "Risk Factors--Dependence on Key Personnel."
FACILITIES
The Company's principal administrative, sales and marketing offices are
located in approximately 4,000 square feet of space in Denver, Colorado. The
lease relating to this office space expires in October 1999. The Company
believes that suitable additional or alternative space will be available in
the future on commercially reasonable terms as needed.
LEGAL PROCEEDINGS
During 1995 and 1996, the Company sold Common Stock to several investors in
private placement transactions. In certain states in which securities were
sold, the Company may not have complied with all applicable requirements in
order to satisfy the exemptions from the registration or qualification
requirements in those states. Pursuant to the provisions of applicable state
laws, the Company delivered to certain stockholders, none of whom is
affiliated with the Company or any of its directors or officers, offers to
repurchase the shares they acquired, and under the laws of such states the
failure to accept such offers made in compliance with such state laws within
certain time periods (generally, 30 days from receipt of such offer)
terminates such purchasers' rescission rights under such state laws. All of
those stockholders have declined in writing the Company's offer to repurchase
their shares. As a result, the Company believes that the stockholders no
longer have rescission rights under such state laws respecting their shares.
32
<PAGE>
From October through December 1996, in Additional Closings of the Bridge
Financing, the Company issued Bridge Notes in the aggregate principal amount
of $250,000 and additional Bridge Warrants to purchase an estimated
approximately 31,250 shares of Common Stock. Such issuances may not have
complied with all applicable requirements to satisfy exemptions from the
registration or qualification requirements under securities laws of the United
States and certain states in which those securities were issued, possibly
entitling the purchasers of those securities to certain remedies, including
rescission rights, and possibly subjecting the Company and its officers and
directors to potential sanctions. The Bridge Notes will, however, be repaid in
full at the closing of this Offering, and to date no purchaser has made a
claim for rescission or other remedies. As a result, the Company believes that
even if such transactions were found to have violated federal or state
securities laws, such violations would not have a material adverse effect on
the Company's business, operating results or financial condition, although
there can be no assurances that this would be the case.
In January 1997, the Company received a letter from VideOne Marketing, Inc.
relating to the VideOne Agreement, pursuant to which VideOne produced for the
Company an infomercial offering The Wrinkle Patch and VideOne agreed to
provide certain distribution services for The Wrinkle Patch. The letter
asserts, among other things, that the Company breached certain of VideOne's
distribution rights and that the Company breached its obligations under the
VideOne Agreement by failing to pay VideOne royalties that VideOne alleges are
owed with respect to certain direct marketing sales of The Wrinkle Patch over
certain television channels. The letter also asserts that a dispute exists
concerning which party is obligated to pay for additional editing and
production costs previously incurred and that are expected to be incurred in
connection with further development of the infomercial. No complaint has been
filed, and the Company is unable to predict whether a complaint will be filed
in the future relating to the subject matter of the letter. The Company is
investigating the allegations made in the letter and believes that, if a
complaint is filed, it may have a number of defenses to any such claim. In
addition, the Company is investigating whether it may have claims against
VideOne relating to VideOne's performance under the VideOne Agreement. The
Company and VideOne have met concerning the above matters, but to date no
agreements have been reached and such matters remain unresolved. Although the
Company believes that the matters raised in the letter will be resolved
without material liability to the Company, there can be no assurance that this
will be the case and, if VideOne were finally to prevail in its claims against
the Company, such outcome could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company is subject to various claims and business disputes in the
ordinary course of business; however, the Company is unaware of any present
claims or disputes which would have a material adverse effect on the Company's
business, operating results or financial condition.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, and their ages and
positions, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Steven S. Porter 47 President, Chief Executive Officer and Chairman
of the Board
Francine E. Porter 37 Executive Vice President, Secretary, Treasurer
and Director
Thomas G. Wiley 69 Chief Financial Officer and Director
Suzanne J. Porter 49 Vice President, Operations
S. Herbert Ostern 66 Vice President, International Sales
Marvin J. Rosenblum(1) 54 Director
Richard G. Hartigan(1) 60 Vice President, Corporate Development and
Director
</TABLE>
- --------
(1) Member of Compensation Committee.
Each director holds office until the next annual meeting of stockholders and
until his or her successor is elected and qualified or until his or her
earlier resignation or removal. Each officer serves at the discretion of the
Board of Directors (the "Board").
Steven S. Porter is a co-founder of the Company and has served as its
President and Chief Executive Officer and Chairman of the Board since its
inception in August 1993. In January 1986, Mr. Porter and two other persons
founded GDP Technologies, Inc. ("GDP"), and from that time until August 1993,
Mr. Porter served as Executive Vice President of that company. GDP is
currently an inactive corporation, and Mr. Porter has devoted, and after this
Offering is expected to devote, substantially all of his business time and
efforts to the business of the Company.
Francine E. Porter, the wife of Steven S. Porter, is a co-founder of the
Company and has served as its Executive Vice President and a director since
its inception in August 1993. From March 1993 to August 1993, Mrs. Porter
served as a make-up artist for Bobbi Brown Professional Cosmetics. From April
1990 to March 1993, Mrs. Porter was self-employed on a part-time basis,
providing services as a make-up artist to a number of businesses in the
cosmetics industry.
Thomas G. Wiley has served as the Chief Financial Officer and a director of
the Company since January 1994. From October 1989 until January 1994, Mr.
Wiley was retired. From September 1988 through October 1989, Mr. Wiley served
as the President of TexPort Inc., a computer-related enterprise. From November
1984 to September 1988, Mr. Wiley was retired. From August 1980 to November
1984, Mr. Wiley served as the President of Computer Elections Systems, the
largest manufacturer of computerized voting equipment in the United States.
From March 1973 until October 1984, Mr. Wiley served as Executive Vice
President of Hale Technology, a venture capital firm. From July 1964 to
December 1972, Mr. Wiley served as Vice President, Finance of Electronic
Memories and Magnetics, an NYSE listed company engaged primarily in
manufacturing components and subsystems for computers.
Suzanne J. Porter, sister of Steven S. Porter, has served as the Vice
President, Operations of the Company since November 1993. From May 1989 to
October 1993, Ms. Porter served as Vice President, Operations for GDP. From
June 1974 to April 1989, Ms. Porter served in several positions for Business
Records Corporation and its predecessor, including as Vice President, Services
and Support.
S. Herbert Ostern has served as the Vice President, International Sales of
the Company since January 1994. Since June 1991, Mr. Ostern has provided
independent consulting services to a number of cosmetics companies. From April
1969 to June 1991, Mr. Ostern served as Senior Vice President and the Regional
Director for Estee Lauder International.
34
<PAGE>
Marvin J. Rosenblum has served as a director of the Company since January
1995. Since 1973 he has been an attorney in private practice in Chicago,
Illinois, concentrating in financial transactions, and licensing and
technology transfer arrangements in Europe and Asia.
Richard G. Hartigan, Jr. has served as Vice President, Corporate Development
and a director of the Company since February 1997. Since 1995, Mr. Hartigan
has served as the managing director of the Hartigan Group, which provides
marketing advice to cosmetics companies. From 1990 to 1995, Mr. Hartigan
served as President and Chief Executive Officer of Lancaster Group, a
cosmetics company. From 1965 to 1990, Mr. Hartigan was employed by Estee
Lauder, a cosmetics company, in several positions, the last of which was
Executive Vice President.
SCIENTIFIC ADVISORY PANEL
The Company has engaged certain industry experts for the purpose of
consultation and advice regarding various aspects of its business plan,
product design and development and other matters relating to the Company. The
nature, scope and frequency of the consultations between the Company and each
adviser varies depending on the Company's current activities, the need for
scientific advice and the individual scientific adviser. Although the Company
expects to receive guidance from its advisers, each of the advisers has
substantial commitments to third parties and is able to devote only a small
amount of time to the affairs of the Company. The Company's Scientific
Advisory Board includes:
<TABLE>
<CAPTION>
NAME OCCUPATION/TITLE
---- ----------------
<C> <S>
Bernard Idson, Ph.D. Professor of Pharmacy, Pharmaceutical and
Cosmetic Consultant, Drug Dynamic Institute,
University of Texas
Joe M. McCord, Ph.D. Professor of Medicine, Head, Division of
Biochemistry and Molecular Biology, Webb-Waring
Institute for Biomedical Research, University of
Colorado
Noel H. Upfall, D.O. Private Medical Practitioner (Detroit, Michigan)
Guy F. Webster, M.D., Ph.D. Associate Professor of Dermatology, Director of
the Center for Cutaneous Pharmacology, Thomas
Jefferson University Medical College
(Philadelphia, Pennsylvania)
</TABLE>
DIRECTOR COMPENSATION
Directors of the Company do not receive cash compensation for their services
as directors but are reimbursed for their reasonable expenses in attending
meetings of the Board. Directors are eligible to participate in the Incentive
Plan, and outside directors are eligible to participate in the Directors Plan.
See "--Employee Benefit Plans."
In March 1996, each person who at the time was a director received a non-
qualified stock option to purchase 15,909 shares of Common Stock at an
exercise price of $4.40 per share. Each option is exercisable as to 6,818
shares upon grant and as to approximately 454 of the remaining shares each
month thereafter commencing April 1, 1996. These options expire on March 24,
2001.
35
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company by, in all capacities during 1996,
(i) the Company's chief executive officer and (ii) the Company's other
executive officers whose salary and bonus (including consulting fees) exceeded
$100,000 during 1996 (of which there were none) (each a "Named Executive
Officer").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
------------------ --------------------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
--------------------------- ---- --------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Steven S. Porter............ 1996 $67,500 $ -- 15,909 --
President, Chief Executive
Officer
and Chairman of the Board
</TABLE>
Option Grants in Last Fiscal Year. The following table sets forth each grant
of stock options made during the fiscal year ended December 31, 1996 to each
of the Named Executive Officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED DURING
OPTIONS FISCAL EXERCISE PRICE EXPIRATION
NAME GRANTED(#)(1) 1996(%)(2) ($/SH)(3) DATE
- ---- ------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Steven S. Porter......... 15,909 15.4% $4.40 03/24/01
</TABLE>
- --------
(1) The option is exercisable with respect to 6,818 of the shares upon grant
and approximately 454 of the remaining shares monthly thereafter
commencing April 1, 1996.
(2) Based on an aggregate of 103,060 options granted by the Company in the
year ended December 31, 1996 to employees of and consultants to the
Company, including the Named Executive Officer.
(3) The exercise price per share of the option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board.
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values. The
following table sets forth the information with respect to the number and
value of securities underlying unexercised options held by the Named Executive
Officers at December 31, 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT DECEMBER IN-THE-MONEY OPTIONS AT
SHARES VALUE 31, 1996(#)(1) DECEMBER 31, 1996($)(2)
ACQUIRED ON REALIZED ------------------------- -------------------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven S. Porter........ -- -- 10,909 5,000 39,272 18,000
</TABLE>
- --------
(1) Does not include 100,000 shares of Common Stock issuable upon exercise of
an option to be granted concurrently with the effective date of this
Offering, at an exercise price equal to 110% of the initial public
offering price of the Shares offered hereby.
(2) Based on the estimated initial public offering price of $8.00 per share,
minus the per share exercise price, multiplied by the number of shares
underlying the option.
No Named Executive Officer exercised any options in fiscal 1996, and no
Named Executive Officer acquired shares upon the exercise of stock options
during 1996.
36
<PAGE>
EMPLOYMENT AGREEMENTS
The Company is party to employment agreements with Steven Porter and
Francine Porter. The agreements become effective upon the closing of this
Offering. The agreements provide that the officer will devote all of his or
her business time and energy to the affairs of the Company. The agreements
have a term of three years and provide for annual salaries to Steven Porter
and Francine Porter of $150,000 and $125,000, respectively. The agreements
provide for grants of new stock options to Steven Porter and Francine Porter
to purchase 100,000 and 50,000 shares, respectively, at an exercise price
equal to 110% of the initial public offering price of the Shares. The options
will become immediately exercisable upon grant with respect to 25,000 shares
as to Mr. Porter and 12,500 shares as to Mrs. Porter, and the options will
vest as to the remaining 75,000 shares and 37,500 shares, respectively, over
three years, one-third at the end of each year. Either the Company or the
officer may terminate the agreement at any time upon notice to the other
party. The agreements provide that upon a termination of employment without
cause, the officer is entitled to severance compensation of the lesser of 18
months or the remaining term of the agreement (but in no event less than 6
months) of his or her salary, which would be paid at the same time as salary
payments would otherwise have been paid. The Company also has a number of
agreements with other officers describing certain terms of their employment.
See "Certain Transactions."
EMPLOYEE BENEFIT PLANS
1997 Equity Incentive Plan. In February 1997, the Board adopted the 1997
Equity Incentive Plan (the "Incentive Plan") and reserved a total of 300,000
shares of Common Stock for issuance thereunder. The Company's stockholders are
expected to approve the Incentive Plan before the effective date of this
Offering, and upon such approval the Incentive Plan will become effective upon
the effective date of this Offering. Of the shares reserved for issuance under
the Incentive Plan, options to purchase a total of 150,000 shares of Common
Stock will be granted to Steven Porter and Francine Porter upon the
effectiveness of this Offering. Shares that (i) are subject to an option under
the Incentive Plan but cease to be subject to such option for any reason other
than exercise of such option, (ii) are awarded under the Incentive Plan but
are forfeited or are repurchased by the Company at the original issue price or
(iii) are subject to an award that otherwise terminates without shares being
issued will, in each case, be redesignated as available for grant or issuance
under the Incentive Plan.
The Incentive Plan provides for the grant of stock options and stock bonuses
and the issuance of restricted stock by the Company to its employees,
officers, directors, consultants, independent contractors and advisers. No
person will be eligible to receive more than 250,000 shares in any calendar
year pursuant to grants under the Incentive Plan. The Incentive Plan is
currently administered by the Compensation Committee of the Board (the
administrator referred to as the "Committee"), consisting of Messrs. Lewis and
Rosenblum. The Incentive Plan permits the Committee to grant options that are
either incentive stock options, as defined in Section 422 of the Code, or
nonqualified stock options, on terms (including the exercise price, which may
not be less than 85% of the fair market value of the Common Stock, and the
vesting schedule) determined by the Committee, subject to certain statutory
and other limitations in the Incentive Plan. In addition to, or in tandem
with, awards of stock options, the Committee may grant participants restricted
stock awards to purchase Common Stock for not less than 85% of its fair market
value at the time of grant. The other terms of such restricted stock awards
may be determined by the Committee. The Committee may also grant stock bonus
awards of the Company's Common Stock either in addition to, or in tandem with,
other awards under the Incentive Plan, under such terms, conditions and
restrictions as the Compensation Committee may determine. Under the Incentive
Plan, stock bonuses may be awarded for the satisfaction of performance goals
established in advance. In the event of a merger, consolidation or similar
corporate transaction, any or all outstanding awards under the Incentive Plan
may be assumed, converted, replaced or substituted by the successor
corporation (if any), which assumption, conversion, replacement or
substitution will be binding on all participants in the Incentive Plan. In the
event such successor corporation (if any) does not assume or substitute
awards, such awards will expire in connection with such transaction at such
times and on such conditions as determined by the Board. The Incentive Plan
will terminate in February 2007, unless terminated earlier in accordance with
its provisions.
37
<PAGE>
Directors Plan. In February 1997, the Board adopted the 1997 Directors Stock
Option Plan (the "Directors Plan") and reserved a total of 50,000 shares of
Common Stock for issuance thereunder. The Company's stockholders are expected
to approve the Directors Plan before the effectiveness of this Offering, and
upon such approval the Directors Plan will become effective upon the
effectiveness of this Offering. Members of the Board who are not employees of
the Company, or any parent, subsidiary or affiliate of the Company, are
eligible to participate in the Directors Plan. Each eligible director who
first becomes a member of the Board on or after the date that the Directors
Plan becomes effective will automatically be granted an option to acquire
15,000 shares on the date such director first becomes a director. At each
annual meeting of stockholders of the Company, each eligible director will
automatically be granted an additional option to purchase 1,000 shares if such
director has served continually as a member of the Board since the date of
grant of such director's initial option, or if such director did not receive
an initial option, such director has served continuously as a member of the
Board since the Directors Plan became effective. All options issued under the
Directors Plan will vest as to 1/48 of the shares subject to the option per
month after the date of grant, provided the optionee continues as a member of
the Board or as a consultant of the Company. The exercise price of all options
granted under the Directors Plan will be the fair market value of the Common
Stock on the date of grant. In the event of a dissolution, a merger in which
the Company is not the surviving corporation, a sale of substantially all the
assets of the Company or certain other transactions, the successor corporation
may assume the outstanding options issued under the Directors Plan or may
substitute equivalent options or substantially similar consideration. In the
event such successor corporation refuses to assume or substitute those
options, then those options will accelerate at such times and on such
conditions as the Committee will determine.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF
LIABILITY
The Company intends to enter into indemnity agreements with each of its
current directors and executive officers to give such directors and officers
additional contractual assurances regarding the scope of the indemnification
set forth in the Company's Bylaws and to provide additional procedural
protections. At present, there is no pending litigation or proceeding
involving a director, officer or employee of the Company regarding which
indemnification is sought, nor is the Company aware of any threatened
litigation that may result in claims for indemnification.
As permitted by Section 145 of the Delaware General Corporation Law (the
"DGCL"), the Bylaws of the Company provide that (i) the Company is required to
indemnify its directors and officers to the maximum extent permitted by the
DGCL, (ii) the Company may, in its discretion, indemnify other persons as set
forth in the DGCL, (iii) to the maximum extent permitted by the DGCL, the
Company is required to advance expenses, as incurred, to its directors and
officers in connection with a legal proceeding (subject to certain
exceptions), (iv) the rights conferred in the Bylaws are not exclusive and (v)
the Company is authorized to enter into indemnification agreements with its
directors, officers, employees and agents.
As permitted by the DGCL, the Company's Certificate of Incorporation
includes a provision that eliminates the personal liability of directors for
monetary damages for breach of fiduciary duty as a director except for
liability (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit.
After this Offering, the Company intends to seek to obtain directors and
officers liability insurance.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
38
<PAGE>
CERTAIN TRANSACTIONS
Since January 1, 1994, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company was or
is to be a party in which the amount involved exceeds $60,000 and in which any
director, executive officer, holder of more than 5% of the Common Stock or any
member of the immediate family of any such person, had or will have a direct
or indirect material interest other than compensation agreements, see
"Management," and as described below.
The Company was founded by Steven S. and Francine E. Porter and incorporated
in August 1993. Mr. and Mrs. Porter received a total of 454,545 shares of
Common Stock in consideration of past services to the Company. Mr. and Mrs.
Porter subsequently transferred 2,362 of these shares to two third parties. In
August 1993, Scott Thring received 13,636 shares of Common Stock for services
rendered to the Company, and an option to purchase 13,636 shares of Common
Stock at an exercise price of $.22 per share, all of which are now
exercisable. In November 1993, the Company entered into a letter agreement
with Suzanne J. Porter, the sister of Steven Porter, to obtain her services as
Vice President, Operations, pursuant to which the Company issued to her
113,636 shares of Common Stock for services rendered to the Company. In
December 1993, the Company entered into a letter agreement with David Ross to
obtain his services as Vice President, Sales and Marketing, and Mr. Ross
received a total of 113,636 shares of Common Stock for services rendered to
the Company. In January 1994, the Company entered into a letter agreement with
S. Herbert Ostern to obtain his services as Vice President of International
Sales, pursuant to which the Company issued to him 22,727 shares of Common
Stock for services rendered to the Company, granted him an option to purchase
22,727 shares of Common Stock at an exercise price of $.22 per share,
exercisable as to 50% of the shares after one year of his continuous
employment and as to the remaining shares after two years of his continuous
employment, and agreed to pay him a commission of .5% of certain of the
Company's international net sales to be paid quarterly in arrears as long as
he remains an employee. Also in January 1994, the Company entered into a
letter agreement with Thomas G. Wiley to obtain his services as Chief
Financial Officer, pursuant to which the Company issued to him 22,727 shares
of Common Stock for services rendered to the Company and granted him an option
to purchase 22,727 shares of Common Stock at an exercise price of $.22 per
share, exercisable as to 50% of the shares after one year of his continuous
employment and as to the remaining shares after two years of his continuous
employment. In the aggregate, the Company issued 740,907 shares of Common
Stock to Mr. and Mrs. Porter, Ms. Suzanne Porter, Mr. Ross, Mr. Thring, Mr.
Wiley, and Mr. Ostern through April 1994. At the time of issuance of these
shares, the Company was being organized and operating activities had not
commenced. Consequently, for financial reporting purposes these shares were
deemed to be founders stock of nominal value at the date of issuance.
On April 17, 1995, Steven and Francine Porter, who are directors and
executive officers of the Company, assigned to the Company for nominal
consideration all right, title and interest they had in their invention
described in a patent application titled "Skin Care Composition And Methods,"
and any United States and foreign patents, and any applications which might
then or thereafter be filed for the described invention.
The Company paid to Edward Lewis, who was a director of the Company until
February 1997, a total of $23,510 between April 1996 and June 1996, and in
April 1996 issued to Mr. Lewis 15,673 shares of Common Stock for services
rendered to the Company.
Between June 1995 and June 1996, the Company issued to Hillary Management,
S.A., 136,440 shares of Common Stock at purchase prices between $1.10 per
share and $4.40 per share. Certain members of Edward Lewis' family have a
beneficial interest in 21,629 of these shares.
The Company borrowed certain amounts from several investors between November
1994 and July 1995 (the "1995 Note Financing"), giving to each such investor a
promissory note and an option to purchase a stated number of shares of Common
Stock. In connection with the 1995 Note Financing, Thomas G. Wiley, a director
and Chief Financial Officer of the Company, loaned the Company $20,000,
evidenced by a promissory note dated July 7, 1995. The note is due at the
earlier of September 30, 1996 or completion of this Offering. To secure
39
<PAGE>
payment, Steven Porter pledged 40,000 shares of his stock in GDP. In addition,
on July 7, 1995, the Company granted Mr. Wiley an option to purchase 9,090
shares of Common Stock at an exercise price of $1.10 per share exercisable
until the earlier of July 7, 2000, or the effective date of this Offering.
In January 1995, Marvin Rosenblum, a director of the Company, entered into
an agreement with the Company, pursuant to which (i) Mr. Rosenblum agreed to
provide financial consulting services and assist the Company in evaluating its
general business and planning, (ii) the Company sold to Mr. Rosenblum 68,181
shares of Common Stock at $0.73 per share, (iii) the Company granted to Mr.
Rosenblum an option, exercisable through April 30, 1995, to purchase 68,181
shares of Common Stock at an exercise price of $1.10 per share and (iv) Steven
and Francine Porter granted Mr. Rosenblum an option to purchase 68,181 shares
of Common Stock which they owned, at an exercise price of $1.10 per share,
with a term ending February 1, 2000. In April 1995, Mr. Rosenblum partially
exercised the 68,181 share option by purchasing 45,454 shares of Common Stock,
and transferred those shares to a third party. The remainder of that option
expired unexercised. In July 1995, the Company granted a five-year option to
Mr. Rosenblum to purchase 22,727 shares of Common Stock at an exercise price
of $1.10 per share. In connection with these transactions, the Company granted
Mr. Rosenblum piggyback registration rights and a right of first refusal to
purchase his pro rata share of certain future issuances of Common Stock, and
the Company and the Porters granted Mr. Rosenblum certain "tag along" rights
to sell a portion of his shares if any beneficial holder of 5% or more of the
Common Stock sold his shares. These rights of first refusal and tag along
rights terminate upon the registration of any class of the Company's
securities under the Exchange Act.
In November 1994, certain stockholders of the Company, including Steven and
Francine Porter, Suzanne Porter, Thomas Wiley and Scott Thring, executed an
agreement which, except in cases of transfers to certain family members of
such stockholders, granted a right of first refusal to the Company, and a
right of second refusal to the stockholders in the event any existing
stockholder desired to transfer his or her shares of Common Stock to any third
party. Under these rights, first the Company, and if the Company elected not
to exercise such right then the stockholders, could purchase the stock from
the selling stockholder at the same price and on the same terms as those
offered by the third party purchaser. This transfer restriction continued up
to six months after the closing of any initial public offering of Common
Stock, or such longer period, not to exceed one year from the date of the
initial public offering, as requested by the underwriters. In addition, the
agreement required that any person who acquired shares from such stockholders
after the date of its execution agree, as a condition of ownership, to the
restrictions described above. In June 1996, this agreement was terminated by
mutual agreement among the parties.
In August 1994, the Company issued to Dermal Technologies, Inc. 90,909
shares of Common Stock in exchange for (i) the assignment to the Company of
all Dermal Technologies' right, title and interest in certain transdermal
delivery technology and (ii) the introduction to Dermal Technologies' major
component suppliers. Additionally, for the services of Dermal Technologies'
principals in obtaining an agreement between the Company and a third party to
commercialize certain of the Company's products, the Company granted Dermal
Technologies royalty rights, based on sales of certain of its products, which
terminate on the close of this Offering. Such royalty payments have not been
significant.
Also in 1994, the Company entered into letter agreements with Bernard Idson,
Ph.D., Guy F. Webster, M.D., Ph.D., and Joseph M. McCord, Ph.D. to retain
their services as members of the Company's Scientific Advisory Board. Pursuant
to these agreements, the Company granted each adviser an option to purchase
4,545 shares of Common Stock at an exercise price of $.22 per share and agreed
to pay each consultant a retainer of $1,000 per month. Through December 31,
1996, $2,000 of these payments have been made, and approximately $61,000 of
the net proceeds of this Offering will be used to pay the remainder of these
payments. See "Use of Proceeds."
In connection with the Bridge Financing, if the Bridge Notes are not repaid
by specified dates, then Steven Porter, Francine Porter, Suzanne Porter,
Marvin Rosenblum, Edward Lewis, Thomas Wiley, Hillary Management, S.A., and
Dermal Technologies, Inc. have agreed to vote their shares of Common Stock in
favor
40
<PAGE>
of the directors designated by a representative of the Bridge Investors, and
the Company has agreed in certain circumstances to cause additional shares to
become subject to the voting agreement so that the representative of the
Bridge Investors can elect a majority of the directors of the Company. See
"Capitalization--Recent Financing Transactions."
No officer or director of the Company is an officer, director or shareholder
of either Dermal Technologies, Inc. or Hillary Management, S.A. Further,
although certain officers and directors of the Company are shareholders of GDP
Technologies, Inc., the Company has not entered into any contractual or other
relationship with that company, and does not expect to do so in the future.
The Company believes that, except for the issuance by the Company of the
shares deemed to be founders stock for financial reporting purposes as
described above, all of the transactions set forth above were made on terms no
less favorable to the Company than could have been obtained from unaffiliated
third parties. All future transactions between the Company and its officers,
directors and principal stockholders and their affiliates will be approved by
a majority of the Board, including a majority of the independent and
disinterested directors of the Board, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Common Stock as of December 31, 1996,
and as adjusted to reflect the sale of the shares of Common Stock offered
hereby, by (i) each person known by the Company to be the beneficial owner of
more than 5% of the Common Stock, (ii) each of the Company's directors, (iii)
each Named Executive Officer and (iv) all executive officers and directors as
a group.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)(2)
DIRECTORS, NAMED EXECUTIVE --------------- ---------------
OFFICERS AND 5% STOCKHOLDERS NUMBER PERCENT NUMBER PERCENT
---------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Steven S. Porter(3)............................. 489,453 32.3% 489,453 18.5%
Francine E. Porter(4)........................... 476,953 31.7 476,953 18.1
Marvin J. Rosenblum(5).......................... 171,361 10.8 171,361 6.3
Hillary Management, S.A.(6)..................... 136,440 9.2 136,440 5.2
David Ross...................................... 107,909 7.3 107,909 4.1
Suzanne T. Porter............................... 113,636 7.7 113,636 4.4
Dermal Technologies, Inc........................ 90,909 6.1 90,909 3.5
Thomas G. Wiley(7).............................. 66,816 4.4 66,816 2.5
Richard G. Hartigan............................. -- -- -- --
All executive officers and directors
as a group (7 persons)(8)...................... 843,311 51.4 843,311 30.5
</TABLE>
- --------
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable.
(2) Assumes that the Underwriters' over-allotment option to purchase up to
168,750 shares from the Company is not exercised. See "Underwriting."
(3) Includes 452,181 shares held jointly with Francine Porter and 37,272
shares subject to options exercisable before March 2, 1997.
(4) Includes 452,181 shares held jointly with Steven Porter and 24,772 shares
subject to options exercisable before March 2, 1997.
(5) Includes 68,181 shares beneficially owned by Steven and Francine Porter
that are subject to an option exercisable by Mr. Rosenblum before March 2,
1997, and 34,999 shares subject to an option exercisable before March 2,
1997.
(6) Includes 21,629 shares in which certain members of a former director's
family have a beneficial interest.
(7) Includes 44,089 shares subject to options exercisable before March 2,
1997.
(8) Includes 163,859 shares subject to options exercisable before March 2,
1997.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 15,000,000 shares of $.001 par value Common Stock and
10,000,000 shares of $.001 par value Preferred Stock. As of January 31, 1997,
there were outstanding 1,478,299 shares of Common Stock held of record by
approximately 63 stockholders, options and warrants (excluding Bridge
Warrants) to purchase 345,036 shares of Common Stock, additional options to
purchase 150,000 shares of Common Stock that will be outstanding upon the
effectiveness of this Offering and Bridge Warrants to acquire an estimated
118,750 Bridge Shares.
COMMON STOCK
Subject to preferences that may be applicable to any Preferred Stock
outstanding at the time, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the Board may from time to time determine. Each
stockholder is entitled to one vote for each share of Common Stock held on all
matters submitted to a vote of stockholders. Cumulative voting for the
election of directors is not provided for in the Company's Certificate of
Incorporation, which means that the holders of a majority of the shares voted
can elect all of the directors then standing for election. The Common Stock is
not entitled to preemptive rights and is not subject to conversion or
redemption. Upon liquidation, dissolution or winding-up of the Company, the
assets legally available for distribution to stockholders are distributable
ratably among the holders of the Common Stock and any participating Preferred
Stock outstanding at that time after payment of liquidation preferences, if
any, on any outstanding Preferred Stock and payment of other claims of
creditors. Each outstanding share of Common Stock is, and all shares of Common
Stock to be outstanding upon completion of this Offering will be, fully paid
and nonassessable.
PREFERRED STOCK
The Board is authorized, subject to any limitations prescribed by Delaware
law, to provide for the issuance of shares of Preferred Stock in one or more
series, to establish from time to time the number of shares to be included in
each such series, to fix the rights, preferences and privileges of the shares
of each wholly unissued series and any qualifications, limitations or
restrictions thereon, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then
outstanding), without any further vote or action by the stockholders. The
Board may authorize the issuance of Preferred Stock with voting or conversion
rights that could adversely affect the voting power or other rights of the
holders of Common Stock. Thus, the issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the
Company. The Company has no current plans to issue any shares of Preferred
Stock.
OTHER SECURITIES
Representative's Warrants
In connection with this Offering, the Company has authorized the issuance to
the Representative of up to 112,500 Representative's Warrants and has reserved
112,500 shares of Common Stock for issuance upon exercise of the
Representative's Warrants. Each Representative's Warrant will entitle the
holder to purchase one share of Common Stock at a price of $ per share,
which is 120% of the initial public offering price of the Shares in this
Offering. The Representative's Warrants will, subject to certain conditions,
be exercisable any time from the first until the fifth anniversary of the date
of this Prospectus. See "Underwriting."
The Representative's Warrants also contain provisions to protect the holder
against dilution by adjustment of the exercise price in certain events, such
as stock dividends and distributions, stock splits and recapitalizations. The
Company is not required to issue fractional shares upon the exercise of a
Representative's Warrant, and the holder thereof will not possess any rights
as a stockholder of the Company until such holder exercises the
Representative's Warrants.
43
<PAGE>
The foregoing discussion of certain terms and provisions of the
Representative's Warrants is qualified in its entirety by reference to the
detailed provisions of the Representative's Warrant Agreement, the form of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
For the life of the Representative's Warrants, the holders thereof have the
opportunity to profit from a rise in the market price of the Common Stock
without assuming the risk of ownership of the shares of Common Stock issuable
upon the exercise of the warrants, with the resulting dilution in the interest
of the Company's stockholders by reason of exercise of the warrants at a time
when the exercise price is less than the market price for the Common Stock.
Further, the terms on which the Company could obtain additional capital during
the life of the warrants may be adversely affected. The warrant holders may be
expected to exercise the Representative's Warrants at a time when the Company
would, in all likelihood, be able to obtain any needed capital by a new
offering of its securities on more favorable terms than those provided for by
the Representative's Warrants.
DELAWARE ANTI-TAKEOVER LAW
Upon the closing of this Offering, the Company will be subject to the
provisions of Section 203 of the DGCL (the "Anti-Takeover Law") regulating
corporate takeovers. The Anti-Takeover Law prevents certain Delaware
corporations, including those whose securities are listed on the Nasdaq
SmallCap Market, from engaging, under certain circumstances, in a "business
combination" (which includes a merger or sale of more than 10% of the
corporation's assets) with any "interested stockholder" (a stockholder who
owns 15% or more of the corporation's outstanding voting stock) for three
years following the date that such stockholder became an "interested
stockholder." A Delaware corporation may "opt out" of the Anti-Takeover Law
with an express provision in its original certificate of incorporation or an
express provision in its certificate of incorporation or bylaws resulting from
a stockholders' amendment approved by at least a majority of the outstanding
voting shares. The Company has not "opted out" of the provisions of the Anti-
Takeover Law.
REGISTRATION RIGHTS
Pursuant to a subscription agreement and certain purchase options, the
Company has granted Marvin J. Rosenblum, subject to certain exceptions, the
right to request inclusion of 68,181 shares of Common Stock and 90,909 shares
purchasable upon exercise of stock options previously granted by the Company
or Steven and Francine Porter, if the Company elects to register any of its
Common Stock under the Securities Act either for its own account or for the
account of any other stockholder. The Company is required to bear all
registration expenses, other than underwriting discounts and selling
commissions, incurred in connection with such registrations. The registration
rights relating to the 90,909 shares subject to the options described above
may be transferred to a permitted assignee or transferee of the options.
The Company granted to the investors in the 1995 Note Financing Transaction
the right to include the shares issuable to them upon exercise of the options
granted in the 1995 Note Financing Transaction, totalling approximately 95,763
shares of Common Stock, in any underwritten public offering which occurred
during the exercise period of their options (subject to the underwriter's
right to exclude such shares from a registration). The Company is required to
bear all registration expenses, other than underwriting discounts and selling
commissions, incurred in connection with the registration of the investors'
shares on one such registration.
In connection with the Bridge Financing, the Company agreed to file a
registration statement no later than nine months after the effectiveness of
this Offering to register the resale of the Bridge Shares. The Company has
agreed to keep such a registration statement effective until such shares have
been sold or until such shares can be sold without restriction pursuant to
Rule 144. If such registration statement does not remain effective, then the
Bridge Investors have certain additional demand registration rights. In
addition, the Bridge Investors have piggyback registration rights to require
the Company to include the Bridge Shares in registration statements filed by
the Company registering Common Stock under the Securities Act, either for its
own account or for the account of any other stockholder.
44
<PAGE>
The holders of approximately 121,120 shares of Common Stock purchased in a
private placement transaction concluded in June 1996 have piggyback
registration rights entitling them to have their shares included in future
registrations by the Company, subject to certain restrictions. The Company is
required to bear all registration expenses, other than underwriting discounts
and selling commissions, incurred in connection with the registration of the
shares.
The holders of the Representative's Warrants have the right to require the
Company to file a registration statement, commencing one year after the
effectiveness of this Offering, to register the sale of the shares of Common
Stock issuable upon exercise of the Representative's Warrants. The Company is
required to bear all registration expenses, other than underwriting discounts
and selling commissions, incurred in connection with the registration of the
shares underlying Representative's Warrants.
The Company has granted to David Ross piggyback registration rights
entitling him to have the shares of Common Stock held by him, totalling
107,909 shares as of December 31, 1996, included in future registrations by
the Company, subject to certain restrictions. Such registration rights expire
with respect to any such shares that may be distributed to the public pursuant
to Rule 144 within the succeeding six months without regard to the volume
restrictions of Rule 144.
These registration rights could result in substantial future expense to the
Company and could adversely affect the Company's ability to complete future
equity or debt financings. Furthermore, the registration and sale of Common
Stock of the Company held by or issuable to the holders of registration
rights, or even the potential of such sales, could have an adverse affect on
the market price of the securities offered hereby.
TRANSFER AGENT AND REGISTRAR AND WARRANT AGENT
The Transfer Agent and Registrar for the Company's Common Stock and the
Warrant Agent for the Warrants is Continental Stock Transfer & Trust Company.
LISTING
The Company has applied to list its Common Stock on the Nasdaq SmallCap
Market under the trading symbol "OSMO" and on the Boston Stock Exchange under
the trading symbol "OSX."
SHARES ELIGIBLE FOR FUTURE SALE
Before this Offering, there has been no market for the Common Stock. Future
sales of substantial amounts of Common Stock in the public market could
adversely affect market prices prevailing from time to time.
Upon completion of this Offering, assuming no exercise of options or
warrants after January 31, 1997, the Company will have outstanding
approximately 2,603,299 shares of Common Stock. Of these shares, the 1,125,000
shares sold in this Offering will be freely tradeable without restriction
under the Securities Act, unless purchased by "affiliates" of the Company as
that term is defined in Rule 144 under the Securities Act. The remaining
1,478,299 shares of Common Stock held by existing stockholders were issued and
sold by the Company in reliance on exemptions from the registration
requirements of the Securities Act. These shares may be sold in the public
market only if registered or pursuant to an exemption from registration such
as Rules 144, 144(k) or 701 under the Securities Act. Holders of approximately
1,363,572 shares have executed lock-up agreements providing that they will not
directly or indirectly sell, contract to sell, grant any option to purchase or
otherwise transfer or dispose of any securities of the Company until one year
from the closing of this Offering without the prior written consent of the
Representative. Additionally, a stockholder holding 107,909 shares of Common
Stock has agreed to these restrictions for a period of one year from the
closing of this Offering, except that 30,000 of his shares will not be so
restricted following the closing of this Offering. The Representative has
represented that it will not release any Bridge Shares before expiration of
the lock-up period.
45
<PAGE>
As a result of the foregoing lock-up agreements and securities law
restrictions, assuming no exercise of options or warrants after December 31,
1996, 30,000 shares of Common Stock other than the 1,125,000 shares offered
hereby will be eligible for resale without restriction immediately after the
effectiveness of this Offering pursuant to Rule 144 or Rule 144(k), 6,818
shares of Common Stock will be eligible for resale commencing in June 1997
pursuant to Rule 144, and approximately 1,441,481 additional shares of Common
Stock will be eligible for resale, pursuant to either Rule 701 or Rule 144,
beginning one year from the initial closing of this Offering.
In general, under Rule 144 as it will be in effect commencing April 29,
1997, beginning 90 days after the date of this Prospectus, a person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares for at least one year (including the holding period of any prior owner
except an affiliate) is entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (which, assuming no exercise
of options or warrants after December 31, 1996, will equal approximately
2,603,299 shares immediately after this Offering) or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks preceding
the filing of a Form 144 with respect to such sale. Sales under Rule 144 are
also subject to certain manner of sale provisions and notice requirements and
to the availability of current public information about the Company. Under
Rule 144(k), a person who is not deemed to have been an affiliate of the
Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares to be sold for at least two years (including the
holding period of any prior owner except an affiliate), is entitled to sell
such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with the holding period requirements of Rule 144. Any employee,
officer or director of or consultant to the Company who purchased his or her
shares pursuant to a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701. Rule 701 further provides that non-
affiliates may sell such shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or
notice provisions of Rule 144. Each holder of Rule 701 shares is required to
wait until 90 days after the date of this Prospectus before selling such
shares.
Shortly after this Offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock subject to
certain outstanding options or reserved for issuance under the Incentive Plan
or Directors Plan. Based upon the number of outstanding options and reserved
shares as of December 31, 1996, such registration statement would cover
approximately 622,000 shares. Accordingly, shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates of the Company, be available for sale in the open market
immediately following the expiration of lock-up provisions. See "Risk
Factors--Shares Eligible for Future Sale."
Additional shares of Common Stock issuable upon the exercise of certain
outstanding options and warrants will become eligible for public sale as a
result of registration rights agreements with the Company or the Company
otherwise agreeing to register such shares. See "Description of Capital
Stock--Registration Rights."
46
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Company and the Underwriters named below, the Company has agreed to sell to
the Underwriters for whom National Securities Corporation is acting as
representative (in such capacity, the "Representative"), and the Underwriters
have severally and not jointly agreed to purchase, the Shares set forth below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ -----------
<S> <C>
National Securities Corporation.................................
-----------
Total.......................................................
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to the approval of certain legal matters by their
counsel and various other conditions. The nature of the Underwriters'
obligations are such that they are committed to purchase all of the above
Securities if any are purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the Shares to the public at the public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per share of Common Stock.
The Underwriters may allow, and such dealers may allow, a concession not in
excess of $ per share of Common Stock to certain other dealers. After this
Offering, the public offering price and concessions and discounts may be
changed by the Representative. The Company has granted to the Underwriters an
option exercisable during the 45-day period commencing on the date of this
Prospectus to purchase from the Company, at the initial public offering price
less underwriting discounts and the non-accountable expense allowance, up to
an aggregate of 168,750 Shares for the sole purpose of covering over-
allotments, if any. To the extent that the Underwriters exercise the option,
each Underwriter will have a firm commitment, subject to certain conditions,
to purchase the number of the additional Shares proportionate to its initial
commitment.
The Representative has informed the Company that it does not expect sales to
discretionary accounts by the Underwriters to exceed five percent of the
Shares offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to pay to the Representative a non-accountable expense allowance equal
to 3% of the gross proceeds derived from the sale of the Shares underwritten,
of which $50,000 has been advanced.
The Company has agreed to sell to the Representatives for $.0001 each the
Representative's Warrants to purchase from the Company up to 112,500 Shares at
an exercise price per Share equal to 120% of the initial public offering price
per Share offered hereby. The Representative's Warrants are exercisable for a
period of four years commencing one year from the date of this Prospectus and
are restricted from sale, transfer, assignment or hypothecation for a period
of 12 months from the date of this Prospectus, except to officers of the
Representative. The Representative's Warrants provide for adjustment in the
exercise price of the Representative's Warrants in the event of certain
mergers, acquisitions, stock dividends and capital changes. The
47
<PAGE>
Representative's Warrants grant to the holders thereof certain rights with
respect to the registration under the Securities Act of the securities
issuable upon exercise of the Representative's Warrants.
The offering prices set forth on the cover page of this Prospectus should
not be considered indications of the actual values of the Common Stock. Such
prices are subject to change as a result of market conditions and other
factors and no assurance can be given that the Common Stock can be resold at
its public offering price.
The Company, its officers and directors and other stockholders and option
holders holding approximately 1,363,572 shares of Common Stock have agreed
that for a period of 12 months following the closing of this Offering, they
will not offer, sell, contract to sell, grant any option for the sale or
otherwise dispose of any securities of the Company (other than intra-family
transfers or transfers to trust for estate planning purposes), without the
Representative's consent. Additionally, a stockholder holding 107,909 shares
of Common Stock has agreed to those restrictions for a period of 12 months
following the closing of this Offering, except that 30,000 of his shares will
not be so restricted after the closing of this Offering. These restrictions do
not apply to (i) the issuance of shares of Common Stock upon the exercise of
options and warrants outstanding prior to the sale of the Shares offered
hereby, or (ii) the issuance of shares of Common Stock, pursuant to the
Underwriters' over-allotment option. The Representative has represented that
it will not release any Bridge Shares before expiration of the lock-up period.
The Company has agreed that for a period of five years from the closing of
the sale of the Shares offered hereby, it will nominate for election as a
director a person designated by the Representative, and during such time as
the Representative has not exercised such right, the Representative shall have
the right to designate an observer, who shall be entitled to attend all
meetings of the Board and receive all correspondence and communications sent
by the Company to the members of the Board. The Representative has not yet
identified to the Company the person who is to be nominated for election as a
director or designated as an observer. The Company has agreed to reimburse
designees of the Representative for their out-of-pocket expenses incurred in
connection with their attendance of meetings of the Board.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to
copies of each such agreement which are filed as exhibits to the Registration
Statement, of which this Prospectus forms a part. See "Available Information."
Determination of Offering Price
Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, the initial public offering price will be determined by
negotiations between the Company and the Representative. Among the factors
considered in determining the initial public offering price will be the
history and the prospects of the Company and the industry in which it
operates, the past and present operating results of the Company and the trends
of such results, the previous experience of the Company's executive officers
and the general condition of the securities markets at the time of this
Offering.
LEGAL MATTERS
The validity of the issuance of the Shares offered hereby will be passed
upon for the Company by Fenwick & West LLP, Palo Alto, California, and certain
legal matters relating only to patent matters will be passed upon for the
Company by Davis, Graham & Stubbs LLP, Denver, Colorado. Certain legal matters
in connection with this Offering will be passed upon for the Underwriters by
Camhy Karlinsky & Stein LLP, New York, New York.
48
<PAGE>
EXPERTS
The balance sheets as of December 31, 1995 and 1996, and the statements of
operations, stockholders' (deficit) equity, and cash flows for the years then
ended, have been audited by Arthur Andersen LLP, independent public
accountants, as set forth in their report thereon appearing elsewhere herein
and in the Registration Statement of which this Prospectus forms a part, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Denver, Colorado, a Registration Statement under the Securities
Act with respect to the shares of Common Stock. This Prospectus does not
contain all of the information set forth in the Registration Statement and its
exhibits. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and
exhibits. Statements contained in this Prospectus regarding the contents of
any contract or any other document to which reference is made are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement, including the exhibits
thereto, may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of certain prescribed rates.
