<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 9, 1996
REGISTRATION NO. 333-09915
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
THE TRYLON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3841 33-0346437
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION
INCORPORATION OR NO.)
ORGANIZATION)
970 W. 190TH STREET, SUITE 900
TORRANCE, CALIFORNIA 90502
(310) 327-8820
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
MARTIN L. LONKY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
THE TRYLON CORPORATION
970 W. 190TH STREET, SUITE 900
TORRANCE, CALIFORNIA 90502
(310) 327-8820
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
Copies to:
GARY OLSON ERIC A. KLEIN KENNETH J. BARONSKY
ROBERT A. KOENIG KLEIN & MARTIN MILBANK, TWEED, HADLEY &
LATHAM & WATKINS 2029 CENTURY PARK EAST MCCLOY
633 W. FIFTH STREET SUITE 1112 601 S. FIGUEROA STREET
SUITE 4000 LOS ANGELES, CALIFORNIA 30TH FLOOR
LOS ANGELES, CALIFORNIA 90067 LOS ANGELES, CALIFORNIA
90071 (310) 201-2581 90017
(213) 485-1234 (213) 892-4000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
----------------
If any of the securities on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, as
amended, (the "Securities Act"), check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<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, DATED OCTOBER 9, 1996
PROSPECTUS
, 1996
SHARES
THE TRYLON CORPORATION
COMMON STOCK
All of the shares of Common Stock, par value $.01 per share (the "Common
Stock"), offered hereby (the "Offering") are being issued and sold by The
Trylon Corporation (the "Company"). Prior to this Offering, there has been no
public market for the shares of Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $ and $
per share. See "Underwriting" for a discussion of factors considered in
determining the initial public offering price of the shares. Upon completion of
the Offering (assuming the Underwriters' over-allotment option is not
exercised), the directors and officers of the Company will own approximately %
of the outstanding shares of Common Stock and will have the right to vote those
shares in the election of directors and other matters submitted to a vote of
stockholders. See "Principal and Selling Stockholders."
Application has been made to include the Common Stock in the Nasdaq National
Market under the symbol "TRLN."
SEE "RISK FACTORS" ON PAGES 6-14 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK
OFFERED HEREBY.
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.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share...................................... $ $ $
Total(3)....................................... $ $ $
</TABLE>
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(1) The Company and certain of the Company's stockholders (the "Selling
Stockholders") have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company and the Selling Stockholders have granted to the Underwriters a
30-day option to purchase up to and additional shares of Common
Stock, respectively on the same terms as set forth above solely to cover
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to the Public, Underwriting Discounts and Commissions,
Proceeds to the Company and proceeds to the Selling Stockholders will be
$ , $ , $ and $ , respectively. The Company will not receive any
of the proceeds from the sale of shares by the Selling Stockholders. See
"Underwriting" and "Principal and Selling Stockholders."
The shares are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters and subject to various
prior conditions, including their right to reject orders in whole or in part.
It is expected that delivery of the shares offered hereby will be available for
delivery on or about , 1996 at the offices of Donaldson, Lufkin & Jenrette
Securities Corporation, New York, New York or through the facilities of the
Depository Trust Corporation.
DONALDSON, LUFKIN & JENRETTE SMITH BARNEY INC.
SECURITIES CORPORATION
<PAGE>
[Illustration includes three photographs inset on a background of illuminated
Speculites. (The three photographs include a speculum with a blue-white
Speculite, Speculite packaging from Pharmacia & Upjohn and a Pharmacia & Upjohn
trade exhibit). Captions read: "Speculum with blue-white Speculite", "Pharmacia
& Upjohn packaging for Speculite", "Pharmacia & Upjohn PPS trade exhibit".]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS 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 STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus assumes an initial public
offering price of $ per share and that the Underwriters' over-allotment
option to acquire shares is not exercised. In addition, all of the
information in this Prospectus has been adjusted to give effect to an aggregate
Common Stock split to be completed prior to the consummation of the
Offering. Unless the context requires otherwise, all references herein to the
Company include the Company's wholly-owned subsidiary, Perisphere Industries,
Inc.
THE COMPANY
The Trylon Corporation ("Trylon" or the "Company") is an innovative medical
products company that has pioneered the use of chemical light technology in
diagnostic and other medical applications. The Company's first product, PAP
PLUS SPECULOSCOPY(R) ("PPS"), combines the Company's patented visual
examination, SPECULOSCOPY(TM), with the standard Pap smear, into a simple
primary cervical screening test for women. Speculoscopy, which can be performed
by a wide range of health care practitioners at low cost, visually illuminates
cervical abnormalities, which may include cancer and precancer, during a
routine pelvic examination. Trylon received clearance from the FDA in December
1995 to market PPS for primary cervical screening.
Clinical data reviewed by the FDA indicated that PPS was more accurate in
detecting cervical abnormalities than the traditional screening test for
detecting cervical cancer, the Pap smear. As a result, the Company believes
that PPS will allow health care practitioners to identify women with cervical
abnormalities earlier than if they used the Pap smear alone. Earlier diagnosis
allows for more cost-effective treatment. At a precancerous state of disease,
costs of treatment typically do not exceed $500, while costs of treating
invasive cervical cancer often exceed $60,000.
The Company's objective is to have PPS become a standard of care generally
accepted for primary cervical screening worldwide. The Company has scheduled
major United States and international product launches of PPS during 1996. In
the United States, the Company has a long-term marketing and distribution
agreement with Pharmacia & Upjohn, Inc. ("P&U"), one of the largest
pharmaceutical distribution companies in the world. In addition, PPS is being
marketed through leading pharmaceutical and medical supply companies in certain
European, Asian and North American markets.
P&U has a strong commitment to the areas of women's health care and cancer
treatment and plans to utilize its entire national sales force for the
distribution of PPS. In addition, P&U has committed to a national advertising
campaign for PPS and has selected PPS for special sales incentives. P&U will be
the primary sponsor of the national advertising campaign, although the Company
intends to supplement P&U's efforts by contributing approximately $10 million
to the cost of such campaign. The PPS launch, scheduled to commence in the
fourth quarter of 1996, will target: (i) over 60,000 health care practitioners
through P&U's direct selling efforts and educational programs, (ii) women and
women's advocacy groups, primarily through a direct-to-consumer television and
print advertising program and other public relations efforts and (iii) third-
party payors, including managed-care organizations. The initial promotional
campaign will use P&U's established sales force to target office-based
physicians in 20 major domestic markets. During 1997, P&U plans to expand these
marketing efforts nationwide, supported by the consumer advertising and
advocacy campaigns to be undertaken jointly by the Company and P&U.
Cervical cancer is the second most common cancer in women worldwide, with
approximately 450,000 new cases diagnosed annually. In the United States, over
50 million women are screened for cervical cancer annually using a standard Pap
smear. Nevertheless, the incidence of cervical cancer has increased in the
United States
3
<PAGE>
over the last ten years, and the rate of death within the first five years of
diagnosis of cervical cancer remains above 30%. The American Cancer Society
reported that in 1995 approximately 15,800 new cases of cervical cancer were
diagnosed in the United States. Worldwide, more than 150 million Pap smears are
performed annually, leaving acute, unfulfilled needs for screening in large
portions of the world, particularly in developing countries.
In addition to PPS, the Company has developed and initiated clinical studies
of a number of products that apply its proprietary technologies to other
medical, surgical and dental uses. These products include ORAL SPECULOSCOPY(TM)
for the screening of oral cancer and SPIRABRUSH Cx(R) as a cervical sampling
device. The Company's goal is to introduce at least one new product each year.
The Company is actively developing and seeking to acquire other innovative
technologies with medical applications. See "Business."
The Company was incorporated in the State of Delaware on June 30, 1987. The
Company's executive offices are located at 970 West 190th Street, Torrance,
California 90502 and its telephone number is (310) 327-8820.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company(1).......
Common Stock to be outstanding immediately
after the Offering(2).......................
Use of Proceeds to the Company............... To fund domestic and
international marketing
campaigns for PPS, research and
development activities, capital
expenditures and general
corporate purposes.
Proposed Nasdaq National Market Symbol....... TRLN
</TABLE>
- --------------------
(1) Does not include up to shares of Common Stock that may be sold by the
Company and the Selling Stockholders pursuant to the Underwriters' over-
allotment option. See "Underwriting."
(2) Includes (i) 3,399.6 shares of Common Stock which will be issued upon the
automatic conversion of outstanding shares of Series A Convertible
Preferred Stock at the effective date of the Offering and (ii) up to 149.9
additional shares of Common Stock issuable to an existing stockholder of
the Company pursuant to anti-dilution rights that are held by such
stockholder and that will be triggered by the preferred stock conversion,
but excludes up to 2,143 shares of Common Stock issuable upon the exercise
of outstanding options held by an officer, a director and a former
director. See "Description of Capital Stock."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial information set forth below for the
Company's fiscal years ended December 31, 1993, 1994 and 1995 is derived from
the Company's consolidated financial statements audited by Arthur Andersen LLP,
independent public accountants, included elsewhere in this Prospectus. The
summary consolidated financial information set forth below for the Company's
fiscal years ended December 31, 1991 and 1992 and the six months ended June 30,
1995 and 1996, and as of June 30, 1996, is derived from the Company's unaudited
consolidated financial statements. The unaudited consolidated financial
statements from which such financial information is derived include all
adjustments, consisting of normal recurring adjustments, which management
considers necessary for a fair presentation of the Company's financial position
and results of operations as of such date and for such periods. Operating
results for the six months ended June 30, 1996 are not necessarily indicative
of the results that may be expected for future periods, including the entire
year ending December 31, 1996. The summary financial information presented
below is qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements, including the
notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues, net........... $ 88,417 $ 593,757 $1,305,014 $2,544,983 $ 628,748 $ 214,162 $ 608,196
Gross profit............ 49,605 241,122 979,312 1,847,720 333,116 75,134 257,919
Income (loss) before
income taxes........... (910,275) (646,968) (251,386) 432,259 (1,007,968) (724,375) (738,148)
Net income (loss)....... (912,792) (647,768) (252,186) 431,459 (1,008,768) (724,375) (738,948)
Net income (loss) per
common share:
Historical ............ $ (15.89) $ (10.84) $ (3.65) $ 4.64 $ (12.94) $ (8.94) $ (9.27)
========= ========= ========== ========== =========== ========= =========
Pro forma(2)........... $ (11.54) $ (8.45)
=========== =========
Weighted average number
of common shares
outstanding:
Historical............. 57,459.2 59,766.7 69,159.1 76,741.7 83,868.4 83,868.4 83,868.4
========= ========= ========== ========== =========== ========= =========
Pro forma(2)........... 87,417.9 87,417.9
=========== =========
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED(1)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................... $ 878,175 $37,278,175
Total assets........................................ 1,670,302 38,070,302
Total liabilities................................... 720,205 720,205
Long term debt, net of current portion.............. -- --
Stockholders' equity................................ 950,097 37,350,097
</TABLE>
- --------------------
(1) Adjusted to reflect the sale by the Company of shares of Common Stock
in the Offering at an assumed initial public offering price of $ per
share and the application of the estimated net proceeds therefrom. See "Use
of Proceeds."
(2) Pro forma information gives effect to the conversion of the Series A
Convertible Preferred Stock into Common Stock (and the issuance of
additional shares of Common Stock to an existing stockholder pursuant to
anti-dilution rights that will be triggered by the Preferred Stock
conversion) as though such conversion (and anti-dilution adjustment) had
occurred at the beginning of the period for which the information is given.
See Note 10 (Pro Forma Presentation) of Notes to Consolidated Financial
Statements.
5
<PAGE>
RISK FACTORS
This Prospectus contains certain forward-looking statements. Actual results
of operations could differ materially from those projected in these forward-
looking statements as a result of certain of the risk factors set forth below
and elsewhere in this Prospectus. Prospective investors should consider
carefully the following factors, in addition to other information contained in
this Prospectus, in evaluating the Company and its business before purchasing
shares of Common Stock offered hereby.
DEPENDENCE ON A SINGLE PRODUCT; UNCERTAINTY OF MARKET ACCEPTANCE
Currently, the only products marketed by the Company are PPS, the
SPECULITE(R) light source and other products supporting PPS, and certain
derivative products which generate only nominal revenues. The Company's PPS-
related products are expected to account for a majority of the Company's
revenues for at least the next several years. Accordingly, the Company's
success depends upon the acceptance by the medical community (including health
care providers, third-party payors and patients) in the United States and
foreign markets of the PPS screening test as a clinically useful and cost-
effective method of detecting cervical disease. To date, PPS has been used
primarily on a limited clinical basis and there can be no assurance that the
medical community will endorse the PPS screening test as a new standard of
care for cervical examinations. In addition, there can be no assurance that
PPS will achieve market acceptance on a timely basis, or at all, due to the
influence of established medical practices, cost constraints, the introduction
or acceptance of competing products or technologies and other factors beyond
the Company's control. Failure of the PPS screening test to achieve market
acceptance would have a material adverse effect on the Company's business,
financial condition, results of operations and prospects. See "Business--
Market and Business Strategy."
LIMITED OPERATING EXPERIENCE; HISTORICAL AND ANTICIPATED FUTURE LOSSES
The Company has a limited history of operations which have focused primarily
on research and development, product engineering, clinical trials and seeking
FDA regulatory clearance to market its products. The Company obtained FDA
clearance of its Section 510(k) premarket notification for PPS in December
1995. The Company has generated only limited revenues from the sale of its
products to date and does not have experience manufacturing, marketing or
selling products in large commercial quantities. The Company has experienced
significant operating losses since its inception and, as of June 30, 1996, had
an accumulated deficit of $4.4 million. These losses are primarily
attributable to the significant expenses associated with the research,
development, clinical testing and FDA premarket clearance process with respect
to the PPS screening test and supporting products. The Company expects to
incur substantial additional losses due to increased operating expenses
arising from continued research and development, the expansion of
manufacturing activities and domestic and international sales and marketing
efforts. The Company has established marketing, distribution and manufacturing
agreements with larger companies with expertise in those areas. See
"Business--Market and Business Strategy" and "--Manufacturing." There can be
no assurance that the Company will be able to transition successfully, either
internally or through third-party contracts, to a large-scale commercial
enterprise and achieve significant revenues or profits. The Company's results
of operations may fluctuate significantly from quarter to quarter and will
depend upon numerous factors, including the extent to which the Company's
products gain market acceptance in the United States and foreign countries,
and the accompanying timing and volume of domestic and international sales.
For a description of the Company's operating history and historical and
anticipated future losses, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON THIRD-PARTY REIMBURSEMENT
Successful sales of the PPS screening test in the United States and foreign
markets will depend, in part, on the availability of adequate reimbursement
from third-party payors such as government entities, managed care
organizations and private insurance plans. As federal and state governmental
agencies are intensifying their efforts to limit health care expenditures,
including through various pending legislative proposals to reduce
6
<PAGE>
Medicaid and Medicare expenditures, there is substantial uncertainty in the
United States concerning third-party reimbursement for the use of medical
tests incorporating new technologies. Internationally, health care payment
systems vary significantly between countries, and include government-sponsored
health care payment systems and private insurance. The Company's foreign
distributors recently have begun to seek reimbursement approvals from
government agencies in selected foreign markets but have not obtained any
reimbursement approvals to date. The Company estimates that such approvals
could take approximately 12 to 24 months to obtain following product
introduction in such foreign markets, although the time required for such
approvals may vary considerably among countries based on their health care
system and regulatory structure. There can be no assurance that such approvals
will be obtained in such time frame or at all. See "Business--Market and
Business Strategy--International Distribution and Marketing."
Reimbursement by a third-party payor may depend on a number of factors,
including such payor's determination that the use of the Company's PPS
screening test is clinically useful, cost-effective and not experimental.
Since reimbursement approval is required from each third-party payor, seeking
such approvals is a time-consuming process. Demonstration of PPS's cost-
effectiveness will be particularly important in managed-care organizations,
where tight cost controls have become common. Although the Company believes
that the low cost of the PPS screening test relative to other adjunctive
screening techniques, and its effectiveness at detecting early-stage cervical
disease, will make third-party payors receptive to its use, there can be no
assurance that payors will approve PPS for broad use or reimbursement.
Furthermore, some third-party payors may reduce over time the reimbursement
offered for the use of PPS because of the potential for less frequent
screening. Even if third-party reimbursement for the PPS screening test is
obtainable, the Company does not believe that third-party payors will always
reimburse the full cost of the test. Accordingly, acceptance of PPS in the
fee-for-service markets will depend on the willingness of the patient to bear
some or all of the cost of the test. Failure of medical practitioners to
obtain reimbursement for the PPS screening test by third-party payors could
have a material adverse effect on the Company's business, financial condition,
results of operations and prospects. See "Business--Pricing and
Reimbursement."
DEPENDENCE ON SINGLE CONTRACT MANUFACTURER
The Company does not currently manufacture any of its products but obtains
its most critical component, the Speculite light source, pursuant to a long-
term supply agreement with Omniglow Corporation ("Omniglow") which gives the
Company the exclusive right to sell Speculite for use in specified medical
applications through 2004. Omniglow acquired the patents for the manufacture
of Speculite from American Cyanamid Company in 1993 and is the only United
States manufacturer. In 1994, the Company entered into a relationship with
Omniglow and another company located in Shanghai, China that will manufacture
Speculite for sale in China and certain other countries at a lower price than
that currently charged by Omniglow. Under the current supply agreement, the
price charged by Omniglow to the Company for supplying Speculite is not fixed,
and the Company's only protection from potential increases in the price
charged by Omniglow for supplying Speculite is a six month advance notice
requirement. Any increase in the price charged by Omniglow for Speculite could
have a material adverse effect on the Company's business, financial condition,
results of operations and prospects. The Company's supply agreement with
Omniglow does not contain any minimum purchase requirements. The agreement may
be terminated by either party, prior to its expiration, only upon a material
default by the other party under the exclusivity, confidentiality or other
covenants set forth in the agreement, or upon certain events of bankruptcy or
insolvency involving the other party. See "Business--Manufacturing."
The Company's dependence on Omniglow as its sole domestic source of supply
makes the Company vulnerable to possible interruptions in such supply. Any
alternative supplier of Speculite would be required to meet stringent FDA and
international manufacturing standards applicable to medical devices. There can
be no assurance that an alternate manufacturing source could be found if
necessary, that Omniglow would consent to the Company's use of an alternative
supplier, or that available inventories would be adequate to meet the
Company's product needs during any prolonged interruption of supply. A
reduction or interruption in supply of Speculite, or the Company's inability
to secure an alternative manufacturer, if required, would limit the
7
<PAGE>
Company's ability to market the PPS screening test and would have a material
adverse effect on the Company's business, financial condition, results of
operations and prospects. See "Business--Manufacturing."
RELIANCE ON MARKETING AND DISTRIBUTION PARTNERS
The Company has no sales force of its own and relies exclusively on its
domestic and foreign distribution partners for the marketing of PPS and its
other products. The Company's principal domestic distributor of PPS is P&U,
with whom it has entered into a distribution and marketing agreement which
gives P&U exclusive rights to distribute PPS in most areas of the United
States. The Company also has entered into exclusive distribution agreements
with certain foreign distribution partners including Bracco S.p.A. (an
affiliate of Merck & Co.) in Italy, Pharmascience, Inc. in Canada and Asian
Sourcing Company in Asia. Although the Company is currently endeavoring to
establish a network of distribution and marketing partners to sell PPS
internationally, to date the Company has had only limited foreign sales in a
limited number of countries. The Company's inability to establish a network of
distribution and marketing partners who will commit the substantial financial
resources and sales personnel necessary to sell its products successfully in
the respective markets would have a material adverse effect on the Company's
business, financial condition, results of operations and prospects. Moreover,
the failure by one or more of the Company's distributors, particularly P&U, to
achieve success in marketing PPS would have a similar adverse effect. Although
the Company's agreements with its distributors contain minimum purchase
requirements for the PPS screening test, these purchase requirements are set
at low levels and are not sufficient to ensure the Company's short-term or
long-term viability. The Company's distributors have never sold PPS products
in any quantity in excess of these minimum purchase requirements, and their
failure to do so in the future would have a material adverse effect on the
Company's business, financial condition, results of operations and prospects.
The Company's distribution and marketing agreements are subject to customary
notice and termination provisions upon the occurrence of events such as a
party's failure to perform material obligations or upon a bankruptcy filing.
For a description of the Company's relationships with distributors, including
the terms of its distribution agreements, see "Business--Market and Business
Strategy." There can be no assurance that the Company will not continue to be
dependent upon a limited number of its distributors. In 1994, P&U accounted
for 55 percent of the Company's revenues and Bracco S.p.A. accounted for 16
percent of the Company's revenues. In 1995, Bracco S.p.A. accounted for 36
percent of the Company's revenues and Asian Sourcing Corporation accounted for
30 percent of the Company's revenues. In the six months ended June 30, 1996,
Bracco S.p.A. accounted for 90 percent of the Company's revenues and Asian
Sourcing Corporation accounted for 6 percent of the Company's revenues. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS RELATED TO NEW PRODUCTS; FUTURE CAPITAL NEEDS
The long-term success of the Company will not only depend upon the
successful establishment and market acceptance of PPS as a new standard of
care for primary cervical screening but also upon the further development and
successful commercialization of new technologies and additional applications
of the Company's proprietary technology. In general, the process of developing
technologies and products is time-consuming and costly, and there is no
assurance that any technology or product development will be successfully
completed, that any necessary regulatory approvals or clearances will be
granted by the FDA or other governmental authorities on a timely basis, if at
all, or that commercial acceptance will be achieved. Failure by the Company to
develop, obtain regulatory approvals or clearances for, or successfully market
domestically and internationally, new technologies or new applications of PPS
and Speculite technologies could have a material adverse effect on the
Company's business, financial condition, results of operations and prospects.
See "Business--Product and Technology Applications." In connection with the
launch of new products or otherwise, the Company may require additional
funding in the future, and the Company may seek to raise additional capital
through bank loan facilities, debt or equity offerings, or other sources of
funding. The Company recognizes that additional funding may not be available
when needed or that funds may not be available on terms acceptable to the
Company, either of which would have a material adverse effect on the Company's
business, financial condition, results of operation and prospects. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
8
<PAGE>
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend in large part on the Company's and its
manufacturers' ability to establish and maintain patent protection for its
proprietary technologies, products and processes, preserve its trade secrets
and operate without infringing the proprietary rights of other parties. There
can be no assurance that any United States or international patents issued or
licensed to the Company and its suppliers will not be successfully challenged,
invalidated or circumvented or that patent applications to which the Company
holds rights will result in the issuance of patents. Although the Company is
not currently aware of any claim by third parties that any of the Company's
products or technology infringe upon any patents or proprietary rights of such
parties, there can be no assurance that the Company will not be subject to
such claims in the future. The defense and prosecution of patent claims is
costly and time consuming, regardless of whether the outcome is favorable to
the Company, and can result in the diversion of substantial financial,
management, and other resources away from the Company's main business
activities. Additionally, adverse outcomes in any such claims could have a
material adverse effect on the Company's business, financial condition,
results of operation and prospects.
Many of the Company's competitors have invested substantial resources in
technologies that compete with the Company's technology in the cervical
screening market. There can be no assurance that such competitors will not
independently develop proprietary products that are substantially equivalent
or superior to PPS. Among other things, there is no certainty that other non-
toxic formulations of chemical light or other light sources with similar color
attributes as the Speculite cannot be developed by other entities, although
the Company is unaware of any other non-toxic chemical or other light source
currently under development that could effectively perform Speculoscopy.
Similarly, there can be no assurance that other parties will not be issued
patents which will prevent, limit or interfere with one or more of the
Company's products, or will require licensing and the payment of significant
fees or royalties by the Company to such third parties in order to enable the
Company to conduct its business. Any of these occurrences could have a
material adverse effect on the Company's business, financial condition,
results of operation and prospects.
Patents on medical and diagnostic procedures, such as the Company's patent
relating to the Speculoscopy examination, historically have been uncommon in
the United States and rarely enforced. In response to increasing attempts in
recent years to enforce and exploit such patents, Congress currently is
considering bills that could limit in certain respects the issuance or
enforcement of process patents on medical procedures. Because congressional
consideration of these bills has been preliminary in nature, it is impossible
to predict whether any legislation ultimately will be enacted or whether such
legislation, if enacted, would have any effect on the Company. Even if
enacted, however, such legislation would not be expected to affect the
Speculite patents held by Omniglow, because such patents relate to a product
rather than a medical procedure.
For a description of the patents covering the Company's products and
procedures, the ownership thereof and the limitations thereon, see "Business--
Patents and Proprietary Rights."
The Company's success also depends upon the skill, knowledge, and experience
of its scientific and technical personnel. To help protect its rights, the
Company requires that all employees and consultants enter into confidentiality
agreements that prohibit the disclosure of confidential information to anyone
outside the Company and require developments and inventions be assigned to the
Company by the employee or consultant. There can be no assurance, however,
that such confidentiality agreements will provide adequate protection for the
Company's trade secrets, know-how or other proprietary information in the
event of any unauthorized use or disclosure. Any disclosure of such
information could have a material adverse effect on the Company's business,
financial condition, results of operation and prospects.
GOVERNMENTAL REGULATION
The products marketed and manufactured by the Company are medical devices
regulated by the federal Food and Drug Administration ("FDA") pursuant to the
Federal Food, Drug and Cosmetic Act, as amended, and the regulations
promulgated thereunder. These products are subject to extensive regulation by
the FDA and,
9
<PAGE>
in some instances, by foreign and state governments. The FDA regulates
clinical testing, manufacture, labeling, sale, distribution and promotion of
all medical devices. Manufacturers must obtain market clearance to introduce
products through either the Section 510(k) premarket notification process or
the lengthier premarket approval ("PMA") application process. The Speculite
and other medical devices manufactured or distributed by the Company or its
contract manufacturers, pursuant to FDA clearances, will be subject to
continuing regulation by the FDA. In December 1994, just prior to the
scheduled commencement of a major PPS marketing campaign by P&U, the Company
received a letter from the FDA warning against the use of certain marketing
claims being made for Speculoscopy and PPS. The Company suspended active
marketing of the product and in June 1995, submitted a Section 510(k)
application for the clearance of new claims. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview." In
December 1995, the Company received FDA clearance to market Speculite under
the claim that PPS is more accurate than the Pap smear alone at detecting
cervical abnormalities. As a result of new studies, in August 1996 the Company
submitted to the FDA a new Section 510(k) application with additional
marketing claims that would allow the Company to identify in its promotional
materials the specific pathologies detected by PPS. The Company expects to
receive comments regarding its application within 90 days of submission. In
addition to its Section 510(k) application, the Company intends to file a PMA
seeking FDA clearance for claims that Speculoscopy is able to detect cancer.
There is no guarantee that the Company will be granted additional claims
through the Section 510(k) premarket notification process or PMA process.
Neither past nor future FDA clearance will preclude any third-party from
asserting a claim against the Company contending that the Company's claims
cannot be substantiated. See "--Risks of Liability." FDA rules permit the FDA
to revoke or limit prior clearances for safety or performance reasons. The
Company has not applied for or received FDA clearances for any products other
than Speculite and PPS, and no assurances can be given that it will receive
further FDA clearances with respect to its marketing of PPS or for any other
application of Speculite or other products. See "Business--Governmental
Regulation."
The Company's facilities, and those of its contract manufacturers, may be
subject to periodic inspections for compliance with the FDA's Good
Manufacturing Practices ("GMP") and other regulatory requirements by federal
and state agencies, including the California State Department of Health
Services ("CDHS"), Food and Drug Branch. Should the Company or its contract
manufacturers, subcontractors or suppliers be found in noncompliance with
applicable requirements, including GMP, it could result in, among other
things, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure of the government to grant
premarket clearance or premarket approval for devices, withdrawal of marketing
clearances and criminal prosecution. Should the Company modify or change a
product in any manner, including the use of a different facility to
manufacture or process such product, or a change in design, packaging,
labeling or advertising, it may be required to submit additional Section
510(k) notices and obtain further FDA clearances. There can be no assurance
that approval of any subsequent Section 510(k) notices will be obtained in a
timely manner, if at all. The FDA also has the authority to require the
Company to repair, replace, recall, or refund the cost of any device
manufactured or distributed by the Company. Failure or delay in attaining or
maintaining FDA, CDHS or other regulatory approvals, or non-compliance with
regulatory requirements, could have a material adverse effect on the Company's
business, financial condition, result of operations and prospects. See
"Business--Government Regulation."
The Company will also be required to obtain international regulatory
approvals, and to comply with United States export laws, in order to
distribute its products outside the United States. The approval process
differs substantially between countries and may be longer or shorter in
duration and may have significantly different requirements from those
applicable to the approval process in the United States. In order to
commercially distribute medical devices in many European countries, the
Company must adhere to certain quality assurance standards and obtain certain
clearances. The Company has not yet obtained these clearances and there can be
no assurance that such clearances can be obtained on a timely basis, if at
all. Although not all countries currently regulate the distribution of medical
devices, there can be no assurance that such countries will not develop
stringent regulatory standards. In some countries, the Company may be subject
to significant expense and licensing requirements for its products. Generally,
the extent and complexity of the regulation of medical products is increasing
worldwide, with regulation in some countries already nearly as exhaustive as
that in the
10
<PAGE>
United States. The Company anticipates that this trend will continue and that
the cost and time required to obtain approval to market in any given country
will increase, with no assurance that such approval will be obtainable. The
Company's distributors and marketing partners generally will be responsible
for obtaining regulatory approvals and establishing reimbursement from third-
party payors in their respective territories. To date, only limited foreign
regulatory approvals for PPS have been obtained. See "Business--International
Distribution and Marketing." Failure to obtain the necessary international
regulatory approvals or applicable certifications, or the imposition of
substantial associated costs, could have a material adverse effect on the
Company's business, financial condition, results of operations and prospects.
See "Business--Government Regulation."
COMPETITION
The medical diagnostic industry is subject to vigorous competition,
innovation and technological change. Companies that compete to develop and
sell medical devices in the United States and abroad are numerous and include,
among others, diagnostic, health care, pharmaceutical and biotechnology
companies. The market for adjunctive primary cervical screening tests is
growing in the United States and internationally. Over the past few years, a
number of publicly held and private companies have entered the Pap smear
improvement market with medical devices, and some of these companies, as well
as potential new entrants into this market, have substantially greater
financial, management and technical resources than the Company. Additionally,
many of these companies have substantially greater experience in research and
development, regulatory matters, manufacturing and marketing. While no
adjunctive test has become a standard of care having broad acceptance in the
medical community, several technologies have emerged that may compete in this
field, and others may emerge in the future. Currently available technologies
include DNA testing for the presence of the human papilloma virus ("HPV")
which has been linked to cervical disease and visual and photographic tests
using projected rather than internal light. Development-stage tests include a
test based on light absorption by abnormal cells, an electromagnetic
conductivity test, and a chemical test based on protein markers found in
cancer cells. In addition, computerized slide-reading technologies which
improve the effectiveness of laboratory analysis of Pap smear samples have
recently reached the marketplace. The Company believes its product can be
differentiated from other adjunctive screening products currently available by
its low cost and immediate results and by the FDA's clearance of marketing
claims that PPS is more sensitive than the Pap smear alone in detecting
cervical abnormalities. To date, the Company knows of no technology other than
PPS that has received FDA clearance of similar marketing claims. However,
there can be no assurance that the Company's present or future competitors
will not succeed in developing or marketing procedures that are more effective
or commercially attractive. Should a competitive product or procedure be
developed that renders the Company's technology and products obsolete, or that
otherwise successfully competes with PPS for limited health-care expenditures,
it would have a material adverse effect on the Company's business, financial
condition, results of operation and prospects. See "Business--Competition."
RISKS INHERENT IN INTERNATIONAL TRANSACTIONS
The Company plans to market the PPS screening test and its supporting
products to domestic and international customers. In 1995 and the first six
months of 1996, sales to international customers have provided a majority of
the Company's revenue, although the Company expects that the proportion of its
revenues attributable to domestic sales will rise substantially when P&U
launches its nationwide marketing roll-out of PPS in late 1996 and 1997. Any
international sales and operations may be limited or disrupted at any time by
the imposition of government controls or difficulties in obtaining any
necessary licenses or permits, and may be adversely affected by fluctuations
in currency exchange rates or increases in tariffs. In addition, the profit
margins from international sales generally are lower than those obtainable
from domestic sales due to cost controls imposed by foreign governments and
other third-party payors and the effect of import duties. There can be no
assurance that the Company will be able to successfully commercialize its PPS
screening test or any future products in any foreign market. In addition, the
laws of some countries will not protect the Company's proprietary rights to
the same extent as the laws of the United States. For a description of the
Company's international sales activity, see "Business--Market And Business
Strategy--International Distribution and Marketing."
11
<PAGE>
RISKS OF LIABILITY
The development, manufacture and sale of medical products entails the risk
of exposing the Company to considerable liability. A recent United States
Supreme Court decision held that, despite a company's compliance with FDA
regulations, it still may not be shielded from common-law negligent design
claims or manufacturing and labeling claims based on state rules. The Company
currently maintains product liability insurance, with limits of $5 million per
occurrence and $5 million in the aggregate. There can be no assurance that
such coverage limits will be adequate to protect the Company from any
liabilities it might incur. Product liability insurance is expensive and there
can be no assurance that the Company will be able to continue to obtain and
maintain insurance at acceptable rates, if at all. Potential losses from any
possible future liability claims, and the effect any product liability
litigation may have upon the reputation and marketability of the Company's
technology and products, together with diversion of the attention of the
Company's key personnel, could have a material adverse effect on the Company's
business, financial condition, results of operations and prospects.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent to a significant extent upon the contributions,
experience and expertise of a few key management and technical personnel. The
loss of the services of such personnel could have a material adverse effect on
the Company's business, financial condition, results of operations and
prospects. The Company does not have key-man life insurance policies on any of
its personnel. In addition to its existing management, the Company's success
will depend upon its ability to attract and retain additional highly qualified
management and technical personnel. The Company faces competition for
qualified personnel, and there can be no assurance that the Company will be
able to attract and retain such personnel. See "Management--Executive Officers
and Directors."
BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS
The Company anticipates that the proceeds of the Offering will be used for
advertising, research and development, working capital and general corporate
purposes. The Company is not currently able to estimate precisely the
allocation of the proceeds among such uses, and the timing and amount of
expenditures will vary depending upon numerous factors. The Company's
management will have broad discretion to allocate the proceeds of the Offering
and to determine the timing of expenditures and there can be no assurance that
the proceeds can or will be invested to yield a significant return to the
Company. See "Use of Proceeds."
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS
Dr. Martin Lonky, the Chief Executive Officer, President and Chairman of the
Company, Dr. Stewart Lonky, the Executive Vice President, Chief Medical
Officer and a Director of the Company, and Dr. Neal Lonky, the Secretary and a
Director of the Company, will, in the aggregate, beneficially own
approximately % of the Company's outstanding Common Stock following the
completion of the Offering (approximately % if the Underwriter's over-
allotment option is exercised in full). The Company's directors and executive
officers will, in the aggregate, beneficially own approximately % of the
Company's outstanding Common Stock following the completion of the Offering
(approximately % if the Underwriter's over-allotment option is exercised in
full). These stockholders, if acting together, would be able to control
substantially all matters requiring approval by the stockholders of the
Company, including the election of directors and the approval of mergers or
other business combination transactions. Such concentration of ownership could
discourage or prevent a change in control of the Company. See "Principal and
Selling Stockholders."
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS; ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws, and of Delaware law, may have the effect of making it more
difficult for a third-party to acquire, or of discouraging a third-party from
attempting to acquire, control of the Company. Such provisions could limit the
price that certain investors might be willing to pay in the future for shares
of the Company's Common Stock. The Company's Restated Certificate
12
<PAGE>
of Incorporation allows the Company to issue Preferred Stock without any vote
or further action by the stockholders, provides for a classified board of
directors, eliminates the right of stockholders to call special meetings of
stockholders or to act by written consent without a meeting, eliminates
cumulative voting in the election of directors, and requires the holders of at
least 66 2/3% of outstanding voting shares to approve certain charter or by-
law amendments. Moreover, Section 203 of the Delaware General Corporation Law
prohibits a Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years unless certain
conditions are met. These provisions of the Company's charter documents and of
Delaware law may make it more difficult for stockholders to take certain
corporate actions and could have the effect of delaying or preventing a change
in control of the Company. For a fuller discussion of these and other charter
and contractual provisions that could have anti-takeover effects, see
"Management" and "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
There will be shares of Common Stock outstanding immediately following
consummation of the Offering ( shares if the Underwriters' over-allotment
option is exercised in full). The shares of Common Stock offered hereby
(plus an additional shares if the Underwriters' over-allotment option is
exercised in full) will be fully tradable without restriction or registration
under the Securities Act by persons other than "affiliates" (as defined in the
Securities Act) of the Company. The remaining shares of Common Stock will
be "restricted securities" as defined in the Securities Act and may be sold
only pursuant to an effective registration statement under the Securities Act
or an applicable exemption from the registration requirements of the
Securities Act, including Rule 144 thereunder. Upon completion of the
Offering, the Company will file an S-8 Registration Statement to register up
to shares of Common Stock reserved for issuance pursuant to stock
incentive plans of the Company. Certain holders of Common Stock and all
directors and executive officers have agreed with the Underwriters (as defined
below) not to offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of their shares of Common Stock for a period of 180 days
after the date of this Prospectus, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation. See "Shares Eligible for
Future Sale."
Upon expiration of the 180-day lock-up period, shares of Common Stock
will become eligible for sale in the public market pursuant to Rule 701 under
the Securities Act and an additional shares will become eligible for
immediate public resale, subject to volume limitations and the other
provisions of Rule 144.
Sales of the Company's Common Stock (including shares issued upon the
exercise of outstanding options) in the public market after the Offering could
materially adversely affect the market price of the Common Stock. Such sales
also might negatively affect the Company's ability to sell equity securities
in the future at a time and price that the Company deems appropriate.
NO PRIOR PUBLIC TRADING MARKET FOR COMMON STOCK; IMMEDIATE AND SUBSTANTIAL
DILUTION
Prior to the Offering there has been no public market for the Common Stock,
and there can be no assurance that an active trading market will develop or,
if one does develop, that it will be maintained. The initial public offering
price, which will be established by negotiations between the Company and the
Underwriters, may not be indicative of prices that will prevail in the trading
market. In addition, the initial public offering price of the Company's Common
Stock is substantially higher than the net tangible book value per share of
Common Stock. Investors purchasing shares of Common Stock in the Offering will
incur immediate and substantial dilution in the net tangible book value of the
Common Stock of $ per share. To the extent that currently outstanding options
to purchase the Company's Common Stock are exercised, there will be further
dilution. See "Underwriting" and "Dilution."
POTENTIAL VOLATILITY OF STOCK PRICE
The stock market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely
13
<PAGE>
affect the market price of the Company's Common Stock. In addition, the market
price of the shares of Common Stock is likely to be highly volatile. Factors
such as market acceptance of the Company's products, fluctuations in the
Company's operating results, announcements of technological innovations or new
products by the Company or its competitors, FDA and international regulatory
actions, actions with respect to reimbursement matters, developments with
respect to patents or proprietary rights, public concern as to the safety of
products developed by the Company or others, changes in health care policy in
the United States and internationally, failure of the Company's results of
operations to be consistent with the expectations of public market analysts
and investors, issuances of changes in stock market analysts' recommendations
and general market conditions may have a significant effect on the market
price of the Common Stock. There can be no assurance that the Company's future
operating results will not be below the expectations of public market analysts
and investors in some future quarter, which would have a material adverse
effect on the price of the Company's Common Stock. For a discussion of past
and possible future trends that could affect the Company's operating results,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
ABSENCE OF DIVIDENDS
The Company has not paid any dividends on the Common Stock and does not
anticipate paying any dividends on the Common Stock in the foreseeable future.
See "Dividend Policy."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares offered by
the Company hereby are estimated to be approximately $36.4 million (or
approximately $ million if the Underwriters' over-allotment option is
exercised in full), after deducting the estimated underwriting discounts and
commissions and offering expenses. The Company intends to use approximately
$20 million of the net proceeds to fund a domestic and international
marketing, advertising, and public relations program, including a women's
health advocacy program. The Company intends to use approximately $4 to $6
million of the net proceeds to fund product research and development over the
next 24 months, including the development of products from proprietary
technologies the Company already owns or may acquire. The Company intends to
use the remainder of the net proceeds to fund general corporate purposes,
including the addition of marketing and administrative personnel, leasehold
improvements and other capital expenditures associated with the expansion of
staff, and working capital requirements. The exact amount and timing of these
expenditures will depend on numerous factors, including the progress and cost
of the Company's product development programs and the rate of market
acceptance of the Company's products.
Pending the above uses, the net proceeds of the Offering will be invested in
investment-grade, interest bearing securities.
DIVIDEND POLICY
The Company has not declared or paid dividends on its Common Stock. The
declaration and payment of dividends by the Company are subject to the
discretion of the Board of Directors. It is the current policy of the Company
to retain earnings, if any, to finance the operations and expansion of the
Company's business. Any determination as to the payment of dividends in the
future will depend upon, among other things, general business conditions, the
Company's earnings, financial condition, capital needs and other factors
deemed pertinent by the Company's Board of Directors, including the
limitations, if any, on the payment of dividends under state law. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
15
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents, short-term
debt and consolidated capitalization of the Company at June 30, 1996 and as
adjusted to reflect the sale of the shares of Common Stock in the Offering
(assuming an offering price of $ per share), and the receipt of the
estimated net proceeds therefrom. For a description of the intended use of
these proceeds, see "Use of Proceeds." This table should be read in
conjunction with the Company's consolidated financial statements, including
the notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED
<S> <C> <C>
Cash and cash equivalents(1)......................... $ 842,649 $37,242,649
=========== ===========
Short-term indebtedness.............................. $ 120,000 $ 120,000
=========== ===========
Stockholders' equity:
Preferred Stock, par value $.01 per share; 10,000
shares authorized; 1,699.80 shares issued and
outstanding (actual) and no shares issued and
outstanding (as adjusted)(2)...................... 849,876 --
Common Stock, par value $.01 per share; 100,000
shares authorized; 74,786.4 shares issued and
outstanding (actual) and shares issued and
outstanding (as adjusted)(2)(3)................... 747 [ ]
Additional paid-in capital......................... 4,460,466 [ ]
Accumulated deficit................................ (4,360,992) (4,360,992)
----------- -----------
Total stockholders' equity....................... 950,097 37,350,097
----------- -----------
Total capitalization................................. $ 1,070,097 $37,470,097
=========== ===========
</TABLE>
- ---------------------
(1) Neither actual nor as adjusted amounts include gross proceeds of $891,020
received in September 1996 upon the exercise of outstanding Common Stock
purchase warrants.
(2) As adjusted amounts give effect to (i) the automatic conversion of all
outstanding shares of Series A Convertible Preferred Stock into 3,399.6
shares of Common Stock at the effective date of the Offering, and (ii) the
issuance of up to 149.9 additional shares of Common Stock to an existing
stockholder of the Company pursuant to anti-dilution rights that are held
by such stockholder and that will be triggered by the preferred stock
conversion.
(3) Excludes (i) up to 2,143 shares of Common Stock issuable upon the exercise
of outstanding options held by an officer, a director and a former
director, (ii) 750 shares of Common Stock issued in August 1996 to an
officer of the Company and (iii) 6,939 shares of Common Stock issued in
September 1996 upon the exercise of outstanding Common Stock purchase
warrants.
16
<PAGE>
DILUTION
After giving effect to the sale by the Company of the shares offered hereby
and the application of the net proceeds therefrom, the pro forma net tangible
book value of the Company at June 30, 1996 after such adjustment would have
been $ or $ per share of Common Stock. This represents an immediate
increase in net tangible book value per share of $ to the existing
stockholders and an immediate dilution in net tangible book value of $ per
share to new investors at the initial public offering price. Net tangible book
value per share represents the amount of total tangible assets of the Company
less total liabilities, divided by the number of shares of Common Stock
outstanding on a fully diluted basis. The following illustrates this dilution
per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $
Net tangible book value per share before the Offering.............. $
Increase per share attributable to new investors...................
Pro forma net tangible book value per share after the Offering.......
Dilution per share to new investors.................................. $
</TABLE>
The following table summarizes, as of September 30, 1996, the relative
investments of the current stockholders and new investors, on a fully diluted
basis, and giving pro forma effect to the sale by the Company of the shares
offered hereby to new investors in the Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT NUMBER PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Current stockholders.... 88,167.9
New investors...........
Total.................
</TABLE>
For purposes of the foregoing tables, the number of shares of Common Stock
outstanding have been calculated on a fully diluted basis, after giving effect
to (i) the automatic conversion of all outstanding shares of Series A
Convertible Preferred Stock into 3,399.6 shares of Common Stock at the
effective date of the Offering, (ii) the issuance of up to 149.9 additional
shares of Common Stock to an existing stockholder of the Company pursuant to
anti-dilution rights that are held by such stockholder and that will be
triggered by the preferred stock conversion, (iii) the issuance of up to 2,143
shares of Common Stock upon the exercise of outstanding options held by an
officer, a director and a former director, (iv) the issuance of 750 shares of
Common Stock in August 1996 to an officer of the Company and (v) the issuance
of 6,939 shares of Common Stock in September 1996 upon the exercise of
outstanding Common Stock purchase warrants. See "Description of Capital
Stock."
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial information set forth below as of
December 31, 1994 and 1995 and for the three years ended December 31, 1993,
1994 and 1995 is derived from the Company's consolidated financial statements
audited by Arthur Andersen LLP, independent public accountants, included
elsewhere in this Prospectus. The selected consolidated financial information
set forth below as of December 31, 1991, 1992 and 1993 and June 30, 1996 and
for the years ended December 31, 1991 and 1992 and the six months ended
June 30, 1995 and 1996 is derived from the Company's unaudited consolidated
financial statements. The unaudited consolidated financial statements from
which such selected financial information is derived include all adjustments,
consisting of normal recurring adjustments, which management considers
necessary for a fair presentation of the Company's financial position and
results of operations as of such dates and for such periods. Operating results
for the six months ended June 30, 1996 are not necessarily indicative of the
results that may be expected for future periods, including the entire year
ending December 31, 1996. The selected financial information presented below
is qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements, including the
notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
STATEMENT OF OPERATIONS
DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues, net.......... $ 88,417 $ 593,757 $1,305,014 $2,544,983 $ 628,748 $ 214,162 $ 608,196
Cost of goods sold..... 38,812 352,635 325,702 697,263 295,632 139,028 350,277
--------- --------- ---------- ---------- ----------- --------- ---------
Gross profit........... 49,605 241,122 979,312 1,847,720 333,116 75,134 257,919
Selling expenses....... 161,027 243,465 242,478 471,695 183,778 162,423 332,789
General and administra-
tive expenses......... 593,759 474,119 663,790 717,559 786,263 383,325 506,304
Research and develop-
ment expenses......... -- -- 123,687 184,542 435,733 228,072 186,089
--------- --------- ---------- ---------- ----------- --------- ---------
Operating income
(loss)................ (705,181) (476,462) (50,643) 473,924 (1,072,658) (698,686) (767,263)
Other income (expense). (205,094) (170,506) (200,743) (41,665) 64,690 (25,689) 29,115
--------- --------- ---------- ---------- ----------- --------- ---------
Income (loss) before
income taxes.......... (910,275) (646,968) (251,386) 432,259 (1,007,968) (724,375) (738,148)
Provision for income
taxes................. 2,517 800 800 800 800 -- 800
--------- --------- ---------- ---------- ----------- --------- ---------
Net income (loss)...... $(912,792) $(647,768) $ (252,186) $ 431,459 $(1,008,768) $(724,375) $(738,948)
========= ========= ========== ========== =========== ========= =========
Net income (loss) per
common share:
Historical............. $ (15.89) $ (10.84) $ (3.65) $ 4.64 $ (12.94) $ (8.94) $ (9.27)
========= ========= ========== ========== =========== ========= =========
Pro forma(1)........... $ (11.54) $ (8.45)
=========== =========
Weighted average number
of common shares out-
standing:
Historical............. 57,459.2 59,766.7 69,159.1 76,741.7 83,868.4 83,868.4 83,868.4
========= ========= ========== ========== =========== ========= =========
Pro forma(1)........... 87,417.9 87,417.9
=========== =========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------------------------------------- --------------
1991 1992 1993 1994 1995 1996
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C>
Working capital........ $ 889,519 $(2,031,427) $ (164,892) $ 353,225 $1,566,764 $ 878,175
Total assets........... 1,418,637 747,565 919,823 2,042,727 2,485,813 1,670,302
Total liabilities...... 3,216,519 2,761,521 1,055,498 1,646,376 855,720 720,205
Long term debt, net of
current portion....... 2,318,768 18,476 6,915 -- -- --
Stockholders' equity
(deficit) ............ (1,797,882) (2,013,956) (135,675) 396,351 1,630,093 950,097
</TABLE>
- ---------------------
(1) Pro forma information gives effect to the conversion of the Series A
Convertible Preferred Stock into Common Stock (and the issuance of additional
shares of Common Stock to an existing stockholder pursuant to anti-dilution
rights that will be triggered by the Preferred Stock conversion) as though
such conversion (and anti-dilution adjustment) had occurred at the beginning
of the period for which the information is given. See Note 10 (Pro Forma
Presentation) of Notes to Consolidated Financial Statements.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company has focused on the development, marketing, and sale of medical
technologies utilizing the application of chemical light. The Company's first
product is Speculoscopy, a visual examination for the screening of cervical
disease. To date, nearly all of the Company's revenues have been derived from
the sale of products or licensing fees associated with the Speculoscopy
examination. In December 1995, the Company received FDA clearance to market
PPS (the screening test which combines Speculoscopy with the standard Pap
smear) on the basis that it is more sensitive in detecting cervical
abnormalities than the Pap smear alone.
The Company's predecessor, Trylon Associates, Ltd., which was founded in
1984, operated under a joint development agreement with American Cyanamid
Company for the purpose of developing a medically useful chemiluminescent
light source. In April 1985, Trylon Associates, Ltd. received FDA clearance
for marketing Speculite. The Company commenced marketing of its first product,
Amber Speculite, in 1988. Although the Company has derived limited revenues
from the sale of Amber Speculite, virtually all of the Company's activities
from 1988 until 1992 were directed at the development of Speculoscopy. The
Company has developed and funded research studies in the United States and
abroad, and has developed collateral materials such as sales brochures,
manuals and continuing medical education programs to train health care
practitioners to perform the Speculoscopy examination. From 1992 to 1994, the
Company engaged in limited distribution of the PPS screening test while
conducting further research with clinical laboratory groups.
In 1994, the Company entered into an exclusive distribution and marketing
agreement for the sale of PPS products with what was then The Upjohn Company
("Upjohn") and is now Pharmacia & Upjohn, Inc. ("P&U"). Following a limited
sales force launch in October 1994, the PPS screening test was scheduled for
broader market introduction when the Company received the FDA's letter in
December 1994 warning against the use of certain marketing claims being made
for Speculoscopy and PPS. The Company, with the concurrence of Upjohn, decided
to discontinue active marketing of the product while it responded to the FDA
letter. In June 1995, the Company submitted a Section 510(k) application for
the clearance of new claims and marketing of Speculoscopy as a Class II
device. See "Governmental Regulation." The Company's revenues in 1995 and the
first half of 1996 were negatively affected by the delay of planned marketing
activities. In December 1995 the FDA cleared the Company's marketing claims
for Speculoscopy and PPS. The Company and P&U have scheduled a major domestic
marketing campaign for PPS commencing in late 1996. In addition, the Company
has commenced marketing PPS through other pharmaceutical and medical supply
companies in certain foreign markets. See "Business--Market and Business
Strategy."
Since its inception in 1987, the Company has sustained significant losses,
with an accumulated deficit of $4.4 million as of June 30, 1996. These losses
have arisen principally from expenses associated with the Company's
development of Speculoscopy and the PPS screening test and the expenses of
clinical studies. The Company expects that such operating losses will continue
in the immediate future due to significant marketing and advertising
expenditures, hiring of additional employees and other expenses anticipated in
connection with the Company's growth. Furthermore, the Company intends to
increase its research and development expenditures on chemical light
diagnostic technologies, support materials and other medical technologies. See
"Use of Proceeds." There can be no assurance that the revenues generated from
either PPS sales or the sales of other products will be substantial or
consistent in the future, given the fact that the Company has no long-term
sales history. The Company anticipates that its operating results may
fluctuate significantly from quarter to quarter in the future, and that this
fluctuation will depend on a number of factors, many of which are outside the
Company's control. These factors include the willingness of distributors to
stock inventories, manufacturing lead time, timing of orders and growth of
market penetration. For a description of other factors which may affect the
Company's earnings, see "Risk Factors--Limited Operating Experience;
Historical and Anticipated Future Losses."
The Company's PPS-related revenues derive principally from the sale to the
Company's distributors, including P&U domestically and the Company's foreign
distributors, of PPS materials, the components of which are purchased from the
Company's third-party suppliers. The principal component of PPS sales is the
Speculite light source, which is manufactured domestically by Omniglow under a
long-term supply agreement which gives the Company the
19
<PAGE>
exclusive right to sell Speculite for use in specified medical applications.
Under the current supply agreement, the price charged by Omniglow to the
Company for supplying Speculite is not fixed, and the Company's only
protection from potential increases in the price charged by Omniglow for
supplying Speculite is a six month advance notice requirement. Omniglow owns
patent rights with respect to Speculite, while the Company owns patents on the
Speculoscopy procedure. The Company believes that its procedure patents
prevent others from marketing cervical screening tests similar to PPS using
chemical light having the color attributes of Blue-White Speculite. However,
the Company does not generally derive licensing revenues from its Speculoscopy
patents beyond the revenues it receives for the sale to distributors of PPS
products. See "Business--Market and Business Strategy," "--Patents and
Proprietary Rights" and "--Manufacturing."
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net revenues increased by 184% to $608,196 for the six months ended June 30,
1996 from $214,162 for the same period in 1995. This increase was attributable
to the introduction of Speculite and Speculoscopy optics in Italy through the
Company's Italian distributor, Bracco S.p.A., which accounted for 90% of the
Company's revenues during the six months ended June 30, 1996. Foreign sales in
the aggregate accounted for 96.1% of revenues during this period in 1996,
compared to 66.5% of revenues during the same period in 1995. The Company
expects that the percentage of its revenues attributable to domestic sales
will rise substantially when P&U launches its nationwide marketing roll-out of
PPS in late 1996 and 1997.
Cost of goods sold increased 152% to $350,277 for the six months ended June
30, 1996 from $139,028 for the same period in 1995. The increase in cost of
goods sold resulted primarily from the launch of Speculoscopy in Italy in
1996. Gross profit increased 243% to $257,919 for the six months ended June
30, 1996 from $75,134 for the same period in 1995, with an increase in gross
profit margin to 42.4% from 35.1%. This increase resulted from higher margins
on the products being sold in Italy compared to those sold in the Pacific Rim
during the same period in 1995. Gross profit on PPS sales alone (both domestic
and foreign) averaged $1.06 per unit for the six months ended June 30, 1996,
compared to $1.10 per unit for the same period in 1995.
Total operating expenses increased 32.5% to $1,025,182 for the six months
ended June 30, 1996 from $773,820 for the same period in 1995. The total
increase of $251,362 is comprised of a $170,366 increase in selling expenses
due to domestic public relations efforts, a $122,979 increase in general and
administrative expense resulting from increased operating activity,
professional fees and additional personnel, offset by a $41,983 reduction in
research and development expenses due to regulatory and clinical education
expenses incurred in the 1995 period and not repeated in 1996.
Interest expense decreased 90.2% to $4,956 in the six months ended June 30,
1996 from $50,695 in the same period in 1995. This decrease was primarily a
result of the exchange of $466,935 in principal and accrued interest on the
Company's convertible subordinated debentures for shares of Series A
Convertible Preferred Stock and Common Stock in November and December 1995,
and the repayment of $365,031 in principal and accrued interest on such
debentures, resulting in their retirement in full.
The Company was not required to make any material provision for income taxes
in the first six months of 1996 or 1995 due to the effect of substantial net
operating loss carryforwards for federal and state income tax purposes.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net revenues decreased 75.3% to $628,748 in 1995 from $2,544,983 in 1994.
This decrease resulted primarily from the Company's decision to suspend
temporarily the domestic marketing of PPS after receiving the FDA letter in
December 1994. See "Risk Factors--Governmental Regulation." Domestic sales
accounted for 31.6% of net revenues in 1995, compared to 75.5% of net revenues
in 1994. The majority of revenues generated in 1995 were derived from two
foreign distributors of PPS materials, Bracco S.p.A. and Asian Sourcing
Corporation. See "Business--International Distribution and Marketing."
Cost of goods sold decreased 57.6% to $295,632 in 1995 from $697,263 in 1994
and primarily represented amounts paid to Omniglow for the manufacture of
Speculite under the Company's supply agreement. See "Business--
20
<PAGE>
Manufacturing." The decrease in cost of goods sold resulted primarily from the
suspension of domestic marketing of PPS. Gross profit decreased 82.0% to
$333,116 in 1995 from $1,847,720 in 1994, with a reduction in gross profit
margin to 53.0% in 1995 from 72.6% in 1994. Gross profit on PPS sales alone
(both domestic and foreign) averaged $0.94 per unit in 1995, compared to $2.16
per unit in 1994. The decrease in gross profit margin was a result of the
inefficiencies of manufacturing smaller quantities of PPS materials and the
increased contribution of foreign PPS sales, which have a lower gross profit
margin due to price constraints resulting from the prevalence of public health
care systems and the effect of import duties.
Total operating expenses increased 2.3% to $1,405,774 in 1995 from
$1,373,796 in 1994. The increase in operating expenses resulted primarily from
an increase in research and development costs related to the initiation of new
clinical study protocols related to PPS. In addition, the Company realized
nonrecurring legal and other professional expenses in the amount of $60,061
related to discussions with Omniglow regarding the Company's proposal to
acquire the manufacturing rights for Speculite products and in the amount of
$37,618 resulting from the Company's response to the FDA letter it received
in December 1994. The increase in research and development expenses and
general and administrative expenses was partially offset by a decline in
selling expenses due to the delayed launch of the PPS marketing campaign.
Interest expense decreased 1.9% to $84,631 in 1995 from $86,273 in 1994
primarily due to the exchange of $466,935 in principal and accrued interest on
the Company's convertible subordinated debentures for shares of Series A
Convertible Preferred Stock in November 1995.
The Company had no material income tax liability in 1995 or 1994 due to the
effect of substantial net operating loss carryforwards for federal and state
income tax purposes.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net revenues increased 95.0% to $2,544,983 in 1994 from $1,305,014 in 1993.
This increase resulted from (i) an increase of $1,395,432 in sales of domestic
PPS products to Upjohn at the initiation of their distribution agreement and
their PPS launch in the third and fourth quarters of 1994, (ii) an increase of
$59,264 in foreign sales primarily to a single distributor, Asian Sourcing
Corporation and (iii) the receipt in 1994 of $250,000 in fees associated with
the licensing of the Company's products for distribution in Asia and an
additional $250,000 in fees associated with an amendment extending the Upjohn
distribution and marketing agreement. These fees were paid solely as
consideration for entering into the distribution agreement or amendment, as
applicable, and were non-refundable. For a description of the distribution
agreements, see "Business--Market and Business Strategy." Foreign sales
accounted for 24.4% of net revenues in 1994, compared to 1.2% of net revenues
in 1993. Substantially all domestic sales during 1994 and 1993 were to Upjohn
and MetWest, Inc., respectively.
Cost of goods sold increased 114.1% to $697,263 in 1994 from $325,702 in
1993 and primarily represented amounts paid to Omniglow for the manufacture of
Speculite under the Company's supply agreement. The increase in cost of goods
sold resulted from increased sales volumes. Gross profit increased 88.7% to
$1,847,720 in 1994 from $979,312 in 1993, with a decrease in gross profit
margin to 72.6% in 1994 from 75% in 1993. The decrease in gross profit margin
was a result of the increased contribution of foreign PPS sales which have a
lower gross margin due to price constraints, partially offset by the margin-
enhancing effect of licensing fees that contributed $500,000 to net revenues
in 1994. Gross profit on PPS sales alone (both domestic and foreign) averaged
$2.16 per unit in 1994, compared to $4.20 per unit in 1993.
Total operating expenses increased 33.4% to $1,373,796 in 1994 from
$1,029,955 in 1993. This increase resulted from an increase in selling
expenses to support the increased sales of PPS during 1994. These selling
expenses included an increase in personnel and the commencement of public
relations and advertising efforts for the anticipated launch of PPS which was
later postponed. Interest expense decreased 59.5% to $86,273 in 1994 from
$213,034 in 1993. This decrease was primarily a result of the conversion of
$999,666 principal amount of convertible subordinated debentures into shares
of Common Stock in June 1993 and the exchange of $739,484 in principal and
accrued interest on the convertible subordinated debentures for shares of
Series A Convertible Preferred Stock during 1993 and the first half of 1994.
The Company had no material income tax liability in 1994 or 1993 due to the
effect of substantial net operating loss carryforwards for federal and state
income tax purposes.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's expenses have exceeded its revenues,
resulting in an accumulated deficit of $4.4 million at June 30, 1996. In
addition to its product sales, which have totalled approximately $5.8 million
since inception, the Company has funded its operations through the private
placement of debt and equity securities aggregating approximately $4.0 million
through June 30, 1996. In addition, the Company received gross proceeds of
approximately $0.9 million for Common Stock issued in September 1996 upon the
exercise of certain outstanding warrants.
At December 31, 1995, the Company had cash and cash equivalents of
$1,221,619. Cash and cash equivalents increased from $678,851 at December 31,
1994, primarily due to the issuance in 1995 of shares of Common Stock and
Warrants, for aggregate net proceeds of $1,664,215 to the Company. During 1994
and 1993, the Company did not recognize any cash infusions from investment
activities. During 1995, net cash used in operations was $1,268,545, and
during 1993, net cash used in operations was $252,806. In 1994, the Company
had $1,018,108 of net cash provided by operating activities, which resulted
from an increase in accounts payable of $499,442 in the fourth quarter of
1994, coupled with net income of $431,459 for 1994. The increase in cash used
in operations during 1995 resulted from the Company's decision to suspend
active marketing of PPS following the FDA letter received in December 1994, as
well as an increase in research and development costs related to the FDA
response and additional product development.
The Company had $512,129 of net cash provided from investing activities in
1995, largely as a result of its withdrawal of funds from a government
security. The Company used $521,359 of cash for investment purposes in 1994,
consisting primarily of the initial investment in the government security
mentioned above. The Company used a total of $100,758 in investment activities
in 1993, consisting primarily of cash placed in a restricted cash account.
The Company's accounts receivable totalled $941,314 at December 31, 1995 and
$345,334 at June 30, 1996. The decrease in accounts receivable was
attributable to the receipt of approximately $608,000 in full settlement of a
receivable from a former distributor which previously had been in dispute.
The Company had no long-term indebtedness outstanding or term loan
facilities in place at December 31, 1995. During 1995, the Company exchanged
$466,935 (in principal amount plus accrued interest) of its outstanding
convertible subordinated debentures for Common Stock, and retired $365,031 by
repayment. The Company had a $120,000 bank line of credit outstanding as of
December 31, 1994 and 1995, which matures on November 15, 1996. The Company
also had a $50,000 stand-by letter of credit from the same bank relating to
its long-term supply agreement with Omniglow. These lines of credit have been
guaranteed by Drs. Martin and Stewart Lonky, neither of whom has received any
compensation or consideration for furnishing such guarantee.
The Company has not significantly invested in capital equipment, nor has the
Company had any significant expenses related to leasehold improvements, over
the last three years. The Company anticipates a number of future cash uses
that will impact its liquidity. These uses include $20 million budgeted for a
domestic and international marketing, advertising and public relations
program, including a women's health advocacy program, and $4 million to
$6 million budgeted for product research and development over the next 24
months. The research and development efforts are expected to include the
initiation of new studies, the accelerated development of new products, and
support of clinical trials of the Company's Spirabrush Cx sampling device and
its Oral Speculoscopy screening program. In addition, the Company anticipates
expanding its marketing and administrative personnel and making leasehold
improvements and capital expenditures associated with expansion of its staff
and office space. The Company anticipates that the net proceeds from the
Offering, together with interest from such proceeds, will be sufficient to
fund its anticipated operations through at least 1997. However, the Company's
future liquidity and capital requirements will depend on numerous factors,
including the extent of revenues generated from a successful launch of the PPS
screening test by P&U and the extent to which the Company's products generate
market demand and thus require additional investment. The Company may require
additional funding in the future, and the Company may seek to raise additional
capital through bank loan facilities, debt or equity offerings, or other
sources of funding. The Company recognizes that additional funding may not be
available when needed or that funds may not be available on terms acceptable
to the Company, either of which would have a material adverse effect on the
Company's business, financial condition, results of operation and prospects.
22
<PAGE>
BUSINESS
OVERVIEW
The Trylon Corporation ("Trylon" or the "Company") is an innovative medical
products company that has pioneered the use of chemical light technology in
diagnostic and other medical applications. The Company's first product, PAP
PLUS SPECULOSCOPY(R) ("PPS"), combines the Company's patented visual
examination, SPECULOSCOPY(TM), with the standard Pap smear, into a simple
primary cervical screening test for women. Speculoscopy, which can be
performed by a wide range of health care practitioners at low cost, visually
illuminates cervical abnormalities, which may include cancer and precancer,
during a routine pelvic examination. Clinical data reviewed by the FDA
indicated that PPS was more accurate in detecting cervical abnormalities than
the traditional screening test for detecting cervical cancer, the Pap smear.
As a result, the Company believes that PPS will allow for the earlier
detection and thus the earlier and less expensive treatment of cervical
disease.
The Company's objective is to have PPS become a standard of care generally
accepted for primary cervical screening worldwide. Trylon received clearance
from the FDA to market PPS in December 1995 and has scheduled major United
States and international product launches of PPS during 1996. In the United
States, the Company has a long-term distribution agreement with Pharmacia &
Upjohn, Inc. ("P&U"), one of the largest pharmaceutical distribution companies
in the world. In addition, PPS is being marketed through leading
pharmaceutical and medical supply companies in certain European, Asian and
North American markets.
P&U has a strong commitment to the areas of women's health care and cancer
treatment and plans to utilize its entire national sales force for the
distribution of PPS. In addition, P&U has committed to a national advertising
campaign for PPS and has selected PPS for special sales incentives. P&U will
be the primary sponsor of the national advertising campaign, although the
Company will supplement P&U's efforts by contributing approximately $10
million to the cost of such campaign. The PPS launch, scheduled to commence in
the fourth quarter of 1996, will target: (i) over 60,000 health care
practitioners through P&U's direct selling efforts and educational programs,
(ii) women and women's advocacy groups, primarily through a direct-to-consumer
television and print advertising program and other public relations efforts
and (iii) third-party payors, including managed-care organizations.
In the United States, over 50 million women are screened for cervical cancer
annually using a standard Pap smear. Nevertheless, the incidence of cervical
cancer has increased in the United States over the last ten years, and the
rate of death within the first five years of diagnosis of cervical cancer
remains above 30%. The American Cancer Society reported that in 1995
approximately 15,800 new cases of cervical cancer were diagnosed in the United
States. Worldwide, cervical cancer is the second most common cancer in women,
with approximately 450,000 new cases diagnosed annually. Approximately $5.0
billion is spent annually in the United States administering and evaluating
Pap smears.
The Company believes that PPS will allow health care practitioners to
identify women with cervical abnormalities earlier than if they used the Pap
smear alone. Earlier diagnosis allows for more cost-effective treatment. At a
precancerous stage of disease, costs of treatment typically do not exceed
$500, while costs of treating invasive cervical cancer often exceed $60,000.
In addition to PPS, the Company has developed and initiated clinical studies
of a number of products that apply its proprietary technologies to other
medical, surgical and dental uses. These products include Oral
Speculoscopy(TM) for the screening of oral cancer and Spirabrush Cx(R) as a
cervical sampling device. The Company's goal is to introduce at least one new
product each year. The Company is actively developing and seeking to acquire
other innovative technologies with medical applications. See "Additional
Product and Technology Applications."
PPS TECHNOLOGY
PPS is a patented gynecologic examination that combines the standard
Papanicolaou smear ("Pap smear") with an illuminated visual examination of the
cervix, known as Speculoscopy, for the detection of cervical abnormalities,
which may include cancer and precancer. PPS can be administered by physicians,
nurse
23
<PAGE>
practitioners and physician assistants without a significant up-front
investment of capital or training time. The Speculoscopy portion of the PPS
screening test takes from two to five minutes to perform and provides
immediate visual results without the need for laboratory processing.
While the patient is undergoing a pelvic examination after a Pap smear, the
health care practitioner performs a Speculoscopy by swabbing the cervix with a
preparatory solution and using the Company's small, disposable chemical light
source, known as Speculite, and a low-level magnification instrument to
visually examine the cervix. Prior to vaginal insertion, the Speculite is
activated by bending the flexible outer plastic capsule, causing an inner vial
to break and release the activator. The Speculite is then attached to the
speculum to provide the necessary light source for the examination. The
chemicals contained in the Speculite light source produce no heat and are non-
toxic.
To interpret the results of Speculoscopy, health care practitioners only
have to note the presence of whitened areas, which indicate potential
abnormalities as opposed to normal cervical tissue, which appears dark blue or
purple. This allows for a quick and simple indication as to whether further
investigation or treatment may be required. The potentially diseased areas
appear white because of the characteristics of the Speculite light source and
the presence of a larger nucleus in many abnormal cells (including cancerous
and precancerous cells) which reflects the light instead of absorbing it, as
do normal cells. Speculite possesses certain chemical and physical properties
not found in normal incandescent light (such as from a lamp or flashlight),
allowing Speculite to create a visual contrast not obtainable with other light
sources known to the Company.
The Company anticipates that, upon its nationwide launch in late 1996, the
PPS screening test will be available at an incremental cost to the patient or
her insurer in the fee-for-service market of $20 to $25 over the cost of a
routine gynecological examination (which typically ranges from $75 to $125,
including laboratory costs). The equipment required to perform Speculoscopy
consists of the disposable Speculite and a lightweight, reusable hand-held
monocular optic with a one-time cost to the practitioner of under $100. The
Speculite used in the PPS screening test is blue-white in coloration (the
"Blue-White Speculite"), and is sold in kits containing all the components
necessary to perform both a Pap smear and a Speculoscopy, or in boxes
containing the Blue-White Speculite only.
THE PROBLEM OF CERVICAL CANCER AND PRECANCER
BACKGROUND
Cervical cancer is the second most common cancer among women worldwide, with
approximately 450,000 new cases reported annually. Currently, the accepted
method of screening for cervical cancer is the Pap smear. Over 50 million Pap
smears are performed annually in the United States by an estimated 205,000
health care practitioners. Worldwide, more than 150 million Pap smears and
primary screening evaluations for cervical cancer are performed annually.
Surveys indicate that less than one-half of all women who should receive
primary screening do so, with the unfulfilled need for screening particularly
acute in developing countries.
The most severe form of cervical cancer is invasive cervical cancer, which
is cancer that is no longer isolated to the surface of the cervix and is
capable of spreading. Cervical cancer usually develops over a number of years,
typically causes no symptoms during early development and is preceded by a
curable precancerous stage. In the United States, despite the approximate 50
million Pap smears performed annually, the American Cancer Society ("ACS")
reported approximately 15,800 new cases of invasive cervical cancer in 1995,
representing eight years of generally continuing increases in new cases
reported. The rate of death within the first five years of diagnosis of
cervical cancer has remained above 30% in the United States since the ACS
began compiling statistical information in the early 1970's. In addition, the
ACS has reported a significant increase since 1977 in the incidence of late-
stage cervical precancer.
24
<PAGE>
CERVICAL CANCER INCIDENCE AND DEATH RATES
Number of new cases of cervical cancer
in the United States
1991.......................... 13,000
1992.......................... 13,500
1993.......................... 13,500
1994.......................... 15,000
1995.......................... 15,800
Number of deaths from cervical cancer
in the United States
1991.......................... 4,500
1992.......................... 4,400
1993.......................... 4,400
1994.......................... 4,600
1995.......................... 4,800
Under current medical practice, treating cervical precancer and non-invasive
cancer in the United States generally is much less expensive than finding and
treating invasive cervical cancer. Costs associated with treating early-stage
precancer typically are less than $500 while costs associated with treating
invasive cervical cancer often exceed $60,000.
THE PAP SMEAR AND ITS LIMITATIONS
The Pap smear, first used in the 1940's by Dr. George Papanicolaou, was
intended to be a screening test to identify women with invasive cervical
cancer. To perform a Pap smear, the health care practitioner scrapes the
surface of the cervix in order to collect cells. The cells are then placed on
a slide to be read at a clinical laboratory to determine if cancerous or
precancerous cells are present. Positive or ambiguous test results are usually
followed up by retesting or biopsy in order to arrive at a definitive
diagnosis.
There are many processing steps where errors in Pap smear interpretation can
occur. Significant public attention over the past decade has focused on the
performance quality of clinical laboratories in the reading of Pap smears. A
high incidence of slide interpretation errors has resulted in misdiagnoses in
which women with cervical cancer were not identified. These problems have been
addressed in part by legislation such as the Clinical Laboratory Improvement
Act of 1988 as well as the development of automated Pap smear readers. In
addition to laboratory errors, errors can occur as a result of clinical
conditions that reduce the potential number of cells collected and available
for diagnosis.
Despite improvements in the reading of Pap smears, a negative Pap smear
cannot assure that a woman is free of cervical cancer or precancer, because at
any given time the majority of cervical disease lies below the surface of the
cervix and cannot be detected by a Pap smear. As shown in the diagram below,
abnormal cells generally come to the surface of the cervix only as cervical
disease progresses. As a result, there is a reduced likelihood that
precancerous cells will be collected for a Pap smear, and explains why, in
clinical studies, the Pap smear has been shown to have low sensitivity in
detecting precancer.
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STAGES OF CERVICAL DISEASE
[A graphic illustration depicting a cross section of a cervix and reflecting
different stages of progression of cervical disease. The stages of cervical
disease illustrated by the picture include early stage precancer, mid stage
precancer, late stage precancer and invasive cervical cancer. The picture
further illustrates that the Pap smear is able to collect cell samples from
the surface of the cervix only.]
Additionally, many cancerous and precancerous cells are not collected by the
Pap smear sampling process because of a barrier created by infection with
Human Papilloma Virus ("HPV"). HPV is a sexually-transmitted disease, and in
the last two decades, an increasing number of women have become infected with
this virus. Various studies have shown that from 13% to 46% of young women of
child bearing age, including adolescents, are infected with HPV. One of the
features of cervical cells infected with HPV is that most of them manufacture
keratin, a material which exists on the surface of hair and nails, but not
normally on the cervix. As a result of HPV infection, a keratin barrier
frequently forms on the surface of the cervix. This barrier can result in the
trapping of cells, preventing their collection.
These biological processes significantly limit the ability of the Pap smear
to identify women with cervical disease at an early, treatable stage,
notwithstanding the use of automated Pap smear readers or improved laboratory
procedures which have been instituted in the past decade. Further improvements
in cervical screening will require health care practitioners to be able to
detect cancers and precancers below the surface or keratin barrier, as made
possible by the use of PPS.
THE ROLE OF PPS IN EFFECTIVE CERVICAL SCREENING
Over the past few years, the American College of Obstetrics and Gynecology
and other professional organizations have focused the attention of physicians
on the need for cost-effective adjunctive tests to be performed at the time of
the Pap smear to improve the sensitivity of primary cervical screening. As of
today, Speculoscopy is the only adjunct to the Pap smear that has been cleared
by the FDA for marketing as part of a primary screening procedure. The Company
anticipates filing further applications with the FDA seeking clearance to
market PPS as a device that is able to detect cervical cancer.
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To further its objective to establish PPS as a standard of care for cervical
cancer screening, the Company has conducted multi-center trials of PPS. The
studies, which involved over 4,000 women, indicated that PPS was 2.4 times
more sensitive than the Pap smear alone in detecting cervical cancer and
precancer. The following table compares the percentage of participants with
cancer or precancer in such trials who accurately tested "positive" using each
of the two screening tests.
COMPARISON OF SCREENING TEST SENSITIVITY
<TABLE>
<CAPTION>
PAP SMEAR
PATIENTS BY STAGE OF DISEASE ALONE PPS
---------------------------- --------- ----
<S> <C> <C>
Patients with early-stage precancer 33% 88%
Patients with severe precancer 73% 100%
Patients with invasive cancer 100% 100%
Total (all patients with cancer or precancer) 37% 89%
</TABLE>
Additional data from such trials showed that less than 1% of all women who
tested negative using PPS had any biopsy evidence of cervical cancer or
precancer, whereas more than 5% of all women who tested negative using the Pap
smear alone had biopsy evidence of cervical cancer or precancer. Based on
these findings, the Company believes that a principal advantage of PPS over
the Pap smear alone will be its ability to detect cancers and precancers at
earlier stages of the disease, allowing for less costly prevention or
treatment. The Company's existing FDA clearances permit the marketing of PPS
as being more accurate and more sensitive than the Pap smear alone in
detecting cervical abnormalities. Although the Company has not yet sought FDA
clearance of claims that Speculoscopy can detect cancer, the Company believes
that the foregoing data should support such claims. In reliance on such data,
the Company has submitted to the FDA a new Section 510(k) application for the
clearance of additional marketing claims that would allow the Company to
identify in its promotional materials the specific pathologies detected by
PPS. The Company believes that its data demonstrates that using PPS, with its
greater accuracy and sensitivity than the Pap smear alone, health care
practitioners will have more confidence than before that a negative PPS
screening test correlates highly with the absence of cervical abnormalities.
MARKET AND BUSINESS STRATEGY
GENERAL
The Company's marketing objective is to capture a significant portion of the
market for primary cervical screening, which includes over 50 million Pap
smears performed annually in the United States and more than 150 million
performed worldwide, and thereby establish PPS as a generally accepted
standard of care. The Company intends to tailor the marketing of PPS according
to the characteristics of each particular market, while the Company will
utilize three key elements in its overall strategy to capture market share and
maximize earnings:
. leveraging the resources of large pharmaceutical distributors;
. focusing the advertising and marketing campaigns on target market
segments; and
. gaining acceptance with payors.
DISTRIBUTION AND MARKETING IN THE UNITED STATES
P&U distribution agreement. The Company has signed an agreement with P&U for
the marketing and distribution of PPS products in the United States through
1998. The agreement makes P&U the exclusive distributor of PPS in 45 states,
and a non-exclusive distributor in the five remaining states. The agreement
calls for P&U to market the PPS screening test and related products through
its entire national sales force, and for P&U's nationwide distribution system
to fulfill orders. In addition, P&U has committed to a national advertising
campaign for PPS.
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The Company and P&U have scheduled a major domestic marketing campaign for
PPS commencing in late 1996. As part of its 18-month initial promotional
campaign, P&U will offer to its sales representatives special incentives for
sales of PPS and will offer to purchasers significant trial discounts. Sales
efforts over the first six months will be targeted to over 60,000 health care
practitioners in 20 major domestic markets, primarily through direct selling
efforts and educational programs. In addition, PPS will be marketed directly
to women and women's advocacy groups, primarily through a television, radio
and print advertising program. P&U will be the primary sponsor of the national
advertising campaign, although the Company intends to supplement P&U's efforts
by contributing approximately $10 million to the cost of such campaign. During
1997, P&U intends to expand its marketing efforts nationwide. The domestic
marketing campaign for PPS, as currently designed, will rely on marketing
claims previously cleared by the FDA and will not require any additional
clearances.
Educating physicians. The Company will employ P&U's large direct account
database and distribution expertise to effectively market, sell and distribute
PPS to practicing physicians and other health care practitioners. Initially,
the Company and P&U will target office-based physicians who perform a large
number of Pap smears, have direct accounts with P&U and practice in high-
income areas. P&U will send its trained PPS representatives on initial sales
calls to the target physicians to introduce PPS, to enroll the physicians in
workshops on the screening procedure and to encourage the physicians to be
early advocates of PPS. The representatives will use several sales aids to
demonstrate the sensitivity of PPS in cervical cancer screening, including
demonstration kits, videotapes, and printed articles. The campaign to market
to physicians will commence in late 1996.
Utilizing P&U's entire national sales force, state-of-the-art distribution
and delivery system, and relationships with physicians and other health-care
practitioners nationwide allows the Company to expedite the market penetration
of PPS and shorten the sales process without bearing the cost of an in-house
sales force. P&U has successfully utilized its infrastructure and distribution
system to introduce a number of new products to the female health-care market,
such as Depo-Provera(R) 150, a contraceptive drug that has been successfully
marketed by P&U using direct-to-consumer advertising.
Informing women of health benefits. The Company will focus its direct-to-
consumer advertising campaign on women and advocacy groups for women's health
care. P&U has demonstrated, through its successful promotional campaign for
Rogaine(R), that an effective way to generate immediate awareness and create
substantial demand is to directly market to the consumer. Based upon consumer
market research, the Company and P&U have designed the PPS media campaign,
utilizing television, radio and print advertising to generate consumer
awareness and communicate the benefits of PPS to women. In addition, the
Company and its public relations firm have designed specific programs to
assist women's health care advocacy groups in capturing for PPS a greater
proportion of health care expenditures.
Proving cost effectiveness to payors. Evidence of the cost effectiveness and
improved quality of disease detection will be primary factors in achieving
acceptance of PPS by third-party payors, including managed care organizations.
The Company and P&U will utilize pharmaceutical economic models that enable
payors to assess how PPS will increase both the quality of disease detection
and cost-effectiveness of the cervical screening programs they currently use.
As a result, the introduction of the PPS screening test in managed care
organizations will offer the prospect of better detection of cervical disease
coupled with material long-term cost savings over existing cervical screening
protocols. In addition, the Company believes that managed care organizations
that initiate the PPS screening test will see PPS as offering a potential
marketing advantage over competitors by providing a higher level of care to
women and increasing patient confidence in the managed care organizations. The
Company envisions that managed care organizations will be able to provide a
PPS screening program to its members by purchasing, for a single price or for
a capitated fee, a PPS screening test which includes materials, training of
health care practitioners, educational materials for practitioners and
patients and continuing education programs. Pricing incentives will be given
to the managed care organizations that signup for the PPS screening program
during 1997.
The P&U distribution agreement sets forth certain price ranges and minimum
purchase requirements applicable to P&U's purchases of PPS, with such purchase
requirements varying inversely with the prices paid
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<PAGE>
by P&U. However, the purchase requirements are set at low levels that would
not produce material revenues for the Company, and are therefore expected to
be exceeded if the domestic marketing launch is successful. The P&U
distribution agreement requires P&U to prepare and update strategic marketing
and promotion plans for PPS and to provide running twelve-month sales
forecasts and reports of inventory turnover. Under the agreement, P&U
covenants not to market any competing device for a purpose similar to that of
PPS. The agreement contains certain product warranties and specifications and
is subject to termination upon notice in the event of a material breach, an
event of insolvency, or a determination of illegality. The Company also has
the right to terminate the agreement upon notice in the event of a termination
of supply, a change in ownership of P&U, or if P&U fails to achieve its sales
forecasts.
INTERNATIONAL DISTRIBUTION AND MARKETING
Acceptance of PPS as a standard of care in international markets will
involve many of the same considerations as in the United States, with
recognition of the significant variations in health care payment systems
between countries, including government-sponsored systems and private
insurance. The Company's international strategy will require it to work with
each of its foreign distributors to obtain required governmental and third-
party approvals, and to provide marketing materials, including continuing
medical education programs. In selecting its foreign distributors, the Company
has teamed primarily with pharmaceutical companies, but also works with
medical supply companies that have expertise and distribution networks already
in place. The Company will identify basic marketing needs of its distributors,
as well as advertising needs, and will share its research and clinical
expertise with its distributors to meet marketing and regulatory requirements.
Other than in Asia, the Company's foreign distribution agreements rely on the
export of Speculite manufactured by the Company's domestic supplier, Omniglow
Corporation ("Omniglow"). See "--Manufacturing." The Company's foreign
distribution agreements described below generally contain minimum purchase
requirements for PPS, although these purchase requirements are set at low
levels that would not produce material revenues for the Company. Similarly,
although many of the foreign distribution agreements provide for fixed
purchase prices for limited terms, the prices are subject to periodic
renegotiation at the end of the fixed term or if the Company or the
distributor seeks to renegotiate the contract. Ultimately, market conditions,
and not the terms of the Company's distribution agreements, will determine the
quantity of, and revenues derived from, the Company's international PPS sales.
For information regarding the Company's historical revenue, operating income
or loss and identifiable assets attributable to each geographic area to which
the Company exports its products, see Note 1 of the Notes to Consolidated
Financial Statements included elsewhere herein.
Europe. The Company has entered into a five-year exclusive distribution
agreement for PPS in Italy with Bracco, S.p.A. ("Bracco"), a pharmaceutical
company based in Milan, Italy and an affiliate of Merck & Co., Inc., one of
the world's leading pharmaceutical distribution companies. Bracco has invested
significantly in studying the effectiveness and market potential of PPS, and
has scheduled the commencement of marketing efforts in Italy in October 1996.
Such marketing efforts will be targeted primarily to physicians through
educational symposia and demonstrations. Due to the influence of physicians in
the public health care system in Italy, the Company believes that acceptance
of PPS by physicians will be a key to its success in Italy. Moreover, the
Company believes that a successful launch in Italy may facilitate access to
other markets in Europe. In particular, the Company has targeted Germany and
France as potentially attractive markets for PPS, and to a lesser extent
England, Spain and Portugal. The Company may seek to access these other
European markets through Bracco and its subdistributors or through other
distribution partners.
The distribution agreement with Bracco specifies certain fixed price terms
for the first three years and is then subject to mutually agreed upon
increases. The agreement requires that the Company maintain and protect its
patents and trademarks as necessary but Bracco assumes the responsibility for
any regulatory clearances necessary for sales of PPS in Italy. Bracco agrees
to use its best efforts to promote the sales of PPS and will bear all
advertising costs. The distribution agreement contains certain product
warranties and specifications, and can be terminated upon advance written
notice by either party in the event of a change of control, a breach by the
other party or an event of bankruptcy.
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<PAGE>
Canada. In Canada, the Company is completing negotiations to extend an
existing exclusive distribution agreement with Pharmascience, Inc.
("Pharmascience"), based in Montreal, Canada for the distribution of PPS
products. The Company has been approved for marketing by Canadian regulatory
authorities. Pharmascience is familiar with the marketing and distribution
plan for the launch of PPS in the United States and has expressed to the
Company its desire to follow a similar launch plan. The Company believes it is
in a good position to achieve market exposure in Canada due to a recent effort
by the Canadian public health care system to locate an effective adjunct to
the Pap smear in order to increase the intervals between cervical cancer
screening. Pharmascience intends to focus a significant initial selling and
advertising effort towards physicians in an effort to capitalize on a national
effort to improve upon the existing Pap smear screening test.
The existing agreement with Pharmascience is being renegotiated to change
certain minimum purchase requirements and pricing terms. The agreement
presently allows that product price increases may occur annually. The
agreement requires that the Company maintain and protect its patents and
trademarks as necessary but Pharmascience assumes the responsibility for any
regulatory clearances necessary for sales of PPS in Canada. Pharmascience must
promote sales and submit sales forecasts to the Company. The agreement is
subject to termination upon prior written notice in the event of a material
breach, an event of insolvency or change of control.
Australia. In Australia, the Company intends to sign an exclusive agreement
with Baxter Healthcare Pty. Ltd. ("Baxter"), for the distribution of PPS
products in Australia, New Zealand and certain other countries of the South
Pacific for a five-year term. PPS has been registered for sale with the
Australian regulatory authorities, and Baxter already has commenced sales.
Baxter has informed the Company that it intends to conduct further research
studies of its own on PPS in order to support its marketing efforts. Baxter's
marketing campaign will be aimed at physicians and will include direct selling
efforts and advertising in professional journals. The Company will provide
Baxter with training assistance in the marketing of PPS.
The Baxter distribution agreement, as presently drafted, provides for a
fixed sale price for a period of one year after which it will be subject to
change based on market conditions. The agreement requires that the Company
obtain and maintain its patent and trademarks as necessary, and register the
products with the appropriate Australian authorities for sale by Baxter.
Baxter is required to submit a sales report at the end of each year, to
prepare a non-binding forecast of projected sales for the succeeding calendar
year and to vigorously promote the products. The agreement contains certain
product warranties and specifications, and is subject to termination at any
time by advance written notice in the event of any uncured breach or any event
of insolvency.
Asia. The Company has entered into a fifteen-year exclusive agreement for
the distribution of PPS in certain countries in Asia by Asian Sourcing
Corporation ("ASC"), a distributing group based in Shanghai. In each of these
Asian countries, which include China, Taiwan, the Philippines, Thailand,
Singapore, Indonesia, Malaysia and Hong Kong, ASC subcontracts or will
subcontract with local medical supply companies or pharmaceutical companies
for distribution. Unlike under the Company's other distribution agreements,
ASC will not be required to purchase PPS from the Company. Rather, the
Company's primary manufacturer, Omniglow, has granted ASC a license to
manufacture Speculite locally, and the Company has granted ASC a license for
the marketing in those countries of the Speculoscopy procedure. In return, ASC
has agreed to purchase certain chemicals from the Company, which the Company,
in turn, will purchase from Omniglow. ASC will manufacture Speculite at its
newly constructed 15,000 square foot facility that can currently produce 15
million units per year. Local manufacturing eliminates import duties and
allows significant cost reductions which the Company believes will be
essential to the successful marketing of PPS in Asia. Prior to opening its PPS
manufacturing facility, ASC purchased from the Company Speculite supplied by
Omniglow. Although the Company does not expect to generate significant
revenues from the sale to ASC of chemicals to be used in ASC's manufacturing
operations, the Company believes that ASC could become a second source of
supply of Speculite in the future. The agreement with ASC is subject to
termination upon a breach.
Other Regions. The Company has entered into additional contracts,
relationships and agreements for the distribution of PPS in Greece, Mexico and
the Middle East.
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Medically Underserved Populations. The Company is continuing to conduct
research internationally aimed at bringing practical cervical screening to
medically underserved populations. These populations are found in remote or
poor regions with a low medical infrastructure which cannot support a highly
technical screening program such as the Pap smear. Even where laboratory based
tests such as the Pap smear are feasible, such tests require a waiting period
while results are returned, and patients must return to the clinic or be found
again to complete diagnostic evaluation and treatment. Because of these
inefficiencies, the follow-up rate for the Pap smear in these regions is quite
low.
For these reasons, numerous national and international health organizations,
including the World Health Organization ("WHO"), are looking for a cervical
cancer screening protocol that does not rely heavily on patient return or
recall visits for the completion of treatment. The Company has been asked by
WHO to participate in a trial of cervical cancer screening in Myanmar
(formerly Burma) to assess the use of Speculoscopy as a screening adjunct. In
addition, Speculoscopy alone has been used by the California based Medicine
For Humanity group in remote areas of the Philippines for a "one-stop"
cervical cancer screening protocol. The procedure of performing a Speculoscopy
alone in areas where laboratory infrastructure is either poor or nonexistent
has been referred to as a "Speculoscopy See and Treat" protocol. This protocol
is undergoing evaluation not only in foreign countries, but in under served
and low infrastructure areas in the United States.
PRICING AND REIMBURSEMENT
The Company anticipates that its distributors will charge health care
practitioners and managed care organizations a price for the PPS screening
test that will range from $6 to $10 per unit of Speculite. The Company
currently anticipates that the price of the PPS screening test charged by the
practitioner to the patient in the fee-for-service market in the United States
will be approximately $20 to $25 more than the price of a routine
gynecological examination (which typically ranges from $75 to $125, including
laboratory costs). This amount may be subject to full, partial or no
reimbursement, and the level of reimbursement likely will affect PPS's market
penetration. Reimbursement for PPS requires approval from each payor
individually. Currently, there is no unique procedure code for PPS or
Speculoscopy under the Current Procedural Terminology ("CPT") codes published
by the American Medical Association. Presently, third-party reimbursement for
the PPS screening test requires doctors to submit and substantiate PPS
services using existing general procedure codes for patient examinations.
However, Speculoscopy added to the Pap smear results in an "upgrade" of the
existing examination, and allows the practitioner to bill for a more extensive
examination. Since health care practitioners already routinely perform a
pelvic examination and a Pap smear on healthy women in yearly examinations,
the addition of the Speculoscopy component of the PPS screening test could be
billed to the third-party payor as a separate procedure, or the entire PPS
screening test could be billed as a higher level of screening service,
allowing an increased charge for the entire examination and patient visit.
Currently, billing for the Pap smear occurs separately from the examination
and is generally rendered by the clinical laboratory providing the Pap smear
interpretation. The Company envisions no change in the billing of Pap smears.
Because the Company does not anticipate third-party payors will always
reimburse the full cost of the PPS screening test when the Speculoscopy
component is billed as a separate item, acceptance of PPS in the fee-for-
service market will depend in addition on the willingness of the patient to
bear some or all of the cost of the test. The Company has incorporated this
consideration into the promotional strategy being implemented by P&U and the
Company.
Internationally, health care payment systems vary significantly between
countries, and include government-sponsored health care payment systems and
private insurance. The Company's foreign distributors recently have begun to
seek reimbursement approvals in selected foreign markets but have not obtained
any reimbursement approvals to date. See "Risk Factors--Dependence on Third-
Party Reimbursement."
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PRODUCT AND TECHNOLOGY APPLICATIONS
The Company markets or plans to market several products for use with the PPS
procedure, as described below:
PPS TECHNOLOGY
The components used in the PPS screening test include the disposable
Speculite light source and the lightweight, reusable magnifying lens known as
the Speculoscopy optic. Together with the Speculite and Speculoscopy optics,
the Company markets educational programs which support the PPS screening test,
including the Atlas of Speculoscopy, a photographic illustration of positive
and negative Speculoscopy findings for the examiner, and a monograph on
cervical disease and diagnostic procedures which includes a practitioner test
eligible for continuing medical education credit. These products are all in
current distribution to PPS users.
SAMPLING BRUSH
The Company has designed and contracted for the manufacture of a new
sampling brush used to obtain samples from areas of the cervix that show white
coloration in the Speculoscopy examination. Favorable results from preliminary
studies completed in 1993 using this product, Spirabrush Cx, have provided the
basis for ongoing product modifications and trials. The Company will commence
formal studies designed to obtain FDA clearance of the Spirabrush Cx in the
fourth quarter of 1996. The Company expects to conclude its studies in the
first quarter of 1997 and to subsequently file a Section 510(k) application
with the FDA. The Company hopes to obtain FDA clearance to market the
Spirabrush Cx by the third quarter of 1997. The market for Spirabrush Cx will
depend in part on the ability and willingness of clinical laboratories to
process the cell samples obtained by the brush.
In addition, the Company markets or has under development certain non-PPS
applications of Speculite and Speculoscopy and related products, as described
below:
AMBER SPECULITE
In addition to the Blue-White Speculite used in Speculoscopy, the Company
has developed the Amber Speculite, designed to emulate a standard incandescent
light. The Amber Speculite was introduced to the market in 1990 and was test
marketed to physicians for examinations other than the Pap smear, including
radiologic procedures, fertility procedures, in-hospital examinations and
office procedures. Sales to date have not been significant because the Company
has focused its efforts on the development of PPS. The Company plans to
increase its marketing and sales efforts for the Amber Speculite to targeted
market segments beginning in the fourth quarter of 1996.
SURGICAL OPTICS
In 1996, as an outgrowth of Speculoscopy optics, the Company completed the
design of low-cost, stereo-optic binocular surgical magnifying loupes. These
binocular loupes are designed to be used by surgeons, dentists and
veterinarians who use either low-powered or medium-powered magnification to
assist in surgical and dental procedures. The Company believes that there are
over 44,000 surgeons in the United States who constitute the potential market
for surgical loupes. The Company's loupes were introduced in June 1996 at the
United States annual meeting of cardiovascular surgeons and will be subject to
further development and marketing. The Company's loupes currently sell at less
than one-half of the price of equivalent loupes on the market, and the Company
believes that its products will be very competitive with those of other
surgical magnifying loupe manufacturers.
ORAL SPECULOSCOPY
The Company believes that the Speculite might have applications in the field
of screening for cancers and precancerous lesions in the oral cavity. As of
1995, according to the American Cancer Society, there were almost twice as
many cases of oral cancer in the United States (approximately 28,000) as there
were cases of cervical
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cancer. Currently, palpation (feeling for abnormalities) and direct
visualization of larger lesions are the only generally-used means available
for screening the oral cavity for tumors. However, preliminary observations
have indicated that white lesions evidencing oral cancer or precancer are
visible using the Speculite light source and low powered magnification. The
Company has started preliminary clinical trials of a procedure referred to as
Oral Speculoscopy, using the Speculite light source, to screen for oral cancer
and precancer. The Company believes that, if the data demonstrate that
precancerous and cancerous lesions can be visualized using Oral Speculoscopy,
it can become a screening test for oral cancer and precancer. The Company
hopes to complete a multi-center trial of Oral Speculoscopy in 1997, although
its prospective results cannot be predicted, and the time for such trial's
completion could be materially lengthened or shortened. If the Company's
findings support the use of Oral Speculoscopy as a screening device, the
Company would seek necessary FDA clearances for the marketing of Oral
Speculoscopy.
CO/2/ STAT
The Company is developing a low cost, disposable carbon dioxide (CO/2/)
detection device to be used in determining carbon dioxide levels in exhaled
breath. It is often necessary to determine the carbon dioxide levels of
individuals experiencing respiratory distress in order to make a preliminary
diagnosis of the nature of the problem, and a recommendation for treatment.
There are more than 20 million individuals in the United States with various
lung diseases who could be potential candidates for use of this product.
Development of the product is still in a preliminary stage, however, and the
timing and potential results of such development efforts are inherently
uncertain. If the Company's development efforts are successful, the Company
intends to make the product available for use in physicians' offices,
emergency rooms, and in-patient hospital settings. In addition, the Company
may seek to make the product available to the home market in the same manner
as blood sugar, home pregnancy and cholesterol tests which are sold over the
counter.
OTHER COLORED SPECULITE
The Company also is investigating other chemical light colorations for use
in other endoscopic applications, such as peritoneal lighting for micro-
laparoscopy, lighting cavities and crevices in orthopedic procedures,
urological lighting of the bladder and endoscopic lighting in the
gastrointestinal tract. These applications will require additional clearances
and approvals from the FDA.
PATENTS AND PROPRIETARY RIGHTS
The Company holds United States patents on the Speculoscopy method and the
underlying apparatus. The apparatus patent, which was issued in 1993 and has
14 years of remaining life, covers endoscopic instruments for performing
Speculoscopy. This patent describes Speculoscopy as an endoscopic procedure
involving a visually magnified examination of a body cavity, illuminated by a
chemical light source including blue and green colorations. The method patent,
which was issued in 1994 and has 15 years of remaining life, covers the use of
Speculoscopy for vaginal examinations. The Company has been granted patents
from the European Patent Office and in Canada, Australia, India, Japan, Taiwan
and Spain on endoscopic instruments using chemical light sources. Some of
these patents also cover the Speculoscopy procedure. The Company plans to file
further domestic and foreign patent applications for Oral Speculoscopy and for
the use of chemical light in other endoscopic applications, although no
assurance can be given that the Company will be granted the patent rights it
seeks.
Omniglow owns patents on the formulations of chemical light used in the
Blue-White Speculite for the PPS screening test. Approximately nine years
remain on the term of the principal patent for the Blue-White Speculite, and
the Company enjoys the protection of this patent by virtue of its agreement
with Omniglow giving the Company the exclusive right to sell the Speculite for
use in specified medical applications. This agreement was entered into in 1994
and has a ten-year term, which will be automatically renewed for an additional
ten-year term commencing 2004 unless either party gives notice to the other of
non-renewal. See "--Manufacturing." There is no certainty that other non-toxic
formulations of chemical light or other light sources with similar color
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attributes as the Blue-White Speculite cannot be developed, but the Company is
unaware of any other non-toxic chemical or other light source currently under
development that could effectively perform Speculoscopy. See "Risk Factors--
Reliance on Patents and Proprietary Technology." In contrast to the patents
covering the Blue-White Speculite, patents covering the formulation of
chemical light used in the Amber Speculite have expired.
Patents on medical and diagnostic procedures, such as the Company's patent
relating to the Speculoscopy examination, historically have been uncommon in
the United States and rarely enforced. In response to increasing attempts in
recent years to enforce and exploit such patents, Congress currently is
considering bills that could limit in certain respects the issuance or
enforcement of process patents on medical procedures. Because congressional
consideration of these bills has been preliminary in nature, it is impossible
to predict whether any legislation ultimately will be enacted or whether such
legislation, if enacted, would have any effect on the Company. Even if
enacted, however, such legislation would not be expected to affect the patents
governing the Blue-White Speculite, because such patents relate to a product
rather than a medical procedure.
The Company has copyright protection on certain product literature and has
obtained trademark registrations for Speculite and PPS in the United States,
France and Austria and has applied for trademark registrations in
approximately 20 other countries.
PAP PLUS SPECULOSCOPY CLINICAL DATA
Clinical research trials of Speculoscopy and the PPS screening test began in
1988 and have continued to the present time. Studies have taken place at
multiple sites in the United States, Italy and Canada. A total of 4,212 women
have been studied prospectively using a protocol in which each woman in the
study had a Pap smear, Speculoscopy and colposcopy performed. Women who had an
abnormal colposcopy received a cervical biopsy to diagnose the cervical
disease present. Only a protocol like this one that uses definitive testing,
including a biopsy, can determine the true incidence of cervical disease in
the population, and only in studies which first determine the true incidence
of cervical disease can any new screening test or screening test improvement
be evaluated fully.
In these clinical research studies a total of 358 of the 4,212 women had
cervical cancer or precancer, as determined by cervical biopsy. The Pap smear
was abnormal in only 132 of these 358 women, yielding a sensitivity of 37%. In
contrast, the PPS screening test was positive in 318 of these 358 women,
yielding an overall sensitivity of 89%. Thus, the PPS screening test was more
than twice as sensitive as the Pap smear alone in detecting those women with
cervical disease. The Pap smear alone found only 106 of 323 women (or 33%)
with early stage precancer, while PPS found 283 of such women (or 88%). In
addition, the Pap smear alone found only 24 of 33 women (or 73%) with the most
severe form of cervical precancer, while the PPS screening test correctly
identified 100% of these women. Both the Pap smear and PPS found two women
with invasive cancer. The only women with cervical disease not identified by
the PPS screening test were women with the earliest precancerous lesions.
An additional 8,713 women have been studied prospectively in the United
States with the PPS screening test using a protocol in which only the women
with either a positive Pap smear result or a positive Speculoscopy result were
sent for definitive colposcopy and biopsy. In this protocol, the true
incidence of cervical disease in the entire population cannot be established,
but the difference between the Pap smear alone and the PPS screening test can
be determined. In these studies, which were carried out by primary healthcare
practitioners, a total of 375 women were identified through the PPS screening
test as having cervical cancer and precancerous lesions. The Pap smear alone
was abnormal in only 99 of these women, with a sensitivity of 26%. In
addition, out of 55 women identified through PPS as having severe cervical
precancer, the Pap smear alone was abnormal in only 41, or 75%, of these
women.
MANUFACTURING
The Company does not currently manufacture any of its products but obtains
its most critical component, the Speculite light source, pursuant to a long-
term supply agreement with Omniglow which gives the Company
34
<PAGE>
the exclusive right to sell Speculite for use in specified medical
applications. The agreement was entered into in 1994 and has a ten-year term,
which will be automatically renewed for an additional ten-year term commencing
2004 unless either party gives notice to the other of non-renewal. Omniglow
acquired the patents for the manufacture of Speculite from American Cyanamid
Company in 1993 and is the only United States manufacturer. Speculite is
manufactured at Omniglow's manufacturing facility in West Springfield,
Massachusetts. The Company specifies standards of production for Omniglow's
manufacture of Speculite in accordance with Good Manufacturing Procedures
("GMP") as required by the FDA. Omniglow has informed the Company that the
Omniglow facility is in full compliance with current FDA standards for the
manufacture of Speculite, although the Company has made no independent
investigation or examination of the facility for this purpose.
In 1994, the Company and Omniglow entered into a joint venture with ASC to
establish a manufacturing facility in Shanghai, China and to transfer
technology for the manufacture and sale of PPS products and protocol to ASC.
ASC was licensed by Omniglow to manufacture Speculite from prepackaged
chemicals and activators, while the Company licensed to ASC the clinical
technology for the PPS screening test. The Company, with the help of ASC,
commenced clinical trials of PPS in China in 1994. These studies remain
underway today. Production of Speculite at the Shanghai facility began in
early 1996. The Company purchases the pre-packaged chemicals from Omniglow and
acts as a re-seller of these chemicals to ASC for packaging at the Shanghai
facility. ASC markets the PPS screening test in China and certain other
countries in Asia. See "--Market and Business Strategy--International
Distribution and Marketing."
In 1995 and 1996 the Company had sporadic discussions with Omniglow
regarding a proposal by the Company to acquire the manufacturing rights for
Speculite products. These discussions were terminated by the Company when no
agreement could be reached regarding price and other terms acceptable to the
Company.
Adhesive strips for affixing the Speculite light to the vaginal speculum
used in the pelvic examination are manufactured for the Company according to
its specifications by Medifix Adhesive Products, Ltd. of England. Alternative
sources for the manufacturing of this component exist at other locations and
the Company does not anticipate difficulty in obtaining supply. Medical
packaging of Speculite products is performed either at Omniglow's
Massachusetts facility or at Anderson Winn Medical Packagers, an FDA-approved
medical packaging site in Canoga Park, California.
Speculoscopy magnification optics, as well as magnifying surgical loupes,
are manufactured for the Company according to its specifications at three
separate manufacturing facilities in China, and are sold to the company by
ASC. They are shipped via Shanghai to Los Angeles, where they are inspected by
the Company.
GOVERNMENTAL REGULATION
GENERAL
As an entity engaged in the sale and marketing of medical products, the
Company is subject to extensive regulation by the FDA, other federal agencies,
certain state and local governments, and foreign governmental agencies. The
FDA regulates the research, clinical studies, marketing, manufacture,
packaging and promotion of medical products in the United States. The Company
has had extensive interaction with the FDA over the past ten years in
obtaining clearance for the marketing of Speculite and the PPS screening test.
Medical devices are generally classified into three classes on the basis of
the controls required by the FDA to assure safety and efficacy. Class I
devices are considered a low risk if they malfunction, and are subject to
general controls, such as maintaining GMPs for manufacture and packaging and
general labeling requirements. Class II devices are subject to both the
general controls of Class I devices and more specific controls, including
performance standards and postmarket surveillance, in order to ensure safety
and effectiveness. Class III devices are considered to be life-supporting or
life-sustaining or new devices or technologies that are not found to be
substantially equivalent to legally marketed devices and will require a PMA to
demonstrate safety and
35
<PAGE>
effectiveness. A company can apply for clearance to market a medical device
under the Section 510(k) premarket notification process, rather than a PMA, if
the device can be shown by valid scientific evidence to be substantially
equivalent to an existing legally marketed medical device.
If an applicant can establish that a device is substantially equivalent to
an existing legally marketed device, the applicant may still be required to
submit clinical research data to support any new claims it is making. Clinical
research data in such instances will be reviewed by internal FDA experts and
consultants to the FDA. The current waiting period to receive a response from
the FDA in the review of Section 510(k) applications is 90 to 200 days. The
FDA response to such an application may be to determine that the device is
substantially equivalent to another legally marketed device and to allow the
device to be marketed in the United States. The FDA, however, could decide
that further data is required for approval of the claims being made for the
device, which can substantially delay the use of these new claims to describe
the device's capabilities.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. In addition, the Company is subject to state
tort law. A recent United States Supreme Court decision held that, despite a
company's compliance with FDA regulations, it still may not be shielded from
common-law negligent design claims or manufacturing and labeling claims based
on state law or regulations. There can be no assurance that the Company will
not be required to incur significant costs to comply with such laws and
regulations in the future, or that such laws will not have a material effect
upon the Company's business, financial condition and results of operations.
Sales of medical devices outside of the United States are subject to United
States export laws and foreign regulatory requirements that vary widely from
country to country. The time required to obtain approval by a foreign country
may be longer or shorter than that required for FDA clearance, and the
requirements may differ. In order to commercially distribute medical devices
in many European countries, the Company must adhere to certain quality
assurance standards and obtain certain clearances that the Company has not yet
obtained. Generally, the extent and complexity of the regulation of medical
products is increasing worldwide, with regulation in some countries already
nearly as exhaustive as that in the United States. The Company anticipates
that this trend will continue and that the cost and time required to obtain
approval to market in any given country will increase. The Company's
distributors and marketing partners generally will be responsible for
obtaining regulatory approvals and establishing reimbursement from third-party
payors in their respective territories. To date, only limited foreign
regulatory approvals for PPS have been obtained. See "Business--International
Distribution and Marketing" and "Risk Factors--Governmental Regulation."
THE COMPANY'S FDA APPLICATIONS AND CLEARANCES
The Company's predecessor submitted a Section 510(k) application and
received its first FDA review in 1985 for the Speculite light source. The
Company's claims that the chemical light source was efficacious, safe, non-
toxic to vaginal tissue in case of rupture and a colposcopic-equivalent light
source were approved with a Class I clearance. Marketing and sales of the
Company's Amber Speculite commenced under this clearance.
Following introduction of the Amber Speculite, the Company supported
research both in the United States and in foreign countries by investigators
wishing to determine the efficacy of the Blue-White Speculite chemical light
in pelvic examinations. From 1992 to 1994 the Company engaged in a limited
market introduction of the PPS screening test with a clinical laboratory
group, which purchased Speculoscopy supplies for resale and to support further
research. The Company abandoned the clinical laboratory approach to
distribution and sale of Speculoscopy in 1994 when it entered into its
exclusive marketing and distribution agreement with P&U. Following a limited
sales force launch in October 1994, the PPS screening test was scheduled for
broader market introduction when the Company received the FDA's letter in
December 1994 warning against the use of certain marketing claims being made
for Speculoscopy and PPS. The Company, with the concurrence of P&U, decided to
suspend active marketing of the product while it responded to the FDA letter.
In June 1995, the Company submitted a Section 510(k) application for the
clearance of new claims. In support of such application, the
36
<PAGE>
Company submitted data from prospective studies conducted in the United States
and in foreign countries. In December 1995 the Company received FDA clearance
to market PPS as a Class II device under the claim that PPS is more accurate
than the Pap smear alone at detecting cervical abnormalities. The Company's
Speculite medical products, and the manufacturing, labeling and advertising of
such products, will continue to be under the surveillance of the FDA,
including inspection of facilities and records and medical device reporting
requirements. The Company and its manufacturer and packager keep required
records at their respective sites.
In August 1996, the Company submitted to the FDA a new Section 510(k)
application with additional marketing claims that would allow the Company to
identify in its promotional materials the specific pathologies detected by
PPS. In support of this application, an additional 4,000 patients have been
studied with the PPS examination in the United States and Italy, with
correlations of the results of colposcopic biopsy, Pap smear, Speculoscopy,
and the PPS screening test. The Company expects to receive comments regarding
its application within 90 days of submission. See "Risk Factors--Governmental
Regulation."
The Company does not currently have clearance to market PPS under the claim
that it is able to detect cervical cancer. The Company intends to file a PMA
seeking FDA approval of such a claim. Although the Company has developed
substantial data to support such application, there is no guarantee that such
PMA will be granted by the FDA at any time in the future. The domestic
marketing campaign to be launched by P&U in late 1996 will rely on claims
previously cleared by the FDA and will not require any additional clearances.
The Company may be required to submit either a Section 510(k) or PMA
application to the FDA for the clearance of marketing claims for Oral
Speculoscopy in the future. The Company already has commenced preliminary
clinical trials of Oral Speculoscopy, and the Company intends to start a
multi-center trial of Oral Speculoscopy in the fourth quarter of 1996 upon the
anticipated completion of the preliminary studies. If the Company's findings
support the use of Oral Speculoscopy as a screening device, the Company likely
would file a Section 510(k) application with the FDA. The goal of such
application would be to obtain clearance for the marketing of Oral
Speculoscopy using the cervical version of Speculoscopy as the existing,
legally marketed predicate device if such FDA clearance is required.
The Company plans to submit a Section 510(k) application for clearance of
claims for its Spirabrush Cx cervical sampling device in the first quarter of
1997 if currently ongoing clinical trials can be concluded by such time. See
"--Product and Technology Applications." Although the Company believes that
Spirabrush Cx will be found to be substantially equivalent to currently
marketed cervical cytologic sampling devices, there can be no assurance that
the Company will receive FDA clearance of the Spirabrush Cx in a timely manner
or at all.
COMPETITION
Over the past few years, a number of publicly held and private companies
have entered the cervical screening market with devices that are designed to
improve the Pap smear or to act as adjuncts or as secondary screening
procedures. The Company believes that there are substantial differences
between its PPS products and the products of these other companies.
The diagnostically definitive test for detecting all levels of cervical
disease is a biopsy of the cervix directed by colposcopy. Colposcopy is a
magnified examination of the cervix performed by a specially trained expert
after the cervix has been washed with dilute acetic acid (vinegar), and is
designed to identify the area(s) of the cervix containing abnormal cells so
that a biopsy may be performed. Colposcopy is generally performed only on
women with abnormal Pap smears. The cost of equipment to perform a colposcopy
is significant, usually amounting to more than $5,000 and frequently exceeding
$10,000. The cost to patients for colposcopy varies from $150 to more than
$300. Additionally, a diagnostic colposcopy can be performed by only a small
fraction of the health care practitioners who perform primary screening
examinations on women. The Company believes that colposcopy is neither a
suitable or affordable adjunctive primary screening test, nor a replacement for
the Pap smear, although it will remain in widespread use as the definitive
follow-up test for guiding cervical biopsy.
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Several companies recently have begun to market computerized slide-reading
systems that select the most abnormal cells on a Pap smear slide for review by
the slide-reading technician. Other companies have focused on new slide
preparation solutions and technology for the preparation of slides for review.
The Company believes that the technologies of these companies are not directly
competitive with the PPS screening test, inasmuch as Speculoscopy is designed
in large part to identify cervical abnormalities that do not produce cells for
collection and reading. Another new technology in cervical screening is DNA
testing for HPV, which has been linked to cervical disease. The Company
believes that Speculoscopy can be differentiated from HPV testing by its lower
cost, immediate results and greater diagnostic efficacy.
The Pap smear improvement technologies described above, as well as other
laboratory technologies such as HPV testing, will compete with the Company for
a limited amount of health care dollars available for the improvement of
cervical cancer and precancer screening. Pap smear reading improvement devices
have been on the market longer than PPS, and successful capture of market
share by PPS will depend on the Company's ability to communicate the
differences between Speculoscopy as an adjunct to the Pap smear and the
improvements of Pap smear reading technology.
Other companies currently are marketing, or plan to market, adjunctive tests
to be done in conjunction with the Pap smear that are either visual tests or
tests that use highly technical equipment to measure cells' light absorption
or electromagnetic conductivity. One visual adjunct that is currently
available, known as cervicography, produces a photograph which the health care
provider obtains though a specialized camera and then sends to a laboratory
for review. However, this test requires costly photographic equipment and
produces delayed results. Moreover, its cost to the patient, excluding the
cost of the Pap smear, is approximately $40. This test does not currently have
significant market share. The Company believes that PPS is a more effective
adjunctive test for widespread cervical screening than is cervicography,
because PPS is quick, cost-effective and highly accurate. Another type of test
being developed is known as spectroscopy and uses a fiberoptic device to test
light absorption by cervical cells, relying on scientific principles similar
to those on which Speculoscopy is based. In addition, a chemical test is under
study based on a recently-announced discovery of protein markers found in
cancer cells. It currently is impossible to estimate the impact on PPS of
spectroscopy and other early-stage technologies being prepared as adjuncts,
since these technologies are still in their developmental stages and do not
currently have FDA clearance for marketing.
To date, the Company knows of no technology other than PPS that has received
FDA clearance to be marketed as part of a primary screening procedure. The FDA
has cleared PPS to be marketed as being more sensitive than the Pap smear
alone in detecting cervical abnormalities. The Company believes that this
clearance will aid the Company in drawing the distinction between its PPS
screening test and these other technologies. See "Risk Factors--Competition."
PRODUCT LIABILITY
The Company currently maintains product liability coverage for any harmful
effects of the intact Speculite light capsule or its contents during the
routine use of the Speculite chemical light device. There have been no claims
made to date regarding Speculite.
PERSONNEL AND FACILITIES
The Company currently employs nine full time personnel and two part-time
personnel at its 3,000 square foot office space in Torrance, California. There
are immediate plans to increase the full time personnel to twelve, with
further increases in full time personnel upon successful completion of the
Offering. The Company has plans to increase its current office space to 5,000
square feet and to extend its current lease, which expires in 1998.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about the executive
officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
Martin L. Lonky, Ph.D. . 52 Chief Executive Officer, President and Chairman of the Board
Stewart A. Lonky, M.D. . 49 Executive Vice President, Chief Medical Officer and Director
Stanley S. Anders III .. 46 Senior Vice President and Chief Financial Officer
Neal M. Lonky, M.D. .... 39 Secretary and Director
David G. Wallace........ 45 Director
Alfred M. Bloch, M.D.,
Ph.D. ................. 61 Director
George A. Vandeman...... 56 Director
</TABLE>
Martin L. Lonky, Ph.D.--Chief Executive Officer, President and Chairman of
the Board. Dr. Martin Lonky is a founder of the Company and has served as
Chairman of the Board of Directors, Chief Executive Officer and President of
the Company since its inception in 1987. Dr. Lonky received his B.S. degree in
physics from Rensselaer Polytechnic Institute in 1964 and his M.S. and Ph.D.
degrees in physics in 1967 and 1972, respectively, from the University of
Delaware. From 1972 to 1974, he was a Presidential Intern to the United States
Army Land Warfare Laboratory, where he was involved in government programs
using chemical light technology. For the past eight years, Dr. Lonky has
operated a privately held consulting service providing engineering and
management guidance for both government and private companies. From 1993 to
1996, Dr. Lonky was with the Aircraft Division of Northrop Grumman, Inc.
("Northrop") in the capacity of Manager of Reliability and Systems Assurance.
From 1991 to 1993 he served as a Manager in the Engineering Department of the
Northrop Electronics Division. Dr. Lonky is the brother of Stewart A. Lonky,
M.D. and Neal M. Lonky, M.D.
Stewart A. Lonky, M.D.--Executive Vice President, Chief Medical Officer and
Director. Dr. Stewart Lonky is a founder of the Company, has served as a
Director of the Company since 1987 and has served as Executive Vice President
of the Company since 1991. Dr. Lonky has been a practicing physician in Los
Angeles, California since 1982. Prior to entering the private sector, Dr.
Lonky was a full time faculty member and Assistant Professor of Medicine at
the University of California, San Diego. In that capacity, he headed a basic
science and clinical research laboratory funded entirely by research grants,
conducting research in the areas of biochemistry and applied physiology. Dr.
Lonky received his B.S. from St. Lawrence University, and his M.D. from the
State University of New York. His post-graduate training took place in New
York, Missouri, and California. He was a National Institutes of Health Post-
graduate Fellow from 1974-1977, and joined the full-time teaching and research
faculty at the University of California, San Diego in 1977. He received his
Master's in Business Administration from Pepperdine University in 1993.
Stanley S. Anders III--Mr. Anders joined the Company as Senior Vice
President and Chief Financial Officer in August 1996. He previously served as
a Managing Director in the Health Ventures practice of KPMG Peat Marwick LLP
from July 1995 to August 1996. From 1993 to 1995, he served as Vice
President--Finance of Cytran Corporation, a privately-owned development stage
biotechnology company. In 1993, Mr. Anders served as President of Advanced
Medical, Inc. (AMEX: AMA) ("Advanced Medical") after serving for four years as
Chief Financial Officer at Advanced Medical from its inception in 1989. During
the period from April 1990 through August 1993, he also served as Senior Vice
President of IMED Corporation, a medical device manufacturer and subsidiary of
Advanced Medical. He served as Vice President--Finance at Advanced Medical's
predecessor company from 1985 to 1989. From 1972 to 1984, he was with Price
Waterhouse, a public accounting firm. Mr. Anders holds an A.B. degree from
Duke University.
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<PAGE>
Neal M. Lonky, M.D.--Secretary and Director. Dr. Neal Lonky is a founder of
the Company and has served as a Director and Secretary of the Company since
1987. Dr. Lonky is an obstetrician and gynecologist with the Southern
California Permanente Medical Group (Kaiser Permanente) in Anaheim,
California, and serves as Assistant Chief of Service and Area Research
Chairman. Dr. Lonky has practiced medicine with this group since 1986. Dr.
Lonky is an Associate Clinical Professor of Obstetrics and Gynecology at the
University of California, Irvine, California. Dr. Lonky currently is engaged
in clinical gynecologic research studies at Kaiser Permanente, including
screening and management of cervical neoplasia. In addition, he currently is
pursuing a Masters in Public Health and Health Services at the University of
California at Los Angeles School of Public Health. Dr. Lonky has served as a
consultant to the Company since 1992 and is currently involved in product
evaluation, medical informatics and development of medical and nursing
education programs.
David G. Wallace--Director. Mr. Wallace has served as a Director of the
Company since 1991. Mr. Wallace has served as the Vice President of Sales and
Marketing for Micro-Kinetics Corporation, a motion control company, from 1991
to the present. In addition, in 1995, Mr. Wallace co-founded Micro Optics
Design Corporation where he currently serves as Chairman and Chief Executive
Officer. In 1989, Mr. Wallace co-founded Paige Innovations, Inc., where he
served as an officer and director. Between 1975 and 1989 Mr. Wallace served in
sales and management roles in numerous early stage companies. Mr. Wallace has
been a director of Advanced Medical Devices, Inc. ("AMD") since 1989.
Alfred M. Bloch, M.D., Ph.D.--Director. Dr. Bloch has served as a Director
of the Company since 1995. Dr. Bloch has been a practicing physician in
private practice in Los Angeles, California for the past 25 years. From 1986
to 1995, when Dr. Bloch negotiated its sale, Dr. Bloch was a director, and in
1995 was Chairman of the Board of the restaurant chain Johnny Rockets
International, Inc.
George A. Vandeman--Director. Mr. Vandeman has served as a Director of the
Company since 1996 and has been Senior Vice President, General Counsel and
Secretary of Amgen Inc. (NASDAQ: AMGN) since July, 1995. Prior to joining
Amgen Inc., Mr. Vandeman was a senior partner specializing in mergers and
acquisitions at Latham & Watkins.
Pursuant to its acquisition of Common Stock in December, 1992, AMD was given
the right to appoint two members of the Board of Directors. AMD currently has
exercised its right to appoint one director, David G. Wallace.
CLASSIFIED BOARD OF DIRECTORS
Pursuant to the terms of the Restated Certificate of Incorporation of the
Company, the Board of Directors is divided into three classes, designated
Class I, Class II and Class III. Class I, consisting of Dr. Neal Lonky and Mr.
Wallace, will hold office initially for a term expiring at the annual meeting
of stockholders to be held in 1997, Class II, consisting of Dr. Stewart Lonky
and Mr. Vandeman, will hold office initially for a term expiring at the annual
meeting of the stockholders to be held in 1998 and Class III, consisting of
Dr. Martin Lonky and Dr. Bloch, will hold office initially for a term expiring
at the annual meeting of stockholders to be held in 1999. Currently there is
one vacancy in each designated Class of directors. Each director will hold
office until the annual meeting for the year in which his term expires and
until his successor is duly elected and qualified. At each annual meeting of
stockholders of the Company, the successors to the class of directors whose
terms expire at such meeting will be elected to hold office for a term
expiring at the annual meeting of stockholders held in the third year
following the year of their election. See "Description of Capital Stock--
Certain Anti-Takeover Effects." The Board of Directors elects officers
annually and such officers serve at the discretion of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee and a Compensation
Committee, each of which are composed of independent directors.
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<PAGE>
Audit Committee. The Audit Committee has the responsibility for reviewing
and supervising the financial controls of the Company. The Audit Committee
makes recommendations to the Board of Directors of the Company with respect to
the Company's financial statements and the appointment of independent
auditors, reviews significant audit and accounting policies and practices,
meets with the Company's independent public accountants concerning, among
other things, the scope of audits and reports, and reviews the performance of
overall accounting and financial controls of the Company. Following the
Offering, the Audit Committee will consist of at least two independent
directors to be designated by the Board of Directors.
Compensation Committee. The Compensation Committee has the responsibility
for reviewing the performance of the officers of the Company and recommending
to the Board of Directors of the Company annual salary and bonus amounts for
all officers of the Company. The Compensation Committee also has the
responsibility for oversight and administration of the Company's stock
incentive and other compensatory plans. The Compensation Committee consists of
David G. Wallace and George A. Vandeman.
DIRECTOR COMPENSATION
Except as described below, members of the Company's Board of Directors do
not receive any cash compensation for attending Board of Directors' or
committee meetings.
The Company's 1994 Directors' Stock Award Plan (the "Directors' Plan")
provides for stock grant awards to non-employee members of the Board of
Directors pursuant to a formula. At the end of each year, a total pool of up
to 1200 shares of Common Stock is made available to non-employee directors, as
a group, for their services during that year, with the exact award amounts
fixed by formula based on attendance at Board of Directors' meetings and, if
applicable, committee meetings. Generally, a total of 750 shares are available
to all directors as a group based on board attendance, and 450 additional
shares are available to committee members as a group. See "Management -- 1994
Directors' Stock Award Plan." Pursuant to the Directors' Plan, for services
rendered in 1995, Dr. Neal Lonky and Mr. Wallace received stock awards of 150
shares and 200 shares, respectively, and certain other directors who are not
current continuing members of the Board of Directors received an additional
500 shares.
For agreeing to serve as a member of the Board of Directors in 1996, Mr.
Vandeman has been granted an option to purchase 1,043 shares of Common Stock.
The shares underlying his option shall vest equally in one-third increments
over a three-year period with exercise prices of $260.00, $300.00 and $340.00
per share, respectively. Mr. Vandeman's option will expire ten years from the
date of its issuance.
Dr. Bloch and certain related entities (Dr. Bloch and these entities are
hereinafter referred to as the "Bloch Entities") acquired 4,573 shares of
Common Stock for a purchase price of $260 per share and 4,573 Common Stock
purchase warrants exercisable at the same price, as part of a private equity
placement effected by the Company in December 1995. Certain terms of the
purchase by the Bloch Entities varied from the terms offered to unaffiliated
investors, including a "net exercise" feature that allowed the Bloch Entities
to forego paying the exercise price of their Warrants in cash, by surrendering
upon exercise a number of shares of Common Stock having a fair market value
equal to the exercise price. In September 1996, the Bloch Entities exercised
in full their Common Stock purchase warrants pursuant to such net exercise
provisions, resulting in a net issuance of 3,512 shares of Common Stock.
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<PAGE>
EXECUTIVE OFFICER COMPENSATION
The following table presents for the periods shown information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer. Other than the Chief Executive Officer, no executive
officer of the Company received total salary and bonus during the year ended
December 31, 1995 in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
-------------- ----------------
RESTRICTED STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS COMPENSATION
--------------------------- ---- -------- ----- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Martin L. Lonky, Ph.D. .................... 1995 $120,000 -- $9,000(1) $12,513(2)
Chief Executive Officer and President
</TABLE>
- ---------------------
(1) In September 1995, under the Company's 1994 Long-Term Equity Incentive
Plan, Dr. Lonky received a restricted stock award of 750 shares of Common
Stock, which vests in equal increments over a three year period,
commencing September 1995. Neither Dr. Lonky nor any other officer has
received any stock option grants or exercised any stock options in 1995 or
prior years.
(2) Represents automobile insurance, service and lease payments.
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with Dr. Martin L. Lonky in
June 1996. For the first twelve months of the agreement, Dr. Lonky is entitled
to receive a base salary of $240,000, subject to an adjustment upwards in
subsequent years by the Board of Directors. In addition, during each fiscal
year, the executive is eligible for a cash bonus, based in part on his
individual performance and in part on the Company's overall performance during
such fiscal year. The agreement provides, among other things, for a cash bonus
of $50,000 to Dr. Lonky upon completion of the Company's initial public
offering. In addition to such group benefits as are provided by the Company to
its employees, Dr. Lonky shall receive certain specified life, health and
disability insurance benefits.
The agreement is for a term of three years and, no later than one year prior
to expiration, the Company must inform Dr. Lonky (referred to as the
"executive") whether it will renew the agreement or offer the executive a new
employment agreement. The executive may terminate his agreement for any reason
upon 60 days advance written notice. In the event of death or permanent
disability (as defined in the employment agreement), the executive or his
beneficiary shall be entitled to receive a lump sum payment equal to his then
current annual base salary. The Company, at any time after the first 18 months
of the agreement, may terminate the executive without cause upon 60 days
advance written notice, and in such event the Company shall pay the executive
a lump sum in cash equal to 18 months of the executive's current annual base
salary, bonus compensation and the cash value of all benefits. This lump sum
payment will not apply in the event of termination for cause (as defined). In
addition, upon a Change of Control (as defined in the employment agreement),
the executive shall be entitled to receive a lump sum payment equal to the
greater of (i) his annual base salary, bonus compensation and the cash value
of all benefits he would have earned had he remained employed for the 18
months following his termination; or (ii) a lump sum cash payment equal to his
annual base salary, bonus compensation and the cash value of all benefits he
would have earned had he remained employed for his entire term. Generally, a
Change of Control under the agreement will be deemed to occur if the
executive's employment is terminated by the Company without cause or by the
executive with cause within three months before or 12 months after (i) the
sale or transfer of more than 50% of the Company's Common Stock to persons who
were not stockholders at the effective date of the agreement or (ii) the sale
of all or substantially all of the assets of the Company, but excludes any
initial or secondary public offering or any transaction with a subsidiary or
affiliate of the Company.