49
<PAGE>
OSMOTICS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants.............. F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' (Deficit) Equity............................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Osmotics Corporation:
We have audited the accompanying balance sheets of OSMOTICS CORPORATION (a
Colorado corporation) as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' (deficit) equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Osmotics Corporation as of
December 31, 1995 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Arthur Andersen LLP
Denver, Colorado,
January 31, 1997
F-2
<PAGE>
OSMOTICS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
--------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................. $ 37,352 $ 90,930
Trade accounts receivable, net of allowance for
doubtful accounts of $0 and $15,000, respectively... 50,343 478,306
Inventory, net of reserve for obsolesence of $0 and
$15,000, respectively............................... 183,694 234,113
Prepaid expenses..................................... 8,293 65,247
--------- -----------
Total current assets............................... 279,682 868,596
--------- -----------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment.................... 12,217 105,490
Less: Accumulated depreciation....................... (6,593) (22,580)
--------- -----------
Property and equipment, net.......................... 5,624 82,910
--------- -----------
OTHER ASSETS, net of accumulated amortization of $6,112
and $150, respectively................................ 5,467 15,940
--------- -----------
DEFERRED INITIAL PUBLIC OFFERING COSTS................. -- 404,347
--------- -----------
Total assets......................................... $ 290,773 $ 1,371,793
========= ===========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 213,573 $ 281,370
Accrued initial public offering costs................ -- 365,811
Accrued compensation and other accrued liabilities... 150,437 275,648
Deferred revenue and product warranties.............. -- 141,130
Bridge financing, net of unamortized discount of
$90,000............................................. -- 660,000
Current portion of notes payable..................... 193,948 128,500
Current portion of capital leases payable............ -- 16,470
--------- -----------
Total current liabilities............................ 557,958 1,868,929
--------- -----------
LONG-TERM LIABILITIES:
Notes payable, net of current portion................ 5,653 --
Capital leases payable............................... -- 38,601
--------- -----------
Total long-term liabilities.......................... 5,653 38,601
--------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock, no par value, 6,000,000 shares autho-
rized, 1,153,770 and 1,478,299 shares issued and
outstanding at December 31, 1995 and 1996, respec-
tively.............................................. 609,414 1,815,839
Warrants............................................. 7,935 381,078
Accumulated deficit.................................. (890,187) (2,732,654)
--------- -----------
Total stockholders' (deficit) equity................. (272,838) (535,737)
--------- -----------
Total liabilities and stockholders' (deficit) equity. $ 290,773 $ 1,371,793
========= ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE>
OSMOTICS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1995 1996
--------- -----------
<S> <C> <C>
REVENUES............................................... $ 328,465 $ 1,254,800
COST OF PRODUCTS SOLD.................................. 160,000 435,201
--------- -----------
GROSS PROFIT........................................... 168,465 819,599
OPERATING EXPENSES:
General and administrative........................... 292,742 541,600
Selling and marketing................................ 600,087 1,587,765
Production management................................ 66,059 90,889
--------- -----------
LOSS FROM OPERATIONS................................... (790,423) (1,400,655)
OTHER INCOME (EXPENSE):
Interest expense..................................... (20,285) (443,480)
Other income (expense), net.......................... -- 1,668
--------- -----------
NET LOSS............................................... $(810,708) $(1,842,467)
========= ===========
PER SHARE DATA (Note 2):
Pro forma net loss per common and common equivalent
share............................................... $ (0.68) $ (1.27)
========= ===========
Shares used in computing pro forma net loss per
common and common equivalent share.................. 1,186,733 1,446,012
========= ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
OSMOTICS CORPORATION
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
-------------------- ------------------ ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT
--------- ---------- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES, December 31,
1994................... 836,362 $ 25,000 34,403 $ 3,187 $ (79,479)
Common stock issued for
cash at $.74 per share
in January 1995........ 68,181 50,000 -- -- --
Common stock issued for
services in February,
April and June 1995, at
$1.10 per share........ 11,363 12,501 -- -- --
Stock options exercised
in April 1995 at $1.10
per share.............. 45,454 50,000 -- -- --
Common stock issued for
cash at $1.10 per share
in June and July 1995.. 45,454 50,000 -- -- --
Warrants issued to
lenders for purchase of
common stock at $1.10
per share.............. -- -- 61,360 4,748 --
Private placement of
common stock for cash
at $3.19 per share, net
of offering costs of
$46,879................ 146,956 421,913 -- -- --
Net loss................ -- -- -- -- (810,708)
--------- ---------- ------- -------- -----------
BALANCES, December 31,
1995................... 1,153,770 609,414 95,763 7,935 (890,187)
Private placement of
common stock for cash
at $3.19 per share, net
of offering costs of
$26,631................ 92,569 268,665 -- -- --
Common stock issued for
services--
In April 1996, at $3.19
per share............. 15,673 50,000 -- -- --
In June 1996, at $4.40
per share............. 2,045 9,000 -- -- --
In July 1996, at $4.40
per share............. 409 1,800 -- -- --
Private placement of
common stock for cash
at $4.40 per share, net
of offering costs of
$48,800................ 121,106 484,200 -- -- --
Warrants issued in
connection with Bridge
Financing.............. -- -- 93,750 * 375,000 --
Exercise of warrants
issued to lenders at
$1.10 per share in July
1996................... 22,727 26,857 (22,727) (1,857) --
Private placement of
common stock for cash
at $5.94 per share, net
of offering costs of
$49,897................ 70,000 365,903 -- -- --
Net loss................ -- -- -- -- (1,842,467)
--------- ---------- ------- -------- -----------
BALANCES, December 31,
1996................... 1,478,299 $1,815,839 166,786 $381,078 $(2,732,654)
========= ========== ======= ======== ===========
</TABLE>
- --------
* The estimated number of shares of common stock issuable upon exercise of
these warrants will be determined by the Company's initial public offering
price per share of common stock, which is assumed to be $8.00 per share
(see Notes 1 and 11).
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
OSMOTICS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1995 1996
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(810,708) $(1,842,467)
Adjustments--
Depreciation and amortization..................... 16,360 79,332
Amortization of debt discount (Note 4)............ -- 285,000
Common stock issued for services.................. 12,501 10,800
Provision for bad debt............................ -- 15,000
Inventory reserve................................. -- 15,000
Changes in--
Accounts receivable............................. (50,343) (442,963)
Inventory....................................... (183,694) (65,419)
Prepaid expenses and other assets............... (8,070) (56,956)
Accounts payable and accrued liabilities........ 288,873 193,853
Deferred revenue................................ -- 141,130
--------- -----------
Net cash flows from operating activities...... (735,081) (1,667,690)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................. (12,217) (12,535)
Other assets........................................ (750) (8,373)
--------- -----------
Net cash flows from investing activities........ (12,967) (20,908)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.............. 618,792 1,269,096
Proceeds from issuance of notes payable and war-
rants.............................................. 135,000 21,000
Proceeds from Bridge Financing...................... -- 750,000
Payments on notes payable........................... -- (96,448)
Stock issuance costs................................ -- (111,805)
Debt issuance costs................................. -- (64,000)
Payments on capital leases.......................... -- (25,667)
--------- -----------
Net cash flows from financing activities...... 753,792 1,742,176
--------- -----------
NET INCREASE IN CASH.................................. 5,744 53,578
CASH, beginning of period............................. 31,608 37,352
--------- -----------
CASH, end of period................................... $ 37,352 $ 90,930
========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.............................. $ -- $ 22,467
========= ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Property purchased under capital leases............. $ -- $ 80,738
Discount of notes payable equal to warrants issued
to lenders......................................... 4,748 375,000
Common stock issued for--
Stock offering costs.............................. 36,479 13,521
Accrued liabilities for--
Stock offering costs.............................. 10,400 --
Deferred initial public offering costs............ -- 365,811
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS RISKS
Osmotics Corporation (the "Company") develops and markets cosmetics skin
care products, including products using the Company's transdermal delivery
method. Its products are currently produced, based on Company specifications,
by independent contract manufacturers.
The Company was initially incorporated in the state of Colorado on August
18, 1993 as Porter Skinsystems, Ltd., and was subsequently renamed Osmotics
Corp. on November 1, 1993. On April 19, 1996, the Company was renamed Osmotics
Corporation. The Company intends to reincorporate in the state of Delaware
prior to the effective date of its initial public offering (Note 11). The
Company's corporate office is located in Denver, Colorado and its customers
are primarily located in the United States, England and France.
The Company began shipping its first product in April 1995 and has a limited
operating history. It has incurred losses and negative cash flow from
operations since its inception. The success of future operating results will
depend on many factors, including market acceptance and demand for the
Company's products, the intensity of future product and price competition
experienced, effective expansion of its sales force and distribution channels,
its ability to control costs and manage growth, and general economic
conditions. There can be no assurance that the Company will ever generate
significant revenues or achieve or sustain profitability. The Company's
revenues to date have been principally derived from four customers (Note 9),
the loss of which would have a material adverse effect on the Company's
results of operations and financial condition. During the period of time
required to achieve profitable operations, the Company will require additional
financing which may not be available.
The Company's capital requirements to date have been provided through
private placements of common stock (Note 3), notes payable and the Bridge
Financing (Note 4). At December 31, 1996, the Company's current liabilities
exceeded its current assets by approximately $1 million. The Company needs
additional funding to continue its operations through the remainder of 1997.
Consequently, there is substantial doubt as to the ability of the Company to
continue as a going concern. The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern and do not
include any adjustments that might result from the outcome of this
uncertainty. The Company plans to file a registration statement and sell
shares of its common stock in an initial public offering (the "Offering")
during the first quarter of 1997 (Note 11). If the Offering is delayed or
suspended, other financing sources will be needed. The Company currently has
no commitments for such alternative financing and has no assurance it would be
available.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventory
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Cost includes the purchase price of components and amounts due to
contract manufacturers based on items produced for the Company. Inventories
consist principally of raw materials and purchased components. Finished
products are generally shipped upon completion of production.
Property and Equipment
Property and equipment are stated at cost and depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets, generally two to five years. Depreciation expense for the years ended
December 31, 1995 and 1996 was $6,593 and $20,063, respectively. Maintenance
and repairs are expensed as incurred and improvements are capitalized.
F-7
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Earnings Per Share
Earnings per share is computed using the weighted average number of common
and common equivalent shares outstanding for each period. Common equivalent
shares include stock options and warrants to purchase the Company's common
stock. Pursuant to Securities and Exchange Commission Accounting Staff
Bulletin No. 83, common and common equivalent shares issued during the twelve
months immediately preceding the Company's initial public offering filing date
have been included in the calculation of common and common equivalent shares,
regardless of whether their inclusion is dilutive, using the treasury stock
method and the anticipated public offering price as if they were outstanding
for all periods. Common stock equivalents, excluding those issued within
twelve months immediately preceding the Company's initial public offering
filing date, are excluded for loss periods because their inclusion would be
anti-dilutive (i.e., it would reduce the reported loss per share).
Revenue Recognition
Revenues are recognized upon shipment of products to customers. The Company
may accept product returns in its discretion, but retailers are not granted
the right to return unsold products. Generally, returns accepted by the
Company represent products returned to retailers by consumers and the Company
provides an allowance for such estimated returns which is included in deferred
revenue and product warranties. Certain customers have full rights to return
unsold products. These shipments are treated as consignments and related
revenue is deferred until the products are sold by the consignees to
consumers. As of December 31, 1996, deferred revenue and product warranties is
comprised of $80,000 related to sales treated as consignments and $61,130 of
allowance for estimated product warranty and returns.
Credit Risk/Foreign Currency Risk/Off-Balance-Sheet Risk
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company's principal
customers (Note 9) accounted for 87% and 68% of the Company's accounts
receivable as of December 31, 1995 and 1996, respectively.
Transactions denominated in currencies other than U. S. dollars are recorded
based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period end translation) or
realized (upon settlement of the transactions). Certain sales during 1996 were
denominated in foreign currencies; however, no significant foreign exchange
gains or losses were incurred.
The Company has no significant financial instruments with off-balance-sheet
risk of accounting loss such as foreign exchange contracts, options contracts
or other foreign hedging arrangements.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, short-term trade
receivables and payables and notes and capital leases payable. The carrying
values of cash and short-term trade receivables and payables approximate fair
value. The fair value of notes and capital leases payable is estimated based
on current rates available for similarly secured debt with similar maturities,
and at December 31, 1996, approximates the carrying value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The current provision for income taxes represents actual or estimated
amounts payable or refundable on tax returns filed or to be filed for each
year. Deferred income tax assets and liabilities are recorded for the expected
future income tax consequences, based on enacted tax laws, of temporary
differences between the financial reporting and tax bases of assets and
liabilities and carryforwards. The overall change in deferred tax assets and
liabilities for the period measures the deferred tax expense for the period.
Effects of changes in tax laws on deferred tax assets and liabilities are
reflected as adjustments to tax expense in the period of enactment. Deferred
tax assets are recognized for the expected future tax effects of all
deductible temporary differences, loss carryforwards and tax credit
carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a
valuation allowance for the amount of any tax benefits which, more likely than
not based on current circumstances, are not expected to be realized (see Note
8).
(3) STOCKHOLDERS' (DEFICIT) EQUITY
The Board of Directors intends to approve the reincorporation of the Company
in the state of Delaware, which is expected to be consummated before the
effectiveness of the Offering. The reincorporation will result in a change in
the authorized capital stock of the Company to 15,000,000 shares of $0.001 par
value common stock and 10,000,000 shares of $0.001 par value preferred stock.
The reincorporation will be effected through a merger with an effective
exchange ratio of 2.2 shares of common stock of the Colorado corporation for
one share of common stock of the Delaware corporation. All share and per share
amounts included in the accompanying financial statements and notes for all
periods presented have been retroactively adjusted to reflect the stock
exchange.
Effective August 30, 1994, the Company issued 90,909 shares of common stock
to Dermal Technologies in consideration for certain services provided to the
Company and the Company recorded $20,000 of expense relating to these
services. Under the terms of a related agreement, Dermal Technologies is
entitled to receive a 1% royalty on all sales of Antioxidant Skin Care Derms.
The term of the royalty agreement terminates on the effective date of an
initial public offering.
Pursuant to a private placement memorandum dated August 1, 1995, the Company
issued 146,956 and 92,569 shares of common stock in exchange for cash of
$468,792 and $295,296 during 1995 and 1996, respectively.
Pursuant to a March 30, 1996 private placement memorandum, the Company
authorized the issuance of up to 227,272 shares of common stock at $4.40 per
share. As of December 31, 1996, the Company had received cash proceeds of
$533,000 in connection with the issuances of 121,106 shares of common stock.
In November and December 1996, the Company sold a total of 70,000 shares of
common stock in a private placement transaction, in reliance on Regulation S
of the Securities Act, to investors at $5.94 per share. Proceeds to the
Company, net of placement fees were $365,903.
Effective February 1, 1996, the Company entered into a six month agreement
with a consultant to provide consulting services to the Company in exchange
for a monthly fee comprised of shares of common stock valued at $1,800 and
$1,800 in cash each month over the term of the agreement. The Company recorded
the shares of common stock based on their market value at the date of issuance
to the consultant. As of December 31, 1996, the Company has issued 2,454
shares of the Company's common stock for $4.40 per share related to this
transaction, and the Company recognized the related $21,600 of consulting fees
in general and administrative expense in the accompanying 1996 statement of
operations.
F-9
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Stock Options
At various dates since inception, the Company's Board of Directors has
granted "nonqualified" stock options, as defined by the Internal Revenue Code
and related regulations, to purchase shares of the Company's common stock to
officers, employees, directors and consultants.
In February 1997, the Board of Directors adopted the 1997 Equity Incentive
Plan (the "Incentive Plan"). The Incentive Plan, which is expected to be
approved by the stockholders, is administered by a committee of the Board of
Directors (the "Committee") and becomes effective only upon the effective date
of a registration statement for an initial public offering.
The Incentive Plan provides that the Committee may award up to 300,000
shares of the Company's common stock in the form of nonqualified or incentive
stock options or stock bonuses and the issuance of restricted stock by the
Company to its employees, directors, consultants, independent contractors and
advisers. Nonqualified stock options or restricted stock awards to purchase
the Company's common stock may be awarded at a price not less than 85% of the
fair market value of the stock at the date of the award. Incentive stock
options must be awarded at a price not less than 100% of the fair market value
of the stock at the date of the award, or 110% of the fair market value for
awards to more than 10% stockholders. Options granted under the Incentive Plan
may have a term of up to 10 years. The Incentive Plan will terminate in
February 2007, unless terminated earlier in accordance with its provisions.
In February 1997, the Board of Directors adopted the 1997 Directors Stock
Option Plan (the "Directors Plan") and reserved a total of 50,000 shares of
Common Stock for issuance thereunder. The Directors Plan is expected to be
approved by the stockholders and becomes effective only upon the effective
date of a registration statement for an initial public offering. Members of
the Board of Directors who are not employees of the Company, or any parent,
subsidiary or affiliate of the Company, are eligible to participate in the
Directors Plan. Each eligible director who first becomes a member of the Board
of Directors on or after the date that the Directors Plan becomes effective
will automatically be granted an option to acquire 15,000 shares on the date
such director first becomes a director. At each annual meeting of stockholders
of the Company, each eligible director will automatically be granted an
additional option to purchase 1,000 shares if such director has served
continually as a member of the Board since the date of grant of such
director's initial option, or if such director did not receive an initial
option, such director has served continuously as a member of the Board of
Directors since the Directors Plan became effective. All options issued under
the Directors Plan will vest as to one-forty-eighth of the shares subject to
the option per month after the date of grant, provided the optionee continues
as a member of the Board of Directors or as a consultant of the Company. The
exercise price of all options granted under the Directors Plan will be the
fair market value of the common stock on the date of grant.
F-10
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for employee stock options or similar equity
instruments. However, SFAS 123 allows the continued measurement of
compensation cost for such plans using the intrinsic value based method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), provided that pro forma disclosures are made of net income or loss
and net income or loss per share, assuming the fair value based method of SFAS
123 had been applied. The Company has elected to account for its stock-based
compensation plans under APB 25; accordingly, for purposes of the pro forma
disclosures presented below, the Company has computed the fair values of all
options granted during 1995 and 1996, using the Black-Scholes pricing model
and the following weighted average assumptions:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Risk-free interest rate............................. 6.6% 5.5%
Expected dividend yield............................. 0% 0%
Expected lives outstanding 3.0 years 2.0 years
Expected volatility................................. 19.46% 19.46%
</TABLE>
To estimate lives of options for this valuation, it was assumed options will
be exercised upon becoming fully vested and the Company has completed an
initial public offering of its common stock. All options are initially assumed
to vest. Cumulative compensation cost recognized in pro forma net income or
loss with respect to options that are forfeited prior to vesting is adjusted
as a reduction of pro forma compensation expense in the period of forfeiture.
Because the Company's common stock is not yet publicly traded, the expected
market volatility was based on an approximation of the volatility of the
NASDAQ index for 1996. Actual volatility of the Company's common stock may
vary. Fair value computations are highly sensitive to the volatility factor
assumed; the greater the volatility, the higher the computed fair value of
options granted.
The total fair value of options granted was computed to be approximately
$45,053 and $79,356 for the years ended December 31, 1995 and 1996,
respectively. These amounts are amortized ratably over the vesting periods of
the options or recognized at date of grant if no vesting period is required.
Pro forma stock-based compensation, net of the effect of forfeitures, was
$36,284 and $78,346 for 1995 and 1996, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss and pro forma net loss per
common share would have been reported as follows:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C> <C>
Net loss: As reported $810,708 $1,842,467
Pro forma $846,992 $1,920,813
EPS: As reported $(0.68) $(1.27)
Pro forma $(0.71) $(1.33)
</TABLE>
Weighted average shares used to calculate pro forma net loss per share were
determined as described in Note 2, except in applying the treasury stock
method to outstanding options, net proceeds assumed received upon exercise
were increased by the amount of compensation cost attributable to future
service periods and not yet recognized as pro forma expense.
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
F-11
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of stock options as of December 31, 1995 and 1996 and changes
during the years then ended is presented below:
<TABLE>
<CAPTION>
1995 1996
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year...... 118,181 $ .55 169,894 $1.08
Granted............................. 120,409 $1.72 103,060 $4.64
Canceled............................ (23,242) $1.10 (954) $3.19
Exercised........................... (45,454) $1.10 -- --
------- -------
Outstanding at end of year............ 169,894 $1.08 272,000 $2.42
======= =======
Weighted average fair value of options
granted.............................. $ .374 $ .77
======= =======
</TABLE>
The following table summarizes information about the options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.22.................... 72,727 7.1 years $ .22 72,727 $ .22
$1.10................... 68,181 8.0 years $1.10 68,182 $1.10
$3.19-$5.94............. 131,092 9.8 years $4.66 77,515 $2.55
------- -------
$.22-$5.94.............. 272,000 8.3 years $2.42 218,424 $1.91
======= =======
</TABLE>
Summary of Potentially Dilutive Securities Outstanding
In addition to the options described above, the Company has issued certain
warrants for the purchase of common stock described elsewhere herein. A
summary of these potentially dilutive securities outstanding as of December
31, 1996 (and subsequently, as indicated) follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF SHARES PRICE
--------- ----------
<S> <C> <C>
Outstanding stock options per above.................. 272,000 $.22-$5.40
Warrants issued to lenders (Note 4).................. 73,036 $ 1.10
Bridge Warrants (Note 4)............................. 93,750* $ .022
Additional issuances subsequent to December 31, 1996:
Bridge Warrants issued in January 1997 (Note 4).... 25,000* $ .022
Options to be granted in connection with employment
agreements
effective upon closing of the Offering (Note 11).. 150,000 $ 8.80 **
</TABLE>
- --------
* The estimated number of shares of common stock issuable upon exercise of
these warrants will be determined by the Company's initial public offering
price per share of common stock, which is assumed to be $8.00 per share.
** 110% of assumed initial public offering price of $8.00 per share.
F-12
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) BRIDGE FINANCING AND NOTES PAYABLE
During 1996, the Company entered into certain agreements ("Bridge
Financing") with individual investors (the "Bridge Investors") to obtain
bridge loans ("Bridge Notes") in the principal amount of $750,000. The Company
received $500,000 of proceeds from the Bridge Financings in July 1996 and had
additional closings totaling $250,000 in October through December 1996 (Note
7) for an aggregate principal balance of $750,000 as of December 31, 1996. The
Company issued additional Bridge Notes in the aggregate principal amount of
$200,000 in January 1997, increasing the aggregate principal balance of the
Bridge Notes to $950,000 as of January 31, 1997. Each Bridge Note bears
interest at 12% per annum until six months following its issuance, and 15% per
annum thereafter, until maturity. Principal and interest under each Bridge
Note is due in four equal quarterly installments beginning nine months
following its issuance, unless an initial public offering becomes effective
before that date, at which time principal will be due five days after
receiving funds from the initial public offering. The Bridge Notes are secured
by a security interest, granted to a representative of the Bridge Investors,
in substantially all of the assets of the Company, including its intellectual
property. In connection with the Bridge Notes, the Company granted warrants
(the "Bridge Warrants") to purchase shares of the Company's common stock. The
Bridge Warrants entitle the holder to acquire for total consideration of $.022
per Bridge Warrant a number of shares of common stock equal to the principal
amount of the holder's Bridge Notes ($750,000 and $950,000 as of December 31,
1996 and January 31, 1997, respectively, in the aggregate) divided by the
initial public offering price of one share of common stock. If an offering is
not consummated before one year following the date a Bridge Warrant is issued,
then such Bridge Warrant will entitle the holder to acquire a number of shares
of common stock equal to the principal amount of the holder's Bridge Note
divided by $4.40 per share. The warrants relating to the original Bridge
Financing of $500,000 are exercisable immediately following such time as the
number of shares for which they are exercisable may be determined with
certainty. The warrants relating to the additional Bridge Financings in July
1996 through January 1997 of $450,000, are not exercisable until one year
following the effective date of the Offering. In addition, under the terms of
the Bridge Financing, the Company has paid a placement fee and legal costs of
$72,500, which has been recorded as deferred debt issuance costs and is being
amortized to interest expense over the life of the notes.
The Company has accounted for the Bridge financing as a borrowing and a sale
of equity securities (i.e., the warrants). The $750,000 and $950,000 as of
December 31, 1996 and January 31, 1997, respectively, gross proceeds were
allocated between the debt and the warrants based on their relative fair
values at the date of issuance. Because of the nominal exercise price of the
warrants, the fair value of the warrants was estimated to approximate the fair
value of the underlying common stock (i.e., $750,000 in the aggregate). The
fair value of the debt is its principal amount of $750,000. Consequently, the
debt was recorded at an initial discounted amount of $375,000 and $475,000 as
of December 31, 1996 and January 31, 1997, respectively, and the discount is
being amortized to interest expense ($285,000 for the year ended December 31,
1996) over the term of the borrowing. As the Bridge Notes will be repaid out
of a portion of the net proceeds of the Offering, the Company will expense any
remaining unamortized discount in the quarter in which the Offering is
consummated. The warrants were recorded at $375,000 and $475,000 as of
December 31, 1996 and January 31, 1997, respectively. The $62,000 placement
fee was treated as deferred debt expense and is being amortized to interest
expense over the life of the borrowings.
If the Company does not repay each Bridge Note within six months following
its issuance, then that Bridge Note allows for extended payment terms. If the
Company defaults in the payment of any of these installments, then holders of
approximately 884,074 shares of common stock have agreed to vote their shares
in favor of the directors designated by a representative of the Bridge
Investors, and the Company has agreed in certain circumstances to cause
additional shares to become subject to the voting agreement so that the
representative of the Bridge Investors can elect a majority of the directors
of the Company.
F-13
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During 1994 and 1995, the Company borrowed $203,949 from individual
investors (the "Notes"). In connection with the issuance of the Notes, the
investors received warrants to purchase 95,763 shares of the Company's common
stock exercisable at $1.10 per share. The warrants expire at the earlier of
five years from the date of the Notes or the effective date of an initial
public offering. The warrants were valued at their estimated fair value of
$7,935 and this amount is reflected in stockholders' equity and as a discount
of the notes payable. The discount is being amortized as interest expense
($3,505 and $4,348 for the years ended December 31, 1995 and 1996,
respectively) over the term of the Notes. The Notes are due at various dates
through January 1997, or upon a public offering of the Company's common stock.
The Notes bear interest at 10% per annum and are collateralized by a pledge of
certain equity securities owned by the Company's president. During 1996, two
lenders exercised such warrants to purchase 22,727 shares of common stock and
the Company repaid three of the Notes totaling $96,448.
In November 1996, the Company entered into an unsecured promissory note with
a shareholder of the Company to borrow up to $30,000 to fund additional
infomercial costs (Note 6). As of December 31, 1996, the Company had drawn
approximately $21,000 on this note. The note bears interest at 10% per annum
and it matures at the earliest of (i) November 1, 1997, (ii) five business
days following the closing of a qualified initial public offering, (iii) five
business days following the closing of a funding whereby the Company receives
gross proceeds of $2,000,000, or (iv) on the dissolution or winding up of the
Company.
The aggregate maturities of the Bridge Financing and the notes payable as of
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................. $788,500
--------
$788,500
========
</TABLE>
(5) CAPITAL LEASES
During 1996, the Company financed certain office furniture and equipment
through capital leases totaling $80,738.
The following is a schedule of future minimum lease payments under capital
leases, together with the present value of net minimum lease payments, as of
December 31, 1996:
<TABLE>
<S> <C>
1997............................................................ $ 21,374
1998............................................................ 21,031
1999............................................................ 14,032
2000............................................................ 8,382
2001............................................................ --
Thereafter...................................................... --
Less: interest.................................................. (9,748)
--------
Present value of future minimum lease payments.................. 55,071
Less: current portion........................................... (16,470)
--------
Capital lease obligations, long-term............................ $ 38,601
========
</TABLE>
F-14
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) LICENSE AND DISTRIBUTION AGREEMENTS
Infomercial
In March 1996, the Company and VideOne Marketing, Inc. ("VideOne") entered
into an Infomercial Production and Product Management Agreement (the "VideOne
Agreement") to produce a Wrinkle Patch infomercial. Additionally, pursuant to
the VideOne Agreement VideOne has the exclusive right worldwide, subject to
certain exceptions, (i) to manage the direct response marketing and airing of
the infomercial and (ii) to distribute The Wrinkle Patch, including updates
and revisions, in certain direct response media categories.
In connection with an agreement with a shareholder of the Company, the
shareholder will pay VideOne for the set-up and production costs totaling
$98,898 in consideration for certain future royalties based solely on future
sales of Company products by VideOne.
Distribution Agreements
In March 1996, the Company entered into a distribution agreement with an
individual shareholder, whereby this individual has exclusive rights to
market, sell and distribute all products manufactured by the Company in a
defined territory. At the time of entering such agreement, this individual
held 45,454 shares of the Company's common stock, which this individual
continues to hold. The distribution agreement expires on December 31, 2001,
with an option to extend for two additional five-year periods. The
distribution agreement is subject to earlier termination if this individual
fails to meet certain performance standards set forth in the agreement.
In May 1996, the Company entered into a distribution agreement with a third
party whereby the third party has the exclusive right to market, sell and
distribute all skin care products manufactured by the Company under the brand
name Spa-Sante to professional beauty establishments, including spas and
beauty salons, located in North America, Central America, Europe, the Middle
East and Africa. The third party distributor will market, sell and distribute
the products on behalf of the Company and retain a percentage of the selling
price of the products sold. Beginning in 1997, the third party has agreed to
pay all costs of sales. This agreement terminates in July 2001, and is
renewable at the third party distributor's election for two successive five-
year periods. The agreement is subject to earlier termination if the third
party distributor fails to satisfy certain performance goals.
In January 1997, the Company entered into a distribution agreement with a
third party whereby the third party has the exclusive right to market and sell
in France cosmetic products manufactured by the Company. The agreement
terminates in January 2000, and is renewable for additional periods of three
years each. The agreement is subject to earlier termination if the third party
fails to meet certain performance standards set forth in the agreement.
Licensing
The Company has agreed to supply on a non-exclusive basis to a third party
skin patches for inclusion in products to be sold by the third party under its
own label in all countries, other than countries located in the Pacific Rim.
The third party has agreed not to market and sell such products in the upscale
market (which is defined in the contract), and the Company has agreed not to
sell skin patches under the Osmotics trademark except in the up-scale market.
This agreement terminates in January 2002, and is renewable for successive
five-year periods unless either party elects otherwise.
F-15
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES
During 1995 and 1996, the Company sold common stock to several investors in
private placement transactions. In certain states in which securities were
sold, the Company may not have complied with all applicable requirements in
order to satisfy the exemptions from the registration or qualification
requirements in those states. Pursuant to the provisions of applicable state
laws, the Company delivered to certain stockholders, none of whom is
affiliated with the Company or any of its directors or officers, offers to
repurchase the shares they acquired, and under the laws of such states the
failure to accept such offers made in compliance with such state laws within
certain time periods (generally, 30 days from receipt of such offer)
terminates such purchasers' rescission rights under such state laws. All of
those stockholders have declined in writing the Company's offer to repurchase
their shares. As a result, the Company believes that the stockholders no
longer have rescission rights under such state laws respecting their shares.
From October through December 1996, in additional closings of the Bridge
Financing, the Company issued Bridge Notes in the aggregate principal amount
of $250,000 and additional Bridge Warrants to purchase an estimated
approximately 31,250 shares of Common Stock. Such issuances may not have
complied with all applicable requirements to satisfy exemptions from the
registration or qualification requirements under securities laws of the United
States and certain states in which those securities were issued, possibly
entitling the purchasers of those securities to certain remedies, including
rescission rights, and possibly subjecting the Company and its officers and
directors to potential sanctions. The Bridge Notes will, however, be repaid in
full at the closing of this Offering, and to date no purchaser has made a
claim for rescission or other remedies. As a result, the Company believes that
even if such transactions were found to have violated federal or state
securities laws, such violations would not have a material adverse effect on
the Company's business, operating results or financial condition, although
there can be no assurances that this would be the case.
In January 1997, the Company received a letter from VideOne Marketing, Inc.
relating to the VideOne Agreement. The letter asserts, among other things,
that the Company breached certain of VideOne's distribution rights and that
the Company breached its obligations under the VideOne Agreement by failing to
pay VideOne royalties that VideOne alleges are owed with respect to certain
direct marketing sales of The Wrinkle Patch over certain television channels.
The letter also asserts that a dispute exists concerning which party is
obligated to pay for additional editing and production costs previously
incurred and that are expected to be incurred in connection with further
development of the infomercial. No complaint has been filed, and the Company
is unable to predict whether a complaint will be filed in the future relating
to the subject matter of the letter. The Company is investigating the
allegations made in the letter and believes that, if a complaint is filed, it
may have a number of defenses to any such claim. In addition, the Company is
investigating whether it may have claims against VideOne relating to VideOne's
performance under the VideOne Agreement. The Company and VideOne have met
concerning the above matters, but to date no agreements have been reached and
such matters remain unresolved. Although the Company believes that the matters
raised in the letter will be resolved without material liability to the
Company, there can be no assurance that this will be the case and, if VideOne
were finally to prevail in its claims against the Company, such outcome could
have a material adverse effect on the Company's business, operating results
and financial condition.
In April 1996, the Company entered into a lease for office space under a
noncancelable lease agreement which expires in 1999. The Company had
previously leased offices on a month-to-month basis. The Company also leases
certain office equipment under lease agreements which terminate in 1999.
Future minimum commitments under noncancelable leases in effect as of December
31, 1996 are as follows:
<TABLE>
<S> <C>
Year ended December 31,
1997........................................................... $ 45,428
1998........................................................... 45,428
1999........................................................... 37,856
--------
$128,712
========
</TABLE>
F-16
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Rent expense for the years ended December 31, 1995 and 1996, was
approximately $22,000 and $44,000, respectively.
The Company and its cosmetic products are subject to regulation by the Food
and Drug Administration ("FDA") and the Federal Trade Commission ("FTC"), as
well as various other federal, state and local authorities. Such regulation
relates primarily to the ingredients, packaging, labeling, advertising and
marketing of the Company's products. Failure to comply with FDA requirements
in such matters can result in severe civil and criminal penalties, including
seizure of product, injunction against production, distribution, sales, and
prosecution. Cosmetics, in contrast to new drugs, do not require premarket
notification to, or approval by, the FDA, but must be properly labeled and
manufactured. The Company believes its products meet the statutory definition
of cosmetics and are not currently drugs. The FTC oversees the advertising of
cosmetic products, and prohibits false or misleading advertising. Management
believes it has taken appropriate steps to monitor and assure compliance with
material aspects of the above regulations. However, an assertion by the FDA,
FTC or similar authority of noncompliance by the Company could have a material
adverse effect on the Company's results of operations and financial condition.
The Company is subject to various claims and business disputes in the
ordinary course of business. Management does not anticipate that the ultimate
outcome of these issues will have a material impact on the Company's financial
position or results of operations.
(8) INCOME TAXES
From its inception, the Company has generated losses for both financial
reporting and tax purposes. The federal net operating loss carryforward is
approximately $2,200,000 as of December 31, 1996. The deferred tax asset
related to this benefit of approximately $814,000 has been fully offset by a
valuation allowance, due to the Company's history of operating losses.
The Company's net operating loss carryforwards expire at various dates
through the year 2011. The Tax Reform Act of 1986 contains provisions which
may limit the net operating loss carryforwards available for use in any given
year if certain events occur, including changes in ownership interests.
(9) SIGNIFICANT CUSTOMERS
Below is a listing of major customers, each of which comprised more than 10%
of revenue:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Customer 1.............................. $288,639 88% $467,606 37%
Customer 2.............................. $ 38,855 12% $204,181 16%
Customer 3.............................. $ -- --% $229,374 18%
Customer 4.............................. $ -- --% $134,925 11%
</TABLE>
The Company's sales within the United States were $328,465 and $850,374 for
the years ended December 31, 1995 and 1996, respectively. The Company's sales
to retailers in London, England and Paris, France were $0 and $404,426 for the
years ended December 31, 1995 and 1996, respectively.
F-17
<PAGE>
OSMOTICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(10) ACCRUED COMPENSATION AND OTHER ACCRUED LIABILITIES
The components of accrued compensation and other accrued liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
-------- --------
<S> <C> <C>
Accrued consulting fees................................ $ 85,000 $121,000
Accrued commissions and royalties...................... 38,295 11,376
Accrued interest....................................... 17,146 66,409
Accrued payroll related items.......................... 9,996 56,863
Accrued audit fees..................................... -- 20,000
-------- --------
$150,437 $275,648
======== ========
</TABLE>
(11) SUBSEQUENT EVENTS
In January 1997, the Board of Directors authorized management of the Company
to resume the process, initiated in July 1996, of preparing a Registration
Statement with the Securities and Exchange Commission for the Company's
initial public offering. Once effective, the Registration Statement may permit
the Company to sell shares of its common stock to the public. As of December
31, 1996, the balance sheet includes approximately $404,000 of deferred costs
directly related to the Offering. The Company will also sell to the
underwriter, upon closing of the offering, warrants to purchase shares of
common stock at an exercise price equal to 120% of the initial public offering
per share.
In 1997, the Company entered into employment agreements with Steven
and Francine Porter that are to become effective on the closing date of the
Offering. The agreements provide for salaries of $150,000 and $125,000 to
Steven and Francine Porter, respectively. Each agreement has a three year
term. The agreements also provide for grants of stock options of 100,000 and
50,000 shares to Steven and Francine Porter, respectively, at an exercise
price equal to 110% of the initial public offering price. On the effective
date of the offering 25% of the options become exercisable and the balance of
the shares vest at 25% at the end of each year thereafter. The agreements
provide that upon termination of employment by the Company without cause, the
respective officer is entitled to severance compensation for the lesser of 18
months or the remaining term of the employment agreement of his or her salary,
payable at the same time as the salary payments would otherwise have been
paid.
F-18
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Capitalization............................................................ 15
Dilution.................................................................. 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 23
Management................................................................ 34
Certain Transactions...................................................... 39
Principal Stockholders.................................................... 42
Description of Capital Stock.............................................. 43
Shares Eligible for Future Sale........................................... 45
Underwriting.............................................................. 47
Legal Matters............................................................. 48
Experts................................................................... 49
Additional Information.................................................... 49
Index to Financial Statements............................................. F-1
</TABLE>
---------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,125,000 SHARES
OF COMMON STOCK
[LOGO OF OSMOTICS]
-----------------
PROSPECTUS
-----------------
NATIONAL SECURITIES
CORPORATION
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors to the Registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (iii)
under section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. In
addition, as permitted by Section 145 of the Delaware General Corporation Law,
the Bylaws of the Registrant provide that: (i) the Registrant is required to
indemnify its directors and executive officers to the fullest extent permitted
by the Delaware General Corporation Law; (ii) the Registrant may, in its
discretion, indemnify other officers, employees and agents as set forth in the
Delaware General Corporation Law; (iii) upon receipt of an undertaking to
repay such advances if indemnification is determined to be unavailable, the
Registrant is required to advance expenses, as incurred, to its directors and
executive officers to the fullest extent permitted by the Delaware General
Corporation Law in connection with a proceeding (except if a determination is
reasonably and promptly made by the Board of Directors by a majority vote of a
quorum consisting of directors who were not parties to the proceeding or, in
certain circumstances, by independent legal counsel in a written opinion that
the facts known to the decision-making party demonstrate clearly and
convincingly that such person acted in bad faith or in a manner that such
person did not believe to be in or not opposed to the best interests of the
corporation); (iv) the rights conferred in the Bylaws are not exclusive and
the Registrant is authorized to enter into indemnification agreements with its
directors, officers, employees and agents; (v) the Registrant may not
retroactively amend the Bylaw provisions relating to indemnity; and (vi) to
the fullest extent permitted by the Delaware General Corporation Law, a
director or executive officer will be deemed to have acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the best
interests of the Registrant, and, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe that his or her conduct
was unlawful, if his or her action is based on the records or books of account
of the Registrant or on information supplied to him or her by officers of the
Registrant in the course of their duties or on the advice of legal counsel for
the Registrant or on information or records given or reports made to the
Registrant by independent certified public accountants or appraisers or other
experts.
The Registrant has entered into indemnity agreements with each of its
directors and executive officers. The indemnity agreements provide that
directors and executive officers will be indemnified and held harmless to the
fullest possible extent permitted by law including against all expenses
(including attorneys' fees), judgments, fines and settlement amounts paid or
reasonably incurred by them in any action, suit or proceeding, including any
derivative action by or in the right of the Registrant, on account of their
services as directors, officers, employees or agents of the Registrant or as
directors, officers, employees or agents of any other company or enterprise
when they are serving in such capacities at the request of the Registrant. The
Registrant will not be obligated pursuant to the agreements to indemnify or
advance expenses to an indemnified party with respect to proceedings or claims
(i) initiated by the indemnified party and not by way of defense, except with
respect to a proceeding authorized by the Board of Directors and successful
proceedings brought to enforce a right to indemnification under the indemnity
agreements, (ii) for any amounts paid in settlement of a proceeding unless the
Registrant consents to such settlement; (iii) on account of any suit in which
judgment is rendered against the indemnified party for an accounting of
profits made from the purchase or sale by the indemnified party of securities
of the Registrant pursuant to the provisions of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and related laws; (iv) on account
of conduct by an indemnified party that is finally adjudged to have been in
bad faith or conduct that the indemnified party did not reasonably believe to
be in, or not opposed to, the best interests of the Registrant; (v) on account
of any criminal action or proceeding arising out of conduct that the
indemnified party had reasonable cause to believe was unlawful; or (vi) if a
final decision by a court having jurisdiction in the matter shall determine
that such indemnification is not lawful.
II-1
<PAGE>
The indemnity agreement requires a director or executive officer to
reimburse the Registrant for expenses advanced only to the extent that it is
ultimately determined that the director or executive officer is not entitled,
under Delaware law, the Bylaws, his or her indemnity agreement or otherwise to
be indemnified for such expenses. The indemnity agreement provides that it is
not exclusive of any rights a director or executive officer may have under the
Certificate of Incorporation, Bylaws, other agreements, any majority-in-
interest vote of the stockholders or vote of disinterested directors, the
Delaware law, or otherwise.
The indemnification provision in the Bylaws, and the indemnity agreements
entered into between the Registrant and its directors and executive officers,
may be sufficiently broad to permit indemnification of the Registrant's
directors and executive officers for liabilities arising under the Securities
Act.
As authorized by the Registrant's Bylaws, the Registrant, with approval by
the Registrant's Board of Directors, intends, after the offering, to seek to
obtain directors and officers liability insurance.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------- -------
<S> <C>
Underwriting Agreement............................................... 1.01
Registrant's Certificate of Incorporation............................ 3.01
Registrant's Bylaws.................................................. 3.02
Form of Indemnity Agreement.......................................... 10.05
</TABLE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid in
connection with the sale of the shares of Common Stock being registered
hereby. All amounts are estimates except for the Securities and Exchange
Commission registration fee, the NASD filing fee, the Nasdaq SmallCap Market
filing fee and the Boston Stock Exchange Fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 3,681
NASD filing fee.................................................... 1,715
Nasdaq SmallCap Market filing fee.................................. 8,078
Boston Stock Exchange listing fee.................................. 7,500
Accounting fees and expenses....................................... 150,000
Legal fees and expenses............................................ 375,000
Printing fees and expenses......................................... 100,000
Blue sky fees and expenses......................................... 50,000
Transfer agent and registrar fees and expenses..................... 5,000
Miscellaneous...................................................... 49,026
--------
Total.......................................................... $750,000
========
</TABLE>
II-2
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The Common Stock, and options of the Registrant issued to stockholders of
the Company, in connection with the reincorporation into Delaware were not
deemed "sold" as a result of Rule 145(a)(2) promulgated under the Securities
Act. The following table sets forth information regarding all securities sold
by the Registrant's Colorado predecessor since inception.
<TABLE>
<CAPTION>
NUMBER AGGREGATE
OF PURCHASE FORM OF
CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES SHARES PRICE CONSIDERATION
------------------- ---------------------- --------------------- ------- --------- -------------
<S> <C> <C> <C> <C> <C>
7 Founders............. 08/18/93 and 04/29/94 Common Stock 740,907 Nominal Past Services
1 Technology Provider.. 08/30/94 Common Stock 90,909 $ 20,000 Property and
Past Services
1 Investor............. 01/23/95 Common Stock 68,181 50,000 Cash
1 Investor............. 04/11/95 and 04/30/95 Common Stock 45,454 50,000 Cash
1 Investor............. 06/29/95 and 07/31/95 Common Stock 45,454 50,000 Cash
9 Investors............ 11/23/94 thru 07/10/95 Notes and Warrants 95,763 204,169 Loans
19 Investors............ 08/01/95 thru 04/08/96 Common Stock 239,525 764,087 Cash
24 Investors............ 05/01/96 thru 06/30/96 Common Stock 121,106 533,000 Cash
2 Consultants.......... 11/23/94 and 06/12/95 Common Stock 15,908 67,500 Past Services
1 Consultant........... 04/04/96 Common Stock 15,673 49,999 Past Services
1 Consultant........... 07/31/96 Common Stock 2,454 9,000 Past Services
5 Investors............ 07/17/96 Notes and Warrants(1) 62,500 $500,000 Cash
2 Investors............ 07/29/96 Common Stock 22,727 $ 25,000 Cash
(Exercised Options)
2 Investors............ 12/03/96 Common Stock 70,000 $415,800 Cash
10 Investors............ 10/31/96 thru 01/31/97 Notes and Warrants(1) 56,250 $450,000 Cash
</TABLE>
- -------
(1) Estimated number of shares issuable upon exercise of warrants to acquire
shares of Common Stock. The number of shares issuable is based upon an
initial public offering price per share of $8.00 for the Shares offered
hereby. See "Capitalization."
Between August 1993 and the date of this registration statement, the Company
issued options to purchase a total of 340,181 shares of Common Stock, 272,000
of which were still outstanding on December 31, 1996, at exercise prices
ranging from $.22 to $5.94 per share, to a limited number of employees and
consultants. No consideration was paid to the Company by any recipient of any
of the foregoing options for the grant of any such options. As of the date of
this Prospectus, such options have been exercised to acquire a total of 45,454
shares of Common Stock.
All sales of Common Stock made pursuant to the exercise of stock options
granted under agreements with directors, officers, employees, consultants and
others for services unrelated to financing transactions were made pursuant to
an exemption from the registration requirements of the Securities Act afforded
by either Section 4(2) or Rule 701 promulgated under the Securities Act. All
other sales were made in reliance on Section 4(2) or Regulation S of the
Securities Act. These latter sales were made without general solicitation or
advertising. The purchasers were sophisticated investors who represented to
the Registrant that the shares were being acquired for investment.
II-3
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 Form of Underwriting Agreement.***
2.01 Form of Agreement and Plan of Merger by and between the Registrant and
Osmotics Corporation, a Colorado corporation.
3.01 Registrant's Certificate of Incorporation.***
3.02 Registrant's Bylaws.***
4.01 Specimen Common Stock Certificate.
4.02 Form of Representative's Warrant Agreement between National Securities
Corporation and Registrant.***
5.01 Opinion of Fenwick & West LLP regarding legality of the securities
being issued.
10.01 Registrant's 1997 Equity Incentive Plan.
10.02 Registrant's 1997 Directors Stock Option Plan.
10.03 Employment Agreement, dated as of , 1997, between Registrant and
Steven Porter.
10.04 Employment Agreement, dated as of , 1997, between Registrant and
Francine Porter.
10.05 Form of Indemnity Agreement to be entered into by Registrant with each
of its directors and executive officers.***
10.06 Subscription Agreement (and Consulting Agreement) dated as of January
23, 1995, between Registrant and Marvin J. Rosenblum.***
10.07 Distribution Agreement, dated as of March 19, 1996, between Registrant
and Mikio Ogawa.**/***
10.08 Distribution Agreement, dated as of May 24, 1996, between Registrant
and The Global Group International.**/***
10.09 Registration Rights Agreement dated July 17, 1996.***
10.10 Assignment, dated April 17, 1995, by Steven Porter and Francine Porter
to Registrant.
10.11 Infomercial Production and Product Management Agreement, dated as of
March 5, 1996, between Registrant and VideOne Marketing, Inc.**
10.12 Sublease Agreement, dated April 9, 1996, between Registrant and
Barrett Resources Corporation.
10.13 Distributorship Agreement, dated as of January 1997, between
Registrant and Fabel Paris.**/***
10.14 Sole Source Private Label Agreement, dated as of January 1997, between
Registrant and Fabel Paris.**/***
23.01 Consent of Fenwick & West LLP.
23.02 Consent of Arthur Andersen LLP, Independent Accountants.
23.03 Consent of Davis, Graham & Stubbs LLP, PC.
24.01 Power of Attorney.***
</TABLE>
- --------
* To be supplied.
** Confidential Treatment Requested.
*** Previously filed.
II-4
<PAGE>
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes the following:
(1) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
(2) For determining liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(3) For determining liability under the Securities Act, each post-
effective amendment that contains a form of prospectus shall be deemed as a
new registration statement for the securities offered therein, and that
offering of the securities at that time shall be deemed to be the initial
bona fide offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 24 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of 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-5
<PAGE>
SIGNATURES
In accordance with to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirement for filing on Form SB-2 and authorized this amendment to
Registration Statement to be signed on its behalf by the undersigned, in the
City of Denver, State of Colorado, on February 28, 1997.
OSMOTICS CORPORATION
By: /s/ Steven S. Porter
-----------------------------
Steven S. Porter,
President and Chief Executive
Officer
In accordance with the requirements of the Securities Act, this amendment to
Registration Statement was signed by the following persons in the capacities
and on the dates stated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ Steven S. Porter President, Chief Executive February 28, 1997
- ------------------------------------ Officer and Director
Steven S. Porter
PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER:
Thomas G. Wiley* Chief Financial Officer February 28, 1997
- ------------------------------------ and Director
Thomas G. Wiley
ADDITIONAL DIRECTORS:
Francine E. Porter* Executive Vice President February 28, 1997
- ------------------------------------ and Director
Francine E. Porter
Marvin J. Rosenblum* Director February 28, 1997
- ------------------------------------
Marvin J. Rosenblum
*By: /s/ Steven S. Porter
--------------------------------
Steven S. Porter,
(Attorney-in-fact)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
ON
SEQUENTIAL
EXHIBIT NUMBERED
NUMBER EXHIBIT TITLE PAGE
------- ------------- ----------
<C> <S> <C>
1.01 Form of Underwriting Agreement.***
2.01 Form of Agreement and Plan of Merger by and between the
Registrant and Osmotics Corporation, a Colorado
corporation.
3.01 Registrant's Certificate of Incorporation.***
3.02 Registrant's Bylaws.***
4.01 Specimen Common Stock Certificate.
4.02 Form of Representative's Warrant Agreement between
National Securities Corporation and Registrant.***
5.01 Opinion of Fenwick & West LLP regarding legality of the
securities being issued.