42
<PAGE>
1994 LONG-TERM EQUITY INCENTIVE PLAN
The Company's 1994 Long-Term Equity Incentive Plan (the "1994 Plan") was
approved by the Board of Directors in May, 1994 and approved by the
stockholders in June, 1994. There were 11,000 shares of Common Stock
originally reserved for issuance under the 1994 Plan which was increased to
23,377 shares of Common Stock pursuant to an amendment to the 1994 Plan
adopted by the Board of Directors and approved by the stockholders in June
1996.
The 1994 Plan is intended to provide equity incentives to encourage a high
level of performance by employees of, and consultants and advisors to, the
Company, including executive officers of the Company. The 1994 Plan allows the
Board or the Compensation Committee to administer the 1994 Plan and to issue
nontransferable incentive and nonqualified stock options, stock awards, stock
purchase rights, stock appreciation rights, and long-term performance awards,
either individually or in any type of combination. All of the forms of awards
are subject to repurchase limitations and vesting limitations, unless
otherwise specified by the Board or Compensation Committee.
The 1994 Plan permits the granting of non-transferable stock options that
are intended to qualify either as incentive stock options ("ISOs") or non-
qualified stock options ("NQSOs"). The option exercise price for each share
covered by an option may be less than the fair market value of a share of
Common Stock on the date of grant of such option. However, in the case of an
ISO, or in the case of an NQSO granted to a person other than an employee, the
price shall be no less than 100% of the fair market value of a share of the
Common Stock at the time of grant, subject to certain conditions in the 1994
Plan; provided that, in the case of an ISO granted to a 10% stockholder of the
Company, the price shall be no less than 110% of the fair market value of the
Common Stock on the date the option is granted. The term of each option will
be fixed by the Compensation Committee but may not exceed ten years from the
date of grant. Options may be made exercisable in installments, and the
exercisability of options may be accelerated by the Board or the Compensation
Committee or upon the occurrence of certain events, such as a change in
control of the Company. The options may be exercised by payment of cash, stock
or by cashless exercise. In the event of death or disability of an optionee,
the optionee or his or her estate will have a certain period of time in which
to exercise any vested options. Options granted under the 1994 Plan which do
not vest shall become available again for grant and purchase under the 1994
Plan.
The Board or the Compensation Committee may grant stock awards, which are
grants of Common Stock made without the payment of consideration by the
recipient of the grant; Common Stock purchase rights, which allow for the
purchase of stock in addition to, or in tandem with, other awards under the
1994 Plan; and nontransferable stock appreciation rights entitling the holder
upon exercise thereof to receive an amount in any combination of cash or
Common Stock (as determined by the Board or the Compensation Committee) equal
in value to the difference between the fair market value of the shares covered
by such right on the date of exercise over the aggregate exercise price.
The Company also may grant long-term performance awards, which are grants of
stock issued for no cash consideration that are based on the Company's, a
subsidiary's and/or an individual's performance factors or upon such other
criteria as the Company may deem appropriate. Performance factors may vary
from participant to participant, between group to group and period to period.
Unless otherwise determined by the Board or the Compensation Committee, long-
term performance awards may be paid out on a prorated basis in the event of
termination due to death or disability and are forfeited in the event of other
types of termination. Long-term performance awards are payable in cash or
Common Stock.
The 1994 Plan provides for proportional adjustments of outstanding awards
and the number of shares available for awards under the 1994 Plan in the event
of stock dividends, stock splits, combinations, reclassifications or similar
changes in the capital structure of the Company without consideration. The
1994 Plan also generally provides for acceleration of awards in the event of a
corporate acquisition of the Company in which the Company is not the surviving
entity and the awards are not assumed by the surviving entity.
43
<PAGE>
The Board may amend, alter or discontinue the 1994 Plan at any time, which
action shall not adversely affect any outstanding awards. The Board also may
accelerate any award or waive any conditions or restrictions of any
outstanding award at any time. Unless earlier terminated, the 1994 Plan will
terminate in 2004.
As of the date hereof, the Company has granted (i) restricted stock awards
totaling 11,412.5 shares of Common Stock to management directors, employees
and independent contractors, of which 8,458.75 are fully vested to the
recipients and (ii) non-qualified options covering 350 shares of Common Stock
to an executive officer of the Company, none of which are currently vested.
1994 DIRECTORS' STOCK AWARD PLAN
The Company's 1994 Directors' Stock Award Plan (the "Directors' Plan") was
adopted by the Board of Directors in May, 1994 and approved by the
stockholders in June, 1994. A total of 4,000 shares of Common Stock have been
authorized for issuance under the Directors' Plan.
The Directors' Plan is intended to provide equity incentives to non-employee
members of the Board to reward their past service, encourage their continued
service on the Board and to enable the Company to attract and retain the best
qualified individuals for service on the Board. The incentives take the form
of stock grant awards, which are made automatically without the payment of
cash consideration by the directors receiving the grants. The Compensation
Committee of the Board, or the Board, may impose certain terms and conditions
on the grant of stock awards under the Directors' Plan. To date, all stock
awards granted under the Directors' Plan were fully vested upon their
issuance.
At the end of each year, a total pool of up to 1,200 shares of Common Stock
is made available to non-employee directors, as a group, for their services
during that year, with the exact award amounts fixed by formula based on
attendance at Board of Directors' meetings and, if applicable, committee
meetings. Generally, a total of 750 shares are available to all directors as a
group based on board attendance, and 450 additional shares are available to
committee members as a group. Pursuant to the Directors' Plan, for services
rendered in 1995, Dr. Neal Lonky and Mr. Wallace received stock awards of 150
shares and 200 shares, respectively, and certain other directors who are not
current continuing members of the Board of Directors received an additional
500 shares.
As of the date hereof 3,590 shares of Common Stock have been issued under
the Directors' Plan. Unless earlier terminated, the Directors' Plan will
terminate in 2003.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
The Company's Restated Certificate of Incorporation contains a provision
eliminating or limiting the personal liability of a director to the Company
and its stockholders for monetary damages arising from acts or omissions in
the director's capacity as a director. The provision does not, however,
eliminate or limit the personal liability of a director (i) for any breach of
such director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under the Delaware statutory provision
making directors personally liable, under a negligence standard, for unlawful
dividends or unlawful stock purchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal benefit. This
provision offers persons who serve on the Board of Directors of the Company
protection against awards of monetary damages resulting from breaches of their
duty of care (except as indicated above). As a result of this provision, the
ability of the Company or a stockholder thereof to successfully prosecute an
action against a director for a breach of his duty of care is limited.
However, this provision does not affect the availability of equitable remedies
such as an injunction or rescission based upon a director's breach of his duty
of care. The Securities and Exchange Commission (the "Commission") has taken
the position that a provision of this sort will have no effect on claims
arising under the federal securities laws.
In addition, the Restated Certificate of Incorporation and the Company's
Bylaws provide for mandatory indemnification rights, subject to limited
exceptions, to any director or officer of the Company who by reason of
44
<PAGE>
the fact that he or she is a director or officer of the Company is involved in
a legal proceeding of any nature. Such indemnification rights include
reimbursement for expenses incurred by such director or officer in advance of
the final disposition of such proceeding in accordance with the applicable
provisions of Delaware General Corporation Law (the "DGCL"). The Company may
from time to time agree to provide similar indemnifications to certain
employees and other agents.
The Company intends to enter into separate indemnification agreements with
its directors and executive officers. Each indemnification agreement will
provide, among other things, for (i) indemnification against any and all
expenses, judgments, fines, penalties, and amounts paid in settlement of any
claim against an indemnified party unless it is determined, as provided in the
indemnification agreement, that indemnification is not permitted under law and
(ii) prompt advancement of expenses to any indemnitee in connection with his
or her defense against any claim.
The Company also maintains directors' and officers' liability insurance.
45
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 30, 1996,
and as adjusted to give effect to the sale of Common Stock by the Company
offered hereby, by (i) each stockholder who is known by the Company to
beneficially own 5% or more of the outstanding shares of Common Stock, (ii)
each director and the Chief Executive Officer of the Company and (iii) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
OWNERSHIP(2)
-----------------
NUMBER OF BEFORE AFTER
NAME OF BENEFICIAL OWNER(1) SHARES OFFERING OFFERING
<S> <C> <C> <C>
Martin L. Lonky, Ph.D.(3)(4)....................... 11,972.12 14.52
Stewart A. Lonky, M.D.(3)(5)....................... 11,872.72 14.39
Neal M. Lonky, M.D.(6)............................. 10,666.02 12.93
Alfred M. Bloch, M.D., Ph.D.(7).................... 8,581.90 10.41
David G. Wallace................................... 690 *
George A. Vandeman(8).............................. -- --
All executive officers and directors as a group (7
persons)(9)....................................... 44,532.76 54.00
</TABLE>
- -------------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each of the stockholders named
in this table is: c/o The Trylon Corporation, 970 West 190th Street, Suite
900, Torrance, California 90502.
(2) Pursuant to the rules of the Commission, in calculating percentage
ownership, each person is deemed to beneficially own his own shares
subject to options, warrants or stock grants which are exercisable or vest
within 60 days, but options, warrants and stock grants owned by others
(even if exercisable or subject to vesting within 60 days) are deemed not
to be outstanding. Unless otherwise indicated in the footnotes to this
table and subject to the community property laws where applicable, each of
the stockholders named in this table has sole voting and investment power
with respect to the shares beneficially owned.
(3) Dr. Martin Lonky and Dr. Stewart Lonky (the "Selling Stockholders") have
agreed to sell up to shares and shares, respectively, if the
underwriter's over-allotment option is exercised. Assuming the over-
allotment option is exercised in full, the percentage ownership of Dr.
Martin Lonky and Dr. Stewart Lonky would be % and %, respectively.
(4) Includes 937.5 shares issuable pursuant to stock awards that are not
vested.
(5) Includes 409 shares held by the Stewart A. Lonky, M.D. Pension and Profit
Sharing Plan; 7,693.72 shares held by The S & M Lonky Revocable Trust,
Stewart and Marilyn Lonky, Trustees; and 88 shares held by PaineWebber as
custodian for the benefit of The Stewart A. Lonky, M.D., Rollover IRA,
which includes 60 shares issuable upon the conversion of 30 shares of
Series A Convertible Preferred Stock. Also includes 937.5 shares issuable
pursuant to stock awards that are not vested. Excludes 200 shares held by
Elizabeth Lonky, Dr. Lonky's daughter and 300 shares held by Danielle and
Bret Stone, Dr. Lonky's daughter and son-in-law, to which Dr. Lonky
disclaims beneficial ownership.
(6) Includes 40, 40 and 20 shares, respectively, held by Dr. Lonky as
custodian for the benefit of David J. Lonky, U.T.M.A., Nathaniel J. Lonky,
U.T.M.A., and Jeffrey Hoblin, U.T.M.A., Dr. Lonky's minor children and 20
shares held by Jason Hoblin, Dr. Lonky's step-son. Also includes 8,686.72
shares held by The Neal M. Lonky and Naomi L. Lonky Revocable Trust, dated
July 10, 1988.
(7) Includes 3,159.6 shares held by Lincoln Trust Company, custodian for
Alfred M. Bloch Rollover IRA; 4,912 shares held by The Bloch/Reinhardt
Charitable Remainder Unitrust; and 429.3 shares held by The
Bloch/Reinhardt Living Trust, Alfred M. Bloch and Ruth R. Bloch, Trustees.
Excludes 1,310 shares held by The Ruth Reinhardt Bloch, Irrevocable Trust,
E. Alan Levi, Trustee.
(8) Excludes 1,043 shares issuable pursuant to stock options not presently
exercisable.
(9) See Notes 4, 5, 6 and 7. Excludes 1,393 shares issuable pursuant to stock
options not presently exercisable.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 100,000 shares of
Common Stock, par value $.01 per share, and 10,000 shares of Preferred Stock,
par value $.01 per share. The following summary description of the capital
stock of the Company is qualified in its entirety by reference to the Restated
Certificate of Incorporation and Bylaws of the Company, copies of which are
filed as exhibits to the registration statement of which this Prospectus is a
part, and by the provisions of applicable law.
COMMON STOCK
As of September 30, 1996, there were 82,475.4 shares of Common Stock issued
and outstanding, held of record by 166 stockholders. Of these shares, 2,953.75
shares were subject to vesting restrictions or other forfeiture provisions. In
addition, the Company will be obligated to issue (i) 3,399.6 shares of Common
Stock upon the automatic conversion of outstanding shares of Series A
Convertible Preferred Stock at the effective date of the Offering, (ii) up to
149.9 additional shares of Common Stock to an existing stockholder of the
Company pursuant to anti-dilution rights that are held by such stockholder and
that will be triggered by the preferred stock conversion, and (iii) up to
2,143 shares of Common Stock upon the exercise of outstanding options held by
an officer, a director and a former director.
When the Company entered into its exclusive supply agreement with Omniglow
in September 1994, the Company granted Omniglow the right to acquire options
on 1,826 shares of the Company's Common Stock, exercisable at $295.61 per
share (as adjusted to reflect stock splits made subsequent to the grant).
Omniglow was required to satisfy certain conditions precedent to the grant of
such options, including an obligation to pay a nominal purchase price for such
options within ten days of the date the supply agreement was executed. Other
option grants covering up to 7,469 shares of Common Stock were conditioned
upon Omniglow reducing the price charged by it to the Company for Speculite.
Omniglow did not satisfy any of such conditions precedent to the grant of
options. Although no assurance can be given that Omniglow will not contest the
forfeiture of the foregoing options, the Company believes that Omniglow does
not currently have the right to acquire any shares of the Company's Common
Stock.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be submitted to a vote of the stockholders, and do
not have preemptive rights. The Company's Restated Certificate of
Incorporation does not provide for cumulative voting in the elections of
directors. However, pursuant to the provisions of Section 2115 the California
General Corporation Law, if a majority of a corporation's property, payroll
and sales relate to California (as measured by certain specified tests), and
if more than one-half of the outstanding voting securities of the Company are
held by California residents, stockholders may be entitled to cumulate their
votes, unless the recordholders of the Company's listed stock certify that
such stock is held by at least 800 beneficial holders.
Subject to preferences that may be applicable to any outstanding shares of
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors of the Company out of funds legally available therefor. See
"Dividend Policy." All outstanding shares of Common Stock are, and all shares
to be outstanding upon the completion of the Offering, including the shares to
be sold in the Offering, when issued and paid for will be, fully paid and
nonassessable. In the event of any liquidation, dissolution or winding-up of
the affairs of the Company, holders of Common Stock will be entitled to share
ratably in the assets of the Company remaining after payment or provision for
payment of all of the Company's debts and obligations and the liquidation
preference of any outstanding Preferred Stock.
PREFERRED STOCK
The Board of Directors, without further stockholder authorization, is
authorized to issue 10,000 shares of Preferred Stock in one or more series and
to determine and fix the rights, preferences, privileges and restrictions
47
<PAGE>
of each series, including dividend rights and preferences over dividends on
the Common Stock and one or more series of Preferred Stock, conversion rights,
voting rights (in addition to those provided by law), redemption rights and
the terms of any sinking fund therefor, and rights upon liquidation,
dissolution or winding up, including preferences over the Common Stock and one
or more series of Preferred Stock. Upon the closing of the Offering, no shares
of Preferred Stock will remain outstanding. Although the Company has no
present plans to issue any shares of Preferred Stock following the closing of
the Offering, the issuance of shares of Preferred Stock, or the issuance of
rights to purchase such shares, may have the effect of delaying, deferring or
preventing a change in control of the Company, may discourage bids for the
Company's Common Stock at a premium over the market price of the Common Stock
and may adversely affect the market price of, and the voting and other rights
of the holders of the Common Stock.
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws summarized in the following paragraphs may be deemed to have anti-
takeover effects and may delay, defer or prevent a tender offer or takeover
attempt that a stockholder might consider to be in such stockholder's best
interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders.
Classified Board of Directors. The Restated Certificate of Incorporation and
Bylaws of the Company provide for the Board of Directors to be divided into
three classes of directors, as nearly equal in number as is reasonably
possible, serving staggered terms so that directors' initial terms will expire
either at the 1997, 1998 or 1999 annual meeting of stockholders. Starting with
the 1997 annual meeting of stockholders, one class of directors will be
elected each year for a three-year term. See "Management--Classified Board of
Directors."
The Company believes that a classified Board of Directors will help to
assure the continuity and stability of the Board of Directors and the
Company's business strategies and policies as determined by the Board of
Directors, since a majority of the directors at any given time will have had
prior experience as directors of the Company. The Company believes that this,
in turn, will permit the Board of Directors to more effectively represent the
interests of stockholders.
With a classified Board of Directors, at least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in
the majority of the Board of Directors. As a result, a provision relating to a
classified Board of Directors may discourage proxy contests for the election
of directors or purchases of a substantial block of the Common Stock because
such provision could operate to prevent obtaining control of the Board of
Directors in a relatively short period of time. The classification provision
could also have the effect of discouraging a third-party from making a tender
offer to otherwise attempt to obtain control of the Company. Under the DGCL,
unless the certificate of incorporation otherwise provides, a director on a
classified board may be removed by the stockholders of the corporation only
for cause.
Although the Bylaws do not give the Board of Directors any power to approve
or disapprove stockholder nominations for the election of directors or of any
other business desired by stockholders to be conducted at an annual or any
other meeting, the Bylaws (i) may have the effect of precluding a nomination
for the election of directors or precluding the conduct of business at a
particular annual meeting if the proper procedures are not followed or (ii)
may discourage or deter a third-party from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to obtain
control of the Company, even if the conduct of such solicitation or such
attempt might be beneficial to the Company and its stockholders.
Limitations of Stockholder Action by Written Consent. The Restated
Certificate of Incorporation prohibits stockholder action by written consent
in lieu of a meeting, and provides that stockholder action can be taken only
at an annual or special meeting of stockholders. This provision may have the
effect of delaying consideration of a stockholder proposal until the next
annual meeting, unless a special meeting is called by the Board of Directors
or the Chairman of the Board.
48
<PAGE>
Amendment of Certain Provisions of Restated Certificate of Incorporation and
Bylaws. The Restated Certificate of Incorporation and the Bylaws provide that
the affirmative vote of the holders of at least 66 2/3% of the outstanding
shares of the Company then entitled to vote on the matter is required to amend
the Bylaws and certain provisions of the Restated Certificate of
Incorporation, including those provisions relating to the number of directors,
the filling of vacancies on the Board of Directors, the prohibition on
stockholder action without a meeting, indemnification of directors, officers
and others, the limitation on liability of directors and the supermajority
voting requirements in the Restated Certificate of Incorporation and Bylaws.
The Restated Certificate of Incorporation further provides that the Bylaws may
be amended by the Board of Directors, except that the authorized number of
directors may not be amended without the affirmative vote of the holders of at
least 66 2/3% of the outstanding shares of the Company then entitled to vote
on the matter. These voting requirements will have the effect of making more
difficult any amendment by stockholders, even if a majority of the Company's
stockholders believes that such amendment would be in the Company's best
interests.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. The Bylaws establish an advance notice procedure
with regard to the nomination, other than by or at the direction of the Board
or a committee thereof, of candidates for election as directors (the
"Nomination Procedure") and with regard to other matters to be brought by
stockholders before an annual meeting of stockholders of the Company (the
"Business Procedure"). The Nomination Procedure requires that a stockholder
give prior written notice, in proper form, of a planned nomination for the
Board of Directors to the Secretary of the Company. The requirements as to the
form and timing of that notice are specified in the Bylaws. If the Chairman of
the Board of Directors determines that a person was not nominated in
accordance with the Nomination Procedure, such person will not be eligible for
election as a director. Under the Business Procedure, a stockholder seeking to
have any business conducted at an annual meeting must give prior written
notice, in proper form, to the Secretary of the Company. The requirements as
to the form and timing of that notice are specified in the Bylaws. If the
Chairman of the Board of Directors determines that the other business was not
properly brought before such meeting in accordance with the Business
Procedure, such business will not be conducted at such meeting.
Section 203 of the Delaware Law. The Company is subject to Section 203 of
the DGCL. Generally, Section 203 of the DGCL prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (i)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock, excluding for purposes of determining the number of shares
outstanding shares owned by officer-directors, or (iii) on or after such date
the business combination is approved by the board and by the affirmative vote
of at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder. A "business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer
Corporation.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that a significant public market for the Common
Stock will develop or be sustained after the Offering. Sales of a substantial
number of shares of Common Stock in the public market after the Offering, or
the perception that such sales could occur, could adversely affect the market
price of the Common Stock and the Company's ability to raise capital through a
subsequent offering of securities. In connection with the Offering, certain
holders of the Common Stock, including all directors and executive officers of
the Company, have agreed not to offer, sell, contract to sell or grant any
option to purchase or otherwise dispose of shares of Common Stock for a period
of 180 days from the effective date of the Offering, without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. See
"Underwriting."
Of the shares of Common Stock to be outstanding after the Offering,
shares ( shares if the Underwriters' over-allotment option is exercised in
full) will be available for resale in the public market without restriction
immediately following the Offering if held by holders who are not "affiliates"
of the Company (as defined in the Securities Act). All of the remaining shares
are "restricted securities" within the meaning of Rule 144 adopted under the
Securities Act. These restricted shares were issued and sold by the Company in
private transactions in reliance upon exemptions from registration under the
Securities Act. After the 180-day lock-up period pursuant to agreements with
the Underwriters, all of these restricted shares will be available for resale
subject, in the case of all of such shares, to the holding period, quantity
and manner of sale limitations of Rule 144. In addition, the Company intends
to register approximately shares of Common Stock reserved for issuance
under the Company's 1994 Long-Term Equity Incentive Plan and 1994 Directors'
Stock Award Plan as soon as practicable following the consummation of the
Offering. See "Description of Capital Stock" and "Underwriting."
In general, under Rule 144 as currently in effect, any person who has
beneficially owned restricted shares for at least two years will be entitled
to sell in any three-month period commencing 90 days after the date of this
Prospectus, a number of shares that does not exceed the greater of (i) 1% of
the then outstanding shares of Common Stock or (ii) the average weekly trading
volume of the then outstanding shares during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
Commission. Sales pursuant to Rule 144 are also subject to certain
requirements relating as to manner of sale, the filing of a notice and the
availability of current public information about the Company. A person who is
not deemed to have been an affiliate of the Company at any time during the 90
days immediately preceding the sale and who has beneficially owned his or her
shares for at least three years is entitled to sell such shares pursuant to
Rule 144(k) without regard to the limitations described above.
50
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement,
the syndicate of Underwriters named below (the "Underwriters"), for whom
Donaldson, Lufkin & Jenrette Securities Corporation and Smith Barney Inc. are
acting as representatives (the "Representatives"), have severally agreed to
purchase from the Company an aggregate of shares of Common Stock. The
number of shares of Common Stock that each Underwriter has agreed to purchase
is set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...................
Smith Barney Inc......................................................
Total.................................................................
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock directly to the public at the
public offering price set forth on the cover page of this Prospectus, and to
certain dealers (who may include the Underwriters) at a price that represents
a concession not in excess of $ per share under the public offering price.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
Underwriters. The Underwriters do not intend to confirm sales of the Common
Stock offered hereby to accounts over which they exercise discretionary
authority.
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock are
subject to the approval of certain legal matters by counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all
shares of Common Stock offered hereby (other than the shares of Common Stock
covered by the over-allotment option described below) if any such shares are
purchased.
The Company and the Selling Stockholders have granted to the Underwriters an
option solely to cover over-allotment, exercisable no later than 30 days from
the date of this Prospectus, to purchase up to an aggregate of additional
shares of Common Stock at the price to the public set forth on the cover page
of this Prospectus minus the underwriting discounts and commissions. The
Underwriters may exercise such options solely for the purpose of covering
over-allotments, if any, in connection with the Offering. To the extent such
option is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set forth next to such Underwriter's name in the
preceding table bears to the total number of shares listed in such table.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including certain liabilities under
the Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Certain holders of the Company's Common Stock, including all directors and
executive officers, have agreed that they will not directly or indirectly
offer, sell, contract to sell, grant any option to purchase, or otherwise
dispose or transfer any shares of Common Stock of the Company owned by them
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation for a period of 180 days after the date of this Prospectus. In
addition, the Company has agreed that for a period of 180 days after the date
of this Prospectus it will not, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, directly or indirectly
offer, sell, issue, distribute or otherwise dispose of any equity securities
or any option, rights or warrants with respect to any equity securities,
except for (i) shares of Common Stock offered hereby, (ii) shares of Common
Stock issued pursuant to the exercise of options outstanding on the date of
this Prospectus
51
<PAGE>
and (iii) options granted after the date of this Prospectus pursuant to the
1994 Directors' Stock Award Plan or the 1994 Long-Term Equity Incentive Plan.
"See Shares Eligible for Future Sale."
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price for the shares offered hereby
has been determined by negotiations between the Company and the
Representatives. Among the factors considered in determining the initial
public offering price were the history of, and the prospects for, the
Company's business and the industry in which it competes, an assessment of the
Company's management, its past and present operations, its past and present
earnings and the trend of such earnings, the prospects for earnings of the
Company, the present state of the Company's development, the general condition
of the securities market at the time of the Offering and the market prices and
earnings of similar securities of comparable companies at the time of the
Offering.
52
<PAGE>
LEGAL MATTERS
Certain matters with respect to the validity of the issuance of the shares
offered hereby are being passed upon for the Company by Latham & Watkins, Los
Angeles, California and Klein & Martin, Los Angeles, California. Two partners
and one associate of Klein & Martin currently hold an aggregate of 890 shares
of Common Stock. Certain legal matters relating to the Offering will be passed
upon for the Underwriters by Milbank, Tweed, Hadley & McCloy, Los Angeles,
California.
EXPERTS
The consolidated financial statements of the Company for the three years
ended December 31, 1995, included in this Prospectus and Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.
ADDITIONAL INFORMATION
The Company has filed with the Commission, a Registration Statement on Form
S-1, including amendments, exhibits and schedules thereto, under the
Securities Act, with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission, and to which reference hereby is made. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference hereby is made to the exhibit for a more complete description of the
matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Registration Statement filed by the Company
with the Commission, as well as such reports and other information filed by
the Company with the Commission, may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, New
York, New York 10048, and at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material, when
filed, may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding reporting companies
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), at
http:/www.sec.gov.
Upon consummation of the Offering, the Company will become subject to the
informational requirements of the Exchange Act, and, in accordance therewith,
will file reports and other information with the Commission in accordance with
the Commission's rules. Such reports and other information concerning the
Company may be inspected and copied at the public reference facilities and
regional offices of the Commission or through the Website referred to above.
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by independent auditors, and quarterly reports for the first three
quarters of each fiscal year containing unaudited interim financial
information.
53
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995, and June 30,
1996 (unaudited)......................................................... F-3
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1995, and the unaudited six month periods ended
June 30, 1995 and 1996................................................... F-4
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1995, and the unaudited six month
period ended June 30, 1996............................................... F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1995, and the unaudited six month periods ended
June 30, 1995 and 1996................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
The consolidated financial statements as of June 30, 1996, and for the six
month periods ended June 30, 1995 and 1996, are unaudited.
The information required by the applicable financial statement schedules has
been disclosed in the financial statements and notes thereto and, accordingly,
the schedules have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Trylon Corporation:
After the stock splits discussed in Note 1 of Notes to Consolidated
Financial Statements are effected, we expect to be in a position to render the
following audit report.
Arthur Andersen LLP
Los Angeles, California
April 30, 1996
- -------------------------------------------------------------------------------
"REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Trylon Corporation:
We have audited the accompanying consolidated balance sheets of THE TRYLON
CORPORATION (a Delaware corporation) and subsidiary as of December 31, 1994
and 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. 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 The Trylon Corporation and
subsidiary as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
Los Angeles, California
October , 1996"
F-2
<PAGE>
THE TRYLON CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
(SEE NOTE
10) JUNE
DECEMBER 31, JUNE 30, 30,
------------------------ ----------- -----------
1994 1995 1996 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............. $ 678,851 $ 1,221,619 $ 842,649 $ 842,649
Restricted cash.......... 185,256 196,350 200,681 200,681
Short-term investment.... 509,189 -- -- --
Accounts receivable, net
of allowance of $15,000
in 1994 and 1995, and
$3,000 in 1996 ......... 580,570 941,314 345,334 345,334
Inventories.............. 45,735 63,201 70,835 70,835
Other current assets..... -- -- 138,881 138,881
----------- ----------- ----------- -----------
Total current assets... 1,999,601 2,422,484 1,598,380 1,598,380
----------- ----------- ----------- -----------
Property and equipment, at
cost:
Machinery and equipment.. 43,848 45,625 49,082 49,082
Furniture and fixtures... 52,297 52,297 59,512 59,512
Leasehold improvements... 3,095 3,095 -- --
----------- ----------- ----------- -----------
99,240 101,017 108,594 108,594
Less--Accumulated
depreciation and
amortization............ (69,902) (75,118) (80,549) (80,549)
----------- ----------- ----------- -----------
Total property and
equipment, net........ 29,338 25,899 28,045 28,045
----------- ----------- ----------- -----------
Other assets............... 13,788 37,430 43,877 43,877
----------- ----------- ----------- -----------
Total assets............... $ 2,042,727 $ 2,485,813 $ 1,670,302 $ 1,670,302
=========== =========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings.... $ 120,000 $ 120,000 $ 120,000 $ 120,000
Convertible subordinated
debentures.............. 760,302 -- -- --
Accounts payable......... 681,424 356,940 361,631 361,631
Accrued liabilities...... 46,382 275,871 97,442 97,442
Preferred dividends
payable................. 38,268 102,909 141,132 141,132
----------- ----------- ----------- -----------
Total current
liabilities........... 1,646,376 855,720 720,205 720,205
----------- ----------- ----------- -----------
Commitments and
contingencies (Note 8)
Stockholders' equity:
Preferred stock, $0.01
par value:
Authorized--10,000
shares
Issued and
outstanding--1,699.80
shares in 1994, 1995
and 1996, and none in
pro forma 1996........ 849,876 849,876 849,876 --
Common stock, $0.01 par
value:
Authorized--100,000
shares
Issued and
outstanding--55,160.4
shares in 1994,
74,286.4 in 1995,
74,786.4 in 1996 and
78,335.9 in pro forma
1996.................. 551 742 747 783
Additional paid-in capital. 2,044,486 4,363,296 4,460,466 5,310,306
Accumulated deficit........ (2,498,562) (3,583,821) (4,360,992) (4,360,992)
----------- ----------- ----------- -----------
Total stockholders'
equity................ 396,351 1,630,093 950,097 950,097
----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity...... $ 2,042,727 $ 2,485,813 $ 1,670,302 $ 1,670,302
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
THE TRYLON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ---------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues, net:
Product sales......... $1,305,014 $2,044,983 $ 496,683 $ 164,379 $ 592,186
License and other
fees................. -- 500,000 132,065 49,783 16,010
---------- ---------- ----------- --------- ----------
Total revenues, net. 1,305,014 2,544,983 628,748 214,162 608,196
Cost of goods sold...... 325,702 697,263 295,632 139,028 350,277
---------- ---------- ----------- --------- ----------
Gross profit........ 979,312 1,847,720 333,116 75,134 257,919
Operating expenses:
Selling expenses...... 242,478 471,695 183,778 162,423 332,789
General and
administrative
expenses............. 663,790 717,559 786,263 383,325 506,304
Research and
development expenses. 123,687 184,542 435,733 228,072 186,089
---------- ---------- ----------- --------- ----------
Total operating
expenses........... 1,029,955 1,373,796 1,405,774 773,820 1,025,182
---------- ---------- ----------- --------- ----------
Operating income
(loss)............. (50,643) 473,924 (1,072,658) (698,686) (767,263)
---------- ---------- ----------- --------- ----------
Other income (expense):
Interest income....... 11,249 43,340 36,709 24,494 34,071
Interest expense...... (213,034) (86,273) (84,631) (50,695) (4,956)
Other, net............ 1,042 1,268 112,612 512 --
---------- ---------- ----------- --------- ----------
Total other income
(expense).......... (200,743) (41,665) 64,690 (25,689) 29,115
---------- ---------- ----------- --------- ----------
Income (loss) before
provision for
income taxes....... (251,386) 432,259 (1,007,968) (724,375) (738,148)
Provision for income
taxes.................. 800 800 800 -- 800
---------- ---------- ----------- --------- ----------
Net income (loss)... $ (252,186) $ 431,459 $(1,008,768) $(724,375) $ (738,948)
========== ========== =========== ========= ==========
Net income (loss) per
common share:..........
Historical............ $ (3.65) $ 4.64 $ (12.94) $ (8.94) $ (9.27)
========== ========== =========== ========= ==========
Pro forma (Note 10)... $ (11.54) $ (8.45)
=========== ==========
Weighted average number
of common shares
outstanding:...........
Historical............ 69,159.1 76,741.7 83,868.4 83,868.4 83,868.4
========== ========== =========== ========= ==========
Pro forma (Note 10)... 87,417.9 87,417.9
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
THE TRYLON CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- --------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
-------- -------- -------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1992................... -- $ -- 37,609.6 $376 $ 588,202 $(2,602,534)
Conversion of
subordinated
debentures........... 1,457.20 728,573 13,632.6 136 1,329,551 --
Issuance of common
stock in connection
with TMSC merger..... -- -- 928.2 9 (9) --
Issuance of common
stock for services... -- -- 250.0 3 18,329 --
Sale of preferred
stock................ 106.78 53,392 -- -- -- --
Net loss.............. -- -- -- -- -- (252,186)
-------- -------- -------- ---- ---------- -----------
Balance, December 31,
1993................... 1,563.98 781,965 52,420.4 524 1,936,073 (2,854,720)
Conversion of
subordinated
debentures........... 21.82 10,911 -- -- -- --
Sale of preferred
stock................ 114.00 57,000 -- -- -- --
Preferred stock
dividends............ -- -- -- -- -- (75,301)
Issuance of common
stock in connection
with stock plans..... -- -- 2,740.0 27 108,413 --
Net income............ -- -- -- -- -- 431,459
-------- -------- -------- ---- ---------- -----------
Balance, December 31,
1994................... 1,699.80 849,876 55,160.4 551 2,044,486 (2,498,562)
Sale of common stock.. -- -- 6,226.7 62 1,664,153 --
Conversion of
subordinated
debentures........... -- -- 1,729.4 17 466,918 --
Conversion of
preferred dividends
payable to common
stock................ -- -- 43.9 1 11,849 --
Issuance of common
stock in connection
with stock plans..... -- -- 11,012.5 110 175,891 --
Issuance of common
stock in connection
with TMSC merger..... -- -- 113.5 1 (1) --
Preferred stock
dividends............ -- -- -- -- -- (76,491)
Net loss.............. -- -- -- -- -- (1,008,768)
-------- -------- -------- ---- ---------- -----------
Balance, December 31,
1995................... 1,699.80 849,876 74,286.4 742 4,363,296 (3,583,821)
Issuance of common
stock for services
(unaudited).......... -- -- 500.0 5 97,170 --
Preferred stock
dividends
(unaudited).......... -- -- -- -- -- (38,223)
Net loss (unaudited).. -- -- -- -- -- (738,948)
-------- -------- -------- ---- ---------- -----------
Balance, June 30, 1996
(unaudited)............ 1,699.80 $849,876 74,786.4 $747 $4,460,466 $(4,360,992)
======== ======== ======== ==== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
THE TRYLON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- --------------------
1993 1994 1995 1995 1996
--------- ---------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net income (loss)..... $(252,186) $ 431,459 $(1,008,768) $(724,375) $(738,948)
Adjustments to recon-
cile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and am-
ortization........... 12,554 11,727 5,216 4,510 8,526
Provision for losses
on accounts receiv-
able................. -- 15,000 -- -- --
Amortization of dis-
count on U.S. trea-
sury bill............ -- -- (15,811) (15,811) --
Issuance of common
stock for services... 18,332 -- -- -- 97,175
Issuance of common
stock in connection
with stock plans..... -- 108,440 149,555 79,800 --
Accrued interest on
convertible deben-
tures................ 210,377 77,504 71,664 34,516 --
Changes in assets and
liabilities:
Decrease (increase)
in:
Accounts receivable. (471,737) (100,564) (360,744) (144,410) 595,980
Inventories......... 81,826 (4,388) (17,466) (45,162) (7,634)
Other assets........ 4,124 6,481 2,804 6,031 (145,328)
Increase (decrease)
in:
Accounts payable.... 146,555 499,442 (324,484) (205,614) 4,691
Accrued liabilities. (2,651) (26,993) 229,489 62,925 (178,429)
--------- ---------- ----------- --------- ---------
Net cash provided
by (used in)
operating
activities....... (252,806) 1,018,108 (1,268,545) (947,590) (363,967)
--------- ---------- ----------- --------- ---------
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Purchases of property
and equipment........ (12,739) (4,933) (1,777) (1,777) (10,672)
Purchase of invest-
ment................. -- (509,189) -- -- --
Proceeds from sale of
investment........... -- -- 525,000 525,000 --
Restricted cash....... (88,019) (7,237) (11,094) (6,561) (4,331)
--------- ---------- ----------- --------- ---------
Net cash provided
by (used in)
investing
activities....... (100,758) (521,359) 512,129 516,662 (15,003)
--------- ---------- ----------- --------- ---------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Net proceeds from sale
of preferred stock... 53,392 57,000 -- -- --
Net proceeds from sale
of common stock...... -- -- 1,664,215 -- --
Proceeds from short-
term borrowings...... 10,000 20,000 -- -- --
Principal payments on
convertible deben-
tures................ -- -- (365,031) -- --
Principal payments on
notes payable........ (11,561) (6,915) -- -- --
Preferred dividends
paid................. -- (37,033) -- -- --
--------- ---------- ----------- --------- ---------
Net cash provided
by financing ac-
tivities......... 51,831 33,052 1,299,184 -- --
--------- ---------- ----------- --------- ---------
Net increase (decrease)
in cash and cash
equivalents........... (301,733) 529,801 542,768 (430,928) (378,970)
Cash and cash equiva-
lents, beginning of
period................ 450,783 149,050 678,851 678,851 1,221,619
--------- ---------- ----------- --------- ---------
Cash and cash equiva-
lents, end of period $ 149,050 $ 678,851 $ 1,221,619 $ 247,923 $ 842,649
========= ========== =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
THE TRYLON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND AND BUSINESS RISKS
The Trylon Corporation (the Company) was incorporated in the state of
Delaware on June 30, 1987. The Company is the successor to the business of
Trylon Development Corporation and Trylon Associates, Ltd., which were formed
in 1983 and 1984, respectively. The Company designs, markets and sells medical
products obtained primarily through an exclusive supply agreement (see below).
The Company's primary product, which is used in cervical examinations,
utilizes a patented chemiluminescent light capsule manufactured by the
Company's major supplier. The Company also sells optics used in connection
with the light capsules. The Company sells its products both domestically and
internationally through distribution agreements with its customers.
In December 1994, the Company was warned by the Food and Drug Administration
(FDA) to discontinue using certain medical claims to sell its primary product.
The Company chose to suspend active marketing of the product until such claims
received FDA clearance. This action significantly affected 1995 operations as
the Company virtually stopped domestic shipments of its primary product. In
December 1995, the Company was cleared by the FDA to market this product using
the previously asserted claims. As a result of this clearance, the Company has
scheduled a major domestic marketing campaign for its product commencing in
late 1996.
At this stage of its development, the Company faces a variety of significant
business risks. These include, but are not limited to, the uncertainty of
market acceptance of the Company's products and applications thereof,
continued government regulation, potential competition, and dependence upon a
principal contract manufacturer, outside marketing and distribution partners
and key personnel.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Perisphere Industries, Inc. All significant
intercompany transactions and accounts have been eliminated.
USE OF ESTIMATES
In the normal course of preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
EXCLUSIVE SUPPLY AGREEMENT
The Company obtains its most critical product component (the Speculite)
pursuant to a long-term exclusive supply agreement with Omniglow Corporation
(Omniglow). The Company entered into this agreement in 1994, shortly after
Omniglow acquired the exclusive patent rights to produce Speculite. The
initial term of the agreement is 10 years with an optional 10 year renewal,
which can be revoked by either party at the end of the initial term. Sales of
Speculite supplied pursuant to the agreement represented 88 percent, 92
percent and 52 percent of the Company's revenues in 1993, 1994 and 1995,
respectively.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of products. Revenues for 1994
included $500,000 of license fees and other fees relating to distribution
agreements. These fees were recognized as revenue upon receipt of the funds
because the fees were paid solely as consideration for entering into the
distribution agreements (with no further performance required on the part of
the Company) and were non-refundable.
F-7
<PAGE>
THE TRYLON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIGNIFICANT CUSTOMERS
The Company's largest customers accounted for approximately 77 percent in
1993, 55 percent and 16 percent in 1994, and 36 percent and 30 percent in 1995
of the Company's revenues. With the exception of one customer, which accounted
for 16 percent in 1994 and 36 percent in 1995 of the Company's revenues, no
other customer accounted for more than 10 percent of the Company's revenues in
more than one year. At December 31, 1994 and 1995, there was one customer with
a significant receivable balance, representing 88 percent and 95 percent of
total receivables, respectively.
FOREIGN OPERATIONS
The Company operates principally in three geographic areas: the United
States, Europe and the Pacific Rim. The following is a summary of information
by areas for each of the three years in the period ended December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
Sales
United States.................. $1,289,219 $ 1,922,089 $ 198,504
Europe......................... 1,200 293,730 225,000
Pacific Rim.................... -- 309,264 188,624
Other.......................... 14,595 19,900 16,620
---------- ----------- -----------
$1,305,014 $ 2,544,983 $ 628,748
========== =========== ===========
Operating income (loss)
United States.................. $ 839,541 $ 1,146,162 $ 30,157
Europe......................... 600 146,865 67,500
Pacific Rim.................... -- 234,803 75,450
Other.......................... 7,298 9,950 8,310
General corporate expenses..... (898,082) (1,063,856) (1,254,075)
---------- ----------- -----------
$ (50,643) $ 473,924 $(1,072,658)
========== =========== ===========
</TABLE>
All identifiable assets are located in the United States, as of December 31,
1994 and 1995.
CASH AND CASH EQUIVALENTS
Cash balances include restricted deposits with a bank amounting to $185,256
and $196,350 at December 31, 1994 and 1995, respectively, which are security
required by the Company's line of credit (see Note 2).
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents.
SHORT-TERM INVESTMENT
As of December 31, 1994, the short-term investment consisted of a U.S.
Treasury bill, which is recorded at its cost, and which approximated its
market value.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and primarily consist of finished goods purchased under the exclusive
distribution agreement (see above).
F-8
<PAGE>
THE TRYLON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs are
charged to expense as incurred, while significant replacements and betterments
are capitalized.
Depreciation and amortization are provided using the straight-line method
based upon the estimated useful lives of the related assets. Useful lives
range from five to seven years.
WARRANTY
The Company warrants its products against defects in materials and
workmanship for a two year period. The estimated cost of warranty obligations
is recognized at the time of revenue recognition.
COMMON STOCK SPLITS
In 1993, the Company effected a 10 for 1 stock split of its common stock. In
June 1996, the Company's Board of Directors and stockholders approved a 5 for
1 split of the Company's common stock. In August 1996, the board of directors
is expected to approve an additional split of the Company's common stock, with
the ratio to be determined, which will be submitted to stockholders for
approval in September 1996. These stock splits are expected to take effect
prior to closing of the Company's initial public offering when required
filings with the Delaware Secretary of State are made. All share amounts set
forth in these consolidated financial statements have been retroactively
restated to give effect to the 10 for 1 stock split, but not either of the
subsequent splits.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share are based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
related periods. For all periods presented, per share information was computed
pursuant to the rules of the Securities and Exchange Commission (SEC), which
require that common shares issued by the Company during the twelve months
immediately preceding the Company's initial public offering plus the number of
common shares issuable pursuant to the issue of warrants or the grant of
options during the same period, be included in the calculation of the shares
outstanding from the beginning of all periods presented.
2. SHORT-TERM BORROWINGS
The Company has entered into a line of credit agreement with a bank under
which the Company may borrow up to $120,000. The agreement expires on November
15, 1996. At December 31, 1994 and 1995, $120,000 was outstanding under the
agreement. Borrowings under the agreement bear interest at the bank's
reference rate (8.5 percent at December 31, 1995). The line of credit is
secured by a certificate of deposit held by the bank (see Note 1) and is
guaranteed by certain shareholders of the Company.
3. CONVERTIBLE SUBORDINATED DEBENTURES
In 1990 and 1991, the Company issued approximately $2,000,000 of 12 percent
convertible subordinated debentures. The debentures had a maturity date of
June 1, 1993 and a conversion period beginning April 15, 1993 through June 1,
1993. During the conversion period, the holders could convert up to 50 percent
of the original principal balance at the conversion price of $73.33 per common
share. Upon conversion, the related portion of accrued interest would be
forfeited by the debenture holder. The debentures were subordinated to all
other indebtedness of the Company.
During the initial conversion period, $999,666 principal amount of the
debentures was converted into 13,632.60 shares of common stock. In connection
with the conversion, $330,021 of forfeited accrued interest
F-9
<PAGE>
THE TRYLON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
was recorded as a capital contribution by the Company. In May 1993, the
Company agreed with the debenture holders to an extension of the maturity date
through June 1994 and offered the holders the option to exchange the unpaid
amounts for preferred stock pursuant to a private offering (see Note 4) at the
price of $500 per share. During 1993, $728,573 of principal and accrued
interest on the debentures was exchanged for 1,457.20 preferred shares. In
April 1994, $10,911 of principal and accrued interest on the debentures was
exchanged for 21.82 preferred shares.
In July 1994, the Company agreed with the debenture holders to extend the
maturity date through June 1995. At December 31, 1994, $760,302 was owed in
principal and accrued interest to the debenture holders. In June 1995, the
Company agreed with the debenture holders to a further extension through June
1996 and offered the holders the option to exchange the unpaid amounts for
common stock in connection with the Company's private offering of common stock
(see Note 5) at the price of $270 per unit. In November 1995, $466,935 of
principal and accrued interest on the debentures was exchanged for 1729.40
units. After this exchange, $365,031 in principal and accrued interest was
outstanding under the debentures. In December 1995, the debentures were repaid
in full from the proceeds of the private offering.
4. PREFERRED STOCK
In June 1994, the Company completed a private offering of preferred stock at
a price of $500 per share. The preferred stock bears a nine percent cumulative
dividend which is payable semi-annually, as may be declared by the Board of
Directors, and has a liquidation preference of $500 per share. The preferred
stock is convertible, at the holder's option and in certain other
circumstances, into common stock at the conversion price of $295.86 per common
share. The preferred stock automatically converts into common stock upon the
effectiveness of a registration statement for an underwritten public offering
of common stock by the Company. The preferred stock is subject to redemption
at the Company's option beginning in June 1996. Upon redemption, the Company
is obligated to pay the holders their initial purchase price plus all declared
but unpaid dividends.
During 1993, the Company sold 106.78 preferred shares for $53,392. Also in
1993, 1,457.20 preferred shares were issued in exchange for certain of the
Company's convertible debentures (see Note 3). During 1994, the Company sold
an additional 114.00 preferred shares for $57,000, and another 21.82 preferred
shares were issued in exchange for additional debentures. No preferred shares
were issued during 1995. In 1994, the Company declared a dividend on the
preferred shares in the aggregate amount of $75,301, of which $38,268 remained
unpaid at December 31, 1994 and 1995. In 1995, the Company declared a dividend
on the preferred shares in the aggregate amount of $76,491. In December 1995,
in connection with the Company's private offering of common stock (see Note
5), $11,850 of the accrued dividends was converted into 43.90 units of common
stock. At December 31, 1995, the Company had unpaid dividends on the preferred
shares in the amount of $102,909.
5. COMMON STOCK
PRIVATE OFFERING
In December 1995, the Company completed a private offering of its common
stock. The Company sold 6,226.70 units for cash, each unit consisting of one
share of common stock and a warrant to purchase one share of common stock, at
a price of $270 per unit. The gross and net proceeds from the offering were
$1,681,215 and $1,664,215, respectively. The exercise price of the warrants is
$260 per share. The warrants expire in November 1997 and 2000, or 30 days
following the Company's filing of a registration statement for an initial
public offering, if earlier. As of December 31, 1995, no warrants had been
exercised and warrants to purchase 8,000 shares had been issued in connection
with the private offering, and also in exchange for certain of the convertible
debentures and convertible preferred stock (see Notes 3 and 4).
F-10
<PAGE>
THE TRYLON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MERGER AGREEMENT
On December 31, 1992, the Company entered into a merger agreement with
Trylon Medical Systems Corporation (TMSC). At the time of merger, the Company
was the majority owner of TMSC. In connection with the merger, the Company
issued 2,397.60 shares of its common stock to the minority owner of TMSC. The
merger agreement included an anti-dilution clause under which the Company must
issue additional shares to the minority owner upon the Company's issuance of
its common stock relating to the conversion of the Company's convertible
debentures or sales of common stock to repay the debentures (see Note 3). In
1993, in connection with the conversion of the debentures, an additional
928.20 shares were issued to the minority owner of TMSC. In December 1995, in
connection with the final disposition of the debentures, the Company issued an
additional 113.50 shares to the minority owner. During 1993 and 1994, $739,484
of debentures were exchanged for convertible preferred stock (see Note 4). If
all of this preferred stock were converted into common stock, the Company
would be committed to issue an additional 149.9 shares to the minority owner.
CONVERTIBLE NOTES PAYABLE
In 1992, the holders of certain convertible notes converted the debt into
3,076.70 shares of the Company's common stock.
6. INCOME TAXES
Under Statement of Financial Accounting Standards No. 109, deferred income
tax assets or liabilities are computed based on temporary differences between
the financial statement and income tax bases of assets and liabilities using
the enacted marginal income tax rate in effect for the year in which the
differences are expected to reverse. Deferred income tax expenses or credits
are based on the changes in the deferred income tax assets or liabilities from
period to period.
The provision for income taxes for the years ended December 31, 1993, 1994
and 1995 represents the minimum state tax.
The components of the net deferred income tax asset at December 31, 1994 and
1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Allowance for bad debts.............................. $ 6,015 $ 6,015
Net operating loss carryforward...................... 804,774 1,131,302
Accrued salaries..................................... -- 29,273
Other, net........................................... 16,713 18,718
--------- -----------
827,502 1,185,308
Valuation reserve.................................... (827,502) (1,185,308)
--------- -----------
$ -- $ --
========= ===========
</TABLE>
Realization of the net deferred income tax asset is dependent on generating
sufficient taxable income during the periods in which temporary differences
will reverse. Due to the Company's limited operating history, anticipated
short-term future losses and uncertainty of long-term profitability,
management believes it is more likely than not that the net deferred income
tax asset may not be realized. The amount of the net deferred income tax asset
considered realizable, however, may be adjusted in the future if estimates of
future taxable income during the reversal periods justify such adjustment.
F-11
<PAGE>
THE TRYLON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the years ended December 31, 1993, 1994
and 1995 are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------------- ----------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C> <C>
Income tax provision
(benefit) at statutory
federal rate........... $(85,471) (34.0)% $183,827 34.0% $(327,781) (34.0)%
State and local income
taxes, net of federal
income tax effect...... 800 .3 32,981 6.1 800 .1
Tax benefits not recog-
nized.................. 85,471 34.0 -- -- 327,781 34.0
Effect of net operating
loss carryforwards..... -- -- (216,008) (39.9) -- --
-------- ----- -------- ----- --------- -----
$ 800 .3 % $ 800 .2% $ 800 .1 %
======== ===== ======== ===== ========= =====
</TABLE>
Net operating loss carryforwards as of December 31, 1995 for federal and
state tax purposes are approximately $3,000,000 and $1,000,000, respectively,
and expire beginning in 2004 and 1997.
7. STATEMENTS OF CASH FLOWS
Cash paid for income taxes was approximately $2,000 in 1993 and 1994, and
$7,000 in 1995. Cash paid for interest was approximately $13,000 in 1993,
$8,000 in 1994 and $85,000 in 1995.
During 1995, the Company issued common stock under its stock incentive
plans. Approximately $26,000 was recorded as deferred compensation and was
included in other assets. Also in 1995, the Company declared a preferred stock
dividend in the amount of $76,491 and $11,850 of dividends payable were
converted into common stock and $466,935 of convertible debentures were
converted into common stock. During 1994, the Company declared a dividend in
the amount of $75,301, and $10,911 of convertible debentures were converted
into preferred stock. In 1993, $999,666 of convertible debentures were
converted into common stock and $728,573 of debentures were converted into
preferred stock. Also in 1993, $330,021 of accrued interest on the convertible
debentures was converted to equity as a capital contribution. These non-cash
transactions are excluded from the December 31, 1993, 1994 and 1995
Consolidated Statements of Cash Flows.
8. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases its facilities and certain equipment under noncancelable
operating leases, expiring at various dates through July 1998. Minimum future
obligations under such leases at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996............................................................. $ 67,855
1997............................................................. 67,855
1998............................................................. 41,627
--------
$177,337
========
</TABLE>
Rent expense under noncancelable operating leases for the years ended
December 31, 1993, 1994 and 1995 was $46,000, $68,000 and $68,000,
respectively.
LETTER OF CREDIT
The Company maintains a stand-by letter of credit arrangement with a bank in
the amount of $50,000, relating to contractual obligations with the Company's
major supplier.
F-12
<PAGE>
THE TRYLON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. STOCK PLANS
In 1994, the Company established a Long-Term Equity Incentive Plan and a
Directors Stock Award Plan (the Plans) under which a total of 27,377 shares of
its common stock may be awarded to eligible employees, officers, consultants
and directors. Under the Plans, the Company may issue nontransferable
incentive and nonqualified stock options, stock awards, stock purchase rights,
stock appreciation rights, and long-term performance awards, either
individually or in any type of combination. Shares awarded vest over a period
fixed by the Board of Directors (generally not more than four years), except
for those awarded to non-employee directors, which vest immediately, and in
certain other circumstances. In 1994, 2,740 shares were awarded and issued
under the Plans, all of which vested in 1994. In 1995, 11,012.5 shares were
awarded and issued under the Plans, 5,700 of which were awarded in January
1995, 4,962.5 of which were awarded in September 1995, and 350 of which were
awarded in December 1995. Of the total awarded shares, 8,808.75 vested in
1995. In connection with the award of these shares, $108,440 and $149,555 was
recorded as compensation expense in the December 31, 1994 and 1995
Consolidated Statements of Operations, respectively. As of December 31, 1995,
an option to purchase 750 shares of common stock was outstanding at the
exercise price of $73.33 per share. The option is fully vested and expires in
1997.
10. UNAUDITED INFORMATION
BASIS OF PRESENTATION
The unaudited financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and note disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to those rules and regulations, although the
Company believes that the disclosures made are adequate to make the
information presented not misleading. These unaudited financial statements
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to fairly present the results of
operations, changes in cash flows and financial position as of and for the
periods presented. These unaudited financial statements should be read in
conjunction with the audited financial statements and related notes thereto,
appearing elsewhere herein. The results for the interim periods presented are
not necessarily indicative of results to be expected for the full year.
PRO FORMA PRESENTATION
The pro forma consolidated balance sheet as of June 30, 1996 and the pro
forma net income (loss) per common share amounts included on the consolidated
statements of operations for the year ended December 31, 1995 and the six
month period ended June 30, 1996 give pro forma effect to the conversion of
the preferred stock into common stock (and the issuance of additional shares
of common stock to an existing stockholder pursuant to anti-dilution rights
that will be triggered by the preferred stock conversion) as though such
conversion (and anti-dilution adjustment) had occurred at the beginning of the
related period.
COMMON STOCK
In March 1996, the Company entered into an agreement with one of its law
firms under which the Company may pay for certain legal services by issuing
common stock. Under the agreement, the Company issued 500 shares (under the
Long-Term Equity Incentive Plan), all of which are currently voted by the law
firm and can be earned through future services rendered. As of June 30, 1996,
299 shares were earned at a value of $97,175. The Company may repurchase any
unearned shares for $1 in total consideration at any time prior to August 31,
1996. The Company recorded the $97,175 as legal expense and as an increase to
stockholders' equity and a corresponding increase to general and
administrative expenses during the six month period ended June 30, 1996.
F-13
<PAGE>
THE TRYLON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK PLANS
During the six month period ended June 30, 1996, the Company granted to a
director a non-qualified stock option to purchase 1,043 shares of common stock
at exercise prices ranging from $260 per share to $340 per share. The option
vests equally over a three year period and expires in 10 years.
EXCLUSIVE SUPPLY AGREEMENT
Sales of Speculite supplied pursuant to the Company's exclusive supply
agreement (see Note 1) represented approximately 98 percent and 61 percent of
the Company's revenues during the six month periods ended June 30, 1995 and
1996, respectively.
SIGNIFICANT CUSTOMERS
During the six months ended June 30, 1995 and 1996, the Company's largest
customer accounted for approximately 66 percent and 90 percent, respectively,
of the Company's revenues.
FOREIGN OPERATIONS
The following is a summary of information by geographic areas for the six
month periods ended June 30, 1995 and 1996:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1995 1996
---------- ---------
<S> <C> <C>
Sales
United States.................................... $ 71,828 $ 24,021
European Community............................... -- 549,000
Pacific Rim...................................... 142,334 35,175
Other ........................................... -- --
---------- ---------
$ 214,162 $ 608,196
========== =========
Operating income (loss)
United States.................................... $ (97,984) $(201,808)
European Community............................... -- 162,874
Pacific Rim...................................... 37,000 4,221
Other............................................ -- --
General corporate expenses....................... (637,702) (732,550)
---------- ---------
$(698,686) $(767,263)
========== =========
</TABLE>
All identifiable assets are located in the United States as of June 30,
1996.
RESTRICTED CASH
Restricted cash balances, relating to the Company's line of credit
agreement, totaled to $200,681 at June 30, 1996.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and primarily consist of finished goods purchased under the exclusive supply
agreement (see above).
F-14
<PAGE>
THE TRYLON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes during the six month periods ended June 30, 1995
and 1996 was $2,410 and $1,600, respectively. Cash paid for interest during
the six month periods ended June 30, 1995 and 1996 was $5,650 and $4,956,
respectively.
INCOME TAXES
For the six months ended June 30, 1996, the provision for income taxes
differs from the amount computed by applying the federal statutory income tax
rate to the income before provision for income taxes as follows:
<TABLE>
<S> <C> <C>
Expected federal tax benefit.............................. $(250,970) (34.0)%
State tax benefit, net of federal tax benefit............. -- --
Tax benefit not recognized................................ 250,970 34.0
--------- -----
$ -- -- %
========= =====
</TABLE>
SUBSEQUENT EVENTS
In September 1996, warrants to purchase 8,000 shares of common stock were
exercised at the exercise price of $260 per share. The gross proceeds relating
to the portion of such warrants exercised for cash were $891,020. Warrants to
purchase 1,061 shares of common stock were surrendered to pay for a portion of
the warrants exercised on a net basis, resulting in a net issuance of 6,939
shares. As of September 30, 1996, no warrants were outstanding.
In August 1996, 750 shares were awarded under the Long-Term Equity Incentive
Plan. The shares awarded vest equally over a four year period. The Company
also granted a nonqualified option to purchase 350 shares of common stock at
the exercise price of $280 per share. The option vests equally over four years
and expires in 2006.
F-15
<PAGE>
[Illustration includes a photograph, inset on a plain background, displays
five packages of PPS products as marketed in Italy by Bracco S.p.A. Captions and
packaging read: "Bracco S.p.A. (Italy) packaging for PPS products." "Pap piu
Speculospy-Kit Speculite," "Speculite."]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH IN-
FORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAK-
ING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Consolidated Financial Information............................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 23
Management................................................................ 39
Principal and Selling Stockholders........................................ 46
Description of Capital Stock.............................................. 47
Shares Eligible for Future Sale........................................... 50
Underwriting.............................................................. 51
Legal Matters............................................................. 53
Experts................................................................... 53
Additional Information.................................................... 53
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------
UNTIL , 1996 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
THE TRYLON CORPORATION
COMMON STOCK
----------------
PROSPECTUS
----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SMITH BARNEY INC.
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of the Common Stock being registered hereby. All of
the amounts shown are estimates except for the Commission registration fee and
the NASD filing fee.
<TABLE>
<S> <C>
Commission Registration Fee............................................ $
NASD Filing Fee........................................................
Nasdaq National Market Listing Fees.................................... *
Accounting Fees and Expenses........................................... *
Blue Sky Fees and Expenses............................................. *
Legal Fees and Expenses................................................ *
Printing and Engraving Expenses........................................ *
Transfer Agent Fees.................................................... *
Miscellaneous Expenses................................................. *
----
TOTAL.............................................................. $ *
====
</TABLE>
- ---------------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bylaws of the Company generally provide that the Company shall
indemnify, to the fullest extent permitted by law, any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit, investigation, administrative hearing or any other
proceeding (each, a "Proceeding") by reason of the fact that he is or was a
director or officer of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another entity, against
expenses (including attorneys' fees) and losses, claims, liabilities,
judgments, fines and amounts paid in settlement actually incurred by him in
connection with such Proceeding. The Bylaws also provide that the Company may
advance litigation expenses to a director, officer, employee or agent upon
receipt of an undertaking by or on behalf of such director, officer, employee
or agent to repay such amount if it is ultimately determined that the
director, officer, employee or agent is not entitled to be indemnified by the
Company.
The Company has entered into, or intends to enter into, agreements to
indemnify its directors and executive officers in addition to the
indemnification provided for in the Restated Certificate of Incorporation and
Bylaws. These agreements, among other things, will indemnify the Company's
directors and executive officers for certain expenses (including attorneys'
fees), and all losses, claims, liabilities, judgments, fines and settlement
amounts incurred by such person arising out of or in connection with such
person's service as a director or officer of the Company to the fullest extent
permitted by applicable law.
Policies of insurance may be obtained and maintained by the Company under
which its directors and officers will be insured, within the limits and
subject to the limitations of the policies, against certain expenses in
connection with the defense of, and certain liabilities which might be imposed
as a result of, actions, suits or proceedings to which they are parties by
reason of being or having been such directors or officers.
The form of Underwriting Agreement, filed as Exhibit 1.1. hereto, provides
for the indemnification of the Registrant, its controlling persons, its
directors and certain of its officers by the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act").
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In December 1993 and April 1994, the Registrant issued 1,457.2 and 21.82
shares, respectively, of Series A Convertible Preferred Stock to certain
existing holders of its 12% Convertible Debentures for the conversion of
$728,572.59 of principal and interest and $10,910.63 of principal,
respectively, outstanding under those debentures.
In 1993 and 1994, the Registrant issued 220.8 shares of Series A Convertible
Preferred Stock to 13 individual investors for aggregate consideration of
$110,392.09.
In June 1994, the Registrant granted stock awards in the aggregate of 1,600
shares of Common Stock to non-employee directors under the 1994 Directors'
Stock Award Plan for services to the Registrant during fiscal years 1989
through 1993.
In September 1994, the Registrant granted stock awards in the aggregate of
1,140 shares of Common Stock to non-employee directors under the 1994
Directors' Stock Award Plan for services to the Registrant during fiscal year
1994.
In December 1994, the Registrant granted to one of its non-employee
directors an option to purchase 750 shares of Common Stock at $73.33 per
share.
In January 1995, the Registrant granted stock awards in the aggregate of
5,700 shares of Common Stock to certain employees, officers and consultants
under its 1994 Long-Term Equity Incentive Plan, for services to the Registrant
during fiscal years 1989 through 1993.
In September 1995, the Registrant granted stock awards in the aggregate of
4,112.5 shares of Common Stock to employees, officers, and employee-directors
under its 1994 Long-Term Equity Incentive Plan for services to the Registrant
during fiscal years 1994 and 1995, and 850 shares of Common Stock to non-
employee directors under the 1994 Directors' Stock Award Plan for services to
the Registrant during fiscal year 1995.