10.01 Registrant's 1997 Equity Incentive Plan.
10.02 Registrant's 1997 Directors Stock Option Plan.
10.03 Employment Agreement, dated as of , 1997, between
Registrant and Steven Porter.
10.04 Employment Agreement, dated as of , 1997, between
Registrant and Francine Porter.
10.05 Form of Indemnity Agreement to be entered into by
Registrant with each of its directors and executive
officers.***
10.06 Subscription Agreement (and Consulting Agreement) dated
as of January 23, 1995, between Registrant and Marvin J.
Rosenblum.***
10.07 Distribution Agreement, dated as of March 19, 1996,
between Registrant and Mikio Ogawa.**/***
10.08 Distribution Agreement, dated as of May 24, 1996, between
Registrant and The Global Group International.**/***
10.09 Registration Rights Agreement dated July 17, 1996.***
10.10 Assignment, dated April 17, 1995, by Steven Porter and
Francine Porter to Registrant.
10.11 Infomercial Production and Product Management Agreement,
dated as of March 5, 1996, between Registrant and VideOne
Marketing, Inc.**
10.12 Sublease Agreement, dated April 9, 1996, between
Registrant and Barrett Resources Corporation.
10.13 Distributorship Agreement, dated as of January 1997,
between Registrant and Fabel Paris.**/***
10.14 Sole Source Private Label Agreement, dated as of January
1997, between Registrant and Fabel Paris.**/***
23.01 Consent of Fenwick & West LLP.
23.02 Consent of Arthur Andersen LLP, Independent Accountants.
23.03 Consent of Davis, Graham & Stubbs LLP, PC.
24.01 Power of Attorney.***
</TABLE>
- --------
* To be supplied.
** Confidential Treatment Requested.
*** Previously filed.
<PAGE>
EXHIBIT 2.01
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Merger Agreement") is made as
of ___________, 1997 by and between Osmotics Corporation, a Colorado corporation
("Osmotics Colorado"), and Osmotics Corporation, a Delaware corporation
("Osmotics Delaware"). Osmotics Colorado and Osmotics Delaware are hereinafter
sometimes referred to collectively as the "Constituent Corporations."
R E C I T A L S
A. Osmotics Colorado was incorporated in August 1993. Its current
authorized capital stock consists of: 6,000,000 shares of Common Stock, no par
value ("Osmotics Colorado Common Stock"), of which approximately 3,252,339
shares are issued and outstanding.
B. Osmotics Delaware was incorporated on July 18, 1996. Its
authorized capital stock consists of: (1) 15,000,000 shares of Common Stock, par
value $0.001 per share ("Osmotics Delaware Common Stock"), of which 1,000 shares
are issued and outstanding; and (2) 10,000,000 shares of Preferred Stock, $0.001
par value ("Osmotics Delaware Preferred Stock"), none of which shares are issued
and outstanding.
C. The respective Boards of Directors of Osmotics Colorado and
Osmotics Delaware deem it advisable and to the advantage of each of the
Constituent Corporations that Osmotics Colorado merge with and into Osmotics
Delaware upon the terms and subject to the conditions set forth in this Merger
Agreement for the purpose of effecting a change of the state of incorporation of
Osmotics Colorado from Colorado to Delaware.
D. The Boards of Directors of each of the Constituent Corporations
have approved this Merger Agreement.
A G R E E M E N T
NOW, THEREFORE, the parties do hereby adopt the plan of reorganization
set forth in this Merger Agreement and do hereby agree that Osmotics Colorado
shall merge with and into Osmotics Delaware on the following terms, conditions
and other provisions:
1. MERGER AND EFFECTIVE TIME. At the Effective Time (as defined
below), Osmotics Colorado shall be merged with and into Osmotics Delaware (the
"Merger"), and Osmotics Delaware shall be the surviving corporation of the
Merger (the "Surviving Corporation"). The Merger shall become effective upon
the close of business on the date when a duly executed copy of this Merger
Agreement, along with all required officers' certificates, is filed with the
Secretary of State of the State of Colorado, or upon the close of business on
the date when a duly executed copy of this Merger Agreement, along with all
required officers'
<PAGE>
Osmotics Corporation
Agreement and Plan of Merger
certificates, is filed with the Secretary of State of the State of Delaware,
whichever later occurs (the "Effective Time").
2. EFFECT OF MERGER. At the Effective Time, the separate corporate
existence of Osmotics Colorado shall cease; the corporate identity, existence,
powers, rights and immunities of Osmotics Delaware as the Surviving Corporation
shall continue unimpaired by the Merger; and Osmotics Delaware shall succeed to
and shall possess all the assets, properties, rights, privileges, powers,
franchises, immunities and purposes, and be subject to all the debts,
liabilities, obligations, restrictions and duties of Osmotics Colorado, all
without further act or deed.
3. GOVERNING DOCUMENTS. At the Effective Time, the Certificate of
Incorporation of Osmotics Delaware in effect immediately prior to the Effective
Time shall become the Certificate of Incorporation of the Surviving Corporation
and the Bylaws of Osmotics Delaware in effect immediately prior to the Effective
Time shall become the Bylaws of the Surviving Corporation.
4. DIRECTORS AND OFFICERS. At the Effective Time, the directors and
officers of Osmotics Delaware shall be and become the directors and officers
(holding the same titles and positions) of the Surviving Corporation, and after
the Effective Time shall serve in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation.
5. CONVERSION OF SHARES OF OSMOTICS COLORADO. Subject to the terms
and conditions of this Agreement, at the Effective Time, and except for shares
of Osmotics Colorado whose holders have validly dissented from the Merger as
provided in Colorado Business Corporations Code Article 113 ("Dissenting
Shares"), each share of Osmotics Colorado Common Stock outstanding immediately
prior thereto shall be automatically changed and converted into 0.454545 fully
paid and nonassessable, issued and outstanding shares of Osmotics Delaware
Common Stock (with the effect that 2.2 share of Osmotics Colorado Common Stock
will be exchanged to one share of Osmotics Delaware Common Stock). Dissenting
Shares shall be entitled to exercise only those rights provided in Article 113.
6. CANCELLATION OF SHARES OF OSMOTICS DELAWARE. At the Effective
Time, all of the previously issued and outstanding shares of Osmotics Delaware
Common Stock that were issued and outstanding immediately prior to the Effective
Time shall be automatically retired and canceled.
7. STOCK CERTIFICATES. At and after the Effective Time, all of the
outstanding certificates other than those representing Dissenters Shares that,
prior to that date, represented shares of Osmotics Colorado Common Stock shall
be deemed for all purposes to evidence ownership of and to represent the number
of shares of Osmotics Delaware Common Stock into which such shares of Osmotics
Colorado Common Stock are converted as provided herein. The registered owner on
the books and records of Osmotics Colorado of any such outstanding stock
certificate for Osmotics Colorado Common Stock shall, until such certificate
shall have been surrendered for transfer or otherwise accounted for to Osmotics
Delaware or its transfer agent, be
2
<PAGE>
Osmotics Corporation
Agreement and Plan of Merger
entitled to exercise any voting and other rights with respect to, and to receive
any dividend and other distributions upon, the shares of Osmotics Delaware
Common Stock evidenced by such outstanding certificate as above provided.
Dissenting Shares shall be entitled to exercise only those rights provided in
Article 113.
8. CONVERSION OF OPTIONS AND WARRANTS. At the Effective Time, each
outstanding and unexercised portion of an option to purchase one share of
Osmotics Colorado Common Stock shall be assumed by Osmotics Delaware and shall
become an option to purchase 0.454545 shares of Osmotics Delaware Common Stock
(subject to the elimination of fractional shares as provided in Section 9 below)
at 2.2 times the exercise price per share but otherwise shall, to the extent
permitted by law and otherwise reasonably practicable, have the same term,
exercisability, vesting schedule, status as an "incentive stock option" under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), if
applicable, and all other material terms and conditions as the former Osmotics
Colorado options. Continuous employment with Osmotics Colorado at the Effective
Time will be credited to an optionee for purposes of determining the vesting of
the number of shares of Osmotics Delaware Common Stock subject to exercise under
an assumed Osmotics Colorado option. At the Effective Time, each outstanding
and unexercised portion of a warrant to purchase or acquire one share of
Osmotics Colorado Common Stock shall be assumed by Osmotics Delaware and become
a warrant to purchase or acquire 0.454545 shares of Osmotics Delaware Common
Stock at 2.2 times the exercise price per share but otherwise with the same
term, exercisability, and all other material terms and conditions.
9. FRACTIONAL SHARES. No fractional shares of Osmotics Delaware
Common Stock will be issued in connection with the Merger. In lieu thereof,
Osmotics Delaware shall pay each shareholder of Osmotics Colorado who would
otherwise be entitled to receive a fractional share of Osmotics Delaware Common
Stock (assuming the aggregation of all shares held by the same holder of more
than one stock certificate representing shares of Osmotics Colorado Common
Stock) a cash amount equal to the applicable fraction multiplied by the fair
market value of a share of Osmotics Delaware Common Stock, as determined by the
Board of Directors of Osmotics Delaware in good faith (the "Fair Market Value
Per Share"). Upon exercise of each assumed option or warrant of Osmotics
Colorado to purchase Osmotics Delaware Common Stock, cash will be paid by
Osmotics Delaware in lieu of any fractional share of Osmotics Delaware Common
Stock, respectively, issuable upon exercise of such option or warrant, and the
amount of cash received for such fractional share shall be the Fair Market Value
Per Share upon exercise thereof multiplied by the applicable fraction, less the
unpaid exercise price per share for such fraction.
10. Employee Benefit Plans. At the Effective Time, the obligations
of Osmotics Colorado under or with respect to every plan, trust, program and
benefit then in effect or administered by Osmotics Colorado for the benefit of
the directors, officers and employees of Osmotics Colorado or any of its
subsidiaries shall become the lawful obligations of Osmotics Delaware and shall
be implemented and administered in the same manner and without interruption
until the same are amended or otherwise lawfully altered or terminated.
Effective at
3
<PAGE>
Osmotics Corporation
Agreement and Plan of Merger
the Effective Time, Osmotics Delaware hereby expressly adopts and assumes all
obligations of Osmotics Colorado under such employee benefit plans.
11. FURTHER ASSURANCES. From time to time, as and when required by
the Surviving Corporation or by its successors or assigns, there shall be
executed and delivered on behalf of Osmotics Colorado such deeds, assignments
and other instruments, and there shall be taken or caused to be taken by it all
such further action, as shall be appropriate, advisable or necessary in order to
vest, perfect or confirm, of record or otherwise, in the Surviving Corporation
the title to and possession of all property, interests, assets, rights,
privileges, immunities, powers, franchises and authority of Osmotics Colorado,
and otherwise to carry out the purposes of this Merger Agreement. The officers
and directors of the Surviving Corporation are fully authorized in the name of
and on behalf of Osmotics Colorado, or otherwise, to take any and all such
actions and to execute and deliver any and all such deeds and other instruments
as may be necessary or appropriate to accomplish the foregoing.
12. CONDITION. The consummation of the Merger is subject to the
approval of this Merger Agreement and the Merger contemplated hereby by the
shareholders of Osmotics Colorado and by the sole stockholder of Osmotics
Delaware, prior to or at the Effective Time.
13. ABANDONMENT. At any time before the Effective Time, this Merger
Agreement may be terminated and the Merger abandoned by the Board of Directors
of Osmotics Colorado or Osmotics Delaware, notwithstanding approval of this
Merger Agreement by the Boards of Directors and shareholders of Osmotics
Colorado and Osmotics Delaware. If, however, after such approvals have been
obtained Osmotics Delaware consummates a registered underwritten initial public
offering of its equity securities (and "IPO"), then the Board of Directors of
Osmotics Colorado and Osmotics Delaware shall not have such discretion to
abandon the Merger.
14. AMENDMENT. At any time before the Effective Time, this Merger
Agreement may be amended, modified or supplemented by the Boards of Directors of
the Constituent Corporations, notwithstanding approval of this Merger Agreement
by the shareholders of Osmotics Colorado and Osmotics Delaware; provided,
however, that any amendment made subsequent to the adoption of this Agreement by
the shareholders of Osmotics Colorado or the sole stockholder of Osmotics
Delaware shall not: (i) alter or change in material respects the amount or kind
of shares, securities, cash, property and/or rights to be received in exchange
for or upon conversion of any shares of any class or series of Osmotics
Colorado, (ii) alter or change in material respects the terms of the Certificate
of Incorporation of the Surviving Corporation to be effected by the Merger; or
(iii) alter or change in material respects any of the terms or conditions of
this Agreement if such alteration or change would adversely affect the holders
of any shares of any class or series of Osmotics Colorado or Osmotics Delaware.
15. TAX-FREE REORGANIZATION. The Merger is intended to be a tax-free
plan of reorganization within the meaning of Section 368(a)(1)(F) of the
Internal Revenue Code of 1986, as amended.
4
<PAGE>
Osmotics Corporation
Agreement and Plan of Merger
16. GOVERNING LAW. This Agreement shall be governed by and construed
under the internal laws of the State of Colorado as applied to agreements among
Colorado residents entered into and to be performed entirely within Colorado,
without reference to the principles of conflicts of law or choice of laws,
except to the extent that the laws of the State of Delaware would apply in
matters relating to the internal affairs of Osmotics Delaware and the Merger.
17. COUNTERPARTS. In order to facilitate the filing and recording of
this Merger Agreement, it may be executed in any number of counterparts, each of
which shall be deemed to be an original.
[The remainder of this page left intentionally blank]
5
<PAGE>
Osmotics Corporation
Agreement and Plan of Merger
IN WITNESS WHEREOF, this Merger Agreement is hereby executed on behalf
of each of the Constituent Corporations and attested by their respective
officers thereunto duly authorized.
OSMOTICS CORPORATION, a Colorado OSMOTICS CORPORATION, a Delaware
corporation corporation
By: By:
------------------------------- -------------------------------
Steven S. Porter Steven S. Porter
Chief Executive Officer Chief Executive Officer
ATTEST: ATTEST:
By: By:
------------------------------- -------------------------------
Francine E. Porter, Secretary Francine E. Porter, Secretary
[Signature Page to Agreement and Plan of Merger]
6
<PAGE>
[LOGO OF OSMOTICS CORPORATION APPEARS HERE]
COMMON STOCK COMMON STOCK
NUMBER SHARES
[ ] [ ]
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 688354 10 9
OSMOTICS CORPORATION
Incorporated under the Laws of the State of Delaware.
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK
OF PAR VALUE $.001 PER SHARE
============================OSMOTICS CORPORATION===============================
(herein called the "Corporation"), transferable only on the books of the
Corporation by the holder hereof in person or by duly authorized attorney upon
the surrender of this Certificate properly endorsed or assigned for transfer.
This Certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
[Signature] [Signature]
/s/FRANCINE E. PORTER /s/STEVEN S. PORTER
--------------------- -------------------
SECRETARY PRESIDENT
[FACSIMILE SEAL APPEARS HERE]
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(NEW YORK, N.Y.) TRANSFER AGENT
AND REGISTRAR
AUTHORIZES OFFICER
<PAGE>
OSMOTICS CORPORATION
- --------------------------------------------------------------------------------
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM- as tenants in common
TEN ENT- as tenants by the entireties
JT TEN- as joint tenants with
right of survivorship and
not as tenants in common
UNIF GIFT MIN ACT Custodian
--------------- -------------
(Cust) (Minor)
under Uniform Gifts to Minors
Act
-------------------------------
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
| |
- --------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
- ------------------------------------------------------------------------
OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT---------------------------------------------
ATTORNEY, TO
- -------------------------------------------------------------------
TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH FULL
POWER OF SUBSTITUTION IN THE PREMISIS.
DATED
------------------
X
-----------------------------------------------
X
-----------------------------------------------
NOTICE THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE
OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
SIGNATURE GUARANTEED:
---------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION, (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
[Letterhead of Fenwick & West LLP]
Osmotics Corporation
1125 17th Street, Suite 2310
Denver, Colorado 80202
Re: Osmotics Corporation
--------------------
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
SB-2, File Number 333-5306-D, filed with the Securities and Exchange Commission
on July 19, 1996, as amended through March 3, 1997 (the "Registration
Statement") in connection with registration under the Securities Act of 1933, as
amended, of (1) up to 1,125,000 shares of your Common Stock, (2) up to 168,750
shares of Common Stock issuable upon exercise of the Underwriters' over-
allotment option, (3) up to 112,500 Representatives' Warrants, each
Representatives' Warrant exercisable to acquire one share of Common Stock, and
(4) up to 112,500 shares of Common Stock issuable upon exercise of the
Representatives' Warrants. All of the foregoing securities will be referred to
collectively as the "Securities." The Securities are to be sold to the
underwriters named in the Registration Statement for resale to the public.
In rendering this opinion, we have examined the following:
(1) the Registration Statement, together with the Exhibits filed
as a part thereof;
(2) the minutes of meetings and actions by written consent of
the stockholders and Board of Directors that are contained
in your minute books and the minute books of your
predecessor, Osmotics Corporation, a Colorado corporation
("Osmotics Colorado"), that are in our possession; and
-----------------
(3) the stock record books you have provided to us, including
records of the capital stock, stock options and warrants you
have issued, as well as such stock records provided by you
respecting Osmotics Colorado.
In our examination of documents for purposes of this opinion, we have
assumed, and express no opinion as to, the genuineness of all signatures on
original documents, the authenticity of all documents submitted to us as
originals, the conformity to originals of all documents submitted to us as
copies, the lack of any undisclosed terminations, modifications, waivers or
amendments to any documents reviewed by us and the due execution and delivery of
all documents where due execution and delivery are prerequisites to the
effectiveness thereof.
As to matters of fact relevant to this opinion, we have relied solely
upon our examination of the documents referred to above and have assumed the
current accuracy and completeness of the information obtained from public
officials and records included in the documents referred to above. We have made
no independent investigations or other attempts to verify the accuracy of
<PAGE>
any of such information or to determine the existence or non-existence of any
other factual matters; however, we are not aware of any facts that would lead us
-------
to believe that the opinion expressed herein is not accurate.
Based upon the foregoing, it is our opinion that the Securities that
may be issued and sold by you, when issued and sold in the manner referred to in
the Registration Statement, will be legally issued, fully paid and
nonassessable.
We consent to the use of this opinion as an exhibit to the
Registration Statement and further consent to all references to us in the
Registration Statement, and the Prospectus constituting a part thereof and any
amendments thereto which have been approved by us.
This opinion speaks only as of its date and is intended solely for
your use as an exhibit to the Registration Statement for the purpose of the
above sale of the Securities and is not to be relied upon for any other purpose.
Very truly yours,
Fenwick & West LLP
<PAGE>
EXHIBIT 10.01
OSMOTICS CORPORATION
1997 EQUITY INCENTIVE PLAN
As Adopted February __, 1997
1. PURPOSE. The purpose of this Plan is to provide incentives to
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company, its Parent and
Subsidiaries, by offering them an opportunity to participate in the Company's
future performance through awards of Options, Restricted Stock and Stock
Bonuses. Capitalized terms not defined in the text are defined in Section 23.
2. SHARES SUBJECT TO THE PLAN.
2.1 Number of Shares Available. Subject to Sections 2.2 and 18,
the total number of Shares reserved and available for grant and issuance
pursuant to this Plan will be 300,000 Shares. Subject to Sections 2.2 and 18,
Shares that: (a) are subject to issuance upon exercise of an Option but cease to
be subject to such Option for any reason other than exercise of such Option; (b)
are subject to an Award granted hereunder but are forfeited or are repurchased
by the Company at the original issue price; or (c) are subject to an Award that
otherwise terminates without Shares being issued will again be available for
grant and issuance in connection with future Awards under this Plan. At all
times the Company shall reserve and keep available a sufficient number of Shares
as shall be required to satisfy the requirements of all outstanding Options
granted under this Plan and all other outstanding but unvested Awards granted
under this Plan.
2.2 Adjustment of Shares. In the event that the number of
outstanding Shares is changed by a stock dividend, recapitalization, stock
split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company without consideration,
then (a) the number of Shares reserved for issuance under this Plan, (b) the
Exercise Prices of and number of Shares subject to outstanding Options, and (c)
the number of Shares subject to other outstanding Awards will be proportionately
adjusted, subject to any required action by the Board or the shareholders of the
Company and compliance with applicable securities laws; provided, however, that
fractions of a Share will not be issued but will either be replaced by a cash
payment equal to the Fair Market Value of such fraction of a Share or will be
rounded up to the nearest whole Share, as determined by the Committee.
3. ELIGIBILITY. ISOS (as defined in Section 5 below) may be granted
only to employees (including officers and directors who are also employees) of
the Company or of a Parent or Subsidiary of the Company. All other Awards may
be granted to employees, officers, directors, consultants, independent
contractors and advisors of the Company or any Parent or Subsidiary of the
Company; provided such consultants, contractors and advisors render bona fide
services not in connection with the offer and sale of securities in a capital-
raising transaction. No person will be eligible to receive more than 400,000
Shares in any calendar year under this Plan pursuant to the grant of Awards
hereunder, other than new employees of the Company or of a Parent or Subsidiary
of the Company (including new employees who are also officers and directors of
the Company or any Parent or Subsidiary of the Company) who are eligible to
receive up to a maximum of 250,000 Shares in the calendar year in which they
commence their employment. A person may be granted more than one Award under
this Plan.
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Osmotics Corporation
1997 Equity Incentive Plan
4. ADMINISTRATION.
4.1 Committee Authority. This Plan will be administered by the
Committee or by the Board acting as the Committee. Subject to the general
purposes, terms and conditions of this Plan, and to the direction of the Board,
the Committee will have full power to implement and carry out this Plan.
Without limitation, the Committee will have the authority to:
(a) construe and interpret this Plan, any Award Agreement and any
other agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to
this Plan;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to
Awards;
(f) determine whether Awards will be granted singly, in combination
with, in tandem with, in replacement of, or as alternatives to,
other Awards under this Plan or any other incentive or
compensation plan of the Company or any Parent or Subsidiary of
the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission or reconcile any
inconsistency in this Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of this Plan.
4.2 Committee Discretion. Any determination made by the
Committee with respect to any Award will be made in its sole discretion at the
time of grant of the Award or, unless in contravention of any express term of
this Plan or Award, at any later time, and such determination will be final and
binding on the Company and on all persons having an interest in any Award under
this Plan. The Committee may delegate to one or more officers of the Company
the authority to grant an Award under this Plan to Participants who are not
Insiders of the Company.
4.3 Committee Members. If two or more members of the Board are
Outside Directors, the Committee will be comprised of at least two (2) members
of the Board, all of whom are Outside Directors and who satisfy the requirements
under the Exchange Act for administering this Plan.
5. OPTIONS. The Committee may grant Options to eligible persons and
will determine whether such Options will be Incentive Stock Options within the
meaning of the Code ("ISO") or Nonqualified Stock Options ("NQSOS"), the number
of Shares subject to the Option, the Exercise Price of the Option, the period
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following:
5.1 Form of Option Grant. Each Option granted under this Plan
will be evidenced by an Award Agreement which will expressly identify the Option
as an ISO or an NQSO ("STOCK OPTION AGREEMENT"), and will be in such form and
contain such provisions (which need not be the same for each Participant) as the
Committee may from time to time approve, and which will comply with and be
subject to the terms and conditions of this Plan.
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5.2 Date of Grant. The date of grant of an Option will be the
date on which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
this Plan will be delivered to the Participant within a reasonable time after
the granting of the Option.
5.3 Exercise Period. Options may be exercisable within the times
or upon the events determined by the Committee as set forth in the Stock Option
Agreement governing such Option; provided, however, that no Option will be
exercisable after the expiration of ten (10) years from the date the Option is
granted; and provided further that no ISO granted to a person who directly or by
attribution owns more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or of any Parent or Subsidiary of the
Company ("TEN PERCENT STOCKHOLDER") will be exercisable after the expiration of
five (5) years from the date the ISO is granted. The Committee also may provide
for Options to become exercisable at one time or from time to time, periodically
or otherwise, in such number of Shares or percentage of Shares as the Committee
determines.
5.4 Exercise Price. The Exercise Price of an Option will be
determined by the Committee when the Option is granted and may be not less than
85% of the Fair Market Value of the Shares on the date of grant; provided that:
(i) the Exercise Price of an ISO will be not less than 100% of the Fair Market
Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO
granted to a Ten Percent Stockholder will not be less than 110% of the Fair
Market Value of the Shares on the date of grant. Payment for the Shares
purchased may be made in accordance with Section 8 of this Plan.
5.5 Method of Exercise. Options may be exercised only by
delivery to the Company of a written stock option exercise agreement (the
"EXERCISE AGREEMENT") in a form approved by the Committee (which need not be the
same for each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding Participant's investment
intent and access to information and other matters, if any, as may be required
or desirable by the Company to comply with applicable securities laws, together
with payment in full of the Exercise Price for the number of Shares being
purchased.
5.6 Termination. Notwithstanding the exercise periods set forth
in the Stock Option Agreement, exercise of an Option will always be subject to
the following:
(a) If the Participant is Terminated for any reason except death or
Disability, then the Participant may exercise such Participant's
Options only to the extent that such Options would have been
exercisable upon the Termination Date (unless otherwise determined
by the Committee on the date of grant and set forth in the Award
Agreement) no later than three (3) months after the Termination
Date (or such shorter or longer time period not exceeding five (5)
years as may be determined by the Committee, with any exercise
beyond three (3) months after the Termination Date deemed to be an
NQSO), but in any event, no later than the expiration date of the
Options.
(b) If the Participant is Terminated because of Participant's death or
Disability (or the Participant dies within three (3) months after
a Termination other than because of Participant's death or
disability), then Participant's Options may be exercised only to
the extent that such Options would have been exercisable by
Participant on the Termination Date (unless otherwise determined
by the Committee on the date of grant and set forth in the Award
Agreement) and must be exercised by Participant (or Participant's
legal representative or authorized assignee) no later than twelve
(12) months after the Termination Date (or such shorter or longer
time period not exceeding five (5) years as may be determined by
the Committee, with any such exercise beyond (a) three (3) months
after the Termination Date when the Termination is for any reason
other than the Participant's death or Disability, or (b) twelve
(12) months after the Termination Date when the Termination is for
Participant's death or Disability, deemed to be an NQSO), but in
any event no later than the expiration date of the Options.
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(c) If a Participant is determined by the Board to have committed an
act of theft, embezzlement, fraud, dishonesty or a breach of
fiduciary duty to the Company or Subsidiary, neither the
Participant, the Participant's estate nor such other person who
may then hold the Option shall be entitled to exercise any Option
with respect to any Shares whatsoever, after termination of
service, whether or not after termination of service the
Participant may receive payment from the Company or Subsidiary for
vacation pay, for services rendered prior to termination, for
services rendered for the day on which termination occurs, for
salary in lieu of notice, or for any other benefits. In making
such determination, the Board shall give the Participant an
opportunity to present to the Board evidence on his behalf. For
the purpose of this paragraph, termination of service shall be
deemed to occur on the date when the Company dispatches notice or
advice to the Participant that his service is terminated.
5.7 Limitations on Exercise. The Committee may specify a
reasonable minimum number of Shares that may be purchased on any exercise of an
Option, provided that such minimum number will not prevent Participant from
exercising the Option for the full number of Shares for which it is then
exercisable.
5.8 Limitations on ISO. The aggregate Fair Market Value
(determined as of the date of grant) of Shares with respect to which ISO are
exercisable for the first time by a Participant during any calendar year (under
this Plan or under any other incentive stock option plan of the Company, Parent
or Subsidiary of the Company) will not exceed $100,000. If the Fair Market
Value of Shares on the date of grant with respect to which ISO are exercisable
for the first time by a Participant during any calendar year exceeds $100,000,
then the Options for the first $100,000 worth of Shares to become exercisable in
such calendar year will be ISO and the Options for the amount in excess of
$100,000 that become exercisable in that calendar year will be NQSOs. In the
event that the Code or the regulations promulgated thereunder are amended after
the Effective Date of this Plan to provide for a different limit on the Fair
Market Value of Shares permitted to be subject to ISO, such different limit will
be automatically incorporated herein and will apply to any Options granted after
the effective date of such amendment.
5.9 Modification, Extension or Renewal. The Committee may
modify, extend or renew outstanding Options and authorize the grant of new
Options in substitution therefor, provided that any such action may not, without
the written consent of a Participant, impair any of such Participant's rights
under any Option previously granted. Any outstanding ISO that is modified,
extended, renewed or otherwise altered will be treated in accordance with
Section 424(h) of the Code. The Committee may reduce the Exercise Price of
outstanding Options without the consent of Participants affected by a written
notice to them; provided, however, that the Exercise Price may not be reduced
below the minimum Exercise Price that would be permitted under Section 5.4 of
this Plan for Options granted on the date the action is taken to reduce the
Exercise Price.
5.10 No Disqualification. Notwithstanding any other provision in
this Plan, no term of this Plan relating to ISO will be interpreted, amended or
altered, nor will any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the
Company to sell to an eligible person Shares that are subject to restrictions.
The Committee will determine to whom an offer will be made, the number of Shares
the person may purchase, the price to be paid (the "PURCHASE PRICE"), the
restrictions to which the Shares will be subject, and all other terms and
conditions of the Restricted Stock Award, subject to the following:
6.1 Form of Restricted Stock Award. All purchases under a
Restricted Stock Award made pursuant to this Plan will be evidenced by an Award
Agreement ("RESTRICTED STOCK PURCHASE AGREEMENT") that will be in such form
(which need not be the same for each Participant) as the Committee will from
time to time approve, and will comply with and be subject to the terms and
conditions of this Plan. The offer of Restricted Stock will be accepted by the
Participant's execution and delivery of the Restricted Stock Purchase Agreement
and full payment for the Shares to the Company within thirty (30) days from the
date the Restricted Stock Purchase Agreement is delivered to the person. If
such person does not execute and deliver the Restricted Stock Purchase
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Osmotics Corporation
1997 Equity Incentive Plan
Agreement along with full payment for the Shares to the Company within thirty
(30) days, then the offer will terminate, unless otherwise determined by the
Committee.
6.2 Purchase Price. The Purchase Price of Shares sold pursuant
to a Restricted Stock Award will be determined by the Committee and will be at
least 85% of the Fair Market Value of the Shares on the date the Restricted
Stock Award is granted, except in the case of a sale to a Ten Percent
Stockholder, in which case the Purchase Price will be 100% of the Fair Market
Value. Payment of the Purchase Price may be made in accordance with Section 8
of this Plan.
6.3 Restrictions. Restricted Stock Awards will be subject to
such restrictions (if any) as the Committee may impose. The Committee may
provide for the lapse of such restrictions in installments and may accelerate or
waive such restrictions, in whole or part, based on length of service,
performance or such other factors or criteria as the Committee may determine.
7. STOCK BONUSES.
7.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares
(which may consist of Restricted Stock) for services rendered to the Company or
any Parent or Subsidiary of the Company. A Stock Bonus may be awarded for past
services already rendered to the Company, or any Parent or Subsidiary of the
Company pursuant to an Award Agreement (the "STOCK BONUS AGREEMENT") that will
be in such form (which need not be the same for each Participant) as the
Committee will from time to time approve, and will comply with and be subject to
the terms and conditions of this Plan. A Stock Bonus may be awarded upon
satisfaction of such performance goals as are set out in advance in the
Participant's individual Award Agreement (the "PERFORMANCE STOCK BONUS
AGREEMENT") that will be in such form (which need not be the same for each
Participant) as the Committee will from time to time approve, and will comply
with and be subject to the terms and conditions of this Plan. Stock Bonuses may
vary from Participant to Participant and between groups of Participants, and may
be based upon the achievement of the Company, Parent or Subsidiary and/or
individual performance factors or upon such other criteria as the Committee may
determine.
7.2 Terms of Stock Bonuses. The Committee will determine the
number of Shares to be awarded to the Participant and whether such Shares will
be Restricted Stock. If the Stock Bonus is being earned upon the satisfaction
of performance goals pursuant to a Performance Stock Bonus Agreement, then the
Committee will determine: (a) the nature, length and starting date of any
period during which performance is to be measured (the "PERFORMANCE PERIOD") for
each Stock Bonus; (b) the performance goals and criteria to be used to measure
the performance, if any; (c) the number of Shares that may be awarded to the
Participant; and (d) the extent to which such Stock Bonuses have been earned.
Performance Periods may overlap and Participants may participate simultaneously
with respect to Stock Bonuses that are subject to different Performance Periods
and different performance goals and other criteria. The number of Shares may be
fixed or may vary in accordance with such performance goals and criteria as may
be determined by the Committee. The Committee may adjust the performance goals
applicable to the Stock Bonuses to take into account changes in law and
accounting or tax rules and to make such adjustments as the Committee deems
necessary or appropriate to reflect the impact of extraordinary or unusual
items, events or circumstances to avoid windfalls or hardships.
7.3 Form of Payment. The earned portion of a Stock Bonus may be
paid currently or on a deferred basis with such interest or dividend equivalent,
if any, as the Committee may determine. Payment may be made in the form of
cash, whole Shares, including Restricted Stock, or a combination thereof, either
in a lump sum payment or in installments, all as the Committee will determine.
7.4 Termination During Performance Period. If a Participant is
Terminated during a Performance Period for any reason, then such Participant
will be entitled to payment (whether in Shares, cash or otherwise) with respect
to the Stock Bonus only to the extent earned as of the date of Termination in
accordance with the Performance Stock Bonus Agreement, unless the Committee will
determine otherwise.
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Osmotics Corporation
1997 Equity Incentive Plan
8. PAYMENT FOR SHARE PURCHASES.
8.1 Payment. Payment for Shares purchased pursuant to this Plan
may be made in cash (by check) or, where expressly approved for the Participant
by the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the Participant;
(b) by surrender of shares that either: (1) have been owned by
Participant for more than six (6) months and have been paid for
within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such note
has been fully paid with respect to such shares); or (2) were
obtained by Participant in the public market;
(c) by tender of a full recourse promissory note having such terms as
may be approved by the Committee and bearing interest at a rate
sufficient to avoid imputation of income under Sections 483 and
1274 of the Code; provided, however, that Participants who are not
employees or directors of the Company will not be entitled to
purchase Shares with a promissory note unless the note is
adequately secured by collateral other than the Shares;
(d) by waiver of compensation due or accrued to the Participant for
services rendered;
(e) with respect only to purchases upon exercise of an Option, and
provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from the Participant and
a broker-dealer that is a member of the National Association
of Securities Dealers (an "NASD DEALER") whereby the
Participant irrevocably elects to exercise the Option and to
sell a portion of the Shares so purchased to pay for the
Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise
Price directly to the Company; or
(2) through a "margin" commitment from the Participant and a NASD
Dealer whereby the Participant irrevocably elects to exercise
the Option and to pledge the Shares so purchased to the NASD
Dealer in a margin account as security for a loan from the
NASD Dealer in the amount of the Exercise Price, and whereby
the NASD Dealer irrevocably commits upon receipt of such
Shares to forward the Exercise Price directly to the Company;
or
(f) by any combination of the foregoing.
8.2 Loan Guarantees. The Committee may help the Participant pay
for Shares purchased under this Plan by authorizing a guarantee by the Company
of a third-party loan to the Participant.
9. WITHHOLDING TAXES.
9.1 Withholding Generally. Whenever Shares are to be issued in
satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under this Plan,
payments in satisfaction of Awards are to be made in cash, such payment will be
net of an amount sufficient to satisfy federal, state, and local withholding tax
requirements.
9.2 Stock Withholding. When, under applicable tax laws, a
Participant incurs tax liability in connection with the exercise or vesting of
any Award that is subject to tax withholding and the Participant is obligated to
pay the Company the amount required to be withheld, the Committee may in its
sole discretion allow the Participant to satisfy the minimum withholding tax
obligation by electing to have the Company withhold from the Shares to be issued
that number of Shares having a Fair Market Value equal to the minimum amount
required to be
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Osmotics Corporation
1997 Equity Incentive Plan
withheld, determined on the date that the amount of tax to be withheld is to be
determined (the "TAX DATE"). All elections by a Participant to have Shares
withheld for this purpose will be made in accordance with the requirements
established by the Committee and be in writing in a form acceptable to the
Committee
10. PRIVILEGES OF STOCK OWNERSHIP.
10.1 Voting and Dividends. No Participant will have any of the
rights of a shareholder with respect to any Shares until the Shares are issued
to the Participant. After Shares are issued to the Participant, the Participant
will be a shareholder and have all the rights of a shareholder with respect to
such Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; provided, that if such
Shares are Restricted Stock, then any new, additional or different securities
the Participant may become entitled to receive with respect to such Shares by
virtue of a stock dividend, stock split or any other change in the corporate or
capital structure of the Company will be subject to the same restrictions as the
Restricted Stock; provided, further, that the Participant will have no right to
retain such stock dividends or stock distributions with respect to Shares that
are repurchased at the Participant's original Purchase Price pursuant to Section
12.
10.2 Financial Statements. The Company will provide financial
statements to each Participant prior to such Participant's purchase of Shares
under this Plan, and to each Participant annually during the period such
Participant has Awards outstanding; provided, however, the Company will not be
required to provide such financial statements to Participants whose services in
connection with the Company assure them access to equivalent information.
11. TRANSFERABILITY. Awards granted under this Plan, and any interest
therein, will not be transferable or assignable by Participant, and may not be
made subject to execution, attachment or similar process, otherwise than by will
or by the laws of descent and distribution or as determined by the Committee and
set forth in the Award Agreement with respect to Awards that are not ISOs.
During the lifetime of the Participant an Award will be exercisable only by the
Participant, and any elections with respect to an Award may be made only by the
Participant, unless otherwise determined by the Committee and set forth in the
Award Agreement with respect to Awards that are not ISOs.
12. RESTRICTIONS ON SHARES. At the discretion of the Committee, the
Company may reserve to itself and/or its assignee(s) in the Award Agreement a
right to repurchase a portion of or all Unvested Shares held by a Participant
following such Participant's Termination at any time within ninety (90) days
after the later of Participant's Termination Date and the date Participant
purchases Shares under this Plan, for cash and/or cancellation of purchase money
indebtedness, at the Participant's Exercise Price or Purchase Price, as the case
may be.
13. CERTIFICATES. All certificates for Shares or other securities
delivered under this Plan will be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem necessary or advisable,
including restrictions under any applicable federal, state or foreign securities
law, or any rules, regulations and other requirements of the SEC or any stock
exchange or automated quotation system upon which the Shares may be listed or
quoted.
14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
Participant's Shares, the Committee may require the Participant to deposit all
certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or terminated, and the Committee may cause a
legend or legends referencing such restrictions to be placed on the
certificates. Any Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under this Plan will be
required to pledge and deposit with the Company all or part of the Shares so
purchased as collateral to secure the payment of Participant's obligation to the
Company under the promissory note; provided, however, that the Committee may
require or accept other or additional forms of collateral to secure the payment
of such obligation and, in any event, the Company will have full recourse
against the Participant under the promissory note notwithstanding any pledge of
the Participant's Shares or other collateral. In connection with any pledge of
the
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Osmotics Corporation
1997 Equity Incentive Plan
Shares, Participant will be required to execute and deliver a written pledge
agreement in such form as the Committee will from time to time approve. The
Shares purchased with the promissory note may be released from the pledge on a
pro rata basis as the promissory note is paid.
15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or
from time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and cancellation
of any or all outstanding Awards. The Committee may at any time buy from a
Participant an Award previously granted with payment in cash, Shares (including
Restricted Stock) or other consideration, based on such terms and conditions as
the Committee and the Participant may agree.
16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not
be effective unless such Award is in compliance with all applicable federal and
state securities laws, rules and regulations of any governmental body, and the
requirements of any stock exchange or automated quotation system upon which the
Shares may then be listed or quoted, as they are in effect on the date of grant
of the Award and also on the date of exercise or other issuance.
Notwithstanding any other provision in this Plan, the Company will have no
obligation to issue or deliver certificates for Shares under this Plan prior to:
(a) obtaining any approvals from governmental agencies that the Company
determines are necessary or advisable; and/or (b) completion of any registration
or other qualification of such Shares under any state or federal law or ruling
of any governmental body that the Company determines to be necessary or
advisable. The Company will be under no obligation to register the Shares with
the SEC or to effect compliance with the registration, qualification or listing
requirements of any state securities laws, stock exchange or automated quotation
system, and the Company will have no liability for any inability or failure to
do so.
17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award
granted under this Plan will confer or be deemed to confer on any Participant
any right to continue in the employ of, or to continue any other relationship
with, the Company or any Parent or Subsidiary of the Company or limit in any way
the right of the Company or any Parent or Subsidiary of the Company to terminate
Participant's employment or other relationship at any time, with or without
cause.
18. CORPORATE TRANSACTIONS.
18.1 Assumption or Replacement of Awards by Successor. In the
event of (a) a dissolution or liquidation of the Company, (b) a merger or
consolidation in which the Company is not the surviving corporation (other than
a merger or consolidation with a wholly-owned subsidiary, a reincorporation of
the Company in a different jurisdiction, or other transaction in which there is
no substantial change in the shareholders of the Company or their relative stock
holdings and the Awards granted under this Plan are assumed, converted or
replaced by the successor corporation, which assumption will be binding on all
Participants), (c) a merger in which the Company is the surviving corporation
but after which the shareholders of the Company immediately prior to such merger
(other than any shareholder that merges, or that owns or controls another
corporation that merges, with the Company in such merger) cease to own their
shares or other equity interest in the Company, or (d) the sale of substantially
all of the assets of the Company, any or all outstanding Awards may be assumed,
converted or replaced by the successor corporation (if any), which assumption,
conversion or replacement will be binding on all Participants. In the
alternative, the successor corporation may substitute equivalent Awards or
provide substantially similar consideration to Participants as was provided to
shareholders (after taking into account the existing provisions of the Awards).
The successor corporation may also issue, in place of outstanding Shares of the
Company held by the Participant, substantially similar shares or other property
subject to repurchase restrictions no less favorable to the Participant. In the
event such successor corporation (if any) refuses to assume or substitute
Awards, as provided above, pursuant to a transaction described in this
Subsection 18.1, at the discretion of the Committee, either (a) such Awards will
expire on such transaction at such time and on such conditions as the Board will
determine; or (b) the vesting of all Awards granted pursuant to this Plan will
accelerate and the options will become exercisable in full prior to the
consummation of such event at such times and on such conditions as the Committee
determines, and if such options are not exercised prior to the consummation of
the corporate transaction, they shall terminate.
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1997 Equity Incentive Plan
18.2 Other Treatment of Awards. Subject to any greater rights
granted to Participants under the foregoing provisions of this Section 18, in
the event of the occurrence of any transaction described in Section 18.1, any
outstanding Awards will be treated as provided in the applicable agreement or
plan of merger, consolidation, dissolution, liquidation, sale of assets or other
"corporate transaction."
18.3 Assumption of Awards by the Company. The Company, from time
to time, also may substitute or assume outstanding awards granted by another
company, whether in connection with an acquisition of such other company or
otherwise, by either; (a) granting an Award under this Plan in substitution of
such other company's award; or (b) assuming such award as if it had been granted
under this Plan if the terms of such assumed award could be applied to an Award
granted under this Plan. Such substitution or assumption will be permissible if
the holder of the substituted or assumed award would have been eligible to be
granted an Award under this Plan if the other company had applied the rules of
this Plan to such grant. In the event the Company assumes an award granted by
another company, the terms and conditions of such award will remain unchanged
(except that the exercise price and the number and nature of Shares issuable
upon exercise of any such option will be adjusted appropriately pursuant to
Section 424(a) of the Code). In the event the Company elects to grant a new
Option rather than assuming an existing option, such new Option may be granted
with a similarly adjusted Exercise Price.
19. ADOPTION AND SHAREHOLDER APPROVAL. This Plan will become
effective on the date on which the registration statement filed by the Company
with the SEC under the Securities Act registering the initial public offering of
the Company's Common Stock is declared effective by the SEC (the "EFFECTIVE
DATE"); provided, however, that if the Effective Date does not occur on or
before December 31, 1997, this Plan will terminate having never become
effective. This Plan shall be approved by the shareholders of the Company
(excluding Shares issued pursuant to this Plan), consistent with applicable
laws, within twelve (12) months before or after the date this Plan is adopted by
the Board. Upon the Effective Date, the Board may grant Awards pursuant to this
Plan; provided, however, that: (a) no Option may be exercised prior to initial
shareholder approval of this Plan; (b) no Option granted pursuant to an increase
in the number of Shares subject to this Plan approved by the Board will be
exercised prior to the time such increase has been approved by the shareholders
of the Company; and (c) in the event that shareholder approval of such increase
is not obtained within the time period provided herein, all Awards granted
hereunder will be canceled, any Shares issued pursuant to any Award will be
canceled, and any purchase of Shares hereunder will be rescinded. So long as
the Company is subject to Section 16(b) of the Exchange Act, the Company will
comply with the requirements of Rule 16b-3 (or its successor), as amended, with
respect to shareholder approval.
20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided
herein, this Plan will terminate ten (10) years from the date this Plan is
adopted by the Board or, if earlier, the date of shareholder approval. This
Plan and all agreements thereunder shall be governed by and construed in
accordance with the laws of the State of California.
21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time
terminate or amend this Plan in any respect, including without limitation
amendment of any form of Award Agreement or instrument to be executed pursuant
to this Plan; provided, however, that the Board will not, without the approval
of the shareholders of the Company, amend this Plan in any manner that requires
such shareholder approval pursuant to the Code or the regulations promulgated
thereunder as such provisions apply to ISO plans or (if the Company is subject
to the Exchange Act or Section 16(b) of the Exchange Act) pursuant to the
Exchange Act or Rule 16b-3 (or its successor), as amended, thereunder,
respectively.
22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by
the Board, the submission of this Plan to the shareholders of the Company for
approval, nor any provision of this Plan will be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and bonuses otherwise than under this Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
23. DEFINITIONS. As used in this Plan, the following terms will have
the following meanings:
9
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Osmotics Corporation
1997 Equity Incentive Plan
"AWARD" means any award under this Plan, including any Option,
Restricted Stock or Stock Bonus.
"AWARD AGREEMENT" means, with respect to each Award, the signed written
agreement between the Company and the Participant setting forth the terms and
conditions of the Award.
"BOARD" means the Board of Directors of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the committee appointed by the Board to administer
this Plan, or if no such committee is appointed, the Board.
"COMPANY" means Osmotics Corporation or any successor corporation.
"DISABILITY" means a disability, whether temporary or permanent,
partial or total, within the meaning of Section 22(e)(3) of the Code, as
determined by the Committee.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXERCISE PRICE" means the price at which a holder of an Option may
purchase the Shares issuable upon exercise of the Option.
"FAIR MARKET VALUE" means, as of any date, the value of a share of the
Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National Market,
its closing price on the Nasdaq National Market on the date of
determination as reported in The Wall Street Journal;
(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, its closing price on the date of
determination on the principal national securities exchange on
which the Common Stock is listed or admitted to trading as
reported in The Wall Street Journal;
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a
national securities exchange, the closing price on the date of
determination as reported in The Wall Street Journal or, if
closing prices are not reported, the average of the high bid and
low asked prices on the date of determination;
(d) in the case of an Award made on the Effective Date, the price per
share at which shares of the Company's Common Stock are initially
offered for sale to the public by the Company's underwriters in
the initial public offering of the Company's Common Stock pursuant
to a registration statement filed with the SEC under the
Securities Act; or
(d) if none of the foregoing is applicable, by the Committee in good
faith.
"INSIDER" means an officer or director of the Company or any other
person whose transactions in the Company's Common Stock are subject to Section
16 of the Exchange Act.
"OUTSIDE DIRECTOR" means any director who is not; (a) a current
employee of the Company or any Parent or Subsidiary of the Company; (b) a former
employee of the Company or any Parent or Subsidiary of the Company who is
receiving compensation for prior services (other than benefits under a tax-
qualified pension plan); (c) a current or former officer of the Company or any
Parent or Subsidiary of the Company; or (d) currently receiving compensation for
personal services in any capacity, other than as a director, from the Company or
any
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Osmotics Corporation
1997 Equity Incentive Plan
Parent or Subsidiary of the Company; provided, however, that at such time as the
term "Outside Director", as used in Section 162(m) of the Code is defined in
regulations promulgated under Section 162(m) of the Code, "Outside Director"
will have the meaning set forth in such regulations, as amended from time to
time and as interpreted by the Internal Revenue Service.
"OPTION" means an award of an option to purchase Shares pursuant to
Section 5.
"PARENT" means any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company if each of such corporations other
than the Company owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
"PARTICIPANT" means a person who receives an Award under this Plan.