In November and December of 1995, the Registrant issues 8,000 units (the
"Units"), consisting of 1 share of Common Stock and a warrant granting the
holder the right to purchase 1 additional share of Common Stock at $260 per
share, to 29 individuals and entities, 11 existing 12% Convertible Debenture
holders and 3 Series A Convertible Preferred Share holders. From the issuance,
the Registrant received an aggregate of $1,681,215 in cash and converted an
aggregate of $466,935 of debenture principal and an aggregate of $11,850 of
accrued dividends on the preferred stock into Units.
In December 1995, the Registrant issued to Klein & Martin 350 shares of
Common Stock for legal services provided to the Registrant (other than matters
relating to securities offerings).
In December 1995, the Registrant issued 113.5 shares of Common Stock to
Advanced Medical Devices ("AMD") pursuant to AMD's antidilution rights which
were triggered by the conversion of certain 12% Convertible Debenture
principal as part of the offering of the Units.
In March 1996, the Registrant issued to Klein & Martin 500 shares of Common
Stock for legal services provided (or to be provided) to the Registrant (other
than matters relating to securities offerings).
In May 1996, the Registrant granted Mr. George A. Vandeman an option to
purchase 1,043 shares of Common Stock. The option is exercisable in one-third
( 1/3) increments over a 3-year period at $260, $300 and $340 per share,
respectively.
In August 1996, the Registrant granted to Stanley S. Anders III an option to
purchase 350 shares of Common Stock and a stock award in the amount of 750
shares of Common Stock. The option and award vest in equal quarterly
increments over a four year period. The option is exercisable at $280 per
share.
II-2
<PAGE>
In September 1996, the Registrant issued 6,939 shares of Common Stock
pursuant to the exercise of 8,000 warrants issued in November and December of
1995. As consideration for the issuance, the Registrant received (i) an
aggregate of $891,020 in cash and (ii) 1,061 warrants surrendered pursuant to
a net exercise right held by certain stockholders.
Any sale of securities described herein were carried out in reliance on the
exemption from registration contained in Section 4(2) and/or Section 3(b) of
the Securities Act as transactions not involving any public offering, except
that transactions involving the Registrant's stock plans were also carried out
in reliance upon Rule 701 promulgated under the Securities Act. The recipients
in each case represented their intention to acquire the securities for
investment only and not with a view to the distribution thereof. All
recipients had adequate access, through employment or other relationships, to
information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
See Exhibit Index.
(b) Financial Statement Schedules:
Schedules for which provision is made in the applicable accounting
regulation of the Commission are either not required under the related
instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing as specified in the underwriting agreements certificates in
such denominations and registered in such names as required by the underwriter
to permit prompt delivery to each purchaser.
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 foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
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 pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective: and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such new securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF TORRANCE, STATE OF CALIFORNIA, ON OCTOBER 9, 1996.
THE TRYLON CORPORATION
/s/ Martin L. Lonky
By:__________________________________
Martin L. Lonky President, Chief
Executive Officer and Chairman of
the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
*/s/ Martin L. Lonky President, Chief
- ------------------------------------- Executive Officer October 9, 1996
MARTIN L. LONKY and Chairman of the
Board (Principal
Executive Officer)
*/s/ Stewart A. Lonky
- ------------------------------------- Executive Vice October 9, 1996
STEWART A. LONKY President, Chief
Medical Officer and
Director
/s/ Stanley S. Anders III Senior Vice October 9, 1996
- ------------------------------------- President and Chief
STANLEY S. ANDERS III Financial Officer
*/s/ Neal M. Lonky Secretary and
- ------------------------------------- Director October 9, 1996
NEAL M. LONKY
*/s/ Alfred M. Bloch Director
- ------------------------------------- October 9, 1996
ALFRED M. BLOCH
*/s/ David G. Wallace Director
- ------------------------------------- October 9, 1996
DAVID G. WALLACE
*/s/ George A. Vandeman
- ------------------------------------- Director October 9, 1996
GEORGE A. VANDEMAN
*By /s/ Martin L. Lonky
- -------------------------------------
ATTORNEY-IN-FACT
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C>
*1.1 Form of Underwriting Agreement
*3.1 Restated Certificate of Incorporation of Registrant
*3.2 Bylaws of Registrant
*5.1 Opinion and Consent of Latham & Watkins
10.1 Employment Agreement dated as of June 12, 1996 by and between Registrant and
Dr. Martin L. Lonky
10.2 Employment Agreement dated as of April 1, 1996 by and between Registrant and
Dr. Stewart A. Lonky
10.3 Employment Agreement dated as of August 1, 1996 by and between Registrant
and Stanley S. Anders III
10.4 The Trylon Corporation 1994 Long-Term Equity Incentive Plan
10.5 The Trylon Corporation 1994 Directors' Stock Award Plan
10.6 Agreement dated March 16, 1994 by and among Omniglow Corporation, Registrant
and Asian Sourcing Corporation
10.7 Distribution Agreement dated as of July 20, 1994 by and between Registrant
and Pharmacia & Upjohn as amended as of December 16, 1994 and February 20,
1996
10.8 Development and Licensing Agreement dated February 14, 1996 by and between
Registrant and Bracco, S.p.A.
10.9 Exclusive Distribution Agreement dated as of September 9, 1994 by and
between Omniglow Corporation and Registrant, as amended September 9, 1994
10.10 Lease for Registrant's corporate offices in Torrance, California
10.11 Form of Indemnification Agreement between the Registrant and its Executive
Officers and Directors
11.1 Statement Regarding Computation of Per Share Earnings
**21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.4 Consent of Latham & Watkins (included in Exhibit 5.1)
**24.1 Power of Attorney (included on page II-4)
27.1 Financial Data Schedule
</TABLE>
- ---------------------
* To be filed by amendment
** Previously filed
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of June 12,
1996 by and between THE TRYLON CORPORATION, a Delaware corporation (the
"Company"), and MARTIN L. LONKY, PH.D. (the "Employee") with reference to the
following facts:
A. The Company desires to encourage the continuity of its management and
secure for its benefit the skills of individuals who provide unique value to its
operations;
B. The Company recognizes that Employee possesses certain skills and
expertise which give him peculiar value to the Company, the loss of which cannot
be reasonably or adequately replaced;
C. The Company desires to retain these skills for the benefit of the
Company and to provide Employee with compensation commensurate with such skills;
and
D. Employee and the Company desire to enter into an employment agreement
on the terms and conditions contained herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
BASIC EMPLOYMENT
1.1 Employment. The Company agrees to employ Employee, and Employee
hereby agrees to be employed by the Company, to perform the duties described
below for the compensation and duration specified in this Agreement, as it may
be amended from time to time, subject to and upon all the terms and conditions
set forth herein. Employee shall only be required to perform his duties in Los
Angeles County, California, provided, however that the foregoing shall not apply
as to reasonable business travel commensurate with Employee's position and the
Company's operational requirements.
1.2 Term. The term of this Agreement ("Term") shall commence as of July
1, 1996 (the "Effective Date"), and continue in full force and effect after the
Effective Date for a period of three years. At or prior to the time when the
remaining term of this Agreement is one year, the Company shall inform Employee
either that (a) it will renew this Agreement or offer to Employee a new
agreement and provide Employee with an execution copy of such agreement, or (b)
it will not renew this Agreement upon expiration. Each twelve (12) month period
during the Term shall be referred to herein as a "Contract Year." Upon the
Effective Date, all previously existing employment agreements or arrangements
between Employee and the Company (other than this Agreement and any agreements
pursuant to the Company s 1994 Long-Term Incentive Plan) shall terminate
automatically and be of no further force or effect.
1.3 Duties. During the Term, Employee shall hold the office of Chairman
of the Board of Directors, Chief Executive Officer and President and shall serve
as a director on the Company's Board of Directors. Employee hereby agrees to
use his best efforts and to devote such professional time, energy and ability as
necessary in order to assure the proper and efficient performance of his work
for the Company. Employee, with the prior approval of the Board of Directors,
may render services of a business, professional or commercial nature to other
persons or firms. Such services may be rendered both with and without
compensation. In the event Employee desires to hold a position on the board of
directors of any other companies, Employee may devote up to twenty (20) hours
per month to such activities, upon notifying the Board of Directors of such
involvement. At present, Employee is rendering services to the entities
indicated on the attached Schedule 1 (whether as an employee, shareholder,
officer, director or otherwise), as to which services the Company hereby
consents and approves. Should the rendering of services for individuals or
entities other than the Company have a documented adverse impact on the Company,
the Company and Employee shall reach agreement to reduce the amount of time
Employee devotes to such services.
<PAGE>
1.4 Compensation. The Company hereby agrees to pay Employee an initial
salary (the "Initial Salary") at the annual rate set forth in Exhibit "A",
attached hereto and incorporated herein by this reference. The Initial Salary
and the Initial Salary as adjusted pursuant to this Section 1.4 (collectively,
the "Base Salary"), shall be payable in arrears in equal payments at such
frequency as is the custom and practice of the Company and on at least a monthly
basis. Each Contract Year, Employee's performance shall be reviewed by the
Board or a committee or other designee of the Board. Employee's Base Salary
shall be subject to an upward adjustment as determined by the Board or a
committee or designee of the Board, based on the results of such performance
review. Employee's Base Salary will be increased by not less than the greater
of (i) the amount determined by the Board of Directors, committee or designee of
the Board, or (ii) the change in the Consumer Price Index (1982-84=100) for
Urban Wage Earners and Clerical Workers - Los Angeles, Anaheim, Riverside for
such Contract Year. Employee's Base Salary in any Contract Year shall never be
less than the Initial Salary as set forth in Exhibit "A."
1.5 Bonus Compensation. In addition to Base Salary, during each year of
this Agreement Employee shall be eligible for a bonus in the form of cash
("Bonus Compensation") to be based upon Employee s performance. The Bonus
Compensation shall consist of two parts: the "Personal Management Goals" and the
"Enterprise Goals." The Personal Management Goals shall be determined annually
during the term of this Agreement (and not later than the end of the first month
of each Contract Year) mutually by the Board of Directors (or, if in existence,
the Compensation Committee of the Board of Directors) and Employee. The
Personal Management Goals, which shall be based on fulfillment of Employee's job
description and objectives and scaled by allocation of specified percentages of
the maximum annual bonus amount to completion of specified tasks or projects,
shall be suggested by Employee each year for review by the Board of Directors or
Compensation Committee. Upon agreement, they shall be attached to Exhibit "A"
hereto and shall become a part of this Agreement. The Personal Management Goals
and the related bonus eligibility for the first Contract Year (which shall not
be decreased but may be increased for future Contract Years) are set forth in
Exhibit "A" attached hereto and incorporated herein. The Enterprise Goals, as
set forth in Exhibit "A" hereto, are intended to reward Employee for assisting
the Company in attaining the specified enterprise goals, which bonus payment to
Employee shall be made at the time the relevant enterprise goal is achieved.
1.6 Change of Control. If Employee's employment with the Company is
terminated either by the Company without cause or by the Employee for cause
within three (3) months prior to or twelve (12) months after a Change of
Control, as defined below, the Company shall pay Employee in satisfaction of
this Agreement the greater of: (i) a lump sum cash payment equal to his Base
Salary, Bonus Compensation and the cash value of any and all benefits including,
but not limited to, health, life, disability and other insurance benefits
(collectively "Benefits") which Employee would have earned had he remained
employed with the Company for the eighteen (18) months following his termination
within the time frame described above in this Section 1.6, or (ii) a lump sum
cash payment equal to the amount of his Base Salary, Bonus Compensation and the
cash value of any and all Benefits which Employee would have earned had he
remained employed with the Company for the remainder of the Term. If the
foregoing is characterized under Section 280G of the Internal Revenue Code (the
"Code") as "excess parachute payment" (as defined therein), the maximum amount
payable to Employee shall be limited to 2.99 times the base amount (as defined
therein) (e.g. such amount which is the highest allowable payment without
invoking the excise tax imposed by Section 280G of the Code). The term "Change
of Control" shall be defined as the (i) sale or transfer of more than fifty
percent (50%) of the common stock of the Company in one or a series of
transactions to a single buyer or group of persons acting in concert (but shall
not include any sale or transfer to the extent that such is made to a
shareholder or shareholders of the Company who owned shares of the Company's
common stock as of the date of this Agreement), or (ii) sale of all or
substantially all of the assets of the Company. Notwithstanding the foregoing,
the term "Change of Control" shall not include any initial or secondary public
offering of the common stock of the Company or any transaction with a subsidiary
or affiliate of the Company. Upon payment to Employee of the lump sum payment
hereunder, this Agreement shall terminate (except as to such provisions hereof
which expressly survive termination) and Employee shall have no further
obligations or liabilities of any kind to the Company.
1.7 Working Conditions/ Benefits
1.7.1 Location of Employment. In connection with his employment by
the Company, Employee shall at all times be entitled to maintain his existing
office at the Company's principal executive offices in Los Angeles County,
California. The Company shall not, without the written consent of Employee,
transfer Employee to a location more than forty (40) miles from the Company's
current location. The Company shall promptly pay (or reimburse Employee for)
all reasonable moving expenses incurred by Employee as a result of a change of
his principal residence in connection with any such relocation to which Employee
has consented, and will indemnify Employee against, and reimburse Employee for,
any loss incurred as a result of the sale of his principal residence (which loss
shall be computed for the purpose hereof as the difference between the actual
sales price of such
2
<PAGE>
residence and the higher of (a) Employee's aggregate investment in such
residence or (b) the fair market value of such residence as determined by a real
estate appraiser designated by Employee and reasonably satisfactory to the
Company) in connection with any such change in residence.
1.7.2 Vacation and Illness. Employee shall be entitled to no less
than twenty-five (25) business days of paid vacation per Contract Year. Any
unused vacation days shall accrue from year to year. Employee shall receive a
cash payment equal to the value of any accrued vacation days, computed based
upon Employee's current Base Salary and an eight (8) hour working day, in the
event (i) Employee provides the Company with written notice of his election to
receive such sums and not to use such vacation days, which election may be made
at any time, and from time to time, during the Term, or (ii) this Agreement is
terminated for any reason. Employee shall further be entitled to leaves of
absence and sick leave with pay in accordance with the Company's policies and
procedures established from time to time, or, if there is no policy or procedure
in place at any applicable time, then on the same basis as other senior
management of the Company.
1.7.3 Insurance Benefits. Employee shall be eligible to participate
in and, if eligible, to receive employee group medical, dental, life insurance
and such other benefits made available by the Company in accordance with the
Company's policies and procedures established from time to time, or, if there is
no policy or procedure in place at any applicable time, then on the same basis
as other senior management of the Company. In addition, Employee shall arrange
for, and the Company shall fund, a life insurance policy, in form reasonably
satisfactory to Employee, for the benefit of Employee or his designated
beneficiaries in the amount and on the terms set forth in Exhibit "B" attached
hereto and incorporated herein. The beneficiary of such policy shall be
determined by the Employee. The Company shall provide Employee with secondary
dental insurance and excess co-payment/deductible medical insurance in form and
amount as set forth on Exhibit "B" attached hereto and incorporated herein. The
Company shall also provide Employee with disability insurance, in form
reasonably satisfactory to Employee, with a benefit in the amount set forth on
Exhibit "B" attached hereto and incorporated herein. Company also shall
purchase and fund for the benefit of Employee an annuity in an amount and with a
payment schedule as set forth on Exhibit "B" attached hereto and incorporated
herein.
1.7.4 Stock Options and Awards. Should senior management of the
Company receive grants of Company stock options or awards during the Term,
Employee shall participate at such time in all such grants or awards and shall
receive grants or awards (subject to compliance with applicable laws) which have
the same terms as generally afforded to senior management and which equals at
least the average amount received by such senior management at such time.
Notwithstanding the foregoing, stock grants made in consideration of entering
into an employment agreement or relationship with the Company or stock option
grants that are not included within a stock option plan or program approved by
the shareholders of the Company shall not be included in any calculation of the
foregoing.
1.7.5 Expenses. Employee shall be entitled to reimbursement for all
approved reasonable travel and other business expenses incurred by Employee in
connection with his services to the Company pursuant to the terms of this
Agreement. The Company shall also pay to Employee a monthly automobile
allowance in the amount set forth on Exhibit "B" attached hereto and
incorporated herein. All business expenses for which Employee seeks
reimbursement from the Company shall be adequately documented by Employee in
accordance with the Company's procedures covering expense reimbursement and in
compliance with the regulations of the Internal Revenue Service.
1.7.6 Facilities. Company shall provide Employee with a private
office, computer, secretarial support, telephone, facsimile, reprographic and
other support services and facilities commensurate with Employee's position and
applicable industry standards.
3
<PAGE>
ARTICLE II
PROPRIETARY INFORMATION
2.1 Non-Disclosure. Employee acknowledges that, during the course and
scope of his employment with the Company, Employee may gain knowledge of, have
access to or have otherwise disclosed to him confidential information and
materials which are of value to the Company. Employee recognizes and
acknowledges that any and all confidential information and materials are made
available to him only for the limited purpose of the performance of his duties
as an employee. Employee agrees that, during and after the Term, Employee will
regard and preserve such information and materials as strictly confidential,
and, without the express prior written consent of the Company, will not directly
or indirectly disclose to any third person or use for the benefit of anyone
other than the Company, any and all confidential information obtained or
originated by the Employee by reason of his employment.
2.2 Confidential Information. For purposes of this Agreement,
confidential information and materials shall include, but shall not be limited
to, information, in all forms and in whatever media embodied, relating to the
business of the Company, contract terms, contracting policies, sales data,
sales programs, budgets, business plans, financial information, financial data,
personnel or payroll information, internal business procedures, processes,
techniques, methods, ideas, discoveries, developments, computer programs, access
codes, information flow systems and design, information processing technologies
and protocols, records, product designs, product planning, research and
development data and programs, trade secrets, customer lists and related
customer information, all of which is deemed confidential and/or proprietary,
which Employee has encountered, become aware of, or originated in the course of
or arising out of his employment with the Company ("Confidential Information").
Confidential Information shall not include (i) information independently
developed by Employee without the use of Confidential Information, and (ii)
information which is or becomes publicly known through no breach of the terms of
this Article.
2.3. Books and Records. All business records of the Company and any and
all additional correspondence, notes, files, records (including computer
hardware, software, discs and printouts), books or papers relating in any manner
whatsoever to the Company, or relating to or arising out of Confidential
Information whether prepared by Employee or otherwise, in whatever media
embodied ("Confidential Books and Records") shall be the exclusive property of
the Company. Employee shall not make or retain any copies of such Confidential
Books and Records without the approval of the Company. All such Confidential
Books and Records, including any photographic or electronic copy or original of
such records, shall be immediately returned to the Company by Employee upon
termination of his employment or upon the request of the Company.
2.4. Inventions. All inventions, discoveries and improvements relating in
any way to the business of the Company (including but not limited to research
and development, products, protocols, methods, computer programs or procedures)
which are conceived, suggested or devised by Employee solely or jointly with
others during the period of Employee's employment with the Company, shall be
disclosed to the Company and all such inventions, discoveries and improvements
shall become and remain the sole property of the Company. Employee agrees to
cooperate with the Company in the execution of appropriate instruments assigning
and evidencing such ownership rights.
2.5. Remedies. Employee acknowledges and agrees that the disclosure of
Confidential Information and the breach of the provisions of this Article may
give rise to irreparable injury to the Company which cannot be adequately
compensated with monetary damages, and Employee further agrees that the Company
may seek and obtain injunctive relief against the breach or threatened breach of
any of the provisions of this Article and/or specific enforcement of such
provisions in addition to any other legal or equitable remedies which may be
available.
ARTICLE III
TERMINATION
3.1 Termination by Company for Cause. The Company shall not terminate
Employee's employment hereunder other than for "Cause" (as defined herein). The
Company shall have the right to terminate Employee's employment at any time for
Cause by giving Employee written notice of the effective date of termination.
For purposes of this Section, "Cause" shall be defined as:
4
<PAGE>
(i) dishonesty, fraud, misappropriation, embezzlement or other act
of material misconduct against the Company;
(ii) substantial, continuing and willful failure to render services
in accordance with the terms of this Agreement, provided that a reasonable
demand for performance of services had been delivered to Employee by the Board
at least thirty (30) days prior to termination identifying the manner in which
the Board believes that Employee has failed to perform (as determined by the
Board) and Employee has failed to reasonably remedy such failure to perform
within such thirty (30) day period;
(iii) willful and knowing violation of any laws, rules or regulations
of any governmental or regulatory body material to the business of the Company;
or
(iv) conviction of or a plea of nolo contendere to a felony or a
charge or indictment of a felony, the defense of which renders Employee
substantially unable to perform his services hereunder.
If the Company terminates Employee's employment for any of the reasons set forth
in this Section 3.1, the Company shall have no further obligation hereunder from
and after the effective date of such termination and shall have all other rights
and remedies available under this Agreement, at law or in equity.
3.2 Termination on Account of Death or Permanent Disability. To
compensate in the case of Employee's death or Permanent Disability, the Board of
Directors shall provide Employee or his Designated Beneficiary with (i) a lump
sum payment equal to one (1) time Employee's current Base Salary or (ii) during
the Term and before such death or Permanent Disability, Company provides
Employee with insurance coverage as to death and Permanent Disability that
equals or exceeds one (1) year of Employee's current Base Salary and adjusts
annually for any increase in such Base Salary. For purposes of this Agreement,
the term "Permanent Disability" shall mean Employee's inability to perform his
duties under this Agreement for ninety (90) consecutive days or one hundred and
eighty (180) days during any twelve (12) month period due to illness, accident
or other incapacity (as determined in good faith by a physician mutually
acceptable to the Company and Employee) or if a physician so selected advises
the Company that it is likely that Employee will be unable to perform such
duties for ninety (90) consecutive days or one hundred and eighty (180) days
during the succeeding twelve (12) month period. If the Board of Directors
chooses to provide insurance coverage, Employee, his spouse and his children
shall also be entitled to continue to be covered, if eligible, by all medical,
health, accident and other insurance at the same coverage level maintained for
Employee's benefit immediately prior to the date of Employee's termination
(subject to continuing payment of any premiums, deductibles and copayments by
the person who was the responsible party at the time of death or Permanent
Disability) for a period of eighteen (18) months from the date of Employee's
death or Permanent Disability. In the event Employee's surviving children are
ineligible under the terms of such insurance to continue to be so covered, the
Company shall provide substantially equivalent coverage through other sources or
will provide Employee's surviving children with the lump sum payment equal to
the agreed upon present value of the continuation of such health insurance
coverage under this Section 3.2. In the event of Permanent Disability, Employee
shall continue to receive credit for years of service under all retirement plans
of the Company where permitted by law.
3.3 Voluntary Termination by Employee Without Cause. Employee may
terminate this Agreement at any time without cause upon sixty (60) days' advance
written notice to the Company; provided, that in the event that Employee's
employment with the Company is voluntarily terminated by Employee without cause:
(i) Employee shall continue to be bound by any provisions of this Agreement that
expressly survive termination of this Agreement, and (ii) the Company shall,
within thirty (30) days of the effective date of such termination, pay Employee
in cash and in one lump sum an amount equal to one half (.5) times his current
Base Salary. Should such termination occur later than the first Contract Year,
such amount paid Employee shall be equal to eighteen months of his current Base
Salary multiplied by the percentage of the Term completed at the time of such
termination.
3.4 Termination by Employee for Cause. Employee may terminate this
Agreement due to any uncured material breach by the Company of any provision of
this Agreement or for "Good Reason" upon written notice to the Company; provided
that a reasonable demand for performance had been delivered to the Company by
the Employee at least thirty (30) days prior to termination identifying the
manner in which the Employee believes that the Company has failed to perform and
the Company has failed to remedy such failure to perform within such thirty (30)
day period (or, in the case of breaches which are capable of cure but not
reasonably within such thirty (30) day period, if Company has not commenced
efforts to cure within such thirty (30) day period and has not thereafter
continued diligently in good faith its efforts to cure until such cure has been
effected). "Good Reason" shall mean (i) the failure by the Company to
continuously provide Employee with working conditions and supervisory authority
5
<PAGE>
that are of the type and level as are applicable to Employee as of the Effective
Date, except in connection with the termination of his employment for
disability, retirement or Cause or by Employee other than for Good Reason, (ii)
a requirement that Employee travel on the Company's business to an extent
materially greater than Employee's normal business travel obligations; or (iii)
any material breach by the Company of any provision of this Agreement or any
other agreement with Employee.
3.5 Termination by the Company Without Cause. At any time beginning
eighteen (18) months after the Effective Date, the Company may terminate this
Agreement without cause upon sixty (60) days' advance written notice to
Employee; provided, that in the event that Employee's employment with the
Company is terminated by the Company without cause: (i) the Company shall
continue to be bound by any provisions of this Agreement that expressly survive
termination of this Agreement, and (ii) the Company shall, as of the effective
date of such termination, pay Employee in cash and in one lump sum an amount
equal to eighteen (18) months of Employee's current Base Salary, Bonus
Compensation and Benefits.
ARTICLE IV
INDEMNIFICATION
The Company shall indemnify Employee and hold him harmless from and against
any acts or decisions made by Employee in good faith and while exercising
reasonable judgment in performing services for the Company. The Company shall
also obtain and maintain coverage for Employee under any insurance policy now in
force or hereafter obtained during the Term covering other officers of the
company against lawsuits. To the extent permitted by applicable law, the
Company shall pay all expenses, including reasonable attorneys fees, actually
and necessarily incurred by the Employee in connection with the defense of such
act, suit or proceeding, including the cost of court settlements, provided that
the Employee has not acted with gross negligence or in bad faith.
ARTICLE V
MISCELLANEOUS
5.1 Notices. Whenever notice is to be served hereunder, service shall be
made personally, by facsimile transmission, by overnight courier or by
registered or certified mail, return receipt requested. All postage and other
delivery charges shall be prepaid by the party sending the notice. Notice shall
be effective only upon receipt by the party being served, except notice shall be
deemed received 72 hours after posting by the United States Post Office, by
method described above. Confirmation of receipt of any facsimile sent must be
received in order to presume that the transmission was received. All notices
shall be sent to the addresses described below unless changed by written notice
pursuant to the terms of this Section:
6
<PAGE>
To the Company:
THE TRYLON CORPORATION
970 West 190th Street
Suite 900
Torrance, CA 90502-1037
Attention:
Fax: 310-327-8979
To Employee:
Martin L. Lonky, Ph.D.
27600 Alvesta Place
Rancho Palos Verdes, California 90275
Fax: 310-832-2590
5.2 Assignability. The Company may assign its interest in this Agreement
to any subsidiary or affiliate of the Company or in connection with a merger or
sale of all or substantially all of the assets of the Company and the provisions
of this Agreement shall inure to the benefit of the successors and assigns of
the Company. Employee may not assign or transfer this Agreement, it being
deemed personal to Employee only; provided, however, upon Employee's death,
Employee's heirs, executors and/or administrators may seek collection of any
sums that may have been due Employee as of Employee's death. Subject to the
above, this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, legal representatives, successors
and assigns.
5.3 Severability. If any term or provision of this Agreement, or the
application thereof to any person or circumstance, shall to any extent be found
to be invalid, void, or unenforceable, the remaining provisions of this
Agreement and any application thereof shall, nevertheless, continue in full
force and effect without being impaired or invalidated in any way.
5.4 Waiver. No waiver of any term, provision or condition of this
Agreement, whether by conduct or otherwise, in any one or more instances, shall
be deemed to be or be construed as a further or continuing waiver of any such
term, provision or condition or as a waiver of any other term, provision or
condition of this Agreement.
5.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original instrument and all of
which together shall constitute the same instrument.
5.6 Entire Agreement. This Agreement, together with the Exhibits and
Schedules hereto and any extensions or renewals hereof, constitutes the parties'
entire Agreement with respect to the subject matter hereof and supersedes all
prior statements or agreements, both written and oral. This Agreement may be
amended only by a writing signed by the parties.
5.7 Governing Law. The validity, interpretation and construction of this
Agreement, and all other matters related to the Agreement, shall be interpreted
and governed by the laws of the State of California.
5.8 Headings. The headings herein used are for convenience purposes only
and shall not be used to construe the meaning of this Agreement in any respect.
5.9 Deductions. The Company shall deduct from any payment to Employee
hereunder such social security insurance, federal, state and other taxes, state
disability insurance and other withholdings as may be required by law.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of
the date first above written, by their duly authorized representatives.
COMPANY THE TRYLON CORPORATION,
a Delaware corporation
By: /s/ Stewart A. Lonky, M.D.
--------------------------
Title: Vice President
EMPLOYEE /s/ Martin L. Lonky, PH.D
-------------------------
Martin L. Lonky, PH.D.
8
<PAGE>
EXHIBIT "A"
COMPENSATION
INITIAL SALARY
--------------
$240,000
MAXIMUM ANNUAL PERSONAL MANAGEMENT GOALS BONUS COMPENSATION
-----------------------------------------------------------
$56,250
ENTERPRISE GOALS
----------------
Milestone Bonus
--------- ------
<TABLE>
<S> <C>
Initial Public Offering or comparable $ 50,000
private placement or sale transaction
with a valuation for the Company of at
least $75 million (post-money)
The Company achieving $5 million annual $100,000
pre-tax earnings cumulatively during the term
of the Agreement, with earnings calculated
according to generally accepted accounting
principles (GAAP) and the Company's historical
accounting practices
The Company achieving an additional $5 million $150,000
annual pre-tax earnings cumulatively during
the term of the Agreement, with earnings
calculated according to generally accepted
accounting principles (GAAP) and the
Company's historical accounting practices
</TABLE>
9
<PAGE>
SCHEDULE 1
Consulting services for Northrop Grumman Corporation generally relating to
litigation of canceled military programs.
10
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of April 1,
1996 by and between THE TRYLON CORPORATION, a Delaware corporation (the
"Company"), and STEWART A. LONKY, M.D. (the "Employee") with reference to the
following facts:
A. The Company desires to encourage the continuity of its management and
secure for its benefit the skills of individuals who provide unique value to its
operations;
B. The Company recognizes that Employee possesses certain skills and
expertise which give him peculiar value to the Company, the loss of which cannot
be reasonably or adequately replaced;
C. The Company desires to retain these skills for the benefit of the
Company and to provide Employee with compensation commensurate with such skills;
and
D. Employee and the Company desire to enter into an employment agreement
on the terms and conditions contained herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
BASIC EMPLOYMENT
1.1 Employment. The Company agrees to employ Employee, and Employee
hereby agrees to be employed by the Company, to perform the duties described
below for the compensation and duration specified in this Agreement, as it may
be amended from time to time, subject to and upon all the terms and conditions
set forth herein. Employee shall only be required to perform his duties in Los
Angeles County, California, provided, however that the foregoing shall not apply
as to reasonable business travel commensurate with Employee's position and the
Company's operational requirements.
1.2 Term. The term of this Agreement ("Term") shall commence as of April
1, 1996 (the "Effective Date"), and continue in full force and effect after the
Effective Date for a period of three years. At or prior to the time when the
remaining term of this Agreement is one year, the Company shall inform Employee
either that (a) it will renew this Agreement or offer to Employee a new
agreement and provide Employee with an execution copy of such agreement, or (b)
it will not renew this Agreement upon expiration. Each twelve (12) month period
during the Term shall be referred to herein as a "Contract Year." Upon the
Effective Date, all previously existing employment agreements or arrangements
between Employee and the Company (other than this Agreement and any agreements
pursuant to the Company's 1994 Long-Term Incentive Plan) shall terminate
automatically and be of no further force or effect.
<PAGE>
1.3 Duties. During the Term, Employee shall hold the office of Chief
Medical Officer and Executive Vice President and shall serve as a director on
the Company's Board of Directors. Employee hereby agrees to use his best efforts
and to devote such professional time, energy and ability as he deems necessary
in order to assure the proper and efficient performance of his work for the
Company, it being expressly understood that Employee shall not be devoting all
of his time to the management of the Company and that Employee shall be
rendering services of a business, professional or commercial nature to other
persons or firms indicated on the attached Schedule 1. At present, Employee is
actively involved with the entities indicated on the attached Schedule 1
(whether as an employee, shareholder, partner, officer, director or otherwise).
1.4 Compensation. The Company hereby agrees to pay Employee an initial
salary (the "Initial Salary") at the annual rate set forth in Exhibit "A",
attached hereto and incorporated herein by this reference. The Initial Salary
and the Initial Salary as adjusted pursuant to this Section 1.4 (collectively,
the "Base Salary"), shall be payable in arrears in equal payments at such
frequency as is the custom and practice of the Company and on at least a monthly
basis. Each Contract Year, Employee's performance shall be reviewed by the
Board or a committee or other designee of the Board. Employee's Base Salary
shall be subject to an upward adjustment as determined by the Board or a
committee or designee of the Board, based on the results of such performance
review. Employee's Base Salary will be increased by not less than the greater
of (i) the amount determined by the Board of Directors, committee or designee of
the Board, or (ii) the change in the Consumer Price Index (1982-84=100) for
Urban Wage Earners and Clerical Workers - Los Angeles, Anaheim, Riverside for
such Contract Year. Employee's Base Salary in any Contract Year shall never be
less than the Initial Salary as set forth in Exhibit "A."
1.5 Bonus Compensation. In addition to Base Salary, during each year of
this Agreement Employee shall be eligible for a bonus in the form of cash
("Bonus Compensation") to be based upon Employee's performance. The Bonus
Compensation shall consist of two parts: the "Personal Management Goals" and the
"Enterprise Goals." The Personal Management Goals shall be determined annually
during the term of this Agreement (and not later than the end of the first month
of each Contract Year) mutually by the Board of Directors (or, if in existence,
the Compensation Committee of the Board of Directors) and Employee. The
Personal Management Goals, which shall be based on fulfillment of Employee's job
description and objectives and scaled by allocation of specified percentages of
the maximum annual bonus amount to completion of specified tasks or projects,
shall be suggested by Employee each year for review by the Board of Directors or
Compensation Committee. Upon agreement, they shall be attached to Exhibit "A"
hereto and shall become a part of this Agreement. The Personal Management Goals
and the related bonus eligibility for the first Contract Year (which shall not
be decreased but may be increased for future Contract Years) are set forth in
Exhibit "A" attached hereto and incorporated herein. The Enterprise Goals, as
set forth in Exhibit "A" hereto, are intended to reward Employee for assisting
the Company in attaining the specified enterprise goals, which bonus payment to
Employee shall be made at the time the relevant enterprise goal is achieved.
1.6 Change of Control. If Employee's employment with the Company is
terminated either by the Company without cause or by the Employee for cause
within three (3) months prior to or twelve (12) months after a Change of
Control, as defined below, the Company shall pay Employee in satisfaction of
this Agreement the greater of:
2
<PAGE>
(i) a lump sum cash payment equal to his Base Salary, Bonus Compensation and the
cash value of any and all benefits including, but not limited to, health, life,
disability and other insurance benefits (collectively "Benefits") which Employee
would have earned had he remained employed with the Company for the eighteen
(18) months following his termination within the time frame described above in
this Section 1.6, or (ii) a lump sum cash payment equal to the amount of his
Base Salary, Bonus Compensation and the cash value of any and all Benefits which
Employee would have earned had he remained employed with the Company for the
remainder of the Term. If the foregoing is characterized under Section 280G of
the Internal Revenue Code (the "Code") as "excess parachute payment" (as defined
therein), the maximum amount payable to Employee shall be limited to 2.99 times
the base amount (as defined therein) (e.g. such amount which is the highest
allowable payment without invoking the excise tax imposed by Section 280G of the
Code). The term "Change of Control" shall be defined as the (i) sale or transfer
of more than fifty percent (50%) of the common stock of the Company in one or a
series of transactions to a single buyer or group of persons acting in concert
(but shall not include any sale or transfer to the extent that such is made to a
shareholder or shareholders of the Company who owned shares of the Company's
common stock as of the date of this Agreement), or (ii) sale of all or
substantially all of the assets of the Company. Notwithstanding the foregoing,
the term "Change of Control" shall not include any initial or secondary public
offering of the common stock of the Company or any transaction with a subsidiary
or affiliate of the Company. Upon payment to Employee of the lump sum payment
hereunder, this Agreement shall terminate (except as to such provisions hereof
which expressly survive termination) and Employee shall have no further
obligations or liabilities of any kind to the Company.
1.7 Working Conditions/ Benefits
1.7.1 Location of Employment. In connection with his employment by
the Company, Employee shall at all times be entitled to maintain his existing
office at the Company's principal executive offices in Los Angeles County,
California. The Company shall not, without the written consent of Employee,
transfer Employee to a location more than forty (40) miles from the Company's
current location. The Company shall promptly pay (or reimburse Employee for)
all reasonable moving expenses incurred by Employee as a result of a change of
his principal residence in connection with any such relocation to which Employee
has consented, and will indemnify Employee against, and reimburse Employee for,
any loss incurred as a result of the sale of his principal residence (which loss
shall be computed for the purpose hereof as the difference between the actual
sales price of such residence and the higher of (a) Employee's aggregate
investment in such residence or (b) the fair market value of such residence as
determined by a real estate appraiser designated by Employee and reasonably
satisfactory to the Company) in connection with any such change in residence.
1.7.2 Vacation and Illness. Employee shall be entitled to no less
than twenty-five (25) business days of paid vacation per Contract Year. Any
unused vacation days shall accrue from year to year. Employee shall receive a
cash payment equal to the value of any accrued vacation days, computed based
upon Employee's current Base Salary and an eight (8) hour working day, in the
event (i) Employee provides the Company with written notice of his election to
receive such sums and not to use such vacation days, which election may be made
at any time, and from time to time, during the Term, or (ii) this Agreement is
terminated for any reason. Employee shall further be entitled to leaves of
absence and sick leave with pay in accordance with the Company's policies and
3
<PAGE>
procedures established from time to time, or, if there is no policy or procedure
in place at any applicable time, then on the same basis as other senior
management of the Company.
1.7.3 Insurance Benefits. Employee shall be eligible to participate
in and, if eligible, to receive employee group medical, dental, life insurance
and such other benefits made available by the Company in accordance with the
Company's policies and procedures established from time to time, or, if there is
no policy or procedure in place at any applicable time, then on the same basis
as other senior management of the Company. In addition, Employee shall arrange
for, and the Company shall fund, a life insurance policy, in form reasonably
satisfactory to Employee, for the benefit of Employee or his designated
beneficiaries in the amount and on the terms set forth in Exhibit "B" attached
hereto and incorporated herein. The beneficiary of such policy shall be
determined by the Employee. The Company shall provide Employee with secondary
dental insurance and excess co-payment/deductible medical insurance in form and
amount as set forth on Exhibit "B" attached hereto and incorporated herein. The
Company shall also provide Employee with disability insurance, in form
reasonably satisfactory to Employee, with a benefit in the amount set forth on
Exhibit "B" attached hereto and incorporated herein. Company also shall
purchase and fund for the benefit of Employee an annuity in an amount and with a
payment schedule as set forth on Exhibit "B" attached hereto and incorporated
herein.
1.7.4 Stock Options and Awards. Should senior management of the
Company receive grants of Company stock options or awards during the Term,
Employee shall participate at such time in all such grants or awards and shall
receive grants or awards (subject to compliance with applicable laws) which have
the same terms as generally afforded to senior management and which equals at
least the average amount received by such senior management at such time.
Notwithstanding the foregoing, stock grants made in consideration of entering
into an employment agreement or relationship with the Company or stock option
grants that are not included within a stock option plan or program approved by
the shareholders of the Company shall not be included in any calculation of the
foregoing.
1.7.5 Expenses. Employee shall be entitled to reimbursement for all
approved reasonable travel and other business expenses incurred by Employee in
connection with his services to the Company pursuant to the terms of this
Agreement. The Company shall also pay to Employee a monthly automobile
allowance in the amount set forth on Exhibit "B" attached hereto and
incorporated herein. All business expenses for which Employee seeks
reimbursement from the Company shall be adequately documented by Employee in
accordance with the Company's procedures covering expense reimbursement and in
compliance with the regulations of the Internal Revenue Service.
1.7.6 Facilities. Company shall provide Employee with a private
office, computer, secretarial support, telephone, facsimile, reprographic and
other support services and facilities commensurate with Employee's position and
applicable industry standards.
ARTICLE II
PROPRIETARY INFORMATION
2.1 Non-Disclosure. Employee acknowledges that, during the course and
scope of his employment with the Company, Employee may gain knowledge of, have
4
<PAGE>
access to or have otherwise disclosed to him confidential information and
materials which are of value to the Company. Employee recognizes and
acknowledges that any and all confidential information and materials are made
available to him only for the limited purpose of the performance of his duties
as an employee. Employee agrees that, during and after the Term, Employee will
regard and preserve such information and materials as strictly confidential,
and, without the express prior written consent of the Company, will not directly
or indirectly disclose to any third person or use for the benefit of anyone
other than the Company, any and all confidential information obtained or
originated by the Employee by reason of his employment.
2.2 Confidential Information. For purposes of this Agreement,
confidential information and materials shall include, but shall not be limited
to, information, in all forms and in whatever media embodied, relating to the
business of the Company, contract terms, contracting policies, sales data,
sales programs, budgets, business plans, financial information, financial data,
personnel or payroll information, internal business procedures, processes,
techniques, methods, ideas, discoveries, developments, computer programs, access
codes, information flow systems and design, information processing technologies
and protocols, records, product designs, product planning, research and
development data and programs, trade secrets, customer lists and related
customer information, all of which is deemed confidential and/or proprietary,
which Employee has encountered, become aware of, or originated in the course of
or arising out of his employment with the Company ("Confidential Information").
Confidential Information shall not include (i) information independently
developed by Employee without the use of Confidential Information, and (ii)
information which is or becomes publicly known through no breach of the terms of
this Article.
2.3. Books and Records. All business records of the Company and any and
all additional correspondence, notes, files, records (including computer
hardware, software, discs and printouts), books or papers relating in any manner
whatsoever to the Company, or relating to or arising out of Confidential
Information whether prepared by Employee or otherwise, in whatever media
embodied ("Confidential Books and Records") shall be the exclusive property of
the Company. Employee shall not make or retain any copies of such Confidential
Books and Records without the approval of the Company. All such Confidential
Books and Records, including any photographic or electronic copy or original of
such records, shall be immediately returned to the Company by Employee upon
termination of his employment or upon the request of the Company.
2.4. Inventions. All inventions, discoveries and improvements relating in
any way to the business of the Company (including but not limited to research
and development, products, protocols, methods, computer programs or procedures)
which are conceived, suggested or devised by Employee solely or jointly with
others during the period of Employee's employment with the Company, shall be
disclosed to the Company and all such inventions, discoveries and improvements
shall become and remain the sole property of the Company. Employee agrees to
cooperate with the Company in the execution of appropriate instruments assigning
and evidencing such ownership rights.
2.5. Remedies. Employee acknowledges and agrees that the disclosure of
Confidential Information and the breach of the provisions of this Article may
give rise to irreparable injury to the Company which cannot be adequately
compensated with monetary damages, and Employee further agrees that the Company
may seek and obtain injunctive relief against the breach or threatened breach of
any of the provisions of this Article and/or
5
<PAGE>
specific enforcement of such provisions in addition to any other legal or
equitable remedies which may be available.
ARTICLE III
TERMINATION
3.1 Termination by Company for Cause. The Company shall not terminate
Employee's employment hereunder other than for "Cause" (as defined herein). The
Company shall have the right to terminate Employee's employment at any time for
Cause by giving Employee written notice of the effective date of termination.
For purposes of this Section, "Cause" shall be defined as:
(i) dishonesty, fraud, misappropriation, embezzlement or other act
of material misconduct against the Company;
(ii) substantial, continuing and willful failure to render services
in accordance with the terms of this Agreement, provided that a reasonable
demand for performance of services had been delivered to Employee by the Board
at least thirty (30) days prior to termination identifying the manner in which
the Board believes that Employee has failed to perform (as determined by the
Board) and Employee has failed to reasonably remedy such failure to perform
within such thirty (30) day period;
(iii) willful and knowing violation of any laws, rules or regulations
of any governmental or regulatory body material to the business of the Company;
or
(iv) conviction of or a plea of nolo contendere to a felony or a
charge or indictment of a felony, the defense of which renders Employee
substantially unable to perform his services hereunder.
If the Company terminates Employee's employment for any of the reasons set forth
in this Section 3.1, the Company shall have no further obligation hereunder from
and after the effective date of such termination and shall have all other rights
and remedies available under this Agreement, at law or in equity.
3.2 Termination on Account of Death or Permanent Disability. To
compensate in the case of Employee's death or Permanent Disability, the Board of
Directors shall provide Employee or his Designated Beneficiary with (i) a lump
sum payment equal to one (1) time Employee's current Base Salary or (ii) during
the Term and before such death or Permanent Disability, Company provides
Employee with insurance coverage as to death and Permanent Disability that
equals or exceeds one (1) year of Employee's current Base Salary and adjusts
annually for any increase in such Base Salary. For purposes of this Agreement,
the term "Permanent Disability" shall mean Employee's inability to perform his
duties under this Agreement for ninety (90) consecutive days or one hundred and
eighty (180) days during any twelve (12)
6
<PAGE>
month period. If the Board of Directors chooses to provide insurance coverage,
Employee, his spouse and his children shall also be entitled to continue to be
covered, if eligible, by all medical, health, accident and other insurance at
the same coverage level maintained for Employee's benefit immediately prior to
the date of Employee's termination (subject to continuing payment of any
premiums, deductibles and copayments by the person who was the responsible party
at the time of death or Permanent Disability) for a period of eighteen (18)
months from the date of Employee's death or Permanent Disability. In the event
Employee's surviving children are ineligible under the terms of such insurance
to continue to be so covered, the Company shall provide substantially equivalent
coverage through other sources or will provide Employee's surviving children
with the lump sum payment equal to the agreed upon present value of the
continuation of such health insurance coverage under this Section 3.2. In the
event of Permanent Disability, Employee shall continue to receive credit for
years of service under all retirement plans of the Company where permitted by
law.
3.3 Voluntary Termination by Employee Without Cause. Employee may
terminate this Agreement at any time without cause upon sixty (60) days' advance
written notice to the Company; provided, that in the event that Employee's
employment with the Company is voluntarily terminated by Employee without cause:
(i) Employee shall continue to be bound by any provisions of this Agreement that
expressly survive termination of this Agreement, and (ii) the Company shall,
within thirty (30) days of the effective date of such termination, pay Employee
in cash and in one lump sum an amount equal to one half (.5) times his current
Base Salary. Should such termination occur later than the first Contract Year,
such amount paid Employee shall be equal to eighteen months of his current Base
Salary multiplied by the percentage of the Term completed at the time of such
termination.
3.4 Termination by Employee for Cause. Employee may terminate this
Agreement due to any uncured material breach by the Company of any provision of
this Agreement or for "Good Reason" upon written notice to the Company; provided
that a reasonable demand for performance had been delivered to the Company by
the Employee at least thirty (30) days prior to termination identifying the
manner in which the Employee believes that the Company has failed to perform and
the Company has failed to remedy such failure to perform within such thirty (30)
day period (or, in the case of breaches which are capable of cure but not
reasonably within such thirty (30) day period, if Company has not commenced
efforts to cure within such thirty (30) day period and has not thereafter
continued diligently in good faith its efforts to cure until such cure has been
effected). "Good Reason" shall mean (i) the failure by the Company to
continuously provide Employee with working conditions and supervisory authority
that are of the type and level as are applicable to Employee as of the Effective
Date, except in connection with the termination of his employment for
disability, retirement or Cause or by Employee other than for Good Reason, (ii)
a requirement that Employee travel on the Company's business to an extent
materially greater than Employee's normal business travel obligations; or (iii)
any material breach by the Company of any provision of this Agreement or any
other agreement with Employee.
3.5 Termination by the Company Without Cause. At any time beginning
eighteen (18) months after the Effective Date, the Company may terminate this
Agreement without cause upon sixty (60) days' advance written notice to
Employee; provided, that in the event that Employee's employment with the
Company is terminated by the Company without cause: (i) the Company shall
continue to be bound by any provisions of this Agreement that expressly survive
termination of this Agreement, and (ii) the Company
7
<PAGE>
shall, as of the effective date of such termination, pay Employee in cash and in
one lump sum an amount equal to eighteen (18) months of Employee's current Base
Salary, Bonus Compensation and Benefits.
ARTICLE IV
INDEMNIFICATION
The Company shall indemnify Employee and hold him harmless from and against
any acts or decisions made by Employee in good faith and while exercising
reasonable judgment in performing services for the Company. The Company shall
also obtain and maintain coverage for Employee under any insurance policy now in
force or hereafter obtained during the Term covering other officers of the
company against lawsuits. To the extent permitted by applicable law, the
Company shall pay all expenses, including reasonable attorneys fees, actually
and necessarily incurred by the Employee in connection with the defense of such
act, suit or proceeding, including the cost of court settlements, provided that
the Employee has not acted with gross negligence or in bad faith.
ARTICLE V
MISCELLANEOUS
5.1 Notices. Whenever notice is to be served hereunder, service
shall be made personally, by facsimile transmission, by overnight courier or by
registered or certified mail, return receipt requested. All postage and other
delivery charges shall be prepaid by the party sending the notice. Notice shall
be effective only upon receipt by the party being served, except notice shall be
deemed received 72 hours after posting by the United States Post Office, by
method described above. Confirmation of receipt of any facsimile sent must be
received in order to presume that the transmission was received. All notices
shall be sent to the addresses described below unless changed by written notice
pursuant to the terms of this Section:
To the Company:
THE TRYLON CORPORATION
970 West 190th Street
Suite 900
Torrance, CA 90502-1037
Attention:
Fax: 310-327-8979
8
<PAGE>
To Employee:
Stewart A. Lonky, M.D.
Westchester Medical Plaza
8540 S. Sepulveda Boulevard, Suite 1010
Fax: 310-216-1007
5.2 Assignability. The Company may assign its interest in this
Agreement to any subsidiary or affiliate of the Company or in connection with a
merger or sale of all or substantially all of the assets of the Company and the
provisions of this Agreement shall inure to the benefit of the successors and
assigns of the Company. Employee may not assign or transfer this Agreement, it
being deemed personal to Employee only; provided, however, upon Employee's
death, Employee's heirs, executors and/or administrators may seek collection of
any sums that may have been due Employee as of Employee's death. Subject to the
above, this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, legal representatives, successors
and assigns.
5.3 Severability. If any term or provision of this Agreement, or the
application thereof to any person or circumstance, shall to any extent be found
to be invalid, void, or unenforceable, the remaining provisions of this
Agreement and any application thereof shall, nevertheless, continue in full
force and effect without being impaired or invalidated in any way.
5.4 Waiver. No waiver of any term, provision or condition of this
Agreement, whether by conduct or otherwise, in any one or more instances, shall
be deemed to be or be construed as a further or continuing waiver of any such
term, provision or condition or as a waiver of any other term, provision or
condition of this Agreement.
5.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original instrument and all of
which together shall constitute the same instrument.
5.6 Entire Agreement. This Agreement, together with the Exhibits and
Schedules hereto and any extensions or renewals hereof, constitutes the parties'
entire Agreement with respect to the subject matter hereof and supersedes all
prior statements or agreements, both written and oral. This Agreement may be
amended only by a writing signed by the parties.
5.7 Governing Law. The validity, interpretation and construction of
this Agreement, and all other matters related to the Agreement, shall be
interpreted and governed by the laws of the State of California.
5.8 Headings. The headings herein used are for convenience purposes
only and shall not be used to construe the meaning of this Agreement in any
respect.
9
<PAGE>
5.9 Deductions. The Company shall deduct from any payment to
Employee hereunder such social security insurance, federal, state and other
taxes, state disability insurance and other withholdings as may be required by
law.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
as of the date first above written, by their duly authorized representatives.
COMPANY THE TRYLON CORPORATION,
a Delaware corporation
By: /s/ Martin L. Lonky
------------------------------
Title: President
---------------------------
EMPLOYEE /s/ Stewart A. Lonky, M.D.
---------------------------------
Stewart A. Lonky, M.D.
10
<PAGE>
EXHIBIT "A"
COMPENSATION
INITIAL SALARY
--------------
$180,000
MAXIMUM ANNUAL PERSONAL MANAGEMENT GOALS BONUS COMPENSATION
-----------------------------------------------------------
$45,000
ENTERPRISE GOALS
----------------
Milestone Bonus
--------- -----
Initial Public Offering or comparable $37,500
private placement or sale transaction
with a valuation for the Company of at
least $75 million (post-money)
The Company achieving $5 million annual $75,000
pre-tax earnings cumulatively during the
term of the Agreement, with earnings
calculated according to generally accepted
accounting principles (GAAP) and the Company's
historical accounting practices
The Company achieving an additional $5 million $112,500
annual pre-tax earnings cumulatively during
the term of the Agreement, with earnings
calculated according to generally accepted
accounting principles (GAAP) and the
Company's historical accounting practices
<PAGE>
SCHEDULE 1
OUTSIDE ACTIVITIES AS OF EFFECTIVE DATE
1. Stewart A. Lonky, M.D., a sole proprietorship.
2. General partner of Medical Associates of Westchester.
3. President and sole shareholder of West Coast Cardiopulmonary, Inc.
<PAGE>
Exhibit 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of
August 1, 1996 by and between THE TRYLON CORPORATION, a Delaware corporation
(the "Company"), and STANLEY S. ANDERS III (the "Employee") with reference to
the following facts:
A. The Company desires to encourage the continuity of its management and
secure for its benefit the skills of individuals who provide unique value to its
operations;
B. The Company recognizes that Employee possesses certain skills and
expertise which give him peculiar value to the Company, the loss of which cannot
be reasonably or adequately replaced;
C. The Company desires to retain these skills for the benefit of the
Company and to provide Employee with compensation commensurate with such skills;
and
D. Employee and the Company desire to enter into an employment agreement
on the terms and conditions contained herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
BASIC EMPLOYMENT
1.1 Employment. The Company agrees to employ Employee, and Employee
hereby agrees to be employed by the Company, to perform the duties described
below for the compensation and duration specified in this Agreement, as it may
be amended from time to time, subject to and upon all the terms and conditions
set forth herein. Employee shall only be required to perform his duties in Los
Angeles County and Contra Costa County, California, it being recognized that
Employee will be commuting from his principal residence in Contra Costa County
to the Company's offices in Los Angeles County each week for a period of up to
one year from the date hereof; provided, however that the foregoing shall not
apply as to reasonable business travel commensurate with Employee's position and
the Company's operational requirements.
1.2 Term. The term of this Agreement ("Term") shall commence as of
August 19, 1996 (the "Effective Date"), and continue in full force and effect
after the Effective Date for a period of three years. At or prior to the time
when the remaining term of this Agreement is one year, the Company shall inform
Employee either that (a) it will renew this Agreement or offer to Employee a new
agreement and provide Employee with an execution copy of such agreement, or (b)
it will not renew this Agreement upon expiration. Each twelve (12) month period
during the Term shall be referred to herein as a "Contract Year."
1.3 Duties. During the Term, Employee shall hold the office of Senior
Vice President and Chief Financial Officer. Employee hereby agrees to use his
best efforts and to devote all of his professional time, energy and ability in
order to assure the proper and efficient performance of his work for the
Company. Subject to approval of the Board, Employee may serve on the Board of
Directors of other companies.
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1.4 Compensation. The Company hereby agrees to pay Employee an initial
salary (the "Initial Salary") at the annual rate set forth in Exhibit "A",
attached hereto and incorporated herein by this reference. The Initial Salary
and the Initial Salary as adjusted pursuant to this Section 1.4 (collectively,
the "Base Salary"), shall be payable in arrears in equal payments at such
frequency as is the custom and practice of the Company and on at least a monthly
basis. Each Contract Year, Employee's performance shall be reviewed by the
Board or a committee or other designee of the Board. Employee's Base Salary
shall be subject to an upward adjustment as determined by the Board or a
committee or designee of the Board, based on the results of such performance
review. Employee's Base Salary will be increased by not less than the greater
of (i) the amount determined by the Board of Directors, committee or designee of
the Board, or (ii) the change in the Consumer Price Index (1982-84=100) for
Urban Wage Earners and Clerical Workers - Los Angeles, Anaheim, Riverside for
such Contract Year. Employee's Base Salary in any Contract Year shall never be
less than the Initial Salary as set forth in Exhibit "A."
1.5 Bonus Compensation.
1.5.1 Performance Bonus. In addition to Base Salary, during each
-----------------
year of this Agreement Employee shall be eligible for a bonus in the form of
cash ("Bonus Compensation") to be based upon Employee's performance. The Bonus
Compensation shall be based on Employee's "Personal Management Goals." The
"Personal Management Goals" shall be determined annually during the term of this
Agreement (and not later than the end of the first month of each Contract Year)
mutually by the Board of Directors (or, if in existence, the Compensation
Committee of the Board of Directors) and Employee. If agreement is not reached
between Employee and the Board of Directors, the Bonus Compensation shall be
such amount as determined by the Board of Directors in their sole discretion.
The Personal Management Goals, which shall be based on fulfillment of Employee's
job description and objectives and scaled by allocation of specified percentages
of the maximum annual bonus amount to completion of specified tasks or projects,
shall be suggested by Employee each year for review by the Board of Directors or
Compensation Committee. Upon agreement, they shall be attached to Exhibit "A"
hereto and shall become a part of this Agreement. The Personal Management Goals
and the related bonus eligibility for the first Contract Year (which shall not
be decreased but may be increased for future Contract Years) are set forth in
Exhibit "A" attached hereto and incorporated herein.
1.5.2 Relocation Payment. In connection with the agreement of
------------------
Employee to enter into this Agreement and to relocate his principal residence
from Contra Costa County to Los Angeles County within one year after the date
hereof, Company will pay to Employee (i) $50,000, payable on January 1, 1997;
and (ii) $50,000, payable upon the completion of Employee's relocation of his
principal residence to Los Angeles County or such earlier date as mutually
agreed. Such payment shall be payable in cash.
1.6 Change of Control. If Employee's employment with the Company is
terminated either by the Company without cause or by the Employee for cause
within three (3) months prior to or twelve (12) months after a Change of
Control, as defined below, the Company shall pay Employee in satisfaction of
this Agreement the greater of: (i) a lump sum cash payment equal to his Base
Salary, Bonus Compensation and the cash value of any and all benefits including,
but not limited to, health, life, disability and other insurance benefits
(collectively "Benefits") which Employee would have earned had he remained
employed with the Company for the eighteen (18) months following his termination
within the time frame described above in this Section 1.6, or (ii) a lump sum
cash payment equal to the amount of his Base Salary, Bonus Compensation and the
cash value of any and all Benefits which Employee would have earned had he
remained employed with the Company for the remainder of the Term. If the
foregoing is characterized under Section 280G of the Internal Revenue Code (the
"Code") as "excess parachute payment" (as defined therein), the maximum amount
payable to Employee shall be limited to 2.99 times the base amount (as defined
therein) (e.g. such amount which is the highest allowable payment without
invoking the excise tax imposed by Section 280G of the Code). The term "Change
of Control" shall be defined as the (i) sale or transfer of more than fifty
percent (50%) of the common stock of the Company in one or a series of
transactions to a single buyer or group of persons acting in concert (but shall
not include any sale or transfer to the extent that such is made to a
shareholder or shareholders of the Company who owned shares of the Company's
common stock as of
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the date of this Agreement), or (ii) sale of all or substantially all of the
assets of the Company. Notwithstanding the foregoing, the term "Change of
Control" shall not include any initial or secondary public offering of the
common stock of the Company or any transaction with a subsidiary or affiliate of
the Company. Upon payment to Employee of the lump sum payment hereunder, this
Agreement shall terminate (except as to such provisions hereof which expressly
survive termination) and Employee shall have no further obligations or
liabilities of any kind to the Company.
1.7 Working Conditions/ Benefits
1.7.1 Location of Employment. In connection with his employment by
the Company, Employee shall at all times be entitled to maintain his existing
office at the Company's principal executive offices in Los Angeles County,
California and, for the period during which his principal residence is located
in Contra Costa County, California, may maintain an auxiliary office in Contra
Costa County, California (which provision shall not waive or reduce the
requirement of Employee to be present in the Company's Los Angeles County office
each week on a regular basis, unless otherwise required or allowed by the
Company; it is anticipated that Employee shall spend one (1) day each week
during such year in his Contra Costa office). The Company shall not, without the
written consent of Employee, transfer Employee to a location more than forty
(40) miles from the Company's current location; provided, however, that any
transfer or relocation from Contra Costa County to Los Angeles County shall be
excluded from the provisions set forth in this section. The Company shall
promptly pay (or reimburse Employee for) all reasonable moving expenses incurred
by Employee as a result of a change of his principal residence in connection
with any such relocation to which Employee has consented, and will indemnify
Employee against, and reimburse Employee for, any loss incurred as a result of
the sale of his principal residence (which loss shall be computed for the
purpose hereof as the difference between the actual sales price of such
residence and the higher of (a) Employee's aggregate investment in such
residence or (b) the fair market value of such residence as determined by a real
estate appraiser designated by Employee and reasonably satisfactory to the
Company) in connection with any such change in residence.
1.7.2 Vacation and Illness. Employee shall be entitled to no less
than twenty-five (25) business days of paid vacation per Contract Year. Any
unused vacation days shall accrue from year to year. Employee shall receive a
cash payment equal to the value of any accrued vacation days, computed based
upon Employee's current Base Salary and an eight (8) hour working day, in the
event (i) Employee provides the Company with written notice of his election to
receive such sums and not to use such vacation days, which election can be made
at any time, and from time to time, during the Term or (ii) this Agreement is
terminated for any reason. Employee shall further be entitled to leaves of
absence and sick leave with pay in accordance with the Company's policies and
procedures established from time to time, or, if there is no policy or procedure
in place at any applicable time, then on the same basis as other senior
management of the Company.
1.7.3 Insurance Benefits. Employee shall be eligible to participate
in and, if eligible, to receive employee group medical, dental, life insurance
and such other benefits made available by the Company in accordance with the
Company's policies and procedures established from time to time, or, if there is
no policy or procedure in place at any applicable time, then on the same basis
as other senior management of the Company. The Company shall also provide
Employee with (a) disability insurance, in form reasonably satisfactory to
Employee, with a benefit in the amount set forth on Exhibit "B" attached hereto
and incorporated herein, and (b) secondary dental insurance and excess co-
payment/deductible medical insurance in form and amount as set forth on Exhibit
"B" attached hereto and incorporated herein.
1.7.4 Stock Options and Awards. Employee shall receive a stock
award grant as of the date of this Agreement in the amount of 750 shares, and a
stock option as of the date of this Agreement in the amount of 350 shares, of
Company's Common Stock under the Company's 1994 Long-Term Equity Incentive Plan,
as amended (the "Plan"), which grant and option collectively represent
approximately 1.2% of the Company's stock on an as converted, fully-diluted
costs as of the date hereof (recognizing that such percentage will vary over
time).
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Such grant and option shall be set forth in a separate agreement to be entered
into between Employee and the Company. In the event of termination by Company of
Employee without cause pursuant to Section 3.5, Employee, in addition to any
stock grants and options vested to him at the date of termination, shall have
the vesting schedule for his stock grants and options accelerated so as to vest
as of the termination date the stock grants and options scheduled to vest over
the next four quarters after the termination date. Exercise of the options shall
be in accordance with the Plan. Such stock award grant and options shall vest in
quarterly increments over a period of four years from the date of this
Agreement. The exercise price for the stock options, and the agreed value of
each stock award grant, shall be $280 per share. Employee shall be responsible
for any personal income tax incurred as a result of such award. Employee shall
be eligible for any such further awards as the Board of Directors in their sole
discretion may make.
1.7.5 Expenses. Employee shall be entitled to reimbursement for all
approved reasonable travel and other business expenses incurred by Employee in
connection with his services to the Company pursuant to the terms of this
Agreement. During the period of up to one year after the date of this Agreement
when Employee is commuting from his Contra Costa County residence to the
Company's offices in Los Angeles County, Company will pay for Employee's
reasonable commuting expenses (if such are made through Company's travel agent)
and for an executive apartment in Los Angeles County which Employee may use a
temporary residence during the work week. It is estimated that the travel and
living expenses during such period will not exceed $25,000. Once Employee
finally has relocated his principal residence to Los Angeles County, the
Company, at its discretion, shall also lease an automobile for Employee or pay
to Employee a monthly automobile allowance in the amount set forth on Exhibit
"B" attached hereto and incorporated herein. Prior to such relocation being
completed, the Company will make an automobile available to Employee for local
commuting in Los Angeles County (either by rental or otherwise). All business
expenses for which Employee seeks reimbursement from the Company shall be
adequately documented by Employee in accordance with the Company's procedures
covering expense reimbursement and in compliance with the regulations of the
Internal Revenue Service.
1.7.6 Facilities. Company shall provide Employee with a private office at
Company's principal offices, computer, secretarial support, telephone,
facsimile, reprographic and other support services and facilities commensurate
with Employee's position and applicable industry standards. Company and
Employee mutually will determine what, if any, equipment is required for
Employee's auxiliary office in Contra Costa County (if such is established).
ARTICLE II
PROPRIETARY INFORMATION
2.1 Non-Disclosure. Employee acknowledges that, during the course and
scope of his employment with the Company, Employee may gain knowledge of, have
access to or have otherwise disclosed to him confidential information and
materials which are of value to the Company. Employee recognizes and
acknowledges that any and all confidential information and materials are made
available to him only for the limited purpose of the performance of his duties
as an employee. Employee agrees that, during and after the Term, Employee will
regard and preserve such information and materials as strictly confidential,
and, without the express prior written consent of the Company, will not directly
or indirectly disclose to any third person or use for the benefit of anyone
other than the Company, any and all confidential information obtained or
originated by the Employee by reason of his employment.
2.2 Confidential Information. For purposes of this Agreement,
confidential information and materials shall include, but shall not be limited
to, information, in all forms and in whatever media embodied, relating to the
business of the Company, contract terms, contracting policies, sales data,
sales programs, budgets, business plans, financial information, financial data,
personnel or payroll information, internal business procedures, processes,
techniques, methods, ideas, discoveries, developments, computer programs, access
codes, information flow systems and design, information processing technologies
and protocols, records, product designs, product planning, research and
development data and programs, trade secrets, customer lists and related
customer information, all of which is deemed confidential and/or proprietary,
which Employee has encountered, become
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aware of, or originated in the course of or arising out of his employment with
the Company ("Confidential Information"). Confidential Information shall not
include (i) information independently developed by Employee without the use of
Confidential Information, and (ii) information which is or becomes publicly
known through no breach of the terms of this Article.
2.3. Books and Records. All business records of the Company and any and
all additional correspondence, notes, files, records (including computer
hardware, software, discs and printouts), books or papers relating in any manner
whatsoever to the Company, or relating to or arising out of Confidential
Information whether prepared by Employee or otherwise, in whatever media
embodied ("Confidential Books and Records") shall be the exclusive property of
the Company. Employee shall not make or retain any copies of such Confidential
Books and Records without the approval of the Company. All such Confidential
Books and Records, including any photographic or electronic copy or original of
such records, shall be immediately returned to the Company by Employee upon
termination of his employment or upon the request of the Company.
2.4. Inventions. All inventions, discoveries and improvements relating in
any way to the business of the Company (including but not limited to research
and development, products, protocols, methods, computer programs or procedures)
which are conceived, suggested or devised by Employee solely or jointly with
others during the period of Employee's employment with the Company, shall be
disclosed to the Company and all such inventions, discoveries and improvements
shall become and remain the sole property of the Company. Employee agrees to
cooperate with the Company in the execution of appropriate instruments assigning
and evidencing such ownership rights.
2.5. Remedies. Employee acknowledges and agrees that the disclosure of
Confidential Information and the breach of the provisions of this Article may
give rise to irreparable injury to the Company which cannot be adequately
compensated with monetary damages, and Employee further agrees that the Company
may seek and obtain injunctive relief against the breach or threatened breach of
any of the provisions of this Article and/or specific enforcement of such
provisions in addition to any other legal or equitable remedies which may be
available.
ARTICLE III
TERMINATION
3.1 Termination by Company for Cause. The Company shall not terminate
Employee's employment hereunder other than for "Cause" (as defined herein). The
Company shall have the right to terminate Employee's employment at any time for
Cause by giving Employee written notice of the effective date of termination.
For purposes of this Section, "Cause" shall be defined as:
(i) dishonesty, fraud, misappropriation, embezzlement or other act
of material misconduct against the Company;
(ii) substantial, continuing and willful failure to render services
in accordance with the terms of this Agreement, provided that a reasonable
demand for performance of services had been delivered to Employee by the Board
at least thirty (30) days prior to termination identifying the manner in which
the Board believes that Employee has failed to perform (as determined by the
Board) and Employee has failed to reasonably remedy such failure to perform
within such thirty (30) day period;
(iii) willful and knowing violation of any laws, rules or
regulations of any governmental or regulatory body material to the business of
the Company; or
(iv) conviction of or a plea of nolo contendere to a felony or a
charge or indictment of a felony, the defense of which renders Employee
substantially unable to perform his services hereunder.
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If the Company terminates Employee's employment for any of the reasons set forth
in this Section 3.1, the Company shall have no further obligation hereunder from
and after the effective date of such termination and shall have all other rights
and remedies available under this Agreement, at law or in equity.
3.2 Termination on Account of Death or Permanent Disability. To
compensate in the case of Employee's death or Permanent Disability, the Board of
Directors shall provide Employee or his Designated Beneficiary with (i) a lump
sum payment equal to one (1) time Employee's current Base Salary or (ii) during
the Term and before such death or Permanent Disability, Company provides
Employee with insurance coverage as to death and Permanent Disability that
equals or exceeds one (1) year of Employee's current Base Salary and adjusts
annually for any increase in such Base Salary. For purposes of this Agreement,
the term "Permanent Disability" shall mean Employee's inability to perform his
duties under this Agreement for ninety (90) consecutive days or one hundred and
eighty (180) days during any twelve (12) month period due to illness, accident
or other incapacity (as determined in good faith by a physician mutually
acceptable to the Company and Employee) or if a physician so selected advises
the Company that it is likely that Employee will be unable to perform such
duties for ninety (90) consecutive days or one hundred and eighty (180) days
during the succeeding twelve (12) month period. If the Board of Directors
chooses to provide insurance coverage, Employee, his spouse and his children
shall also be entitled to continue to be covered, if eligible, by all medical,
health, accident and other insurance at the same coverage level maintained for
Employee's benefit immediately prior to the date of Employee's termination
(subject to continuing payment of any premiums, deductibles and co-payments by
the person who was the responsible party at the time of death or Permanent
Disability) for a period of eighteen (18) months from the date of Employee's
death or Permanent Disability. In the event Employee's spouse and/or surviving
children are ineligible under the terms of such insurance to continue to be so
covered, the Company shall provide substantially equivalent coverage through
other sources or will provide Employee's spouse and/or surviving children, as
applicable, with the lump sum payment equal to the agreed upon present value of
the continuation of such health insurance coverage under this Section 3.2. In
the event of Permanent Disability, Employee shall continue to receive credit for
years of service under all retirement plans of the Company where permitted by
law.
3.3 Voluntary Termination by Employee Without Cause. Employee may
terminate this Agreement at any time after eighteen months from the date of the
Agreement upon sixty (60) days advance written notice to the Company; provided,
however, that in the event Employee's employment with the Company is voluntarily
terminated by Employee without cause: (i) Employee shall continue to be bound
by any provisions of this Agreement that expressly survive termination of this
Agreement and (ii) Employee shall have vested on the termination date by
acceleration those options that would have vested in the next full quarter after
the termination date.
3.4 Termination by Employee for Cause. Employee may terminate this
Agreement due to any uncured material breach by the Company of any provision of
this Agreement or for "Good Reason" upon written notice to the Company; provided
that a reasonable demand for performance had been delivered to the Company by
the Employee at least thirty (30) days prior to termination identifying the
manner in which the Employee believes that the Company has failed to perform and
the Company has failed to remedy such failure to perform within such thirty (30)
day period (or, in the case of breaches which are capable of cure but not
reasonably within such thirty (30) day period, if Company has not commenced
efforts to cure within such thirty (30) day period and has not thereafter
continued diligently in good faith its efforts to cure until such cure has been
effected). "Good Reason" shall mean (i) the failure by the Company to
continuously provide Employee with working conditions and supervisory authority
that are of the type and level as are applicable to Employee as of the Effective
Date, except in connection with the termination of his employment for
disability, retirement or Cause or by Employee other than for Good Reason, (ii)
a requirement that Employee travel on the Company's business to an extent
materially greater than Employee's normal business travel obligations; or (iii)
any material breach by the Company of any provision of this Agreement or any
other agreement with Employee.
3.5 Termination by the Company Without Cause. At any time after the
Effective Date, the Company may terminate this Agreement without cause upon
sixty (60) days' advance written notice to Employee; provided, that in the event
that Employee's employment with the Company is terminated by the Company without
cause: (i) the Company shall continue to be bound by any provisions of this
Agreement that expressly survive
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termination of this Agreement, and (ii) the Company shall, as of the effective
date of such termination, pay Employee in cash and in one lump sum an amount
equal to that set forth on Exhibit B.
ARTICLE IV
INDEMNIFICATION
The Company shall indemnify Employee and hold him harmless from and against
any acts or decisions made by Employee in good faith and while exercising
reasonable judgment in performing services for the Company. The Company shall
also obtain and maintain coverage for Employee under any insurance policy now in
force or hereafter obtained during the Term covering other officers of the
company against lawsuits. To the extent permitted by applicable law, the
Company shall pay all expenses, including reasonable attorneys fees, actually
and necessarily incurred by the Employee in connection with the defense of such
act, suit or proceeding, including the cost of court settlements, provided that
the Employee has not acted with gross negligence or in bad faith.
ARTICLE V
MISCELLANEOUS
5.1 Notices. Whenever notice is to be served hereunder, service shall be
made personally, by facsimile transmission, by overnight courier or by
registered or certified mail, return receipt requested. All postage and other
delivery charges shall be prepaid by the party sending the notice. Notice shall
be effective only upon receipt by the party being served, except notice shall be
deemed received 72 hours after posting by the United States Post Office, by
method described above. Confirmation of receipt of any facsimile sent must be
received in order to presume that the transmission was received. All notices
shall be sent to the addresses described below unless changed by written notice
pursuant to the terms of this Section:
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To the Company:
THE TRYLON CORPORATION
970 West 190th Street
Suite 900
Torrance, CA 90502-1037
Attention:
Fax: 310-327-8979
To Employee:
Stan Anders
3729 Meadow Lane
Lafayette, CA 94549
5.2 Assignability. The Company may assign its interest in this Agreement
to any subsidiary or affiliate of the Company or in connection with a merger or
sale of all or substantially all of the assets of the Company and the provisions
of this Agreement shall inure to the benefit of the successors and assigns of
the Company. Employee may not assign or transfer this Agreement, it being
deemed personal to Employee only; provided, however, upon Employee's death,
Employee's heirs, executors and/or administrators may seek collection of any
sums that may have been due Employee as of Employee's death. Subject to the
above, this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, legal representatives, successors
and assigns.
5.3 Severability. If any term or provision of this Agreement, or the
application thereof to any person or circumstance, shall to any extent be found
to be invalid, void, or unenforceable, the remaining provisions of this
Agreement and any application thereof shall, nevertheless, continue in full
force and effect without being impaired or invalidated in any way.
5.4 Waiver. No waiver of any term, provision or condition of this
Agreement, whether by conduct or otherwise, in any one or more instances, shall
be deemed to be or be construed as a further or continuing waiver of any such
term, provision or condition or as a waiver of any other term, provision or
condition of this Agreement.
5.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original instrument and all of
which together shall constitute the same instrument.
5.6 Entire Agreement. This Agreement, together with the Exhibits and
Schedules hereto and any extensions or renewals hereof, constitutes the parties'
entire Agreement with respect to the subject matter hereof and supersedes all
prior statements or agreements, both written and oral. This Agreement may be
amended only by a writing signed by the parties.
5.7 Governing Law. The validity, interpretation and construction of this
Agreement, and all other matters related to the Agreement, shall be interpreted
and governed by the laws of the State of California.
5.8 Headings. The headings herein used are for convenience purposes only
and shall not be used to construe the meaning of this Agreement in any respect.
5.9 Deductions. The Company shall deduct from any payment to Employee
hereunder such social security insurance, federal, state and other taxes, state
disability insurance and other withholdings as may be required by law.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of
the date first above written, by their duly authorized representatives.
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COMPANY THE TRYLON CORPORATION,
a Delaware corporation
By: /s/ Martin L. Lonky
Title: President
EMPLOYEE /s/ Stanley S. Anders III
-------------------------
STANLEY S. ANDERS III
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EXHIBIT "A"
COMPENSATION
INITIAL SALARY
--------------
$180,000
MAXIMUM ANNUAL PERSONAL MANAGEMENT GOALS BONUS COMPENSATION
-----------------------------------------------------------
$45,000
<PAGE>
EXHIBIT 10.4
THE TRYLON CORPORATION
1994 LONG-TERM EQUITY INCENTIVE PLAN
1. PURPOSE. This 1994 Long-Term Equity Incentive Plan ("Plan") is
established as a compensatory plan to enable The Trylon Corporation (the
"Company" to provide an incentive to eligible employees, officers, independent
consultants, directors who are also employees or consultants, and advisers,
whose present and potential contributions are important to the continued success
of the Company, to afford such persons an opportunity to acquire a proprietary
interest in the Company, and to enable the Company to continue to enlist and
retain in its employ the best available talent for the successful conduct of
its business. It is intended that this purpose will be effected through the
granting of (a) stock options, (b) stock awards, (c) stock purchase rights,
(d) stock appreciation rights, and (e) long-term performance awards.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "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 the voting securities, by
contract or otherwise.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Committee or Committees referred to in
Section 5 of the Plan. If at any time no Committee shall be in office, then the
functions of the Committee specified in the Plan shall be exercised by the
Board.
(e) "Common Stock" means the Common Stock, $.01 par value per share,
of the Company.
(f) "Company" means The Trylon Corporation, a corporation organized
under the laws of the state of Delaware, or any successor corporation.
(g) "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.
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(h) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) the last reported sale price of the Common Stock of the
Company on the NASDAQ National Market System or, if no such reported sale takes
place on any such day, the average of the closing bid and asked prices, or
(ii) if such Common Stock shall then be listed on a national
securities exchange, the last reported sale price or, if no such reported sale
takes place on any such day, the average of the closing bid and asked prices on
the principal national securities exchange on which the Common Stock is listed
or admitted to trading, or
(iii) if such Common Stock shall not be quoted on such
National Market System nor listed or admitted to trading on a national
securities exchange, then the average of the closing bid and asked prices, as
reported by The Wall Street Journal for the over-the-counter market, or
(iv) if none of the foregoing is applicable, then the Fair
Market Value of a share of Common Stock shall be determined in good faith by the
Board of Directors of the Company in its discretion.
(i) "Insider" means an officer or director of the Company or any
other person whose transactions in Common Stock are subject to Section 16(b) of
the Exchange Act.
(j) "Long Term Performance Award" means an award under Section 9
below. A Long Term Performance Award shall permit the recipient to receive a
stock bonus (as determined by the Committee) upon satisfaction of such
performance factors as are set out in the recipient's individual grant. Long-
term Performance Awards will be based upon the achievement of Company,
Subsidiary and/or individual performance factors or upon such other criteria as
the Committee may deem appropriate.
(k) "Option" means any option to purchase shares of Common Stock
granted pursuant to Section 6 below.
(l) "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, at the time of the
granting of an award under the Plan, 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.
(m) "Plan" means this 1994 Long-Term Equity Incentive Plan, as
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hereinafter amended from time to time.
(n) "Restricted Stock" means shares of Common Stock acquired pursuant
to a grant of Stock Purchase Rights under Section 8 below.
(o) "Right" means and includes Stock Appreciation Rights and Stock
Purchase Rights granted pursuant to the Plan.
(p) "Stock Appreciation Right" means an award made pursuant to
Section 7 below, which right permits the recipient to receive cash equal to the
difference between the Fair Market Value of Common Stock on the date of grant of
the Option and the Fair Market Value of Common Stock on the date of exercise of
the Stock Appreciation Right.
(q) "Stock Award" means a grant of shares of Common Stock, which may
be subject to conditions established by the Committee and set forth in the Award
Agreement, which may include continuous service with the Company, attendance at
meetings, achievement of Company business objectives, and other comparable
measures of performance. Such awards may be based on Fair Market Value or other
specified valuation.
(r) "Stock Purchase Right" means an award made pursuant to
Section 8 below, which right permits the recipient to purchase Common Stock
pursuant to a restricted stock purchase agreement entered into between the
Company and the Participant.
(s) "Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if, at the time
of granting of the Option, 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.
3. ELIGIBILITY. Awards may be granted to employees, officers, directors
who are also employees or consultants, independent consultants and advisers of
the Company or any Parent, Subsidiary or Affiliate of the Company (provided such
consultants and advisers render bona fide services not in connection with the
offer and sale of securities in a capital-raising transaction) (collectively ,
the "Participants"). ISOs (hereinafter defined in Section 6 hereof) 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. A
Participant may be granted more than one award under this Plan. The Company,
from time to time, also may assume outstanding options granted by another
company, whether in connection with an acquisition of such other company or
otherwise, by either (i) granting an Option under this Plan in replacement of
the option assumed by the
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Company, or (ii) treating the assumed option as if it had been granted under
this Plan if the terms of such assumed option could be applied to an Option
granted under this Plan. Such assumption shall be permissible if the holder of
the assumed option would have been eligible to be granted an Option under this
Plan if the other company had applied the rules of this Plan to such grant.
4. STOCK SUBJECT TO THE PLAN. Subject to Section 11 and 12, the
total number of shares of Common Stock reserved and available for distribution
pursuant to the Plan shall be 11,000 shares (the "Shares"). Subject to Sections
11 and 12, if any shares of Common Stock that have been subject to issuance upon
exercise or an Option cease to be subject to such Option, or if any shares of
Restricted Stock or other shares that are subject to any Right, Option or Long-
Term Performance Award granted hereunder are forfeited or repurchased or any
such award otherwise terminates without a payment being made to the Participant
in the form of Common Stock, such shares shall again be available for
distribution in connection with future awards or Option grants under the Plan.
5. ADMINISTRATION
(a) Procedure. The Plan shall be administered by (i) the Board if the
Board may administer the Plan in compliance with Rule 16b-3 promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any
successor rule thereto (Rule 16b-3), when applicable, with respect to a plan
intended to qualify under Rule 16b-3 as a discretionary plan, or (ii) a
Committee designated by the Board to administer the Plan, which Committee shall
be constituted to permit the Plan to comply with Rule 16b-3 with respect to a
plan intended to qualify thereunder as a discretionary plan. Once appointed,
the Committee shall continue to serve until otherwise directed by the Board.
From time to time, the Board may change the size of the Committee, appoint
additional members thereof, remove members (with or without cause), appoint new
members in substitution therefor, fill vacancies, however caused, and remove all
members of the Committee and thereafter directly administer the Plan, all to the
extent permitted by Rule 16b-3 with respect to a plan intended to qualify
thereunder as a discretionary plan. As used herein , except in Section 18 and
20, reference to the Board shall mean such Board or the Committee, whichever is
then acting with respect to the Plan.
(b) Authority. Subject to the general purposes, terms, and conditions of
the Plan, and to the direction of the Board, the Committee, if there be one,
shall have full power to implement and carry out the Plan including, but not
limited to, the following:
(i) to select the employees, officers, consultants, directors and
advisers of the Company and/or its Subsidiaries to whom Options, Rights and
Long-
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Term Performance Awards, or any combination thereof, may from time to time
be granted hereunder;
(ii) to determine whether and to what extent Options, Rights and
Long-Term Performance Awards, or any combination thereof, are granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder (including, but not
limited to, the share price and any restriction or limitation, or any vesting
acceleration or waiver of forfeiture restrictions regarding the Option or other
award and/or the shares of Common Stock relating thereto, based in each case on
such factors as the Committee shall determine, in is sole discretion);
(vi) to determine whether and under what circumstances an Option
may be settled in cash or Restricted Stock under Section 6(h) instead of Common
Stock;
(vii) to determine the form of payment that will be acceptable
consideration for exercise of an Option, Right or Long-Term Performance Award
granted under the Plan;
(viii) to determine whether, or to what extent and under what
circumstances Common Stock and other amounts payable with respect to an award
under this Plan shall be deferred either automatically or at the election of the
Participant (including providing for and determining the amount (if any) of any
deemed earnings on any deferred amount during any deferral period);
(ix) to reduce the exercise price of any Option or Right; and
(x) to determine the terms and restrictions applicable to Stock
Purchase Rights and the Restricted Stock purchased by exercising such Rights.
The Committee shall have the authority to construe and interpret the
Plan, to prescribe, amend and rescind rules and regulations relating to the
Plan, and to make all other determinations necessary or advisable for the
administration of the Plan, and any such interpretation shall be final and
binding on all persons having an interest in any award under this Plan.
In addition to such other rights of indemnification as they may have
as
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directors, members of the Committee shall be indemnified by the Company
against any reasonable expenses, including attorneys' fees actually and
necessarily incurred, or in connection with any appeal therefor, to which they
or any of them may be a party by reason of any action taken or failure to act
under or in connection with the Plan or any option granted thereunder, and
against all amounts paid by them in settlement thereof, (provided such
settlement is approved by independent legal counsel selected by the Company) or
paid by them in satisfaction of a judgment in any such action, suit or
proceeding that such director is liable for negligence or misconduct in the
performance of his or her duties; provided that within 60 days after institution
of any such action, suit or proceeding a director shall in writing offer the
Company the opportunity, at its own expense, to handle the defense of the same.
6. STOCK OPTIONS. The Committee, in its discretion, may grant
Options to eligible Participants and shall determine whether such Options shall
be Incentive Stock Options ("ISOs") within the meaning of the Code or
Nonqualified Stock Options (NQSOs"). Each Option shall be evidenced by a written
Option agreement which shall expressly identify the Option as an ISO or as NQSO,
and be in such form and contain such provisions as the Committee shall from time
to time deem appropriate. Without limiting the foregoing, the Committee may, at
any time, or from time to time, authorize the Company, with the consent of the
respective recipients, to issue new Options including Options in exchange for
the surrender and cancellation of any or all outstanding Options or Rights.
The Committee shall determine the number of Shares subject to the
Option, the exercise price of the Option, the period during which the Option may
be exercised, all other terms and conditions of the Option, subject to the
following:
(a) Form of Option Grant. Each Option granted under this Plan shall
be evidenced by a written Stock Option Grant (the "Grant") in such form (which
need not be the same for each Participant) 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.
(b) Date of Grant. The date of grant of an Option shall be the date
on which the Committee makes the determination to grant such Option unless
otherwise specified by the Committee. The Grant representing the Option will be
delivered to Participant with a copy of this Plan within a reasonable time after
the granting of the Option.
(c) Exercise Price. The exercise price of an Option shall be determined by
the Committee on the date the Option is granted; such price may be less than the
Fair Market Value of the Common Stock on the date the Option is granted,
provided that (i) the exercise price of an ISO or of an NQSO granted to a person
other than
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an employee shall be not less than 100% of the Fair Market Value of the Shares
on the date the Option is granted; and (ii) the exercise price of any ISO
granted to a person owning more than 10% of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary of the Company
("Ten Percent Stockholder") shall not be less than 110% of the Fair Market Value
of the Shares on the date the Option is granted.
(d) Exercise Period. Options shall be exercisable within the times or
upon the events determined by the Committee as set forth in the Grant; provided,
however, that no Option shall 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 Ten Percent Stockholder shall be exercisable after the expiration
of five (5) years from the date the Option is granted. The Committee also may
provide for the exercise of options either as to an increased percentage of
shares per year or as to all remaining shares, if the Participant with the
approval of the Company, shall retire.
(e) Limitations on ISOs. The aggregate Fair Market Value (determined
as of the time an Option is granted) of stock with respect to which ISOs 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 or any
Parent or Subsidiary of the Company) shall not exceed $100,000. If the Fair
Market Value of Shares with respect to which ISOs are exercisable for the first
time by a Participant during any calendar year exceeds $100,000, the Options for
the first $100,000 worth of Shares to become exercisable in that calendar year
shall 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
ISOs, such different limit shall be incorporated herein and shall apply to any
Options granted after the effective date of such amendment.
(f) Options Non-Transferable. Options granted under this Plan, and
any interest therein, shall not be transferable or assignable by the
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, and
shall be exercisable during the lifetime of the Participant only by the
Participant; provided, however, that NQSOs held by a Participant who is not an
Insider, may be transferred to such family members, trusts and charitable
institutions as the Committee, in its sole discretion, shall approve at the time
of the grant of such Option.
(g) Assumed Options. In the event the Company assumes an option
granted by another company, the terms and conditions of such option shall remain
unchanged (except the exercise price and the number and nature of Shares
issuable upon exercise, which 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
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assuming an existing option (as specified in Section 3), such new option may be
granted with a similarly adjusted exercise price.
(h) Buyout Provisions. The Committee may at any time offer to buy out
for a payment in cash or Common Stock (including Restricted Stock), an Option
previously granted, based on such terms and conditions as the Committee shall
establish and communicate to the Participant at the time that such offer is
made.
(i) Notice. 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, if any, and such representations and agreements regarding
Participant's investment intent and access to information, if any, 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.
(j) Payment. Payment for Shares purchased upon exercise of an Option
may be made in cash (by check) or, where approved by the Committee in its sole
discretion at the time of grant and where permitted by law: (i) by cancellation
of indebtedness of the Company to the Participant; (ii) by surrender of shares
of Common Stock having a Fair Market Value equal to the applicable exercise
price of the Options, that have been owned by the Participant for more than six
(6) months (and which have been paid for within the meaning of the Securities
and Exchange Commission (the "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 Participant in the open public
market; (iii) where approved by the Committee in is discretion, 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 that the portion of the
exercise price equal to the par value of the Shares, if any, must be paid in
cash or other legal consideration; (iv) by waiver of compensation due or accrued
to the Participant for services rendered; (v) provided that a public market for
the Company's stock exists, 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 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; (vi)
provided that a public market for the Company's stock exists, through a "margin"
commitment from the Participant and an 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
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<PAGE>
whereby the NASD Dealer irrevocably commits upon receipt of such Shares to
forward the exercise price directly to the Company; or (vii) by any combination
of the foregoing.
(k) Limitations on Exercise. Notwithstanding the exercise period set
forth in the Grant, exercise of an Option shall always be subject to the
following (except as may be varied in individual instances by action of the
Board of Directors):
(i) If the Participant ceases to be employed by the Company or any
Parent, Subsidiary or Affiliate of the Company for any reason except death or
disability, the Participant's Options may be exercised to the extent (and only
to the extent) that they would have been exercisable upon the date of
termination of the Participant's employment, within three (3) months after the
date of termination (or such shorter time period as may be specified in the
Grant), but in any event no later than the expiration date of the Option.
(ii) If the Participant's employment with the Company or any
Parent, Subsidiary or Affiliate of the Company is terminated because of the
Disability of the Participant, or if the Participant dies within three (3)
months of his termination of employment, the Participant's Options may be
exercised to the extent (and only to the extent) that they would have been
exercisable by the Participant on the date of termination of Participant's
employment, by the Participant (or the Participant's legal representative)
within twelve (12) months after the date of termination of the Participant's
employment (or such shorter time period as may be specified in the Grant), but
in any event no later than the expiration date of the Options.
(iii) If the Participant's employment with the Company or any
Parent, Subsidiary or Affiliate of the Company is terminated because of the
Death of the Participant, the Participant's Options may be exercised to the
extent (and only to the extent) that they would have been exercisable by the
Participant on the first vesting date occurring after such death as may be
specified in the Grant (the "Option Vesting Date") and on the next subsequent
Option Vesting Date, by the Participant's legal representative within twelve
(12) months after the date of the Participant's death (or such shorter time
period as may be specified in the Grant), but in any event no later than the
expiration date of the Options.
(iv) The Committee shall have discretion to determine whether
Participant has ceased to be employed by the Company or any Parent, Subsidiary
or Affiliate of the Company and the effective date on which such employment
terminated or whether such Participant is on an authorized leave of absence or
absence for military or governmental service.
(v) In the case of a Participant who is a director, consultant, or
adviser, the Committee will have the discretion to determine whether the
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<PAGE>
Participant is "employed by the Company or any Parent, Subsidiary or Affiliate
of the Company" pursuant to the foregoing Sections.
(vi) The Committee may specify a reasonable minimum number of
Shares that may be purchased on any exercise of an of an Option, provided that
such minimum number will not prevent the Participant from exercising the full
number of Shares as to which the Option is then exercisable.
(vii) An Option shall not be exercisable unless such exercise is in
compliance with the Securities Act of 1933, as amended (the "Securities Act"),
all applicable state securities laws and the requirements of any stock exchange
or national market system upon which the Shares may then be listed, as they are
in effect on the date of exercise. The Company shall 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 national market system, and the Company shall have no liability for
any inability or failure to do so.
(l) Modification, Extension and Renewal of Options. The Committee
shall have the power to modify, extend or renew outstanding Options and to
authorize the grant of new Options in substitution therefor, provided that any
such action may not, without the written consent of the Participant, impair any
rights under any Option previously granted. Any outstanding ISO that is
modified, extended, renewed or otherwise altered shall be treated in accordance
with Section 424(h) of the Code. The Committee shall have the power to reduce
the exercise price of outstanding Options without the consent of Participants by
a written notice to the Participants affected; provided, however, that the
exercise price per Share may not be reduced below the minimum exercise price
that would be permitted under Section 6(c) of this Plan for Options granted on
the date the action is taken to reduce the exercise price.
7. STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be granted
only in connection with an Option, either concurrently with the grant of the
Option or at any time thereafter during the term of the Option. The following
provisions apply to such Stock Appreciation Rights.
(a) Grant of Stock Appreciation Right. The Stock Appreciation Right
shall entitle the Participant to exercise the Rights by surrendering to the
Company unexercised a portion of the underlying Option as to which the
Participant has a right to exercise. The Participant shall receive in exchange
from the Company an amount equal to the excess of (x) the Fair Market Value on
the date of exercise of the Common Stock covered by the surrendered portion of
the underlying Option. Notwithstanding the foregoing, the Committee may place
limits on the amount that may be paid upon exercise of a Stock Appreciation
Right; provided, however, that
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<PAGE>
such limit shall not restrict the exercisability of the underlying Option. In
the event that a Stock Appreciation Right is granted that relates to an ISO,
such Right shall contain such additional or different terms as may be necessary
under applicable regulations to preserve treatment of the ISO as such under
Section 422 of the Code.
(b) Forfeiture of Option. When a Stock Appreciation Right is exercised,
the underlying Option, to the extent surrendered, shall no longer be exercisable
and shall be deemed cancelled.
(c) Expiration of Stock Appreciation Right. A Stock Appreciation
Right shall be exercisable only when and to the extent that the underlying
Option is exercisable and shall expire no later than the date on which the
underlying Option expires.
(d) Exercise of Stock Appreciation Right. A Stock Appreciation Right
may be exercised only at a time when the Fair Market Value of the Common Stock
covered by the underlying Option exceeds the exercise price of the Common Stock
covered by the underlying Option. Notwithstanding the foregoing, with respect to
Insiders, in no event may a Stock Appreciation Right be exercisable within the
first six (6) months of the grant of such Stock Appreciation Right; provided,
however, that this limitation shall not apply in the event that death or
Disability of the Participant occurs prior to the expiration of the six-month
period.
(e) Form of Payment. The Company's obligation arising upon the exercise
of a Stock Appreciation Right may be paid currently or on a deferred basis with
such interest or earnings equivalent as may be determined by the Committee, and
may be paid in Common Stock or in cash, or in any combination of Common Stock
and cash, as the Committee, in its sole discretion, may determine. Shares of
Common Stock issued upon the exercise of a Stock Appreciation Right shall be
valued at the Fair Market Value of the Common Stock as of the date of exercise.
(f) Compliance with Section 16(b). A person who is subject to Section
16(b) of the Exchange Act may only make an election to receive cash in full or
partial settlement of the Stock Appreciation Right or exercise a Stock
Appreciation Right during such time or times as are permitted by Rule 16b-3 or
any successor provision.
8. STOCK PURCHASE RIGHTS AND STOCK AWARDS.
(a) Stock Purchase Rights.
(i) Issuance. Stock Purchase Rights to purchase Restricted Stock
may be issued either alone, in addition to, or in tandem with other awards
granted under the Plan. After the Committee determines that it will offer Stock
Purchase Rights
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under the Plan, it shall advise the offeree in writing of the terms, conditions
and restrictions related to the offer, including the number of shares of Common
Stock that such person shall be entitled to purchase, the price to be paid, and
the time within which such person must accept such offer, which shall in no
event exceed 60 days from the date the Stock Purchase Right was granted. The
offer shall be accepted by execution of a Restricted Stock Purchase Agreement
(the "Purchase Agreement") in the form determined by the Committee.
(ii) Repurchase Option. Unless the Committee determines otherwise,
the Purchase Agreement shall grant the Company a repurchase option exercisable
upon the voluntary or involuntary termination of the purchaser's employment with
the Company for any reason (including death or Disability). The purchase price
for Shares repurchased pursuant to the Purchase Agreement shall be the original
price paid by the purchaser and may be paid by cancellation of any indebtedness
of the purchaser to the Company. The repurchase option shall lapse at such rate
as the Committee may determine.
(iii) Other provisions. The Purchase Agreement shall contain such
other terms, provision and conditions not inconsistent with the Plan as may be
determined by the Committee in its sole discretion. The provisions of Purchase
Agreements need not be the same with respect to each purchaser.
(b) Stock Awards.
(i) Issuance. Stock Awards may be issued either alone, in addition
to, or in tandem with other awards granted under the Plan. After the Committee
determines that it will offer Stock Awards under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of shares of Common Stock included in the Stock
Award. The offer shall be accepted by execution of a Stock Award Agreement (the
"Award Agreement") in the form determined by the Committee.
(ii) Repurchase Option. Unless the Committee determines otherwise,
the Award Agreement shall grant the Company a repurchase option exercisable upon
the voluntary or involuntary termination of the purchaser's employment with the
Company for any reason (including death or Disability). The purchase price for
Shares repurchased pursuant to the Award Agreement shall be a price determined
at the time of the Stock Award by the Committee and may be paid by cancellation
of any indebtedness of the Stock Award recipient to the Company.
9. LONG-TERM PERFORMANCE AWARDS.
(a) Administration. Long-Term Performance Awards are stock bonus
awards that may be granted either alone or in addition to other awards granted
under the
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Plan. Such awards shall be granted for no cash consideration. The Committee
shall determine the nature, length and starting date of any performance period
(the "Performance Period") for each Long-Term Performance Award, and shall
determine the performance factors to be used in the determination of Long-Term
Performance Award and the extent to which such Long-Term Performance Awards have
been earned. Long-Term Performance Awards may vary from Participant to
Participant and between groups of Participant and shall be based upon the
achievement of Company, Parent, Subsidiary or Affiliate, or upon such individual
performance factors or upon such other criteria as the Committee may deem
appropriate. Performance Periods may overlap and Participants may participate
simultaneously with respect to Long-Term Performance Awards that are subject to
different Performance Periods and different performance factors and criteria.
Long-Term Performance Awards shall be confirmed by, and be subject to the terms
of, a Long-Term Performance Award agreement. The terms of such awards need not
be the same with respect to each participant.
At the beginning of each Performance Period, the Committee shall
determine for each Long-Term Performance Award subject to such Performance
Period the number of shares of Common Stock to be awarded to the Participant at
the end of the Performance Period if and to the extent that the relevant
measures of performance for such Long-Term Performance Award are met. Such
number of shares of Common Stock may be fixed or may very in accordance with
such performance or other criteria as may be determined by the Committee.
(b) Adjustment of Awards. The Committee may adjust the performance
factors applicable to the Long-Term Performance Awards to take into account
changes in law and accounting and tax rules and to make such adjustments as the
Committee deems necessary or appropriate to reflect the inclusion or exclusion
of the impact of extraordinary or unusual items, events or circumstances in
order to avoid windfalls or hardships.
(c) Termination. Unless otherwise provided in the applicable Long-
Term Performance Award agreement, if a Participant terminates his or her
employment or his or her consultancy during a Performance Period because of
death or Disability, the Committee may provide for an earlier payment in
settlement of such award in such amount and under such terms and conditions as
the Committee deems appropriate.
Except as otherwise provided in the applicable Long-Term Performance
Award agreement, if a Participant terminates employment or his or her
consultancy during a Performance Period for any other reason, then such a
Participant shall not be entitled to any payment with respect to the Long-Term
Performance Award subject to such Performance Period, unless the Committee shall
otherwise determine.
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(d) Form of Payment. The earned portion of a Long-Term Performance
Award may be paid currently or on a deferred basis with such interest or
earnings equivalent as may be determined by the Committee. Payment shall be
made in the form of cash, whole shares of Common Stock, including Restricted
Stock, or a combination thereof, either in a lump sum payment or in
installments, all as the Committee shall determine. If and to the extent the
full amount of a Long-Term Performance Award is not paid in Common Stock, then
the shares of Common Stock representing the portion of the value of the Long-
Term Performance Award not paid in Common Stock shall again become available for
award under the Plan.
10. WITHHOLDING TAXES
(a) Withholding Generally. Whenever, under the Plan, Shares are to be
issued in satisfaction of Option, Rights or Long-Term Performance Awards granted
hereunder, the Company shall have the right to require the recipient to remit to
the Company an amount sufficient to satisfy federal, state, or local withholding
tax requirements prior to the delivery of any certificate or certificates for
such Shares, Wherever, under the Plan, payments are to be made in cash, such
payment shall be net of an amount sufficient to satisfy federal, state, and
local withholding tax requirements.
(b) Stock Withholding. When a Participant incurs tax liability in
connection with the exercise or vesting of any Option, Right or Long-Term
Performance Award, which tax liability is subject to tax withholding under
applicable tax laws, and the Participant is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Participant may
satisfy the 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 amount required to be 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
shall be made in writing in a form acceptable to the Committee and shall be
subject to the following restrictions:
(i) the election must be made on or prior to the applicable Tax
Date;
(ii) once made, the election shall be irrevocable as to the
particular Shares as to which the election is made;
(iii) all elections shall be subject to the consent or disapproval
of the Committee;
(iv) if the Participant is an Insider, the election may not be made
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within six months of the date of grant of the Option, Right or Long-Term
Performance Award; provided, however that this limitation shall not apply in the
event that death or Disability of the Participant occurs prior to the expiration
of the six-month period; and
(v) if the Participant is an Insider and the Company has
securities registered under the Securities Exchange Act of 1934, as amended, the
election must be made either six months prior to the Tax Date or in the 10-day
period beginning on the third day following the release of the Company's
quarterly or annual summary statement of sales or earnings; provided, however,
that on and after such date as the Company elects to comply with the
requirements of Rule 16b-3, the provisions of Rule 16b-3(d)(1)(i) and Rule 16b-
3(e) of the Exchange Act shall apply with respect to any such elections in
accordance with rules established by the Committee.
In the event the election to have shares withheld is made by a
Participant who is an Insider and Tax Date is deferred until six months after
exercise of the Option under Section 83(b) of the Code, the Participant shall
receive the full number of Shares with respect to which the exercise occurs,
but such Participant shall be unconditionally obligated to tender back to the
Company the proper number of Shares on the Tax Date.
11. ADJUSTMENT OF 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 deliverable in connection
with any Option, Right or Long-Term Performance Award, and the exercise price
per share of such Options shall be proportionately adjusted, subject to any
required action by the Board or stockholders of the Company and compliance with
applicable securities laws; provided, however, that no certificate or scrip
representing fractional shares shall be issued and any resulting fractions of a
share shall be ignored.
12. ASSUMPTION OF OPTIONS BY SUCCESSORS.
(a) Assumption. In the event of a dissolution or liquidation of the
Company, a merger in which the Company is not the surviving corporation (other
than a merger with a wholly owned subsidiary or where there is not substantial
change in the stockholders of the Company and the obligations of the Company
under this Plan are assumed by the successor corporation), the sale of
substantially all of the assets of the Company, or, any other transaction which
qualifies as a "corporate transaction" under Section 424(a) of the Code wherein
the stockholders of the Company give up all of their equity interest in the
Company (except for the
15
<PAGE>
acquisition of all or substantially all of the outstanding shares of the
Company), any or all outstanding Options and Rights, notwithstanding any
contrary terms of the Plan, shall accelerate and become exercisable in full
prior to and shall expire on the consummation of such dissolution, liquidation,
merger or sale of assets at such times and on such conditions as the Committee
shall determine unless the successor corporation assumes the outstanding
obligations or substitutes substantially equivalent Options or Rights (as
finally determined by the Company's Board of Directors). Any Option or Right
held by a Participant whose employment with the successor corporation is
terminated by such corporation without cause, within twelve (12) months after
consummation of the merger, consolidation or sale of assets, shall accelerate
and become immediately and fully exercisable upon such termination.
(b) Acceleration Upon Unfriendly Takeover. Notwithstanding anything
in Section 12(a) hereof to the contrary, if fifty percent (50%) or more of the
outstanding voting securities of the Company becomes beneficially owned (as
defined in Rule 13d-3 promulgated by the SEC) by a person (as defined in Section
2(2) of the Securities Act and in Section 13(d)(3) of the Exchange Act) in a
transaction or series of transactions expressly disapproved by the Board, then
all outstanding Options or Rights under this Plan shall become immediately
exercisable with no further act or action required by the Committee.
13. EMPLOYMENT RELATIONSHIP. Nothing in the Plan or any award made
thereunder shall interfere with or limit in any way the right of the Company or
of any Parent, subsidiary or Affiliate to terminate any recipient's employment
or consulting relationship at any time, with or without cause, not confer upon
any Parent recipient any right to continue in the employ or service of the
Company or any Subsidiary or Affiliate.
14. GENERAL RESTRICTION. Each award shall be subject to the requirement
that, if, at any time, the Committee shall determine, in its discretion, that
the listing, registration, or qualification of the shares subject to such award
upon any securities exchange or under any state or federal law, or the consent
or approval of any government regulatory body, is necessary or desirable as a
condition of, or in connection with, such award or the issue or purchase of
Shares thereunder, such award may not be exercised in whole or in part unless
such listing registration, qualification, consent, or approval shall have been
effected or obtained free of any conditions not acceptable to the Board.
15. RIGHTS AS A STOCKHOLDER. The holder of an Option, Right or Long-
Term Performance Award shall have no rights as a stockholder with respect to any
shares covered by the Option, Right or Long-term Performance Award until the
date of exercise. Once an Option, Right or Long-Term Performance Award is
exercised by the holder thereof, the Participant shall have the rights
equivalent to those of a
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<PAGE>
stockholder, and shall be a stockholder when his or her holding is entered upon
the records of the duly authorized transfer agent of the Company. Except as
otherwise expressly provided in the Plan, no adjustment shall be made for
dividends or other rights for which the record date is prior to the date such
stock certificate is issued.
16. NONASSIGNABILITY OF AWARDS. Except as otherwise provided in
Section 6(f) hereof, no awards made hereunder shall be assignable or
transferable by the recipient except by will or by the laws of descent and
distribution and as otherwise consistent with the specific Plan provision
relating thereto. During the life of the recipient, an Option, Right or Long-
Term Performance Award shall be exercisable only by him or her.
17. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by
the Board, the submission of the Plan to the stockholders of the Company for
approval, nor any provisions of the Plan shall 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 Options otherwise than under the Plan, and such arrangements may be
either generally applicable or applicable only in specific cases.
18. ADOPTION AND STOCKHOLDER APPROVAL. This Plan shall become effective on
the date that it is adopted by the Board of the Company. This Plan shall be
approved by the stockholders of the Company, in any manner permitted by
applicable corporate law, within twelve months before or after the date this
Plan is adopted by the Board. Upon the effective date of the Plan, the Board may
grant awards pursuant to this Plan; provided that, in the event that stockholder
approval is not obtained within the time period provided herein, all awards
granted hereunder shall terminate.
19. TERM OF PLAN. Awards may be granted pursuant to this Plan from
time to time within a period of ten (10) years from the date on which this Plan
is adopted by the Board.
20. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time
terminate or amend this Plan in any respect including (but not limited to)
amendment of any form of grant, exercise agreement or instrument to be executed
pursuant to this Plan; provided, however, that the Board shall not, without the
approval of the stockholders of the Company, emend this Plan in any manner that
requires such stockholder approval pursuant to the Code or the regulations
promulgated thereunder as such provisions apply to ISO plans or pursuant to the
exchange Act or Rule 16b-3 (or its successor) promulgated thereunder. In any
case, no amendment of this Plan may adversely affect any then outstanding award
or any unexercised portions thereof, without the written consent of the
Participant.
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EXHIBIT 10.5
THE TRYLON CORPORATION
1994 DIRECTORS' STOCK AWARD PLAN
1. Establishment and Purpose
(a) Establishment. There is hereby adopted the 1994 Directors' Stock Award
Plan (the "Plan") of The Trylon Corporation, a Delaware corporation (the
"Company"). The Plan is intended to provide a means whereby eligible members of
the Board of Directors of the Company may be given an opportunity to receive
stock award grants.
(b) Purpose. The purpose of the Plan is to enable the Company to attract
and retain the best available individuals for service as members of the Board of
Directors of the Company, to provide additional incentive to such individuals
while serving as directors, and to encourage their continued service on the
Board of Directors.
2. Definitions
As used herein, the following definitions shall apply:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the Committee or Committees referred to in
Section 4 of the Plan. If at any time no Committee shall be in office, then the
functions of the Committee specified in the Plan shall be exercised by the
Board.
(d) "Common Stock" shall mean the Common Stock, $.01 par value per share,
of the Company.
(e) "Continuous Status as a Director" shall mean the absence of any
interruption or termination of service as a Director.
(f) "Director" shall mean a member of the Board.
(g) "Eligible Committees" shall mean those committees of the Board
established from time to time and, when constituted by the Board, designated by
the Board as being an "Eligible Committee" for purposes of this Plan.
<PAGE>
(h) "Employee" shall mean any person, including officers and Directors, who
is an employee of the Company, or any Subsidiary of the Company, for purposes of
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tax withholding under the Code. The payment of a director's fee by the Company
shall not be sufficient in and of itself to constitute "employment" by the
Company.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, amended.
(j) "Fair Market Value" shall mean, as of any date, the value of Common
Stock determined as follows:
(i) the last reported sale price of the Common Stock of the Company on
the NASDAQ National Market System or, if no such reported sale takes place on
any such day, the average of the closing bid and asked prices, or
(ii) if such Common Stock shall then be listed on a national securities
exchange, the last reported sale price or, if no such reported sale takes place
on any such day, the average of the closing bid and asked prices on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading, or
(iii) if such Common Stock shall not be quoted on such National Market
System nor listed or admitted to trading on a national securities exchange, then
the average of the closing bid and asked prices, as reported by The Wall Street
Journal for the over-the-counter market, or
(iv) if none of the foregoing is applicable, then the Fair Market Value
of a share of Common Stock shall be determined in good faith by the Committee in
is discretion.
(k) "Outside Director" shall mean a Director who is not an Employee.
(l) "Parent" shall mean a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(m) "Recipient" shall mean an Outside Director who receives a Stock Award.
(n) "Securities Act" shall mean the Securities Act of 1933, as amended.
(o) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(p) "Stock Award" means a grant of shares of Common Stock pursuant to the
Plan.
(q) "Subsidiary" shall mean a "subsidiary corporation," whether now or
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<PAGE>
hereafter existing, as defined in Section 424(f) of the Code.
3. Shares Subject to the Plan.
Subject to the provisions of Section 13 of the Plan, the maximum number of
Shares which may be awarded under the Plan is 4,000 shares of Common Stock. If
a Stock Award is not accepted or becomes unexercisable for any reason and has
not been exercised in full, the Shares subject to such Stock Award shall become
available for future grant under the Plan. If Shares which were acquired upon
exercise of a Stock Award are subsequently repurchased by the Company, such
shares shall not become available for future grant under the Plan.
4. Administration of the Plan.
(a) Administrator. The Plan shall be administered by the Board or by the
Committee appointed by the Board, which shall consist of two or more members of
the Board. The Committee shall select one of its members as chairman, and shall
hold meetings at such times and places as it may determine. A majority of the
Committee shall constitute a quorum and acts of the Committee at which a quorum
is present, or acts reduced to approved in writing by all the members of the
Committee, shall be the valid acts of the Committee.
(b) Powers of the Committee. Subject to the provisions and restrictions of
the Plan, the Committee shall have the authority, in its discretion, to: (i)
determine the Fair Market Value of the Common Stock; (ii) determine the exercise
price per Share; (iii) interpret the Plan; (iv) subject to Section 13, amend the
Plan or any Stock Award; (v) authorize any person to execute on behalf of the
Company any agreements or other documents in connection with the grant of a
Stock Award under the Plan; (vi) approve forms of agreement for use under the
Plan; and (vii) make all other determinations deemed necessary or advisable for
the administration of the Plan.
(c) Effect of Committee's Decision. All decisions, determinations and
interpretations of the Committee shall be final and binding on all holders of
any Stock Awards granted under the Plan.
5. Stock Award Grants.
(a) Automatic Grants. All grants of Stock Awards hereunder shall be
automatic and nondiscretionary and shall be made strictly in accordance with the
provisions of this Section 5. No person shall have any discretion to select
which Outside Directors shall be granted Stock Awards or to determine the number
of Shares to be covered by Stock Awards granted to Outside Directors.
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<PAGE>
(b) Initial Grants.
As recognition for prior years of service to the Company, the Outside
5
<PAGE>
Directors shall be granted, effective upon approval of this Plan by the
shareholders of the Company, Stock Awards for the immediate issuance of fully
paid, nonassessable Shares, with no exercise price payable by the Outside
Directors and no repurchase limitations, as follows: (i) Leonardo Berezovsky,
M.D., 650 Shares; (ii) Neal Lonky, M.D., 350 Shares; (iii) Demos Vardiabasis,
200 Shares, (iv) David Wallace, 200 Shares, and (v) William Azzalino, 200
Shares. The remaining directors as of the date of the adoption by the Board of
the Plan, Martin Lonky and Stewart Lonky, M.D., are Employees and therefore not
eligible as Outside Directors to receive Stock Awards under this Plan.
(c) Subsequent Grants.
(i) On December 31 of each year, commencing with December 31, 1994,
each Outside Director as of that date shall be granted automatically a Stock
Award in an amount to be determined as set forth below; provided that on such
date the Outside Director has served on the Board for at least six months
("Service Requirement"). Each December 31 during the term of the Plan (until
such time as no more Shares remain authorized for distribution under the Plan) ,
an aggregate of 750 Shares shall be granted as Stock Awards to the Outside
Directors who have satisfied the Service Requirement. To the extent that all
Outside Directors meeting the Service Requirement have attended at least eighty
percent (80%) of Board meetings during such year, the 750 Shares shall be shared
equally among them. If one or more Outside Directors have attended less than
eighty percent (80%) of Board meetings during such year, there shall be
determined a fraction for each such Outside Director consisting of a numerator
of meetings attended by the Outside Director in question and a denominator of
meetings held by the Board, which fractions shall be multiplied by their
proportion of the 750 Shares so as to reduce the number of Shares available to
them through Stock Awards in such year. The number of Shares resulting from
such reduction which are not distributed as Stock Awards to Outside Directors
who attended less than eighty percent (80%) of the Board meetings during such
year shall be reallocated equally among all other Outside Directors who attended
at least eighty percent (80%) of the Board meeting during such year.
(ii) On December 31 of each year, commencing with December 31, 1994,
each Outside Director who has served on an Eligible Committee of the Board for
at least six months, is an Outside Director as of December 31 of such year and
has attended at least half of the Eligible Committee meetings during such year
(a "Qualified Committee Member") shall be granted automatically a Stock Award in
an amount to be determined as set forth below. The number of Shares available
each year during the term of the Plan (until such time as no more Shares remain
authorized for distribution under the Plan) for distribution to Outside
Directors who have served during such year on an Eligible Committee for at least
six months shall be 450 Shares. In order to determine the distribution of such
Shares, the number
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<PAGE>
of Qualified Committee Members of all Eligible Committees during such year shall
7
<PAGE>
be calculated and such number shall be divided into 450 Shares to determine the
amount of Shares under each Stock Award to a Qualified Committee Member. An
Outside Director may serve on more than one Eligible Committee if permitted by
law and the Company's Bylaws and may receive a Stock Award with respect to
participation in each Eligible Committee (i.e., an Outside Director who is a
Qualified Committee Member on two (2) Eligible Committees shall receive two (2)
Stock Awards hereunder).
(d) Limitations.
(i) Notwithstanding the provisions of Sections 5(b) and 5(c) hereof,
in the event that a sufficient number of Shares is not available under the Plan,
the remaining Shares shall be prorated based upon the number of Shares each
Director was entitled to receive under this Plan. Any further grants shall then
be deferred until such time, if any, as additional Shares become available for
grant under the Plan. Subject to the terms of Section 13 hereof, the Board
shall have the authority at any time to make additional Shares available for
grant under the Plan, subject to obtaining stockholder approval of such increase
to the extent required under Section 13 hereof.
(ii) Notwithstanding the provisions of Sections 5(b) and (c) hereof,
any grant of a Stock Award made before the Company has obtained stockholder
approval of the Plan and any grant of a Stock Award made after amendment of the
Plan where such amendment of the Plan requires stockholder approval under
Section 13 hereof shall be conditioned upon obtaining such stockholder approval.
(iii) Notwithstanding the provisions of Section 5(c)(ii) hereof,
each grant described in that subparagraph made after the date that the Company
becomes subject to new Rule 16b-3 under the Exchange Act, as amended effective
May 1, 1991 ("New Rule 16b-3), shall be conditional upon the Company receiving
on or prior to the date of the grant either an opinion of counsel or a no-action
letter issued by the Staff of the Securities and Exchange Commission to the
Company stating that the grant is an exempt grant under New Rule 16b-3 under the
Exchange Act as then applicable to the Company and the recipient of the grant
remains a "disinterested" person within the meaning of New Rule 16b-3.
6. Terms and Conditions of Stock Awards.
Each Stock Award granted pursuant to this Plan shall be evidenced by a
written stock award agreement ("Stock Award Agreement") executed by the Company
and the Outside Director containing such terms and conditions that are
consistent with this Plan and as otherwise determined by the Committee.
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<PAGE>
7. Eligibility.
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<PAGE>
Stock Awards may be granted only to Outside Directors. The Plan shall not
confer upon any Outside Director any right with respect to continuation of
service as a Director or a nomination to serve as a Director, nor shall it
interfere in any way with any rights which the Director or the Company may have
to terminate his or her directorship at any time.
8. Term of Plan; Effective Date.
The Plan shall become effective on May 24, 1993. Stock Awards may be
granted under this Plan at any time on or before May 24, 2003.
9. Withholding Taxes.
Whenever, under the Plan, Shares are to be issued in satisfaction of the
Stock Awards granted hereunder, the Company shall have the right to require the
recipient to remit to the Company an amount in cash sufficient to satisfy any
applicable federal, state or local income and employment tax withholding
requirements prior to the delivery of any certificate or certificates for such
Shares.
10. Rights as a Stockholder.
Notwithstanding the grant of a Stock Award hereunder, until the execution
and delivery of a Stock Award Agreement and issuance (as evidenced by the
appropriate entry on the books of a duly authorized transfer agent of the
Company, or if none, of the Company) of the stock certificate evidencing such
Shares, no right to vote or receive dividends or any other rights as a
stockholder shall exist with respect to the Shares underlying such Stock Award.
A stock certificate for the number of Shares so acquired shall be issued to the
Recipient as soon as practicable after execution and delivery of the Stock Award
Agreement. No adjustment will be made for a dividend or other right if the
record date is prior to the date the stock certificate is issued.
11. Nontransferability of Stock Awards.
No Stock Award may be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by will or by the laws of descent or
distribution. The designation of a beneficiary by a Recipient does not
constitute a transfer. Such limitations shall apply only to the grant of a
Stock Award and shall not act as restrictions upon the Shares issued pursuant to
a Stock Award to an Outside Director.
10
<PAGE>
12. Adjustment Upon Changes in Capitalization
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,
11
<PAGE>
combination, reclassification or similar change in the capital structure of the
Company without consideration, the number of Shares available under this Plan
shall be proportionately adjusted, subject to any required action by the Board
or stockholders of the Company and compliance with applicable securities laws;
provided, however, that no certificate or scrip representing fractional shares
shall be issued and any resulting fractions of a share shall be ignored.
13. Amendment and Termination of the Plan.
(a) Amendment. The Board or the Committee may amend the Plan from time
to time in such respects as the Board or the Committee, as the case may be, may
deem advisable; provided that, to the extent necessary to comply with Rule 16b-3
under the Exchange Act (or any other applicable law or regulation), the Company
shall obtain approval of the Company's stockholders to amend the Plan to the
extent and in the manner required by such law or regulation. Notwithstanding the
foregoing, the provisions set forth in Section 5 and 6 of this Plan (and any
other Sections of this Plan that affect the formula award terms required to be
specified in this Plan by Rule 16b-3) shall not be amended more than once every
six months, other than to comport with changes in the Code, the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder.
(b) Termination or Suspension. The Committee, without further approval
of the stockholders, may at any time terminate or suspend the Plan. Except as
otherwise provided herein, any such termination or suspension of the Plan shall
not affect Stock Awards already granted hereunder and such Stock Awards shall
remain in full force and effect as if the Plan had not been terminated or
suspended.
(c) Outstanding Stock Awards. Except as otherwise provided herein,
rights and obligations under any outstanding Stock Award shall not be altered or
impaired by amendment, suspension or termination of the Plan, except with the
consent of the person to whom the Stock Award was granted.
14. Conditions Upon Issuance of Shares.
Shares shall not be issued pursuant to the grant of a Stock Award unless
the Stock Award and the issuance and delivery of such Shares pursuant thereto
shall comply with all relevant provisions of law, including, without limitation,
the Securities Act, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall further be subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the grant of a Stock Award, the Company may require
that the person receiving such to represent and warrant at the time of any such
exercise
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<PAGE>
that the Shares are being taken only for investment and without any present
13
<PAGE>
intention to sell or distribute such Shares, if, in the opinion of counsel for
the Company, such a representation is required by any of the relevant provisions
of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdictional authority deemed by the Company's counsel to be necessary
for the lawful issuance and sale of any Shares hereunder shall relieve the
Company of any liability for failure to issue or sell such Shares.
15. Reservation of Shares.
The Company, during the term of this Plan, will at all times reserve and
keep available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan.
16. Stockholder Approval.
This Plan shall be approved by the stockholders of the Company, in any
manner permitted by applicable corporate law, within twelve months after the
date this Plan is adopted by the Board. In the event that stockholder approval
is not obtained within the time period provided herein, all awards previously
granted hereunder shall terminate.
17. Additional Restrictions of Rule 16b-3.
The terms and conditions of Stock Awards granted hereunder to persons
subject to Section 16 of the Exchange Act shall comply with the applicable
provisions of Rule 16b-3. This Plan and the Stock Awards granted hereunder
shall be deemed to contain such additional conditions and restrictions as may be
required for this Plan to qualify as a "formula plan" under Rule 16b-3, as then
applicable to the Company, and to qualify for the maximum exemptions from
Section 16 of the Exchange Act with respect to Plan transactions.
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<PAGE>
EXHIBIT 10.6
AGREEMENT
BETWEEN
OMNIGLOW CORPORATION,
THE TRYLON CORPORATION
AND
ASIAN SOURCING CORPORATION
THIS AGREEMENT ("Agreement") is dated as of the 16th day of March 1994, by
and between OMNIGLOW CORPORATION, a corporation organized under the laws of the
State of California, United States of America ("Omniglow"), THE TRYLON
CORPORATION, a corporation organized under the laws of the State of Delaware,
United States of America ("Trylon") and Asian Sourcing Corporation, a
corporation organized under the laws of the State of California, United States
of America ("ASC"), and sets forth the material agreements of the parties with
respect to the matters set forth below.
WHEREAS, Omniglow is the owner of one or more patents relating to, has
proprietary know how with respect to, and manufactures Blue-White Speculite(R),
a chemiluminescent lightstick which is utilized, through certain proprietary
knowledge owned by Trylon, for the endoscopic gynecological examination,
testing, diagnosis and treatment of women through chemiluminescent illumination,
which examination is known as Speculoscopy; and
WHEREAS, ASC has indicated its desire to form a joint venture under the
laws of the People's Republic of China with a company organized under the laws
of People's Republic of China ("Joint Venture Partner") for the purpose of
distributing Speculite(R) within and, as permitted by Omniglow and Trylon,
outside the People's Republic of China and, for the purpose of supplying such
requirements, manufacturing Speculite(R) at a mutually approved location in the
People's Republic of China (the "Joint Venture"); and
WHEREAS, in order to carry out such endeavors, ASC desires to obtain from
Omniglow and Trylon certain licenses, training and products that will be
sublicensed, provided and/or sold, as applicable to the Joint Venture and/or
utilized by the Joint Venture, and ASC will pay to Omniglow and Trylon for such
items the amounts listed herein; and
WHEREAS, Omniglow and Trylon desire to proceed on the terms and conditions
set forth herein; and, in consideration of the foregoing Omniglow is intending
to enter into a joint venture with Trylon for the purpose of carrying out the
intent of this Agreement, subject to conditions precedent enumerated herein;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements, premises and covenants contained herein, the parties agree as
follows:
1. Definitions and Interpretation
------------------------------
A. Wherever used in this Agreement the word "manufacture"
shall
<PAGE>
mean the manufacture of Speculite(R) chemiluminescent lightsticks from
chemiluminescent chemicals and ampules containing other chemiluminescent
chemicals supplied by Omniglow, Trylon or any affiliate of either, but shall not
include manufacture of such chemicals, ampules or other components of the
lightsticks.
B. Wherever used in this Agreement the words "distribution," "sell,"
"market," "license" or "transfer" shall mean the distribution, sale, marketing,
license or other transfer of Speculite(R) chemiluminescent lightsticks, but
shall not include the distribution, sale, marketing, license or other transfer
of chemicals, goods, products or other materials manufactured, distributed, sold
or supplied by Omniglow or Trylon or any affiliate of either other than as
expressly permitted by this Agreement.
C. Wherever a party is named or referred to in this Agreement, or is
referenced by a type of proposed party, such as joint venturer, distributor,
subdistributor, representative, agent, entity or otherwise, the party shall be
deemed to include the party and each and everyone of its shareholders, partners,
limited partners, owners of all types, subsidiaries, affiliates, officers,
directors, agents, servants, employees and representatives of all types.
D. The term "Blue-White Speculite(R) Lightstick" or "Lightstick" or
Speculite(R) shall mean a Blue-White Speculite(R) chemiluminescent light stick,
with fracturable glass ampules imbedded in polypropylene containers,
approximately 52mm in length (samples of which have been provided to ASC prior
to the date hereof), to be used solely as an illumination source in the visual
examination by physicians and health care providers of pathological demarcations
during gynecological endoscopic visual examination procedures.
2. Joint Venture and Cooperation.
-----------------------------
A. [Omitted]
B. [Omitted]
C. [Omitted]
3. Conditions to Performance of ASC. Each and all of the following
--------------------------------
shall be conditions for the benefit of Omniglow and Trylon, jointly and
severally, to the obligations of Omniglow and Trylon each to perform hereunder
and to continue the appointment of ASC as a distributor hereunder and the Term
of the Agreement. Should any of such conditions not be satisfied within one (1)
year of the date of this Agreement, Trylon and/or Omniglow, at their election,
may terminate this Agreement (and thereby terminate the appointment and rights
of ASC hereunder) upon thirty (30) days prior written notice to ASC or may
convert ASC's distributorship to a nonexclusive distributorship.
A. ASC, directly or through an entity in which it holds a controlling
interest, and the Joint Venture Partner shall have entered into a joint venture
agreement that includes confidentiality clauses, non-competition clauses,
exclusivity clauses and protections for patents, trademarks, trade secrets, know
how, confidential information and proprietary property and information of
Omniglow and of Trylon reasonably satisfactory to Omniglow and to Trylon, as
applicable;
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<PAGE>
B. ASC and the Joint Venture shall have used its and their best
efforts to obtain patent protection (or other reasonably equivalent protection,
in Omniglow and Trylon's sole determination) in the People's Republic of China
satisfactory to Omniglow with regard to Omniglow patents relating to
chemiluminescent light technology and Speculite(R) and satisfactory to Trylon
with regard to Trylon patents relating to Speculoscopy. Should Omniglow's
patents be determined, or be likely to be determined, by Chinese authorities not
to qualify for patent protection by reason of lack of novelty, or otherwise, ASC
and the Joint Venture again will use its and their best efforts to obtain patent
protection for Omniglow's chemiluminescent light products and Speculite(R) if
such are modified by Omniglow to add novel or other elements to the products or
processes and for Trylon's proprietary procedures and processes if such are
modified by Trylon to add novel or other elements to the existing procedures and
processes. In all such instances, Trylon and Omniglow shall provide to ASC all
appropriate information to effect and obtain such patent protection and shall
execute documents and take such other actions as are reasonably necessary for
such purpose.
C. ASC or the Joint Venture shall have obtained all necessary
government approvals for the Joint Venture and the conduct of its operations,
and the Joint Venture Partner shall have been approved by Trylon and Omniglow
(which consent will not be unreasonably withheld if the proposed Joint Venture
Partner has sufficient financial and personnel resources and legal authority for
fulfillment of the Joint Venture's duties and obligations and the Joint Venture
Partner and its officers, directors, shareholders, affiliates and controlling
persons are generally recognized as having a business, legal and ethical
reputation of high quality).