"PLAN" means this Osmotics Corporation 1997 Equity Incentive Plan, as
amended from time to time.
"RESTRICTED STOCK AWARD" means an award of Shares pursuant to
Section 6.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" means shares of the Company's Common Stock reserved for
issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any
successor security.
"STOCK BONUS" means an award of Shares, or cash in lieu of Shares,
pursuant to Section 7.
"SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
"TERMINATION" or "TERMINATED" means, for purposes of this Plan with
respect to a Participant, that the Participant has for any reason ceased to
provide services as an employee, officer, director, consultant, independent
contractor, or advisor to the Company or a Parent or Subsidiary of the Company.
An employee will not be deemed to have ceased to provide services in the case of
(i) sick leave, (ii) military leave, or (iii) any other leave of absence
approved by the Committee, provided, that such leave is for a period of not more
than 90 days, unless reemployment upon the expiration of such leave is
guaranteed by contract or statute or unless provided otherwise pursuant to
formal policy adopted from time to time by the Company and issued and
promulgated to employees in writing. In the case of any employee on an approved
leave of absence, the Committee may make such provisions respecting suspension
of vesting of the Award while on leave from the employ of the Company or a
Subsidiary as it may deem appropriate, except that in no event may an Option be
exercised after the expiration of the term set forth in the Option agreement.
The Committee will have sole discretion to determine whether a Participant has
ceased to provide services and the effective date on which the Participant
ceased to provide services (the "TERMINATION DATE").
"UNVESTED SHARES" means "Unvested Shares" as defined in the Award
Agreement.
"VESTED SHARES" means "Vested Shares" as defined in the Award
Agreement.
11
<PAGE>
EXHIBIT 10.02
OSMOTICS CORPORATION
1997 DIRECTORS STOCK OPTION PLAN
As Adopted February __, 1997
1. PURPOSE. This 1997 Directors Stock Option Plan (this "PLAN") is
established to provide equity incentives for nonemployee members of the Board of
Directors of Osmotics Corporation (the "COMPANY"), who are described in Section
6.1 below, by granting such persons options to purchase shares of stock of the
Company.
2. ADOPTION AND STOCKHOLDER APPROVAL. After this Plan is adopted by the
Board of Directors of the Company (the "BOARD"), this Plan will become effective
on the time and date (the "EFFECTIVE DATE") on which the registration statement
filed by the Company with the Securities and Exchange Commission ("SEC") under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), to register the
initial public offering of the Company's Common Stock is declared effective by
the SEC; provided, however, that if the Effective Date does not occur on or
before December 31, 1997, this Plan and any Options granted hereunder will
terminate. This Plan shall be approved by the shareholders of the Company,
consistent with applicable laws, within twelve (12) months after the date this
Plan is adopted by the Board. Options ("OPTIONS") may be granted under this
Plan after the Effective Date provided that, in the event that shareholder
approval is not obtained within the time period provided herein, this Plan, and
all Options granted hereunder, shall terminate. No Option that is issued as a
result of any increase in the number of shares authorized to be issued under
this Plan shall be exercised prior to the time such increase has been approved
by the shareholders of the Company and all such Options granted pursuant to such
increase shall similarly terminate if such shareholder approval is not obtained.
So long as the Company is subject to Section 16(b) of the Securities Exchange
Act of 1934, as amended, (the "EXCHANGE ACT") the Company will comply with the
requirements of Rule 16b-3 with respect to shareholder approval.
3. TYPES OF OPTIONS AND SHARES. Options granted under this Plan shall be
non-qualified stock options ("NQSOS"). The shares of stock that may be
purchased upon exercise of Options granted under this Plan (the "SHARES") are
shares of the Common Stock of the Company.
4. NUMBER OF SHARES. The maximum number of Shares that may be issued
pursuant to Options granted under this Plan (the "MAXIMUM NUMBER") is 50,000
Shares, subject to adjustment as provided in this Plan. If any Option is
terminated for any reason without being exercised in whole or in part, the
Shares thereby released from such Option shall be available for purchase under
other Options subsequently granted under this Plan. At all times during the
term of this Plan, the Company shall reserve and keep available such number of
Shares as shall be required to satisfy the requirements of outstanding Options
granted under this Plan; provided, however that if the aggregate number of
Shares subject to outstanding Options granted under this Plan plus the aggregate
number of Shares previously issued by the Company pursuant to the exercise of
Options granted under this Plan equals or exceeds the Maximum Number of Shares,
then notwithstanding anything herein to the contrary, no further Options may be
granted under this Plan until the Maximum Number is increased or the aggregate
number of Shares subject to outstanding Options granted under this Plan plus the
aggregate number of Shares previously issued by the Company pursuant to the
exercise of Options granted under this Plan is less than the Maximum Number.
5. ADMINISTRATION. This Plan shall be administered by the Board or by a
committee of not less than two members of the Board appointed to administer this
Plan (the "COMMITTEE"). As used in this Plan, references to the Committee shall
mean either such Committee or the Board if no Committee has been established.
The interpretation by the Committee of any of the provisions of this Plan or any
Option granted under this Plan shall be final and binding upon the Company and
all persons having an interest in any Option or any Shares purchased pursuant to
an Option.
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Osmotics Corporation
1997 Directors Stock Option Plan
6. ELIGIBILITY AND AWARD FORMULA.
6.1 Eligibility. Options shall be granted only to directors of the
Company who are not employees of the Company or any Parent, Subsidiary or
Affiliate of the Company, as those terms are defined in Section 17 below (each
such person referred to as an "OPTIONEE").
6.2 Initial Grant. Each person who first becomes a member of the
Board after the Effective Date will automatically be granted an Option for
15,000 Shares (the "INITIAL GRANT") on the date such Optionee becomes a member
of the Board.
6.3 Succeeding Grants. At each Annual Meeting of the Company that
occurs after the Effective Date, each member of the Board who has served
continuously as a member of the Board since the date of the prior Annual
Meeting, will automatically be granted an Option for 1,000 Shares (a "SUCCEEDING
GRANT").
7. TERMS AND CONDITIONS OF OPTIONS. Subject to the following and to
Section 6 above:
7.1 Form of Option Grant. Each Option granted under this Plan shall
be evidenced by a written Stock Option Grant ("GRANT") in such form (which need
not be the same for each Optionee) as the Committee shall from time to time
approve, which Grant shall comply with and be subject to the terms and
conditions of this Plan.
7.2 Vesting. Options granted under this Plan shall be exercisable as
they vest. The date an Optionee receives an Initial Grant or a Succeeding Grant
is referred to in this Plan as the "START DATE" for such Option.
(a) Initial Grants. Each Initial Grant will vest as to two and
eight one-hundredths percent (2.08%) per month on the last date of each month
following the Start Date, so long as the Optionee continuously remains a
director or a consultant of the Company.
(b) Succeeding Grants. Each Succeeding Grant will vest as to two
and eight one-hundredths percent (2.08%) per month on the last date of each
month following the Start Date, so long as the Optionee continuously remains a
director or a consultant of the Company.
7.3 Exercise Price. The exercise price of an Option shall be the Fair
Market Value (as defined in Section 17.4) of the Shares, at the time that the
Option is granted.
7.4 Termination of Option. Except as provided below in this Section,
each Option shall expire ten (10) years after its Start Date (the "EXPIRATION
DATE"). The Option shall cease to vest and unvested Options shall expire when
the Optionee ceases to be a member of the Board or a consultant of the Company.
The date on which the Optionee ceases to be a member of the Board or a
consultant of the Company shall be referred to as the "TERMINATION DATE". An
Option may be exercised after the Termination Date only as set forth below:
(a) Termination Generally. If the Optionee ceases to be a member
of the Board or consultant of the Company for any reason except death or
disability, then each Option then held by such Optionee, to the extent (and only
to the extent) that it would have been exercisable by the Optionee on the
Termination Date, may be exercised by the Optionee within seven (7) months after
the Termination Date, but in no event later than the Expiration Date
(b) Death or Disability. If the Optionee ceases to be a member of
the Board or consultant of the Company because of the death of the Optionee or
the disability of the Optionee within the meaning of Section 22(e)(3) of the
Internal Revenue Code of 1986, as amended (the "CODE"), then each Option then
held by such Optionee, to the extent (and only to the extent) that it would have
been exercisable by the Optionee on the Termination Date, may be exercised by
the Optionee (or the Optionee's legal representative) within twelve (12) months
after the Termination Date, but in no event later than the Expiration Date.
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Osmotics Corporation
1997 Directors Stock Option Plan
8. EXERCISE OF OPTIONS.
8.1 Exercise Period. Subject to the provisions of Section 8.5 of this
Plan, Options shall be exercisable as they vest.
8.2 Notice. Options may be exercised only by delivery to the Company
of an exercise agreement in a form approved by the Committee stating the number
of Shares being purchased, the restrictions imposed on the Shares and such
representations and agreements regarding the Optionee's investment intent and
access to information as may be required by the Company to comply with
applicable securities laws, together with payment in full of the exercise price
for the number of Shares being purchased.
8.3 Payment. Payment for the Shares purchased upon exercise of an
Option may be made (a) in cash or by check; (b) by surrender of shares of Common
Stock of the Company that have been owned by the Optionee for more than six (6)
months (and which have been paid for within the meaning of SEC Rule 144 and, if
such shares were purchased from the Company by use of a promissory note, such
note has been fully paid with respect to such shares) or were obtained by the
Optionee in the open public market, having a Fair Market Value equal to the
exercise price of the Option; (c) by waiver of compensation due or accrued to
the Optionee for services rendered; (d) provided that a public market for the
Company's stock exists, through a "same day sale" commitment from the Optionee
and a broker-dealer that is a member of the National Association of Securities
Dealers (an "NASD DEALER") whereby the Optionee irrevocably elects to exercise
the Option and to sell a portion of the Shares so purchased to pay for the
exercise price and whereby the NASD Dealer irrevocably commits upon receipt of
such Shares to forward the exercise price directly to the Company; (e) provided
that a public market for the Company's stock exists, through a "margin"
commitment from the Optionee and an NASD Dealer whereby the Optionee irrevocably
elects to exercise the Option and to pledge the Shares so purchased to the NASD
Dealer in a margin account as security for a loan from the NASD Dealer in the
amount of the exercise price, and whereby the NASD Dealer irrevocably commits
upon receipt of such Shares to forward the exercise price directly to the
Company; or (f) by any combination of the foregoing.
8.4 Withholding Taxes. Prior to issuance of the Shares upon exercise
of an Option, the Optionee shall pay or make adequate provision for any federal
or state withholding obligations of the Company, if applicable.
8.5 Limitations on Exercise. Notwithstanding the exercise periods set
forth in the Grant, exercise of an Option shall always be subject to the
following limitations:
(a) An Option shall not be exercisable until such time as this
Plan (or, in the case of Options granted pursuant to an amendment increasing the
number of shares that may be issued pursuant to this Plan, such amendment) has
been approved by the shareholders of the Company in accordance with Section 15
of this Plan.
(b) An Option shall not be exercisable unless such exercise is in
compliance with the Securities Act and all applicable state securities laws, as
they are in effect on the date of exercise.
(c) The Committee may specify a reasonable minimum number of
Shares that may be purchased upon any exercise of an Option, provided that such
minimum number will not prevent the Optionee from exercising the full number of
Shares as to which the Option is then exercisable.
9. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an
Option shall be exercisable only by the Optionee or by the Optionee's guardian
or legal representative, unless otherwise permitted by the Committee. No Option
may be sold, pledged, assigned, hypothecated, transferred or disposed of in any
manner other than by will, by the laws of descent and distribution, or as
otherwise determined by the Committee and set forth in the Grant.
10. PRIVILEGES OF STOCK OWNERSHIP. No Optionee shall have any of the
rights of a shareholder with respect to any Shares subject to an Option until
the Option has been validly exercised. No adjustment shall be made for
dividends or distributions or other rights for which the record date is prior to
the date of exercise, except as provided in this Plan. The Company shall
provide to each Optionee a copy of the annual financial
3
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Osmotics Corporation
1997 Directors Stock Option Plan
statements of the Company, at such time after the close of each fiscal year of
the Company as they are released by the Company to its shareholders.
11. ADJUSTMENT OF OPTION SHARES. In the event that the number of
outstanding shares of Common Stock of the Company is changed by a stock
dividend, stock split, reverse stock split, combination, reclassification or
similar change in the capital structure of the Company without consideration,
the number of Shares available under this Plan and the number of Shares subject
to outstanding Options and the exercise price per share of such outstanding
Options shall be proportionately adjusted, subject to any required action by the
Board or shareholders of the Company and compliance with applicable securities
laws; provided, however, that no fractional shares shall be issued upon exercise
of any Option and any resulting fractions of a Share shall be rounded up to the
nearest whole Share.
12. NO OBLIGATION TO CONTINUE AS DIRECTOR. Nothing in this Plan or any
Option granted under this Plan shall confer on any Optionee any right to
continue as a director of the Company.
13. COMPLIANCE WITH LAWS. The grant of Options and the issuance of Shares
upon exercise of any Options shall be subject to and conditioned upon compliance
with all applicable requirements of law, including without limitation compliance
with the Securities Act, compliance with all other applicable state securities
laws and compliance with the requirements of any stock exchange or national
market system on which the Shares may be listed. The Company shall be under no
obligation to register the Shares with the SEC or to effect compliance with the
registration or qualification requirement of any state securities laws, stock
exchange or national market system.
14. ACCELERATION OF OPTIONS. In the event of (a) a dissolution or
liquidation of the Company, (b) a merger or consolidation in which the Company
is not the surviving corporation (other than a merger or consolidation with a
wholly-owned subsidiary, a reincorporation of the Company in a different
jurisdiction, or other transaction in which there is no substantial change in
the shareholders of the Company or their relative stock holdings and the Options
granted under this Plan are assumed or replaced by the successor corporation,
which assumption will be binding on all Optionees), (c) a merger in which the
Company is the surviving corporation but after which the shareholders of the
Company immediately prior to such merger (other than any shareholder which
merges, or which owns or controls another corporation which merges, with the
Company in such merger) cease to own their shares or other equity interests in
the Company, or (d) the sale of substantially all of the assets of the Company,
the vesting of all options granted pursuant to this Plan will accelerate and the
options will become exercisable in full prior to the consummation of such event
at such times and on such conditions as the Committee determines, and if such
options are not exercised prior to the consummation of the corporate
transaction, they shall terminate in accordance with the provisions of this
Plan.
15. AMENDMENT OR TERMINATION OF PLAN. The Committee may at any time
terminate or amend this Plan (but may not terminate or amend the terms of any
outstanding option without the consent of the Optionee); provided, however, that
the Committee shall not, without the approval of the shareholders of the
Company, increase the total number of Shares available under this Plan (except
by operation of the provisions of Sections 4 and 11 above) or change the class
of persons eligible to receive Options. Further, the provisions in Sections 6
and 7 of this Plan shall not be amended more than once every six (6) months,
other than to comport with changes in the Code, the Employee Retirement Income
Security Act or the rules thereunder. In any case, no amendment of this Plan
may adversely affect any then outstanding Options or any unexercised portions
thereof without the written consent of the Optionee.
16. TERM OF PLAN. Options may be granted pursuant to this Plan from time
to time within a period of ten (10) years from the date this Plan is adopted by
the Board.
17. CERTAIN DEFINITIONS. As used in this Plan, the following terms shall
have the following meanings:
17.1 "PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if each of such
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
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Osmotics Corporation
1997 Directors Stock Option Plan
17.2 "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
17.3 "AFFILIATE" means any corporation that directly, or indirectly
through one or more intermediaries, controls or is controlled by, or is under
common control with, another corporation, where "control" (including the terms
"controlled by" and "under common control with") means the possession, direct or
indirect, of the power to cause the direction of the management and policies of
the corporation, whether through the ownership of voting securities, by contract
or otherwise.
17.4 "FAIR MARKET VALUE" means, as of any date, the value of a share
of the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National Market,
its closing price on the Nasdaq National Market on the date of
determination as reported in The Wall Street Journal;
(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, its closing price on the date of
determination on the principal national securities exchange on
which the Common Stock is listed or admitted to trading as
reported in The Wall Street Journal;
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a
national securities exchange, the closing price on the date of
determination as reported in The Wall Street Journal or, if
closing prices are not reported, the average of the high bid and
low asked prices on the date of determination; or
(d) in the case of an Initial Grant made on the Effective Date, the
price per share at which shares of the Company's Common Stock are
initially offered for sale to the public by the Company's
underwriters in the initial public offering of the Company's
Common Stock pursuant to a registration statement filed with the
SEC under the Securities Act; or
(e) if none of the foregoing is applicable, by the Committee in good
faith.
5
<PAGE>
EXHIBIT 10.03
March __, 1997
Steven S. Porter
Osmotics Corporation
1125 17th Street, Suite 2310
Denver, Colorado 80202
Dear Mr. Porter:
This letter (this "Agreement") constitutes the terms and conditions of your
employment by Osmotics Corporation (hereinafter referred to as "Osmotics" or the
"Company).
1. Employment. Effective on the date of the closing (the "Effective
----------
Date") of the initial public offering by the Company of its securities (the
"IPO") that is currently contemplated by that certain Registration Statement on
Form SB-2 filed by the Company with the Securities and Exchange Commission on
July 19, 1996, the Company agrees to employ you in the position of President of
the Company and you agree to serve in that position. Your duties shall be such
as you have performed from the date of incorporation of the Company to date and
as determined from time to time by the Board of Directors of the Company
commensurate in material respects with the duties expected of an officer with
your title and position. You agree to devote your entire business time and
effort to your employment hereunder and shall have no other employment except
with the Company so long as this Agreement shall remain in effect. This
provision shall not preclude passive investments which are not competitive with
the Company's business and which do not require you to devote any time or
effort.
2. Term. This Agreement shall be effective on the Effective Date and
----
shall continue for a period of three (3) years thereafter (the "Term"), unless
your employment is terminated prior thereto pursuant to Section 9 hereof. The
Term may be extended by mutual agreement of the parties. If the Term is not so
extended and your employment has not been otherwise terminated, then your
employment may continue after the Term but will then be terminable by either
party at will, with or without cause.
3. Salary. Your annual base salary will be one hundred one hundred fifty
------
thousand dollars ($150,000) per annum from the Effective Date until the first
anniversary thereof. For each remaining year of this Agreement your salary
shall be not less than that in the first year or such greater amount that the
Board of Directors or any Compensation Committee formed by the Board of
Directors shall determine. Said salary will be paid periodically in accordance
with the Company's normal payroll cycle.
<PAGE>
4. Fringe Benefits. You shall be entitled to participate in all of the
---------------
employee benefit plans provided by the Company, including but not limited to the
medical and dental plans and the 401(k) Plan now in effect, on the same basis
generally made available to its other executives.
5. Executive Incentive Compensation Plan. You will be eligible to
-------------------------------------
participate in the Company's Executive Incentive Compensation Plans when and if
they exist on the same basis generally made available to its other executives.
Payment of a bonus under this plan will be based upon the achievement of
financial performance objectives by the Company as well as achievement of
individual performance objectives by you.
6. Stock Options.
-------------
(a) You will be eligible to participate in the Company's 1997 Equity
Incentive Plan (the "Plan") and any other applicable stock option or equity
incentive plans the Company may adopt.
(b) Upon the Effective Date you will be granted an incentive stock
option (the "Option") to purchase one hundred thousand (100,000) shares of
Common Stock of the Company (which number of shares shall be proportionately
adjusted in the event the Company at any time after the date hereof splits,
subdivides or combines its Common Stock) during the period commencing upon the
Effective Date and ending five (5) years thereafter (the "Option Term") pursuant
to the Plan and the Stock Option Agreement in the form satisfactory to the
Company. The exercise price for these shares will be 110% of the price at which
the shares of the Company's Common Stock are initially offered for sale to the
public in the IPO. Subject to the provisions of the Plan, the Stock Option
Agreement, and Section 9 hereof, the Option will vest (as proportionately
adjusted in the event the Company at any time after the date hereof splits,
subdivides or combines its Common Stock) and become exercisable according to the
following schedule:
On the Effective Date: 25,000 shares shall be purchasable.
The balance of 75,000 shares shall be purchasable at the rate of 25,000
shares on each anniversary of the Effective Date until the Option is fully
vested.
7. Expenses. The Company will reimburse you for all reasonable and
--------
necessary business, entertainment and travel expenses in accordance with its
uniformly applied Company policies.
8. Vacation. You will be entitled to up to three (3) weeks paid vacation
--------
during each calendar year, or such greater period as the Board of Directors
shall approve. Any vacation not used in one year may not be carried over to the
next year; provided, in no event shall accrued but unused vacation time exceed
three (3) weeks or such greater period as the Board of Directors shall approve.
-2-
<PAGE>
9. Termination of Employment.
-------------------------
(a) Termination By Company For Cause: For purposes hereof, "cause"
--------------------------------
shall mean any one or more of the following:
(i) A conviction of you for commission of a felony;
(ii) Commission by you of an act of theft, embezzlement, fraud,
dishonesty or a breach by you of your fiduciary duty to the
Company or its subsidiaries;
(iii) A material breach by you of a material term of this
Agreement;
(iv) A failure or refusal by you to comply in any material
respect with the reasonable policies, standards or
regulations of the Company if, after the Company has
provided you written notice of such failure or refusal,
such failure or refusal continues; and
(v) Any gross negligence or willful misconduct by you in the
performance of your duties which results in material
detriment to the Company or its subsidiaries.
The Company shall have the right to terminate your employment at any time
for cause, the determination of which shall be made in good faith by the
Company, effective upon providing you written notice of such termination. Upon
the effective date of such termination, (i) your salary, payments and benefits
under this Agreement shall terminate; (ii) the Option shall cease to vest and to
the extent the Option has not vested, it shall terminate; and (iii) you may
exercise the Option, to the extent the Option has vested, has not been exercised
and the Option Term is not exceeded, for a period of fifteen (15) days following
the date of your employment termination, and at the end of such fifteen day
period, the Option shall terminate.
(b) Termination by Company Upon Death or Disability of Employee: The
-----------------------------------------------------------
Company shall have the right to terminate your employment at any time upon your
death or disability, whether temporary or permanent, partial or total, within
the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended, as determined by the Committee (as such term is defined in the Plan),
effective upon providing you (or your legal representative in the case of your
death) written notice of such termination. Upon the effective date of such
termination, (i) the Company shall pay to you (or your legal representative in
the case of your death), at the times otherwise due to you, all the salary
otherwise due to you under Section 3 hereof during the period beginning on the
date of such termination and ending six months thereafter, but all other
payments or benefits otherwise due to you hereunder shall terminate; (ii) the
Option will be deemed to be immediately vested for the full number of shares
that would have otherwise been purchasable under the Option if it had continued
to vest pursuant to the schedule set forth in Section 6(b) during that six month
period and, to the extent the Option is not
-3-
<PAGE>
deemed to be so vested, it shall terminate; (iii) you (or your legal
representative in the case of your death) may exercise the Option, to the extent
the Option has vested, has not been exercised and the Option Term is not
exceeded, during that six month period; (iv) upon termination of that six month
period, your salary, payments and benefits under this Agreement and the Option
shall terminate.
(c) Termination By Company Without Cause: In addition to the
------------------------------------
Company's rights set forth in Sections 9(a) and 9(b) above, the Company shall
have the right to terminate your employment at any time for any reason other
than pursuant to Sections 9(a) or 9(b) above effective upon providing you
written notice of such termination. Upon the effective date of such
termination, (i) the Company shall pay to you, at the times otherwise due to
you, all the salary, payments and benefits otherwise due to you under Sections 3
and 4 hereof during the period (the "Severance Period") beginning on the date of
such termination and ending on the earlier of (A) 18 months thereafter and (B)
the end of the Term, but in no event less than 6 months immediately following
such termination; (ii) the Option will be deemed to be immediately vested for
the full number of shares that would have otherwise been purchasable under the
Option if it had continued to vest pursuant to the schedule set forth in Section
6(b) during the Severance Period and, to the extent the Option is not deemed to
be so vested, it shall terminate; (iii) you may exercise the Option, to the
extent the Option has vested, has not been exercised and the Option Term is not
exceeded, during the Severance Period; (iv) upon termination of the Severance
Period, your salary, payments and benefits under this Agreement and the Option
shall terminate.
(d) Termination By Employee: You shall have the right to terminate
-----------------------
your employment at any time for any reason effective upon providing the Company
written notice of such termination. Upon the effective date of such
termination, (i) your salary, payments and benefits under this Agreement will
terminate; (ii) the Option shall cease to vest and to the extent the Option has
not vested, it shall terminate; and (iii) you may exercise the Option, to the
extent the Option has vested, has not been exercised and the Option Term is not
exceeded, for a period of thirty (30) days following the date of such
termination, and at the end of such thirty day period, the Option shall
terminate.
10. Company Property and Confidentiality.
------------------------------------
During the course of your employment you will or may become informed as to
many of the Company's procedural, commercial and technical needs, problems,
developments and projects, as well as activities directed thereto.
In consideration of your employment being given or continued and the
compensation herein, you hereby agree, for yourself and your heirs, executors,
administrators and representative as follows:
(a) To irrevocably assign, transfer and set over to the Company, its
successors and assigns, all your rights, title and interest, including all
worldwide patents, patent applications, copyrights, mask works, trade secrets
and other intellectual property and all "Moral Rights" (as defined below), in
any and all creations, products, technologies, treatments, compounds,
formulations, devices, designs, methods, ideas, inventions, improvements, and
writings and other
-4-
<PAGE>
works of authorship, and any other subject matter which is or may become legally
protectable or recognized as a form of property (collectively, the "Company
Property"), which you, either solely or jointly with others, have conceived,
made or suggested, or may hereafter conceive, make or suggest, during the period
of your employment by Company or its successors and the six-month period next
following the termination of such employment, and which in any way relate
directly or indirectly to the Company's business, procedural, technical or
commercial needs, problems, developments or projects or to its production,
research or experimental developments and projects of every name and nature
under consideration and/or being carried on by or for Company prior to
termination of your employment or which in any way are likely to be of benefit
to the Company; provided, that such Company Property is originated, created,
developed or perfected (a) in the performance of the general duties of which you
are employed, or (b) with the use of any time, material, or facilities of the
Company, or (c) which directly relate to any products, technologies, treatments,
compounds, formulations, devices, designs, ideas, inventions, methods,
composition, process or articles of manufacture or method of doing business
within the scope of the Company's field of activity or of the same general
character during your employment. "Moral Rights" mean any rights to claim
------------
authorship of any Company Property or to restrain or object to any modification
of any Company Property, and any similar right, existing under judicial or
statutory law of any country in the world, or under any treaty, regardless of
whether or not such right is denominated or generally referred to as a "moral
right".
(b) To execute, acknowledge, make and deliver to the Company or its
attorneys without additional compensation but without expense to you, any and
all instruments, including United States and foreign patent applications,
copyright and trademark applications, of securing, protecting or registering any
rights embraced within this Agreement, powers of attorney, assignments, oaths or
affirmations, supplemental oaths and sworn statements, and to do any and all
lawful acts which in the judgment of the Company or its attorneys may be
necessary or desirable to vest in or secure for or maintain for the benefit of
the Company adequate patent and other rights in the United States and all
foreign countries with respect to any Company Property, whether published or
unpublished and whether or not the subject of statutory industrial property or
copyright protection.
(c) To disclose promptly to the Company or its attorneys, any and all
Company Property when conceived or made by you and to report promptly to the
Company all information of which you may become aware during your employment and
which may be of benefit to the Company or which may prevent or minimize loss by
the Company and of which the Company may not otherwise then have knowledge.
(d) You understand that as part of your employment, you will have
access to confidential and proprietary information respecting the Company. You
agree to keep confidential and not to disclose, during or subsequent to your
employment, any information of an unpublished, or confidential, or proprietary
nature. You further agree not to use any information of an unpublished, or
confidential, or proprietary nature which you have learned during your
employment by the Company, for any subsequent employer or for your own benefit
after termination of your employment by the Company. You shall keep
confidential and not make any unauthorized use or disclosure, during or
subsequent to your employment by the Company of any knowledge or information of
an unpublished, or confidential or proprietary nature generated or
-5-
<PAGE>
otherwise acquired by you during the course of your employment by the Company,
relating to the business, research, or engineering activities of the Company, or
to its manufacturing processes or trade secrets, or to its sources of supply or
lists of customers, or to marketing or product plans or contemplated actions of
the Company, provided nothing herein shall be construed to prevent you from
using your general knowledge and skill after termination of this Agreement
whether acquired prior to or during your employment by the Company.
11. Restrictive Covenant. You will not engage in any capacity with a
--------------------
business that develops and markets products directly competitive with the
products developed and marketed by the Company while in the employ of the
Company. In the event you voluntarily terminate your employment or the Company
terminates your employment for cause, during the twelve months or the maximum
period permitted by applicable law (whichever is shorter) following the
termination of your employment with the Company, you hereby agree not to (i)
engage in any capacity in any business that develops and markets products
directly competitive with the products developed and marketed by the Company or
its affiliates, (ii) persuade or attempt to persuade any supplier, distributor,
manufacturer, consultant or customer of the Company or its affiliates not to do
business, or to reduce the amount of business it does, with the Company or its
affiliates, (iii) persuade or attempt to persuade any person who then is an
employee of the Company or any of its affiliates to leave the Company's or
affiliate's employ or to become employed by any person other than the Company
or the affiliate directly or indirectly. These restrictions shall not apply if
the termination of your employment by the Company is without cause. These
undertakings shall be enforceable by injunction.
12. Assignment. You shall not have the right to assign any of your rights
----------
under this Agreement (except those under the Company's fringe benefit and stock
option plans referred to herein if such plans so permit) without the prior
written consent of the Company. The Company shall have the right without your
consent to authorize the exercise of any of its rights under this Agreement by
any person, firm or corporation that directly or indirectly controls, is
controlled by, or is subject to common ownership or control with the Company or
to assign this Agreement as part of the sale of its entire business.
13. Notice. Any notice, request, demand or other communication required
------
or permitted hereunder shall be in writing and shall be deemed effective when
personally served or upon receipt if deposited in the United States mail,
postage prepaid, certified or registered return receipt requested, addressed to
the party to be notified at the address provided above or at such other address
as either party may hereafter designate by appropriate notice.
14. Entire Agreement. You agree with and acknowledge to the Company that
----------------
you are not entitled to any additional benefits not expressly set forth herein,
except as provided under the several benefit plans herein before referred to.
This Agreement contains all of the agreements, understandings, conditions,
representations, warranties and covenants made by the parties hereto relating to
the subject matter hereof and merges all prior written or oral communications
between the parties on such subject and none of such other oral or written
communications shall be binding upon either of the parties. This Agreement may
not be modified or amended except in writing executed by all parties.
-6-
<PAGE>
15. Waiver. No waiver by either party hereto of any breach of this
------
Agreement shall be deemed to be a waiver of any preceding or succeeding breach
of the same or any other provision hereof. The exercise of any right granted to
either party hereunder shall not operate as a waiver. The termination of this
Agreement or your employment shall not relieve either party of its respective
obligations accruing prior thereto, nor impair or prejudice the respective
rights of either party against the other, which rights by their nature survive
such termination, including, without limitation each party's obligations under
Sections 9(c), 10, 11, 12 and 18 hereof.
16. Enforceability. Should any provision of this Agreement or the
--------------
application thereof, to any extent, be held invalid or unenforceable, the
remainder of this Agreement and the application thereof, other than those
provisions held invalid or enforceable, shall not be affected thereby and shall
continue to be valid and enforceable to the fullest extent permitted by law or
equity.
17. Governing Law, Jurisdiction. This Agreement shall be construed and
---------------------------
interpreted pursuant to the laws of the State of Colorado applicable to
agreements made and to be performed entirely therein and the parties hereto
submit and consent to the sole jurisdiction of the courts of the State of
Colorado, including Federal Courts located therein, should Federal jurisdiction
requirements exist, in any action brought to enforce (or otherwise relating to)
this contract, provided that nothing contained in this paragraph 17 shall effect
the requirement that any dispute relating to this Agreement be submitted to
arbitration pursuant to paragraph 18 hereof.
18. Resolution of Disputes; Arbitration.
-----------------------------------
(a) In the event of a dispute between the Company and you regarding
this Agreement, the interpretation thereof or performance thereunder, counsel
for the Company and your counsel shall attempt in good faith to resolve such
dispute.
(b) In the event such dispute cannot be resolved in accordance with
paragraph 18(a), either the Company or you may submit the dispute to arbitration
in Denver, Colorado, in accordance with the Commercial Arbitration Rules then
obtaining of the American Arbitration Association (the "rules"). Each party
shall appoint an arbitrator; the two arbitrators so appointed shall select a
neutral third arbitrator from the American Arbitration Association panel as
provided in the Rules.
(c) The award of the arbitrators shall be final and binding, shall be
the sole remedy of the parties for such dispute and may be enforced by a court
of competent jurisdiction.
(d) Unless the arbitrators find that exceptional circumstances
require otherwise, the arbitrators will grant the prevailing party in
arbitration its costs of arbitration and reasonable attorneys' fees as part of
the arbitration award.
-7-
<PAGE>
If you are in agreement with the foregoing, please indicate so in the space
provided below whereupon this shall constitute the full agreement between us.
OSMOTICS CORPORATION
By:
______________________________
Agreed and accepted:
_____________________________
Francine E. Porter
Date:__________________, 1997
-8-
<PAGE>
EXHIBIT 10.04
March __, 1997
Francine E. Porter
Executive Vice President
Osmotics Corporation
1125 17th Street
Suite 2310
Denver, Colorado 80202
Dear Mrs. Porter:
This letter (this "Agreement") constitutes the terms and conditions of your
employment by Osmotics Corporation (hereinafter referred to as "Osmotics" or the
"Company).
1. Employment. Effective on the date of the closing (the "Effective
----------
Date") of the initial public offering by the Company of its securities (the
"IPO") that is currently contemplated by that certain Registration Statement on
Form SB-2 filed by the Company with the Securities and Exchange Commission on
July 19, 1996, the Company agrees to employ you in the position of Executive
Vice President of the Company and you agree to serve in that position. Your
duties shall be such as you have performed from the date of incorporation of the
Company to date and as determined from time to time by the Board of Directors of
the Company commensurate in material respects with the duties expected of an
officer with your title and position. You agree to devote your entire business
time and effort to your employment hereunder and shall have no other employment
except with the Company so long as this Agreement shall remain in effect. This
provision shall not preclude passive investments which are not competitive with
the Company's business and which do not require you to devote any time or
effort.
2. Term. This Agreement shall be effective on the Effective Date and
----
shall continue for a period of three (3) years thereafter (the "Term"), unless
your employment is terminated prior thereto pursuant to Section 9 hereof. The
Term may be extended by mutual agreement of the parties. If the Term is not so
extended and your employment has not been otherwise terminated, then your
employment may continue after the Term but will then be terminable by either
party at will, with or without cause.
3. Salary. Your annual base salary will be one hundred one hundred
------
twenty-five thousand dollars ($125,000) per annum from the Effective Date until
the first anniversary thereof. For each remaining year of this Agreement your
salary shall be not less than that in the first year or such greater amount that
the Board of Directors or any Compensation Committee formed by the Board of
Directors shall determine. Said salary will be paid periodically in accordance
with the Company's normal payroll cycle.
<PAGE>
4. Fringe Benefits. You shall be entitled to participate in all of the
---------------
employee benefit plans provided by the Company, including but not limited to the
medical and dental plans and the 401(k) Plan now in effect, on the same basis
generally made available to its other executives.
5. Executive Incentive Compensation Plan. You will be eligible to
-------------------------------------
participate in the Company's Executive Incentive Compensation Plans when and if
they exist on the same basis generally made available to its other executives.
Payment of a bonus under this plan will be based upon the achievement of
financial performance objectives by the Company as well as achievement of
individual performance objectives by you.
6. Stock Options.
-------------
(a) You will be eligible to participate in the Company's 1997 Equity
Incentive Plan (the "Plan") and any other applicable stock option or equity
incentive plans the Company may adopt.
(b) Upon the Effective Date you will be granted an incentive stock
option (the "Option") to purchase fifty thousand (50,000) shares of Common Stock
of the Company (which number of shares shall be proportionately adjusted in the
event the Company at any time after the date hereof splits, subdivides or
combines its Common Stock) during the period commencing upon the Effective Date
and ending five (5) years thereafter (the "Option Term") pursuant to the Plan
and the Stock Option Agreement in the form satisfactory to the Company. The
exercise price for these shares will be 110% of the price at which the shares of
the Company's Common Stock are initially offered for sale to the public in the
IPO. Subject to the provisions of the Plan, the Stock Option Agreement, and
Section 9 hereof, the Option will vest (as proportionately adjusted in the event
the Company at any time after the date hereof splits, subdivides or combines its
Common Stock) and become exercisable according to the following schedule:
On the Effective Date: 12,500 shares shall be purchasable.
The balance of 37,500 shares shall be purchasable at the rate of 12,500
shares on each anniversary of the Effective Date until the Option is fully
vested.
7. Expenses. The Company will reimburse you for all reasonable and
--------
necessary business, entertainment and travel expenses in accordance with its
uniformly applied Company policies.
8. Vacation. You will be entitled to up to three (3) weeks paid vacation
--------
during each calendar year, or such greater period as the Board of Directors
shall approve. Any vacation not used in one year may not be carried over to the
next year; provided, in no event shall accrued but unused vacation time exceed
three (3) weeks or such greater period as the Board of Directors shall approve.
-2-
<PAGE>
9. Termination of Employment.
-------------------------
(a) Termination By Company For Cause: For purposes hereof, "cause"
--------------------------------
shall mean any one or more of the following:
(i) A conviction of you for commission of a felony;
(ii) Commission by you of an act of theft, embezzlement, fraud,
dishonesty or a breach by you of your fiduciary duty to the
Company or its subsidiaries;
(iii) A material breach by you of a material term of this
Agreement;
(iv) A failure or refusal by you to comply in any material
respect with the reasonable policies, standards or
regulations of the Company if, after the Company has
provided you written notice of such failure or refusal,
such failure or refusal continues; and
(v) Any gross negligence or willful misconduct by you in the
performance of your duties which results in material
detriment to the Company or its subsidiaries.
The Company shall have the right to terminate your employment at any time
for cause, the determination of which shall be made in good faith by the
Company, effective upon providing you written notice of such termination. Upon
the effective date of such termination, (i) your salary, payments and benefits
under this Agreement shall terminate; (ii) the Option shall cease to vest and to
the extent the Option has not vested, it shall terminate; and (iii) you may
exercise the Option, to the extent the Option has vested, has not been exercised
and the Option Term is not exceeded, for a period of fifteen (15) days following
the date of your employment termination, and at the end of such fifteen day
period, the Option shall terminate.
(b) Termination by Company Upon Death or Disability of Employee: The
-----------------------------------------------------------
Company shall have the right to terminate your employment at any time upon your
death or disability, whether temporary or permanent, partial or total, within
the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended, as determined by the Committee (as such term is defined in the Plan),
effective upon providing you (or your legal representative in the case of your
death) written notice of such termination. Upon the effective date of such
termination, (i) the Company shall pay to you (or your legal representative in
the case of your death), at the times otherwise due to you, all the salary
otherwise due to you under Section 3 hereof during the period beginning on the
date of such termination and ending six months thereafter, but all other
payments or benefits otherwise due to you hereunder shall terminate; (ii) the
Option will be deemed to be immediately vested for the full number of shares
that would have otherwise been purchasable under the Option if it had continued
to vest pursuant to the schedule set forth in Section 6(b) during that six month
period and, to the extent the Option is not
-3-
<PAGE>
deemed to be so vested, it shall terminate; (iii) you (or your legal
representative in the case of your death) may exercise the Option, to the extent
the Option has vested, has not been exercised and the Option Term is not
exceeded, during that six month period; (iv) upon termination of that six month
period, your salary, payments and benefits under this Agreement and the Option
shall terminate.
(c) Termination By Company Without Cause: In addition to the
------------------------------------
Company's rights set forth in Sections 9(a) and 9(b) above, the Company shall
have the right to terminate your employment at any time for any reason other
than pursuant to Sections 9(a) or 9(b) above effective upon providing you
written notice of such termination. Upon the effective date of such
termination, (i) the Company shall pay to you, at the times otherwise due to
you, all the salary, payments and benefits otherwise due to you under Sections 3
and 4 hereof during the period (the "Severance Period") beginning on the date of
such termination and ending on the earlier of (A) 18 months thereafter and (B)
the end of the Term, but in no event less than 6 months immediately following
such termination; (ii) the Option will be deemed to be immediately vested for
the full number of shares that would have otherwise been purchasable under the
Option if it had continued to vest pursuant to the schedule set forth in Section
6(b) during the Severance Period and, to the extent the Option is not deemed to
be so vested, it shall terminate; (iii) you may exercise the Option, to the
extent the Option has vested, has not been exercised and the Option Term is not
exceeded, during the Severance Period; (iv) upon termination of the Severance
Period, your salary, payments and benefits under this Agreement and the Option
shall terminate.
(d) Termination By Employee: You shall have the right to terminate
-----------------------
your employment at any time for any reason effective upon providing the Company
written notice of such termination. Upon the effective date of such
termination, (i) your salary, payments and benefits under this Agreement will
terminate; (ii) the Option shall cease to vest and to the extent the Option has
not vested, it shall terminate; and (iii) you may exercise the Option, to the
extent the Option has vested, has not been exercised and the Option Term is not
exceeded, for a period of thirty (30) days following the date of such
termination, and at the end of such thirty day period, the Option shall
terminate.
10. Company Property and Confidentiality.
------------------------------------
During the course of your employment you will or may become informed as to
many of the Company's procedural, commercial and technical needs, problems,
developments and projects, as well as activities directed thereto.
In consideration of your employment being given or continued and the
compensation herein, you hereby agree, for yourself and your heirs, executors,
administrators and representative as follows:
(a) To irrevocably assign, transfer and set over to the Company, its
successors and assigns, all your rights, title and interest, including all
worldwide patents, patent applications, copyrights, mask works, trade secrets
and other intellectual property and all "Moral Rights" (as defined below), in
any and all creations, products, technologies, treatments, compounds,
formulations, devices, designs, methods, ideas, inventions, improvements, and
writings and other
-4-
<PAGE>
works of authorship, and any other subject matter which is or may become legally
protectable or recognized as a form of property (collectively, the "Company
Property"), which you, either solely or jointly with others, have conceived,
made or suggested, or may hereafter conceive, make or suggest, during the period
of your employment by Company or its successors and the six-month period next
following the termination of such employment, and which in any way relate
directly or indirectly to the Company's business, procedural, technical or
commercial needs, problems, developments or projects or to its production,
research or experimental developments and projects of every name and nature
under consideration and/or being carried on by or for Company prior to
termination of your employment or which in any way are likely to be of benefit
to the Company; provided, that such Company Property is originated, created,
developed or perfected (a) in the performance of the general duties of which you
are employed, or (b) with the use of any time, material, or facilities of the
Company, or (c) which directly relate to any products, technologies, treatments,
compounds, formulations, devices, designs, ideas, inventions, methods,
composition, process or articles of manufacture or method of doing business
within the scope of the Company's field of activity or of the same general
character during your employment. "Moral Rights" mean any rights to claim
------------
authorship of any Company Property or to restrain or object to any modification
of any Company Property, and any similar right, existing under judicial or
statutory law of any country in the world, or under any treaty, regardless of
whether or not such right is denominated or generally referred to as a "moral
right".
(b) To execute, acknowledge, make and deliver to the Company or its
attorneys without additional compensation but without expense to you, any and
all instruments, including United States and foreign patent applications,
copyright and trademark applications, of securing, protecting or registering any
rights embraced within this Agreement, powers of attorney, assignments, oaths or
affirmations, supplemental oaths and sworn statements, and to do any and all
lawful acts which in the judgment of the Company or its attorneys may be
necessary or desirable to vest in or secure for or maintain for the benefit of
the Company adequate patent and other rights in the United States and all
foreign countries with respect to any Company Property, whether published or
unpublished and whether or not the subject of statutory industrial property or
copyright protection.
(c) To disclose promptly to the Company or its attorneys, any and all
Company Property when conceived or made by you and to report promptly to the
Company all information of which you may become aware during your employment and
which may be of benefit to the Company or which may prevent or minimize loss by
the Company and of which the Company may not otherwise then have knowledge.
(d) You understand that as part of your employment, you will have
access to confidential and proprietary information respecting the Company. You
agree to keep confidential and not to disclose, during or subsequent to your
employment, any information of an unpublished, or confidential, or proprietary
nature. You further agree not to use any information of an unpublished, or
confidential, or proprietary nature which you have learned during your
employment by the Company, for any subsequent employer or for your own benefit
after termination of your employment by the Company. You shall keep
confidential and not make any unauthorized use or disclosure, during or
subsequent to your employment by the Company of any knowledge or information of
an unpublished, or confidential or proprietary nature generated or
-5-
<PAGE>
otherwise acquired by you during the course of your employment by the Company,
relating to the business, research, or engineering activities of the Company, or
to its manufacturing processes or trade secrets, or to its sources of supply or
lists of customers, or to marketing or product plans or contemplated actions of
the Company, provided nothing herein shall be construed to prevent you from
using your general knowledge and skill after termination of this Agreement
whether acquired prior to or during your employment by the Company.
11. Restrictive Covenant. You will not engage in any capacity with a
--------------------
business that develops and markets products directly competitive with the
products developed and marketed by the Company while in the employ of the
Company. In the event you voluntarily terminate your employment or the Company
terminates your employment for cause, during the twelve months or the maximum
period permitted by applicable law (whichever is shorter) following the
termination of your employment with the Company, you hereby agree not to (i)
engage in any capacity in any business that develops and markets products
directly competitive with the products developed and marketed by the Company or
its affiliates, (ii) persuade or attempt to persuade any supplier, distributor,
manufacturer, consultant or customer of the Company or its affiliates not to do
business, or to reduce the amount of business it does, with the Company or its
affiliates, (iii) persuade or attempt to persuade any person who then is an
employee of the Company or any of its affiliates to leave the Company's or
affiliate's employ or to become employed by any person other than the Company
or the affiliate directly or indirectly. These restrictions shall not apply if
the termination of your employment by the Company is without cause. These
undertakings shall be enforceable by injunction.
12. Assignment. You shall not have the right to assign any of your rights
----------
under this Agreement (except those under the Company's fringe benefit and stock
option plans referred to herein if such plans so permit) without the prior
written consent of the Company. The Company shall have the right without your
consent to authorize the exercise of any of its rights under this Agreement by
any person, firm or corporation that directly or indirectly controls, is
controlled by, or is subject to common ownership or control with the Company or
to assign this Agreement as part of the sale of its entire business.
13. Notice. Any notice, request, demand or other communication required
------
or permitted hereunder shall be in writing and shall be deemed effective when
personally served or upon receipt if deposited in the United States mail,
postage prepaid, certified or registered return receipt requested, addressed to
the party to be notified at the address provided above or at such other address
as either party may hereafter designate by appropriate notice.
14. Entire Agreement. You agree with and acknowledge to the Company that
----------------
you are not entitled to any additional benefits not expressly set forth herein,
except as provided under the several benefit plans herein before referred to.
This Agreement contains all of the agreements, understandings, conditions,
representations, warranties and covenants made by the parties hereto relating to
the subject matter hereof and merges all prior written or oral communications
between the parties on such subject and none of such other oral or written
communications shall be binding upon either of the parties. This Agreement may
not be modified or amended except in writing executed by all parties.
-6-
<PAGE>
15. Waiver. No waiver by either party hereto of any breach of this
------
Agreement shall be deemed to be a waiver of any preceding or succeeding breach
of the same or any other provision hereof. The exercise of any right granted to
either party hereunder shall not operate as a waiver. The termination of this
Agreement or your employment shall not relieve either party of its respective
obligations accruing prior thereto, nor impair or prejudice the respective
rights of either party against the other, which rights by their nature survive
such termination, including, without limitation each party's obligations under
Sections 9(c), 10, 11, 12 and 18 hereof.
16. Enforceability. Should any provision of this Agreement or the
--------------
application thereof, to any extent, be held invalid or unenforceable, the
remainder of this Agreement and the application thereof, other than those
provisions held invalid or enforceable, shall not be affected thereby and shall
continue to be valid and enforceable to the fullest extent permitted by law or
equity.