4. ASC Responsibilities. It shall be the sole responsibility of ASC
--------------------
to establish, operate and supervise the Joint Venture and all contracts between
ASC and other approved parties in accordance with the terms of this Agreement.
ASC shall use its good faith, best efforts to establish the Joint Venture on
commercially reasonable terms, and shall be solely responsible for any and all
costs, expenses and obligations of any nature arising from or incurred in
connection with the Joint Venture. ASC shall present any proposed Joint Venture
or other agreement to Omniglow and to Trylon at such times as shall be
appropriate to enable Omniglow and Trylon to provide advice to ASC with regard
to contractual protections which must exist for the benefit of ASC, Trylon and
Omniglow before Omniglow and Trylon will approve the Joint Venture or any other
agreement. ASC shall have responsibility for obtaining, or causing the Joint
Venture to obtain, all governmental approvals within the People's Republic of
China, and all of the countries within which ASC desires to sell Speculite(R)
for use in Speculoscopy, to enable ASC and the Joint Venture to conduct business
within the People's Republic of China, and any other such countries. ASC, at its
sole cost, shall at all times have responsibility for enforcing all provisions
of all agreements between ASC and any party which protect Omniglow and/or
Trylon. Should ASC fail to take reasonable action for such protection of
Omniglow and/or Trylon, Omniglow or Trylon, as the case may be, shall have the
right to take such action, legal or otherwise, at ASC's cost and expense to
protect its rights or interests.
5. Joint Venture Responsibilities. Unless ASC and/or the Joint Venture
------------------------------
shall have demonstrated to the reasonable satisfaction of Omniglow and Trylon
the market feasibility for distribution and sale of the Blue-White Speculite(R)
Lightsticks in the People's Republic of China, the Joint Venture and/or ASC (or
its agent or subdistributor) shall initiate and conduct a "pilot" testing
program (the "Program") in major metropolitan areas within the People's Republic
of China to introduce Speculoscopy and to determine whether Speculoscopy may be
adopted by the Chinese governmental health care authorities for use in
connection with its general population. The
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Program shall commence within six (6) months after the date of this Agreement
and shall conclude not later than one (1) year after commencement of the
Program. During and following the completion of the Program the Joint Venture
shall have responsibility for reporting to Omniglow and Trylon interim and final
results of the Program, and for obtaining from the appropriate Chinese
governmental healthcare authorities a determination as to whether those
healthcare authorities will authorize or direct appropriate agencies to purchase
Blue-White Speculite(R) Lightsticks from ASC (or an agent or subdistributor of
Ho) or the Joint Venture for utilization in gynecological Speculoscopy
examination procedures within the People's Republic of China. The Joint Venture
and ASC shall be responsible for negotiating and obtaining all final contracts
with all parties participating in the manufacture and sale of Blue-White
Speculite(R) Lightsticks in the People's Republic of China, all of which
agreements shall be made available to Omniglow and Trylon prior to their
execution to enable Omniglow and Trylon to determine whether such agreements
contain all protections required by Omniglow and Trylon as a condition of
selling products or services relating to Blue-White Speculite(R) Lightsticks to
ASC, the Joint Venture, or any other parties in the People's Republic of China.
If the Joint Venture determines to export and/or sell any amount of the Blue-
White Speculite(R) Lightsticks manufactured within the People's Republic of
China to countries within the Territory other than the People's Republic of
China, ASC shall bear the sole responsibility and cost for such export or sale,
and the grant to ASC and/or the Joint Venture to sell Blue-White Speculite(R)
Lightsticks within the Territory shall be made in consideration of ASC expressly
assuming such entire obligation. If ASC and/or the Joint Venture (or any foreign
entity) is required to purchase any portion of Blue-White Speculite(R)
Lightsticks manufactured within the People's Republic of China as a condition of
the Joint Venture or contracts with parties, agencies, or entities within the
People's Republic of China, ASC and the Joint Venture shall bear the sole
responsibility for such purchase requirements, and shall indemnify, hold
harmless, and defend Omniglow and Trylon with respect to any such purchase
requirement. Neither Omniglow, Trylon, nor any Joint Venture established by
Trylon or Omniglow shall be responsible or be required to make any purchase of
Blue-White Speculite(R) Lightsticks manufactured within the People's Republic of
China.
6. Omniglow and Trylon Information, Equipment Purchase, Turn-Key
-------------------------------------------------------------
Installation and Training and Support Services.
- ----------------------------------------------
A. Omniglow and Trylon Information. Omniglow and Trylon have provided
-------------------------------
or will be providing to ASC a copy of all United States patents they hold
relating to Blue-White Speculite(R) Lightsticks and Speculoscopy. Trylon also
will provide to ASC immediately after execution of a copy of the Form 510(k)
filed with the United States Food and Drug Administration pertaining to
Speculoscopy.
B. Purchase of Equipment. Omniglow has provided to ASC prior to the
---------------------
execution and delivery of this Agreement information concerning the equipment
and equipment prices necessary or appropriate for the automated manufacture of a
large volume of Blue-White Speculite(R) Lightsticks at the manufacturing
facility selected by the Joint Venture. Should the Joint Venture determine to
manufacture Blue-White Speculite(R) Lightsticks, the Joint Venture shall place
an order for the selected equipment through Omniglow and shall forward to
Omniglow $250,000 (or, if the cost of the selected equipment is greater than
$250,000, the amount that is the full invoiced cost of the selected equipment)
in United States currency (or place a satisfactory letter of credit payable to
Omniglow) at the time an order for manufacturing equipment is placed, which
funds will be applied in part or in whole by Omniglow toward the purchase of the
equipment and the preparation of a manufacturing plan and project schedule for
the Joint Venture. ASC acknowledges and
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understands that a lead time of at least one hundred twenty (120) days' is
required for Omniglow to obtain machinery or equipment to be provided under this
Section. Therefore, ASC shall give Omniglow at least one hundred twenty (120)
days' prior written notice of the intended time and place for delivery and
installation of such machinery and equipment.
C. Trylon and Omniglow Turn-Key, Training and Support Services. Once
-----------------------------------------------------------
the equipment purchase has occurred, Omniglow and Trylon will provide certain
training, turn-key and support services to ASC and the Joint Venture, as set
forth below in clauses (i) and (ii), for the compensation set forth below in
clause (iii):
(i) [Omitted]
(ii) Trylon will provide certain training and training information to
ASC and/or the Joint Venture upon request for use in connection with the Joint
Venture in the People's Republic of China. The training will be for the purpose
of enabling Chinese health care practitioners supplied with Blue-White
Speculite(R) Lightsticks by the Joint Venture or ASC to understand and
administer the Speculoscopy examination and, as appropriate, to train other
Chinese health care practitioners in the Speculoscopy examination. Trylon and
ASC shall agree on a training program (including Speculoscopy educational,
marketing and training seminars) to be undertaken by Trylon personnel in the
People's Republic of China (with twelve (12) trips of not more than five (5)
days each by a Trylon employee available at no additional charge to ASC or the
Joint Venture, and additional support in China available from Trylon personnel
on a time and materials basis to be negotiated by the parties) and in the United
States (at ASC's cost with respect to out-of-pocket expenses, but with no
additional fees charged by Trylon to ASC or the Joint Venture for the first five
(5) business days of training, with any additional training to be charged on a
time and materials basis to be negotiated by the parties)(the "Trylon Training
and Support Services").
(iii) [Omitted]
7. Provision of Blue-White Speculite(R) Lightsticks.
------------------------------------------------
[Omitted]
8. Manufacture of Blue-White Speculite(R) Lightsticks. Should the
--------------------------------------------------
Joint Venture commence manufacturing Blue-White Speculite(R) Lightsticks:
A. [Omitted]
B. ASC shall have the right to request lower chemical and
materials prices if necessary and appropriate for maximum market penetration or
market retention, or to reflect possible economies of scale resulting from large
volume orders, which request will be considered by Omniglow and responded to by
Omniglow to ASC within thirty (30) days after the receipt of such request from
ASC. Omniglow shall consider such requests in good faith, but shall have full
discretion to reject or modify such requests.
C. Neither the Joint Venture, ASC nor any other party who is
granted rights pursuant to this Agreement shall manufacture, distribute, sell or
transfer any similar or competing products or any other chemiluminescent light
products or chemicals therefor (whether for Speculoscopy or otherwise) without
the prior written permission of Omniglow and Trylon (which
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provision shall survive any termination or expiration of this Agreement).
D. Upon request by Omniglow, Trylon or the joint venture between
Omniglow and Trylon, ASC shall sell to such requesting party at a cost of the
materials to the Joint Venture (i.e., chemicals sold to ASC by Omniglow, Trylon
and/or the joint venture between Omniglow and Trylon, printed aluminum wrap and
plastic covering and reasonable labor charges (based on comparable labor charges
in the local region of the province for manufacturing domestic general
products), which cost shall be reasonably determined by the parties by reference
to the Joint Venture's actual invoiced and incurred costs for the foregoing
items) plus a twenty-five percent (25%) aggregate margin for ASC (and the Joint
Venture, if applicable) the number of Blue-White Speculite(R) Lightsticks
reasonably requested by Omniglow, Trylon or the joint venture between Omniglow
and Trylon from time to time
E. [Omitted]
F. In the event that manufacturing of the Lightsticks commences in
the People's Republic of China and ASC commences distribution in Taiwan, Trylon
and Omniglow will agree to supply such Taiwanese distribution requirements of
ASC as are reasonably requested from United States or other manufacturing
sources that comply with Taiwanese legal requirements (with price, delivery and
other terms as the parties shall agree).
9. Termination of Rights under this Agreement. All rights of ASC,
------------------------------------------
the Joint Venture or other parties obtaining rights pursuant to this Agreement
shall terminate upon the earlier of: (i) the breach by ASC or the Joint Venture
of any of the terms or conditions of this Agreement; (ii) a determination by the
parties or any governmental authority of the illegality of this Agreement; (iii)
the agreement of the parties; or (iv) the expiration of this Agreement. In the
event of such termination, all obligations of the parties under Sections 10, 11
and 12 of this Agreement, and all other obligations which have not been fully
performed as of the effective date of termination, shall be and remain binding
upon and enforceable against the parties having such continuing obligations.
Further, any provisions which by their terms explicitly survive termination of
this Agreement shall survive the termination of this Agreement.
10. Further Agreements of ASC. In addition to the foregoing, ASC
-------------------------
(and each of its subdistributors, affiliates, agents, partners and licensees)
hereby agree as follows (which agreements shall survive the termination or
expiration of this Agreement):
A. ASC, the Joint Venture and all parties with whom either ASC or the
Joint Venture contract or agree shall respect, shall not infringe, and shall not
challenge any patents owned by Omniglow with respect to chemiluminescent light
products and Speculite(R) and by Trylon with respect to Speculoscopy or any
trademarks of either Omniglow or Trylon. Furthermore, ASC and all such parties
shall not reverse engineer or otherwise in any manner, directly or indirectly,
create chemicals or other products which are in any manner based on or in
technology described in patents, know how or confidential or proprietary
information of Omniglow, Trylon or any joint venture between Omniglow and
Trylon.
B. ASC, the Joint Venture and all parties with whom either ASC or the
Joint Venture contract or agree shall not directly or indirectly manufacture,
sell, distribute or transfer Speculite(R), chemiluminescent light products,
chemicals sold by Omniglow or Trylon (or any affiliate of either) to any party,
or any parts or components thereof, except in the Territory during the Term
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as specifically authorized in the relevant contract with ASC or the Joint
Venture which has been approved by Trylon and Omniglow.
C. Breach of any provisions for the protection of Omniglow or Trylon
in this Agreement or in any contract pursuant or related to this Agreement
(which breach, if reasonably capable of cure, is not cured within thirty (30)
days after notice of such breach is given) shall give Omniglow or Trylon, as
applicable, the right to terminate this Agreement or the appropriate contract,
in which event all rights of ASC and/or all parties having obtained rights
through ASC and/or the Joint Venture, as appropriate, shall terminate
immediately and automatically on the termination date (with no further right to
manufacture, sell, market, distribute or otherwise handle the products
hereunder) and Omniglow shall have the exclusive right to repurchase at the
price sold by Omniglow all products, goods, or chemicals sold by Omniglow to any
party. Should Omniglow not exercise such right within sixty (60) days after
termination, Trylon then shall have the same exclusive right of repurchase.
11. Confidentiality. ASC (and each of its agents, employees,
---------------
shareholders, representatives, officers, directors and partners) acknowledges
and agrees not to use any confidential or proprietary information of Omniglow or
Trylon in a manner adverse to the interests of Omniglow or Trylon, as
applicable, or other than as is necessary or appropriate for the performance of
its rights, duties and obligations under this Agreement. ASC and its partners,
affiliates, officers, directors, shareholders, employees, agents, contractors,
and representatives, jointly and severally agree that they shall keep all
confidential and proprietary information supplied to them under this Agreement
in the strictest confidence, and shall not disclose such information to any
person other than as reasonably necessary for performance of this Agreement.
ASC acknowledges and agrees that all documents, information, know-how, and
property supplied to ASC and/or the Joint Venture by Omniglow are and shall
remain the property of Omniglow and must be returned immediately upon request by
Omniglow. ASC acknowledges and agrees that all documents, information, know-
how, and property supplied to ASC and/or the Joint Venture by Trylon are and
shall remain the property of Trylon and must be returned immediately upon
request by Trylon. In the event of any breach of ASC and/or the Joint Venture
of this Section 11, each of Omniglow and Trylon shall be entitled to equitable
relief from any court of competent jurisdiction to enforce the breached
obligation, including without limitation, specific performance and preliminary
injunctive relief, temporary restraining orders and Mareva orders, in addition
------
to any monetary damages that may be determined. Every contract between ASC
and/or the Joint Venture and another party pursuant to or relating to this
Agreement shall include confidentiality provisions substantially the same as the
provisions of this Section 11. The agreements in this Section 11 shall survive
any termination or expiration of this Agreement.
12. Non-Competition. In consideration of the rights granted by Omniglow and
---------------
Trylon to ASC, the Joint Venture, or other parties entering into contracts
pursuant or related to this Agreement, and in recognition of the need for
loyalty and cooperative efforts between all involved parties to enhance and
promote the value of the patents, trademarks, know how and confidential
information of Omniglow and Trylon, and to develop markets for sale of Blue-
White Speculite(R) Lightsticks which will benefit all parties, neither ASC, the
Joint Venture, nor any party having rights or obligations under any contract
pursuant or related to the terms of this Agreement shall directly or indirectly
engage in any conduct, action or activity that (i) competes or will compete
during the term of this Agreement with the manufacture, distribution, marketing,
sale, licensing or transfer of Blue-White Speculite(R) Lightsticks under this
Agreement, or (ii) competes or will compete with the manufacture, distribution,
sale, license or transfer of Omniglow's chemiluminescent light chemicals,
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materials or finished goods other than Blue-White Speculite(R) Lightsticks. In
the event of any breach of this Section 12 by ASC, the Joint Venture or such
other contracting parties, each of Omniglow and Trylon shall be entitled to
equitable relief from any court of competent jurisdiction to enforce the
breached obligation, including without limitation specific performance and
preliminary injunctive relief, temporary restraining orders and Mareva orders,
------
in addition to any monetary damages that may be determined. Every contract
between ASC and/or the Joint Venture and another party pursuant to or relating
to this Agreement shall include noncompetition provisions for the benefit of
Omniglow and Trylon substantially the same as the provisions of this Section 12.
The agreements in this Section 12 shall survive any termination or expiration of
this Agreement.
13. Dispute Resolution. Should any disputes arise between the parties
------------------
hereto, they agree to attempt to resolve them by good faith discussion and
negotiation. Should resolution of a dispute not occur within fifteen days after
a party has requested good faith discussion and negotiation, any and all
controversies, claims and disputes under and relating to this Agreement, or the
breach thereof, shall be resolved first through good faith mediation, and second
through binding arbitration, with venue in the City and County of San Francisco,
State of California, United States, under the rules and procedures of Judicial
Arbitration and Mediation Services, Inc. ("JAMS"). ASC hereby specifically
consents to venue as set forth above, and consents to personal jurisdiction over
ASC of state and federal courts in the City and County of San Francisco. ASC
agrees that such consent is a material inducement to Omniglow and Trylon to
cause them to enter into this Agreement. Judgment upon the award rendered by an
arbitrator may be entered in any court having jurisdiction thereof. Within ten
(10) days after initiation of mediation, the parties shall select a single
neutral mediator from the JAMS list of available mediators. If the parties fail
to select a mediator within such period, then a mediator shall be selected by
JAMS in accordance with its procedures. Within ten (10) days after the
initiation of arbitration, the parties shall select a single neutral arbitrator
from the JAMS list of available arbitrators to preside over the arbitration
proceeding. If the parties fail to select an arbitrator, the arbitrator shall be
selected by JAMS in accordance with its procedures. If possible, any mediator
or arbitrator should have expertise with international commercial matters and
distribution arrangements. Nothing in this arbitration provision shall be
construed to limit the right of any party to seek preliminary injunctive relief
in any court of competent jurisdiction in accordance with Sections 11 and 12 or
otherwise, nor shall the filing of an action to obtain such relief constitute a
waiver of the right to arbitrate the underlying dispute. The arbitrator shall
have authority to order such other discovery as it deems appropriate for a full
and fair hearing of the case. A determination on the merits shall be rendered
in accordance with the law of the State of California to the same extent as if
the dispute were pending before a superior court of that State. The award shall
include an award to the prevailing party of its arbitration costs, reasonable
legal fees, and costs.
14. Additional Agreements. ASC and the Joint Venture agree to execute
---------------------
additional agreements and instruments when requested by Trylon and/or the Joint
Venture for the purpose of further evidencing, clarifying or specifying the
rights and obligations of the parties hereunder. Such agreements and
instruments shall be executed and delivered promptly to Trylon and Omniglow.
15. Miscellaneous Matters. This Agreement shall be binding on, and
---------------------
inure to
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the benefit of, the parties hereto, their successors and assigns; provided,
however, that ASC may not assign this Agreement or any right, duty or obligation
hereunder without the prior written consent of both Omniglow and Trylon.
Further, this Agreement shall terminate automatically upon any change in
ownership, liquidation, dissolution, sale, merger, reorganization,
recapitalization or business combination of ASC, unless Trylon and Omniglow are
provided with definitive evidence that Handson Ho remains the shareholder of at
least eighty percent (80%) of ASC (or if ASC is not the surviving corporation,
of the surviving corporation). This Agreement may only be amended or modified in
writing by the agreement of both parties, and this Agreement and any amendments
or modifications may be signed in counterparts, with each counterpart being an
original document and all counterparts together constituting an original
document. This Agreement and the relationship of the parties shall be governed
by, and interpreted under, the laws of the State of California, United States,
without regard to choice of law or conflict of law provisions. The parties
hereby disclaim any applicability of the Convention for the International Sale
of Goods to this Agreement. In the event of any dispute, the prevailing party
shall be entitled to recovery of its legal fees and costs and the costs of
enforcement. This Agreement constitutes the entire agreement and understanding
of the parties with respect to the matters herein and supersedes all prior or
contemporaneous agreements or understandings, whether written or oral. Any
notice permitted or refined to be given in accordance with this Agreement, shall
be deemed given upon personal delivery or, upon receipt, by prepaid, registered
mail, to the last address provided by a party hereto or by confirmed fax or
telex.
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IN WITNESS WHEREOF, the duly authorized representatives of the parties
have executed this Agreement as of the date first above written.
OMNIGLOW CORPORATION THE TRYLON CORPORATION
By: /s/ Fred Kaplan By: /s/ M. L. Lonky
----------------- ---------------
Name: Fred Kaplan Name: Martin L. Lonky
----------- ---------------
Title: President Title: President
--------- ---------
Address for Notices: Address for Notices:
20-C Pimentel Court 970 W. 190th Street, Suite 900
Novato, California 94949 USA Torrance, California 90502
ASIAN SOURCING CORPORATION
By: /s/ Handson Ho
--------------
Handson Ho, President
Address for Notices:
474 S. San Leandro Drive
Diamond Bar, CA 91765
[CERTAIN PORTIONS OF THIS DOCUMENT, AS INDICATED WITHIN, HAVE
BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST]
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EXHIBIT 10.7
DISTRIBUTION AGREEMENT
This Distribution Agreement ("Agreement") is made and entered into as
of the 20th day of July, 1994 (the "Agreement Date") by and between THE TRYLON
CORPORATION, a Delaware corporation with offices at 970 West 190th Street, Suite
900, Torrance, California ("Trylon"), PERISPHERE INDUSTRIES, INC., a California
corporation with offices at 970 West 190th Street, Suite 900, Torrance,
California ("Perisphere"), and THE UPJOHN COMPANY, a Delaware corporation, with
its principal place of business at 7000 Portage Road, Kalamazoo, Michigan 49001
("Upjohn").
RECITALS:
A. Upjohn has expertise as a provider of pharmaceuticals and ancillary products
to physicians and health care organizations, and has an organization, the
capability and resources to market and distribute medical device products
targeted for sale to primary care physicians.
B. Trylon has certain rights to distribute medical device products,
including but not limited to Blue-White Speculite (TM) lightsticks, relating to
Pap Plus Speculoscopy (TM), a procedure that may be used in gynecological
examinations for the detection and evaluation of female genital tract disease
("PPS"), and Perisphere has certain rights to distribute optics for use in
connection with PPS. Trylon and Perisphere have been working to achieve national
distribution in the United States of Blue-White Speculite (TM) lightsticks
through clinical laboratory and other distribution channels, but are willing to
suspend further efforts in reliance on the performance by Upjohn of the terms
and conditions herein contained.
C. Upjohn, Trylon and Perisphere now desire to enter into a
contractual relationship whereby Trylon and Perisphere will engage Upjohn as its
exclusive distributor of certain medical device products (including Blue-White
Speculite (TM) lightsticks) in certain territories and for certain periods and
as its nonexclusive distributor of certain medical device products (including
Blue-White Speculite (TM) lightsticks) in certain territories and for certain
periods, as further set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises of the parties
hereto and of the mutual benefits to be gained by the performance thereof, and
for other good and valuable consideration, the respective receipt of which is
hereby acknowledged by each of the parties hereto, the parties hereto agree as
follows:
<PAGE>
SECTION 1 DEFINITIONS
1.1 Affiliate. The term "Affiliate" shall mean any Person that
directly or indirectly, through one or more intermediaries, controls or is
controlled by, or is under common control with, such Person.
1.2 American Cyanamid. The term "American Cyanamid" shall mean the
American Cyanamid Company, a Maine corporation.
1.3 Exclusive Upjohn Territory. For all purposes of this Agreement,
the term "Exclusive Upjohn Territory" shall mean those geographical areas within
the United States of America specified in Exhibit A, attached hereto and
incorporated herein, as being an exclusive distribution territory.
1.4 Lightstick. The term "Lightstick" shall mean the Blue-White
Speculite(R) chemiluminescent light stick manufactured for Trylon, with
fracturable glass ampules imbedded in polypropylene containers, approximately
52mm in length, to be used as an illumination source in the visual examination
by physicians of pathological demarcations during gynecological endoscopic PPS
procedures. Each light stick will be accompanied by a double sided adhesive
polymer, intended to provide adhesive capability of the light stick to
disposable and re-usable specula.
1.5 Lightstick Equivalents. The term "Lightstick Equivalents" shall
mean that number of Lightsticks sold to Upjohn which, when taken together, have
an aggregate value under the offset formula set forth in Section 6.1 [Omitted].
1.6 Nonexclusive Upjohn Territory. For all purposes of this
Agreement, the term "Nonexclusive Upjohn Territory" shall mean those
geographical areas within the United States of America specified in Exhibit A,
attached hereto and incorporated herein, as being a nonexclusive distribution
territory.
1.7 Optics. The term "Optics" shall mean the 6x Basic starter
monocular optics components used in connection with PPS which is manufactured by
or for Perisphere.
1.8 Person. The term "Person" shall mean any corporation, trust,
partnership, individual, association or other entity.
1.9 PPS Kit. The term "PPS Kit" shall mean that certain packaged kit
agreed to by the parties that Upjohn may use to distribute Lightsticks to be
used in connection with PPS. Initially, the PPS Kit shall include a vacuum
formed multi-pocket white plastic tray covered with printed peel-back sealing
paper, one (1) Lightstick, one (1) adhesive strip, one (1) acetic acid wash
pouch, two (2) scopette swabs, one (1) cotton tip applicator, one (1) cytology
brush, one (1) wooden cervical scraper, and one (1) SafeTex or similar cell
protection pack.
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1.10 Products. The term "Products" shall mean those items listed on
Exhibit B attached hereto and incorporated herein.
1.11 Stated Minimum. The term "Stated Minimum" shall mean, with
respect to the first twenty-four (24) months of the Term, [Omitted] Lightstick
Equivalents, and, with respect to any additional subsequent years during the
Term, that number of Lightstick Equivalents mutually agreed and specified by the
parties for such year on Exhibit C attached hereto and incorporated herein
(which annual agreement as to the Stated Minimum for the subsequent year shall
be a condition precedent to any renewal or extension of the Term).
1.12 Term. The term "Term" shall mean that certain period commencing
on the Agreement Date and ending on the date twenty-four (24) months thereafter,
unless otherwise terminated or extended in accordance with the terms and
conditions of this Agreement.
1.13 Upjohn Territory. For all purposes of this Agreement, the term
"Upjohn Territory" shall mean the Exclusive Upjohn Territory and the
Nonexclusive Upjohn Territory.
SECTION 2 ESTABLISHMENT OF DISTRIBUTORSHIP
2.1 Appointment of Distributor
(a) Upon the terms and subject to the conditions stated herein,
Trylon and Perisphere hereby appoint Upjohn for the duration of the Term as its
nonexclusive distributor of the Products in the Nonexclusive Upjohn Territory,
and for the duration of the Term as its sole and exclusive distributor of the
Products in the Exclusive Upjohn Territory, for use solely in connection with
gynecological endoscopic visual examinations, pursuant to which Upjohn will
purchase Products from Trylon and Perisphere, take title to such Products and
thereafter convey title to subdistributors and customers of Upjohn. All Product
sales by Upjohn to customers and subdistributors will be on terms and conditions
established from time to time by Upjohn in its sole and absolute discretion;
provided, however, that Upjohn's subdistributors shall become bound by
- -----------------
provisions similar to the relevant material terms and provisions of this
Agreement and Trylon and Perisphere shall have the right to approve Upjohn
subdistributors (which approval shall not unreasonably be withheld). Upjohn
hereby accepts such appointment and further agrees that during and after the
Term of this Agreement it shall not directly or indirectly market, sell, handle
or distribute any Products outside the Upjohn Territory without the express
prior written consent of Trylon or Perisphere, as applicable. During the Term,
in the event that Upjohn receives any inquiries, orders or requests for
Products, originating from or intended for delivery or use outside the Upjohn
Territory, Upjohn promptly shall refer all such inquiries, orders or requests to
Trylon.
(b) During such time as Upjohn is not in breach of the terms and
conditions of this Agreement, Trylon and/or Perisphere shall not appoint other
distributors of the Products during the Term of this Agreement within the
Exclusive Upjohn Territory, nor may they themselves (or through their agents or
distributors) sell the Products during the Term of
3
<PAGE>
this Agreement within the Exclusive Upjohn Territory (other than to existing
Trylon house accounts as of the date of this Agreement, a list of which will be
provided to Upjohn by Trylon); provided, however, that the parties agree that
such restrictions shall not limit in any manner the ability of Trylon and/or
Perisphere to undertake and conduct marketing, public relations, consumer
awareness programs, educational and professional training, technical support and
clinical research within the Exclusive Upjohn Territory with respect to the
Products as long as all such efforts are consistent with the strategic marketing
plans mutually agreed upon by both parties. Notwithstanding the foregoing, the
PPS Kits may be marketed in the Nonexclusive Upjohn Territory solely by Upjohn
and by Trylon and its current distributors, subdistributors and agents as of the
date of this Agreement (i.e., Trylon without the prior written consent of Upjohn
may not market the PPS Kits through new distributors, subdistributors or agents
who contract with Trylon after the date of this Agreement).
2.2 Limitation on Rights.
Upjohn shall not be entitled to any rights with respect to Trylon,
Perisphere or the Products except those expressly provided by the terms and
provisions of this Agreement.
2.3 Medical Event Reporting.
Subject to the other terms and provisions of this Agreement, Trylon,
Perisphere and Upjohn intend to fully comply with all applicable medical event
reporting laws and agree to exchange such information as may be necessary or
appropriate to achieve that end. The parties further agree to share with the
other parties hereto, to the extent it does not violate the other contractual or
regulatory obligations of a disclosing party, each parties' worldwide medical
experience with the Products for the purpose of allowing compliance with laws
and to enhance and support the performance of each parties' duties and
obligations hereunder. Promptly after execution of this Agreement, the parties
shall negotiate in good faith detailed written procedures for exchange of
medical information relating to the Products; it being acknowledged, however,
that it is not the intention of such agreement to burden any party hereto with
material costs by reason of such procedures.
SECTION 3 TERM
This Agreement shall remain in effect for the Term, unless otherwise
terminated or extended in accordance with the terms and conditions of this
Agreement. After the initial twenty-four (24) months of the Term, this
Agreement will be automatically renewed annually for one (1) year periods,
conditioned upon the full satisfaction by Upjohn of all terms and conditions in
this Agreement (including but not limited to the Products purchase requirements
set forth in Section 4, below) for the prior year and otherwise not being in
breach under this Agreement (upon which renewal, such renewal period shall be
part of the Term). Should either party desire not to renew this Agreement after
the initial Term of twenty-four (24) months, such party must give at least three
(3) months prior written notice to the other party of
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such nonrenewal, during which notice period the Agreement shall continue in full
force and effect.
SECTION 4 OBLIGATIONS OF UPJOHN
During the Term, Upjohn shall have the following duties:
4.1 Marketing.
(a) During the Term, Upjohn shall prepare and update as required a
strategic marketing and promotion plan for the introduction, marketing and
promotion of PPS and the Products for the selected target markets within the
Upjohn Territory. The plan will be updated by Upjohn and reviewed with Trylon
and Perisphere in conjunction with quarterly Products purchases. Upon request,
Upjohn shall promptly supply Trylon with a copy of the current Upjohn Strategic
Marketing Plan for the Products. The initial marketing plan shall be prepared
and completed by Upjohn (and a copy shall be delivered to Trylon) within
seventy-five (75) days of the date of this Agreement.
(b) Target markets as of the date of this Agreement include: fee-for-
service, managed care and public sector markets. Target markets could change in
consultation with Trylon and Perisphere during the Term based on updated
strategic marketing plans and/or marketing experience.
(c) Upjohn will devote resources from its Female Health Care, Primary
Care, Managed Care or National (public sector) Sales Forces at levels necessary
to meet sales forecasts consistent with the Strategic Marketing Plan. Resource
commitments by Upjohn will be reviewed quarterly during the Term to assure
proper levels are applied consistent with the strategic marketing plan. Such
resources will be responsible for: calling on appropriate healthcare
professionals, introducing the Products, performing necessary in-office
training, disseminating promotional and educational materials and samples and
fulfilling orders of Products, all such efforts being consistent with the
strategic marketing plan.
(d) Upjohn promotion within the Upjohn Territory may include, but not
necessarily be limited to: awareness and training for selected physicians,
nurses and other appropriate healthcare professionals and female patients as to
the availability and efficacy of PPS, retention of a public relations company
(with approval from Trylon), advertising (such as, but not limited to, direct
mail, trade journals, sponsorships), presentations at trade shows and/or
conventions, organization of informational and educational seminars (such as
Upjohn's Continuing Medical Education program), placement of articles in
appropriate publications, and/or other methods deemed appropriate.
(e) The foregoing is not intended to limit the independent ability of
Trylon, Perisphere or any other authorized distributor of the Products to
arrange and conduct marketing, sales promotion and publicity for PPS and/or the
Products within the Nonexclusive
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Upjohn Territory, whether in conjunction with Upjohn or otherwise. Upjohn shall
not be liable for any expenses for such activities which are independently
conducted by Trylon, Perisphere or their authorized distributors. All expenses
incurred in the marketing and sales promotion by Upjohn of the Products shall be
for the account of Upjohn, and neither Trylon nor Perisphere shall bear any
liability for any marketing, distribution or promotional expenses of Upjohn.
4.2 Reporting.
(a) Upjohn shall prepare and submit to Trylon and Perisphere a running
twelve (12) month sales forecast beginning from the Agreement date. Upjohn
shall update the forecast quarterly for the succeeding three (3) month interval.
Trylon, Perisphere and Upjohn shall discuss all sales forecasts prior to their
finalization by Upjohn. The twelve (12) month and quarterly forecasts shall
serve as templates for the incremental Products purchase plans which shall be
submitted by Upjohn to Trylon and Perisphere contemporaneously with each sales
forecast.
(b) Upjohn shall furnish Trylon with semi-annual and annual written
reports of inventory turnover of the Products in units, quantities of samples
distributed and quantities in stock, commencing as of the Agreement Date. These
reports shall be submitted within thirty (30) days after the end of the relevant
period.
(c) Upjohn shall maintain, at its principal executive office, sales
records for the Products consistent with standard Upjohn practices for its
products. Upjohn agrees that Trylon, at its expense, shall have the right to
have its representatives inspect and make copies of, at any time during
reasonable business hours and from time to time upon the giving of not less than
forty-eight (48) hours' prior written notice to Upjohn, Upjohn's sales records
for the Products; provided, however, that the scheduling of such inspection does
-----------------
not unreasonably interfere with the business of Upjohn. Upjohn additionally
shall provide access for Trylon in the above manner to any other Upjohn
information reasonably necessary or appropriate for the maintenance by Trylon
of, and compliance with, its FDA status for the Products. All such information
shall be provided in accordance with Section 15 herein.
(d) Upjohn shall notify Trylon promptly of any change in the majority
ownership or executive management of Upjohn.
4.3 PPS Kits and Labelling.
(a) If Upjohn purchases Lightsticks in a subordinated pack, the design
and manufacture of the PPS Kits shall be the responsibility of Upjohn so long as
it is consistent with good manufacturing practices for medical devices as
provided to Upjohn by Trylon; to that end, Upjohn shall use in the manufacture
and assembly of PPS Kits only materials that meet Trylon's quality standards and
are approved by the FDA and shall conduct such manufacture and assembly at FDA
registered and state licensed facilities. Notwithstanding the
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foregoing, Trylon shall have final approval for all matters relating to issues
necessary to protect the validity or strength of any Trylon trademark or service
mark to be affixed to PPS Kits. Trylon agrees to label all perishable Products
sold to Upjohn with a clearly legible expiration date.
(b) Upjohn shall affix to each of the PPS Kits, as mutually agreed to
by the Parties, the Trylon name and relevant Trylon proprietary trade or service
mark(s), together with the symbol of an "r" in a circle (if such trademark or
service mark is registered with the United States Patent and Trademark Office)
or the letters "TM"(if such trademark or service mark is not registered with the
United States Patent and Trademark Office), unless such PPS Kit already
prominently displays the appropriate trademark or service mark. Upjohn may
only use the Trylon trademarks or service marks in connection with the Products
during such time as it is in compliance with the terms and conditions of this
Agreement. Trylon shall have the right, upon request, to inspect Upjohn's
operations with respect to the use of the Trylon trademarks and service marks
and to require the prior approval of any use of the trademarks and service marks
not previously specifically approved by Trylon. Upjohn shall use the Trylon
trademarks and service marks only in their current form and shall not alter
such, combine them with any other words, prefixes, suffixes, logos or designs,
or sublicense the use of the Trylon trademarks or service marks. Without the
prior written approval of Trylon, Upjohn shall not register, nor apply for
registration of, any of the Trylon trademarks or service marks as a trademark,
service mark, trade name or fictitious name, either within or without the Upjohn
Territory. Any goodwill derived from the use of the Trylon trademarks or
service marks by Upjohn shall inure to the benefit of Trylon. Upjohn further
agrees not to challenge Trylon's ownership, rights and/or registration of or to
the trademarks, service marks or any other Trylon intellectual property.
(c) If not previously furnished, Trylon, promptly after execution of
this Agreement, shall furnish Upjohn, upon request by Upjohn, with the know-how
required for the conditioning and packing of the Products (such as packing and
packaging data). Trylon shall keep Upjohn informed upon request of technical
improvements introduced into the packing of the Products.
(d) Improvements of the conditioning and packing of Products which are
developed by Upjohn shall be submitted in writing and, if available, in specimen
form to Trylon for approval before being implemented by Upjohn. Any such
improvements developed by Upjohn shall become shared property of Trylon and
Upjohn on an undivided, equal basis. Upjohn shall deliver to Trylon promptly
such evidence of ownership of the improvements as Trylon may reasonably request.
Appropriate regulatory filings will be made by Upjohn to include these package
designs in the regulatory product file as may be required; all regulatory costs
for such filing shall be borne by Upjohn.
(e) Upjohn shall not undertake or continue any deceptive, misleading,
or unethical practices that are or might be detrimental to Trylon (in Trylon's
sole determination), Trylon products, and/or the public; shall not be involved
in the publication or utilization of
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any misleading or deceptive advertising material; and shall comply with all
applicable laws and regulations.
(f) Notwithstanding the foregoing provisions of this Section, Upjohn
has requested that Trylon, at Upjohn's cost, initially manufacture and assemble
PPS Kits in accordance with Upjohn's reasonable instructions, the foregoing
provisions and the pricing and ordering provisions of Section 6. At any time
during the Term and upon ninety (90) days' prior written notice, Upjohn may
reassume the manufacturing and assembly of the PPS Kits in accordance with the
foregoing provisions. If Upjohn after such reassumption again requests that
Trylon manufacture and assemble PPS Kits and the parties agree on the terms
applicable to such activity (including but not limited to the design of the PPS
Kit, the elements to be included, the labelling of the PPS Kit and its contents,
the cost to Upjohn of such PPS Kits and the manner of payment and delivery),
Trylon will undertake such task on the mutually agreed terms.
SECTION 5 OBLIGATIONS OF TRYLON
5.1 Samples; Sales Promotion Support.
(a) Trylon upon request by Upjohn will quote sample pricing (if
available) for Products other than Lightsticks. Trylon undertakes to inform
Upjohn from time to time about available scientific and other information
available from Trylon for the sales promotion of the Products. [Omitted]
Upjohn shall have the right in any year during the Term to order as many samples
as it desires (on the terms herein generally applicable to orders of
Lightsticks), but all such samples shall not be included in the Stated Minimum
and shall not reduce Upjohn's obligation to purchase the Stated Minimum. Such
samples shall be used solely for promotional use and must be identified when
ordered and invoiced as being samples.
(b) During only the initial twelve (12) months of the Term, Trylon
will furnish to Upjohn at no additional charge (and on a delivery schedule
during the initial twelve (12) months of the Term to be agreed by the parties)
the following number of copies of existing, developed Trylon sales promotion
materials (or such other numbers of such materials as specified by Upjohn,
subject to the monetary limitation specified in Section 5.1(c) below which is
applicable to all Trylon deliveries and activities hereunder) for use by Upjohn
in its performance hereunder (a copy of each of which is attached hereto and
incorporated herein as Exhibit D):
Tri-Fold Point of Sale PPS Brochure 50,000 copies
Patient PPS Education Piece 200,000 copies
PPS Marketing Video 5,000 copies
PPS Billing and Coding Brochure 50,000 copies
PPS Educational Slide Set 5,000 copies
Trylon paper on Cost-Effectiveness of
PPS in the Atypical Patient 50,000 copies
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Trylon paper on PPS Multi-Center
Screening Trials 50,000 copies
If requested by Upjohn and available without substantial additional
charge to Trylon, Trylon will affix to the above described materials the Upjohn
logo (as provided by Upjohn in camera ready form) and/or other relevant Upjohn
information.
(c) Trylon will support Upjohn's marketing plan through the sponsoring
of consumer awareness programs in certain markets selected by Trylon and Upjohn
and the utilization of Trylon's public relations firm, Ogilvy, Adams and
Rinehart, in an awareness campaign. Such Trylon activities will be coordinated
with Upjohn and will use the Upjohn name in an approved manner, although Trylon
will retain its discretion with regard to such activities. In no event will the
activities to be undertaken by Trylon hereunder exceed Five Hundred Thousand
Dollars ($500,000.00), and, subsequent to the initial twelve (12) months of the
Term, Upjohn shall be solely responsible for all of its sales promotion costs.
5.2 Technical Support. Upjohn shall have the right to request Trylon
to provide technical support to Upjohn during the Term (if reasonably available
from Trylon) in accordance with the terms of Section 16 of this Agreement,
including, but not limited to, reasonable access to training and promotional
material associated with PPS and the Products. Any technical support not
otherwise specifically required by this Agreement to be provided to Upjohn at
the reasonable request of Upjohn, shall be provided by Trylon to Upjohn at the
following rates:
Stewart Lonky, M.D.
(or other physicians) $475 per day
Mary Nagle, R.N.
(or other supervisory nurses) $350 per day
All other R.N.s $275 per day
Trylon may bill for a full day for any commitment of four (4) hours or more
(including travel time to destination). Any commitment for less than four (4)
hours will be billed at one-half (1/2) of the full day rate. Travel expenses
will be reimbursable to Trylon based upon actual charges for transportation and
meals during an assignment. Airline travel will be reimbursable at coach class
rates.
5.3 Customer Assistance. Trylon shall maintain toll-free telephone
assistance during the term of this Agreement on a daily basis (Monday through
Friday) during normal business hours (9:00 a.m. to 5:00 p.m. in all continental
United States time zones) to answer technical questions that may arise from
customers or Upjohn. Upjohn may make available this number to its customers or
accounts that have technical inquiries which in Upjohn's opinion can only be
answered by Trylon personnel. The telephone assistance may be used for Upjohn
administrative or sales personnel for their inquiries regarding the Products
characteristics or applications.
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5.4 Product Recall. Trylon shall be required to conduct and fund
any recall or similar corrective action in which it is necessary to retrieve
Products or to locate Products in the field; provided, however, that Upjohn
-----------------
shall maintain adequate records concerning traceability of the Products, and in
the event that recall or similar corrective procedures are required, Upjohn
shall cooperate fully with Trylon to expedite the completion of such procedure.
Upjohn shall keep records of sales of Products by product lot number for quality
assurance control and, if necessary or appropriate in Trylon's determination in
connection with any product recall or FDA issues, will provide such records to
Trylon promptly upon request.
5.5 Right of Inspection. Trylon agrees that Upjohn, at its expense,
shall have the right to have its representatives inspect, at any time during
reasonable business hours and from time to time upon the giving of not less than
forty-eight (48) hours' prior written notice to Trylon, Trylon's facilities (and
those of its vendors, if Trylon is able to obtain such prior permission) to
observe the manufacture, packaging and distribution of the Products and to
inspect the facilities; provided, however that such inspection does not
-----------------
unreasonably interfere with the business of Trylon (or its vendors, as
applicable).
SECTION 6 ORDERING PROCEDURES
6.1 Minimum Purchases - Lightsticks.
(a) [Omitted]
(b) [Omitted]
(c) [Omitted]
(d) [Omitted]
6.2 Minimum Purchases - Optics.
(a) [Omitted]
6.3 Ordering and Payment Procedures
(a) [Omitted]
(b) [Omitted]
(c) [Omitted]
SECTION 7 - RETAIL PRICING.
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Upjohn shall be solely responsible for determining from time to time
the retail price of the Products, including the retail price for Lightsticks,
the party to be billed by Upjohn for such Products (including Lightsticks), the
invoicing and collection of Upjohn accounts, any adjustments, discounts,
credits, returns and settlements with its customers, and all sales policies.
Upjohn acknowledges and agrees physician billing and reimbursement practices
regarding PPS are the sole responsibility of said physicians and that, while
Trylon may share with Upjohn its experiences as to physician billing and
reimbursement practices for PPS, Trylon makes no representation or warranty to
Upjohn or any other party that reimbursement will be available in any specific
circumstance or amount for the use of PPS or that any physician billing or
reimbursement practices are valid or legal.
SECTION 8 COVENANT NOT TO COMPETE; SOLE SUPPLIER
8.1 During the term of this Agreement, Upjohn covenants and agrees
(the "Covenant Not to Compete") that it shall not directly or indirectly
(whether for compensation or otherwise), except as expressly permitted by this
Agreement:
(a) market, promote, develop, manufacture, assemble, sell or
distribute in the Upjohn Territory, whether for its own account or on behalf of
any third party, a colorable imitation or copy of the Lightstick, or any medical
device containing the same active ingredients as the Lightstick or with a sole
indication for PPS; or
(b) engage within the Upjohn Territory in the marketing, promotion,
development, manufacture, assembly, sale and/or distribution of PPS or any
vaginal, self-contained internal light source technology or device (other than
the traditional PAP smear test) used or designed with a purpose similar or
related to that of PPS, whether alone or as a partner, officer, director,
employee, consultant, or holder of any interest, whether beneficial or of record
(excluding any such interest in an investment of not more than 5% in the equity
of an issuer whose securities are registered under the Securities Exchange Act
of 1934, as amended), in any such business or activity or in any Person engaged
in any such activity; or
(c) divert or attempt to divert from Trylon any business directly
related to Trylon's business; or
(d) solicit any employee of Trylon or an Affiliate of Trylon for the
purpose of leaving his or her employment and accepting employment or a
contractual relationship with Upjohn or an Affiliate of Upjohn.
8.2 Upjohn covenants and agrees that it shall purchase Lightsticks only
from Trylon and Optics units only from Perisphere. Upjohn shall not purchase any
products from other suppliers for the purpose of substitution for Lightsticks or
Optics units, nor shall Upjohn contract with any other Person for the
development, specification, manufacturing or assembly of any products similar to
Lightsticks or Optics units.
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8.3 Should Upjohn violate either Section 8.1 or 8.2, or in Trylon's
reasonable judgment prepare to violate Section 8.1 or 8.2, Trylon and Perisphere
shall have the right to terminate this Agreement upon sixty (60) days prior
written notice to Upjohn. Such termination shall be without liability or
further obligation to Trylon and Perisphere, and Upjohn shall remain bound by
the terms of this Agreement that expressly survive termination.
8.4 Upjohn acknowledges and agrees that: (i) compliance with this
Section 8 is necessary to protect the business, goodwill and proprietary
interest of Trylon and Perisphere pursuant to this Agreement; (ii) the
obligations of Upjohn under Section 8 are such that Trylon and Perisphere cannot
adequately be compensated by damages for breach of such obligations; and (ii)
without the agreements of Upjohn in Section 8, Trylon and Perisphere would not
enter into this Agreement. As a result, Upjohn hereby acknowledges and agrees
that the remedy at law for such a breach shall be inadequate and that Trylon and
Perisphere, in addition to any other remedy it may have, shall in the event of
any breach by Upjohn under Section 8 during the Term, be entitled to equitable
relief to enforce the breached obligations, including, without limitation,
specific performance and preliminary injunctive relief (including temporary
restraining orders) for the purposes of enjoining Upjohn from such actions.
SECTION 9 REPRESENTATIONS, WARRANTIES AND COVENANTS OF UPJOHN
Upjohn hereby represents and warrants to Trylon and Perisphere that
the matters set forth herein are true, accurate and complete as of the date of
this Agreement and as of the date of each purchase order by Upjohn hereunder,
which representations and warranties shall survive the execution of this
Agreement. With respect to these representations and warranties, the terms set
forth in this Agreement shall supersede any conflicting terms in the purchase
orders, and no terms in the purchase orders other than quantities and delivery
dates shall have any effect.
9.1 Good Standing. Upjohn is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has the requisite corporate power and authority to enter into
this Agreement and to carry out the terms and provisions hereof.
9.2 Due Authorization; Enforceability. The execution, delivery and
performance by Upjohn, of this Agreement has been duly authorized by all
requisite corporate action, and this Agreement has been duly executed and
delivered by Upjohn. This Agreement constitutes the valid and binding
obligation of Upjohn, enforceable against it in accordance with its terms,
except as it may be limited by the application of principles of equity or the
effect of laws relating to bankruptcy, moratorium or insolvency.
9.3 No Conflict. The execution, delivery and performance of this
Agreement do not violate any provision of law or statute or any decree,
judgment, order or rule of any court or governmental authority, or conflict with
or result in a breach of any of the terms, conditions
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or provisions of, or constitute a default under, the Certificate or Articles of
Incorporation, Bylaws or other charter documents of Upjohn, or any indenture,
mortgage, material agreement or other instrument to which it is a party, or by
which it or any of its property is bound or affected.
9.4 Compliance with Law. To the best of its knowledge, Upjohn is not
now in material violation of any federal, state or local laws, regulations or
orders relating to the operation, conduct or ownership of the property or
business of Upjohn required on the part of Upjohn for the consummation and
performance of this Agreement. Upjohn has obtained all necessary consents,
authorizations approvals and orders from all persons and governmental agencies
and has made all registrations, qualifications, designations, declarations and
filings with all governmental agencies required on the part of Upjohn in
connection with the consummation of the transactions contemplated by this
Agreement.
9.5 Adequate Resources. Upjohn has adequate financial and personnel
resources to fully perform and comply with all of its duties and obligations
under this Agreement.
9.6 No Additional Warranty. Upjohn shall make no representation or
warranty to any Person as to the Products or their usage or capabilities unless
previously authorized in writing to do so by Trylon or Perisphere, as
applicable.
SECTION 10 REPRESENTATIONS, WARRANTIES AND
COVENANTS OF TRYLON AND PERISPHERE
Trylon and Perisphere each hereby represent and warrant to Upjohn that
the matters set forth herein are true, accurate and complete as of the date of
this Agreement and as of the date of each purchase order by Upjohn hereunder,
which representations and warranties shall survive the execution of this
Agreement.
10.1 Good Standing. Each of Trylon and Perisphere is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has the requisite corporate power and
authority to enter into this Agreement and to carry out the terms and provisions
hereof.
10.2 Due Authorization; Enforceability. The execution, delivery and
performance by Trylon and Perisphere of this Agreement has been duly authorized
by all requisite corporate action, and this Agreement has been duly executed and
delivered by Trylon and Perisphere. This Agreement constitutes the valid and
binding obligation of Trylon and Perisphere, enforceable against each of them in
accordance with its terms, except as it may be limited by the application of
principles of equity or the effect of laws relating to bankruptcy, moratorium or
insolvency.
10.3 No Conflict. The execution, delivery and performance of this
Agreement do not violate any provision of law or statute or any decree,
judgment, order or rule of any court
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or governmental authority, or conflict with or result in a breach of any of the
terms, conditions or provision of, or constitute a default under, the
Certificate of Incorporation, Bylaws or other charter documents of Trylon or
Perisphere, or any indenture, mortgage, material agreement or other instrument
to which it is a party, or by which it or any of its property is bound or
affected.
10.4 Compliance with Law. Trylon and Perisphere are not now in
violation of any federal, state or local laws, regulations or orders relating to
the operation, conduct or ownership of the property or business of Trylon or
Perisphere. Trylon, Perisphere, its principals and/or its Affiliates have
obtained all necessary consents, authorizations approvals and orders from all
persons and governmental agencies, and have made all required registrations,
qualifications designations, declarations and filings with governmental
agencies, in connection with the consummation of the transactions contemplated
by this Agreement. Trylon, its principals and/or Affiliates have obtained all
requisite approvals from the United States Food and Drug Administration for
marketing Lightsticks in interstate commerce.
10.5 Manufacturing of Products; Warranty. Products provided by
Trylon and Perisphere, including Lightsticks (i) are manufactured in accordance
with good manufacturing practices acceptable in the industry, using raw
materials of good commercial quality (ii) to the best knowledge of Trylon and
Perisphere, comply with all applicable laws, rules and regulations, and (iii)
are of merchantable quality, free from all patent and latent defects, fit for
the purposes for which intended and, with respect to Lightsticks, shall be
delivered with at least a two-year shelf-life. Trylon and Perisphere accept
full responsibility for their respective Products (iv) under their product
warranties to repair or replace (in its sole discretion) any Product that is
defective in material or workmanship, and (v) under their FDA registrations.
Notification of any liability claim relating to the use of Trylon or Perisphere
Products shall be made in writing to Trylon and Perisphere as soon as possible
after (and in any event within ten (10) days of) Upjohn's receipt (whether
orally or in writing) of any claim or threatened claim or any event upon which a
claim reasonably may be based. Trylon or Perisphere, as applicable, shall have
the right (but not the obligation) to investigate any warranty or FDA regulatory
claim, and Upjohn (at no cost to Upjohn) shall assist Trylon or Perisphere with
such investigation. This product warranty does not obligate Trylon or
Perisphere to bear the cost of labor or transportation charges in connection
with the replacement of defective Products, unless a return authorization first
has been obtained from Trylon or Perisphere, as applicable, nor shall it apply
to any Product upon which alterations have been made (whether by Upjohn or
otherwise) unless these changes were authorized by Trylon or Perisphere, as
applicable.
10.6 Proprietary Rights. To the best knowledge of Trylon, with
respect to the Products, Trylon has not infringed, and is not now infringing, on
any patent, trade name, trademark, service mark, copyright, trade secret,
technology, know-how or process belonging to any other Person.
SECTION 11 CONDITIONS TO PERFORMANCE
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The performance by Trylon and Perisphere hereunder shall be
conditioned upon the truth and accuracy of the material representations and
warranties made by Upjohn to Trylon and Perisphere under Section 9 as of the
date such are given. The performance by Upjohn hereunder shall be conditioned
upon the truth and accuracy of the material representations and warranties made
by Trylon and Perisphere to Upjohn under Section 10 as of the date such are
given.
SECTION 12 TERMINATION
12.1 Termination of Agreement by Trylon and Perisphere for Cause.
(a) In the event Upjohn fails to cure a default in its performance of
any material agreement, term, condition or covenant contained in this Agreement
within twenty (20) days after receiving notice of such default from Trylon or
Perisphere, as applicable, or fails within twenty (20) days after receiving
notice of such default to commence to cure (and diligently prosecute to
completion) a default in its performance of any material agreement, term,
condition or covenant contained in this Agreement if such default cannot be
cured within twenty (20) days, Trylon or Perisphere, as applicable, shall have
the right to terminate this Agreement or, in the case of a default by Upjohn
under its purchase requirements in Section 6, to terminate the exclusive nature
of Upjohn's distributorship and convert such distributorship to a nonexclusive
basis (which action shall not waive or otherwise limit any other rights of
Trylon or Perisphere against Upjohn by reason of such breach).
(b) Trylon and Perisphere shall have the right to terminate this
Agreement immediately, at its election, if Upjohn ceases to conduct its business
(or begins to wind up in preparation for such cessation) or becomes insolvent,
or in the event of the institution under any applicable law of any voluntary or
involuntary insolvency proceedings, including bankruptcy, consent to a
receivership, adoption of an arrangement with creditors, dissolution or
liquidation, or similar action, which proceedings, consent, adoption or
arrangement is not vacated within thirty (30) days after inception.
(c) Trylon and Perisphere shall have the right to terminate this
Agreement upon thirty (30) days prior written notice upon any default or
termination of supply of Lightsticks to Trylon from American Cyanamid or other
source of supply, including but not limited to by reason of the expiration of
distribution agreements or termination of distribution agreements resulting from
a breach or breaches by Trylon thereunder.
(d) Trylon and Perisphere shall have the right to terminate this
Agreement upon thirty (30) days prior written notice if a court of competent
jurisdiction or a governmental regulatory agency determines that the sale of the
Products in the Upjohn Territory is illegal; provided, however, that such
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termination right may be exercised only in the event that the Agreement cannot
be modified to correct the illegality without materially altering the
substantive terms of the business relationship between Trylon, Perisphere and
Upjohn as provided for herein.
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(e) Any change in Upjohn's ownership or management which Trylon
reasonably believes may impair Upjohn's ability to perform its obligations under
this Agreement, notice of which change (including any proposed change) must
immediately be given to Trylon. If a change in management or ownership occurs
which does not impair Upjohn's abilities to perform its responsibilities under
this Agreement as reasonably determined by Trylon, then Trylon will honor the
continuation of this Agreement.
(f) Upjohn has not achieved sales penetration of the Products within
the Territory after the initial twelve (12) months timeframe of at least
seventy-five percent (75%) of the Upjohn sales forecast (as set forth in Section
4.2(a)) for such relevant prior period, and, with respect to any extensions of
the Term beyond the initial twelve (12) months, in each six (6) months
thereafter has not maintained and enhanced such sales penetration of the
Products, as determined by Trylon in its sole discretion.
12.2 Termination of Agreement by Upjohn for Cause.
(a) In the event Trylon or Perisphere, as applicable, fails to cure a
default in its performance of any material agreement or covenant contained in
this Agreement within forty-five (45) days after receiving notice of such
default from Upjohn, or fails within forty-five (45) days after receiving
notice of such default from Upjohn to commence to cure (and diligently
prosecutes to completion) a default in its performance of any material agreement
or covenant contained in this Agreement if such default cannot be cured within
forty-five (45) days, Upjohn shall have the right to terminate this Agreement.
(b) Upjohn shall have the right to terminate this Agreement
immediately, at its election, if Trylon or Perisphere becomes insolvent, or in
the event of the institution under any applicable law, with respect to Trylon or
Perisphere, of any voluntary or involuntary insolvency proceedings, including
bankruptcy, consent to a receivership, adoption of an arrangement with
creditors, dissolution or liquidation, or similar action which proceedings,
content, adoption or arrangement is not vacated within thirty (30) days after
inception; provided, however, that the election of termination of the Agreement
by Upjohn with respect to Perisphere shall not effect a termination of the
Agreement between Upjohn and Trylon if Trylon elects in writing to assume the
liabilities and obligations to Upjohn of Perisphere.
(c) Upjohn shall have the right to terminate this Agreement upon
thirty (30) days prior written notice if a court of competent jurisdiction or a
governmental regulatory agency determines that the sale of the Products in the
Upjohn Territory is illegal; provided, however, that such termination right may
-------- -------
be exercised only in the event that the Agreement cannot be modified to correct
the illegality without materially altering the substantive terms of the business
relationship between Trylon, Perisphere and Upjohn as provided for herein.
16
<PAGE>
12.3 Effect of Termination.
(a) Upon termination of this Agreement, Trylon and Upjohn will
together in good faith decide on the way in which Upjohn's inventory of Products
in finished form, sales promotion material pertaining to the Products and other
related materials should be disposed of. Failing a resolution of such issue
within thirty days after the termination of this Agreement, Upjohn shall be
required to deliver all such inventory, sales promotion material and related
material to Trylon, together with free and clear title thereto. Upon the
termination of this Agreement, Upjohn shall render a statement to Trylon with
regard to the existing inventory of Products and said material. Upon termination
of this Agreement, Upjohn will have no right, title or interest of any kind in
or with regard to the Trylon or Perisphere trademarks, service marks,
intellectual property, formulas, know-how and goodwill, whether relating to any
of the Products or otherwise.
(b) Upon the termination or expiration of this Agreement: (i) Upjohn
shall provide to Trylon copies of any and all data collections relating to the
Products and/or PPS, and a copy of all sales data relating to the Products
(including but not limited to detailed end user/account information, such as end
user/account entity name, location, purchasing history and other related
information) and shall grant to Trylon a perpetual, fully-paid, worldwide non-
exclusive right to use such information and technical data; (ii) all other
property of Trylon or Perisphere which is held by Upjohn or their respective
agents shall be returned to Trylon or Perisphere, as applicable, by Upjohn, and
any property of Upjohn that is held by Trylon, Perisphere or its agents shall be
returned to Upjohn; (iii) all marketing, publicity and promotion by Upjohn for
the Products shall cease immediately, and Upjohn immediately shall cease to use
Trylon's and Perisphere's trade and service marks and other intellectual
property rights; and (iv) unless otherwise permitted under Section 12.3(a), all
sales and distribution of the Products by Upjohn shall cease as of the
termination or expiration date; provided, however, that Upjohn may continue such
-------- -------
marketing, publicity and promotion and use of such intellectual property rights
in order to conclude sales of remaining inventory of Products permitted by
Section 12.3(a).
(c) Upon any notice of nonrenewal or expiration of the Term by Upjohn
to Trylon, Trylon shall have the right to negotiate, execute and deliver one or
more agreements with other Persons for the distribution of the Products in the
Upjohn Territory after the Term. The exercise of such right by Trylon shall not
be a breach of any Trylon obligation or duty to Upjohn hereunder.
SECTION 13 ASSIGNMENT
Upjohn shall not assign, transfer, or subcontract its obligations as set
forth herein, or any claim or right hereunder, without the prior written consent
of Trylon and Perisphere which consent shall not unreasonably be withheld. This
Agreement shall be binding on the parties' successors and assigns.
17
<PAGE>
SECTION 14 INDEMNIFICATION
14.1 Indemnification by Trylon. Trylon shall protect, defend,
indemnify and hold Upjohn and any of its officers, directors, employees,
stockholders, representatives or agents harmless from and against all losses,
claims, demands, liabilities, suits, judgments, damages, costs and expenses
(including reasonable attorneys fees and costs) directly or indirectly arising
out of or resulting from (i) any negligent acts or omissions of Trylon, or any
of its officers, directors or employees, representatives or agents; (ii) any
breach or inaccuracy of any representation, warranty or covenant hereunder;
(iii) any defective or damaged Products by Trylon, whether the claim is premised
on strict products liability or otherwise, where the damage or defect is not
attributable to any action of Upjohn, and the defective or damaged condition of
such component was the proximate cause of the alleged injury sustained; or
(iv) any claim of patent or trademark infringement with respect to the Products.
It shall be a condition of Trylon's obligation to indemnify and hold Upjohn
harmless hereunder that Upjohn give written notice to Trylon following the
assertion of any claim against Upjohn for which indemnification is required
hereunder; provided; however that the failure to give notice shall not relieve
-------- -------
Trylon from its obligations hereunder unless Trylon is materially and
irrevocably prejudiced by reason of such failure.
14.2 Indemnification by Perisphere. Perisphere shall protect,
defend, indemnify and hold Upjohn and any of its officers, directors, employees,
stockholders, representatives or agents harmless from and against all losses,
claims, demands, liabilities, suits, judgments, damages, costs and expenses
(including reasonable attorneys fees and costs) directly or indirectly arising
out of or resulting from (i) any negligent acts or omissions of Perisphere, or
any of its officers, directors or employees, representatives or agents; and (ii)
any breach or inaccuracy of any representation, warranty or covenant hereunder.
It shall be a condition of Perisphere's obligation to indemnify and hold Upjohn
harmless hereunder that Upjohn give written notice to Perisphere following the
assertion of any claim against Upjohn for which indemnification is required
hereunder; provided; however that the failure to give notice shall not relieve
-------- -------
Perisphere from its obligations hereunder unless Perisphere is materially and
irrevocably prejudiced by reason of such failure.
14.3 Indemnification by Upjohn. Upjohn shall protect, defend,
indemnify and hold Trylon and Perisphere, and any of their officers, directors,
employees, stockholders representatives or agents harmless from and against all
losses, claims, demands, liabilities, suits, judgments, damages, costs and
expenses (including reasonable attorneys' fees and costs) directly or indirectly
arising out of or resulting from (i) any negligent acts or omissions of Upjohn,
or any of their respective officers, directors or employees, representatives or
agents or (ii) any breach or inaccuracy of any representation, warranty or
covenant hereunder. It shall be a condition of the obligations of Upjohn to
indemnify and hold Trylon and Perisphere harmless hereunder that Trylon or
Perisphere, as applicable, give written notice to Upjohn following the assertion
of any claim against Trylon or Perisphere for which indemnification is required
hereunder; provided, however, that the failure to give notice shall not relieve
-------- -------
Upjohn
18
<PAGE>
from its obligations hereunder unless Upjohn is materially and irrevocably
prejudiced by reason of such failure.
14.4 Indemnification Procedure.
(a) The indemnified entity shall give prompt written notice to the
indemnifying entity of any claim or assertion of liability by a third party or
any request, demand, proposal, or action by any third party which might give
rise to a claim by the indemnified entity against the indemnifying entity under
this Section 14. Such notice shall be reasonably detailed so as to provide the
recipient with all material information regarding such clam or assertion and
shall comply with the provisions of Section 18.1.
(b) In the event any action, suit, proceeding or claim (a "Legal
Action") is brought or made against an indemnified entity with respect to which
the indemnifying entity may have liability under this Section 14, the
indemnifying entity shall have the right (but not the obligation) to defend, and
to negotiate concerning the resolution or settlement of, the Legal Action (in
the name of the indemnified entity if necessary or appropriate). If the
indemnifying entity does elect to defend or negotiate such Legal Action, the
indemnified entity shall have the right to be represented by counsel, at its own
expense, and shall be kept fully informed as to such Legal Action at all stages
thereof whether or not it is represented by its own counsel. Until the
indemnifying entity elects to defend or negotiate a Legal Action, or if the
indemnified entity reasonably concludes that there are likely to be defenses
available to the indemnified entity that are different from or in addition to
those available to the indemnifying entity (in which case, to the extent of such
differing defenses, the indemnifying entity shall not be entitled to assume the
defense of such Legal Action but shall have the right to be represented by
counsel, at its own expense, and shall be kept fully informed as to such Legal
Action at all stages thereof, whether or not it is represented by its own
counsel), the indemnified entity shall expeditiously undertake the defense and
negotiation of such Legal Action and, until such time or in such event, all
reasonable fees and expenses of outside counsel and other expenses reasonably
incurred by the indemnified entity shall be borne by the indemnifying entity and
paid when incurred. Upjohn, Trylon and Perisphere hereby agree to render to each
other such assistance as they may reasonably require of each other in order to
facilitate the proper and adequate defense or negotiation of the resolution or
settlement of any such Legal Action.
(c) Neither the indemnifying entity nor the indemnified entity shall
make any settlement of any claim or agree to any request or demand of, or enter
into any agreement or arrangement with, any Person, if the result might give
rise to an amount subject to indemnification hereunder, without the written
consent of the other Person, which consent shall not be unreasonably withheld.
19
<PAGE>
SECTION 15 CONFIDENTIALITY
15.1 Nondisclosure. The parties covenant and agree that, during the terms
of this Agreement, each of them may disclose to the other information about the
disclosing party's business or activities which such party considers proprietary
and confidential. Confidential information shall include, but not be limited
to, lists of present or prospective customers or vendors or of persons that have
or shall have dealt with the parties, customer requirements, preferences and
methods of operation, trade secrets, management information reports and other
computer generated reports, pricing policies and details, details of contracts,
operational methods, plans or strategies, business acquisition plans, new
personnel acquisition plans and other business affairs or information of either
party ("Confidential Information"). A disclosing party shall designate
information which is being disclosed to be Confidential Information if it is
commercially reasonable to do so. The party who receives any Confidential
Information (the "Receiving Party") agrees, during the Term and thereafter, to
maintain the strictest possible confidential status for all Confidential
Information, not to use any Confidential Information for any purpose other than
the purpose for which it was originally disclosed to the Receiving Party and not
to disclose any Confidential Information to any third party.
15.2 Exceptions to Nondisclosure Agreement. This obligation of
confidentiality shall not apply to any information which (a) was known to the
Receiving Party at the time of receipt; (b) was in the public domain at the time
of receipt; (c) became public through no fault of the party obligated to keep it
confidential; (d) the Receiving Party learns from third parties who are under no
obligation of confidentiality with respect to the information; or (e) is
required by applicable law to be divulged.
15.3 Return of Information. The parties each covenant and agree, upon
termination or expiration of this Agreement and except as otherwise provided
herein, to return all Confidential Information in its possession which exists in
a tangible form (whether in writing, on magnetic tapes or disks or otherwise) to
the provider thereof and to not use Confidential Information for its benefit or
the benefit of other persons thereafter. The Receiving Party may retain one (1)
copy of the Confidential Information for the sole purpose of determining its
obligations under this Agreement.
15.4 Governmental Disclosure. The parties acknowledge that each may be
required to disclose Confidential Information to governmental agencies or
authorities by law, and each shall endeavor to limit disclosure to that which is
so required. Each party will give the other written notice of any disclosure
pursuant to this Section 15.4, which notice shall specify the substance of any
such disclosure.
15.5 Employee Access. The parties shall cause their respective employees,
representatives, agents and those of their Affiliates, and any Affiliates of the
parties, who have access to any Confidential Information to maintain
confidentiality as set forth in this Section 15 and to return all Confidential
Information in their possession which exists in a tangible form
20
<PAGE>
(whether in writing, or magnetic tapes or disks or otherwise) to the provider
thereof upon the termination of this Agreement. Nothing in this Section 15 shall
be construed as authorizing or permitting the distribution of Confidential
Information to persons other than those who require access thereto to perform
their obligations hereunder or tasks assigned to them in the conduct of the
business contemplated by this Agreement.
15.6 Survival. Notwithstanding any other provision of this Agreement, the
provisions of this Section 15 shall survive the termination or expiration of
this Agreement for a period of five (5) years and shall be deemed a separate and
independent agreement in consideration of the parties' making available to each
other the Confidential Information.
SECTION 16 LICENSE OF TRAINING INFORMATION
(a) Trylon hereby grants to Upjohn, and Upjohn hereby accepts, a non-
exclusive license to use, copy and distribute during the term of the Agreement
in the Upjohn Territory, solely in connection with the duties of Upjohn pursuant
to requirements of this Agreement, any and all medical training information
relating to PPS which has been developed or obtained by Trylon prior to the
Agreement Date ("Current Training Information"). Trylon, upon request by
Upjohn, shall furnish Upjohn with one copy of its Current Training Information.
All Current Training Information shall remain the property of Trylon.
(b) All training and sales materials developed or obtained by Trylon
after the Agreement Date ("Additional Training Information") at the reasonable
written request of Upjohn shall be the property of Trylon and shall be
nonexclusively licensed during this Term in the Upjohn Territory to Upjohn to
use, copy and distribute in connection with the duties of Upjohn under this
Agreement. Upjohn shall reimburse Trylon on a monthly basis for reasonable
costs incurred in the preparation of the Additional Training Information
(including but not limited to time, materials and travel), as such costs are
incurred; provided, however, that Upjohn agrees to reimburse Trylon in full for
-----------------
any Additional Training Information which qualifies as materials which could be
used as Continuing Medical Education. Trylon shall submit a monthly invoice for
amounts due to Upjohn, which invoice shall be due and payable within thirty (30)
days after receipt by Upjohn. Upon request by Upjohn, Trylon shall deliver to
Upjohn a written, non-binding estimate of the costs associated with the
development of any Additional Training Information prior to its development.
(c) As additional assistance for the commencement by Upjohn of its
activities under this Agreement, Trylon shall provide to Upjohn upon its request
the services of Stewart Lonky, M.D. (or another physician reasonably acceptable
to Upjohn) and Mary Nagle (or another nurse reasonably acceptable to Upjohn) to
assist Upjohn with the conduct of two (2) training/technical support sessions of
not more than two (2) days each. For such services, Trylon shall not charge
Upjohn any fees or per diem charge, except that all travel expenses of such
Trylon personnel incurred hereunder shall be reimbursed by Upjohn in accordance
with Section 5.2.
21
<PAGE>
SECTION 17 INSURANCE
17.1 Trylon Insurance. Trylon warrants and represents that it currently
has in effect general and products liability insurance coverage pursuant to a
"claims made" type insurance policy in at least the amounts of Two Million
Dollars ($2,000,000.00) per occurrence and Two Million Dollars ($2,000,000.00)
in the aggregate covering Trylon's activities hereunder. Trylon agrees upon
request by Upjohn to provide to Upjohn a copy of the face of the policy or, at
its option, a certificate of insurance. Trylon will notify Upjohn within ten
(10) days of the lapse of such insurance for any reason. If such policy or
another policy with the same or higher limits is not reinstated or put in place
immediately by Trylon, Upjohn may terminate this Agreement upon thirty (30) days
prior written notice.
17.2 Upjohn Insurance. Upjohn warrants and represents that Upjohn
currently has in effect general and products liability insurance coverage
pursuant to a "claims made" type insurance policy in the amounts of Two Million
Dollars ($2,000,000.00) per occurrence and Two Million Dollars ($2,000,000.00)
in the aggregate covering Upjohn's activities hereunder. Upjohn agrees upon
request by Trylon to provide to Trylon a copy of the face of the policy or, at
its option, a certificate of insurance. Upjohn will notify Trylon within ten
(10) days of the lapse of such insurance for any reason. If such policy or
another policy with the same or higher limits is not reinstated or put in place
immediately by Upjohn, Trylon may terminate this Agreement upon thirty (30) days
prior written notice.
SECTION 18 MISCELLANEOUS
18.1 Notices. All notices, requests, demands, instructions and other
communications required or permitted to be given under this Agreement by a party
hereto shall be deemed duly given or sent hereunder only if in writing and
delivered personally, or mailed first class, postage pre-paid, registered or
certified mail, return receipt requested, to the other party hereto at the
address set forth in this Agreement, or at such other address which each party
may give notice pursuant to the procedure established by this paragraph. Any
such notice shall be deemed to have been given or sent as of the date mailed or
personally delivered.
18.2 Confidential Agreement. This Agreement is confidential, and Upjohn
may not reveal the terms hereof to any third party with the exception of its
legal and financial advisors of each party, unless required by law, or with the
written consent of the other party, or in legal proceedings relating to this
Agreement.
18.3 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE PROCEDURAL AND SUBSTANTIVE LAWS OF THE STATE OF CALIFORNIA,
UNITED STATES OF AMERICA (WITH THE EXCEPTION OF THE CONFLICTS OF LAWS PROVISIONS
OF SUCH STATE), AND BOTH PARTIES AGREE THAT THE FEDERAL AND STATE COURTS LOCATED
IN CALIFORNIA SHALL HAVE JURISDICTION OVER ANY MATTER ARISING IN CONNECTION WITH
THE AGREEMENT, AND HEREBY SUBMIT TO SUCH
22
<PAGE>
JURISDICTION, FURTHER, THE PARTIES AGREE THAT VENUE FOR ANY MATTER ARISING IN
CONNECTION WITH THIS AGREEMENT SHALL PROPERLY LAY IN THE COUNTY OF LOS ANGELES,
CALIFORNIA.
18.4 Dispute Resolution. Except as provided below, no civil action
concerning any dispute under this Agreement shall be instituted before any
court, and all such disputes shall be submitted to final and binding arbitration
before the American Arbitration Association. The place for any arbitration
shall be in Los Angeles County, California, and the laws of the State of
California shall govern, and the arbitrator solely shall apply them to, the
interpretation and construction of this Agreement. Such arbitration shall be
conducted in accordance with the Commercial Rules of the American Arbitration
Association then in effect ("Commercial Rules") before a single neutral
arbitrator; except that either party may request an expedited arbitration
pursuant to the Commercial Rules. If possible, the choice of arbitrators
presented to the parties shall include persons who have experience with
distribution agreements and commercial matters. Discovery shall be allowed in
arbitration in accordance with the provisions of the California Code of Civil
Procedure. Any award issued shall be made in accordance with California law and
shall include the award to the prevailing party of its costs and expenses
(including but not limited to attorneys' fees and costs and arbitration costs
and arbitrator's fees). An award shall be final and binding and may not be
appealed or reviewed, except upon the ground of malfeasance or fraud by the
arbitrator. Judgment upon the award may be enforced in any court of competent
jurisdiction, wherever located. Notwithstanding the foregoing, either party
shall have the right, at its sole discretion, to seek equitable relief from a
court of competent jurisdiction, without being limited in recourse to
arbitration, in the event that a breach by the other party of this Agreement
shall result in irreparable injury to it or if monetary damages would be
inadequate and impossible to calculate adequately, which equitable relief shall
include (but not be limited to) the entering of a temporary restraining order
and/or a preliminary injunction.
18.5 Independent Contractor; No Agency or Joint Venture. During the Term
of this Agreement, Upjohn shall act as an independent contractor under this
Agreement, and nothing contained in this Agreement shall (a) establish a joint
venture or partnership between the parties; (b) establish an employment
relationship between Upjohn and any principal, employee, officer, director or
other representative of Trylon, Perisphere or any Trylon Affiliate; or (c)
establish an agency relationship between Upjohn, or any of its principals,
employees, officers, directors or other representatives and Trylon or
Perisphere. The parties shall be responsible for their own work forces and
organizations, which shall be independent of each other and under the direct
supervision and control of the employing entity. Each party's principals,
officers and employees shall not represent themselves as being officers,
employees or agents of the other party for any purpose, and neither party shall
have the power or authority to bind or obligate the other with regard to any
agreement.
18.6 Headings. The headings and subheadings of the Sections contained
herein are used for convenience and ease of reference and are not to be
construed as limiting the scope or intent of any Section of this Agreement.
23
<PAGE>
18.7 Complete Agreement. This Agreement constitutes the complete
agreement and understanding between the parties hereto with respect to the
matters set forth herein, and supersedes and terminates any and all prior
existing agreements or understandings between them.
18.8 Amendments. This Agreement may be amended, modified, renewed,
superseded or canceled, and any of the terms, covenants or conditions hereof may
be waived, only by a written instrument executed by all parties hereto. The
failure of any party at any time or times to require performance of any
provision of this Agreement by any other party hereto shall in no manner affect
the right of such party at a later time to enforce same.
18.9 Further Actions. Each of the parties hereto shall execute such
further documents and instruments and take such further action as may be
necessary to carry out the terms of this Agreement, including but not limited to
assisting with any necessary or appropriate information for governmental
reporting or filings (but at no additional cost to the parties).
18.10 Force Majeure. In the event that the performance of this Agreement
or of any obligation hereunder, other than payment of money as herein provided,
by either party hereto is prevented, restricted or interfered with by reason of
any cause not within the control of the respective party, and which could not by
reasonable diligence have been avoided by such party (force majeure), the party
so affected, upon giving prompt notice to the other party, shall be excused from
such performance to the extent and for the duration of such prevention,
restriction or interference, provided that the party so affected shall use its
best efforts to avoid or remove such cause of non-performance and shall fulfill
and continue performance hereunder at the utmost dispatch whenever and to the
extent such cause or causes are removed. For the purpose of the preceding
sentence, conditions not within the control of the respective party shall be
considered to include but not be limited to acts of God, flood, storm,
earthquake, public enemy, war, invasion, quarantine restrictions, strike,
lockout and embargoes.
18.11 Severability. If any covenant of any provision of this Agreement is
found by a court of competent jurisdiction to be invalid, unlawful or incapable
of being enforced, all other conditions and provisions of this Agreement which
can be given effect without the invalid, unlawful or unenforceable provisions
shall, nevertheless, remain in full force and effect.
24
<PAGE>
18.12 Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives as of the day and year first above
written.
THE TRYLON CORPORATION, PERISPHERE INDUSTRIES, INC.,
a Delaware corporation a California corporation
By: Marty L. Lonky By: Marty L. Lonky
-------------------------- ----------------------------------
Title: President Title: Vice President
----------------------- -------------------------------
THE UPJOHN COMPANY,
a Delaware corporation
By: Jack J. Jackson
----------------------------------
Title: Senior Vice President
-------------------------------
[CERTAIN PORTIONS OF THIS DOCUMENT, AS INDICATED WITHIN, HAVE
BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST]
25
<PAGE>
EXHIBIT A
=========
UPJOHN TERRITORY
The "Upjohn Territory" shall consist of the Nonexclusive Upjohn
Territory and the Exclusive Upjohn Territory, as set forth below:
NONEXCLUSIVE UPJOHN TERRITORY
- -----------------------------
Arizona
Arkansas
Colorado
Oklahoma
Ohio (except Toledo, Ohio, which is not part of the Upjohn Territory)
Las Vegas, Nevada
EXCLUSIVE UPJOHN TERRITORY
- --------------------------
All of the United States of America, except:
. The Nonexclusive Upjohn Territory; and
. All of Illinois, Wisconsin, Michigan and Toledo, Ohio
26
<PAGE>
EXHIBIT B
=========
PRODUCTS
. Lightsticks @ prices specified in Section 6.1
. Optics @ prices specified in Section 6.2
. Atlas of Speculoscopy @ prices specified in EXHIBIT E
. Other supporting educational materials available as of the date of this
Agreement (available at negotiated prices)
. Other supporting materials
. Speculite specification
Material data safety sheet
FDA medical device application
27
<PAGE>
EXHIBIT C
=========
STATED MINIMUMS
[OMITTED]
28
<PAGE>
EXHIBIT D
=========
COPY OF TRYLON SALES PROMOTIONAL MATERIALS
Referred to in Section 5.1(b)
29
<PAGE>
EXHIBIT E
=========
[OMITTED]
30
<PAGE>
FIRST AMENDMENT
TO
DISTRIBUTION AGREEMENT
This Amendment to Distribution Agreement (the "Amendment") is entered into
effective as of December 16, 1994 by and between THE TRYLON CORPORATION, a
Delaware corporation ("Trylon"), PERISPHERE INDUSTRIES, INC., a California
corporation ("Perisphere"), and THE UPJOHN COMPANY, a Delaware corporation
("Upjohn"), with reference to that certain Distribution Agreement (the "Original
Agreement") dated as of July 20, 1994 by and between the parties hereto.
NOW, THEREFORE, in consideration of the mutual promises contained herein
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. The parties wish to amend the Original Agreement to include the states
of Illinois, Wisconsin and Michigan, as well as the city of Toledo, Ohio, in the
Exclusive Upjohn Territory. Therefore, the section of Exhibit "A" entitled
"Exclusive Upjohn Territory" is hereby amended in full to read as follows:
"EXCLUSIVE UPJOHN TERRITORY
---------------------------
All of the United States of America, except the Nonexclusive Upjohn
Territory."
2. Trylon acknowledges receipt prior to the date hereof of the sum of
$250,000 from Upjohn as an advance towards future purchases by Upjohn of the
Products (the "Upjohn Payment"). The parties hereby agree that the Upjohn
Payment shall no longer be characterized as an advance against future purchases
but shall be treated as consideration for Trylon's willingness to enter into
this Amendment and shall be the property of Trylon. Trylon will use the proceeds
to continue to support marketing and promotion expenses which occur at The
Trylon Corporation during this campaign.
3. Except as specifically set forth herein all terms and conditions of
the Original Agreement shall remain in full force and effect without being
impaired or invalidated in any way.
4. Unless otherwise defined, all terms defined in the Original Agreement
shall have the same meaning in this Amendment.
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<PAGE>
5. This Amendment may be executed in any number of counterparts, each of
which will be deemed an original, but all of which together will constitute one
and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives as of the day and year first above
written.
<PAGE>
THE TRYLON CORPORATION PERISPHERE INDUSTRIES, INC.
a Delaware corporation a California corporation
By: /s/ By: /s/
------------------------- -----------------------------
Title: Title:
---------------------- --------------------------
THE UPJOHN COMPANY,
a Delaware corporation
By: /s/
-------------------------
Title:
----------------------
33
<PAGE>
AMENDMENT TO AGREEMENT
----------------------
The DISTRIBUTION AGREEMENT, dated 7/20/94, by and between the TRYLON
CORPORATION, PERISPHERE INDUSTRIES, INC., and the UPJOHN COMPANY, is hereby
amended by mutual agreement of the parties to read as follows:
SECTION 3 TERM
The Agreement will remain in effect through calendar year 1998, unless otherwise
terminated or extended in accordance with the terms and conditions of the
Agreement. After 1998, the Agreement will be renewed annually for one (1) year
periods, conditioned upon the full satisfaction by Pharmacia & Upjohn of all
terms and conditions in the Agreement (including, but not limited to, the
Products purchase requirements set forth in Section 4 of the Agreement) for the
prior year not being in breach under the Agreement (upon which renewal period
shall be part of the Term). Should either party desire not to renew the
Agreement after 1998, such party must give at least three (3) months prior
written notice to the other party of such nonrenewal, during which notice period
the Agreement shall continue in full force and effect.
SECTION 6 ORDERING PROCEDURES
6.1 Minimum Purchases - Lightsticks
Minimum purchase balances for lightsticks/kits will be rescheduled over the 18-
month period following the Agreement Amendment signing. Purchases by Pharmacia
& Upjohn will be 6, 12, and 18 months after the signing date.
APPROVED BY:
TRYLON CORPORATION PHARMACIA & UPJOHN
Name: /s/ Name: /s/
---------------------- ----------------------------
Title: Date:
--------------------- ----------------------------
Date: Date:
---------------------- ----------------------------
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<PAGE>
EXHIBIT 10.8
EXCLUSIVE DISTRIBUTION AGREEMENT
This Agreement by and between
The TRYLON CORPORATION, a Company organized and existing under the laws of
- ----------------------
California with registered office in 970 West 190th Street, Suite 900, Torrance,
California hereinafter referred to as "TRYLON",
and
BRACCO S.p.A, a Company organized and existing under the laws of Italy with
- ------------
registered office in Milan, Via Egidio Folli No. 50, hereinafter referred to as
"BRACCO"
WHEREAS
- - TRYLON is the owner or licensee of any and all rights - including know-how,
patent and trademark - concerning the Product (as hereinafter defined), which
is manufactured in TRYLON's plant.
- - BRACCO is willing to execute an agreement with TRYLON for the exclusive
distribution of the Product in the Territory and TRYLON is willing to grant
such right to BRACCO at the terms and conditions herein set forth.
NOW IN CONSIDERATION OF THE PREMISES, WHICH FORM AN INTEGRAL PART OF THE PRESENT
AGREEMENT, THE PARTIES HEREBY AGREE AS FOLLOWS.
ARTICLE I - Definitions
Wherever used in this Agreement the following terms shall have the following
meaning:
1.01 "Product": shall mean the diagnostic device for vaginal illumination
whose specifications are set forth as per Schedule A attached hereto,
which forms an integral part of this Agreement, as well as any other
improvement of it in the application field covered by this Agreement.
1.02 "Territory": shall mean the Republic of Italy, the Republic of San
Marino and Vatican City.
1.03 "Trademark": shall mean the trademark "SPECULITE" filed to cover the
Territory on January 10, 1996 application number RM96C000095.
<PAGE>
1.04 "Patent Rights": shall mean the patent granted/issued and/or the
intellectual property rights on the Product indicated in Schedule B
hereto.
1.05 "Effective Date": shall mean the date, to be indicated in writing, in
which BRACCO and TRYLON shall reach the agreement foreseen in para 9.03.
ARTICLE 11 - Grant
2.01 On the terms and conditions as set forth in this Agreement TRYLON hereby
grants BRACCO, that accepts, the exclusive right of promoting, marketing
and selling the Product in the Territory, using the Trademark.
2.02 By appointing BRACCO as its exclusive distributor in the Territory, it
is intended and agreed that TRYLON shall not itself sell the Product in
the Territory and shall not grant to any third party distribution rights
or other rights in the Territory for the Product.
ARTICLE III - Right of First Refusal
With reference to any improvement of the Product outside the application
field governed by the rules of the present Agreement the Parties hereby
agree that TRYLON shall grant to BRACCO a right of first refusal to market
in the Territory, under terms to be proposed by TRYLON, any new product
which embodies improvements of the Product in application fields other than
that covered by the present Agreement.
BRACCO's right of first refusal to any such product shall be exercisable
only during the three (3) month period, beginning with TRYLON's offer of
terms for marketing rights for that Product. BRACCO shall notify TRYLON in
writing of its exercise of the right of first refusal.
In case BRACCO does not exercise its right of first refusal within said
three (3) month period, TRYLON shall be entitled to license a third party to
market the particular product in the Territory on generally equivalent
terms. BRACCO's right to market any product for which it has exercised its
right of first refusal under this Paragraph shall terminate on expiry of
five (5) years from the Effective Date of this Agreement or four (4) years
of commercial sale of that product, whichever period is the last to expire.
The Parties shall also agree upon reasonable minimum quantities to be
purchased by BRACCO, during each year of such term. Such agreement shall
take in any case into consideration the minimum purchase quantities, already
agreed by the Parties for the Product.
ARTICLE IV - Trademark and Infringement
4.01 The Product shall be marketed by BRACCO in the Territory under the
Trademark. The ownership of any rights in the Trademark shall remain
solely with TRYLON and BRACCO shall only be entitled to use the
Trademark for the
2
<PAGE>
purposes provided for in the present Agreement.
4.02 Trademark rights are secured and shall be maintained in the Territory by
TRYLON in its own name and its costs, for the whole duration of the
present Agreement. BRACCO shall do its best efforts to notify TRYLON as
soon as possible of any infringements of the Trademark in the Territory
which may come to its knowledge, and shall have the right to afford
TRYLON full co-operation for the defense of the Trademark in the
Territory.
BRACCO shall reasonably assist TRYLON in taking the necessary measures
in order to protect Trademark rights.
4.03 TRYLON shall take prompt action, at its expense, to stop all
infringements of its Trademark in the Territory, including court action
if necessary.
TRYLON agrees to defend, indemnify and hold BRACCO harmless from any
claims, suits or liability arising out from the marketing, advertising
and/or sale or use, by BRACCO or its customers, of the Product under the
Trademark, in case the Trademark infringes any trademark, trade name or
other interest of any third party.
ARTICLE V - Patent Rights and Infringement
5.01 TRYLON shall be the sole responsible for the application, grant,
maintenance and defense of the Patent Rights in the Territory and shall
bear all relative costs.
5.02 TRYLON shall take prompt action, at its expense, to stop all
infringements in the Territory of its Patent Rights, including court
actions if necessary, being understood that, in order to achieve this
aim, TRYLON shall choose, in its reasonable determination, which kind of
legal actions are to be taken for the defensive strategy. In the event
that BRACCO becomes aware that any of the Patent Rights is disputed or
infringed by a third party, BRACCO shall promptly inform TRYLON thereof
and reasonably assist TRYLON in taking measures necessary to protect the
Patent Rights.
5.03 TRYLON shall indemnify BRACCO against any and all third party claims of
patent infringement which may be asserted against it because of its
marketing, advertising and/or sale of the Product in the Territory, to
the extent BRACCO has not negligently or willfully contributed to the
basis for such claim. TRYLON shall bear all costs and expenses incur-red
in connection with the defence of any such claims or as a result of any
settlement made or judgements rendered on the basis of such claims.
ARTICLE VI - Sales Permissions
6.01 BRACCO shall take all the necessary steps in order to secure and
maintain those
3
<PAGE>
governmental approvals or official sales perrnissions, if any, from the
competent Health Authorities which may be required for the sale of the
Product in the Territory. It is understood that any application shall be
filed in the name of TRYLON.
6.02 Any official costs (such as fees, stamps, annuities, etc.) imposed in
the filing of the applications for or the obtention of the official
sales permissions for the Product in the Territory or related to their
maintenance in force, shall be reimbursed by TRYLON to BRACCO against
supporting documents.
ARTICLE VII - Confidentiality
All information of a confidential nature disclosed by one Party to the other
hereunder shall be marked as "CONFIDENTIAL" and, if orally given, confirmed in
writing as "CONFIDENTIAL" within thirty (30) days of the disclosure and shall be
used only for the purposes of this Agreement and shall not be revealed by the
recipient to any person, company or firm other than its employees, who have a
need to know such information, and such disclosures shall be made on a
confidential basis. No disclosure shall be governed by this Article to the
extent that the information disclosed shall be:
- - public knowledge prior to or after disclosure other than through acts or
omissions attributable to the recipient or its employees, or
- - already known to the recipient at the time of disclosure hereunder, or
- - disclosed to the recipient by a third party having the right to use and
disclose the same.
The present obligation shall survive the termination of this Agreement for
whatever reason and shall remain in force for a period ending five (5) years
after such termination.
Either Party undertakes not to reveal the content and/or the existence of this
Agreement to third parties, without the previous written consent of the other
Party.
ARTICLE VIII - Supplies
8.01 [Omitted]
8.02 [Omitted]
8.03 [Omitted]
8.04 [Omitted]
ARTICLE IX - Packaging
9.01 TRYLON undertakes to supply BRACCO with the Product packed with the
indication of any warning, instruction and specification (e.g. batch
number, expiry date, etc.) in full accordance with all the applicable
laws, written in the Italian language.
4
<PAGE>
9.02 BRACCO undertakes not to make any changes or integrations on the
packagings of the Product as supplied by TRYLON without having
previously obtained the written approval of TRYLON, provided however
that at all events, BRACCO's name and houseman shall clearly appear on
all the packagings,, leaflets and labels, together with the mention that
the Product is manufactured by TRYLON and sold by BRACCO.
9.03 The parties shall cooperate in a very interactive manner in order to
realize the correct packaging and labelling of the Product. For this
purpose it is, however, agreed that in case the parties do not reach an
agreement with reference to all the practical aspects ( e.g.
translations, expenses, etc.) necessary for the realization of said
correct packaging and labelling, within one hundred and eighty (180)
days to be calculated as of the Effective Date, the present Agreement
shall be considered forthwith terminated by the Parties at the
expiration af said term, unless otherwise agreed in writing by BRACCO
and TRYLON.
ARTICLE X - Promotion
10.01 BRACCO shall use its best endevours to promote the sale of the Product
in the Territory by using adeguate promotional efforts. The times and
the programs of launching, introduction and promotion of the Product in
the Territory shall be negotiated and agreed between the Parties.
10.02 TRYLON shall keep BRACCO informed of all promotional activities
concerning the Product outside the Territory. TRYLON shall also keep
BRACCO informed, by advance written notice and in reasonable time, of
all changes concerning the Product (e.g. changes in characteristics,
performance, packaging, labelling, etc.).
TRYLON shall provide to BRACCO, free of charge, the quantities of
promotional materials in connection with the Product, that TRYLON and
BRACCO shall agree and that TRYLON in any case customarily provides to
other distributors of the Product outside the Territory.
Upon the termination of this Agreement, and upon request of TRYLON,
BRACCO shall return all such unused literature, drawings, and other
sales materials to TRYLON.
10.03 The costs of medical visitors, distribution of samples, mailing of
literature, circulars and advertising shall be borne by BRACCO.
10.04 [Omitted]
ARTICLE XI - New Experiences
11.01 The Parties undertake to put at each other disposal, free of charge,
all
5
<PAGE>
results of new experiences made with the Product during the life of
this Agreement.
11.02 TRYLON particularly undertakes to put at BRACCO's disposal, free of
charge, the clinical studies and reports carried out by it or by third
parties on the Product, even if not yet published,
11.03 The provisions set forth in para. 11.01 and 11.02 shall apply provided
that the disclosing Party dord not 'eopardize or impair its, or a third
party's, ability to publish such experience or findings, and provided
that the disclosing Party has the night to disclose such information
without the requirement from the receiving Party of incurring in
additional costs or expenses.
ARTICLE XII - Warranties and Liabilities
12.01 TRYLON represents and warrants that the Product delivered to BRACCO
shall confonn to the specifications submitted and listed in Schedule A
and shall have a minimum shelflife of twenty-four (24) months from the
date of delivery by TRYLON to BRACCO. The Product will be free from
defects of whatever nature and shall be packed and shipped so as to
avoid freight stress.
TRYLON warrants the merchantability of the Product and its fitness
thereof for the particular purpose for which it is sold and takes upon
itself any responsibilities and liabilities applicable to the
manufacturer of the Product, according to any applicable UE and/or local
laws and regulations.
Furthermore, TRYLON hereby declares that TRYLON itself and its
manufacturer of the Product are in compliance with all the rules of the
United States Food and Drug Administration ("FDA") and Good
Manufacturing Procedures ("GMP") with respect to the Product, and that
West Springfield facility at which the Product is manufactured has been
approved by the FDA as a medical diagnostic manufacturing facility.
TRYLON intends to comply with all the applicable U.E. and local laws and
regulation with respect to the Product and undertakes to proceed
diligently to effect such compliance, within one hundred and eighty
(180) days as of the Effective Date. For this purpose, BRACCO agrees to
cooperate with TRYLON and provide it with information and assistance.
12.02 Should BRACCO discover any batch of the Product failing to satisfy the
specifications in Schedule A, TRYLON shall, within forty-five (45) days
after receipt of a written notice from BRACCO, replace the Product at
its own expense, including duties. BRACCO shall provide TRYLON with a
sample of the defective Product reflecting the defects noted.
6
<PAGE>
As an alternative to replacement, BRACCO may elect to obtain the refund
or credit of the purchase price and of the import duty, as well as the
insurance and shipping costs.
Any other quantity of the defective Product, other than the sample above
mentioned, shall be, at TRYLON's election, either returned to TRYLON, or
destroyed in accordance with the applicable laws in the Territory
12.03 TRYLON shall defend, indemnify and hold BRACCO harmless as to any
product liability claims arising out of the use of the Product, except
to the extent such claims arise out of or relate to mishandling,
modification or misuse of the Product or otl-ier negligence by BRACCO.
12.04 TRYLON represents and warrants that it has the full right and power to
grant the distribution rights set forth in Article Two (2) and that
there are not outstanding agreements, assignments, or encumbrances of
whatever nature inconsistent with the provisions of this Agreement.
Without limiting the generality of the foregoing, TRYLON represents and
warrants that: i) any and all authorizations or consents required to be
obtained by the beneficial owner of the Patent Rights, in order to allow
TRYLON to perform its obligations hereunder, have been obtained by
TRYLON; ii) TRYLON shall fully comply with the terms and conditions set
forth in the license agreement with the beneficial owner of the Patent
Rights so as to avoid the lapsing or the impairment and/or other
negative consequence of whatever nature to any of BRACCO's right granted
under this Agreement.
ARTICLE XIII - Term and Termination
13.01 Unless sooner terminated as provided hereinafter, this Agreement, shall
be binding upon the Parties promptly upon its signature and shall have
an initial term of five (5) years as of the Effective Date. Thereafter,
it shall be renewable for an additional five (5) year term and so on for
other possible renewals, provided that each Party shall have the right
to terminate this Agreement at the end of the initial term or of any
renewal term, giving a twelve (12) month prior written notice to the
other Party.
13.02 Either Party shall have the right to terminate at any time this
Agreement by giving a thirty (30) day advance written notice to the
other Party, should any of the following conditions arise:
a) the other Party changes substantially the ownership of its voting shares
or otherwise its control, except: (i) such change takes place within the
existing group of companies to which such other Party presently belongs
to, or:(ii) the third party attaining a majority interest or control of
said other Party is not one to which TRYLON or BRACCO have reasonable
grounds
7
<PAGE>
for objection.
Notwithstanding the foregoing, BRACCO shall be entitled to terminate the
present Agreement under this sub-clause if any competitor of BRACCO,
having its principal place of business in the Territory or anywhere
else, purchases a fifteen percent (15%) or greater interest in TRYLON's
voting stocks and/or assets or other interest.
b) the other Party becomes insolvent or goes into bankruptcy, liquidation,
receivership or into any comparable proceedings for settlement of debts.
13.03 BRACCO shall have the option to terminate this Agreement upon a
fortyfive (45) day prior written notice by registered letter if:
a) the warranties in Article XII are not met for two different Product
shipments and BRACCO's quality control department has refused to accept
such shipments in any consecutive twelve (12) month period. In the event
this conditions occurs and TRYLON fails to remedy, as provided for in
para 12.02, the present Agreement shall terminate at the end of the
forty- fifth day herein foreseen. It is however understood that TRYLON
shall bear no liability in case the Product has not been properly stored
by BRACCO or in case of damages occurred during the relevant shipment.
c) the Product falls to comply with at least one (1) of U.E. and/or
local laws or regulations in the Territory.
d) TRYLON has materially breached any of its other obligations hereunder.
Notwithstanding the above, BRACCO shall not have the right to terminate
the present Agreement as per para 13.03 b) or c) and d), unless it
provides TRYLON a period of forty-five (45) days to cure and remedy said
conditions. If the condition forming the basis for termination cannot,
with diligent effort, be cured within such forty-five day period, TRYLON
shall have a reasonable additional time to effect such cure, provided
that TRYLON commences to cure the condition within such forty-five (45)
day period, and proceeds diligently and continuously thereafter to cure
the condition.
13.04 TRYLON shall have the option to terminate this Agreement upon a
fortyfive (45) day prior written notice by registered letter if BRACCO
does not perform the due payments at the terms and conditions set forth
in Schedule C. Notwithstanding the above, TRYLON shall not have the
right to terminate the present Agreement as per this Section 13.04
unless it provides BRACCO a period of forty-five (45) days to cure and
remedy said condition. If the condition forming the basis for
termination cannot, with diligent effort, be cured within such forty-
five day period, BRACCO shall have reasonable additional time to effect
such cure, provided that BRACCO commences to cure the condition within
such forty-five (45) day period, and proceeds diligently and
continuously thereafter to cure the condition.
8
<PAGE>
ARTICLE XIV - Assignment
Neither Party shall assign or otherwise transfer any of its right or
obligations under this Agreement to any third party without the prior written
approval and consent of the other Party.
However, each Party shall be entitled to assign this Agreement (both rights
and obligations) or delegate its obligation to be performed to an affiliate,
without the prior approval of the other Party. For purpose of this Agreement,
the term "affiliate" shall mean any corporation or business entity controlled
by, controlling or under common control with such Party. In case of any
assignment provided for herein, the assignor shall remain jointly and severally
liable with the assignee for the proper performance by the assignee.
ARTICLE XV - Indemnity
In case of termination of the present Agreement due to initiative of
TRYLON, other than termination pursuant to Article 13 for BRACCO's
unfullfillment, BRACCO shall be entitled to ask and receive from TRYLON an
indemnity in money concerning any expense borne by BRACCO under this Agreement,
and hereby mutually agreed by the Parties in a measure equal to fifty per cent
(50%) of the net sales of the Product, made by BRACCO in the previous calendar
year.
ARTICLE XVI - Rights and Duties after Termination
16.01 In the event of termination or expiration, BRACCO shall have the
option, at its own discretion,
a) to re-sell to TRYLON, even through a third party designated by this
latter, all quantities of the Product in BRACCO's possession at prices
not to exceed BRACCO's landed cost.
b) to go on selling, using the Trademark, the quantities of Product in
its possession, up to the exhaustion of the Product.
16.02 Such termination or expiration shall not affect the obligation of BRACCO
to pay TRYLON any amount accrued to TRYLON under the provisions of this
Agreement while it was in effect, to the extent that said amount cannot
be compensated with any BRACCO's credit of whatever nature towards
TRYLON. Furthermore, such termination or expiration shall not affect
VII[ hereinbefore.
ARTICLE XVII - Force Majeure
If, in the performance of this Agreement, any obligation hereunder is prevented,
restricted or interfered with by reason of any cause beyond the control of the
affected Party, including but not limited to: war or hostility; crime, tort or
other unlawful act, act of
9
<PAGE>
any government or agency, subdivision or branch thereof, strikes or other labour
disputes; accident, fire, explosion, flood, storm or other act of God; fuel,
power, inventory or machinery; technical failure; or, in general, any other
contingency whatsoever (whether similar or dissimilar to those set forth
herein), the Party so affected, upon prompt cabled notice to the other Party,
shall be excused from such performance to the extent of such prevention,
restriction or interference provided that the Party so affected shall use its
best efforts to avoid or remove such cause or causes of non-performance and
shall continue performance hereunder whenever such cause is removed. If the
Party so affected cannot resume performance within six (6) months, the other
Party shall have the right to terminate this Agreement.
ARTICLE XVIII - Notices
Any notice to be notified to the Parties hereto shall be mailed by telex or
telefax and confirmed by registered airmail letter if intended for BRACCO to:
BRACCO S.p.A.
Via Egidio Folli No. 50
20134 NElan,
ITALY
and if intended for TRYLON to:
THE TRYLON CORPORATION
970 West 190th Streeet
Suite 900
90502-1037 Torrance
CALIFORNIA
ARTICLE XIX - Applicable Law and Arbitration
The present Agreement is governed by the Italian law. All divergencies which
might arise in relation to the present Agreement, including those concerning its
validity, interpretation, performance, termination and expiration, will be
settled by a decision of one arbitrator, to be named in accordance with the
"National Arbitration Regulations" of the National and International Arbitration
Chamber in Milan, which regulations the Parties expressively declare to know and
accept, with particular reference, but not limited to, the modalities of
appointment of the arbitrator. The arbitrator will decide in accordance with
the rules of the Italian Civil Procedural Code (arbitrate rituale secondo
diritto).
The place of arbitration shall be Milan and the language to be used in the
arbitral proceedings shall be English.
10
<PAGE>
The Parties undertake to give prompt execution to the award in no event later
than ten (10) days from the date of the communication of the arbitrator's
judgement. The fees and the expenses of such arbitration shall be borne by the
losing Party.
ARTICLE XX - Amendments
20.01 The foregoing constitutes the entire agreement between the Parties about
the promotion, marketing and sale of the Product in the Territory.
20.02 This Agreement shall not be considered as extended, cancelled or amended
in any respect unless done so in writing by means of formal contractual
Amendments to be executed by both Parties.
THIS AGREEMENT has been drawn up in duplicate, in witness whereof the Parties
hereto have caused it to be duly executed by their respective officers hereunder
duly authorized and each Party hereto shall receive one copy duly signed.
signed in Milan on February 14, 1996
The TRYLON CORPORATION BRACCO S.p.A.
/s/ Martin L. Lonky /s/ Diana Bracco
------------------------ --------------------
Mr. Martin L. Lonky Dr.a Diana Bracco
President General Manager
[CERTAIN PORTIONS OF THIS DOCUMENT, AS INDICATED WITHIN, HAVE BEEN OMITTED
PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST]
11
<PAGE>
SCHEDULE A
----------
Specifications
--------------
Products:
- ---------
1. Speculite - Blue/White
Descriptions:
- -------------
1. Speculite: Chemiluminescent light sticks, with fracturable glass ampules
imbedded in polypropylene containers, approximately 52 mm in length. Each
light stick is packaged with a double sided adhesive polymer, intended to
provide adhesive capability of the light stick to disposable and re-usable
specula.
Medical Indication:
- -------------------
Speculite, Blue/White - viewing pathological demarcations during speculoscopy
procedures.
Packaging:
- ----------
to be agreed as per para. 9.3
The TRYLON CORPORATION BRACCO S.p.A.
/s/ Martin L. Lonky /s/ Diana Bracco
- ------------------------ ---------------------
Mr. Martin L. Lonky Dr.a Diana Bracco
President General Manager
12
<PAGE>
SCHEDULE B
----------
Patent Rights
-------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TITLE COUNTRY FILED ISSUED SERIAL REG. EXPIRY DATE
No.
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Endoscopic EPO 01/23/85 86300457.8 1/23/2006
Instruments
and
Illuminating
Attachments
for Same
- --------------------------------------------------------------------------------
Same as above Italy Same as 0190014 Same as
above above
- --------------------------------------------------------------------------------
</TABLE>
The TRYLON CORPORATION BRACCO S.p.A.
/s/ Martin L. Lonky /s/ Diana Bracco
- ------------------------ ---------------------
Mr. Martin L. Lonky Dr.a Diana Bracco
President General Manager
13
<PAGE>
SCHEDULE C
----------
[Omitted]
The TRYLON CORPORATION BRACCO S.p.A.
/s/ Martin L. Lonky /s/ Diana Bracco
- ------------------------ ---------------------
Mr. Martin L. Lonky Dr.a Diana Bracco
President General Manager
14
<PAGE>
EXHIBIT 10.9
EXCLUSIVE DISTRIBUTORSHIP AGREEMENT
This AGREEMENT is made effective as of the 9th day of September, 1994,
between Omniglow Corporation, a corporation ("SELLER"), and THE TRYLON
CORPORATION, a corporation ("DISTRIBUTOR") with reference to the following
recitals which the parties agree are true:
A. SELLER is the owner of certain patents, trademarks, and know how with
regard to certain chemiluminescent light products, and desires to promote
goodwill associated with such patents and trademarks.
B. SELLER is the successor in interest to American Cyanamid Corporation, a
company with which distributor previously performed a joint development
agreement with regard to use of chemiluminescent light products in certain
health care applications.
C. DISTRIBUTOR has developed medical applications for Licensed Products and
desires to exploit these applications through sale of Licensed Products.
D. The Licensed Products to be sold by DISTRIBUTOR will be sold in
competition against existing products and procedures which currently dominate
the market into which Licensed Products will be sold by DISTRIBUTOR.
E. SELLER and DISTRIBUTOR have made significant investments to develop the
Licensed Products and applications for the Licensed Products respectively, and
obtaining patents which protect the Licensed Products and applications, and
desire to develop and enhance goodwill for both Licensed Products and the
applications therefor described in this Agreement.
F. SELLER and DISTRIBUTOR acknowledge and agree that to compete against
existing products and procedures, and to obtain and promote goodwill for patents
of SELLER and DISTRIBUTOR and Licensed Products and applications therefor, it
will be necessary for SELLER and DISTRIBUTOR to work closely together to assure
the best possible sales and marketing efforts for Licensed Products and
applications therefor.
THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the parties agree as follows:
1. EXCLUSIVE DISTRIBUTOR.
---------------------
a. Subject to all terms and conditions below, SELLER hereby
appoints DISTRIBUTOR as SELLER's exclusive distributor to market, sell,
distribute, and subject to the provisions of paragraph 11 below sub-distribute,
the product(s) listed on Exhibit A to this Agreement ("Licensed Products"), in
the field of use of endoscopic human and veterinary
<PAGE>
examination applications ("Field of Use"), in all countries worldwide (the
"Territory"). DISTRIBUTOR's specification for LICENSED PRODUCTS, including color
coordinates, burn time, and intensity/time requirements over five, ten and/or
fifteen minute time intervals are set forth on Exhibit A. SELLER hereby grants
to DISTRIBUTOR a right of first refusal to the use of Licensed Products in human
and veterinarian medical applications other than the Field of Use which right
shall exist during the Initial Term and, if applicable, the Extended Term. In
the event SELLER determines to grant license rights with respect to such other
human or veterinarian medical applications, SELLER shall give DISTRIBUTOR
written notice of the intended license, the terms and conditions on which the
license will be granted, and all qualifications which must be met by the
proposed Licensee. DISTRIBUTOR shall have sixty (60) days after the date of such
notice to advise SELLER in writing if DISTRIBUTOR desires to be the Licensee
with respect to the pertinent application. If DISTRIBUTOR desires to be the
Licensee, DISTRIBUTOR shall indicate in its notice its agreement to be bound by
all terms and conditions of the applicable license, and shall demonstrate its
capability to be the Licensee. If DISTRIBUTOR elects to be the Licensee, and if
DISTRIBUTOR establishes to the satisfaction of SELLER, in SELLER's reasonable
discretion, that DISTRIBUTOR is qualified to be Licensee, then SELLER shall
grant the license to DISTRIBUTOR rather than to any other party. IF DISTRIBUTOR
does not affirmatively elect to be the Licensee, or if SELLER reasonably
determines that DISTRIBUTOR does not have the capability to be the Licensee,
then SELLER hall have the right to grant the license to a party or parties other
than DISTRIBUTOR.
b. DISTRIBUTOR hereby accepts such appointment as exclusive
distributor, and undertakes to promote and increase sales of Licensed Products
in the Field of Use to customers in the Territory, and to protect the interests
of SELLER therein as required by this Agreement.
c. The DISTRIBUTOR is an independent corporate entity having no
affiliation or relationship to or with the SELLER, except that SELLER may become
a shareholder of DISTRIBUTOR pursuant to the option agreement to be executed
pursuant to this Agreement described below. The relationship between the parties
is that of vendor and purchaser rather than principal and agent. Accordingly,
except with the prior written approval of SELLER, DISTRIBUTOR shall not be
empowered by its appointment hereunder or otherwise to act for or to bind
SELLER, or to make any express or implied representation or warranty on behalf
of SELLER.
d. So long as Distributor is not in violation of any of its payment
or exclusive purchase obligations under this Agreement, or its obligations under
Sections 5.a., 5.e., and 8 of this Agreement, Seller shall not appoint any other
distributor in the Field of Use in the Territory during the Initial Term
(defined below) or any Extended Term (defined below) of this Agreement.
e. Licensed Products shipped by SELLER to DISTRIBUTOR under this
Agreement shall meet the specifications for LICENSED PRODUCTS set forth on
Exhibit A at the time of shipment, and all such shipments shall be accompanied
by a certificate to the effect
2
<PAGE>
that licensed products meet the applicable specifications. DISTRIBUTOR shall
have and bear all risk of loss with regard to LICENSED PRODUCTS upon delivery of
LICENSED PRODUCTS by SELLER to the appropriate carrier or shipper.
2. REQUIREMENTS. In consideration of the SELLER selling Licensed
------------
Products to DISTRIBUTOR, and granting DISTRIBUTOR the opportunity to be SELLER's
exclusive distributor under this Agreement, DISTRIBUTOR agrees that during the
Initial Term and any Extended Term of this Agreement, so long as SELLER makes
Licensed Products available to DISTRIBUTOR in accordance with the terms and
conditions of this Agreement, DISTRIBUTOR shall purchase from SELLER all of its
requirements for Licensed Products, all products having the same characteristics
or properties of Licensed Products, and all chemicals or components relating to
Licensed Products.
3. TERM. The initial term of this Agreement, subject to all
----
provisions of this Agreement, shall be ten (10) years ("Initial Term"). The
Initial Term shall automatically be extended for an extended term of ten (10)
years ("Extended Term") unless either party shall have given the other party
written notice of termination at least one hundred eighty (180) days prior to
the end of the Initial Term in accordance with paragraph 7(c) below, or unless
this Agreement shall otherwise have been terminated in accordance with the terms
of this Agreement.
4. ORDERS; PRICES; TERMS OF SALE. So long as Distributor is not in
-----------------------------
violation of any of its payment or exclusive purchase obligations under this
Agreement, or its obligations under Sections 5.a., 5.e., and 8 of this
Agreement, Seller will accept and timely fill Distributor's properly placed
orders. Initial prices and specific terms of sale applicable to all sales
hereunder, including time of payment and credit terms, shall be as set forth on
Exhibit B attached. General terms and conditions of sale applicable to all
sales hereunder shall be as set forth on Exhibit C attached. In the event of a
conflict between such terms and conditions and this Agreement, this Agreement
shall control and govern. SELLER shall have the right at all times to change
prices, terms of sale, or SELLER's general terms and conditions of sale, by
giving one hundred eighty (180) days' prior written notice of such change to
DISTRIBUTOR, which prior change shall not increase the price for any orders from
DISTRIBUTOR accepted by SELLER prior to the effective date of such price change.
5. PATENTS/TRADEMARKS.
------------------
a. DISTRIBUTOR recognizes the validity of and exclusive ownership
by SELLER of all of SELLER's patents, trademarks and trade dress relating to or
affecting Licensed Products including those set forth on Exhibit D attached
hereto. DISTRIBUTOR shall not, either while this Agreement is in effect or at
any time thereafter, register, use or attempt to obtain any right in or to any
such patent, trademark, or trade dress, or in and to any trademark or trade
dress confusingly similar to SELLER's trademarks or trade dress. DISTRIBUTOR
shall not, without the prior written consent of SELLER, use the words or symbols
of any trademark of Seller or of any of its subsidiaries in its advertising,
labels, signs, literature or commercial stationery; provided, however, that
-------- -------
while this Agreement remains in force, DISTRIBUTOR shall be entitled to describe
itself as SELLER's exclusive distributor for the Licensed Products in the
3
<PAGE>
Field of Use in the Territory, and to identify SELLER as the source of Licensed
Products and/or to disclose the country of origin of the Licensed Products. All
uses of SELLER's trademarks permitted by SELLER shall be royalty free uses so
long as DISTRIBUTOR is not in default of its material obligations under this
Agreement. All permitted uses of SELLER's trademarks shall be terminable by
SELLER upon ninety (90) days prior written notice. DISTRIBUTOR shall have the
right to request SELLER to register new trademark(s) for the Licensed Products
developed and owned by SELLER. If SELLER does register such new trademark(s) as
requested by the DISTRIBUTOR, SELLER shall then give to DISTRIBUTOR a royalty-
free, exclusive license to use such trademark(s) in connection with the sale of
the Licensed Products in the Field of Use in the Territory, with the term of
such license being co-terminus with the term of this Agreement.
b. In the event DISTRIBUTOR is permitted to use any of SELLER'S
licensed trademarks in connection with the sale or distribution of Licensed
Products, DISTRIBUTOR shall submit to SELLER for SELLER's prior trademark use
approval all proposed packaging, merchandising, display material, advertising
and promotional material (including commercial stationery) to be used by
DISTRIBUTOR in connection with the Licensed Products.
c. SELLER acknowledges the validity of and exclusive ownership by
DISTRIBUTOR of DISTRIBUTOR's patents and trademarks listed on Exhibit D
attached. SELLER shall not, either while this Agreement is in effect or at any
time thereafter register, use or attempt to obtain any right in or to any such
patent or trademark, or in or to any trademark confusingly similar thereto.
d. SELLER and DISTRIBUTOR acknowledge and agree it is in the best
interest of both parties to assure that patents and trademarks of the parties
are utilized in a manner which will protect, enhance and promote the value of
those patents and trademarks, and goodwill associated therewith, through sale of
Licensed Products. Therefore, the parties shall cooperate in development of
packaging and sales and promotional materials for Licensed Products to protect,
enhance and promote the patents and trademarks, and goodwill associated
therewith, of both parties.
e. Neither party shall at any time challenge in any way the
validity or ownership of any of the patents or trademarks of the other party
listed on Exhibit D, or any other patent or trademark obtained or issued with
respect to Licensed Products after the effective date of this Agreement.
6. DISTRIBUTOR OBLIGATIONS.
-----------------------
a. Unless otherwise agreed to in writing by SELLER, any expense
incurred by DISTRIBUTOR in distributing the Licensed Products in the Field of
Use in the territory shall be borne by DISTRIBUTOR.
4
<PAGE>
b. DISTRIBUTOR shall be solely responsible for complying with all
regulations and laws relating to the export, import, transportation, sale and
use of the Licensed Products by DISTRIBUTOR and its customers, representatives
and distributors and sub-distributors, including regulations and laws relating
to approval of registration of or filing of information in respect of Licensed
Products in the Field of Use; labeling, literature, and directions for use of
the Licensed Products in the Field of Use, and all customs regulations. In
addition, DISTRIBUTOR shall keep SELLER advised of the steps it proposes to
take, or has taken, in order to comply with all applicable regulations and laws
relating to the approval, registration, filing of information, labeling,
distribution, use and sale of the Licensed Products.
c. DISTRIBUTOR shall furnish to SELLER by December 1 and June 1 of
each calendar year during the Initial Term or any Extended Term of this
Agreement, a written forecast on a monthly basis of the quantity of Licensed
Products DISTRIBUTOR estimates it will require for distribution during the six
months extending January 1 through June 30, and July 1 through December 31,
respectively, in order to ensure adequate product supply and availability.
DISTRIBUTOR understands and agrees that because of the manner in which Licensed
Products are manufactured SELLER needs significant lead time with respect to
Licensed Products to be manufactured by SELLER for DISTRIBUTOR. Therefore,
provision by DISTRIBUTOR of accurate sales forecasts is critical to SELLER's
ability to have Licensed Products available for DISTRIBUTOR. DISTRIBUTOR'S
forecasts shall include product codes and units for each product and shall be
sent to SELLER's president at the address for notices set forth at the end of
this Agreement. DISTRIBUTOR shall notify SELLER in writing of any changes to its
business or in markets DISTRIBUTOR services which may or will result in material
changes to any forecast as soon as possible after DISTRIBUTOR learns of the
change. Seller shall notify DISTRIBUTOR as soon as Seller knows if SELLER will
not be able to deliver the forecasted quantities of Licensed Products at the
times requested by DISTRIBUTOR. SELLER will use its best efforts to maintain the
capacity to timely fulfill such orders as are placed by DISTRIBUTOR in
accordance with the forecasts.
d. DISTRIBUTOR shall report to SELLER monthly DISTRIBUTOR's actual
sales for the prior month to enable SELLER to track DISTRIBUTOR's actual sales
against projected customer sales, such monthly sales to be reported on a country
by country basis.
7. DEFAULT/TERMINATION.
-------------------
a. If either party shall at any time fail to discharge any of its
material obligations hereunder, the party entitled to the benefit of performance
shall be entitled to notify the other party of such default, and that it intends
to terminate this Agreement unless the default is corrected by the defaulting
party within ninety (90) days after its receipt of such notice. If the default
continues and is not cured within such ninety (90) day period, then the party
giving the default notice shall be entitled to terminate this Agreement.
b. In the event either party files a voluntary petition for
bankruptcy, as filed against it an involuntary petition for bankruptcy, or a
receiver or trustee is appointed for the property or estate of such party, and
such petition or appointment of a receiver is not
5
<PAGE>
terminated within ninety (90) days after the filing or appointment date, or if
either party makes an assignment for the benefit of creditors, the other party
shall be entitled by written notice to such party to terminate this Agreement
forthwith.
c. Either party may terminate this Agreement, without cause
effective the end of the Initial Term or the Extended Term by giving at least
180 days' prior written notice of termination to the other party.
d. Expiration or termination of this Agreement for any reason shall
not relieve either party from any obligations to the other arising from acts
done on or before the effective date of termination or expiration, or from
performance of obligations under Paragraphs 5, 8, 9, 14, 15 and 16 of this
Agreement.
e. Upon termination of this Agreement, SELLER may, at its option,
purchase all or any part of the inventory of Licensed Products, including raw
materials, chemicals and components, of DISTRIBUTOR sold by SELLER to
DISTRIBUTOR for an amount equal to the cost of such inventory to DISTRIBUTOR at
the time of the shipment thereof, which shall include handling charges and
transportation. Promptly after the effective date of termination DISTRIBUTOR
shall furnish SELLER a statement, certified by an independent accountant,
showing in detail the inventories of Licensed Products owned by DISTRIBUTOR on
such effective date, and the cost thereof. If SELLER elects to purchase any of
said inventory, it shall so notify DISTRIBUTOR not later than thirty (30) days
after receipt of said certified statement, and shall purchase DISTRIBUTOR's
inventory within thirty (30) days thereafter. If SELLER does not elect to
repurchase DISTRIBUTOR's inventory of Licensed Products, then DISTRIBUTOR shall
have the right to sell off its remaining inventory at commercial prices for one
hundred eighty (180) days after the effective date of termination. At the end of
such one hundred eighty (180) day period DISTRIBUTOR shall not sell any Licensed
Products whatsoever.
8. CONFIDENTIAL INFORMATION. In connection with the performance of
------------------------
this Agreement, each party may disclose to the other confidential information
relating to Licensed Products or otherwise relating to the business of the
parties such as customer lists, vendor lists, costs of manufacture, assembly or
packaging of products, product development, ideas or plans, and marketing ideas
or plans ("Confidential Information"). All information marked or identified as
"Confidential Information" shall be treated as confidential information. all
information known by a party to be confidential information of the other party
shall be confidential information without regard to whether it is specifically
designated as such by the party owning the confidential information. Each party
agrees not to use for its own benefit, or disclose to any third party, or use
for the benefit of any third party, any such Confidential Information without
first obtaining the written consent from an officer of the party disclosing the
information. The obligations under this Section 8 shall survive the termination
or expiration of this Agreement for a period of five (5) years.
The foregoing obligations of non-disclosure and non-use shall not
apply to the extent that:
6
<PAGE>
a. any or all of the Confidential Information disclosed by one
party to the other was known to the party receiving the information at the time
of its disclosure and such knowledge is evidenced by competent proof; or
b. such Confidential Information is or becomes generally available
to the public without breach of this Agreement; or
c. such Confidential Information is lawfully received by a party
from any third party without obligation of non-disclosure or non-use; provided,
--------
however, that no patent license or patent immunity is hereby implied under such
- -------
exceptions (a), (b) or (c), and provided further that specific Confidential
Information disclosed by either party to the other pursuant to this Agreement
shall not be deemed to be within any of the above exceptions if it is embraced
by more general information within one of said exclusions.
d. the disclosure is made pursuant to subpoena issued by a court or
government agency having the power to issue subpoenas; or
e. the disclosure is made to a third party who has executed a
confidential disclosure agreement reasonably satisfactory to the party owning
the confidential information.
f. each party agrees to take at least the same actions to protect
the confidential information and trade secrets of the other party as it takes to
protect its own confidential information and trade secrets.
9. INSURANCE AND INDEMNITY.
-----------------------
a. DISTRIBUTOR shall procure and maintain, at its expense, during
the term of this Agreement, general liability insurance to the extent of at
least One Million Five Hundred Thousand Dollars ($1,500,000.00) for each
occurrence of bodily injury or property damage allegedly caused by or
contributed to by the Licensed Products purchased by the DISTRIBUTOR from the
SELLER. DISTRIBUTOR shall supply SELLER with a certificate evidencing such
insurance. All insurance for Product Liability shall contain the standard Broad
Form Vendors Coverage which shall name SELLER as an additional insured. The
certificate of insurance shall reference this Agreement and stipulate that the
policy shall not be canceled or materially altered without ten (10) days advance
written notice SELLER.
b. DISTRIBUTOR agrees to and shall indemnify, hold harmless and
defend SELLER from and against any and all claims, demands, costs, expenses and
causes of action for injury of any type to or death of any person, or
destruction of or damage to any property, including that of DISTRIBUTOR or
SELLER, that occurs or may occur as a result of any action or inaction or
conduct of DISTRIBUTOR, its agents, employees, distributors, sub-distributors,
subcontractors or representatives in any manner relating to endoscopic
gynecological human and veterinary applications of Licensed Products, and all
other uses or
7
<PAGE>
applications of Licensed Products in the Field of Use. Without limiting the
generality of the foregoing, DISTRIBUTOR's duty to indemnify shall include
indemnification with regard to all claims arising: (a) out of representations
made by DISTRIBUTOR or its agents, employees, distributors, sub-distributors or
representatives regarding Licensed Products; (b) out of any use, whether proper
or improper, sale or other disposition of Licensed Products by any party in the
Field of Use; and (c) out of or incident to or resulting directly or indirectly
from any incorrect diagnosis or interpretation relating to use of Licensed
Products in the Field of Use. As used in this paragraph, SELLER includes its
subsidiaries and affiliates and their respective officers, directors,
shareholders, trustees, agents, partners, limited partners and employees.
c. DISTRIBUTOR acknowledges and agrees that but for the
indemnification provision set forth in this paragraph 9, SELLER would not sell
its products in the Field of Use for the reason that SELLER has no knowledge
with regard to legal or market requirements or needs in the Field of Use. In
entering into this Agreement SELLER has relied upon DISTRIBUTOR's knowledge and
expertise in the Field of Use, and has made it clear to DISTRIBUTOR that because
of its lack of knowledge and expertise with regard to the Field of Use SELLER
requires DISTRIBUTOR to provide the indemnification set forth in this Paragraph
9. DISTRIBUTOR has knowingly accepted the indemnification obligation set forth
in this Paragraph 9 with full knowledge of SELLER's unwillingness to have any
product liability risk in or with regard to the Field of Use.
d. Each party shall indemnify, hold harmless and defend the other
party against all claims arising directly or indirectly out of the performance
or non-performance by the party of any act or obligation under this Agreement.
e. Each party shall indemnify, hold harmless and defend the other
party from and against and all claims of liability, loss, cost, expense,
obligation or damage in any manner relating to or arising out of claims by a
third party that Licensed Products manufactured by SELLER, or endoscopic
examination applications for Licensed Products developed by DISTRIBUTOR, violate
the patents or trademarks of another party. It shall be the obligation of SELLER
under this paragraph to provide indemnification with regard to claims that
Licensed Products which has been manufactured by SELLER violates patents or
trademarks of another party. It shall be the obligation of DISTRIBUTOR under
this paragraph to provide indemnification with respect to claims that endoscopic
applications of Licensed Products developed by Distributor violate or infringe
patents or trademarks of another party. In the event a party believes it is
entitled to indemnification under the provisions of this paragraph it shall give
written notice of its claim to the other party. The party having an obligation
to provide indemnification shall at its expense provide full and complete
defense to the party entitled to be indemnified with respect to all claims of
the applicable third party, and shall bear full responsibility for all
reasonable costs and expenses of settlement, litigation, or other resolution of
the claims made by the third party. No settlement of any claims or litigation
shall be effected without the written consent of both the indemnified and
indemnifying party, which consent shall not be unreasonably delayed or withheld.
8
<PAGE>
10. NOTICES. Any notice expressly provided for under this Agreement
-------
shall be in writing, shall be given either manually or by mail, telegram, telex,
facsimile transmission or cable, and shall be deemed sufficiently given if and
when received by the party to be notified at its address for notices set forth
at the end of this Agreement, or if and when mailed by registered mail, postage
prepaid, addressed to such party at such address. Either party may, by written
notice to the other, change its address for receiving such notices.
11. ASSIGNABILITY. DISTRIBUTOR shall have the right to appoint
-------------
representatives and distributors under this Agreement; provided, however, that
Distributor shall not grant any representative, distributor or sub-licensee any
rights greater or longer in duration than the rights of DISTRIBUTOR under this
Agreement, and no representative or distributor shall be granted any rights
which cannot be terminated consistent with the termination provisions of this
Agreement. No representative or distributor shall be granted rights to act as
agent of SELLER. SELLER shall have the right to assign its rights under this
Agreement; provided, however, that no assignment shall result in greater
obligations or burdens to DISTRIBUTOR than exist under this Agreement. Neither
SELLER nor DISTRIBUTOR shall be relieved of its obligations under this Agreement
by virtue of any assignment of rights.
12. AMENDMENTS. This Agreement, including the provisions included in
----------
Exhibits attached, constitutes the entire agreement between the parties with
reference to the subject matter hereof. This Agreement may not be changed or
modified orally, but only by an instrument in writing, signed by the parties,
which states that it is an amendment to this Agreement.