17. Governing Law, Jurisdiction. This Agreement shall be construed and
---------------------------
interpreted pursuant to the laws of the State of Colorado applicable to
agreements made and to be performed entirely therein and the parties hereto
submit and consent to the sole jurisdiction of the courts of the State of
Colorado, including Federal Courts located therein, should Federal jurisdiction
requirements exist, in any action brought to enforce (or otherwise relating to)
this contract, provided that nothing contained in this paragraph 17 shall effect
the requirement that any dispute relating to this Agreement be submitted to
arbitration pursuant to paragraph 18 hereof.
18. Resolution of Disputes; Arbitration.
-----------------------------------
(a) In the event of a dispute between the Company and you regarding
this Agreement, the interpretation thereof or performance thereunder, counsel
for the Company and your counsel shall attempt in good faith to resolve such
dispute.
(b) In the event such dispute cannot be resolved in accordance with
paragraph 18(a), either the Company or you may submit the dispute to arbitration
in Denver, Colorado, in accordance with the Commercial Arbitration Rules then
obtaining of the American Arbitration Association (the "rules"). Each party
shall appoint an arbitrator; the two arbitrators so appointed shall select a
neutral third arbitrator from the American Arbitration Association panel as
provided in the Rules.
(c) The award of the arbitrators shall be final and binding, shall be
the sole remedy of the parties for such dispute and may be enforced by a court
of competent jurisdiction.
(d) Unless the arbitrators find that exceptional circumstances
require otherwise, the arbitrators will grant the prevailing party in
arbitration its costs of arbitration and reasonable attorneys' fees as part of
the arbitration award.
-7-
<PAGE>
If you are in agreement with the foregoing, please indicate so in the space
provided below whereupon this shall constitute the full agreement between us.
OSMOTICS CORPORATION
By:
------------------------------------
Agreed and accepted:
- -----------------------------
Francine E. Porter
Date:__________________, 1997
-8-
<PAGE>
EXHIBIT 10.10
ASSIGNMENT
WHEREAS, WE, Steven Scott Porter and Francine Edmund Porter (herein called
"ASSIGNORS"), of 1860 Blake Street, #610, Denver, Colorado 80202, respectively,
are the co-inventors of the invention "SKIN CARE COMPOSITIONS AND METHODS," for
which we have executed an application for a Patent of the United States, filed
March 31, 1995, Serial No. Unassigned;
WHEREAS, OSMOTICS CORPORATION (herein called "ASSIGNEE"), a corporation
organized and existing under the laws of the State of Colorado, having a
principal place of business at 1860 Blake Street, #610, Denver, Colorado 80202
is desirous of obtaining our entire right, title and interest in, to and under
the said invention and the said application;
NOW, THEREFORE, in consideration of the sum of One Dollar ($1.00) to us in
hand paid, and other good and valuable consideration the receipt of which is
hereby acknowledged, we, the said ASSIGNORS, have sold, assigned, transferred
and set over, and by these presents do hereby sell, assign, transfer and set
over, unto the said ASSIGNEE, its successors, legal representatives and assigns,
our entire right, title and interest in, to and under the said invention, and
the said United States Application and all divisions, renewals and continuations
thereof, and all Patents of the United States which may be granted thereon and
all reissues and extensions thereof; and all applications for industrial
property protection, including, without limitation, all applications for
patents, utility models, and designs which may hereafter be filed for said
invention in any country or countries foreign to the United States, together
with the right to file such applications and the right to claim for the same the
priority of the United States, under The International Union for the Protection
of Industrial Property, or any other international agreement or the domestic
laws of the country in which any such application is filed, as may be
applicable; and all forms of industrial property protection, including, without
limitation, patents, utility models, inventors' certificates and designs which
may be granted for said invention in any country or countries foreign to the
United States and all extensions, renewals and reissues thereof;
AND WE HEREBY authorize and request the Commissioner of Patents and
Trademarks of the United States, and any official of any country or countries
foreign to the United States whose duty it is to issue patents or other evidence
or forms of industrial property protection on applications as aforesaid, to
issue the same to the said ASSIGNEE, its successors, legal representatives and
assigns, in accordance with the terms of this instrument;
AND WE HEREBY covenant and agree that we have full right to convey the
entire interest herein assigned, and that we have not executed, and will not
execute, any agreement in conflict herewith;
AND WE HEREBY further covenant and agree that we will communicate to the
said ASSIGNEE, its successors, legal representatives and assigns, any facts
known to us respecting said invention, and testify in any legal proceeding, sign
all lawful papers, execute all divisional, continuing, reissue and foreign
applications, make all rightful oaths, and generally do everything
<PAGE>
possible to aid the said ASSIGNEE, its successors, legal representatives and
assigns, to obtain and enforce proper protection for said invention in all
countries.
IN TESTIMONY WHEREOF, we hereunto set our hands and seals the day and year
set opposite our signatures.
Date: 4/17/95 /s/
--------------------------- ---------------------------
Steven Scott Porter
STATE OF COLORADO )
) ss.
COUNTY OF )
BEFORE ME, the undersigned authority, on this 17th day of April, 1995,
---- -----
personally appeared Steven Scott Porter, known to me to be the person whose name
is subscribed to the foregoing instrument and who acknowledged to me that he
executed the same of his own free will for the purposes and consideration
therein expressed.
/s/
---------------------------
NOTARY
(SEAL)
My commission expires: 11-9-95
Date: 4/17/95 /s/
--------------------------- ---------------------------
Francine Edmund Porter
STATE OF COLORADO )
) ss.
COUNTY OF )
BEFORE ME, the undersigned authority, on this 17th day of April, 1995,
---- -----
personally appeared Francine Edmund Porter, known to me to be the person whose
name is subscribed to the foregoing instrument and who acknowledged to me that
he executed the same of his own free will for the purposes and consideration
therein expressed.
/s/
---------------------------
NOTARY
(SEAL)
My commission expires: 11-1-95
2
<PAGE>
EXHIBIT 10.11
INFOMERCIAL PRODUCTION
AND
PRODUCT MANAGEMENT AGREEMENT
This Production/Management Agreement ("Agreement") is dated as of March 5, 1996
and is made by and among VIDEONE MARKETING, INC., a Colorado corporation whose
principal place of business is located at 96 Inverness Drive East, Suite A,
Englewood, CO 80112 ("VIDEONE"), on the one hand and Osmotics Corp., a Colorado
corporation whose principal place of business is located at 1860 Blake Street,
Suite 610, Denver, CO 80202 ("CLIENT"), on the other hand.
NOW, THEREFORE, in consideration of the mutual promises and undertakings set
forth herein and intending to be legally bound hereby, the parties agree as
follows:
Whereas, CLIENT is desirous of having a project, titled "WRINKLE PATCH
INFOMERCIAL" (1 (one) long form (28:30) and 3 (three) short form (120, 60, 30
second) direct response commercials) herein after referred to as ("PROJECT"),
created and produced, and is willing to make certain financial commitments to
see that such a project is produced, in as expedient a manner as possible, based
upon the attached estimated timetable in Addendum A to be superseded by
Addendum E upon its construction. Addendum E will present a formal budget which
will supersede Addendum C as it will qualify the actual costs involved with the
production of the PROJECT. Payment schedule for PART A will be adjusted
accordingly. This agreement and its addenda may be amended from time to time in
writing by mutual agreement of the parties.
The parties agree as follows:
For, and in consideration of the sum of $83,778.00, profit participation in the
amount of [ * ] "ADJUSTED GROSS PROFITS" from Direct Response as defined herein,
[ * ] of Gross Sales from the project including reorders from clients gained
from the project as management fees, and $15,120.00 Setup Fees; as described in
Addendum B, which will be due and payable as described therein, VIDEONE agrees
to immediately set forth producing the aforementioned PROJECT upon receipt of
the retainer described below.
PART A: INFOMERCIAL PRODUCTION
1. PRODUCTION
1.1 VIDEONE undertakes to produce the PROJECT and to perform the services
set out in this agreement, including without limitation the services and
responsibilities set out in Addendum E upon its construction. It is understood
that all the costs related to VIDEONE'S production of, the PROJECT including
management setup fees set out herein Addendum D and designated CLIENT costs
above are costs which CLIENT has agreed to pay pursuant to this Agreement.
1.2 VIDEONE warrants that the PROJECT shall be of the same high quality and
standards as the other video products produced by VIDEONE and are of a quality
and standard acceptable in the industry and suitable for broadcast, examples of
which have been reviewed by CLIENT and/or its agents. Both parties agree that
the PROJECT will be shot on Betacam SP tape.
1.3 VIDEONE further agrees that CLIENT shall have the opportunity, during the
production of the PROJECT, to be active in its production and to make
recommendations, suggestions, etc. to VIDEONE, including input into the
[ * ] CONFIDENTIAL TREATMENT REQUESTED
1
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script. CLIENT shall have the right to approve the final script. CLIENT will be
involved with the construction of Addendum E which will contain the final
schedule and budget. CLIENT understands that once Addendum E is approved,
changes to the script may cause changes to the budget and schedule. If such
changes occur due to CLIENT's request or fault, CLIENT shall be responsible for
the increased costs of production. If such changes occur due to any reason other
than CLIENT's fault, then CLIENT and VIDEONE shall negotiate in good faith as
expeditiously as possible regarding an allowance for such costs. VIDEONE agrees
to submit a sample of voice, talent, script and/or outline for CLIENT approval.
1.4 CLIENT is welcome to attend any editing sessions at their own expense. If
they elect not to attend, they will be provided with one (1) proof copy of the
rough and final edits at their request. CLIENT shall give written approval of
the final off-line (rough cut) before VIDEONE will proceed with on-line edit.
VIDEONE will not be held responsible for delays in the production schedule if
written response takes more than 48 hours from presentation of the rough cut.
Any CLIENT Requested changes to the final broadcast master (one-line edit) after
CLIENT's written approval of final off-line (rough cut) resulting in additional
costs shall be the responsibility of CLIENT over and above the production
contract. VIDEONE agrees to obtain and furnish copies upon request to CLIENT
all releases for music, artwork, stock footage, stock photography, on-camera
talent, models and any other copyrighted materials supplied by VIDEONE.
2. DELIVERY OF PROJECT
2.1 Completion shall be defined as the time at which VIDEONE presents
CLIENT the PROJECT in its final and finished form suitable for broadcast but
prior to price testing and insertion of 800 numbers.
3. PAYMENT PART A
3.1 CLIENT agrees to pay VIDEONE the total sum of $83,778.00 (See
Addendum C). It is expressly understood that the above budget includes only Part
A: Informercial Production. It is further understood that the budget for Part B:
Management will be per Addendum D. Actual budget and talent costs will be
itemized on Addendum E to be constructed after an approved script is delivered.
Monies shall be payable as follows:
(a) - $37,500 immediately upon the signing of this agreement.
(b) - $17,500 immediately upon approval of Addendum E as described above.
(c) - $17,500 immediately upon approval of Off-line Edit.
(d) - Balance upon delivery of project as described above.
3.2 VIDEONE agrees to utilize the funds hereunder to pay third party vendors on
a timely basis if the funds are designated for such purpose.
3.3 VIDEONE agrees to pay its share of the production costs on a timely basis
as set out in this Agreement including without limitation, its share of the
costs set out in Addendum E upon its construction. At no time shall VIDEONE
allow any liens or other claims to be placed on or against the PROJECT or CLIENT
as a result of VIDEONE's failure to make timely payments of its share of costs
and the PROJECT shall be delivered to CLIENT free and clear of any and all claim
and liens.
2
<PAGE>
4. OTHER CONSIDERATIONS
4.1 CLIENT agrees to provide assistance to VIDEONE in the production of
the program by designating a single agent or representative to work with the
company on the production of the product. This person shall be charged by the
CLIENT with using their best efforts to gain access for VIDEONE to written
materials, taped audio and/or video materials, computer-generated graphics,
models and animation, locations, personnel, etc., which may or may not be used
in the final PROJECT, which will enhance the quality of the PROJECT.
4.2 Release of this material may be subject to copyright agreements and may
require additional fees on the part of VIDEONE for their use. CLIENT agrees to
inform and provide funds for any material which is subject to additional fees at
the time of providing same.
4.3 CLIENT agrees to supply the Product(s) that are the subject of the Show in
such quantities and in accordance with such delivery schedules as VIDEONE may
require from time to time during the Term.
5. COPYRIGHT AND OWNERSHIP
5.1 The parties agree that the PROJECT is being undertaken by VIDEONE as a
Work For Hire project and that the PROJECT in its finished and final form,
together with the script, music, titles, graphics and interest in the copyrights
shall be the sole and exclusive property of CLIENT. To the extent that VIDEONE
may have any proprietary or intellectual interest in the PROJECT as a result of
the services contemplated in this Agreement, VIDEONE hereby assigns such right
to CLIENT. CLIENT expressly understands that a "VideOne Marketing, Inc." credit
will appear in all finished versions of the Show(s).
5.2 Any footage PROVIDED by CLIENT is the sole property of CLIENT and is only
made available to VIDEONE for use in the project, except for demonstration
purposes. This footage cannot be sold or reproduced in any other form without
the express consent of and compensation to CLIENT.
5.3 The field tapes will not leave the possession of VIDEONE, however, CLIENT
shall be permitted to request dubs of such tapes on 2 weeks notice for any use
that is not in conflict with the terms of this Agreement. In the event VIDEONE
has provided footage for use in the PROJECT (i.e. footage that has not been paid
for whether by CLIENT or VIDEONE as part of their Obligations pursuant to this
Agreement), VIDEONE hereby grants CLIENT the non-exclusive right to use any or
all of the video footage provided by VIDEONE and dubbed for CLIENT for any non-
commercial purpose CLIENT might deem desirable. Any Commercial, Private
Agencies or Companies that wish to use the VIDEONE footage for broadcast or
other than specified purposes will be able to at reasonable and standard rates
to cover additional releases from models, music or other copyrighted materials.
At the time of the request, VIDEONE will negotiate such fees. All contracts
will be made directly to VIDEONE from CLIENT or its agents.
5.4 VIDEONE shall not insert any footage into the PROJECT that is the subject
of Section 5.3 without CLIENT's prior written consent.
PART B: MANAGEMENT AGREEMENT
1. TERM
1.1 INITIAL TERM. This Agreement shall remain in full force and effect for a
term commencing on the date first herein above mentioned and ending one (1)
year(s) from such date (the "Initial Term").
3
<PAGE>
1.2 RENEWAL TERM. Upon expiration of the Initial Term or any Renewal Term, as
the case may be, this Agreement shall continue for four (4) successive annual
periods of one (1) year(s) except in regard to the exclusivity provisions in
PART B paragraph 6 hereof which shall be renewable for successive annual periods
provided the conditions set out therein are met (the "Renewal Term") unless
terminated pursuant to Section 2 below. Upon renewal, this Agreement shall
remain in full force and effect during each such Renewal Term.
1.3 TERM. The Initial Term and each Renewal Term(s) are referred to herein as
(the "Term").
2. TERMINATION
2.1 Without regard to the Term set forth in Section I hereof, either party
may terminate this Agreement in whole or in any portion hereof upon forty-five
(45) days written notice thereof to the other party upon the breach by the other
party of any of its representations, warranties, covenants or agreements
contained in this Agreement. Upon the expiration of such notice period, this
Agreement shall terminate (in whole or in part, as the case may be) without the
need for further action by either party; provided, however, that if the breach
upon which such notice of termination is based shall have been fully cured to
the reasonable satisfaction of the non-breaching party within such forty-five
(45) day period, then such notice of termination shall be deemed rescinded, and
this Agreement shall be deemed reinstated and in full force and effect.
2.2 In the event there is no breach, neither party may terminate the Agreement
except pursuant to the notice and conditions set out in this paragraph 2.
Either party upon sixty (60) days' prior written notice may terminate the
Agreement at the end of any Renewal Term as set out in paragraph 1.2 above, if
the Show does not have thirty (30) verified airings or does not generate in the
aggregate $20,000.00 in revenue in the first two (2) years of the Initial Term
and first Renewal Term. Upon such termination VIDEONE shall cease all further
activities regarding the project.
2.3 In the event CLIENT defaults under this Agreement in regard to payment of
its designated share of the costs of the PROJECT, VIDEONE shall have the right
to nevertheless air the Show, subject to the quality controls and other
obligations set out herein, at its expense, and to recoup its costs before any
such production costs are repaid to CLIENT. In such event CLIENT will use its
best efforts to supply VIDEONE with the Products that are the subject of the
Show on no less favorable terms in regard to cost and payment terms as
previously provided VIDEONE or as provided to any third party.
2.4 In the event the Show is prevented from being broadcast as a result of a
ruling by a regulatory body, the parties shall mutually determine as to whether
the Show can be modified at an acceptable additional cost so as to conform to
such regulations. In the event the parties agree to modify the Show, such
additional costs shall be borne in the same ratio as the production costs are
allocated in this Agreement. If one party wishes to pay for such modification
and the other does not, the party paying for such modification shall recover its
costs related to the modification on a preferred basis before recovery of
regular production costs by the non-paying party.
2.5 Upon termination of this Agreement, unless said termination is the result
of VIDEONE's breach, VIDEONE shall have and retain indefinitely the right to its
financial interest for Products that were placed prior to the effective date of
termination, together with the right to its financial interest for all reorders
and/or continuity programs from prior customers, subject to CLIENT's payment of
VIDEONE's share of proceeds as set forth in Addendum B hereof.
3. PRODUCT. The Product is titled "WRINKLE PATCH" (the "Product") and shall
be deemed to include all updates and revisions, but shall not include similar
products that have been distributed under a different name as
4
<PAGE>
of the effective date of this contract (i.e. Osmotics and/or Spa Sante). VIDEONE
shall have first right of refusal for Direct Response Marketing of all future
products related to the WRINKLE PATCH brand (i.e. full face patches, etc.).
4. RESPONSIBILITIES. Addendum F hereof details the mutual responsibilities of
the parties to this Agreement and their responsibilities for each item necessary
to prepare the Product and to prepare the approximately thirty (30) minute
commercial and all versions thereof, including all shortened spot or other
versions of same (the "Show"), to air the Show and thereafter, to receive,
process and fulfill orders for Product sales. The necessary outsourcing
(telemarketing, fulfillment, etc.) and the Costs associated with that
outsourcing, (minimums, set-up fees, and ongoing expense), will be solely the
responsibility of CLIENT.
5. AIRING OF THE SHOW. VIDEONE shall use its best efforts to acquire, at
CLIENT's expense, broadcast and cable time to air the Show in the most suitable
and desirable time slots. VIDEONE shall consult on a regular basis with CLIENT
regarding the slotting of the Show prior to acquiring such time and shall take
CLIENT's opinions under due consideration in the slotting of the show. In the
event the parties disagree regarding the placement of the Show, they shall
endeavor, in good faith to reach a mutually agreeable broadcast plan.
6. EXCLUSIVITY
6.1 VIDEONE shall the sole and exclusive worldwide (the "Territory") (except for
such territory and for such Term as defined below in section 6.5 as Excluded
Territory), right during the Term to manage the Direct Response marketing and
air the Show.
6.2 VIDEONE shall have the sole and exclusive right in the territory, upon the
terms set out below in paragraph 6.3, to distribute the Products in the
following Direct Response media (a) all forms of Direct Response Television
including 800/900/888 (and similar) telephone numbers; (b) Direct Response Print
media; (c) Outbound telemarketing; (d) Direct Response Package inserts; (e)
Catalogs (See Addendum H); (f) Direct Response Radio; (g) Televised shopping
(see Addendum H); (h) Credit card syndication; (i) Direct mail; (j) Seminars;
and (k) Internet websites.
6.3 (a) The parties shall begin to negotiate in good faith, as expeditiously
as possible but in any event within one hundred eighty (180) days hereafter,
regarding a mutual marketing plan for each of the Direct Response media
categories set out in paragraph 6.2 above which marketing plan shall include
among other things, target dates and schedules for each category; sales
objectives; performance standards that CLIENT and VIDEONE must meet for such
categories; cost allocations between the parties regarding marketing in such
categories and other terms and conditions standard in the industry for each such
category. In the event that the parties are not able to reach agreement on a
mutual marketing plan within sixty (60) days after commencing such good faith
negotiations, then at the request of either party, each party shall submit its
proposed mutual marketing plan to binding arbitration with the Judicial Arbiter
Group, Inc. or, if not available, a mutually acceptable private judicial service
in Denver, Colorado to select within thirty (30) days after commencing
arbitration one of the proposed plans from either CLIENT or VIDEONE on the basis
of commercial reasonableness and industry standards for such Direct Response
media categories. Notwithstanding the foregoing, CLIENT shall have the
exclusive right, in its sole discretion, to determine whether the Products may
be marketed in any of the categories set out above in paragraph 6.2. In the
event CLIENT decides not to market in a category it shall not be permitted
thereafter during the Term of this Agreement to market in such category except
pursuant to the terms of this Agreement.
5
<PAGE>
6.3 (b) Any such time as either party decides that it wishes to market the
Products in one of the categories set out in paragraph 6.2 pursuant to the
mutual marketing plan therefor, it shall so inform the other party in writing of
its desire to do so. The parties shall negotiate in good faith a separate
definitive mutual marketing agreement consistent with the mutual marketing plan
regarding the marketing of the Products in such category containing any
additional specific terms regarding allocation of costs and other terms standard
and common to the industry as may be required. In the event that the parties
are not able to reach agreement within sixty (60) days thereafter, after good
faith negotiations, either party then desiring to market the Products in such
Direct Response media category may submit its proposed mutual marketing
agreement to binding arbitration with the Judicial Arbiter Group, Inc. or, if
not available, a mutually acceptable private judicial service in Denver,
Colorado which shall enforce or reject such agreement within thirty (30) days
after commencing arbitration on the basis of whether it is within the mutual
marketing plan and commercially reasonable. CLIENT shall be free to seek an
agreement with another marketing partner in any Direct Response media category,
provided such agreement is consistent with the mutual marketing plan and further
provided, prior to execution of any such other marketing agreement by CLIENT,
CLIENT shall inform VIDEONE of the terms therein and VIDEONE shall have thirty
(30) days thereafter within which to exercise a right of first refusal to match
the terms therein. In the event VIDEONE indicates that it does not wish to
undertake the marketing of the Products in such category, CLIENT shall be free
to pursue such other marketing arrangement regarding that the Direct Response
media category and VIDEONE will be considered to have waived and relinquished
its exclusivity regarding such category.
6.4 Retail Sales. It is understood by VIDEONE that CLIENT currently sells and
will in the future sell the PRODUCT through retail and other marketing channels.
It is understood by CLIENT that the Infomercial and/or spots will drive retail
sales. CLIENT agrees to compensate VIDEONE for all retail sales inside the
United States not covered by the exclusivity provisions of this agreement
(below 6.5) in the following manner:
(a) The compensation referred to in this Section 6.4 shall begin after
the Show has 30 verified airings in the United States.
(b) The compensation shall cease at the point in time when the number
of PRODUCT units sold through retail channels equals [ * ] times
the aggregate number of such units sold through Direct Response
Broadcast of the SHOW.
(c) The compensation shall be [ * ] of the Gross Revenue received by
CLIENT from retail sales.
6.5 Excluded Territory.
(a) VIDEONE acknowledges that CLIENT is already in the process of
selling the WRINKLE PATCH, including without limitation in and all
of the following :
(i) Quality Value Channel/AKA QVC's-Q2 Network
(ii) Self-Care Catalogue
(b) CLIENT shall provide current historical data on sales of the
WRINKLE PATCH in these areas within thirty (30) days after the
first airing of the infomercial or spots. VIDEONE shall be paid
the following compensation for sales generated in those areas in
the following manner.
(i) The compensation shall be of the Gross revenue
received by CLIENT over and above the average monthly
historical revenue received in the twelve months preceding
the start date referred to in Section 6.4(a).
6.6 Notwithstanding the Term set out in Part B, paragraph 1, regarding this
Agreement generally, the term of Exclusivity provisions of the paragraph 6 shall
be as follows:
[ * ] CONFIDENTIAL TREATMENT REQUESTED
6
<PAGE>
(a) Initial Term. The Exclusivity provisions shall remain in full force and
effect for a term commencing on the date of execution of this Agreement
(except for the Retail Sales Start Date as set out on paragraph 6.4(a)
and shall continue for one (1) year from such date.
(b) Renewal Term. Upon expiration of the Initial Term, this Agreement shall
continue for two (2) successive annual periods (the "Renewal Term")
unless terminated earlier pursuant to the terms of this Agreement and
provided VIDEONE meets the performance standards that shall be mutually
agreed to by the parties.
(c) The non-renewal of the Exclusivity provisions herein, unless for breach,
shall not effect the compensation due on retail sales to VIDEONE set out
in paragraph 6.4(a) hereof.
7. PAYMENTS PART B. The compensation due the parties under PART B of this
Agreement shall be as set forth in Addendum B hereof.
8. CUSTOMER NAMES AND INFORMATION. CLIENT shall maintain sole and exclusive
ownership of all information related to customer names and associated data
hereinafter "Customer List." Customer List rental rights shall be the sole and
exclusive right of CLIENT.
9. REPRESENTATIONS/INDEMNITIES
9.1 CLIENT represents that it is the sole and exclusive owner of the Product and
that it has reviewed the Product with adequate legal counsel which counsel has
opinioned that the Product meets all governmental and NIMA standards, all
information respecting the Product is accurate in all material respects, it has
the right to use (including the right to grant VIDEONE the right to use) the
names, likenesses (including, without limitation, photographs, illustrations,
films and videotapes), endorsements, and testimonials of all endorsers and other
persons which may appear in the Show and Product, it has the right to use
(including the right to grant VIDEONE the right to use) any and all trade names,
trademarks, patents, and copyrights associated with the Product, and that it has
no knowledge of any fact or information (including, without limitation, any
agreement with any third party governing any subject matter whatsoever in
connection with the Show and/or Product) which if disclosed to VIDEONE, would
affect VIDEONE's decision to sign this Agreement. CLIENT agrees to indemnify
VIDEONE for any and all costs or liabilities VIDEONE incurs (including
reasonable legal fees) in connection with the Show and Product. CLIENT expressly
acknowledges that VIDEONE has entered into this Agreement in express reliance on
the representations, warranties and covenants made by CLIENT with respect to the
Products. CLIENT further expressly acknowledges that by executing this Agreement
and performing its services hereunder, VIDEONE makes no certification regarding
the effectiveness, quality, character or fitness of any of the Products.
9.2 CLIENT makes no certification regarding the effectiveness of the Product
and VIDEONE is relying solely upon CLIENT's legal review regarding all
representations in the SHOW. VIDEONE agrees to make no representations in the
show or orally or in writing to any party regarding the Product without prior
written approval from CLIENT regarding such representations.
9.3 VIDEONE represents and warrants to CLIENT that it has the authority to
enter into this Agreement and that there is not now any agreement to provide
services which would prevent it from fulfilling its obligations hereunder, and
that during the term of this Agreement, VIDEONE will not enter into an agreement
which would in any way restrict its ability to provide services under this
Agreement.
9.4 VIDEONE and CLIENT agree to mutually defend, indemnify and hold harmless
each other from and against and in respect of any and all losses, damages,
costs, expenses (including reasonable attorneys' fees), of
7
<PAGE>
deficiencies which are incurred or suffered by, asserted against, or imposed
upon CLIENT to the extent such losses, damages, costs, expenses of deficiencies
shall be attributable to and result from a material breach by VIDEONE or CLIENT
of this Agreement or as a result of its unauthorized representations regarding
the Product.
10. TAXES. Each party shall be responsible for all taxes which are based on
its own net income. All sales, value added, and use taxes arising out of
transactions occurring under this Agreement shall be the responsibility of the
party conducting such transaction and each party hereby indemnifies and holds
the other harmless from any and all claims relating to sales or use taxes
collected or due by the party conducting each of the transactions hereof.
11. REPORTING/AUDITING. At any time within one (1) year after a monthly
payment is made hereunder, each party shall have the right (but not more than
once a quarter) to examine the other party's books and records for the purpose
of determining the accuracy of such statement. Such examination shall be
conducted (i) after each party provides at least ten (10) days prior written
notice of its election to examine books and records, (ii) during the other
party's normal business hours at the place where the party maintains its books
and records, and (iii) at the examining party's sole cost and expense. If it is
mutually determined by CLIENT and VIDEONE that CLIENT has under-paid VIDEONE by
an amount exceeding seven and one-half percent (7-1/2%) of all royalties then
earned by VIDEONE, then CLIENT shall pay the reasonable costs of such
examination (which reasonable cost will not include travel, living and other
personal expenses of examiner). Any determination that CLIENT has under-paid
VIDEONE shall not be deemed a breach of this Agreement unless CLIENT fails to
pay the agreed-upon shortfall within the prescribed time period.
12. INDEPENDENT CONTRACTOR. Neither party nor any of its officers, employees,
agents or representatives is an employee or agent of the other party for any
purpose whatsoever. Rather, each party is and shall at all times remain an
independent contractor. Each party shall have sole control of the manner and
means of performing its obligations under this Agreement. Except as otherwise
specifically provided herein, each party shall be responsible for expenses and
disbursements which it incurs in connection with this Agreement. Neither party
has, nor shall it hold itself out as having, any right, power or authority to
create any contract or obligation either express or implied, on behalf of, in
the name of, or binding upon the other party, unless specifically provided
herein or the other party shall consent thereto in writing. Each party shall
have the right to appoint and shall be solely responsible for its own sales
people, employees, agents and representatives, who shall be at such party's own
risk expense and supervision and shall not have any claim against the other
party for compensation or reimbursement.
13. TRADEMARKS/COPYRIGHTS. The parties hereto acknowledge that Client has
secured and shall maintain sole ownership of the trademark, copyright, and
patent(s) now existing or hereafter acquired in and to the Product.
14. INSURANCE. Prior to any airing or Direct Response offer, Client shall be
required to maintain comprehensive and general liability insurance, including
products and professional liability insurance, customarily maintained by
manufacturers similarly situated with a policy limit of not less than one
million dollars ($1,000,000.00) per occurrence and one million dollars
($1,000,000.00) in the aggregate. The parties agree that (i) the deductible on
any insurance policy acquired hereunder shall not exceed ten thousand dollars
($10,000.00), (ii) both parties shall be named as an additional insured on the
applicable insurance policies, (iii) the insurance policies shall be endorsed to
provide no less than ten (10) days notice if any insurance benefit decreases,
(iv) the insurance policies shall be in effect no later than ten (10) days prior
to the initial Product test marketing date (as determined by VIDEONE) and (v)
all insurance shall have no less than an "A" rating (or equivalent thereof) in
the
8
<PAGE>
Best Guide.
15. MISCELLANEOUS.
A. Headings: Headings are used for convenience and are not to be
interpreted as part of this Agreement.
B. Governing Law: This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Colorado. In the event of
any dispute under or relating to the terms of this Agreement or any
breach thereof, the same shall be settled by any court in the county of
Arapahoe having competent jurisdiction, and judgment upon any award
rendered may be entered in any court in the county of Denver having
jurisdiction thereof.
C. Severability: In the event any provision of this Agreement is held
to be unenforceable or contrary to law then the Agreement shall be
interpreted, to the extent possible, without such provision.
D. Notice: Any notice required by or provided pursuant to this
Agreement shall be given in writing by means of registered mail via the
U.S. Postal Service or any professional delivery service that requires
a signed, written receipt confirming delivery of the envelope or
package containing the notice. The notice shall be addressed to the
person signing this Agreement at the address, or such other address as
shall be provided by notice.
E. Further Action: The parties agree to execute such additional
documents and to perform all such other further acts as may be
necessary or desirable to carry out the purposes and intents of this
Agreement.
F. No Amendment: No amendment, modification, change or waiver of this
Agreement or any provision hereof shall be valid, unless in writing and
signed by all of the parties hereto.
G. No Waiver: No waiver by any party hereto of any breach of this
Agreement or any of its provisions shall be deemed to constitute a
waiver of any preceding or succeeding breach of the same or any other
provision hereof.
H. Entire Agreement: This Agreement constitutes the entire
understanding and agreements of the parties with respect to its subject
matter and any and all prior and contemporaneous agreements,
representations with respect to its subject matter are hereby
terminated and canceled in their entirety and are of no further force
and effect. This Agreement may be executed in one or more counter
parts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
I. Binding Terms: All of the terms and provisions contained herein
shall inure to the benefit of and shall be binding upon the parties
hereto and their respective heirs, legal representatives, successors,
and permitted assigns.
J. Approvals: Any request for approval required hereunder shall be
submitted to CLIENT. If CLIENT does not respond in writing or by
telephone with approval or disapproval within two (2) business days
from the date of CLIENT's receipt of VIDEONE's request therefore, then
CLIENT shall be deemed to have disapproved such request and VIDEONE
will be permitted
9
<PAGE>
to modify any previously agreed to schedules under this contract and
its addendum's to take into account the delay. Any approvals requested
hereunder shall not be unreasonably withheld by CLIENT.
K. Counterparts: This Agreement be executed in one or more
counterparts, each of which shall be deemed to be an original, and all
of which together shall constitute one and the same Agreement. This
Agreement may be executed and delivered via electronic facsimile
transmission with the same force and effect as if it were executed and
delivered by the parties simultaneously in the presence of one another.
L. Interpretation and Construction: This Agreement has been fully and
freely negotiated by all of the parties hereto, shall be considered as
having been drafted jointly by all of the parties hereto and shall not
be interpreted or construed against VIDEONE on account of its
participation in the drafting hereof or otherwise.
/s/ RICHARD M. BATENBURG, JR.
- -----------------------------------------------
VideOne Marketing, Inc., a Colorado Corporation
96 Inverness Drive East, Suite A
Englewood, CO 80112
BY: Richard M. Batenburg, Jr.
President & CEO
/s/ SUZANNE J. PORTER
- -----------------------------------------------
Osmotics Corp., a Colorado Corporation
1860 Blake Street, Suite 610
Denver, CO 80202
BY: Suzanne J. Porter
V.P. Operations
10
<PAGE>
ADDENDUM A
WEEK #1 PRODUCTION
WRITER/RESEARCH
SET DESIGN FOR BEFORE PICTURES
CASTING MODELS
CONCEPT MEETINGS
STILL PHOTOGRAPHER
ADMINISTRATION
BANKING/CREDIT CARDS
FULFILLMENT
LEGAL
WEEK #2 PRODUCTION
SHOOT BEFORE PICTURES
WRITER/RESEARCH/SCRIPT OUTLINE
SET DESIGN FOR SHOOT
TRAVEL ARRANGEMENTS
HOST CASTING
BUDGETING
ADMINISTRATION
BANKING
FULFILLMENT
LEGAL
TELEMARKETING
WEEK #3 PRODUCTION
SCRIPT DRAFT
HOST CASTING
ANIMATION
LOGO DESIGN
SCHEDULING
SHOOT TESTIMONIALS
SET BUILDING
ADMINISTRATION
TELEMARKETING/SCRIPTS
OFFER/UP SELL/GIVE AWAY/CONTINUITY PLAN
ACCOUNTING SET UP
MEDIA PLANS
Page 1
<PAGE>
ADDENDUM A
WEEK #4 PRODUCTION
SCRIPT FINAL
CREATE ADDENDUM E
SCHEDULING/FINAL
BUDGET/FINAL
ANIMATION
SHOOT FACTORY/INVENTOR
PROPS AND ARTWORK
SET BUILDING
ADMINISTRATION
MEDIA APPROVAL
WEEK #5 PRODUCTION
SHOOT AFTERS
SCRIPT REWRITE
SCHEDULING/DECISION
TITLE DESIGN
SHOOT PRODUCT
LOCATION FINAL
ADMINISTRATION
MEDIA APPROVAL
PRESS RELEASE
FINAL TELEMARKETING AND FULFILLMENT
SHIP INVENTORY
WEEK #6 PRODUCTION
SHOOT SHOW
RECORD SCRATCH VO
LOG TAPES
TITLE DESIGN
ADMINISTRATION
PROJECT ACCOUNTING
WEEK #7 PRODUCTION
EDIT 2 MINUTE SPOT
OFF LINE SHOW
EFFECTS DESIGN
800 NUMBERS FOR 2 MINUTE
SHIP BROADCAST DUBS
Page 2
<PAGE>
ADDEMDUM A
ADMINISTRATION
MANAGE TWO MINUTE MEDIA
MANAGE TELEMARKETING
MARKET TEST SPOT
OUTBOUND TELE-RESEARCH FOR TWO MINUTE SPOT
WEEK #8 PRODUCTION
RE-EDIT 2 MINUTE SPOT
OFF LINE SHOW/FIRST DRAFT
MUSIC
800 NUMBERS FOR 2 MINUTE
SHIP BROADCAST DUBS
ADMINISTRATION
MANAGE TWO MINUTE MEDIA
MANAGE TELEMARKETING
MARKET TEST SPOT
OUTBOUND TELE-RESEARCH FOR TWO MINUTE SPOT
WEEK #9 PRODUCTION
RE-EDIT OFF LINE
FINAL VO RECORDING
MUSIC
800 NUMBERS FOR 2 MINUTE
SHIP BROADCAST DUBS
ADMINISTRATION
FINALIZE HALF HOUR MEDIA
MANAGE TWO MINUTE MEDIA
MANAGE TELEMARKETING
MARKET TEST OFF LINE
OUTBOUND TELE-RESEARCH FOR TWO MINUTE SPOT
WEEK #10 PRODUCTION
ON LINE
800 NUMBERS FOR 1/2 HOUR
SHIP BROADCAST DUBS
ADMINISTRATION
MANAGE 1/2 HOUR MEDIA
MANAGE TWO MINUTE MEDIA
MANAGE TELEMARKETING
MARKET TEST ON LINE
Page 3
<PAGE>
ADDENDUM A
WEEK #11 PRODUCTION
RE-EDIT ON LINE/PRICE TEST
800 NUMBERS FOR 1/2 HOUR
SHIP BROADCAST DUBS
ADMINISTRATION
RE-EDIT TELEMARKETING SCREENS
MANAGE 1/2 HOUR MEDIA
MANAGE TWO MINUTE MEDIA
MANAGE TELEMARKETING
MARKET TEST ON LINE
OUTBOUND TELE-RESEARCH FOR 1/2 HOUR
WEEK #12 PRODUCTION
EDIT 60 & 30 SECOND
800 NUMBERS FOR 60 & 30 SECOND
800 NUMBERS FOR 1/2 HOUR
SHIP BROADCAST DUBS
ADMINISTRATION
MANAGE 1/2 HOUR MEDIA
MANAGE TWO MINUTE MEDIA
MANAGE TELEMARKETING
OUTBOUND TELE-RESEARCH FOR 1/2 HOUR
SET-UP ROLL OUT
Page 4
<PAGE>
ADDENDUM B
1. CLIENT shall pay VIDEONE $15,120.00 (see Addendum D) for the first 12 weeks
of Administrative costs, thereafter CLIENT shall pay VIDEONE [ ] of gross
sales, as that term is defined hereunder, arising from all Product sales through
the media described in Section 6 hereof for the services of ongoing management
of the infomercial and future markets including all bookkeeping, but not tax
accounting.
The $15,120.00 shall be payable as follows:
$4,000.00 Due upon signing of this Agreement
$4,000.00 Due Four (4) Weeks after signing this Agreement
$4,000.00 Due Eight (8) Weeks after signing this Agreement
$3,120.00 Due Twelve (12) Weeks after signing this Agreement
[ * ] Of gross sales paid Monthly thereafter
2. CLIENT shall pay VIDEONE [ * ] of Adjusted Gross Sales, as that term is
defined hereunder, arising from all Product sales through the media as described
in Section 6 hereof, and reorders from same as described in Part B Section 6
hereof. This profit interest is in consideration for the contributed production
services as described in attached Addendum C due and payable quarterly.
3. In the event that CLIENT's merchant accounts are tied to an escrow account
the payments to VIDEONE shall be included in the instructions to the escrow
agent.
4. CLIENT shall collect, or cause to be collected, all proceeds of sales
of the Products. CLIENT shall transmit a statement, accompanied by payment of
VIDEONE's share of proceeds and management fees due to VIDEONE every thirty (30)
days.
5. DEFINITIONS.
(a) "Gross Sales" as that term is used herein, shall mean CLIENT's gross income
from Direct Response customers, including shipping and handling fees paid by the
customer less actual cost of Shipping & Handling.
(b) "Adjusted Gross Sales" shall be defined as the profit remaining after
"fixed costs".
(c) "Fixed Costs" are due upon CLIENT's receipt of invoice from VIDEONE and/or
outside Vendors the actual direct cost of:
1. Product purchasing/manufacturing costs including Insurance premiums
paid by CLIENT for public and general liability insurance and errors
and omissions insurance to the extent they are paid for coverage of
the Show and/or the Product.
2. Media/advertising, including a fifteen percent (15%) television
media buying commission.
3. Dubbing, trafficking and similar costs. (see Addendum D)
4. Credit card discount. (see Addendum D)
5. Inbound telemarketing/custom service. (see Addendum D)
6. Shipping, handling (fulfillment) and freight costs. (see
Addendum D)
7. Bad debt and returns.
8. Damaged goods.
9. Management Fees paid directly to VideOne Marketing, Inc.
(See #1 above)
10. Returns
[ * ] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
(d) "Direct Response Customers" shall mean any purchaser of any CLIENT product
whose initial contact was made as a result of a VIDEONE managed Direct Response
Vehicle of any kind.
6. PROJECT ACCOUNTING. VIDEONE shall keep and maintain a separate and distinct
accounting record for all costs associated with VIDEONE's activities under this
Agreement. CLIENT shall maintain a checking account in a manner consistent with
the costs which VIDEONE incurs in connection with the marketing and distribution
of the Show and Product, and in no event shall CLIENT allow said checking
account to fall short of such liabilities. CLIENT expressly acknowledges that
VIDEONE shall be paid the management fee set out above (Addendum B) associated
with VIDEONE's activities under this Agreement prior of CLIENT's share of
proceeds.
<PAGE>
ADDENDUM C
THE WRINKLE PATCH
ESTIMATE OF EXPENSES PRIOR TO FINAL SCRIPT & CASTING
PRODUCTION AMOUNT UNITS RATE TOTAL
-------------------------------------
WRITER/RESEARCH 2 WKS 1500 3000
RE-WRITE 1 WKS 1500 1500
PRODUCER/PREP 2 WKS 1650 3300
PRODUCER/SHOOT 2 DAY 500 1000
PRODUCER/SHOOT 10 1/2 DAY 300 3000
DIRECTOR/PREP 2 WKS 1750 3500
DIRECTOR/SHOOT 2 DAY 750 1500
DIRECTOR/SHOOT 10 1/2 DAY 400 4000
STILL PHOTOGRAPHY 4 1/2 DAY 600 2400
CAMERA CREW 10 1/2 DAY 850 8500
STUDIO SHOOT 2 DAY 1900 3800
TEST/MODELS 10 ALLOW 500 5000
HOST (2) 4 DAY 1200 4800
SET & DESIGN 1 ALLOW 3500 3500
PROPS 1 ALLOW 750 750
FLOWERS 1 ALLOW 500 500
CATERING 1 ALLOW 750 750
PROD. ASSISTANT 2 WKS 850 1700
PROD. ASSISTANT 1 WKS 850 850
HAIR AND MAKE-UP 2 DAY 350 700
PROD. ASSISTANT/SHOOT 12 DAY 200 2400
TRAVEL EXPENSES 1 ALLOW 5000 5000
LOCATION EXPENSES 6 ALLOW 350 2100
TAPE STOCK 30 30M 30 900
- --------------------------------------------------------------
TOTAL PRODUCTION 64,450
Page 1
<PAGE>
ADDENDUM C
POST-PRODUCTION AMOUNT UNITS RATE TOTAL
----------------------------------
POST PROD SUPERVISOR 3 WKS 1500 4500
EDIT - LOG 45 HRS 75 3375
EDIT - OFFLINE - EFFECTS 60 HRS 120 7200
EDIT - OFFLINE - ANIMATION 120 HRS 110 13200
DIRECTOR/EDIT OFFLINE 120 HRS 120 14400
EDIT - ONLINE 60 HRS 150 9000
ADDITIONAL ONLINE LABOR 60 HRS 35 2100
SCRATCH VO 1 ALLOW 300 300
ONLINE VO 1 ALLOW 700 700
RECORDING SESSIONS 1 ALLOW 350 350
TITLES AND GRAPHICS 1 ALLOW 3000 3000
ANIMATION 1 ALLOW 5500 5500
3-D LOGO AND TITLE 1 ALLOW 1750 1750
MUSIC BED 1 ALLOW 650 650
VHS DUBS AND SHIPPING 100 T-30 6 600
SHIPPING 12 WKS 100 1200
LEGAL 1 ALLOW 1500 1500
ACCOUNTING 12 WKS 400 4800
PHONE/OFFICE EXPENSES 12 WKS 250 3000
--------
TOTAL POST-PRODUCTION 77,125
- ---------------------------------------------------------------
SUB-TOTAL ALL PRODUCTION 141,575
PRODUCTION FEE (10%) 14,158
INSURANCE (3%) 4,247
--------
TOTAL COST $159,980
- ---------------------------------------------------------------
VIDEONE MARKETING, INC. CONSIDERATION 50% OF BUDGET $ 79,990
AMOUNT DUE VIDEONE MARKETING, INC. FROM SPA-SANTE $ 79,900
COMMERCIALS: 120, 60 & 30
AMOUNT UNITS RATE TOTAL
----------------------------------
WRITER 2 DAY 500 1000
ON-LINE 3 DAY 1500 4500
VO-TALENT 1 ALLOW 200 200
VO RECORD 1 ALLOW 180 180
TITLES AND GRAPHICS 1 ALLOW 750 750
TAPE STOCK 3 5M 25 75
--------
SUB-TOTAL 6705
PRODUCTION FEE (10%) 671
INSURANCE (3%) 201
--------
TOTAL COST $ 7,577
- ---------------------------------------------------------------
VIDEONE MARKETING, INC. CONSIDERATION 50% OF BUDGET $ 3,788
AMOUNT DUE VIDEONE MARKETING, INC. FROM SPA-SANTE $ 3,788
TOTAL DUE VIDEONE MARKETING, INC. FOR PRODUCTION $ 83,778
Page 2
<PAGE>
ADDENDUM D
INFOMERCIAL TRAFFICING (TEST-INFOMERCIAL)
AMOUNT UNITS RATE TOTAL
--------------------------------
800 NUMBERS 25 #'S 180 4500
PRICE CHANGE 1 ALLOW 240 240
BROADCAST 3/4" 50 ALLOW 78.5 3925
BROADCAST 1" 20 ALLOW 107.5 2150
BETA CAM 10 ALLOW 89.5 895
SHIPPING (FED/EX) 80 ALLOW 20 1600
SHIPPING (COUNTER) 5 ALLOW 65 325
VHS DUBS 120 TAPES 2 240
ADDITIONAL TRAFFICING 110 ALLOW 10 1100
MESSENGER 10 ALLOW 20 200
TOTAL 15,175
PRODUCTION FEE (10%) 1,518
INSURANCE (3%) 455
--------
TOTAL COST $ 17,148
- ------------------------------------------------------------------------
DISCOUNT 10% $ 1,715
TOTAL DUE $ 15,433
INFOMERCIAL TRAFFICING (COMMERCIAL)
AMOUNT UNITS RATE TOTAL
--------------------------------
800'S 15 #'S 60 900
BROADCAST 3/4" 30 ALLOW 48.5 1455
BROADCAST 1" 10 ALLOW 77.5 775
BETA CAM 5 ALLOW 69.5 347.5
SHIPPING (FED/EX) 45 ALLOW 20 900
SHIPPING (COUNTER) 3 ALLOW 65 195
VHS DUBS 80 TAPES 2 160
ADDITIONAL TRAFFICING 66 ALLOW 10 660
MESSENGER 6 ALLOW 20 120
TOTAL 5,512.5
PRODUCTION FEE (10%) 551
INSURANCE (3%) 165
--------
TOTAL COST $ 6,229
- ------------------------------------------------------------------------
DISCOUNT 10% $ 623
TOTAL DUE $ 5,606
Page 1
<PAGE>
ADDENDUM D
FULFILLMENT, TELEMARKETING, BANKING, ACCOUNTING,
ADMINISTRATION SET-UP THROUGH TESTING (SEE LIST)
AMOUNT UNITS RATE TOTAL
--------------------------------
SUSIE LOVE 12 WKS 900 10800
ACCOUNTING/BANKING 12 WKS 500 6000
TOTAL $ 16,800
- ------------------------------------------------------------------------
DISCOUNT 10% $ 1,680
TOTAL DUE $ 15,120
OUTSIDE FEES - BEYOND THE CONTROL OF VIDEONE MARKETING, INC. FOR ILLUSTRATION
PURPOSES ONLY
TELEMARKETING
AMOUNT UNITS RATE TOTAL
--------------------------------
SET-UP 1 ALLOW 750 750
SECURITY DEPOSIT 1 ALLOW 750 750
PROGRAMMING 1 ALLOW 320 320
MONTHLY MINIMUMS 2 MTHS 500 1000
TOTAL $ 2,820
- ------------------------------------------------------------------------
FULFILLMENT
SET-UP (CONTINUITY) 1 ALLOW 2300 2300
POSTAGE DEPOSIT 1 ALLOW 10000 10000
PROGRAMMING 1 ALLOW 320 320
SHIPPING TO FULFILLMENT 1 ALLOW 2000 2000
MONTHLY MINIMUMS 2 MTHS 500 1000
TOTAL $ 15,620
- ------------------------------------------------------------------------
PER KIT EXPENSES BASED ON 9000 UNITS (SUBJECT TO QUOTE)
TELEMARKETING 9000 UNITS 2.84 25560
FULFILLMENT 9000 UNITS 2.10 18900
SHIPPING 9000 UNITS 3.00 27000
CREDIT CARD 9000 UNITS 1.50 13500
INVENTORY 9000 UNITS 5.00 45000
SHIPPING BOXES 9000 UNITS 0.50 4500
TOTAL $134,460
- ------------------------------------------------------------------------
Page 2
<PAGE>
ADDENDUM F
1. RESPONSIBILITIES OF EACH PARTY
VIDEONE CLIENT ITEM
X Receive and process mail orders.
X Obtain direct response phone numbers.
X Sales tax collection and filings.
X Provide answering service scripts and
manage answering service(s).
X Write and produce the Show.
X Customize the show with direct response
phone numbers, addresses and, if
applicable, sales tax and shipping message
integrated into commercials.
X Perform as host or similar role, or
acquire services of host or similar role.
X Duplicate sub-masters for stations.
X Traffic tapes to stations.
X Provide order processing functions
including receipt of orders from answering
services, credit card authorization and
deposit, refund processing and the like.
X Provide order fulfillment for the Product
and the Upsell for all Product sales.
X Product development.
X Customer Service Function for the Product
and Upsell.
X Product usage.
X Shipping and/or manufacturing problems.
X Refund requests.
X Process returns.
X Answering service referrals.
X Inventory purchasing and maintenance of
all Product parts.
<PAGE>
EXHIBIT 10.12
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT is entered into this 9th day of April by and
between Barrett Resources Corporation ("Sublessor") and Osmotics Corporation
("Sublessee") subject to a certain lease ("Lease") dated July 24, 1990, entered
into by The 1125 Venture, a Colorado joint venture ("Lessor") and the Sublessor.
(1) SUBLEASE PREMISES
-----------------
Sublessor leases to Sublessee and Sublessee leases from Sublessor upon
terms and conditions set forth herein certain real property legally described
as:
LOTS 1 TO 16 INC & NW 25 FT L 17 TO 32 INC BLK 77 EAST DENVER & ALL VAC ALLEY
ADJ, City and County of Denver, State of Colorado
commonly known as 1125 - 17th Street, Suite 2310, 4,038 rentable square feet,
attached as Exhibit "A", ("Sublease Premises"), together with any rights-of-way,
easements and any other rights, if any, appurtenant thereto.
(2) TERMS AND CONDITIONS OF SUBLEASE
--------------------------------
(a) Terms. The term of this Sublease shall begin on the 1st day of June,
-----
1996 ("Commencement Date") and shall extend through the 31st day of October,
1999, unless terminated sooner as provided herein ("Termination Date").
(b) Conditions. This Sublease Agreement is made expressly subject to all
----------
of the terms and conditions of the Lease. If an event occurs that is not
governed by the terms and provisions of this Sublease Agreement, then the terms
and provisions of the Lease shall govern such event. Furthermore, the Sublessee
assumes each and every covenant, duty and obligation of the Lessee and promises
to faithfully observe each and every term and provision set forth in the Lease
(except as may be modified by this Sublease Agreement). The Sublessee
acknowledges that the Sublessor shall be deemed to be substituted for the Lessor
under the Lease in all respects, and the Sublessor shall be entitled to exercise
all of the rights and privileges of the Lessor as defined in the Lease (except
as may be modified by this Sublease Agreement). By way of illustration and not
by way of limitation, the Sublessor shall be entitled to exercise any remedy
provided to the Lessor under the Lease (in addition to any remedy set forth in
this Sublease) in the event the Sublessee breaches any condition, provision or
covenant set forth in this Sublease Agreement.
(3) RENTAL
------
Sublessee agrees to pay to Sublessor for the full term hereof the sum of
$158,996.25, payable in advance and without notice in equal monthly installments
of $3,785.63 on the first day of each month during said term at the following
address: 1515 Arapahoe Street, Suite 1000, Denver, Colorado 80202 (or at such
other address as Sublessor may designate in writing from time to time) without
any set-off of deduction whatsoever. If the Commencement Date is on a day other
than the first day of a calendar month, Sublessee shall pay to Sublessor the
rental for the number of days that exist prior to the first day of the
succeeding month, with a similar adjustment being made on the Termination Date.
(4) USE OF SUBLEASE PREMISES
------------------------
Sublessee shall have the right to use and occupy the Sublease Premises for
general business use. Any other use shall be permitted only with the prior
written consent of Sublessor, which consent shall not be unreasonably withheld.
Throughout the term of this Sublease (and any extension thereof), Sublessee, at
Sublessee's sole cost and expense, covenants to promptly comply with all laws
and ordinances and the orders, rules, regulations and requirements of all
federal, state and municipal governments and appropriate departments,
commissions, boards and officers thereof.
(5) PAYMENT OF TAXES
----------------
Sublessee agrees to pay all personal property taxes, all franchise or
license fees or any other charge levied against the Sublessee resulting from the
operation of the Sublessee's business in the Sublease Premises.
(6) INSURANCE
---------
During term of this Sublease, Sublessee shall carry and maintain the
following types of insurance in the amounts specified, at Sublessee's sole cost
and expense, and for the mutual benefit of Sublessor and Sublessee:
1
<PAGE>
(a) Liability Insurance. Sublessee shall at all times keep in force a
-------------------
comprehensive general combined liability insurance policy providing protection
of at least $500,000 in respect of personal injury or death of any one person
and not less than $1,000,000 for death or injury to more than one person, and
$500,000 for property damage arising from the use, ownership, maintenance,
disuse or condition of the Sublease Premises, any improvements located on or
appurtenant to the Sublease Premises, improvements or adjoining areas or ways.
Sublessor shall be named and protected under the terms and conditions of said
policy as Sublessor of the Sublease Premises.
(b) Waiver of Subrogation. The parties agree that all insurance policies
---------------------
obtained pursuant to this Sublease shall include a clause or endorsement which
shall waive the right of subrogation on the part of the insurance carrier
against both Sublessor and Sublessee. Sublessor and Sublessee hereby release
the other from any and all liability or responsibility to the other or anyone
claiming through or under them by way of subrogation.
(7) ASSIGNMENT AND SUBLETTING
-------------------------
This Sublease or any interest therein may not be assigned by Sublessee,
voluntarily or involuntarily, by operation of law or otherwise, and all or any
part of the Sublease Premises shall not be subleased by Sublessee. A merger,
consolidation, sale of substantially all of the assets or sales of a substantial
amount of the stock of Sublessee or a transfer of a substantial partnership
interest of Sublessee, shall constitute an assignment of this Sublease for the
purposes of this paragraph. Any assignment or subletting in violation of this
provision shall be null and void.
(8) INDEMNITY PROVISION
-------------------
Sublessee agrees to exonerate, hold harmless, protect and indemnify
Sublessor, or any owner of the Sublease Premises, from and against any and all
losses, damages, claims, suits or actions, judgments and costs which may arise
during the term of this Sublease for personal injury, loss of life or damaged
property sustained in or about the Sublease Premises or the improvements and
appurtenances thereto upon the Sublease Premises or upon the adjacent sidewalks
and streets; and from and against all costs, counsel fees, expenses and
liabilities incurred in any such claims, the investigation thereof or the
defense of any action or proceeding brought thereon; and from and against any
judgments, orders, decrees or liens resultant therefrom and any fines levied by
any authority for any law, regulation or ordinance by virtue of the use of the
improvements and appurtenances thereto situated upon the Sublease Premises.
Sublessee shall not permit any mechanic's or materialmen's liens to be filed
against the Sublease Premises and hereby indemnifies and holds Sublessor
harmless from and against any liability, damage, expense or cost which may be
incurred by Sublessor harmless from and against any liability, damage, expense
or cost which may be incurred by Sublessor in connection with any mechanic's or
materialmen's liens which may be filed against the Sublease Premises as a result
of the provisions of this Sublease. This indemnity shall specifically include
attorneys' fees and any costs incurred by Sublessor to enforce this indemnity.
(9) ADA COMPLIANCE
--------------
(a) Disclosure. Sublessee hereby acknowledges that Sublessor and Broker
----------
have advised Sublessee that the Premises and Sublessee may be subject to the
Americans With Disabilities Act (the "ADA"), a Federal law. Among other
requirements of the ADA that could apply to the Premises, Title III of the ADA
requires owners and tenants of "public accommodations" to remove barriers to
allow access by disabled persons and provide auxiliary aids and services for
hearing, vision or speech impaired persons by certain dates. Any governmental
agency directives issued to ensure Sublessee's compliance with the ADA in the
Premises shall be at Sublessee's sole cost and expense if directly related to
Sublessee's specific use of the space unless Sublessor has agreed, in writing,
to pay for a portion of said costs.
(b) Investigation. Sublessee hereby acknowledges that Sublessor and Broker
-------------
have recommended that Sublessee prior to executing this Sublease, investigate
the ADA and the regulations thereunder to determine if the ADA law and
regulations would apply to Sublessee and/or to the Premises in which Sublessee
is interested in occupying. Sublessee agrees that it is solely responsible, at
its expense, for conducting its own independent investigation of all ADA issues
prior to the execution date of this Sublease and during the primary term of this
Sublease (and any extension thereof).
(10) HAZARDOUS MATERIALS
-------------------
Sublessee shall not (either with or without negligence) cause the escape,
disposal or release of any biologically or chemically active or other hazardous
substances or materials ("Hazardous Materials"). Sublessee shall not allow the
storage or use of such Hazardous Materials in any manner not sanctioned by law
or by the highest standards prevailing in the industry for the storage and use
of Hazardous Materials,
2
<PAGE>
nor allow to be brought into the Premises any Hazardous Materials except to use
in the ordinary course of Sublessee's business, and then only after written
notice is given to Sublessor of the identity of such Hazardous Materials.
Without limitation, Hazardous Materials shall include those described in the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, 42 USC Section 9601 et seq., the Resource Conversation and Recovery
Act, as amended, 42 USC Section 6901 et seq., and applicable state or local laws
and the regulations adopted under these acts. If any lender or governmental
agency shall ever require testing to ascertain whether or not there has been any
release of Hazardous Materials, then the reasonable cost of testing and
resulting cleanup thereof shall be reimbursed by Sublessee to Sublessor upon
demand as additional charges if such requirement applies to the Premises,
provided that such testing proves that Sublessee released such Hazardous
Materials on the Premises. In addition, Sublessee shall execute affidavits,
representations and the like from time to time at Sublessor's request concerning
Sublessee's best knowledge and belief regarding the presence of Hazardous
Materials on the Premises. In all events, Sublessee shall indemnify Sublessor in
the manner elsewhere provided in this Sublease from any release of Hazardous
Materials on the Premises occurring while Sublessee is in possession, or
elsewhere if caused by Sublessee or persons acting under Sublessee.
(11) DEFAULT PROVISIONS
------------------
The occurrence of any one or more of the following events shall constitute
a default and breach of this Sublease by Sublessee:
(a) Failure to Pay Rent. Sublessee failing to pay the rental herein
-------------------
reserved.
(b) Failure to Pay Other Costs. Sublessee failing to make any other
--------------------------
payments required to be made by Sublessee when due, where such failure shall
continue for a period of five (5) calendar days following written notice from
Sublessor to Sublessee.
(c) Failure to Keep Covenants. Sublessee failing to perform or keep any of
-------------------------
the other terms, covenants and conditions herein contained for which Sublessee
is responsible, and such failure continuing and not being cured for a period of
thirty (30) calendar days after written notice or if such default is a default
which cannot be cured within a 30-calendar-day period, then Sublessee's failing
to commence to correct the same within said 30-calendar-day period and
thereafter failing to prosecute the same to completion with reasonable
diligence.
(d) Abandonment. Sublessee abandoning the Sublease Premises.
-----------
(e) Bankruptcy. Sublessee being adjudicated a bankrupt or insolvent or
----------
Sublessee filing in any court a petition for bankruptcy or for reorganization or
for the adoption of an arrangement under the Bankruptcy Act (as now or in the
future amended) or the filing of an involuntary bankruptcy against Sublessee
[unless said involuntary bankruptcy is terminated within thirty (30) calendar
days from the date of said filing], or Sublessee filing in any court for the
appointment of a receiver or trustee of all or a portion of Sublessee's
property, or there being appointed a receiver or trustee for all or a portion of
Sublessee's property, unless said receiver appointed a receiver or trustee for
all or a portion of Sublessee's property, unless said receiver or trustee is
terminated within thirty (30) calendar days from the date of said appointment.
(f) Assignment for Benefit of Creditors. Sublessee making any general
-----------------------------------
assignment or general arrangement of Sublessee's property for the benefit of
Sublessee's creditors.
(12) REMEDIES
--------
In the event of an occurrence of default as set forth above, Sublessor
shall have the right to:
(a) Terminate Sublease. Terminate this Sublease and end the term hereof by
------------------
giving to Sublessee written notice of such termination, in which event Sublessor
shall be entitled to recover from Sublessee at the time of such termination the
present value of the excess, if any, of the amount of rent reserved in this
Sublease for the then balance of the term hereof over the then reasonable rental
value of the Sublease Premises for the same period. The present value shall be
determined by discounting all future excess rent amounts at a rate of eight
percent (8%) per annum. It is understood and agreed that the "reasonable rental
value" shall be the amount of rental which Sublessor can obtain as rent for the
remaining balance of the initial term or renewal term, whichever is applicable;
or
(b) Sue Monthly for Rents. Without resuming possession of the Sublease
---------------------
Premises or terminating this Sublease to sue monthly for and recover all rents,
other required payments due under this
3
<PAGE>
Sublease, and other sums including damages and legal fees at any time and from
time to time accruing hereunder; or
(c) Repossess Sublease Premises. Upon written notice to all interested
---------------------------
parties, reenter and take possession of the Sublease Premises or any part
thereof and repossess the same as of Sublessor's former estate and expel
Sublessee and those claiming through or under Sublessee and remove the effects
of either or both (forcibly, if necessary) without being deemed guilty in any
manner of trespass and without prejudice to any remedies for rent delinquencies
or preceding lease defaults, in which event Sublessor may from time to time
without terminating this Sublease relet the Sublease Premises or any part
thereof for such term or terms and at such rental or rentals and upon such other
terms and conditions as Sublessor may deem advisable, with the right to make
alterations and repairs to the Sublease Premises, and such reentry or taking of
possession of the Sublease Premises by Sublessor shall not be construed as an
election on Sublessor's part to terminate this Sublease unless a written notice
of termination is given to Sublessee or unless the termination thereof is
decreed by a court of competent jurisdiction. In the event of Sublessor's
election to proceed under this provision, then such repossession shall not
relieve Sublessee of Sublessee's obligation to pay any resulting rent deficit
under this Sublease, all of which shall survive such repossession, and shall be
payable hereunder if such repossession had not occurred, less the net proceeds
(if any) of any reletting of the Sublease Premises after deducting all of
Sublessor's expenses in connection with such reletting, including but without
limitation all repossession costs, brokerage commissions, legal expenses,
attorneys' fees, expenses of employees, alteration costs, and expenses of
preparation of such reletting. Sublessee shall pay such current damages to
Sublessor on the days on which the basic rental would have been payable
hereunder if possession had not been retaken, and Sublessor shall be entitled to
receive the same from Sublessee on each such day.
(13) SURRENDER OF SUBLEASE PREMISES
------------------------------
Upon the Termination Date of this Sublease, Sublessee shall peaceably and
quietly leave and surrender the Sublease Premises in as good condition as
existed on the Commencement Date, ordinary wear and tear excepted. Sublessee
shall surrender and deliver the building and Sublease Premises broom clean and
free of Sublessee's property. Provided Sublessee is not in default. Sublessee
shall have the right to remove all of Sublessee's fixtures, equipment, machinery
and other personal property, provided that upon such removal the Sublease
Premises are delivered in the same condition as existed at the time of the
Commencement Date. Further, in the event Sublessee does not remove any of
Sublessee's own fixtures, equipment or personal property or any additions or
alterations made to the Sublease Premises during term of this Sublease,
Sublessor may require Sublessee to remove any such improvements, alterations,
fixtures and equipment and restore the Sublease Premises to the condition as
existed on the Commencement Date or retain the same.
(14) NOTICES
-------
All notices, demands and requests required to be given by either party to
the other shall be in writing and shall either be hand delivered or sent by
certified or registered mail, return receipt requested, postage prepaid,
addressed to the parties at the addresses set forth below or at such other
addresses as the parties may designate in writing delivered pursuant to this
provision. Any notice when given as provided herein shall be deemed to have
been delivered on the date personally served or two (2) calendar days subsequent
to the date that said notice was deposited with the United States Postal
Service.
Sublessor:
John F. Keller
Barrett Resources Corporation
1515 Arapahoe Street, Suite 1000
Denver, CO 80202
Sublessee:
Ms. Suzanne J. Porter
Osmotics Corporation
1125 - 17th Street, Suite 2310
Denver, CO 80202
Brokers:
Fuller and Company
1515 Arapahoe Street, #1600
Denver, CO 80202
4
<PAGE>
Robinson Commercial Services, Inc.
3801 East Florida, #400
Denver, CO 80210
(15) TIME OF ESSENCE
---------------
Time is of the essence hereof.
(16) QUIET ENJOYMENT
---------------
Sublessor represents and warrants that:
(a) Authority. Sublessor has the right to enter into and consummate this
---------
Sublease.
(b) Peaceful Possession. Upon Sublessee's paying the rental herein
-------------------
reserved and upon performing all of the terms and conditions of this Sublease
on Sublessee's part to be performed, Sublessee shall at all times during the
term of this Sublease peacefully and quietly have, hold and enjoy the Sublease
Premises.
(17) MISCELLANEOUS
-------------
(a) Choice of Law. This Sublease is entered into in the State of Colorado
-------------
and shall be construed in accordance with the laws thereof.
(b) Headings and Captions. The headings and captions used in this Sublease
---------------------
are for the convenience of reference only and shall not be used in the
construction or interpretation of this Sublease.
(c) Inurement. The covenants and agreements contained herein shall be
---------
binding upon and inure to the benefit of the parties hereto, their heirs,
personal representatives, administrators, successors and assigns.
(d) Construction of Terms. Words of any gender used in this Sublease shall
---------------------
be held to include any other gender, and words in the singular shall be held to
include the plural, as the identity of Sublessor or Sublessee requires.
(18) NO WAIVER
---------
No waiver by Sublessor of any provisions hereof shall be deemed a waiver of
any other provision hereof or of any subsequent breach by Sublessee of the same
or any other provision. Sublessor's consent to or approval of any act shall not
be deemed to render unnecessary the obtaining of Sublessor's consent to or
approval of any subsequent act by Sublessee. The acceptance of rental hereunder
by Sublessor shall not be a waiver of any preceding breach by Sublessee of any
provision hereof, other than the failure of Sublessee to pay the particular
rental so accepted, regardless of Sublessor's knowledge of such preceding breach
at the time of acceptance of such rent.
(19) ATTORNEYS' FEES
---------------
In case suit shall be brought to enforce any provisions of this Sublease,
the prevailing party shall be awarded (in addition to the relief granted) all
reasonable attorneys' fees and costs resulting from such litigation.
(20) INTEREST ON PAST-DUE OBLIGATIONS
--------------------------------
Any amount due to Sublessor not paid when due shall bear interest at the
rate of two percent (2%) per month from the date due; provided, however, that
any such payment of interest shall not excuse or correct any default by
Sublessee under this Sublease.
(21) MEMORANDUM OF SUBLEASE
----------------------
Either party, upon request from the other party, shall execute in
recordable form a short form Memorandum of Sublease, which Memorandum of
Sublease shall contain only the names of the parties, the Commencement Date and
Termination Date of this Sublease (and any options which may be granted
hereunder), and the legal description of the Sublease Premises.
(22) LEGAL COUNSEL
-------------
By virtue of this paragraph, Broker advises and recommends that all parties
hereto obtain legal counsel to represent them in connection with the examination
of title, zoning of the Sublease Premises, the execution of this Sublease, tax
implications of the transaction and all other aspects relative to the
transaction contemplated hereby.
5
<PAGE>
(23) AGENCY DISCLOSURE
-----------------
The rules and regulations of the Colorado Real Estate Commission require
that Broker discloses its agency relationship with all parties to a transaction.
Broker hereby discloses that it is acting as agent for and on behalf of
Sublessor. The parties acknowledge prior timely agency disclosure and consent
to said agency relationship.
(24) SEVERABILITY
------------
If any sentence, paragraph or section of this Sublease is held to be
illegal or invalid, this shall not affect in any manner those other portions of
the Sublease not illegal or invalid and this Sublease shall continue in full
force and effect as to those provisions.
(25) SECURITY DEPOSIT
----------------
Sublessee shall deposit with Sublessor a Security Deposit of $3,785.63 upon
the execution of this Sublease. Such deposit shall be held by Sublessor until
all terms and conditions of this Sublease are performed satisfactorily by
Sublessee. Said deposit will then be returned to Sublessee within thirty (30)
days following the termination of this Sublease.
(26) ADDITIONAL PROVISIONS
---------------------
(a) Parking. Sublessee shall have the right to four (4) parking spaces in
-------
the attached garage at the current monthly rate for the building.
(b) Tenant Improvements. Sublessor shall provide and pay for all Tenant
-------------------
Improvements as identified in Exhibit "B" attached (see Exhibit "B"). Sublessee
shall be responsible for any additional construction costs.
IN WITNESS WHEREOF, the parties have executed this Sublease Agreement the
day and year first written above.
SUBLESSOR: SUBLESSEE:
/s/ /s/
________________________________ _________________________________
John F. Keller Steven Porter
Barrett Resources President
1515 Arapahoe Street, Suite 1000 Osmotics Corporation
Denver, CO 80202 1125 - 17th Street, Suite 2310
Denver, CO 80202
LESSOR'S CONSENT
----------------
The undersigned Lessor under the Lease hereby consents to this Sublease
Agreement this _____ day of ___________, of the Sublease Premises under the
terms and conditions as set forth herein. This consent shall apply
only to this Sublease Agreement and shall not be deemed to be Lessor's
consent to any other subsequent sublease agreement.
LESSOR:
_______________________________
6
<PAGE>
EXHIBIT "A"
Sublease Premises
1125 - 17th Street, Suite 2310
[Diagram]
-1-
<PAGE>
EXHIBIT "B"
Tenant Improvements
1125 - 17th Street, Suite 2310
1. Paint reception area.
2. Paint all walls that are not vinyl-covered.
3. Shampoo all carpeting.
4. Remove wall and door frame as indicated below.
5. Remove all attached name tags.
[Diagram]
-1-
<PAGE>
LEASE AGREEMENT
BETWEEN
THE 1125 VENTURE
AND
BARRETT RESOURCES
<PAGE>
TABLE OF CONTENTS
1. LEASED PREMISES................................................... 1
2. TERM.............................................................. 1
3. USE............................................................... 1
4. RENT.............................................................. 1
5. ADDITIONAL RENT................................................... 2
6. PRORATION OF RENT................................................. 2
7. OPERATING COST.................................................... 2
8. SERVICES FURNISHED BY LANDLORD.................................... 4
9. IMPROVEMENTS BY LANDLORD.......................................... 4
10. LATENT DEFECTS.................................................... 5
11. QUIET ENJOYMENT................................................... 5
12. REPAIRS BY LANDLORD............................................... 5
13. REPAIRS BY TENANT................................................. 5
14. CARE OF THE PREMISES.............................................. 6
15. ASSIGNMENT OR SUBLEASE............................................ 6
16. SIGNS............................................................. 6
17. HAZARDOUS USE..................................................... 6
18. RULES AND REGULATIONS............................................. 6
19. ENTRY BY LANDLORD................................................. 7
20. NUISANCE.......................................................... 7
21. SUBORDINATION TO MORTGAGE......................................... 7
22. ESTOPPEL CERTIFICATE.............................................. 7
23. CONDEMNATION AND LOSS OR DAMAGE................................... 7
24. LIEN.............................................................. 7
25. HOLDING OVER; MONTH-TO-MONTH TENANCY.............................. 8
26. CASUALTY.......................................................... 8
27. ATTORNEY'S FEES................................................... 8
28. ALTERATION........................................................ 8
29. ASSIGNMENT BY LANDLORD............................................ 8
30. BREACH OF LEASE................................................... 8
31. REMEDIES UPON BREACH.............................................. 9
32. NON-WAIVER........................................................ 9
33. HOLD HARMLESS..................................................... 9
34. WAIVER OF SUBROGATION............................................. 9
35. CASUALTY INSURANCE................................................ 10
<PAGE>
36. LIABILITY INSURANCE............................................... 10
37. NOTICE TO MORTGAGEE............................................... 10
38. AUTHORITIES FOR ACTION AND NOTICE................................. 10
39. SUCCESSORS AND ASSIGNS............................................ 11
40. RELOCATION........................................................ 11
41. MISCELLANEOUS..................................................... 11
42. REAL ESTATE BROKER................................................ 11
43. RECORDING - SHORT FORM MEMORANDUM................................. 11
44. SECURITY DEPOSIT.................................................. 11
45. PARKING........................................................... 12
46. RIGHT OF FIRST OFFER.............................................. 12
47. RENEWAL OPTION.................................................... 13
EXHIBIT A - SPACE PLAN
EXHIBIT B - WORK LETTER AGREEMENT
EXHIBIT C - RULES AND REGULATIONS
-ii-
<PAGE>
DENVER NATIONAL BANK BUILDING
1125 Seventeenth Street, Denver, Colorado 80202
LEASE AGREEMENT
THIS LEASE AGREEMENT, made and entered into this 24th day of July, 1990,
between THE 1125 VENTURE, a Colorado joint venture (hereinafter called
"Landlord"), whose address for purposes hereof is Suite 2500, 1125 Seventeenth
Street, Denver, Colorado 80202 and Barrett Resources Corporation (a Delaware
Corporation) (hereinafter called "Tenant"), whose address for purposes hereof
until commencement of the term of this Lease is 1125 17th Street, Suite 2100,
Denver, Colorado, 80202, and thereafter being that of the "Building"
(hereinafter defined).
1. LEASED PREMISES.
Subject to and upon the terms, provisions and conditions hereinafter set
forth, and in consideration of the duties, covenants and obligations hereunder,
Landlord does hereby lease, demise and let unto Tenant, and Tenant does hereby
lease from Landlord those certain premises (hereinafter called the "Premises")
in the building known as "Denver National Bank Building" (which name may be
changed at Landlord's discretion) being constructed or constructed on the land
described as Lots 1 through 16, inclusive, and the northwesterly 25 feet of Lots
17 through 32, inclusive, East Denver, together with the vacated alley adjoining
said Lots, City and County of Denver, State of Colorado (which land and building
are hereinafter called the "Building"). The Premises in the Building are more
particularly described as follows:
Office space located in Suite 2400
and as reflected on the floor plan of the Premises attached hereto and made a
part hereof as Exhibit A, containing approximately 16,288.54 square feet of
rentable area.
2. TERM.
(A) Subject to and upon the terms and conditions set forth herein, or in
any exhibit or addendum hereto, this Lease shall continue in force for a term of
Sixty (60) months, beginning on the 1st day of November, 1990 and ending on the
31st day of October, 1995.
(B) In the event the Premises should not be ready for occupancy by said
commencement date for any reason, Landlord shall not be liable or responsible
for any claims, damages or liabilities in connection therewith or by reason
thereof, and the term of this Lease shall commence at the time the Building is
completed and the Premises ready for occupancy by Tenant. Should the term of
this Lease commence on a date other than that specified in (A) above, Landlord
and Tenant will, at the request of either, execute a written statement
specifying the beginning date of the term of this Lease. In such event, rental
under this Lease shall not commence until said revised commencement date, the
expiration date shall be extended and shall end on the date sixty (60) months
from said revised commencement date. Landlord shall give Tenant written notice
of such revised commencement date at least fifteen days in advance thereof.
3. USE.
The Premises are to be used and occupied by Tenant solely for the purpose
of general office space. Tenant shall use the Premises in a careful, safe and
proper manner. Tenant shall not use or occupy or permit the Premises to be used
or occupied for any purpose or in any manner prohibited by the laws of the
United States, the State of Colorado, or the ordinances of the City and County
of Denver, including but not limited to the Skyline Urban Renewal Plan and the
deed restrictions imposed thereunder by the Denver Urban Renewal Authority.
Tenant shall not use the Building name as part of Tenant's name without
Landlord's prior written permission.
4. RENT.
Tenant hereby agrees to pay a base annual rental (herein call "base rent")
in the sum of Nine Hundred Forty-four Thousand Seven Hundred Thirty-five and
32/100ths Dollars ($944,735.32) payable in annual amounts as herein provided.
Year 1 shall mean the period beginning on the rental commencement date (as
provided in Paragraph 2 of the Lease) and continuing for twelve (12) months.
Each Subsequent
-1-
<PAGE>
year shall commence on the anniversary of the rental commencement date and
continue for the subsequent twelve (12) months.
Year 1: One Hundred Seventy-nine Thousand One Hundred Seventy-three and
94/100ths Dollars ($179,173.94)
Year 2: One Hundred Seventy-nine Thousand One Hundred Seventy-three and
94/100ths Dollars ($179,173.94)
Year 3: One Hundred Seventy-nine Thousand One Hundred Seventy-three and
94/100ths Dollars ($179,173.94)
Year 4: One Hundred Ninety-five Thousand Four Hundred Sixty-two and 48/100ths
Dollars ($195,462.48)
Year 5: Two Hundred Eleven Thousand Seven Hundred Fifty-one and 02/100ths
Dollars ($211,751.02)
Such base rent, together with any escalation of rent provided for herein, shall
be due and payable in twelve equal installments on the first day of each
calendar month during the initial term of this Lease and any extensions or
renewals hereof, and Tenant hereby agrees to pay such rent to Landlord at
Landlord's address as provided herein (or at such other address as Landlord may
designate from time to time) monthly in advance without demand. All past due
installments shall bear interest at the rate of 5% per month until paid.
5. ADDITIONAL RENT.
Tenant shall pay Landlord as additional rent those charges in respect of
Operating Cost determined as set forth in Paragraph 7, and such other sums as
are required to be paid by Tenant under this Lease. Any such charges or sums
shall be deemed to be rent and shall be payable in the manner provided and
recoverable as rent, and Landlord shall have all rights specified in this Lease
against Tenant for default in payment thereof as in the case of arrears of rent.
6. PRORATION OF RENT.
If the term of this Lease shall begin on a day other than the first day of
a calendar month or end on a day other than the last day of a calendar month,
the monthly installment of rent for the fractional month at the beginning or end
of the term of this Lease shall be prorated, calculated on a daily basis from
the rent payable during that year and shall be paid on the date of the beginning
of the term of this Lease or in advance on the first day of the last month of
the term of this Lease, as the case may be.
7. OPERATING COST.
(A) The base rent provided for herein is based, in part, upon Landlord's
estimate of "Basic Cost," as hereinafter defined, of repairing, maintaining and
operating the Building during the calendar years of the lease term. The
"Initial Basic Cost" is stipulated to be Tenants proportionate share of the
actual Basic Cost for the Building in the year 1990.
(B) "Basic Cost" as said term is used herein shall consist of all operating
expenses of the Building, which shall be computed on the accrual basis and
shall consist of all expenditures by Landlord to maintain all facilities in the
operation of the Building. All operating expenses shall be determined in
accordance with generally accepted accounting principles which shall be
consistently applied. The term "operating expenses" as used herein shall mean
all expenses, costs and disbursements (but not replacement of capital investment
items nor specific costs specially billed to and paid by specific tenants) of
every kind and nature which Landlord shall pay or become obligated to pay
because of or in connection with the operation of the Building, including but
not limited to, the following:
(1) wages and salaries of all employees engaged in operation,
maintenance or security of the Building, including taxes, insurance and
benefits related thereto;
(2) all supplies and materials used in operation and maintenance of
the Building;
(3) cost of all utilities for the Building, including but not limited
to the cost of water, power, heating, lighting, air conditioning,
ventilating, sewer and trash disposal;
(4) cost of all maintenance, building management and service
agreements for the Building and the equipment therein, including alarm
service, janitorial service, window cleaning, security service, elevator
maintenance, and grounds maintenance;
(5) cost of all insurance relating to the Building, including the
cost of casualty and liability insurance applicable to the Building and
Landlord's personal property used in connection therewith;
-2-
<PAGE>
(6) cost of repairs and general maintenance (excluding repairs and
general maintenance paid by proceeds of insurance, by Tenant or by other
third parties, and alterations attributable solely to tenants of the
Building);
(7) amortized cost of installation of capital investment items
required by governmental order, or which reduce operating costs, up to but
not exceeding the annual amount of the operating costs which they have
reduced;
(8) any reasonable management fee for general operation and
management of the Building which is calculated as a percentage of gross
rentals; and
(9) all real estate taxes and assessments and special assessments
imposed upon the Building by any governmental bodies or authorities, and
all charges specifically imposed in lieu of such taxes. The term "taxes"
as used in this Paragraph 7 shall not include state, local and federal
personal and corporate income taxes measured by the income of Landlord;
estate and inheritance taxes, franchise, succession and transfer taxes;
interest on taxes and penalties resulting from failure to pay real estate
taxes; and ad valorem taxes on Landlord's personal furniture and
furnishings, and on Landlord's leasehold improvements to the extent that
same exceed standard building allowances.
(C) In the event that the actual Basic Cost for any calendar year during
the life of this Lease exceeds the Initial Basic Cost set out in (A) above,
Tenant shall pay its proportionate share of the year's increase in the actual
Basic Cost for such year over the Initial Basic Cost in the proportion that its
rentable area in the Premises bears to the total net rentable area of the
finished Building ("Tenant's proportionate share"). Landlord shall within the
period of 150 days (or as soon thereafter as possible) after the close of each
calendar year give Tenant a statement of such year's actual Basic Cost and a
comparison with the Initial Basic Cost, prepared by a certified public
accountant. If such year's actual Basic Cost is greater than the Initial Basic
Cost, Tenant shall pay Landlord, within 30 days of statement receipt, Tenant's
proportionate share of such increase, if any, such payment to be made when due
as a condition to a protest thereof, as hereinafter provided. the
aforementioned comparative statement need not be binding on Tenant, who may,
within a 120-day period after rendition thereof, protest such determination by
written notice to Landlord. In the event such determination shall be in
Tenant's favor, Landlord shall promptly refund to Tenant the amount of such
overpayment or, at Landlord's election, credit such amount to the succeeding
monthly installments of annual base rent. If Tenant shall not dispute any item
or items of any such comparative statement within 120 days after such statement
has been rendered, Tenant shall be deemed to have approved such statement. If
the term of this Lease shall begin on a day other than the first day of the
calendar year or end on a day other than the last day of the calendar year,
Tenant's proportionate share of any increase in the Basic Cost for such year
shall be prorated, calculated on a daily basis for the fractional year at the
beginning or the end of the term of this Lease.
(D) Notwithstanding anything to the contrary herein, it is agreed with
regard to janitorial, maintenance, repairs and utilities only, that in the event
the Building is not fully occupied during any calendar year, or in the event the
entire Building is not furnished with services during any calendar year, an
adjustment shall be made by Landlord in computing the Basic Cost for such year
so that the Basic Cost shall be computed for such year as though the Building,
based on reasonable good faith projections founded on actual operating results
for occupied portions of the Building, had been fully occupied during such year,
and as though the entire Building had been provided with services during such
year.
(E) For each calendar year during the term of this Lease, Landlord shall
provide Tenant with a comparison of the Initial Basic Cost and the estimated
Basic Cost for such calendar year, and Tenant shall thereafter pay in advance in
monthly installments with the base rent Tenant's proportionate share of any
estimated increase in Landlord's Basic Cost of operating the Building over the
Initial Basic Cost. When such year's actual Basic Cost has been determined, the
accounting and settlement provisions of (C) above shall apply.
(F) Tenant at its expense, shall have the right at all reasonable times to
audit Landlord's books and records relating to this Lease for any year or years
for which additional rental payments become due; or at Landlord's sole
discretion Landlord will provide a certified public accountant.
(G) Landlord agrees that during the term of this Lease the Building shall
be run in a reasonable and prudent manner as a first class office building and
that all costs and expenses (including salaries and wages) includable in Basic
Cost shall be comparable to the generally prevailing costs which would then be
paid or incurred therefor by a reasonably prudent operator of a first class
office building in downtown Denver generally similar to the Building.
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(H) Notwithstanding anything contained in this Paragraph 7, the rent
payable by Tenant shall in no event be less than the base rent specified in
Paragraph 4 above.
8. SERVICES FURNISHED BY LANDLORD.
(A) Landlord agrees to furnish Tenant the following services provided
Tenant is not in default:
(1) domestic tempered running water at those points of supply
provided for general use of tenants in the Building; central heat and air
conditioning in season, at such times as Landlord normally furnishes those
services to tenants in the Building, and at such temperatures and in such
amounts as are considered by Landlord to be standard, subject to applicable
governmental rules, regulations, laws and energy conservation guidelines,
but such service on Saturday afternoons, Sundays and holidays shall be
furnished only upon the request of the Tenant received no later than 3:00
p.m. of the prior business day, and Tenant shall bear the entire cost
thereof, prorated with any other tenants requesting the same service;
routine maintenance, painting and electric lighting service for all public
areas and special areas of the Building in the manner and to the extent
deemed by Landlord to be standard, including janitor service on the basis
of a five-day week; and
(2) electrical facilities at standard outlets for sufficient power to
operate typewriters, calculating machines and other machines of similar low
electrical consumption; provided, however, that Tenant shall bear the
utility costs occasioned by electro-data processing machines, photocopy
machines and similar machines of high electrical consumption, including
additional air conditioning costs attributable thereto.
(B) If Landlord shall be unable to any extent to furnish the services
described in (A) above, or if any cessation thereof occurs, or if any of the
equipment or machinery should break down, or for any cause cease to function
properly, such occurrences shall not render Landlord liable in any respect for
damages to either person or property, not be construed as an eviction of Tenant,
nor work an abatement of rent, nor relieve Tenant from fulfillment of any
covenant or agreement herein.
(C) Landlord shall provide only such security for the Building as Landlord
deems necessary, which shall not include any special security measures because
of the presence of Tenant or Tenant's business. Landlord shall have no
responsibility to prevent and shall not be liable to Tenant for losses due to
theft, burglary or vandalism, or for damages done by unauthorized persons
gaining access to the Premises.
(D) Landlord shall furnish Tenant, free of charge, with two keys for each
corridor door entering the Premises. Additional keys will be furnished at a
charge by Landlord equal to the cost plus 15% on an order signed by Tenant or
Tenant's authorized representative. All such keys shall remain the property of
Landlord. No additional locks shall be allowed on any door of the Premises, and
Tenant shall not make, or permit to be made, any duplicate keys, except those
furnished by Landlord. Upon termination of this Lease, Tenant shall surrender
to Landlord all keys to the Premises, and give to Landlord the explanation of
the combination of all locks for safes, safe cabinets and vault doors, if any,
in the Premises.
(E) Landlord shall provide and install, at Tenant's costs, all letters or
numerals on doors in the Premises; all such letters and numerals shall be in the
Building's standard graphics, and no other shall be used or permitted on the
Premises without Landlord's express approval.
(F) If, upon the request of Tenant, Landlord furnishes Tenant with any
additional services not described hereinabove as services normally furnished by
Landlord, Tenant shall pay Landlord for such additional services at the
prevailing wage and material rates in Denver, Colorado, at the time said
services are performed. Charges for such additional services shall be deemed to
be additional rent, and may be collected by Landlord as provided in Paragraph 5
above.
9. IMPROVEMENTS BY LANDLORD.
In preparing the Premises for occupancy by Tenant, Landlord shall be
required to bear the expense of installing the items listed in the Work Letter,
attached hereto as Exhibit B and made a part hereof, but only to the extent that
such expense does not exceed the allowances indicated in said Work Letter. All
installations in excess of those set forth in the Work Letter shall be for
Tenant's account and at Tenant's cost, which cost shall by payable by Tenant to
Landlord as additional rent hereunder promptly upon being invoiced therefor.
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10. LATENT DEFECTS.
Taking possession of the Premises by Tenant shall be conclusive evidence as
against Tenant that the Premises were in good and satisfactory condition when
possession was taken, subject only to latent defects and those deficiencies
listed in writing in a notice delivered to Landlord by Tenant within thirty days
after the date Tenant takes possession of the Premises.
11. QUIET ENJOYMENT.
Tenant shall, and may peacefully have, hold and enjoy the Premises, subject
to the other terms hereof, provided that Tenant pays the rental herein recited
and performs all of Tenant's covenants and agreements herein contained. It is
understood and agreed that this covenant and any and all other covenants of
Landlord contained in this Lease shall be binding upon Landlord and its
successors only with respect to breaches occurring during their respective
ownerships of the Landlord's interest hereunder. In addition, Tenant
specifically agrees to look solely to Landlord's or its successor's interest in
the Building for the recovery of any judgment from Landlord, it being agreed
that Landlord or any successor in interest shall never be personally liable for
any such judgment. The provision contained in the foregoing sentence is not
intended to, and shall not, limit any right that Tenant might otherwise have to
obtain injunctive relief against Landlord or Landlord's successors in interest,
or any suit or action in connection with enforcement or collection of amounts
which may become owing or payable under or on account of insurance maintained by
Landlord.
12. REPAIRS BY LANDLORD.
(A) Unless otherwise expressly stipulated herein, Landlord shall not be
required to make any improvements to or repairs of any kind or character on the
Premises during the term of this Lease, except such repairs as may be deemed
necessary by Landlord for normal maintenance operations of the Building. The
obligation of Landlord so to maintain and repair the Premises shall be limited
to building standard items. Special leasehold improvements will, at Tenant's
written request, be maintained by Landlord, and Tenant shall pay to Landlord for
such maintenance as additional rent hereunder an amount equal to Landlord's
actual costs, plus 15% of said costs to cover overhead.
(B) If any improvement, structural modification or addition to the
Building is required subsequent to the commencement of the term hereof by any
change in the laws, ordinances, rules, regulations or order of any governmental
or quasi-governmental authority having jurisdiction over the Building, Landlord
shall make such improvement, modification or addition, and the rent to be paid
thereafter by Tenant shall be further adjusted, in such amount as Landlord's
independent certified public accountant may determine, so that Tenant pays its
pro rata share of Landlord's per square foot cost (computed in the same manner
as otherwise provided in this Lease) of such improvement, modification or
addition, amortized at a market rate of return over the useful life thereof. In
determining such adjustment in rent, Landlord's independent certified public
accountant shall consider any cost reductions to Landlord in operating the
Building resulting from such improvement, modification or addition. Tenant
shall commence payment of any adjustment in its rent pursuant to this paragraph
on the first day of the month following completion by Landlord of such
improvement, modification or addition.
13. REPAIRS BY TENANT.
(A) Landlord shall have the right, at its option, at Tenant's own cost and
expense, to repair to replace any damage done to the Building, or any part
thereof, caused by Tenant or Tenant's agents, employees, invitees, or visitors,
and Tenant shall pay the cost thereof to the Landlord on demand as additional
rent.
(B) Tenant shall make no alterations in or additions or repairs to the
Premises without first obtaining the written consent of Landlord and after
receiving written consent, Tenant shall notify Landlord at least thirty business
days in advance of any alterations in or repairs or additions to the Premises
which Tenant proposes to make. Tenant shall coordinate any work it proposes to
perform upon the Premises with Landlord in order to prevent a disruption of the
Building's operation.
(C) Tenant shall indemnify and hold Landlord harmless against any
liability, loss, damage, costs or expenses, including attorneys' fees, on
account of any claims of any nature whatsoever including claims of liens by
laborers, materialmen or others for work performed for, or materials or supplies
furnished to Tenant or persons claiming under Tenant. Should any liens be filed
or recorded against the Premises or any action affecting the title thereto be
commended, Tenant shall give Landlord written notice thereof. Within twenty
days after the filing, recording or commencement thereof, Tenant shall cause
such liens to be removed of record or such action to be dismissed; provided,
however, that if Tenant shall desire to contest any claim of lien, it shall
furnish security that is satisfactory to Landlord. If a final judgment is
entered establishing the validity or existence of a lien for any amount, Tenant
shall pay and satisfy the
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same at once. If Tenant shall be in default under the foregoing provisions,
Landlord may (but without being required to do so) pay such lien or claim and
any costs, and the amount so paid, together with reasonable attorneys' fees
incurred in connection therewith, shall be immediately due from Tenant to
Landlord, with interest at the rate of 12 percent per year from the dates of
Landlord's payments, to be payable by Tenant hereunder as additional rent.
(D) At least five days prior to the commencement of any work on the
Premises, permitted to be done by persons requested by Tenant, the Tenant shall
notify Landlord of the proposed work and the names and addresses of the persons
supplying labor and materials for the proposed work so that the Landlord may
avail itself of the provisions of statutes such as Section 38-22-105(2), C.R.S.
1973. During any such work on the Premises, Landlord shall have the right to go
upon and inspect the Premises at all reasonable times, and shall have the right
to post and keep posted thereon notices such as those provided for by Section
38-22-105(2), C.R.S. 1973, or to take any further action which Landlord may deem
to be proper for protection of Landlord's interest in the Premises.
14. CARE OF THE PREMISES.
(A) Tenant shall not commit or allow any waste or damage to be committed
on any portion of the Premises. At the termination of this Lease, by lapse of
time or otherwise, Tenant shall deliver up the Premises to Landlord in as good
condition as at date of possession by Tenant, ordinary wear and tear excepted;
and Tenant shall remove all of Tenant's movable furniture and other effects.
All movable furniture and other effects not so removed shall conclusively be
deemed to have been abandoned and may be appropriated, sold, stored, destroyed
or otherwise disposed of by Landlord without notice to Tenant or any other
person and without obligation to account therefor, and Tenant shall pay Landlord
all expenses incurred in connection with such property. Tenant's obligation to
observe or perform this covenant shall survive the termination of this Lease.
Upon such termination, Landlord shall have the right to reenter and resume
possession of the Premises.
(B) Tenant shall pay before delinquency any and all taxes, assessments,
license taxes and other charges levied, assessed or imposed and which become
payable during the term of this Lease upon Tenant's operations, occupancy or
conduct of business at the Premises or upon Tenant's equipment, furniture,
appliances, trade fixtures, leasehold improvements and other personal property
of any kind installed or located on the Premises.
15. ASSIGNMENT OR SUBLEASE.
Neither this Lease nor any part of the Premises shall be assigned or sublet
by Tenant without the prior written consent of Landlord, and notwithstanding the
consent of Landlord to any such assignment or subletting, the Tenant shall not
be released of its obligation to pay the rent and to perform all other
obligations to be performed by Tenant hereunder for the term of this Lease.
16. SIGNS.
Tenant shall not place signs on the Premises which are visible from outside
the Premises without first obtaining the written consent of Landlord.
17. HAZARDOUS USE.
Tenant shall not occupy or use, or permit any portion of the Premises to be
occupied or used for any business or purpose which is unlawful, disreputable or
deemed to be extra-hazardous, or permit anything to be done which would in any
way increase the rate of casualty insurance coverage on said Building and/or its
contents.
18. RULES AND REGULATIONS.
The Rules and Regulations set forth in Exhibit C attached hereto are hereby
made a part of this Lease. Landlord may, from time to time, amend, modify,
delete or add new and additional reasonable Rules and Regulations for use,
safety, cleanliness and care of the Premises and the Building, and the comfort,
quiet and convenience of occupants of the building, provided that no change
shall materially and adversely affect the use of the Premises by Tenant without
the consent of the Tenant, which consent shall not be unreasonably withheld.
Such new or modified Rules and Regulations shall be effective upon notice
thereof to Tenant from Landlord. In case of a conflict between the terms of the
Lease and the Rules and Regulations, the terms of this Lease shall control.
Tenant will cause its employees and agents, or any other permitted by Tenant to
occupy or enter the Premises, at all times to abide by said Rules and
Regulations set forth in Exhibit C, or as hereafter modified by Landlord. The
breach by Tenant of any Rules or Regulations set forth in Exhibit C, or any
amendments or additions thereto, shall be a default hereunder, and Landlord
shall have all remedies in this Lease provided for in the event of default
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by Tenant and shall not be responsible to Tenant for non-observance by any other
tenant or person of such Rules and Regulations.
19. ENTRY BY LANDLORD.
Tenant shall permit Landlord or its agents or representatives to enter into
and upon any part of the Premises at all reasonable hours to inspect the same,
clean or make repairs, alterations or additions thereto, as Landlord may deem
necessary or desirable, and Tenant shall not be entitled to any abatement or
reduction of rent by reason thereof.
20. NUISANCE.
Tenant shall conduct a business and control Tenant's agents, employees,
invitees and visitors in such manner as not to create any nuisance, or interfere
with, annoy or disturb any other tenant or Landlord in the operation of the
Building.
21. SUBORDINATION TO MORTGAGE.
This Lease shall be and is hereby made subordinate to any mortgages or
deeds of trust which may now or hereafter encumber the Building, and to all
renewals, modifications, consolidations, replacements and extension thereof.
This clause shall be self-operative and no further instrument of subordination
need by required by any mortgagee. It is contemplated that the mortgagee will
be Metropolitan Life Insurance Company. This clause shall be for the benefit of
any mortgagee, including, but not limited to, Metropolitan Life Insurance
Company, as contemplated. In confirmation of such subordination, however,
Tenant shall, at Landlord's request, execute promptly any appropriate
certificate, subordination agreement or instrument that Landlord may request.
Tenant hereby constitutes and appoints Landlord the Tenant's attorney-in-fact to
execute any such certificate, subordination agreement or instrument for and on
behalf of Tenant. Notwithstanding the fact that this Lease is and shall be
subordinate as provided above, Tenant will, at the election and in the sole
discretion of any person or party succeeding to the interest of Landlord as a
result of the enforcement of the default or foreclosure provisions of such
mortgage or deed of trust, including conveyance by deed in lieu of foreclosure,
automatically become the Tenant of such successor in interest without change in
the terms or other provisions of this Lease and Tenant agrees to attorn to such
party; provided, however, that such mortgagee or successor in interest shall not
(i) be bound by any payment of rent or additional rent for more than one month
in advance; (ii) be bound by any amendment or modification of this Lease made
without the written consent of such mortgagee or such successor in interest;
(iii) be liable for any previous act or omission by Landlord under this Lease;
(iv) be subject to any offset which shall theretofore have accrued to Tenant
against Landlord; (v) be obligated with respect to any security deposit under
this Lease unless such security deposit has been physically delivered to such
mortgagee or successor; or (vi) be bound or liable under any provisions in the
Lease whereby Landlord assumed the obligations of Tenant under leases previously
executed by Tenant covering space in other buildings. Tenant further agrees,
upon demand, to execute such nondisturbance and attornment agreements as any
such mortgagee or successor shall request.
22. ESTOPPEL CERTIFICATE.
At Landlord's request Tenant will execute either an estoppel certificate
addressed to Landlord's mortgagee or any prospective successor of Landlord, or a
three-party agreement among Landlord, Tenant and said mortgagee or successor,
certifying to such facts (if true) regarding the status and terms of this Lease
as may be requested, and agreeing to such notice provisions and other matters as
such mortgagee or successor may reasonably require in connection with Landlord's
financing or the conveyance of the Building.
23. CONDEMNATION AND LOSS OR DAMAGE.
If more than 15% of the Premises shall be taken or condemned for any public
purpose, this Lease shall, at the option of either party, forthwith cease and
terminate. All proceeds from any such taking or condemnation of the Premises
shall belong to and be paid to Landlord. Landlord shall not be liable or
responsible to Tenant for any loss or damage to any property or person
occasioned by theft, fire, act of God, public enemy, injunction, riot, strike,
insurrection, war, court order, requisition or order of governmental body, or
authority; or for any damage or inconvenience which may arise through repair or
alteration of any part of the Building, or failure to make any such repairs.
24. LIEN.
As additional security for the Tenant's performance of its obligations
under this Lease and the payment of all rent and other sums due or to become due
hereunder, Tenant hereby grants to Landlord a security interest in and to all of
the personal property of Tenant situated on the Premises except any and all of
Tenants proprietary geological data and information. Tenant shall execute such
documents as the Landlord may reasonably require to evidence Landlord's security
interest in such personal property. If
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Tenant is in default under this Lease, such personal property shall not be
removed from the Premises (except to the extent such property is replaced with
an item of equal or greater value) without the prior written consent of
Landlord. It is intended by the parties hereto that this instrument shall have
the effect of a security agreement and financing statement covering such
personal property under the Uniform Commercial Code of the State of Colorado, as
amended from time to time, and may be filed or recorded as such. Upon the
occurrence of an event of default set forth herein, Landlord may exercise any
rights of a secured party under said Uniform Commercial Code, including the
right to take possession of such personal property and (after ten days' notice
to those parties required by statute to be notified) to sell the same for the
best price that can be obtained at public or private sale, and out of the money
derived therefrom, pay the amount due Landlord and all costs arising out of the
execution of the provisions of this section, paying the surplus, if any, to the
Tenant. If such personal property, or any portion thereof, shall be offered at a
public sale, Landlord may become the purchaser thereof.
25. HOLDING OVER; MONTH-TO-MONTH TENANCY.
If, after the expiration of the term of this Lease, Tenant shall remain in
possession of the Premises or any part thereof and continue to pay rent, without
any express agreement as to such holding, then such holding over shall be deemed
and taken to be a periodic tenancy from month to month, subject to all the terms
and conditions of this Lease on the part of Tenant to be observed and performed
and at a rent equivalent to double the then current monthly installment of rent
due hereunder, payable in advance on the first day of each calendar month
thereafter. Such holding over may be terminated by Landlord or Tenant upon ten
days' notice. In the event that Tenant fails to surrender the Premises upon
termination or expiration of this Lease or such month-to-month tenancy, then
Tenant shall indemnify Landlord against loss or liability resulting from any
delay of Tenant in not surrendering the Premises, including, but not limited to,
any amounts required to be paid to third parties who were to have occupied the
Premises and any attorney's fees related thereto.
26. CASUALTY.
In the event of a fire or other casualty in or to the Premises, Tenant
shall immediately give notice thereof to Landlord. If the Premises, through no
fault or neglect of Tenant, its agents, employees, invitees or visitors, shall
be partially destroyed by fire or other casualty so as to render the Premises
untenantable, and Landlord elects to repair the same, the rent herein shall
abate thereafter until such time as the Premises are made tenantable by
Landlord. In the event of the total destruction of the Premises without fault
or neglect of Tenant, its agent, employees, invitees or visitors, or if from any
cause the Premises or the Building shall be so damaged that Landlord shall not
decide to rebuild (which decision Landlord may make in its sole discretion),
then all rent owed up to the time of such destruction or termination shall be
paid by Tenant and this Lease shall cease and come to an end.
27. ATTORNEY'S FEES.
In the event Tenant makes default in the performance of any of the terms,
covenants, agreements or conditions contained in this Lease and Landlord places
the enforcement of this Lease, or any part thereof, or the collection of any
rent due, or to become due hereunder, or recovery of the possession of the
Premises in the hands of an attorney, or files suit upon the same, Tenant agrees
to pay Landlord a reasonable attorney's fee incurred by Landlord.
28. ALTERATION.
This Lease may not be altered, changed or amended, except by an instrument
in writing, signed by both parties.
29. ASSIGNMENT BY LANDLORD.
Landlord shall have the right to transfer and assign, in whole or in part,
all its rights and obligations hereunder and in the Building and property
referred to herein, and in such event and upon Landlord's transferee assuming
Landlord's obligations hereunder (any such transferee to have the benefit of,
and be subject to, the provisions of Paragraph 44 below) no further liability or
obligation shall thereafter accrue against Landlord hereunder.
30. BREACH OF LEASE.
If default shall be made in the payment of any sum to be paid by Tenant
under this Lease, and such default shall continue for ten days, or default shall
be made in the performance of any of the other covenants or conditions which
Tenant is required to observe and to perform, and such default shall continue
for twenty days, or if the interest of Tenant under this Lease shall be levied
upon under execution or other legal process, or any petition shall be filed by
or against Tenant to declare Tenant a bankrupt, for the reorganization or
rehabilitation of Tenant or to delay, reduce or modify Tenant's debts or
obligations, or if any petition shall be filed or other action taken to
reorganize or modify Tenant's capital structure
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which said reorganized or modified capital structure results in the net worth of
Tenant decreasing by 25 percent (25%) or more from the date of this Lease if
Tenant be a corporation or other entity, or if Tenant be declared insolvent
according to law, or if any assignment of Tenant's property shall be made for
the benefit of creditors, or if a receiver or trustee is appointed for Tenant or
Tenant's property, or if Tenant shall abandon the Premises during the terms of
this Lease or any renewals or extensions thereof, then Landlord may treat the
occurrence of any one or more of the foregoing events as a breach of this Lease
(provided that no such levy, execution, legal process or petition filed against
Tenant shall constitute a breach of this Lease if Tenant shall vigorously
contest the same by appropriate proceedings and shall remove or vacate the same
within twenty days from the date of its creation, service or filing).
31. REMEDIES UPON BREACH.
In the event of a breach of this Lease by Tenant, Landlord may have any one
or more of the following described remedies, in addition to all other rights and
remedies provided at law or in equity:
(A) Landlord may terminate this Lease and forthwith repossess the Premises
and be entitled to recover as damages a sum of money equal to the total of (i)
the cost of recovering the Premises, including Landlord's attorney's fees; (ii)
the unpaid rent earned at the time of termination, plus interest thereon at the
rate of 12% per annum from the due date; (iii) the balance of the rent for the
remainder of the term less the fair market value of the Premises for said
period; (iv) damages for the wrongful withholding of the Premises by Tenant; and
(v) any other sum of money and damages owed by Tenant to Landlord.
(B) Landlord may retake possession of the Premises and shall have the
right, but not the obligation, without being deemed to have accepted a surrender
thereof, and without terminating this Lease, to relet same for the remainder of
the term provided for herein; and if the rent received through such reletting
does not at least equal the rent provided for herein, Tenant shall pay and
satisfy any deficiency between the amount of the rent so provided for and that
received through reletting; and, in addition thereto, Tenant shall pay all
reasonable expenses incurred in connection with any such reletting, including,
but not limited to, the cost of renovating, altering and decorating for a new
occupant.
32. NON-WAIVER.
Failure of Landlord or Tenant to declare any breach or default immediately
upon occurrence thereof, or delay in taking any action in connection therewith,
shall not waive such breach or default, but Landlord or Tenant shall have the
right to declare any such breach or default at any time and take such action as
might be lawful or authorized hereunder, either at law or in equity.
33. HOLD HARMLESS.
Landlord shall not be liable to Tenant, or to Tenant's agents, servants,
employees, customers or invitees, for any damage to person or property caused by
any act, omission or neglect of Tenant, and Tenant agrees to indemnify and hold
Landlord harmless from all liability and claims for any such damage.
34. WAIVER OF SUBROGATION.
Landlord shall cause each insurance policy carried or to be carried by
Landlord insuring the Premises against loss, and Tenant shall cause each
insurance policy carried or to be carried by Tenant on or relating to the
Premises, its fixtures and contents, to be written in a manner so as to provide
that the insurance company waives all right of recovery by way of subrogation
against Landlord or Tenant, as the case may be, in connection with any loss or
damage covered by any such policies. Neither party, its agents, officers and
employees shall be liable to the other for any loss or damage caused (regardless
of cause or origin, including the negligence of any party hereto, its agents,
officers or employees) by fire or any other risk or risks against which any such
policy insures, provided such waiver was obtainable. However, if such waiver
cannot be obtained, or is obtainable only by the payment of an additional
premium above that charged by companies carrying such insurance without such
waiver of subrogation, the party undertaking to obtain such waiver shall notify
the other party of such fact and such other party shall have a period of ten
days after the giving of such notice either to (i) place such insurance in
companies which are satisfactory to the other party and will carry such
insurance with such waiver, and/or (ii) agree to pay such additional premium (in
the case of Tenant, pro rata in the proportion which the area of the Premises
bears to the total net rentable area covered by such insurance). If neither (i)
nor (ii) is done, this paragraph shall be null and void for so long as either
such waiver cannot be obtained or the party in whose favor a waiver of
subrogation is desired shall refuse to pay the additional premium; provided that
if such waiver should subsequently become obtainable without payment of an
additional premium, and the party in whose favor a waiver of subrogation is
desired so notifies the other party in writing, this paragraph shall, at the
expiration of sixty days after such notice, be restored to full force and
effect. If the release of either Landlord or Tenant as set forth in the second
sentence of this paragraph
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shall contravene any law with respect to exculpatory agreements, the liability
of the party in question shall be deemed not released but shall be secondary to
that of the other party's insurer.
35. CASUALTY INSURANCE.
Landlord shall maintain fire and extended coverage insurance on the portion
of the Building constructed by Landlord, including additions and improvements by
Tenant which are required by this Lease and which have become or are to become
the property of Landlord upon vacation of the Premises by Tenant. Said
insurance shall be maintained with an insurance company authorized to do
business in Colorado, in amounts desired by Landlord and at the expense of
Landlord and payments for losses thereunder shall be made solely to Landlord.
Tenant shall maintain at its expense fire and extended coverage insurance on all
of its personal property, including removable trade fixtures, located in the
Premises and on all additions and improvements made by Tenant and not required
to be insured by Landlord above. If the annual premiums to be paid by Landlord
shall exceed the standard rates because of Tenant's operations, the contents of
the Premises, or improvements with respect to the Premises beyond building
standard result in extra-hazardous exposure, Tenant shall promptly pay the
excess amount of the premium upon request by Landlord.
36. LIABILITY INSURANCE.
Tenant shall, at Tenant's expense, maintain a policy or policies of
comprehensive general liability insurance with the premiums thereon fully paid
on or before due date, issued by and binding upon an insurance company approved
by Landlord, such insurance to afford minimum protection of not less than
$500,000.00 in respect of personal injury or death in respect of any one person
and of not less than $1,000,000.00 for death or injury to more than one person,
and $500,000.00 for property damage. Any such policy shall name Landlord as an
additional insured. Tenant shall at Landlord's request furnish Landlord with
copies of all insurance to be maintained by Tenant and with evidence of payment
of the premiums thereon. All such policies shall contain a clause or
endorsement to the effect that they may not be terminated or materially amended
during the term of this Lease except after ten days' written notice thereof to
Landlord.
37. NOTICE TO MORTGAGEE.
Tenant agrees to give any mortgagee, by registered or certified mail, a
copy of any notice of breach or default served by Tenant upon Landlord, provided
that prior to such notice Tenant has been notified in writing (by way of notice
of assignment of rents and leases or otherwise) of the address of such
mortgagee. Tenant further agrees that if Landlord shall have failed to cure
such breach or default within the time provided for in this Lease, then the
mortgagee shall have an additional thirty days within which to cure such breach
or default or if such cannot be cured within that time, then such additional
time as may be necessary if within such thirty days the mortgagee has commenced
and is diligently pursing the remedies necessary to cure such breach or default
(including but not limited to commencement of foreclosure proceedings if
necessary to effect such cure) in which event this Lease shall not be terminated
while such remedies are being so diligently pursued.
38. AUTHORITIES FOR ACTION AND NOTICE.
(A) Landlord may act in any matter provided for herein by its Property
Manager and any other person who may from time to time be designated in writing
by Landlord to act on its behalf. Tenant shall designate in writing one or more
persons to act on Tenant's behalf in any matter provided for herein and may from
time to time change such designation. In the absence of any such designation,
the person or persons executing this Lease shall be deemed to be authorized to
act on behalf of Tenant in any matter provided for herein.
(B) All notice or demands required or permitted to be given to the
Landlord hereunder shall be in writing, and shall be deemed duly served when
delivered personally to Landlord or to the Property Manager employed by Landlord
at the office of such Property Manager in the Building, or when deposited in the
United States mail, postage prepaid, certified or registered, return receipt
requested, addressed to Landlord at its address stated on the first page of this
Lease, or at such other address as Landlord may from time to time specify in
writing. All notices or demands required to be given to the Tenant hereunder
shall be in writing, and shall be deemed duly served when delivered personally
to any employee of Tenant designated in accordance with (A) above to act for
Tenant, or when deposited in the United States mail postage prepaid, certified
or registered, return receipt requested, addressed to Tenant at Tenant's address
stated on the first page of this Lease, or at Tenant's address in the Building,
if Tenant has taken possession hereunder, or at such other address as Tenant may
from time to time specify in writing.
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39. SUCCESSORS AND ASSIGNS.
This Lease shall be binding upon and inure to the benefit of the successors
and assigns of Landlord, and shall be binding upon and inure to the benefit of
Tenant and Tenant's successors, assigns and personal representatives to the
extent assignment may be approved by Landlord hereunder.
40. RELOCATION.
At any time during the term of this Lease, Landlord shall have the right,
upon thirty (30) days' prior written notice to Tenant to substitute other space
within the Building for the Premises (the "Substituted Premises"). Tenant shall
relocate to the Substituted Premises on the date set forth in Landlord's notice
(to occur no sooner than thirty (30) days after receipt by Tenant of said
notice) and Landlord agrees to pay all reasonable moving expenses of Tenant
incidental to the Substituted Premises, including the reasonable replacement of
Tenant's improvements incidental to the Substituted Premises. In the event
Landlord elects to exercise this right, the Substituted Premises shall be
located in an equivalent location on another floor, or alternatively in another
location if approved by Tenant (which approval shall not be unreasonably
withheld), contain as much square footage as the originally leased Premises and
the rental rate shall remain as set forth in Paragraph 4 of the Lease. The
suite number designation and Exhibit A shall be deemed revised to reflect the
description of the Substituted Premises. Except for such revisions, the terms
and provisions of the Lease shall be applicable to the Substituted Premises and
the Substitute Premises shall be deemed to be the Premises under the Lease.
41. MISCELLANEOUS.
(A) The pronouns of any gender shall include the other genders, and either
the singular or the plural shall include the other.
(B) The rights and remedies of Landlord hereunder, and any other rights
and remedies provided by law shall be construed as cumulative and no one of them
is exclusive of any other right or remedy. Such rights and remedies shall
further be continuing rights, none of which shall be exhausted by being
exercised on one or more occasions. Landlord shall be entitled to an injunction
or the appointment of a receiver for Tenant in proper cases upon ex parte
application therefor to enforce any part of parts of this Lease or to prevent or
stop any violation, breach or default on the part of Tenant.
(C) Whenever in this Lease Landlord reserves or is given the right and
power to give or withhold its consent to any action on the part of Tenant, such
right and power shall not be exhausted by its exercise on one or more occasions,
but shall be a continuing right and power for the full term of this Lease.
(D) Tenant acknowledges and agrees that it has not relied upon any
statements, representations, agreements or warranties except such as are
expressed herein. No amendment or modification of this Lease shall be valid or
binding unless expressed in writing and executed by the parties hereto in the
same manner as the execution of this Lease.
(E) If any clause or provision of this Lease is illegal, invalid or
unenforceable under present or future laws effective during the term of this
Lease, then and in that event, it is the intention of the parties hereto that
the remainder of this Lease shall not be affected hereby.
(F) This Lease is made in and shall be governed by and interpreted in
accordance with the laws of the State of Colorado.
42. REAL ESTATE BROKER.
Tenant warrants and agrees to save and hold Landlord harmless from any and
all leasing commissions (including renewals, extensions or options), costs and
liability with respect to the Premises claimed by any real estate broker except
those brokers with whom Landlord may have contracted directly.
43. RECORDING - SHORT FORM MEMORANDUM.
If requested at any time by Landlord, Tenant shall execute (i) a short form
memorandum of this Lease in recordable form which may, at Landlord's option, be
placed of record; and (ii) a memorandum of this Lease on such form as may be
prescribed by the Colorado Department of Revenue, or any other appropriate form,
which memorandum may, at Landlord's option, be filed with said Department so
that Landlord may avail itself of the provision of statutes such as Section 39-
22-604(7)(c), Colorado Revised Statutes 1973.
44. SECURITY DEPOSIT.
Tenant has deposited the sum of $7,000.00 with Landlord as security for
Tenant's prompt and proper performance of all of the terms, covenants and
agreements contained in this Lease. Tenant
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understand and agrees (i) that such deposit is not a prepayment of rent and that
Landlord shall have no obligation to account to Tenant and Tenant shall have no
right to recover from Landlord any interest, earnings or other increments which
may accrue during the time such deposit is held by Landlord.
45. PARKING.
Landlord hereby agrees to rent to Tenant, during the initial term of this
Lease, permits to park a total of sixteen (16) automobiles in the building
parking garage (hereinafter called the "Garage"). Such parking permits shall be
provided on an unassigned basis, whereby rental rates for ten (10) of the
sixteen (16) parking permits shall be $55.00 per month for the initial five (5)
year term of this Lease only, and rates for six (6) of the sixteen (16) parking
permits shall be at the rate determined by Landlord from time to time in the
Garage. Additional spaces may be provided on a month-to-month basis as
available at the rate determined by Landlord from time to time in the Garage.
46. RIGHT OF FIRST OFFER.
Provided Tenant is not in default in the performance of the terms and
conditions of this Lease, Tenant shall have and is hereby granted during the
initial term of this Lease, a Right of first Offer to lease space on the twenty-
fourth floor contiguous to the Premises, ("Right of First Offer Space"). Said
Right of First Offer shall be provided in accordance with the following terms
and conditions:
(A) Tenant shall have ten (10) business days after being notified by
Landlord in writing, of Landlord's contemplated lease transaction with a third
party or parties regarding, including but not limited to, said Right of First
Offer Space, within which to advise Landlord, in writing, in the manner provided
below, if Tenant desires to exercise it's Right of First Offer as to such space.
If Tenant does desire to exercise it's rights hereunder, it shall be required to
add to it's Lease all of the space offered in the contemplated lease transaction
as provided in Landlord's notice, at that particular time. Unless Landlord is
timely notified as aforesaid, it shall be conclusively presumed that Tenant does
not desire to exercise its Right of First Offer as to such space by Landlord, in
accordance with the provisions of subparagraph (B) below, shall be free to
consummate the contemplated lease transaction with said third party. Such space
shall be offered to Tenant upon the terms and conditions, and at the rate which
the Landlord would quote to such third party for the space, but in no event
shall the rental rate be less than the rent which Tenant is then paying. Such
terms and conditions may include, but not be limited to, escalations, pass
throughs, and other matters.
(1) If Tenant elects to add such offered space to its Lease, the
terms and conditions and rental rate on which such space shall be added will be
identical to those which Landlord would quote to such third party for such space
if it were to be available for leasing for a lease term scheduled to commence at
the time of the addition of the space, but in no event shall the rental be less
than the rental rate Tenant is paying for the Premises.
(2) If Tenant exercises such Right of First Offer with respect to any
such space so offered, Tenant will accept such space in an "as-is" condition
without any remodeling work or fix-up work to be performed by Landlord except as
provided in the notice from Landlord.
(3) Tenant must take all of the space offered by Landlord to Tenant
at any particular time and may not elect to lease only a portion thereof.
(4) Tenant's right to exercise its Right of First Offer shall be
conditioned on Tenant not having subleased more than twenty percent (20%) of the
original Premises.
(B) As provided in subparagraph (A) above, if Tenant does not exercise its
initial Right of First Offer, Landlord shall be free to initially lease such
space to whomever it chooses in accordance with the notification to Tenant. The
continuing Right of First Offer shall be offered to Tenant on the following
terms and conditions:
(1) Landlord agrees to notify Tenant in writing thirty (30) days
prior to the expiration of the existing Lease term (or upon vacation thereof by
the then Tenant thereof, successors, or assigns) that same will be available for
leasing by Tenant. Tenant shall have thirty (30) days after the receipt of any
such notice within which to notify Landlord in writing if Tenant desires to
lease such space for the balance of Tenant's Lease term or renewals hereunder.
If Tenant does not notify Landlord within said thirty (30) days period, Landlord
shall be free to lease such space to anyone whom it desires, and Tenant shall
not have further rights with respect to such space.
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47. RENEWAL OPTION.
Provided Tenant is not in default in the performance of the terms and
conditions under this Lease and Tenant has not sublet or assigned more than
twenty percent (20%) of the leased premises, Tenant is hereby granted the option
to renew the term of this Lease for all space then under lease to Tenant for a
period of five (5) years ("Renewal Term"), to commence at the expiration of the
initial five (5) year term of this Lease. Tenant shall exercise said option by
giving Landlord written notification of such exercise at least six (6) months
prior to the expiration date of the initial term of the Lease. The base annual
rental for the Premises during the Renewal Term shall be mutually agreed upon by
Tenant and Landlord, provided, however, if Landlord and Tenant have not mutually
agreed to the base annual rental for the Premises during the Renewal Term on or
before thirty (30) days prior to the expiration date of the Lease term herein,
then this Renewal Option shall expire. Any such renewal of this Lease shall be
upon the same terms and conditions of this Lease, except (a) the base rent
during the Renewal Term shall be as provided above; (b) Tenant shall not have
the right to assign its renewal rights to a subtenant under this Lease; and (c)
the Premises will be provided in their then existing condition at the time the
Renewal Term commences.
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IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the
date aforesaid.
LANDLORD: THE 1125 VENTURE
By: ENERGY PLAZA ASSOCIATES
By: /s/ L.C. Fulenwider Partner
----------------------------------
L.C. Fulenwider III
Executive Vice President
TENANT: BARRETT RESOURCES CORPORATION
By: /s/ John F. Keller Partner
----------------------------------
John F. Keller
Executive Vice President
STATE OF COLORADO )
) ss
COUNTY OF DENVER )
The foregoing instrument was acknowledged before me this 24th day of July,
1990, by L.C. Fulenwider III as Partner for Energy Plaza Associates, a Colorado
general partnership, as a co-venturer of The 1125 Venture, a Colorado joint
venture.
Witness my hand and official seal.
My Commission Expires: -----------------------------------
Notary Public
- ----------------------------- Address:
STATE OF COLORADO )
) ss
COUNTY OF DENVER )
The foregoing instrument was acknowledged before me this 9th day of July,
1990 by John F. Keller as Executive Vice President of Barrett Resources
Corporation.
Witness my hand and official seal.
My Commission Expires: /s/
-----------------------------------
Notary Public
November 27, 1990 Address: 19377 Hill Dr.
- ----------------- Morrison, CO 80465
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EXHIBIT A
Space Plan/Budget Pricing Plan dated May 15, 1990, last revision date May
29, 1990, and initialed by Landlord and Tenant is part of this Lease, although
not attached hereto.
[DIAGRAM]
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EXHIBIT B
---------
WORK LETTER AGREEMENT
---------------------
THIS WORK LETTER AGREEMENT is entered into as of the 24th day of July,
1990, by and between The 1125 Venture ("Landlord") and Barrett Resources
Corporation ("Tenant").
R E C I T A L S :
A. Concurrently with the execution of this Work letter Agreement, Landlord
and Tenant have entered into a lease (the "Lease") covering certain premises
(the "Premises"), more particularly described in Paragraph 1 of the Lease.
B. In order to induce Tenant to enter into the Lease (which is hereby
incorporated by reference to the extent that the provisions of this Work Letter
Agreement may apply thereto) and in consideration of the mutual covenants
hereinafter contained, Landlord and Tenant hereby agree as follows:
1. COMPLETION SCHEDULE. Within ten (10) days after the execution of the
-------------------
Lease, Landlord shall deliver to Tenant, for Tenant's review and approval, a
schedule (the "Work Schedule") setting forth a timetable for the planning and
completion of the installation of the Tenant Improvements to be constructed in
the Premises, and the beginning date (the "Commencement Date") for the term of
the Lease. The Work Schedule shall set forth each of the various items of work
to be done by or approval to be given by Landlord and Tenant in connection with
the completion of the Tenant Improvements. Such Schedule shall be submitted to
Tenant for its approval and, upon approval by both Landlord and Tenant, such
Schedule shall become the basis for completing the Tenant Improvement work. If
Tenant shall fail to approve the Work Schedule, as it may be modified after
discussions between Landlord and Tenant, within five (5) working days after the
date such Schedule is first received by Tenant, Landlord may, at its option,
terminate the Lease and all of its obligations thereunder.
2. TENANT IMPROVEMENTS. Reference herein to "Tenant Improvements" shall
-------------------
include all work to be done in the Premises pursuant to the Tenant Improvement
Plans described in Paragraph 3 below, including but not limited to, partitioning
, doors, ceilings, floor coverings, wall finishes (including paint and
wallcovering), electrical (including lighting, switching, telephones, outlets,
etc.), plumbing, heating, ventilating and air conditioning, fire protection,
cabinets and other millwork.
3. TENANT IMPROVEMENT PLANS. Immediately after the execution of the
------------------------
Lease, Tenant agrees to meet with Landlord's architect and/or space planner for
the purpose of preparing a space plan for the layout of the Premises. Based
upon such space plan, Landlord's architect shall prepare final working drawings
and specifications for the Tenant Improvements. Such final working drawings and
specifications may be referred to herein as the "Tenant Improvement Plans." The
Tenant Improvement Plans must be consistent with Landlord's standard
specifications (the "Standards") for tenant improvements for the Building, as
the same may be changed from time to time by Landlord.
4. NON-STANDARD TENANT IMPROVEMENTS. Landlord shall permit Tenant to
--------------------------------
deviate from the Standards for the Tenant Improvements; provided that: (a) the
deviations shall not be of a lesser quality than the Standards; (b) the total
lighting for the Premises shall not exceed one fixture per each fifty (50)
square feet of net rentable area; (c) the deviations conform to applicable
governmental regulations and necessary governmental permits and approvals have
been secured; (d) the deviations do not require building service beyond the
level normally provided to other tenants in the Building and do not overload the
floors; and (e) Landlord has determined in its sole discretion that the
deviations are of a nature and quality that are consistent with the overall
objectives of the Landlord for the Building.
5. FINAL PRICING AND DRAWING SCHEDULE. After the preparation of the space
----------------------------------
plan and after Tenant's written approval thereof, in accordance with the Work
Schedule, Landlord shall cause its architect to prepare and submit to Tenant the
final working drawings and specifications referred to in Paragraph 3 hereof.
Such working drawings shall be approved by Landlord and Tenant in accordance
with the Work Schedule and shall thereafter be submitted to the appropriate
governmental body by Landlord's contractor for plan checking and the issuance of
a building permit. Landlord with, Tenant's cooperation, shall cause to be made
any changes in the plans and specifications necessary to obtain the building
permit. Concurrent with the plan checking, Landlord shall have prepared a final
pricing proposal for Tenant's approval, in accordance with the Work Schedule,
taking into account any modifications which may be required to reflect changes
in the plans and specifications required by the Building Department of the City
and County of Denver. After final approval of the working drawings, no further
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<PAGE>
changes to the Tenant Improvement Plans may be made without the prior written
approval from both Landlord and Tenant, and then only after agreement by Tenant
to pay any excess costs resulting from the design and/or construction of such
changes which exceed the Tenant Allowance described in Paragraph 7 below.
Tenant hereby acknowledges that any such changes shall be subject to the terms
of Paragraph 8 hereof.
6. CONSTRUCTION OF TENANT IMPROVEMENTS. After the Tenant Improvement
-----------------------------------
Plans have been prepared and approved, the final pricing proposal has been
approved, and a building permit for the Tenant Improvements has been issued,
Landlord shall enter into a construction contract with its contractor for the
installation of the Tenant Improvements in accordance with the Tenant
Improvement Plans. Landlord shall supervise the completion of such work and
shall use all reasonable efforts to secure substantial completion of the work in
accordance with the Work Schedule. The cost of such work shall be paid as
provided in Paragraph 7 hereof. Landlord shall not be liable for any direct or
indirect damages as a result of delays in construction beyond Landlord's
reasonable control, including, but not limited to, acts of God, inability to
secure governmental approvals or permits, governmental restrictions, strikes,
availability of materials or labor or delays by Tenant (or its architect or
anyone performing services on behalf of Tenant).
7. PAYMENT OF COST OF THE TENANT IMPROVEMENTS.
------------------------------------------
(A) Landlord hereby grants to Tenant a "Tenant Allowance" of One Hundred
Ninety-seven Thousand Ninety-one and 33/100ths Dollars [$197,091.33],
(approximately $12.10 per square foot). Such Tenant Allowance shall be used
only for:
(i) Payment of the cost of preparing the space plan and the final
working drawings and specifications, including mechanical, electrical,
plumbing and structural drawings and of all other aspects of the Tenant
Improvement Plans. The Tenant Allowance may be used for payment of
extraordinary design work not included within the scope of Landlord's
building standard improvements or for payments to any other consultants,
designers, architects over than Landlord's architect, engineers, and/or
space planner, provided said payments be approved by Landlord and do not
exceed the Tenant Allowance herein specified.
(ii) The payment of plan check, permit, and license fees relating to
construction of the Tenant Improvements.
(iii) Construction of Tenant Improvements, including, without
limitation, the following:
(a) Installation within the Premises of all partitioning, doors,
floor coverings, ceilings, wall coverings, painting, millwork, and
similar items.
(b) All electrical wiring, lighting, fixtures, outlets and
switches, and other electrical work to be installed within the
Premises.
(c) The furnishing and installation of all duct work, terminal
boxes, diffusers and accessories required for the completion of the
heating, ventilation and air conditioning systems within the Premises,
including the cost of meter and key control for after-hours air
conditioning.
(d) Any additional Tenant requirements including, but not limited
to, odor control, special heating, ventilating and air conditioning,
noise or vibration control or other special systems.
(e) All fire and life safety control systems such as fire walls,
sprinklers, halon, fire alarms, including piping, wiring and
accessories installed within the Premises.
(f) All plumbing, fixtures, pipes and accessories to be installed
within the Premises.
(g) Testing and inspection costs.
(h) Contractor's fees, including but not limited to, any fees
based on general conditions.
(iv) All other costs to be expended by Landlord in the construction of
the Tenant Improvements, including those costs incurred by Landlord for
construction of elements of the
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Tenant Improvements in the Premises, which construction was performed by
Landlord prior to the execution of this Lease by Landlord and Tenant (i.e.,
during or after the construction of the base Building) and which
construction is for the benefit of tenants and is customarily performed by
Landlord prior to the execution of leases for such space in the Building
for reasons of economics (examples of such construction would include the
extension of mechanical [including heating, ventilating and air
conditioning systems] and electrical distribution systems outside the core
of the Building, wall construction, column enclosures and painting outside
of the core of the Building, ceiling hanger wires and window treatment).
(B) The cost of each item shall be charged against the Tenant Allowance.
In the event that the cost of installing the Tenant Improvements, as established
by Landlord's final pricing schedule, shall exceed the Tenant Allowance, or if
any of the Tenant Improvements are not to be paid out of the Tenant Allowance as
provided in Paragraph 7(A) above, the excess shall be paid by Tenant to Landlord
prior to the commencement of construction of the Tenant Improvements.
(C) In the event that, after the Tenant Improvement Plans have been
prepared and a price therefor establishing by Landlord, Tenant shall require any
changes or substitutions to the Tenant Improvement Plans, any additional costs
thereof shall be paid by Tenant to Landlord prior to the commencement of such
work. Landlord shall have the right to decline Tenant's request for a change to
the Tenant Improvement Plans if such change would, in Landlord's opinion,
unreasonably delay construction of the Tenant Improvements.
(D) In the event that the cost of the Tenant Improvements increases as set
forth in Landlord's final pricing due to the requirements of any governmental
agency, Tenant shall pay Landlord the amount of such increase within five (5)
days of Landlord's written notice; provided, however, that Landlord shall first
apply toward such increase any remaining balance in the Tenant Allowance.
(E) Any unused portion of the Tenant Allowance upon completion of the
Tenant Improvements shall not be refunded to Tenant or available to Tenant as a
credit against any obligations of Tenant under the Lease.
8. COMPLETION AND RENTAL COMMENCEMENT DATE. The Commencement of the term
---------------------------------------
of the Lease shall not commence until the earlier of the following two dates:
(i) the date upon which Tenant takes possession of the Premises; or (ii) the
date upon which the Premises are ready for occupancy, i.e., the Tenant
Improvements have been substantially completed as evidenced by the final
inspection performed by the Building Department of the city and County of
Denver, or as determined by Landlord's architect or representative; provided
that if there shall be a delay in substantial completion of the Tenant
Improvements as a result of:
(a) Tenant's failure to approve any item or perform any other
obligation in accordance with and by the date specified in the Work
Schedule;
(b) Tenant's request for materials, finishes or installations other
than those readily available;
(c) Tenant's changes in the Tenant Improvement Plans after the
approval by Tenant;
(d) Tenant's request to deviate from the Standards for Tenant
Improvements;
then the commencement of the term of the Lease and the rental commencement date
shall be accelerated by the number of days of such delay. The Tenant
Improvements shall be deemed substantially complete notwithstanding the fact
that minor details of construction, mechanical adjustments or decorations which
do not materially interfere with Tenant's use and enjoyment of the Premises
remain to be performed (items normally referred to as "punch list" items).
9. ALTERNATE COMMENCEMENT DATE. If Landlord is unable to cause the
---------------------------
premises to be ready for occupancy by the commencement date for reasons other
than those set out in subsection (a) through (d) of Paragraph 8 above, or if the
Landlord shall have the premises ready for occupancy prior to the commencement
date set out in Paragraph 2 of the Lease, then in either such event the
commencement date of the Lease shall be on the first date the premises are ready
for occupancy; provided, however, if the date the premises are ready for
occupancy is not the first day of a month, then the commencement date shall be
the first day of the month immediately following the date the premises are ready
for occupancy. The period between the date the premises are ready for occupancy
and the commencement date shall be deemed to be the Interim Lease Term and
Tenant shall be obligated to pay rent for such Interim Lease
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Term on a pro rata basis based on the base rent for the first full month of the
lease term and Tenant shall hold the premises during the Interim Lease Term
under all of the other terms and conditions of this Lease. If the base rent for
the first full month of the lease term is abated, the base rent for the Interim
Lease Term shall be based upon the first month's rental which is due under the
Lease, and shall be payable at the end of the rental abatement period. In the
event the commencement date set out in Section 2 of the Lease is changed as
provided for in this Paragraph 9, then if the premises are ready for occupancy
after the commencement date set out in Section 2 of the Lease the expiration
date of the lease term shall extend for the number of months set out in Section
2 of the Lease.
IN WITNESS WHEREOF, this Work Letter Agreement is executed as of the date
first above written.
LANDLORD: THE 1125 VENTURE
By: Energy Plaza Associates
By: /s/ Partner
-------------------------
L. C. Fulenwider III
TENANT: BARRETT RESOURCES CORPORATION
By: /s/
--------------------------
John F. Keller
Executive Vice President
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EXHIBIT C
RULES AND REGULATIONS
The Rules and Regulations set forth in this exhibit shall be and hereby are
made a part of the Lease to which they are attached. Whenever the terms
"Tenant" is used in these Rules and Regulations, it shall be deemed to include
Tenant, its employees or agents, and any other persons permitted by Tenant to
occupy or enter the Premises. The following Rules and Regulations may from time
to time be modified by Landlord in the manner set forth in Paragraph 18 of the
Lease.
1. OBSTRUCTION. The sidewalks, entries, passages, corridors, halls, lobbies,
stairways, elevators and other common facilities of the Building shall be
controlled by Landlord and shall not be obstructed by Tenant or used for any
purpose other than ingress or egress to and from the Premises. Tenant shall not
place any item in any of such locations, whether or not any such item
constitutes an obstruction, without the prior written consent of Landlord.
Landlord shall have the right to remove any obstruction or any such item without
notice to Tenant and at the expense of Tenant.
2. ORDINARY BUSINESS HOURS. The ordinary business hours of the Building shall
be from 6:00 A.M. to 6:00 P.M., Monday through Friday of each week, and from
8:00 A.M. to 2:00 P.M. every Saturday, excluding the legal holidays of New
Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
3. DELIVERIES. Tenant shall insure that all deliveries of supplies to the
Premises shall be made only upon the elevator designated by Landlord for
deliveries and only during the ordinary business hours of the Building.
4. MOVING. Furniture and equipment shall be moved in or out of the Building
only upon the elevator designated by Landlord for deliveries and then only
during such hours and in such manner as may be prescribed by Landlord. Landlord
shall have the right to approve or disapprove the movers or moving company
employed by Tenant and Tenant shall cause such movers to use only the loading
facilities and elevator designated by Landlord.
5. HEAVY ARTICLES. No safe or article, the weight of which may, in the
reasonable opinion of Landlord, constitute a hazard or damage to the Building or
its equipment, shall be moved into the Premises. Safes and other heavy
equipment, the weight of which will not constitute a hazard or damage the
Building or its equipment shall be moved into, from or about the Building only
during such hours and in such manner as shall be prescribed by Landlord, and
Landlord shall have the right to designate the location of such articles in the
Premises.
6. NUISANCE. Tenant shall not do or permit anything to be done on the
Premises or in the Building or bring or keep anything therein which would in any
way constitute a nuisance or waste, or obstruct or interfere with the rights of
other tenants of the Building, or in any way injure or annoy them, or conflict
with the laws relating to fire, or with any regulations of the fire department,
or with any insurance policy upon the Building or any part thereof, or conflict
with any of the laws, codes, rules or ordinances of any governmental authority
having jurisdiction over the Building.
7. BUILDING SECURITY. Landlord may restrict access to and from the Premises
and the Building outside the ordinary business hours of the Building for reasons
of building security. Landlord may require identification of persons entering
and leaving the Building and, for this purpose, may issue building passes to
tenants of the Building.
8. PASS KEY. The Building Manager may at all times keep a pass key to the
Premises, and he and other agents of the Landlord shall at all times be allowed
admittance to the Premises; subject, however, to Tenant's reasonable security
requirements which may prohibit access except when accompanied by Tenant's
authorized security personnel.
9. LOCKS AND KEYS FOR PREMISES. Subject always to Tenant's reasonable
security requirements, no additional lock or locks shall be placed by Tenant on
any door in the Building and no existing lock shall be changed unless written
consent of Landlord shall first have been obtained. A reasonable number of keys
to the Premises and to the toilet rooms, if locked by Landlord, will be
furnished by Landlord, and Tenant shall not have any duplicate key made. At the
termination of this tenancy, Tenant shall promptly return to Landlord all keys
to offices and toilet rooms.
1
<PAGE>
10. USE OF WATER FIXTURES. Water closets and other water fixtures shall not be
used for any purpose other than that for which the same are intended, and any
damage resulting to the same from misuse on the part of Tenant shall be paid for
by Tenant. No person shall waste water in any manner.
11. NO ANIMALS; EXCESSIVE NOISE. With the exception of seeing eye dogs for the
blind, no animals shall be allowed in the offices, halls, corridors and
elevators of the Building. No person shall disturb the occupants of this or
adjoining buildings or space by the use of any radio or musical instrument or by
the making of loud or improper noises.
12. BICYCLES. Bicycles or other vehicles shall not be permitted anywhere
inside or on the sidewalks outside of the Building, except in those areas
designated by Landlord for bicycle parking.
13. TRASH. Tenant shall not allow anything to be placed on the outside of the
Building, nor shall anything be thrown by Tenant out of the windows or doors, or
down the corridors, elevator shafts, or ventilating ducts or shafts of the
Building. All trash shall be placed in receptacles provided by Tenant on the
Premises or in any receptacles provided by Landlord for the Building.
14. WINDOWS. No window shades, blinds, screens or draperies will be attached
or detached by Tenant and no awnings shall be placed over the windows without
Landlord's prior written consent. Tenant agrees to abide by Landlord's rules
with respect to maintaining uniform curtains, draperies and linings at all
windows and hallways so that the Building will present a uniform exterior
appearance. Tenant will use its best efforts to have all curtains, draperies
and blinds closed at the end of each day in order to help conserve energy.
Except in case of fire or other emergency, Tenant shall not open any outside
window because the opening of windows interferes with the proper functioning of
the Building heating and air conditioning systems.
15. HAZARDOUS OPERATIONS AND ITEMS. Tenant shall not install or operate any
steam or gas engine or boiler, or carry on any mechanical business in the
Premises without Landlord's prior written consent, which consent may be withheld
in Landlord's absolute discretion. The use of oil, gas or inflammable liquids
for heating, lighting or any other purpose is expressly prohibited. Explosives
or other articles deemed extra hazardous shall not be brought into the Building.
16. HOURS FOR REPAIRS, MAINTENANCE AND ALTERATIONS. Any repairs, maintenance
and alterations required or permitted to be done by Tenant under the Lease shall
be done only during the ordinary business hours of the Building unless Landlord
shall have first consented to such work being done outside of such times. If
Tenant desires to have such work done by Landlord's employees on Saturdays,
Sundays, holidays or weekdays outside of ordinary business hours, Tenant shall
pay the extra cost of such labor.
17. NO DEFACING OF PREMISES. Except as permitted by Landlord, Tenant shall not
mark upon, paint signs upon, cut, drill into, drive nails or screws into, or in
any way deface the walls, ceilings, partitions or floors of the Premises or of
the Building, and any defacement, damage or injury caused by Tenant shall be
paid for by Tenant.
18. CHAIR PADS. During the entire term of this Lease, Tenant shall, at its
expense, install and maintain under all caster chairs a chair pad or carpet
casters to protect the carpeting.
19. SOLICITATION; FOOD AND BEVERAGES. Landlord reserves the right to restrict,
control or prohibit canvassing, soliciting and peddling within the Building.
Tenant shall not grant any concessions, licenses or permission for the sale or
taking of orders for food, beverages, services or merchandise in the Building,
nor install nor permit the installation or use of any machine or equipment for
dispensing food, beverages, services or merchandise, nor permit the preparation,
serving, distribution or delivery of food, beverages, services or merchandise
without the approval of Landlord and in compliance with arrangements prescribed
by Landlord.
2
<PAGE>
THIRD AMENDMENT TO LEASE
BETWEEN
THE 1125 VENTURE (LANDLORD)
AND
BARRETT RESOURCES CORPORATION (TENANT)
This Third Amendment to Lease, made this 27th day of October, 1993, by and
between The 1125 Venture, a Colorado joint venture, hereinafter called
"Landlord", and Barrett Resources Corporation, a Delaware Corporation "Tenant".
WITNESSETH THAT:
WHEREAS, the Landlord and Tenant have previously entered into a Lease
Agreement dated July 24, 1990, a First Amendment to Lease dated October 25,
1990, and a Second Amendment to Lease dated November 16, 1990, (collectively,
the "Amended Lease"); and
WHEREAS, the Landlord and Tenant desire to amend the Amended Lease to (i)
add rentable area to the Premises; (ii) extend the term of the Lease; (iii)
specify new Base Rent; (iv) provide for Tenant Improvements (v) modify the
parking provisions; (vi) provide a Right of Negotiation on space on the 23rd
Floor; and, (vii) amend the existing Renewal Option.
NOW THEREFORE, in consideration of the mutual covenants herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged and confessed, Tenant and Landlord do hereby amend
the Lease as follows:
Except as expressly provided in the Third Amendment, the Amended Lease
shall remain in full force and effect. Except as expressly provided in this
Third Amendment, the term "Lease" as used in the Amended Lease shall refer to
the Amended Lease as modified by this Third Amendment. Capitalized terms used
in this Third Amendment and not otherwise defined herein shall have the
respective meanings set forth in the Amended Lease.
1. Third Additional Premises: Effective November 1, 1993, the Premises shall be
-------------------------
increased by One Thousand Four Hundred Ninety One and 00/100ths (1,491.00)
rentable square feet on the twenty-fourth floor of the Building and Four
Thousand Thirty Eight and 00/100ths (4,038.00) rentable square feet on the
twenty-third floor of the Building for a total increase of Five Thousand Five
Hundred Twenty Nine and 00/100ths (5,529.00) rentable square feet as shown on
Exhibit A attached hereto (collectively, the "Third Additional Premises"). As a
result, the Premises shall contain a total of Twenty Three Thousand Eight
Hundred Fifty and 00/100ths (23,850.00) rentable square feet in the Building.
Notwithstanding anything in Article 23 of the Amended Lease to the contrary, the
damage, or destruction, or the condemnation or
<PAGE>
taking by eminent domain of the 4,038 rentable square feet of the Third
Additional Premises on the 23rd floor of the Building shall not affect Tenant's
obligations under the Amended Lease, as amended hereby, as to the 19,812
rentable square feet on the 24th floor of the Building, but shall only affect
Tenant's rights and obligations as to the 23rd floor space.
2. Term: Subject to and upon the terms and conditions set forth in this Third
----
Amendment to Lease, the term of this Lease shall be extended for a period
of Forty-Eight (48) months, and will terminate on the 31st day of October, 1999.
3. Rent: Commencing November 1, 1993, the base rent to be paid by Tenant
----
shall be revised as follows:
<TABLE>
<CAPTION>
PERIOD ANNUAL BASE RENTAL MONTHLY BASE RENTAL
- ----------------------------------- ------------------ -------------------
<S> <C> <C>
November 1, 1993 - October 31,1994 $268,312.68 $22,359.3
November 1, 1994 - October 31, 1995 $290,672.04 $24,222.67
November 1, 1995 - October 31, 1996 $325,552.50 $27,129.38
November 1, 1996 - October 31, 1997 $325,552.50 $27,129.38
November 1, 1997 - October 31, 1998 $325,552.50 $27,129.38
November 1, 1998 - October 31, 1999 $349,402.00 $29,116.88
</TABLE>
4. Tenant Improvements: Following the execution of this Third Amendment,
-------------------
Landlord shall complete the tenant improvements in accordance with the Work
Letter attached hereto as Exhibit B in a timely manner.
5. Parking: Effective November 1, 1993, Owner shall provide Tenant an
-------
additional five unreserved parking spaces for a total of twenty-one unreserved
parking spaces in the building parking garage ("Garage") for the term of this
Lease. The five additional parking spaces will be provided at the rate
determined by Landlord, which rate may change from time to time. Tenant shall
continue to pay the rate of $55.00 per space, per month on ten spaces as
provided in Paragraph 45 of the Lease, through October 31, 1995. Effective
November 1, 1995, all twenty-one parking spaces shall be provided at the rate
determined by Landlord, which rate may change from time to time.
6. Right of First Negotiation:
--------------------------
(a) Effective as of the date hereof, Tenant's Right of First Offer set
forth in Paragraph 46 of the Amended Lease shall be terminated and of no force
or effect.
(b) From time to time during the period from the date hereof until October
31, 1997 (the "Negotiation Period"), but no more than once in any one hundred
twenty (120) day period, Tenant may send a notice to Landlord ("Request Notice")
to request that Landlord advise Tenant of any Negotiation Space (as defined
hereinbelow) which is currently available (as defined hereinbelow).
2
<PAGE>
(c) "Negotiation Space" shall mean any space which: (1) is located in that
portion of the twenty-third (23rd) floor of the Building known as Suite 2330 and
Suite 2340 and as shown on Exhibit C hereto, and (2) is "Available". The term
"Available" shall mean that the space in question is then offered in the
marketplace to the public at large for rent, free and clear of all claims and
rights of other parties, and space shall be deemed not to be or not to have
become Available if as to such space there is a lease, lease option or option or
other right of extension, renewal, expansion, refusal, negotiation or similar or
other right, either: (i) pursuant to any lease or written agreement which on
or before the date of Tenant's Request Notice is entered into or is the subject
of negotiations between Landlord and a prospective tenant of the Building (and
is entered into after the date of Tenant's Request Notice), or (ii) pursuant to
any extension or renewal of any of the foregoing, whether or not as set forth in
the original lease or written agreement, (iii) pursuant to any amendment or
modification of any of the foregoing (no matter when executed), or (iv) which at
any time during the Negotiation Period is made with or granted to any tenant
under any lease of space in the Building in effect during the Negotiation
Period.
(d) It is agreed and understood that (i) a proposed or actual assignment or
subletting by any tenant of any space shall not make the same Available for the
exercise of Tenant's rights hereunder unless Landlord elects to treat the same
as causing it to be Available or unless Landlord validly exercises its right, if
any, to recapture such space: (i) the default of any tenant of any space or its
desire to terminate its lease shall not make the same Available for the exercise
of Tenant's rights hereunder unless Landlord elects to treat the same to be
Available or unless Landlord exercises its right, if any, to terminate each
tenant's lease; and (iii) no space shall be considered Available if it is the
subject of any leasing activity at the time Landlord receives Tenant's Request
Notice, it being understood that leasing activity shall include negotiations
with a prospective tenant, whether or not a letter of intent or lease proposal
has been executed.
(e) Landlord shall respond to Tenant by written notice (the "Availability
Notice") within ten (10) business days after Landlord's receipt of the Request
Notice. The Availability shall notify Tenant of the economic terms and
conditions upon which Landlord would be willing to lease the Negotiation Space,
if any, to Tenant. Tenant shall have ten (10) calendar days after its receipt
of the Availability Notice in which to give Landlord its written notice
("Election Notice") of Tenant's intent to enter into negotiations to lease all
(but not a portion) of the Negotiation Space on the same terms and conditions
contained in the Amended Lease, except as otherwise stated in the Availability
Notice.
(f) If Tenant timely delivers its Election Notice, Landlord and Tenant
shall, during the thirty (30) day period following Landlord's receipt of the
Election Notice, negotiate in good faith for the lease of the Negotiation Space;
provided that the foregoing obligation to negotiate is non-exclusive and nothing
herein shall be deemed to prevent Landlord from negotiating with any other party
for the Negotiation
3
<PAGE>
Space at any time after the Negotiation Period, whether or not Landlord and
Tenant are negotiating for the same, but subject to the aforesaid obligation to
negotiate in good faith.
(g) Any lease of the Negotiation Space shall be done by amendment to the
Amended Lease, in form prepared by Landlord and reasonably satisfactory to
Landlord and Tenant. Tenant shall accept the Negotiation Space in its "as-is"
condition, with all faults, except as otherwise agreed to Landlord and Tenant.
(h) In the event Tenant fails or elects not to timely deliver its Election
Notice, or in the event Landlord and Tenant fail to execute an amendment to the
Amended Lease prior to the expiration of the thirty (30) day period set forth
above, Tenant's rights with respect to the Negotiation Space shall be null and
void and Tenant shall have no rights with respect to any Negotiation Space,
until such time as Tenant receives another Availability Notice, and Landlord
shall be free to lease said space to any party, on any terms, until Landlord
next receives a valid Request Notice.
(i) Notwithstanding anything to the contrary contained herein, all rights
of Tenant pursuant to the Right of Negotiation shall automatically terminate
without notice and shall be of no further force and effect, whether or not
Tenant has timely exercised the Right of Negotiation granted herein, upon the
occurrence of the following events: (1) The existence at the time Tenant
exercises the Right of Negotiation or (at Landlord's option) at the time the
Negotiation Space is to be added to the Premises of any default on the part of
Tenant under the Amended Lease or of any state of facts which with the passage
of time or the giving of notice, or both, would constitute such a default; (2)
Tenant's third default under the Lease prior to the date the Negotiation Space
is to be added to the Premises, notwithstanding that all such defaults my
subsequently be cured, and; (3) Tenant's assignment or subleasing of all or any
portion of the Premises. In the event of a termination of the Right of
Negotiation pursuant to this Paragraph 6, Tenant shall reimburse Landlord for
all costs and expenses Landlord incurs in connection with Tenant's exercise of
the Right of Negotiation.
(j) This Right of Negotiation is personal to Barrett Resources Corporation,
a Delaware corporation, and may not be exercised by, and shall not be
transferable or assignable (voluntarily or involuntarily) to any person or
entity.
(k) Time shall be of the essence with respect to all of the provisions of
this Paragraph 6.
7. Renewal Option. Tenant shall continue to hold a Renewal Option pursuant to
--------------
Paragraph 47 of the Amended Lease with respect to the entire Premises currently
leased by Tenant in the Building, provided that such Renewal Option shall
commence at the expiration of the Lease term as extended pursuant to this Third
Amendment.
4
<PAGE>
8. Tenant's Proportional Share. "Tenant's Proportionate Share" shall hereby
---------------------------
be amended to mean .050455 (5.05%).
9. Initial Basic Cost. "Initial Basic Cost" shall hereby be amended to mean
------------------
the actual Basic Cost for the Building for the calendar year 1993.
10. Compliance with Law:
-------------------
(a) Tenant acknowledges that the Americans with Disabilities Act of 1990
(as amended and as supplemented by further laws from time to time, the "Act")
imposes certain requirements upon the owners, lessees and operators of
commercial facilities and places of public accommodation, including, without
limitation, prohibitions on discrimination against any individual on the basis
of disability (which discrimination includes certain failures to design and
construct facilities for first occupancy that are readily accessible to and
usable by individuals with disabilities and certain failure, when making
alterations affecting the usability of a facility, to make the same in such a
manner that such altered portions are readily accessible to and usable by
individuals with disabilities). Accordingly Tenant agrees to take all proper
and necessary action to cause the Premises to be maintained, used and occupied
in compliance with the Act and, further to otherwise assume all responsibility
to ensure the Premises' continued compliance with all provisions of the Act
throughout the Term, as extended pursuant to this Third Amendment.
(b) Without limiting its obligations under the Amended Lease, Tenant
covenants and agrees to comply with all laws, rules, regulations and guidelines
now or hereafter made applicable to the Premises by governmental or other public
authorities respecting the disposal of waste, trash, garbage and other matter
(liquid or solid), generated by Tenant, its employees, agents, contractors,
invitees, licensees, guests and visitors, the disposal of which is not otherwise
the express obligation of Landlord under the Amended Lease, including, but not
limited to, laws, rules, regulations and guidelines respecting recycling and
other forms of reclamation (all of which are herein collectively referred to as
"Waste Management Requirements"). Tenant covenants and agrees to comply with
all rules and regulations established by Landlord to enable Landlord from time
to time to comply with Waste Management Requirements applicable to Landlord (i)
as owner of the Premises and (ii) in performing Landlord's obligations under the
Lease, if any.
11. Hazardous Materials.
-------------------
(a) Tenant shall not use, generate, manufacture, produce, store, release,
discharge, or dispose of, on, under or about the Premises or any part of the
Building, or transport to or from the Premises or any part of the building, any
Hazardous materials (defined below) or allow its employees, agents, contractors,
licensees, invitees or any other person or entity to do so.
5
<PAGE>
(b) The term "Hazardous Materials" shall include without limitation: (A)
those substances included within the definitions of "hazardous substances,"
"hazardous materials," "toxic substances," or "solid waste" under all present
and future federal, state and local laws relating to the protection of human
health or the environment, including but not limited to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Resource
Conservation and Recovery Act of 1976, the Safe Drinking Water and Toxic
Enforcement Act of 1986, and the Hazardous Materials Transportation Act, and in
the regulations promulgated pursuant to said laws; (B) those substances listed
in the United States Department of Transportation Table (49 CFR 172.101 and
amendments thereto) or designated by the Environmental Protection Agency (or any
successor agency) as hazardous substances (see, e.g., 40 CFR Part 302 and
--- ----
amendments thereto); (C) such other substances, materials and wastes which are
or become regulated under applicable local, state or federal law, or the United
States government, or which are to become classified as hazardous or toxic under
federal, state, or local laws or regulations; and any material, waste or
substance which is (1) petroleum, (2) asbestos, (3) polychlorinated byphenyls,
(4) designated as a "hazardous substance" pursuant to section 311 of the Clean
Water Act of 1977, 33 U.S.C. sections 1251, et seq. (33 U.S.C. - 1321) or listed
-- ---
pursuant to section 307 of the Clean Water Act of 1977 (33 U.S.C. - 1317); (5)
flammable explosives, or (6) radioactive materials.
(c) To the extent permitted by then applicable law, Tenant shall protect,
indemnify, defend and hold harmless Landlord, its employees and agents from and
against any and all claims, liabilities, losses, actions, costs and expenses
(including attorneys' fees and costs of defense) incurred by such indemnified
persons, or any of them, as the result of (A) the introduction into or about the
Building by Tenant, its employees, agents, licensees, invitees, contractors or
any other person or entity for whom Tenant is responsible (collectively
"Tenant's Agents") of any Hazardous Material, (B) the usage by Tenant or
Tenant's Agents of Hazardous Materials in or about the Building, (C) the
discharge or release in or about the building by Tenant or Tenant's Agents of
any Hazardous Materials, (D) any injury to or death of persons or damage to or
destruction of property resulting from the use by Tenant or Tenant's Agents of
Hazardous Materials in or about the Building, and (E) any failure of Tenant or
Tenant's Agents to observe the covenants set forth in Paragraph 10 herein.
Payment shall not be a condition precedent to enforcement of the foregoing
indemnification provisions.
12. Colorado Law: This Third Amendment shall be construed and governed by the
-------------
laws of the State of Colorado.
13. Authority: This Third Amendment shall be binding upon and inure to the
---------
benefit of the parties hereto, their respective heirs, legal representatives,
successors and assigns. Each party hereto and the persons signing below warrant
that the person signing below on such party's behalf is authorized to do so and
to bind such party to the terms of this Third Amendment.
6
<PAGE>
14. Attorneys' Fees and Costs: In the event of any action at law or in equity
-------------------------
between the parties hereto to enforce any of the provisions hereof, any
unsuccessful party to such litigation shall pay to the successful party all
costs and expenses, including actual attorneys' (including costs and expenses
incurred in connection with all appeals) incurred therein by such successful
party, and such costs, expenses and attorneys; fees may be included in and as
part of such judgment. A successful party shall be any party who is entitled to
recover his costs of suit, whether or not the suit proceeds to final judgment.
15. Entire Agreement. No Amendment. This Third Amendment constitutes the
-------------------------------
entire agreement and understanding between the parties herein named with respect
to this Third Amendment and shall supersede all prior written and oral
agreements concerning the subject matter contained herein. This Third Amendment
may not be altered, amended, modified or otherwise changed in any respect
whatsoever except by a writing duly executed by authorized representatives of
the parties hereto. Each party acknowledges that it has read this Third
Amendment, fully understands all of the Third Amendment's terms and conditions,
and hereby executes this Third Amendment freely, voluntarily and with full
knowledge of its significance. This Third Amendment is entered into by the
undersigned parties freely and voluntarily and with and upon advice of counsel.
16. Severability. If any provision of this Third Amendment or the application
------------
thereof to any person or circumstances shall be invalid or unenforceable to any
extent, the remainder of this Third Amendment and the application of such
provisions to other persons or circumstances, other than those to which it is
held invalid, shall not be affected thereby and shall be enforced to the
furthest extent permitted by law, provided that the invalidity of such provision
does not materially affect the benefits accruing to any party hereto.
17. Counterparts. This Third Amendment may be executed in duplicates or
------------
counterparts, or both, and such duplicates or counterparts together shall
constitute but one original of the Third Amendment. Each duplicate and
counterpart shall be equally admissible in evidence, and each original shall
fully bind each party who has executed it.
18. Agreement to Perform Necessary Acts: Each party agrees that upon demand
-----------------------------------
therefor, it shall promptly perform all further acts and execute, acknowledge
and deliver all further instructions, instruments and documents which may be
reasonably necessary or useful to carry out the provisions of this Third
Amendment or to evidence, perfect or otherwise effectuate the rights and
remedies relating to this Third Amendment.
Except as otherwise provided herein, all other terms and conditions of the Lease
shall remain in full force and effect.
7
<PAGE>
19. Captions and Headings: The titles or headings of the various sections
---------------------
hereof are intended solely for convenience of reference and are not intended and
shall not be deemed to or in any way be used to modify, explain or place any
construction upon any of the provisions of this Third Amendment.
Except as otherwise provided herein, all other terms and conditions o the Leas
shall remain in full force and effect.
IN WITNESS WHEREOF, this Third Amendment is executed as of the date first
above written.
LANDLORD: Metropolitan Life Insurance Company
a New York Corporation
Successor in Interest
By: /s/
--------------------------------------
Kenneth R. Dunbar, Investment Officer
TENANT: Barrett Resources Corporation
a Delaware Corporation
By: /s/
--------------------------------------
John F. Keller, Exec. Vice-President
8
<PAGE>
EXHIBIT A
[DIAGRAM]
1
<PAGE>
EXHIBIT B
WORK LETTER AGREEMENT
THIS WORK LETTER AGREEMENT is entered into as of the ___ day of October,
1993, by and between The 1125 Venture ("Landlord") and Barrett Resources
Corporation ("Tenant").
R E C I T A L S:
A. Concurrently with the execution of this Work Letter Agreement, Landlord
and Tenant have entered into a Third Amendment to Lease (the "Lease Amendment")
covering certain premises (the "Premises"), more particularly described in
Paragraph 1 of the Lease:
B. In order to induce Tenant to enter into the Lease Amendment (which is
hereby incorporated by reference to the extent that the provisions of this Work
Letter Agreement may apply thereto) and in consideration of the mutual covenants
hereinafter contained, Landlord and Tenant hereby agrees as follows:
1. COMPLETION SCHEDULE. Within five (5) days after the execution of the
-------------------
Lease Amendment, Landlord shall deliver to Tenant, for Tenant's review and
approval, a schedule (the "Work Schedule") setting forth a timetable for the
planning and completion of the installation of the Tenant Improvements to be
constructed in the Third Additional Premises on the 23rd floor and the 24th
floor. The Work Schedule shall set forth each of the various items of work to
be done by or approval to be given by Landlord and Tenant in connection with the
completion of the Tenant Improvements. Such Work Schedule shall be submitted to
Tenant for its approval and, upon approval by both Landlord and Tenant, such
Work Schedule shall become the basis for completing the Tenant Improvement work.
If Tenant shall fail to approve the Work Schedule, as it may be modified after
discussions between Landlord and Tenant, within three (3) working days after the
date such Work Schedule is first received by Tenant, then rent shall start on
November 1, 1993 whether the space is ready or not.
2. TENANT IMPROVEMENTS. Reference herein to "Tenant Improvements" shall
-------------------
include all work to be done in the Third Additional Premises pursuant to the
space plan described in Exhibit "D" attached hereto and Paragraph 3 below,
including, but not limited to, providing a rear exit door, relocating upper and
lower kitchen cabinets with sink and dishwasher from an adjacent suite, and
demising that portion of the Third Additional Premises on the 23rd floor which
requires the separation of electrical, life safety, and heating and air
conditioning from the adjacent suite.
3. TENANT IMPROVEMENT PLANS. At the time of execution of the Lease
------------------------
Amendment, Tenant will have met with Landlord's architect and/or space planner
for the purpose of preparing a space plan for the layout of the Premises, and
both Landlord and Tenant will have approved said space plan. Based upon such
approved space plan, Landlord's architect shall prepare final working drawings
and specifications for the Tenant Improvements. Such space plan and final
working drawings and specifications may be referred to herein as the "Tenant
Improvement Plans." The Tenant Improvement Plans must be consistent with
Landlord's standard specifications (the "Standards") for tenant improvements for
the Building, as the same may be changed from time to time by Landlord. The
space plan was prepared by Interarc, signed October 29, 1993.
4. FINAL PRICING AND DRAWING SCHEDULE. After the preparation of the space
----------------------------------
plan and after Tenant's written approval thereof, in accordance with the Work
Schedule, Landlord shall cause its architect to prepare and submit to Tenant the
final working drawings and specifications referred to in Paragraph 3 hereof.
Such working drawings shall be in strict conformance with the approved space
plan and said working drawings shall be approved by Landlord and Tenant in
accordance with the Work Schedule and shall thereafter be submitted to the
appropriate governmental body by Landlord's contractor for plan checking and the
issuance of a building permit. Landlord, with Tenant's cooperation, shall cause
to be made any changes in the plans and specifications necessary to obtain the
building permit. Concurrent with the plan checking, Landlord shall have
prepared a final pricing proposal for Tenant's approval, in accordance with the
Work Schedule, taking into account any modifications which may be required to
reflect changes in the plans and specifications required by the Building
Department of the City and County of Denver. After final of the working
drawings, no further changes to the space plan may be made without the prior
written approval from both Landlord and Tenant, and then only after agreement by
Tenant to pay any costs resulting from the design and/or construction of such
changes in accordance with Paragraph 6 below. Tenant hereby acknowledges that
any such changes shall be subject to the terms of Paragraph 7 hereof.
1
<PAGE>
5. CONSTRUCTION OF TENANT IMPROVEMENTS. After the Tenant Improvement
-----------------------------------
Plans have been prepared and approved (the final pricing proposal has been
approved), and a building permit for the Tenant Improvement has been issued,
Landlord shall enter into a construction contract with its contractor for the
installation of the Tenant Improvements in accordance with the Tenant
Improvement Plans. Landlord shall supervise the completion of such work and
shall use commercially reasonable efforts to secure substantial completion of
the work in accordance with the Work Schedule. The cost of such work shall be
paid as provided in Paragraph 6 hereof. Landlord shall not be liable for any
direct or indirect damages as a result of delays in construction beyond
Landlord's reasonable control, including, but not limited to, acts of God,
inability to secure governmental approvals or permits, governmental
restrictions, strikes, availability of materials or labor or delays by Tenant
(or its architect or anyone performing services on behalf of Tenant).
6. PAYMENT OF COST OF THE TENANT IMPROVEMENTS.
------------------------------------------
(A) Landlord hereby agrees to provide Tenant a Tenant Allowance of Twenty-
four Thousand Eight Hundred Forty-seven and 00/100ths Dollars ($24,847.00).
Such Tenant Allowance shall be used only for:
(i) Payment of the cost of preparing the space plan and the final
working drawings and specifications, including mechanical, electrical,
plumbing and structural drawings and of all other aspects of the
Tenant Improvement Plans.
(ii) The payment of plan check, permit, and license fees relating to
construction of the Tenant Improvements.
(iii) Construction of Tenant Improvements indicated on the signed
Tenant Improvement Plans, including, without limitation, the
following:
(a) Installation within the Third Additional Premises of all
partitioning and doors to demise the Third Additional Premises and to
provide paint for the new demising wall. Landlord shall use
reasonable efforts to re-use the existing wood finish in the reception
area.
(b) All electrical wiring, lighting, fixtures, outlets and
switches, and other electrical work to be installed within the Third
Additional Premises associates with the demised wall and installation
of a dishwasher.
(c) The furnishing and installation of all duct work, terminal
boxes, diffusers and accessories required for the completion of the
heating, ventilation and air conditioning systems within the Third
Additional Premises due to the new demising wall.
(d) All fire and life safety control systems such as fire walls,
sprinklers, halon, fire alarms, including piping, wiring and
accessories installed within the Third Additional Premises.
(e) Relocation of the sink and upper and lower cabinets, and
relocation of shelving.
(f) All plumbing, fixtures, pipes and accessories to be installed
within the Third Additional Premises for the relocated sink and
dishwasher.
(g) Testing and inspection costs.
(h) Contractor's fees, including but not limited to, any fees
based on general conditions.
(B) In the event that, after the space plan has been approved by both
Landlord and Tenant, and a price therefor established by Landlord, Tenant shall
require any changes or substitutions to the Tenant Improvement Plans, any
additional costs thereof shall be paid by Tenant to Landlord prior to the
commencement of such work. Landlord shall have the right to decline Tenant's
request for a change to the Tenant Improvement Plans if such change would, in
Landlord's opinion, unreasonably delay construction of the Tenant Improvements.
(C) In the event that the cost of the Tenant Improvements increases as set
forth in Landlord's final pricing due to the requirements of any governmental
agency for any changes in the approved space
2
<PAGE>
plan required by the Tenant, then Tenant shall pay Landlord the amount of such
increase upon Landlord's written notice prior to the commencement of such work.
(D) Upon completion of the Tenant Improvements, any remaining balance of
the Tenant Allowance, whether or not due to a change in the Tenant Improvement
Plans required by Tenant after the space plan is approved that reduces the scope
of the Tenant Improvements shall not be refunded to Tenant or available to
Tenant as a credit against any obligations of Tenant under the Lease.
7. COMPLETION AND RENTAL COMMENCEMENT DATE. The Commencement Date of the
---------------------------------------
term of the Lease Amendment shall be November 1, 1993. The commencement of rent
for the 4,038 rentable square feet of the Third Additional Premises of the 23rd
floor shall be the earlier of the following two dates: (i) the date upon which
Tenant takes possession of the 23rd floor space: or (ii) the date upon which
the 23rd floor space is ready for occupancy, i.e., the Tenant Improvements have
been substantially completed as evidenced by the final inspection performed by
the Building Department of the City and County of Denver, or as determined by
Landlord's architect or representative; provided that if there shall be a delay
in substantial completion of the Tenant Improvements beyond November 1, 1993 as
a result of:
(a) Tenant's failure to approve any item or perform any other
obligation in accordance with and by the date specified in the Work
Schedule;
(b) Tenant's request for materials, finishes or installation other
than those readily available;
(c) Tenant's changes in the Tenant Improvement Plans after the
approval by Tenant;
(d) Tenant's request to deviate from the Standards for Tenant
Improvements;
then the rental commencement date for the 23rd floor space shall be November 1,
1993.
In the event either Tenant takes possession of the 23rd floor space prior to
November 1, 1993, or the 23rd floor space is ready for occupancy prior to
November 1, 1993, then Tenant shall pay to Landlord $137,10 per day until
November 1, 1993, the Commencement Date. This period between the date the 23rd
floor space is ready for occupancy and the Commencement Date of the term shall
be deemed to be the Interim Lease term and Tenant shall hold the 23rd floor
space during the Interim Lease term under all of the other terms and conditions
of the Amended Lease. If Landlord is unable to cause the 23rd floor space to be
ready for occupancy by November 1, 1993, for reasons other than those set out in
section (a) through (d) above, then Landlord shall abate daily rental of $137.10
from the rent indicated in Paragraph 3 of the Lease Amendment until such space
is ready for occupancy. The Tenant Improvements shall be deemed substantially
complete notwithstanding the fact that minor details of construction, mechanical
adjustments or decorations which do no materially interfere with Tenant's use
and enjoyment of the Premises remain to be performed (items normally referred to
as "punch list" items).
3
<PAGE>
IN WITNESS WHEREOF, this Work Letter Agreement is executed as of the date
first above written.
LANDLORD: Metropolitan Life Insurance Company
a New York Corporation
Successor in Interest
By: /s/
_____________________________________
Kenneth R. Dunbar, Investment Officer
TENANT: BARRETT RESOURCES CORPORATION,
a Delaware Corporation
By: /s/
_____________________________________
John F. Keller, Executive Vice-President
4
<PAGE>
FIRST AMENDMENT TO LEASE
BETWEEN
THE 1125 VENTURE (LANDLORD)
AND
BARRETT RESOURCES CORPORATION
This First Amendment to Lease, made this 25th day of October 1990, by
and between The 1125 Venture, a Colorado joint venture, hereinafter called
"Landlord", and Barrett Resources Corporation, a Delaware Corporation,
hereinafter called "Tenant".
WITNESSETH THAT:
WHEREAS, heretofore and on July 24, 1990, Landlord and Tenant entered
into a written Lease Agreement covering space on the Twenty-Forth (24th) Floor,
for Suite 2400 of the Denver National Bank Building located at 1125 Seventeenth
Street in Denver, Colorado; and
WHEREAS, the Landlord and Tenant desire to amend the Lease Agreement to:
(i) add rentable area to the Premises through the term of the lease, (ii)
specify new base rent, (iii) increase to tenant finish allowance, and (iv)
provide for a temporary Premises; and
WHEREAS, the Landlord and Tenant desire to amend the Lease Agreement as
hereinafter set forth;
NOW THEREFORE, in consideration of the mutual covenants herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which hereby acknowledged and confessed, Tenant and Landlord do hereby amend the
Lease Agreement as follows:
1. First Additional Premises: On the Commencement Date (as defined in Paragraph
8 of the Work Letter of the Lease) the Premises shall be increased by
approximately 1,188.10 square feet
<PAGE>
of rentable area (the "First Additional Premises"), located in Suite 2400 on the
twenty-fourth (24th) floor of the Building, as shown on Exhibit "A" attached
hereto and the Premises shall contain a total of approximately 17,476.64 square
feet of rentable area. Tenant's use and occupancy of the First Additional
Premises shall be on the same terms and conditions as set forth in the Lease
except as set forth herein.
2. Rent: In accordance with Paragraph 4, Rent, of the Lease, beginning on the
rental commencement date of the Lease, Tenant hereby agrees to pay a base annual
rental (herein called "base rent") in the sum of One Million Thousand Six
Hundred Forty-Five and 04/100ths Dollars ($1,013,645.04). On the rental
commencement date, the base rent to be paid by Tenant shall be amended as
follows:
PERIOD BASE ANNUAL RENTAL MONTHLY BASE RENTAL
- ------ ------------------ -------------------
November 1, 1990- $192,243.00 $16,020.25
October 31, 1991
November 1, 1991- 192,243.00 16,020.25
October 31, 1992
November 1, 1992- 192,243.00 16,020.25
October 31, 1993
November 1, 1993- 209,719.68 17,476.64
October 31, 1994
November 1, 1994- 227,196.36 18,933.03
October 31, 1995
3. Tenant Improvement Allowance: In accordance with Paragraph 7 of the Work
Letter of the Lease, the Tenant Allowance shall be amended by this First
Amendment, and Landlord hereby grants to Tenant a Tenant Allowance of Two
Hundred Eleven Thousand Four Hundred Sixty-Seven and 34/100ths ($211,467.34)
(approximately $12.10 per square foot). Such Tenant Allowance as amended herein
shall be administered in accordance with the Work Letter of the Lease.
2
<PAGE>
4. Temporary Premises. Effective October 1, 1990, and continuing until the
Premises are ready for occupancy, Tenant shall occupy Suite 2130 containing
approximately 13,547.50 rentable square feet per Exhibit "A1" attached hereto
(the "Temporary Premises") under the same terms and conditions as this Lease
except that Tenant shall pay a base monthly rental in the sum of Twelve Thousand
Four Hundred Eighteen and 55/100ths Dollars ($12,418.55) for each month or
portion thereof until Tenant relocates to the Premises. At the time the Premises
are ready for occupancy as defined in Paragraph 2 (B) of the Lease, Tenant shall
relocate to the Premises and shall vacate the Temporary Premises and all of the
Tenant's rights to the Temporary Premises shall cease.
5. Miscellaneous.
(a) Capitalized terms not defined herein shall have the same meaning as
set forth in the Lease.
(b) Except as modified herein, the Lease remains in full force and
effect and is hereby ratified by Landlord and Tenant.
(c) This First Amendment shall be binding upon and inure to the benefit
of the parties hereto and their heirs, personal representatives, successors and
assigns.
(d) This First Amendment contains the entire agreement of Landlord and
Tenant with respect to the subject matter hereof, and may not be amended or
modified except by an instrument executed in writing by Landlord and Tenant.
(e) This Agreement shall be governed by and construed in accordance with
the laws of the State of Colorado.
Except as otherwise provided herein, all other terms and conditions of the Lease
Agreement shall remain in full force and effect.
3
<PAGE>
IN WITNESS WHEREOF, this First Amendment to Lease is executed as of the date
first above written.
LANDLORD: The 1125 Venture
By: Energy Plaza Associates
By: , Partner
--------------------------
L.C. Fulenwider, III
TENANT: Barrett Resources Corporation
By:
__________________________
John F. Keller
Executive Vice President
STATE OF COLORADO )
) ss.
COUNTY OF DENVER )
The foregoing instrument was acknowledged before me this 25th day of
October, 1990, by L.C. Fulenwider, III as Partner for Energy Plaza Associates, a
Colorado general partnership, as a co-venturer of The 1125 Venture, a Colorado
joint venture.
Witness my hand and official seal.
My Commission Expires: /s/
--------------------------------
Notary Public
1-21-91 Address:
- -------------------------
STATE OF COLORADO )
) ss.
COUNTY OF DENVER )
The foregoing instrument was acknowledged before me this 24th day of
October, 1990, by John F. Keller as Executive Vice President for Barrett
Resources Corporation.
Witness my hand and official seal.
My Commission Expires: /s/
--------------------------------
Notary Public
1-27-90 Address:
- -------------------------
4
<PAGE>
EXHIBIT A
Space Plan/Budget Pricing Plan dated May 15, 1990, last revision date
October 4, 1990, and initialed by Landlord and Tenant is part of this Lease,
although not attached hereto.
[DIAGRAM]
<PAGE>
EXHIBIT A1
BARRET RESOURCES
TEMPORARY PREMISES
13,547.5 RSF
[DIAGRAM]
<PAGE>
SECOND AMENDMENT TO LEASE
BETWEEN
THE 1125 VENTURE (LANDLORD)
AND
BARRETT RESOURCES CORPORATION
This Second Amendment to Lease, made this 16th day of November 1990, by
and between The 1125 Venture, a Colorado joint venture, hereinafter called
"Landlord", and Barrett Resources Corporation, a Delaware Corporation,
hereinafter called "Tenant".
WITNESSETH THAT:
WHEREAS, heretofore and on July 24, 1990, Landlord and Tenant entered
into a written Lease Agreement covering space on the Twenty-Forth (24th) Floor,
for Suite 2400 of the Denver National Bank Building located at 1125 Seventeenth
Street in Denver, Colorado; and
WHEREAS, on October 25, 1990, Landlord and Tenant entered into a First
Amendment to Lease (The "First Amendment") pursuant to which Tenant leased
certain additional premises (The "First Additional Premises"); and
WHEREAS, the Landlord and Tenant desire to amend the Lease Agreement to:
(i) add rentable area to the Premises through the term of the lease, (ii)
specify new base rent, and (iii) increase the tenant finish allowance, and
WHEREAS, the Landlord and Tenant desire to amend the Lease Agreement as
hereinafter set forth;
NOW THEREFORE, in consideration of the mutual covenants herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which hereby
<PAGE>
acknowledged and confessed, Tenant and Landlord do hereby amend the Lease
Agreement as follows:
1. Second Additional Premises: On the Commencement Date (as defined in
Paragraph 8 of the Work Letter of the Lease) the Premises shall be increased by
approximately 844.75 square feet of rentable area (the "Second Additional
Premises"), located in Suite 2400 on the twenty-fourth (24th) floor of the
Building, as shown on Exhibit "A" attached hereto and the Premises shall contain
a total of approximately 18,321.39 square feet of rentable area. Tenant's use
and occupancy of the Second Additional Premises shall be on the same terms and
conditions as set forth in the Lease except as set forth herein.
2. Rent: In accordance with Paragraph 4, Rent, of the Lease, beginning on
the rental commencement date of the Lease, Tenant hereby agrees to pay a base
annual rental (herein called "base rent") in the sum of One Million Sixty Two
Thousand Six Hundred Forty and 68/100ths Dollars ($1,062,640.68). On the rental
commencement date, the base rent to be paid by Tenant shall be amended as
follows:
PERIOD BASE ANNUAL RENTAL MONTHLY BASE RENTAL
------ ------------------ -------------------
November 1, 1990 - $201,535.32 $16,794.61
October 31, 1991
November 1, 1991 - 201,535.32 16,794.61
October 31, 1992
November 1, 1992 - 201,535.32 16,794.61
October 31, 1993
November 1, 1993 - 219,856.68 18,321.39
October 31, 1994
November 1, 1994 - 238,178.04 19,848.17
October 31, 1995
3. Tenant Improvement Allowance: In accordance with Paragraph 7 of the
Work Letter of the Lease, the Tenant Allowance shall be amended by this Second
Amendment, and Landlord
2
<PAGE>
hereby grants to Tenant a Tenant Allowance of Two Hundred Twenty-One Thousand
Six Hundred Eighty-Eight and 80/100ths ($221,688.80) (approximately $12.10 per
square foot). Such Tenant Allowance as amended herein shall be administered in
accordance with the Work Letter of the Lease.
4. Miscellaneous.
(a) Capitalized terms not defined herein shall have the same meaning
as set forth in the Lease.
(b) Except as modified herein, the Lease remains in full force and
effect and is hereby ratified by Landlord and Tenant.
(c) This Second Amendment shall be binding upon and inure to the
benefit of the parties hereto and their heirs, personal representatives,
successors and assigns.
(d) This Second Amendment contains the entire agreement of Landlord
and Tenant with respect to the subject matter hereof, and may not be amended or
modified except by an instrument executed in writing by Landlord and Tenant.
(e) This Agreement shall be governed by and construed in accordance
with the laws of the State of Colorado.
Except as otherwise provided herein, all other terms and conditions of the Lease
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, this Second Amendment to Lease is executed as of the
date first above written.
LANDLORD: The 1125 Venture
By: Energy Plaza Associates
By: /s/ L.C. Fulenwider, III, Partner
-----------------------------------
L.C. Fulenwider, III
3
<PAGE>
TENANT: Barrett Resources Corporation
By: /s/ John F. Keller
------------------------
John F. Keller
Executive Vice President
STATE OF COLORADO )
) ss.
COUNTY OF DENVER )
The foregoing instrument was acknowledged before me this 19th day of
November, 1990, by L.C. Fulenwider, III as Partner for Energy Plaza Associates,
a Colorado general partnership, as a co-venturer of The 1125 Venture, a Colorado
joint venture.
Witness my hand and official seal.
My Commission Expires: /s/
------------------------------
Notary Public
1-12-91 Address:
- ----------------------
STATE OF COLORADO )
) ss.
COUNTY OF DENVER )
The foregoing instrument was acknowledged before me this 16th day of
November, 1990, by John F. Keller as Executive Vice President for Barrett
Resources Corporation.
Witness my hand and official seal.
My Commission Expires: /s/
------------------------------
Notary Public
11-27-94 Address:
- ---------------------
4
<PAGE>
EXHIBIT A
Space Plan/Budget Pricing Plan dated May 15, 1990, last revision date
October 4, 1990, and initialed by Landlord and Tenant is part of this Lease,
although not attached hereto.
[DIAGRAM]
<PAGE>
PAGE 2 OF
[DIAGRAM]
<PAGE>
EXHIBIT D
SPACE PLAN
Space Plan by Interarc, Inc. for Suite 2310 and Suite 2400 dated October
27, 1993 and signed by Tenant on October 29, 1993 are incorporated herein by
this reference.
<PAGE>
[DIAGRAM]
<PAGE>
CONSENT TO SUBLEASE
-------------------
Sublet Premises: 1125 17th Street, Suite 2310
Date of Prime Lease: July 1, 1990
Date of First Amendment: October 25, 1990
Date of Second Amendment: November 16, 1990
Date of Third Amendment: November 1, 1993
Date of Sublease: June 1, 1996
Subtenant: Osmotics Corporation
Sublessor: Barrett Resources Corporation
Landlord: Metropolitan Life Insurance Company
Pursuant to the terms of your lease ("Prime Lease") covering the above captioned
premises, as the same may have been amended to the date hereof, you have
requested our consent to a sublease (the "Sublease") (dated as described in the
above caption) to the above-captioned Subtenant, a copy of which Sublease is
annexed hereto as Exhibit A and made a part hereof.
---------
We hereby grant our consent to the Sublease upon the following express terms and
conditions:
1. The Sublease is subject and subordinate to the Prime Lease and to all
of its terms, covenants, conditions, provisions and agreements.
2. Except for those sections under the Prime Lease, a copy of which has
been provided to Subtenant by Sublessor, the Subtenant shall perform
faithfully and be bound by all of the terms, covenants, conditions,
provisions and agreements of the Prime Lease, for the period covered by
the Sublet Premises.
3. Neither the Sublease nor this consent thereto shall:
(a) release or discharge you from any liability, whether past, present
or future, under the Prime Lease;
(b) operate as an approval by us to or for any of the specific terms,
covenants, conditions, provisions or agreements of the Sublease and
we shall not be bound thereby;
(c) be construed to modify, waive or affect any of the terms, covenants,
conditions, provisions or agreements of the Prime Lease, or to waive
any breach thereof, or to waive, reduce or derogate from any of our
rights as Landlord thereunder, or to enlarge or increase our
obligations as Landlord thereunder; or
(d) be construed as a consent by us to any further subletting either by
you or by the subtenant or to any assignment by you of the Prime
Lease or assignment by the
<PAGE>
Subtenant of the Sublease, whether or not the Sublease purports to
permit the same and, without limiting the generality of the
foregoing, both you and the Subtenant agree that the Subtenant has
no right whatsoever to assign, mortgage or encumber the Sublease nor
to sublet any portion of the Sublet Premises or permit any portion
of the Sublet Premises to be used or occupied by any other party;
further, in connection herewith, both you and the Subtenant agree
that an assignment by operation of law or a transfer of control of
Subtenant (including but not limited to transfer of the controlling
interest of the stock of Subtenant, if Subtenant is a corporation)
shall be deemed to be a prohibited assignment hereunder.
4. You shall not be released from any liability under the Prime Lease
because of our failure to give notice of default under or in respect of
any of the terms, covenants, conditions, provisions or agreements of
the Prime Lease.
5. In the event of your default under the provisions of the Prime Lease,
the rent due from the Subtenant under the Sublease shall be deemed
assigned to us and we shall have the right, under such default, at any
time at our option, to give notice to the Subtenant of such assignment.
We shall credit you with any rent received by us under such assignment
but the acceptance of any payment on account of rent from the Subtenant
as the result of any such default shall in no manner whatsoever serve
to release you from any liability under the terms, covenants,
conditions, provisions or agreement under the Prime Lease. No such
payment of rent or any other payment by the Subtenant directly to
Landlord and/or acceptance of such payment(s) by Landlord, regardless
of the circumstance or reasons therefor, shall in any manner whatsoever
be deemed an attornment by the Subtenant to us in the absence of either
a specific written agreement signed by us to such an effect or written
notice from Landlord to Subtenant pursuant to paragraph 7 below.
6. Both you and the Subtenant shall be and continue to be liable for the
payment of (a) all bills rendered by us for charges incurred by the
Subtenant for services and materials supplied to the Sublet Premises,
including without limitation, any services and materials supplied
beyond that which is required by the terms of the Prime Lease and (b)
any additional costs incurred by Landlord for maintenance and repair of
the Sublet Premises as the result of Subtenant (rather than you)
occupying the Sublet Premises (including but not limited to any excess
cost to Landlord for services furnished to or for the Sublet Premises
resulting from the extent to which Subtenant uses them for purpose
other than as set forth in the Prime Lease).
7. The term of the Sublease shall expire and come to an end, regardless of
any provision of the Sublease to the contrary, upon the earlier of (i)
its natural expiration date or any premature termination date thereof
(ii) concurrently with any premature termination or natural expiration
of the Prime Lease (whether by consent or other right, now or hereafter
agreed to by Landlord or Prime Tenant, or by operation of law or at
Landlord's option in the event of default by Prime Tenant).
Notwithstanding the foregoing, in the event that the Term (as defined
in the Prime Lease) of the Prime Lease should expire or terminate prior
to the Term of the Sublease, (as defined in paragraph 2), it is agreed
that, at the option of Landlord, which option shall be exercisable by
written notice to Subtenant prior
2
<PAGE>
to or upon the effective date of such termination, Subtenant shall be
bound to Landlord under the terms, covenants and conditions of the
Sublease as provided in paragraph 8 below, for the remaining balance of
the natural term of the Sublease (as opposed to early termination)
thereof, with the same force and effect as if Landlord were the
Sublessor under such Sublease, and Subtenant does hereby agree to
attorn to Landlord as its landlord, such attornment to be effective and
self-operative without the execution of any further instruments on the
part of any of the parties to this Agreement immediately upon
Landlord's exercise of the aforementioned option.
8. In the event Landlord exercises its option of attornment as provided in
paragraph 7 above, Subtenant shall observe and perform: (i) each of the
terms, covenants and conditions of the Sublease that Landlord
designates by observed and performed, and (ii) such other terms,
covenants and conditions to which the parties may agree. It is further
agreed that Landlord shall not be:
(a) liable for any act or omission of Sublessor;
(b) obligated to cure any default of any prior Sublessor which occurred
prior to the time that Landlord succeeded to the interest of
Landlord under the Sublease; or
(c) subject to any offsets or defenses which Subtenant may be entitled
to assert against any prior landlord (including Sublessor); or
(d) bound by any payment of rent or additional rent by Subtenant to any
prior landlord (including Sublessor) for more than one month in
advance; or
(e) bound by any amendment or modification of the Sublease made without
the written consent of Landlord; or
(f) liable or responsible for or with respect to the retention,
application and/or return to Subtenant of any security deposit paid
to any prior landlord (including Sublessor), whether or not still
held by such prior landlord, unless and until Landlord has actually
received for its own account as Landlord the full amount of such
security deposit.
9. This consent is not assignable, nor shall this consent be a consent to
any amendment, modification, extension or renewal of the Sublease,
without Landlord's prior written consent.
10. You covenant and agree that under no circumstances shall we be liable
for any brokerage commission or other charge or expense in connection
with the Sublease and you hereby indemnify and agree to protect, defend
and hold us harmless against same and against any liability, loss,
damage, cost or expense (including but not limited to counsel fees) in
connection with any claim for such brokerage commission. Further, the
Subtenant represents and warrants that it has dealt with no brokers
other than those fees are to be paid by you. The Subtenant hereby
indemnifies and agrees to protect, defend and hold us harmless against
any liability, loss, damage, cost or expense (including but not limited
to counsel fees) in connection with any claim for any brokerage
commission by any person
3
<PAGE>
acting for Subtenant or claiming any commission on the basis of
contracts or dealings with Subtenant.
11. You and Subtenant understand and acknowledge that Landlord's consent
hereto is not a consent to any improvement or alteration work being
performed in the demised premises, that Landlord's consent must be
separately sought and will not necessarily be given, and that if such
consent is given the same will be subject to you signing Landlord's
standard form of agreement with respect to work being performed by
persons other than Landlord unless otherwise agreed to in writing by
Landlord.
This consent shall be of no force or effect unless and until you (as
Prime Tenant) and the Subtenant executed and deliver to Landlord a copy
of this consent, which execution and delivery shall indicate your and
Subtenant's acknowledgment of and agreement to the foregoing terms and
conditions and shall constitute Subtenant's acknowledgment that it has
received a copy of the Prime Lease from you.
ACKNOWLEDGED AND AGREED:
Prime Tenant: Barrett Resources Corporation
By: /s/
______________________________________
Its: CFO
______________________________________
Subtenant: Osmotics Corporation
By: /s/
______________________________________
Its: President
______________________________________
Landlord: Metropolitan Life Insurance Company
By: /s/
______________________________________
Its: ______________________________________
4
<PAGE>
EXHIBIT A
---------
(attach full copy of sublease as Exhibit A)
-------------------------------------------
5
<PAGE>
EXHIBIT "B"
TENANT IMPROVEMENTS
1125 - 17TH STREET, SUITE 2310
Paint reception area
Paint all walls that are not vinyl-covered
Shampoo all carpeting
Remove wall and door frame as indicated below
Remove all attached name tags
[DIAGRAM]
<PAGE>
EXHIBIT B
---------
Neither Tenant nor anyone claiming by, through or under Tenant shall
discriminate against or engage in the segregation of any person, or group of
persons on account of race, color, creed, national origin, or ancestry in the
sale, lease sublease, transfer use, occupancy, tenure, or enjoyment of the
Building or the land used in connection with the Building (hereafter the
"Project"), nor shall Tenant or any person claiming under or through Tenant,
establish or permit any such practice or practices of discrimination or
segregation with reference to the selection, location, number, use or occupancy
of tenant, lessees, subtenants, sublessees, or vendees of the Project.
2
<PAGE>
EXHIBIT 23.01
CONSENT OF COUNSEL
We consent to the reference to our firm under the caption "Legal Matters" in
Amendment No. 2 to the Registration Statement on Form SB-2 and in the related
Prospectus to be filed by Osmotics Corporation on or about March 3, 1997 in
connection with the registration of shares of its Common Stock,
Representative's Warrants, and Shares obtainable upon the exercise of such
warrants.
Fenwick & West LLP
Palo Alto, California
March 3, 1997
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EXHIBIT 23.02
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Denver, Colorado
February 28, 1997
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EXHIBIT 23.03
CONSENT OF COUNSEL
We consent to the reference to our firm under the caption "Legal Matters" in
Amendment No. 2 to the Registration Statement on Form SB-2 and in the related
Prospectus to be filed by Osmotics Corporation in connection with the
registration of 1,125,000 of its Common Stock, Representative's Warrants and
shares obtainable upon the exercise of such warrants.
Davis, Graham & Stubbs LLP
Denver, Colorado
February 28, 1997