13. GOVERNING LAW. This Agreement shall be deemed to have been made
-------------
in the State of California, U.S.A., and shall be construed and enforced in
accordance with and governed by the laws of the State of California.
14. DISPUTE RESOLUTION. Except as set forth in paragraph 15 below,
------------------
in the event of a dispute in any manner relating to or arising out of this
Agreement, the parties shall meet, confer and negotiate in good faith in an
attempt to resolve the dispute. In the event the parties are unable to resolve
the dispute themselves, the dispute shall be resolved through binding
arbitration conducted by Judicial Arbitration and Mediation Services, Inc. in
San Francisco, California. In arbitrating any issue arising under this
Agreement, the power and authority of the arbitrator shall include the power and
authority to grant such equitable relief (including injunctive relief) as may be
appropriate under the circumstances, in accordance with applicable law. The
decision or award of the arbitrator shall be binding upon the parties and shall
be enforceable by judgment entered in a court having jurisdiction. In the event
the arbitrator determines there is a prevailing party in the arbitration, the
prevailing party shall recover from the losing party all costs of arbitration,
including all fees of the arbitrator and all attorneys' fees reasonably incurred
by the prevailing party. The arbitrator shall have authority to order such
limited discovery as the arbitrator shall deem relevant and appropriate.
15. EQUITABLE RELIEF. Notwithstanding the provisions of paragraph 15
----------------
above, if any conduct or an action by DISTRIBUTOR with regard to its obligations
under this
9
<PAGE>
Agreement would entitle SELLER to obtain equitable relief with regard to that
action or inaction, SELLER shall have the right to commence an action in a court
having jurisdiction to obtain appropriate equitable relief from the appropriate
court, whether in the form of injunction, mandatory injunction, specific
performance, precision, or declaratory relief. Any such action shall be limited
to the equitable relief sought by SELLER. All other aspects of the matter
presented to the court shall be resolved through the arbitration provisions set
forth in paragraph 16.
16. Representations and Warranties. Each party represents to the
------------------------------
other as follows:
a. Each party is a corporation organized and existing in and in
good standing under the laws of its state of incorporation.
b. The execution of the performance of this Agreement by the party
executing the agreement will not cause or result in default of any material
agreement or obligation affecting the power or ability of the party to perform
its obligations under this Agreement.
c. There is no litigation pending or threatened, and no claims
have been asserted, with regard to validity or enforceability of any patent or
trademark which is a subject of this Agreement, and no party has asserted any
claim that the patents or trademarks of a party to this Agreement infringe upon
or violate the patents or trademarks of that party.
d. Execution of this Agreement by the respective presidents of the
parties and performance thereof has been duly authorized by the board of
directors of each party under resolution in the form attached as Exhibit F.
Except for the effect of bankruptcy or insolvency rules or proceedings, this
Agreement when executed constitutes the valid, binding, and enforceable
obligation of the party executing the agreement in accordance with the terms of
the agreement.
e. SELLER represents and warrants to BUYER that to the best of its
knowledge the chemicals and materials utilized by SELLER in Licensed Products,
separately and when mixed, are not considered by the United States Food and Drug
Administration to be toxic materials or substances.
17. OPTIONS.
-------
SELLER has expressed an interest in making an investment in the
common stock of DISTRIBUTOR, and DISTRIBUTOR has agreed to terms and conditions
upon which SELLER shall have certain rights to invest in DISTRIBUTOR'S common
stock. Contemporaneously with execution of this Agreement SELLER and DISTRIBUTOR
shall each execute and deliver to the other a stock option agreement in form
identical to Exhibit E attached the "Stock Option Agreement"). SELLER and
DISTRIBUTOR acknowledge and agree that the Contingent Options set forth in the
Stock Option Agreement have been structured to reflect cost
10
<PAGE>
and price objectives of the parties. In the event SELLER reduces it prices to
levels set forth in the Option Agreement, DISTRIBUTOR shall price the Licensed
Products it offers for sale at a level which in its discretion and sole
determination allows DISTRIBUTOR to achieve market penetration of the Licensed
Products and to enhance revenues and reasonable profits of DISTRIBUTOR.
18. List OF EXHIBITS.
----------------
a. Exhibit A - "Licensed Products and Uses";
b. Exhibit B - "Price, Payment, and Terms";
c. Exhibit C - "General Terms and Conditions of Sale";
d. Exhibit D - "SELLER's and DISTRIBUTOR's Patents and
Trademarks";
e. Exhibit E - "Option Agreement."
f. Exhibit F - "Resolution of Board of Directors - Omniglow.
Resolution of Board of Directors - Trylon."
19. GOOD FAITH COMMUNICATION AND COOPERATION. SELLER and DISTRIBUTOR
----------------------------------------
acknowledge and agree that SELLER and DISTRIBUTOR must communicate regularly and
effectively to assure that SELLER at all times understands DISTRIBUTOR's needs
and capabilities, and DISTRIBUTOR understands SELLER's needs and capabilities.
SELLER and DISTRIBUTOR shall each designate a person primarily responsible for
the relationship between SELLER and DISTRIBUTOR, which persons shall have
primary responsibility for maintaining ongoing communications between SELLER and
DISTRIBUTOR. The appointed representatives shall discuss the respective
capabilities, needs, and requirements of the parties, the progress of the
DISTRIBUTOR's sales efforts, any and all problems experienced by DISTRIBUTOR
with regard to Licensed Products. or customers of DISTRIBUTOR with regard to
Licensed Products, and to assure the free-flow of all information necessary to
enable the parties to discuss and agree upon appropriate strategies for
protecting, promoting, enhancing, and growing sales of Licensed Products in the
Field of Use in the Territory. In addition, SELLER and DISTRIBUTOR shall each
cooperate in good faith to deliver to each other such information or documents
as may be required by a party to meet record keeping, file or reporting
requirements a party may have with respect to the Food and Drug Administration
or any other governmental agency having jurisdiction with respect to Licensed
Products.
20. BINDING EFFECT. This Agreement shall be binding upon the parties
--------------
and their respective successors, agents, employees, and representatives of all
types. This Agreement sets forth the final agreement of the parties with regard
to the subject matter of this Agreement.
11
<PAGE>
This Agreement shall not be modified except by a writing signed by the parties
whose rights or obligations are modified.
12
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
SELLER:
OMNIGLOW CORPORATION
By: /s/
-------------------------
Name: Fred Kaplan
Title: President
Address for notices:
------
----------------------------
DISTRIBUTOR:
THE TRYLON CORPORATION
By: /s/
-------------------------
Name: M. Lonky
Title: President
Address for notices:
------
----------------------------
[CERTAIN PORTIONS OF THIS DOCUMENT, AS INDICATED WITHIN, HAVE
BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST]
13
<PAGE>
EXHIBIT A
[OMITTED]
14
<PAGE>
EXHIBIT B
PRICE/CREDIT TERMS
------------------
[OMITTED]
15
<PAGE>
EXHIBIT C
STANDARD TERMS AND CONDITIONS OF SALE
-------------------------------------
[OMITTED]
16
<PAGE>
EXHIBIT 10.10
STANDARD FORM OFFICE LEASE
THIS LEASE is made as of the 15th day of April, 1993, by and between
Landlord and Tenant.
WITNESSETH:
1. Terms and Definitions. For the purposes of this Lease, the following terms
shall have the following definitions and meanings:
(a) Landlord: Nissan Real Estate Corporation U.S.A., a California
Corporation
(b) Landlord's Address: Copy to:
Nissan Real Estate Prentiss Properties
Corporation U.S.A. 970 W. 190th Street
990 W. 190th Street Suite 430
Torrance, CA 90502 Torrance, CA 90502
Attn: Facilities Attn: Kevin Baldridge,
Administrator Property Manager
Tenant's Address:
The Trylon Corporation
970 West 190th Street
Suite 900
Torrance, CA 90502
Attn: Stewart Lonky, M.D.
(c) Tenant: The Trylon Corporation, a Delaware corporation
(d) Building Address:
970 West 190th Street
Torrance, CA 90502
(e) Suite Number: 900
1
<PAGE>
(f) Floor(s) upon which the Premises are located: Ninth
(g) Premises: Those certain premises defined in Subparagraph 2(a) below.
(h) Site: The parcel or parcels of real property defined in Subparagraph
2(a) below.
(i) Approximate Rentable Square Feet within Premises: 3,427 sq. ft.
(j) Term: Five years, with one option to extend for an additional term of
five years as described in Paragraph 3(b).
(k) Parking: Eighteen vehicle parking spaces, free of charge during the
initial term of the Lease.
(l) Leasehold Improvement Allowance: The Leasehold Improvements shall be
constructed by Landlord at Landlord's sole cost and expense pursuant
to the Work Letter Agreement described in Subparagraph 2(a), below.
(m) Leasehold Improvements: All work performed by Landlord to prepare the
Premises for occupancy pursuant to the Work Letter Agreement.
(n) Estimated Commencement Date: June 15, 1993.
(o) Commencement Date: The earlier of the following two dates:
(i) The date upon which the Tenant commences the operation of its
business in the Premises; or
(ii) The date which is three (3) days after the date upon which
Landlord gives Tenant notice that the Leasehold Improvements have been
substantially completed as determined by Landlord's architect or space
planner (except that if completion of the Leasehold Improvements is delayed
by the factors described in Paragraph 6(a) of Exhibit "C" to this Lease,
then the Commencement Date as would otherwise be established shall be
accelerated by the number of days
2
<PAGE>
calculated pursuant to the provisions of Paragraph 6(b) of said Exhibit
"C").
(p) Annual Basic Rent: $67,854.60
Monthly Basic Rent: $5,654.55
(Based on 3,427 Rentable Square Feet of Premises at $1.65 per Rentable
Square Foot per month.)
(q) Operating Expense Allowance: An amount equal to "Tenant's Percentage"
(as defined in Paragraph 6(a) of this Lease) of the "Operating
Expenses" (as defined in Paragraph 6(a) of this Lease) for the
calendar year 1993 (the "Base Year").
(r) Tenant's Percentage: 1.6%.
(s) Security Deposit: a total of $5,654.55, in cash, plus the Letter of
Credit described in Paragraph 56 of this Lease.
(t) Prepaid Rent: Not applicable.
(u) Permitted Use: general business office purposes
(v) Brokers: CB Commercial (Landlord's Broker)
Westmac Commercial Brokerage (Tenant's Broker)
(w) Landlord's Construction Representative: Engineering Concepts.
(x) Tenant's Construction Representative: N/A
(y) Exhibits: A through G, inclusive, which Exhibits are attached to this
Lease and are incorporated herein by this reference.
(z) "New York Prime Interest Rate" shall mean the per annum interest rate
from time to time announced by a majority of the following New York
City banks: The Chase Manhattan Bank, N.A.; Chemical Bank; Citibank,
N.A.; Bankers Trust Company; and Morgan Guaranty Trust Company of New
York, as their respective Prime Rate; provided that if less than three
of such banks have the
3
<PAGE>
same rate in effect, the median of the five rates shall be the New
York Prime Interest Rate. For the purposes of computing interest
hereunder, the New York Prime Interest Rate in effect on the last day
of a month shall be deemed to be such rate in effect throughout the
succeeding month.
2. Premises and Common Areas Leased.
(a) Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord, the Premises contained within the suite designated in Subparagraph
1(e), outlined on the Floor Plan attached hereto and marked Exhibit "A" and
incorporated herein by this reference, in that certain building which, together
with its related parking facilities is located at the address designated in
Subparagraph 1(d) above (said building and said parking facilities are herein
together referred to as the "Building"), located on the parcel or parcels of
real property (the "Site") outlined on the Site Plan attached hereto as Exhibit
"B," and incorporated herein by this reference, and improved or to be improved
by Landlord with the Leasehold Improvements described in the Work Letter
Agreement, a copy of which is attached hereto and marked Exhibit "C" and
incorporated herein by this reference, said Premises being agreed, for the
purposes of this Lease to have an area approximately the number of rentable
square feet designated in Subparagraph 1(i) and being situated on the floor(s)
designated in Subparagraph 1(f) above. By taking possession of the Premises,
Tenant accepts the Leasehold Improvements as completed or as substantially
completed, and in the latter case, Landlord shall provide Tenant with a punch
list of incomplete and/or corrective items -- which list shall be approved and
acknowledged by Tenant and which items Landlord shall complete and/or correct
within fifteen (15) days thereafter, or such additional time as may be required
to complete and/or correct such items so long as Landlord is proceeding with due
diligence.
The parties hereto agree that said letting and hiring is upon and
subject to the terms, covenants and conditions herein set forth and Tenant
covenants as a material part of the consideration for this Lease to keep and
perform each and all of said terms, covenants and conditions by it to be kept
and performed and that this Lease is made upon the condition of such
performance.
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(b) Tenant shall have the nonexclusive right to use in common with
other tenants in the Building and subject to the Rules and Regulations referred
to in Paragraph 30 below, the following areas ("Common Areas") appurtenant to
the Premises:
(i) The common entrances, lobbies, restrooms, elevators,
stairways and accessways, loading docks, ramps, drives and platforms and
any passageways and serviceways thereto, and the common pipes, conduits,
wires and appurtenant equipment serving the Premises; and
(ii) Loading and unloading areas, trash areas, roadways,
sidewalks, walkways, parkways, driveways and landscaped areas appurtenant
to the Building.
(c) Landlord reserves the right from time to time, without
unreasonable interference with Tenant's use:
(i) To install, use, maintain, repair and replace pipes, ducts,
conduits, wires and appurtenant meters and equipment for service to other
parts of the Building above the ceiling surfaces, below the floor surfaces,
within the walls and in the central core areas, and to relocate any pipes,
ducts, conduits, wires and appurtenant meters and equipment included in the
Premises which are located in the Premises or located elsewhere outside the
Premises, and to expand the Building;
(ii) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, loading and unloading areas, ingress, egress,
direction of traffic, landscaped areas and walkways;
(iii) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available:
(iv) To designate other land outside the boundaries of the
Building to be a part of the Common Areas;
(v) To add additional buildings and improvements to the Common
Areas;
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(vi) To use or close temporarily the Common Areas while engaged
in making additional improvements, repairs or alterations to the Building
or the parking structure, or any portion thereof, provided that reasonable
access to the Premises remains available; and
(vii) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and Building as Landlord
may, in the exercise of sound business judgment, deem to be appropriate.
3. Term.
(a) The term of this Lease ("Term") shall be for the period designated
in Subparagraph 1(j) commencing on the Commencement Date, and ending on the
expiration of such period, unless the term hereby demised shall be sooner
terminated as hereinafter provided. The Commencement Date and the date upon
which the term of this Lease shall end shall be determined in accordance with
the provisions of Paragraph 1 and said dates will be specified in Landlord's
Notice of Lease Term Dates ("Notice"), in the form of Exhibit D which is
attached hereto and is incorporated herein by this reference, and shall be
served upon Tenant as provided in Paragraph 9, after Landlord delivers or
tenders possession of the Premises to Tenant. The Notice shall be binding upon
Tenant unless Tenant objects to the Notice in writing, served upon Landlord as
provided for in Paragraph 9 hereof, within five (5) days after Tenant's receipt
of the Notice.
(b) Provided that Tenant is not then in default, and the Tenant named
herein is then occupying the Premises, Tenant shall have the option to renew
this Lease for one (1) additional term of five (5) years. The rent during such
renewal term shall be at ninety-five percent (95%) of the then prevailing market
rate (taking into account any free rent or other concessions then customarily
being offered to tenants) for comparable space in first-class office buildings
located within a three-mile radius of the Building. Tenant shall notify
Landlord of its intention to exercise such option at least six (6) months prior
to the expiration of the initial Term. This option is personal to the Tenant
named herein and may not be exercised by or for any sublessee or assignee of the
Tenant named herein.
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(c) Within thirty (30) days of such notification, Landlord shall
submit to Tenant Landlord's determination of the then prevailing market rent
(taking into account any free rent or other concessions then customarily being
offered to tenants), together with the comparable rent information on which
Landlord has relied in making its determination. In the event that Tenant
notifies Landlord in writing, on or before the thirtieth (30th) business day
following Tenant's receipt of notice of Landlord's determination of the then
market rent under this section of this Lease, that Tenant reasonably disagrees
with any such determination, Landlord and Tenant shall negotiate in good faith
to resolve such dispute within 10 business days thereafter. If not resolved
within such period, the issue shall be referred to an individual (the "Expert")
agreed upon by Landlord and Tenant or (failing such agreement) appointed by the
President of the Los Angeles Real Estate Board or (if such office is no longer
in existence or such officer is unwilling to so act) appointed by an equivalent
individual. The Expert shall in any event have at least 5 years' experience in
leasing office space in Los Angeles and shall be independent. The Expert shall
be deemed to be acting as an expert and not as an arbitrator, and shall
determine the applicable market rent within 30 days after his appointment. The
"then prevailing market rent" which shall apply for purposes of the applicable
provision of this Lease shall be the rent determined by either Landlord or
Tenant which is closest to the Expert's determination and the party that is not
closest shall pay all of the costs and expenses incurred in connection with the
appointment of, and services of, the Expert. Until any such dispute is
resolved, any applicable payments due under this Lease shall correspond to
Landlord's determination and, if applicable, Landlord shall refund any
overpayments made to Tenant within 3 business days following the final
resolution of the dispute.
4. Possession. Tenant agrees that in the event of the inability of
Landlord to deliver possession of the Premises to Tenant on the date above
specified in Subparagraph 1(n) as the Estimated Commencement Date, this Lease
shall not be void or voidable, nor shall Landlord be liable to Tenant for any
loss or damage resulting therefrom, nor shall the expiration date of the above
term be in any way extended.
5. Annual Basic Rent. Tenant agrees to pay Landlord as Annual Basic
Rent for the Premises the Annual Basic Rent designated in Subparagraph 1(p)
(subject to adjustment as
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hereinafter provided) in twelve (12) equal monthly installments ("Monthly Basic
Rent"), each equal to the amount set forth in Subparagraph 1(p) as Monthly Basic
Rent, and each in advance on the first day of each and every calendar month
during the term of this Lease, provided, however, that if the Commencement Date
occurs on any date other than the first day of a month then Monthly Basic Rent
for the partial month during which the Commencement Date occurs shall be paid on
the Commencement Date. In the event the term of this Lease commences or ends on
a day other than the first day of a calendar month, then the rental for such
periods shall be prorated in the proportion that the number of days this Lease
is in effect during such periods bears to thirty (30), and such rental shall be
paid at the commencement of such periods. In addition to said Annual Basic Rent,
Tenant agrees to pay the amount of the rental adjustments as and when
hereinafter provided in this Lease. Said Annual Basic Rent, any additional rent
payable pursuant to the provisions of this Lease and any rental adjustments
shall be paid to Landlord, without any prior demand therefor and without any
deduction or offset whatsoever in lawful money of the United States of America,
which shall be legal tender at the time of payment, at the address of Landlord
designated in Subparagraph 1(b) or to such other person or at such other place
as Landlord may from time to time designate in writing. Further, all charges to
be paid by Tenant hereunder, including, without limitation, payments for real
property taxes, insurance, repairs and parking shall be considered additional
rent for the purposes of this Lease, and the word "rent" in this Lease shall
include such additional rent unless the context specifically or clearly implies
that only the Annual Basic Rent is referenced.
6. Rental Adjustments.
(a) For the purposes of this Subparagraph 6(a), the following terms
are defined as follows:
Tenant's Percentage: Tenant's Percentage shall mean that portion of
the total rentable area of the Building leased by Tenant as set forth as a
percentage in Subparagraph 1(r) above.
Operating Expense Allowance: Operating Expense Allowance shall mean
that portion of Tenant's Percentage of the Operating Expenses which Landlord has
included in the Annual
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Basic Rent and which amount is set forth in Subparagraph 1(q) above.
Operating Expenses: Operating Expenses shall consist of all direct
costs of operation and maintenance of the Building, the Building Common Areas
and the Site ("Operating Expenses") as determined by standard accounting
practices, calculated as described in Subparagraph 6(c), below, including the
following costs by way of illustration, but not limitation: real property taxes
and assessments and any taxes or assessments hereafter imposed in lieu thereof;
rent taxes, gross receipt taxes (whether assessed against Landlord or assessed
against Tenant and paid by Landlord, or both); water and sewer charges; the net
cost and expense of insurance for which Landlord is responsible hereunder or
which Landlord or any first mortgage with a lien affecting the Premises
reasonably deems necessary in connection with the operation of the Building;
utilities; janitorial services; security; labor; parking charges, utilities
surcharges, or any other costs levied, assessed or imposed by, or at the
direction of, or resulting from statutes or regulations or interpretations
thereof, promulgated by any federal, state, regional, municipal or local
government authority in connection with the use or occupancy of the Building or
the Premises or the parking facilities serving the Building or the Premises; the
cost (amortized over such reasonable period as Landlord shall determine together
with interest at the New York Prime Interest Rate on the unamortized balance) of
(a) any capital improvements made to the Building by the Landlord after the
first year of the term of the Lease that reduce other Operating Expenses, or
made to the Building by Landlord after the date of the Lease that are required
under any governmental law or regulation that was not applicable to the Building
at the time it was constructed, or (b) replacement of any building equipment
needed to operate the Building at the same quality levels as prior to the
replacement; costs incurred in the management of the Building, if any (including
supplies, wages and salaries of employees used in the management, operation and
maintenance of the Building, and payroll taxes and similar governmental charges
with respect thereto, and Building management office rental); air-conditioning;
waste disposal; heating; ventilating; elevator maintenance; supplies; materials;
equipment; tools; repair and maintenance of the structural portions of the
Building, including the plumbing, heating, ventilating, air-conditioning and
electrical systems installed or furnished by Landlord;
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maintenance costs, including utilities and payroll expenses, rental of personal
property used in maintenance, and all other upkeep of all parking and common
areas; costs and expenses of gardening and landscaping; maintenance of signs
(other than Tenant's signs); personal property taxes levied on or attributable
to personal property used in connection with the entire Building, including the
Common Areas; reasonable audit or verification fees; and costs and expenses of
repairs, resurfacing, maintenance, painting, lighting, cleaning, refuse removal,
security and similar items, including appropriate reserves. Operating Expenses
shall not include depreciation on the Building or equipment therein, Landlord's
executive salaries or real estate brokers' commissions.
As used herein, the term "real property taxes" shall include any form
of assessment, license fee, license tax, business license fee, commercial rental
tax, levy, charge, penalty, tax or similar imposition, imposed by any authority
having the direct power to tax, including any city, county, state or federal
government, or any school, agricultural, lighting, drainage or other improvement
or special assessment district thereof, as against any legal or equitable
interest of Landlord in the Premises, including, but not limited to, the
following:
(i) any tax on Landlord's "right" to rent or "right" to other
income from the Premises or as against Landlord's business of leasing the
Premises;
(ii) any assessment, tax, fee, levy or charge in substitution,
partially or totally, of any assessment, tax, fee, levy or charge
previously included within the definition of real estate tax, it being
acknowledged by Tenant and Landlord that Proposition 13 was adopted by the
voters of the State of California in the June, 1978 Election and that
assessments, taxes, fees, levies and charges may be imposed by governmental
agencies for such services as fire protection, street, sidewalk and road
maintenance, refuse removal and for other governmental services formerly
provided without charge to property owners or occupants. It is the
intention of Tenant and Landlord that all such new and increased
assessments, taxes, fees, levies and charges be included within the
definition of "real property taxes" for the purposes of this Lease;
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(iii) any assessment, tax, fee, levy or charge allocable to or
measured by the area of the Premises or the rent payable hereunder,
including, without limitation, any gross income tax or excise tax levied by
the State, city or federal government, or any political subdivision
thereof, with respect to the receipt of such rent, or upon or with respect
to the possession, leasing, operating, management, maintenance, alteration,
repair, use or occupancy by Tenant of the Premises, or any portion thereof;
and
(iv) any assessment, tax fee, levy or charge upon this
transaction or any document to which Tenant is a party creating or
transferring an interest or an estate in the Premises.
Notwithstanding any provision of this Subparagraph 6(a) expressed or
implied to the contrary, "real property taxes" shall not include taxes imposed
on (or measured by) Landlord's income, or Landlord's franchise, inheritance or
estate taxes.
(b) By March 1, 1994, and by March 1st of each succeeding calendar
year during the term of this Lease, Landlord shall endeavor to deliver to Tenant
a statement ("Estimate Statement") wherein Landlord shall estimate both the
Operating Expenses and the Tenant's Percentage of Operating Expenses for the
current calendar year. If the estimate of Tenant's Percentage of Operating
Expenses in the Estimate Statement exceeds the Operating Expenses Allowance,
Tenant shall pay, as a "Rental Adjustment," one-twelfth (1/12) of such excess
each month thereafter, beginning with the next installment of rent due, until
such time as Landlord issues a revised Estimate Statement or the Estimate
Statement for the succeeding calendar year; except that, concurrently with the
regular monthly rent payment next due following the receipt of such Estimate
Statement, Tenant shall pay an amount equal to one (1) monthly installment (less
any applicable Operating Expenses already paid) multiplied by the number of
months from January, in the current calendar year, to the month of such rent
payment next due, both months inclusive; provided, however, if at any time
during the term of the Lease, but not more often than quarterly, Landlord
determines that Tenant's Percentage of Operating Expenses for the current
calendar year will be greater than the amount set forth in the Estimate
Statement, Landlord shall issue a revised Estimate Statement and Tenant shall
pay to Landlord, within ten (10) days
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after the delivery of the revised Estimate Statement, the difference between
such revised Estimate Statement and the original Estimate Statement for the
portion of the current calendar year which has then expired, and Tenant shall
pay, during the balance of such current calendar year and until the later of
March 1 or the date of receipt by Tenant of the revised Estimate Statement or
the Estimate Statement for the succeeding calendar year installments such that
the balance would be fully amortized over the remaining months of the current
calendar year. By March 1, 1995, and by March 1st of each succeeding calendar
year during the term of this Lease, Landlord shall endeavor to deliver to Tenant
a statement ("Actual Statement") which states the actual Operating Expenses for
the preceding calendar year. If the Actual Statement reveals that Tenant's
Percentage of Operating Expenses is more than the total Rental Adjustments paid
by Tenant on account of the preceding calendar year, Tenant shall pay Landlord
the difference in a lump sum within ten (10) days of receipt of the Actual
Statement. If the Actual Statement reveals that Tenant's Percentage of Operating
Expenses is less than the total Rental Adjustments paid by Tenant on account of
the preceding calendar year, Landlord shall credit any overpayment toward the
next monthly rent payment falling due and the next monthly installment of
Tenant's Percentage of Operating Expenses to be paid pursuant to the then
current Estimate Statement, or if this Lease has been terminated, such excess
shall be credited against any amount which Tenant owes Landlord pursuant to this
Lease and any further excess shall be promptly paid by Landlord to Tenant. Any
delay or failure by Landlord in delivering any estimate or statement pursuant to
this Paragraph shall not constitute a waiver of its right to require an increase
in rent nor shall it relieve Tenant of its obligations pursuant to this
Paragraph, except that Tenant shall not be obligated to make any payments based
on such estimate or statement until ten (10) days after receipt of such estimate
or statement. In the event Tenant shall dispute the amount set forth in the
Actual Statement described above in this Subparagraph 6(b), Tenant shall have
the right, not later than ninety (90) days following receipt of such Actual
Statement, to cause Landlord's books and records with respect to the preceding
calendar year to be audited by a certified public accountant mutually acceptable
to Landlord and Tenant. The results of such audit shall be binding on Landlord
and Tenant. The amounts payable under this Subparagraph 6(b) by Landlord to
Tenant or by Tenant to Landlord, as the case may be, shall be appropriately
adjusted on the basis of such audit. If
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such audit discloses a liability for further refund by Landlord to Tenant in
excess of ten percent (10%) of the payments previously made by Tenant for such
calendar year, the cost of such audit shall be borne by Landlord; otherwise the
cost of such audit shall be borne by Tenant. If Tenant shall not request an
audit in accordance with the provisions of this Subparagraph 6(b) within ninety
(90) days after receipt of Landlord's Actual Statement, such Actual Statement
shall be conclusively binding upon Landlord and Tenant.
Even though the term has expired and Tenant has vacated the Premises,
when the final determination is made of Tenant's Percentage of Operating
Expenses for the year in which this Lease terminates, Tenant shall immediately
pay any increase due over the estimated expenses paid and conversely any
overpayment made in the event said expense's decrease shall be immediately
rebated by Landlord to Tenant.
Notwithstanding anything contained in this Paragraph 6, the rental
payable by Tenant shall in no event be less than the rent specified in Paragraph
5 hereof.
(c) With respect to any calendar year, including the base year used
for determining the Operating Expense Allowance, during the term of this lease
in which the Building is not leased to the extent of at least ninety-five
percent (95%) of the Rentable Area thereof, the Operating Expenses for such
period shall, for the purposes hereof, be adjusted to allocate the actual cost
of providing services which vary directly with the level of occupancy of the
Building (such as janitorial service) to the leased area of the Building by
multiplying the costs of the variable service by a fraction, the numerator of
which is 95 and the denominator of which is the percentage of the leased area of
the Building. For example, if the actual cost of providing janitorial service
for the leased area of the Building is $100,000 for said year and the Building
is only seventy percent (70%) leased, then the $100,000 cost shall be adjusted
on a 95% "gross-up" basis to a figure of $135,714 ($100,000 x 95/70 = $135,714).
Therefore, if a tenant leased 5% of the Rentable Area of the Building, the
tenant's share of such cost would be $6,786 (5% of $135.714 = $6,786).
Expenses which do not fluctuate based upon occupancy levels shall not
be increased under this Section (c) and Landlord
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shall not receive from Tenants of the Building, as a result of the operation of
this Section (c), an amount which is greater than the actual expenses incurred
for such calendar year.
7. Security Deposit. In connection with Tenant's entry into the "Suite
220 Lease" (as defined in Paragraph 59, below) Tenant has deposited with
Landlord a security deposit in the amount of $3,000. On the Commencement Date
Tenant shall deposit with Landlord an additional security deposit in the amount
of $2,654.55. Simultaneously with Tenant's execution and delivery of this Lease
to Landlord, Tenant shall deliver to Landlord the Letter of Credit described in
Paragraph 56, below. Said cash deposit, in the total amount of $5,654.55, and
said Letter of Credit shall together constitute the Security Deposit. The
Security Deposit, including the Letter of Credit, shall be held by Landlord as
security for the faithful performance by Tenant of all of the terms, covenants,
and conditions of this Lease to be kept and performed by Tenant during the term
hereof. If Tenant defaults with respect to any provisions of this Lease,
including but not limited to the provisions relating to the payment of rent,
Landlord may (but shall not be required to) use, apply or retain all or any part
of the Security Deposit and/or at Landlord's option, draw upon the Letter of
Credit, for the payment of any rent or any other sum in default, or for the
payment of any other amount which Landlord may spend or become obligated to
spend by reason of Tenant's default or to compensate Landlord for any loss or
damage which Landlord may suffer by reason of Tenant's default. If any portion
of said deposit is so used or applied, Tenant shall, within ten (10) days after
demand therefor, deposit cash with Landlord in an amount sufficient to restore
the Security Deposit to its original amount, or if Landlord so draws upon the
Letter of Credit, Tenant shall reinstate the Letter of Credit to its full face
amount as required pursuant to Paragraph 56, and, in either event, Tenant's
failure to do so shall be a material breach of this Lease. Landlord shall not be
required to keep the Security Deposit separate from its general funds, and
Tenant shall not be entitled to interest on the Security Deposit, except as
described in Paragraph 56. If Tenant shall fully and faithfully perform every
provision of this Lease to be performed by it, the Security Deposit or any
balance thereof shall be returned to Tenant (or at Landlord's option, to the
last assignee of Tenant's interests hereunder) at the expiration of the Lease
term, provided that Landlord may retain the Security Deposit until such time as
any
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amount due from Tenant in accordance with Paragraph 5 and 6 hereof has been
determined and paid in full. Should Landlord sell its interest in the Premises
during the term hereof and if Landlord deposits with the purchaser thereof the
then unappropriated funds deposited by Tenant as aforesaid, and assigns to the
purchaser thereof Landlord's beneficial interest in the Letter of Credit,
thereupon Landlord shall be discharged from any further liability with respect
to the Security Deposit.
8. Use. Tenant shall continuously use the Premises for general business
office purposes and purposes incident thereto, and shall not use or permit the
Premises to be used for any other purpose without the prior written consent of
Landlord. Tenant shall not use or occupy the Premises in violation of any
recorded covenants, conditions and restrictions affecting the Site or of any law
or of the Certificate of Occupancy issued for the Building of which the Premises
are a part, and shall, upon five (5) days written notice from Landlord,
discontinue any use of the Premises which is declared by any governmental
authority having jurisdiction to be a violation of any recorded covenants,
conditions and restrictions affecting the Site or of any law or of said
Certificate of Occupancy. Tenant shall comply with any direction of any
governmental authority having jurisdiction which shall, by reason of the nature
of Tenant's use or occupancy of the Premises, impose any duty upon Tenant or
Landlord with respect to the Premises or with respect to the use or occupation
thereof. Tenant shall not do or permit to be done anything which will invalidate
or increase the cost of any fire, extended coverage or any other insurance
policy covering the Building and/or property located therein and shall comply
with all rules, orders, regulations and requirements of the Pacific Fire Rating
Bureau or any other organization performing a similar function. Tenant shall
promptly upon demand reimburse Landlord as additional rent for any additional
premium charged for such policy by reason of Tenant's failure to comply with the
provisions of this Paragraph 8. Tenant shall not do or permit anything to be
done in or about the Premises which will in any way obstruct or interfere with
the rights of other tenants or occupants of the Building, or injure or annoy
them, or use or allow the Premises to be used for any improper, immoral,
unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit
any nuisance in, on or about the Premises. Tenant shall not commit or suffer to
be committed any waste in or upon the Premises and shall keep the Premises in
first class repair and
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appearance. Tenant shall not place a load upon the Premises exceeding the
average pounds of live load per square foot of floor area specified for the
Building by Landlord's architect, with the partitions to be considered a part of
the live load. Landlord reserves the right to prescribe the weight and position
of all safes, files and heavy equipment which Tenant desires to place in the
Premises so as to distribute properly the weight thereof. Further, Tenant's
business machines and mechanical equipment which cause vibration or noise that
may be transmitted to the Building structure or to any other space in the
Building shall be so installed, maintained and used by Tenant as to eliminate
such vibration or noise. Tenant shall be responsible for all structural
engineering required to determine structural load.
9. Payments and Notices. All rents and other sums payable by Tenant to
Landlord hereunder shall be paid to Landlord at the address designated by
Landlord in Subparagraph 1(b) above or at such other places as Landlord may
hereafter designate in writing. Any notice required or permitted to be given
hereunder must be in writing and may be given by personal delivery or by mail,
and if given by mail shall be deemed sufficiently given if sent by registered or
certified mail addressed to Tenant or to Lender, each at the addresses
designated in Subparagraph 1(b). Either party may by written notice to the
other specify a different address for notice purposes except that Landlord may
in any event use the Premises as Tenant's address for notice purposes. If more
than one person or entity constitutes the "Tenant" under this Lease, service of
any notice upon any one of said persons or entities shall be deemed as service
upon all of said persons or entities.
10. Brokers. The parties recognize that the brokers who negotiated this
Lease are the brokers whose names are stated in Subparagraph 1(v), and agree
that Landlord shall be solely responsible for the payment of brokerage
commissions to said brokers, and that Tenant shall have no responsibility
therefor. As part of the consideration for the granting of this Lease, Tenant
represents and warrants to Landlord that to Tenant's knowledge no other broker,
agent or finder negotiated or was instrumental in negotiating or consummating
this Lease and that Tenant knows of no other real estate broker, agent or finder
who is, or might be, entitled to a commission or compensation in connection with
this Lease. Any broker, agent or finder of
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Tenant whom Tenant has failed to disclose herein shall be paid by Tenant. Tenant
shall hold Landlord harmless from all damages and indemnify Landlord for all
said damages paid or incurred by Landlord resulting from any claims that may be
asserted against Landlord by any broker, agent or finder undisclosed by Tenant
herein.
11. Holding Over. If Tenant holds over after the expiration or earlier
termination of the term hereof without the express written consent of Landlord,
Tenant shall become a tenant at sufferance only, at a rental rate equal to one
hundred fifty percent (150%) of the Monthly Basic Rent which would be applicable
to the Premises upon the date of such expiration (subject to adjustment as
provided in Paragraph 6 hereof and prorated on a daily basis), and otherwise
subject to the terms, covenants and conditions herein specified, so far as
applicable. Acceptance by Landlord of rent after such expiration or earlier
termination shall not constitute a holdover hereunder or result in a renewal.
The foregoing provisions of this Paragraph 11 are in addition to and do not
affect Landlord's right of re-entry or any rights of Landlord hereunder or as
otherwise provided by law. If Tenant fails to surrender the Premises upon the
expiration of this Lease despite demand to do so by Landlord, Tenant shall
indemnify and hold Landlord harmless from all loss or liability, including
without limitation, any claim made by any succeeding tenant founded on or
resulting from such failure to surrender.
12. Taxes on Tenant's Property.
(a) Tenant shall be liable for and shall pay at least ten (10) days
before delinquency, taxes levied against any personal property or trade fixtures
placed by Tenant in or about the Premises. If any such taxes on Tenant's
personal property or trade fixtures are levied against Landlord or Landlord's
property or if the assessed value of the Premises is increased by the inclusion
therein of a value placed upon such personal property or trade fixtures of
Tenant and if Landlord, after written notice to Tenant, pays the taxes based
upon such increased assessments, which Landlord shall have the right to do
regardless of the validity thereof, but only under proper protest if requested
by Tenant, Tenant shall upon demand repay to Landlord the taxes levied against
Landlord, or the proportion of such taxes resulting from such increase in the
assessment; provided that in any such event, at Tenant's sole cost and expense,
Tenant shall
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have the right, with Landlord's full cooperation, to bring suit in any court of
competent jurisdiction to recover the amount of any such taxes so paid under
protest, any amount so recovered to belong to Tenant.
(b) If any alterations to the Leasehold Improvements, whether such
alterations are installed and/or paid for by Landlord or Tenant and whether or
not affixed to the real property so as to become a part thereof, cause the
Leasehold Improvements, as so altered, to be assessed for real property tax
purposes at a valuation higher than the Leasehold Improvements prior to such
alteration (adjusted for the tax collector's internal amortization schedule),
then the real property taxes and assessments levied against Landlord or the
property by reason of such excess assessed valuation shall be deemed to be taxes
levied against personal property of Tenant and shall be governed by the
provisions of Subparagraph 12(a), above. If the records of the County Assessor
are available and sufficiently detailed to serve as a basis for determining
whether said Leasehold Improvements, as altered, are assessed at a higher
valuation than the Leasehold Improvements prior to such alteration, such records
shall be binding on both Landlord and Tenant. If the records of the County
Assessor are not available or sufficiently detailed to serve as a basis for
making said determination, the actual cost of construction of such alterations
to the Leasehold Improvements shall be used, as amortized over the remaining
term of the Lease by Landlord.
13. Condition of Premises. Tenant acknowledges that neither Landlord nor
any agent of Landlord has made any representation or warranty with respect to
the Premises or the Building or with respect to the suitability of either for
the conduct of Tenant's business. The taking of possession of the Premises by
Tenant shall conclusively establish that the Premises and the Building were at
such time in satisfactory condition. Without limiting the foregoing, Tenant's
execution of the Notice attached hereto as Exhibit "D" shall constitute a
specific acknowledgment, in light of the practical impossibility of ensuring
that every floor slab has been installed with absolutely no deflection, that all
wood floor coverings, wood paneling, and similar interior Leasehold Improvements
have been and/or will be designed to accommodate the actual floor slab
deflection unique to each particular area of the Premises to be so improved.
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14. Alterations.
(a) Tenant may, at any time and from time to time during the term of
this Lease, at its sole cost and expense, make alterations, additions,
installations, substitutions, improvements and decorations (hereinafter
collectively called "changes" and, as applied to changes provided for in this
Paragraph, "Tenant's Changes") in and to the Premises, excluding structural
changes, on the following conditions, and provided such changes will not result
in a violation of or require a change in the Certificate of Occupancy or any
laws applicable to the Premises:
(1) The outside appearance, character or use of the Building shall
not be affected, and no Tenant's Changes shall weaken or impair the
structural strength or, in the opinion of Landlord, lessen the value of the
Building or create the potential for unusual expenses to be incurred upon
the removal of Tenant's Changes and the restoration of the Premises upon
the termination of this Lease.
(2) No part of the Building outside of the Premises shall be
physically affected.
(3) The proper functioning of any of the mechanical, electrical,
sanitary and other service systems or installations of the Building
("Service Facilities") shall not be adversely affected and there shall be
no construction which might interfere with Landlord's free access to the
Service Facilities or interfere with the moving of Landlord's equipment to
or from the enclosures containing the Service Facilities.
(4) In performing the work involved in making such changes,
Tenant shall be bound by and observe all of the conditions and covenants
contained in this Paragraph.
(5) All work shall be done at such times and in such manner as
Landlord from time to time may designate, and shall meet or exceed the
standards for materials and construction procedures set forth in Exhibit
"C" to this Lease.
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(6) Tenant shall not be permitted to install and make part of the
Premises any materials, fixtures or articles which are subject to liens,
conditional sales contracts or chattel mortgages.
(7) At the date upon which the term of this Lease shall end, or
upon the date of any earlier termination of this Lease, Tenant shall on
Landlord's written request restore the Premises to their condition prior to
the making of any changes permitted by this Paragraph, reasonable wear and
tear excepted.
(b) Before proceeding with any change (exclusive of changes to items
constituting Tenant's personal property), Tenant shall submit to Landlord plans
and specifications for the work to be done, which shall require Landlord's
written approval. Landlord shall then prepare or cause to be prepared, at
Tenant's expense, mechanical, electrical and plumbing drawings and may confer
with consultants in connection with the preparation of such drawings and also
submit to such consultant(s) any of the plans prepared by Tenant. If Landlord
or such consultant(s) shall disapprove of any of the Tenant's plans, Tenant
shall be advised of the reason for such disapproval. In any event, Tenant
agrees to pay to Landlord, as additional rent the cost of such consultation and
review immediately upon receipt of invoices either from Landlord or such
consultant(s).
(c) If the proposed change requires approval by or notice to the
lessor of a superior lease or the holder of a mortgage, no change shall proceed
until such approval has been received, or such notice has been given, as the
case may be, and all applicable conditions and provisions of said superior lease
or mortgage with respect to the proposed change or alteration have been met or
complied with at Tenant's expense; and Landlord, if it approves the change, will
request such approval or give such notice, as the case may be. Any change for
which approval has been received shall be performed strictly in accordance with
the approved plans and specifications, and no amendments or additions to such
plans and specifications shall be made without the prior written consent of
Landlord.
(d) After Landlord's written approval has been sent to Tenant and the
approval by or notice to the lessor of a superior lease or the holder of a
superior mortgage has been received or
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given, as the case may be, Tenant shall enter into an agreement for the
performance of the work to be done pursuant to this Paragraph with Landlord or,
at Landlord's option, Tenant may choose from an approved list to be submitted by
Landlord on request by Tenant, so long as Landlord's contractor performs that
portion of the work which affects the mechanical, plumbing, electrical or fire
protection systems of the Building. In any event, Tenant agrees to pay to
Landlord (on account for the contractor, if other than Landlord), as additional
rent 50% of the estimated cost of such construction immediately upon approval of
such work by Landlord and shall pay, as additional rent, the balance of the
actual cost of such construction immediately upon receipt from Landlord of
invoices from time to time during the course of such construction. At Landlord's
option, such payments shall be made directly to the contractor performing such
work. All costs and expenses incurred in Tenant's Changes shall be paid by
Tenant within seven (7) days after each billing by Landlord or any such
contractor or contractors. If Landlord approves the construction of specific
interior improvements in the Premises by other contractors chosen by Tenant from
a list prepared by Landlord at Tenant's request, then Tenant's contractors shall
obtain on behalf of Tenant and at Tenant's sole cost and expense, (i) all
necessary governmental permits and certificates for the commencement and
prosecution of Tenant's Changes and for final approval thereof upon completion,
and (ii) a completion and lien indemnity bond, or other surety bond, in form and
substance and issued by a surety satisfactory to Landlord, for the Tenant's
Changes. In the event Tenant shall request any changes in the work to be
performed after the submission of the plans referred to in this Paragraph 14,
such additional changes shall be subject to the same approvals and notices as
the changes initially submitted by Tenant.
(e) All Tenant's Changes and the performance thereof shall at all
times comply with (i) all laws, rules, orders, ordinances, directions,
regulations and requirements of all governmental authorities, agencies, offices,
departments, bureaus and boards having jurisdiction thereof, (ii) all rules,
orders, directions, regulations and requirements of the Pacific Fire Rating
Bureau, or of any similar insurance body or bodies, and (iii) all rules and
regulations of Landlord, and Tenant shall cause Tenant's Changes to be performed
in compliance therewith and in a good and first class workmanlike manner, using
materials and equipment at least equal in quality and class to the original
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installations of the Building. Tenant's Changes shall be performed in such
manner as not to interfere with the occupancy of any other tenant in the
Building nor delay, or impose any additional expenses upon Landlord in the
construction, maintenance or operation of the Building, and shall be performed
by contractors or mechanics approved by Landlord and submitted to Tenant
pursuant to this Paragraph, who shall coordinate their work in cooperation with
any other work being performed with respect to the Building. Throughout the
performance of Tenant's Changes, Tenant, at its expense, shall carry, or cause
to be carried, workmen's compensation insurance in statutory limits, and general
liability insurance for any occurrence in or about the Building, of which
Landlord and its managing agent shall be named as parties insured, in such
limits as Landlord may reasonably prescribe, with insurers reasonably
satisfactory to Landlord. Tenant shall furnish Landlord with reasonably
satisfactory evidence that such insurance is in effect at or before the
commencement of Tenant's Changes and, on request, at reasonable intervals
thereafter during the continuance of Tenant's Changes.
(f) Tenant further covenants and agrees that any mechanic's lien filed
against the Premises or against the Building for work claimed to have been done
for, or materials claimed to have been furnished to Tenant, will be discharged
by Tenant, by bond or otherwise, within ten (10) days after the filing thereof,
at the cost and expense of Tenant. All alterations, decorations, additions or
improvements upon the Premises, made by either party, including (without
limiting the generality of the foregoing) all wall-covering, built-in-cabinet
work, paneling and the like, shall, unless Landlord elects otherwise, become the
property of Landlord, and shall remain upon, and be surrendered with the
Premises, as a part thereof, at the end of the Lease term, except that Landlord
may by written notice to Tenant, given at least thirty (30) days prior to the
end of the Lease term, require Tenant to remove all partitions, counters,
railings and the like installed by Tenant, and Tenant shall repair any damage to
the Premises arising from such removal or, at Landlord's option, shall pay, as
additional rent, to the Landlord all of Landlord's costs of such removal and
repair.
(g) All articles of personal property and all business and trade
fixtures, machinery and equipment, furniture and movable partitions owned by
Tenant or installed by Tenant at its
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expense in the Premises shall be and remain the property of Tenant and may be
removed by Tenant at any time during the Lease Term provided Tenant is not in
default hereunder, and provided further that Tenant shall repair any damage
caused by such removal. If Tenant shall fail to remove all of its effects from
said Premises upon termination of this Lease for any cause whatsoever, Landlord
may, at its option, remove the same in any manner that Landlord shall choose,
and store said effects without liability to Tenant for loss thereof, and Tenant
agrees to pay Landlord, as additional rent, upon demand any and all expenses
incurred in such removal, including court costs and attorneys' fees and storage
charges on such effects for any length of time that the same shall be in
Landlord's possession, or Landlord may, at its option, without notice, sell said
effects, or any of the same, at private sale and without legal process, for such
price as Landlord may obtain and apply the proceeds of such sale to any amounts
due under this Lease from Tenant to Landlord and to the expense incident to the
removal and sale of said effects.
(h) Landlord reserves the right at any time and from time to time
without the same constituting an actual or constructive eviction and without
incurring any liability to Tenant therefor or otherwise affecting Tenant's
obligations under this Lease, to make such changes, alterations, additions,
improvements, repairs or replacements in or to the Site and/or the Building
(including the Premises if required so to do by any law or regulation) and the
fixtures and equipment thereof, as well as in or to the street entrances, halls,
passages and stairways thereof, and to change the name by which the Building is
commonly known, as Landlord may deem necessary or desirable. Nothing contained
in this Paragraph 14 shall be deemed to relieve Tenant of any duty, obligation
or liability of Tenant with respect to making any repair, replacement or
improvement or complying with any law, order or requirement of any government or
other authority and nothing contained in this Paragraph 14 shall be deemed or
construed to impose upon Landlord any obligation, responsibility or liability
whatsoever, for the care, supervision or repair of the Building or any part
thereof other than as otherwise provided in this Lease.
15. Repairs.
(a) By entry hereunder, Tenant accepts the Premises as being in good
and sanitary order, condition and repair. Tenant
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shall, when and if needed or whenever requested by Landlord to do so, at
Tenant's sole cost and expense, maintain and make all repairs to the Premises
and every part thereof, to keep, maintain and preserve the Premises in first
class condition, excepting ordinary wear and tear, and repair. Any such
maintenance and repairs shall be performed by Landlord's contractor, or at
Landlord's option, by such contractor or contractors as Tenant may choose from
an approved list to be submitted by Landlord. All costs and expenses incurred in
such maintenance and repair shall be paid by Tenant within seven (7) days after
billing by Landlord or such contractor or contractors. Tenant shall upon the
expiration or sooner termination of the term hereof surrender the Premises to
Landlord in the same condition as when received. Landlord shall have no
obligation to alter, remodel, improve, repair, decorate or paint the Premises or
any part thereof and the parties hereto affirm that Landlord has made no
representations to Tenant respecting the condition of the Premises or the
Building except as specifically herein set forth. Notwithstanding anything to
the contrary contained in Subparagraphs (a) and (b) of this Paragraph 15, Tenant
shall maintain and repair at its sole cost and expense, and with maintenance
contractors approved by Landlord, all non-base building facilities, including
lavatory, shower, toilet, washbasin and kitchen facilities and heating and air
conditioning systems, including all plumbing connected to said facilities or
systems installed by Tenant or on behalf of Tenant or existing in the Premises
at the time of delivery of possession of the Premises to Tenant by Landlord. The
provisions of this paragraph shall not apply to the basic heating and air
conditioning system provided by Landlord to all tenants of the Building.
(b) Anything contained in Subparagraph 15(a) above to the contrary
notwithstanding, Landlord shall repair and maintain the structural portions of
the Building, including the basic plumbing, heating, ventilating, air
conditioning and electrical systems installed or furnished by Landlord, unless
such maintenance and repairs are caused in part or in whole by the act, neglect,
fault of or omission of any duty by Tenant, its agents, servants, employees or
invitees, in which case Tenant shall pay to Landlord, as additional rent, the
reasonable cost of such maintenance and repairs. Landlord shall not be liable
for any failure to make any such repairs, or to perform any maintenance unless
such failure shall persist for an unreasonable time after written notice of the
need of such repairs or
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maintenance is given to Landlord by Tenant. Except as provided in Paragraph 23
hereof there shall be no abatement of rent and no liability of Landlord by
reason of any injury to or interference with Tenant's business arising from the
making of any repairs, alterations or improvements in or to any portion of the
Building or the Premises or in or to fixtures, appurtenances and equipment
therein. Tenant waives the right to make repairs at Landlord's expense under any
law, statute or ordinance now or hereafter in effect.
16. Liens. Tenant shall not permit any mechanic's, materialmen's or other
liens to be filed against the real property of which the Premises form a part
nor against the Tenant's leasehold interest in the Premises. Landlord shall
have the right at all reasonable times to post and keep posted on the Premises
any notices which it deems necessary for protection from such liens. If any
such liens are filed, Landlord may, without waiving its rights and remedies
based on such breach of Tenant and without releasing Tenant from any of its
obligations, cause such liens to be released by any means it shall deem proper,
including payment in satisfaction of the claim giving rise to such lien. Tenant
shall pay to Landlord at once, upon notice by Landlord, any sum paid by Landlord
to remove such liens, together with interest at the New York Prime Interest Rate
from the date of such payment by Landlord.
17. Entry by Landlord. Subject to Landlord's agreement to minimize any
disturbance of Tenant's use of the Premises by exercise of the following rights,
Landlord reserves and shall at any and all times have the right to enter the
Premises to inspect the same, to supply janitor service and any other service to
be provided by the Landlord to Tenant hereunder, to submit said Premises to
prospective purchasers or tenants, to post notices of nonresponsibility, to
alter, improve or repair the Premises or any other portion of the Building, all
without being deemed guilty of any eviction of Tenant and without abatement of
rent, and may, in order to carry out such purposes, erect scaffolding and other
necessary structures where reasonably required by the character of the work to
be performed. Tenant hereby waives any claim for damages for any injury or
inconvenience to or interference with Tenant's business, any loss of occupancy
or quiet enjoyment of the Premises, and any other loss occasioned thereby. For
each of the aforesaid purposes, Landlord shall at all times have and retain a
key with which to unlock all of the
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doors in, upon and about the Premises, excluding Tenant's vaults and safes, and
Landlord shall have the means which Landlord may deem proper to open said doors
in an emergency in order to obtain entry to the Premises, and any entry to the
Premises obtained by Landlord by any of said means, or otherwise, shall not
under any circumstances be construed or deemed to be a forcible or unlawful
entry into, or a detainer of, the Premises, or an eviction of Tenant from the
Premises or any portion thereof, and any damages caused on account thereof shall
be paid by Tenant. It is understood and agreed that no provision of this Lease
shall be construed as obligating Landlord to perform any repairs, alterations or
decorations except as otherwise expressly agreed herein to be performed by
Landlord. Landlord hereby agrees to use its best good faith efforts in the
exercise of its rights under this Paragraph 17 to minimize any disturbance of
Tenant's use and possession of the Premises and to provide as much notice to
Tenant as may be reasonably possible prior to any such exercise of Landlord's
rights under this Paragraph 17.
18. Utilities and Services. Provided that Tenant is not in default
hereunder, Landlord agrees to furnish to the Premises during those hours
("regular business hours") set forth in the Rules and Regulations as defined in
Paragraph 30 hereof, as may be amended in writing by Landlord from time to time
during the term of this Lease and delivered to Tenant, reasonable quantities of
electric current for normal lighting (not to exceed 1.65 watts per square foot
of rentable area in the Premises) and fractional horsepower office machines,
water for lavatory and drinking purposes in the Common Area facilities, heat and
air conditioning required in Landlord's judgment for the comfortable use and
occupation of the Premises, janitorial service (including washing of windows
with reasonable frequency as determined by Landlord), and elevator service by
nonattended automatic elevators. Landlord shall not be liable for, and Tenant
shall not be entitled to any abatement or reduction of rent by reason of
Landlord's failure to furnish any of the foregoing when such failure is caused
by accident, breakage, repairs, strikes, lockouts or other labor disturbances or
labor disputes of any character, or for any other causes. If Tenant requires or
utilizes more water or electric power than is considered reasonable or normal by
Landlord, Landlord may at its option require Tenant to pay, as additional rent,
the cost, as fairly determined by Landlord, incurred by such extraordinary
usage. Tenant shall pay Landlord on demand, as additional rent, at rates
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reasonably established by Landlord, for any heat, air conditioning or other such
service provided to Tenant during hours other than regular business hours. In
addition, Landlord may install separate meter(s) for the Premises, at Tenant's
sole expense, and Tenant thereafter shall pay all charges of the utility
providing service and Landlord shall make an appropriate adjustment to account
for the fact that Tenant is directly paying such metered charges. Tenant
specifically undertakes to install and maintain at Tenant's cost such fire
protection equipment including, without limitation, emergency lighting as
required by any governmental authority or insurer, and if so required Tenant
shall appoint one of Tenant's personnel to coordinate with the fire protection
facilities and personnel of Landlord. Any light bulbs used in the Premises
other than those typically supplied by Landlord throughout the Building shall be
purchased and installed by Tenant. Tenant shall maintain, clean and repair any
and all Building "Non-Standards" (as defined in Exhibit "C" hereto) including
but not limited to metallic trim, wood floor covering, glass panels, windows,
partitions, kitchens and executive washrooms in the Premises. Landlord shall
not be responsible in any manner for said maintenance, cleaning and repair.
19. Bankruptcy. If Tenant shall file a petition in bankruptcy under any
Chapter of the United States Bankruptcy Code as then in effect, or if Tenant
shall be adjudicated a bankrupt in involuntary bankruptcy proceedings and such
adjudication shall not have been vacated within thirty (30) days from the date
thereof, or if a receiver or trustee be appointed for Tenant's property and the
order appointing such receiver or trustee shall not have been set aside or
vacated within thirty (30) days after the entry thereof, or if Tenant shall
assign Tenant's estate or effects for the benefit of creditors, or if this Lease
shall otherwise by operation of law pass to any person or persons other than
Tenant, then and in any such event Landlord may, if Landlord so elects, with or
without notice of such election and with or without entry or action by Landlord,
forthwith terminate this Lease, and notwithstanding any other provisions of this
Lease, Landlord, in addition to any and all rights and remedies allowed by law
or equity, shall upon such termination be entitled to recover damages in the
amount provided in Subparagraph 25(b) below and neither Tenant nor any person
claiming through or under Tenant or by virtue of any statute or order of any
court shall be entitled to possession of the Premises but shall forthwith quit
and surrender the Premises to Landlord. Nothing herein contained
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shall limit or prejudice the right of Landlord to prove and obtain as damages by
reason of any such termination an amount equal to the maximum allowed by any
statute or rule of law in effect at the time when, and governing the proceedings
in which such damages are to be proved, whether or not such amount be greater,
equal to, or less than the amount of damages recoverable under the provisions of
this Paragraph 19.
20. Indemnification.
(a) To the fullest extent permitted by law Tenant hereby agrees to
defend, indemnify and hold Landlord harmless against and from any and all claims
arising from Tenant's use of the Premises or the conduct of its business or from
any activity, work, or thing done, permitted or suffered by Tenant, its agents,
contractors, employees or invitees in or about the Premises or elsewhere, and
hereby agrees to further indemnify and hold harmless Landlord against and from
any and all claims arising from any breach or default in the performance of any
obligation on Tenant's part to be performed under the terms of this Lease, or
arising from any act, neglect, fault or omission of Tenant, or of its agents,
employees, or invitees, and from and against all costs, attorneys' fees,
expenses and liabilities incurred in or about such claim or any action or
proceeding brought thereon; and in case any action or proceeding be brought
against Landlord by reason of any such claim, Tenant upon notice from Landlord
hereby agrees to defend the same at Tenant's expense by counsel approved in
writing by Landlord. Tenant, as a material part of the consideration to
Landlord, hereby assumes all risk of damage to property or injury to persons in,
upon or about the Premises from any cause whatsoever except that which is caused
by the failure of Landlord to observe any of the terms and conditions of this
Lease which failure has persisted for an unreasonable period of time after
written notice of such, and Tenant hereby waives all its claims in respect
thereof against Landlord.
(b) Notwithstanding the foregoing, Tenant shall not be liable nor
indemnify Landlord for damage or injury caused by Landlord's failure to fulfill
all of its obligations under this Lease or by reason of the gross negligence or
willful misconduct of Landlord or its agents, servants, contractors or
employees. Landlord will indemnify and hold Tenant free and harmless from and
against all such losses, damages, actions, claims or demands, including its
reasonable attorneys' fees.
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21. Damage to Tenant's Property. Notwithstanding the provisions of
Paragraph 20 to the contrary, Landlord or its agents shall not be liable for any
damage to property entrusted to employees specifically hired to service the
Building, nor for loss of or damage to any property by theft or otherwise, nor
for any injury or damage to persons or property resulting from fire, explosion,
falling plaster, steam, gas, electricity, water or rain which may leak from any
part of the Building or from the pipes, appliances or plumbing works therein or
from the roof, street or sub-surface or from any other place, or resulting from
dampness or any other patent or latent cause whatsoever. Landlord or its agents
shall not be liable for interference with the light or other incorporeal
hereditaments. Tenant shall give prompt notice to Landlord in case of fire or
accidents in the Premises or in the Building or of defects therein or in the
fixtures or equipment located therein.
22. Insurance.
(a) During the Term. Tenant, at its sole expense, shall obtain and
keep in force the following insurance:
(i) All Risk insurance upon property of every description and
kind owned by Tenant and located in the Building or for which Tenant is
legally liable or installed by or on behalf of Tenant including, without
limitation, furniture, fittings, installations, fixtures and any other
personal property, Leasehold Improvements (other than "Standards" as
described the Work Letter Agreement), and alterations, in an amount not
less than ninety percent (90%) of the full replacement cost thereof. All
such insurance policies shall name Tenant as named insured thereunder, and
shall have attached an endorsement naming Landlord as an additional insured
thereunder and, at Landlord's request, shall name Landlord's mortgagees
(and, if applicable, ground or primary lessors) as loss payees thereunder,
all as their respective interests may appear. Landlord will not be
required to carry insurance of any kind on any "Non-Standards," as
described in the Work Letter Agreement, on Tenant's furniture or
furnishings, or on any of Tenant's fixtures, equipment, improvements, or
appurtenances under this Lease; and Landlord shall not be obligated to
repair any damage thereto or replace the same.
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(ii) Comprehensive general liability insurance coverage, including
personal injury, bodily injury, broad form property damage, operations
hazard, owner's protective coverage, contractual liability, and products
and completed operations liability, in limits not less than $3,000,000
inclusive. All such insurance policies shall name Tenant as named insured
thereunder and shall name Landlord and Landlord's mortgagees (and, if
applicable, ground or primary lessors) as additional insureds thereunder,
all as their respective interests may appear.
(iii) Worker's Compensation and Employer's Liability insurance,
with a waiver of subrogation endorsement, in form and amount satisfactory
to Landlord.
(iv) Any other form or forms of insurance as Tenant, Landlord, or
Landlord's mortgagees or ground or primary lessors may reasonably require
from time to time in form, in amounts, and for insurance risks against
which a prudent tenant of a comparable size and in a comparable business
would protect itself.
(b) All policies shall be issued by insurers that are acceptable to
Landlord and in form satisfactory from time to time to Landlord. Tenant will
deliver certificates of insurance on the Landlord's standard form (or, if
required by Landlord, the mortgagees of Landlord, or any ground or primary
lessors, certified copies of each such insurance policy) to Landlord as soon as
practicable after the placing of the required insurance, but not later than ten
(10) days prior to the date Tenant takes possession of all or any part of the
Premises. All policies shall contain an undertaking by the insurers to notify
Landlord and Landlord's mortgagees (and, if applicable, ground or primary
lessors) in writing, by Registered or Certified U.S. Mail, return receipt
requested, not less than fifteen (15) days before any material change, reduction
in coverage, cancellation, or other termination thereof.
(c) During the Term, Landlord shall insure the Building and the
Standards (excluding any property which Tenant is obligated to insure under
Subparagraphs 22(a) and (b) hereof) against damage with All Risk insurance and
public liability insurance, all in such amounts and with such deductions as
Landlord considers appropriate. Landlord may, but shall not be
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obligated to, obtain and carry any other form or forms of insurance as it or
Landlord's mortgagees may determine advisable. Notwithstanding any contribution
by Tenant to the cost of insurance premiums, as provided herein, Tenant
acknowledges that it has no right to receive any proceeds from any insurance
policies carried by Landlord.
(d) Tenant will not keep, use, sell, or offer for sale in, or upon,
the Premises any article which may be prohibited by any insurance policy
periodically in force covering the Building and the Standards. If Tenant's
occupancy or business in, or on, the Premises, whether or not Landlord has
consented to the same, results in any increase in premiums for the insurance
periodically carried by Landlord with respect to the Building, Tenant shall pay
any such increase in premiums as additional rent within ten (10) days after
being billed therefor by Landlord. In determining whether increased premiums
are a result of Tenant's use of the Premises, a schedule issued by the
organization computing the insurance rate on the Building or the Leasehold
Improvements showing the various components of such rate, shall be conclusive
evidence of the several items and charges which make up such rate. Tenant shall
promptly comply with all reasonable requirements of the insurance authority or
any present or future insurer relating to the Premises.
(e) If any of Landlord's insurance policies shall be cancelled or
cancellation shall be threatened or the coverage thereunder reduced or
threatened to be reduced in any way because of the use of the Premises or any
part thereof by Tenant or any assignee or sub-tenant of Tenant or by anyone
Tenant permits on the Premises and, if Tenant fails to remedy the condition
giving rise to such cancellation, threatened cancellation, reduction of
coverage, threatened reduction of coverage, increase in premiums, or threatened
increase in premiums, within 48 hours after notice thereof, Landlord may, at its
option, either terminate this Lease or enter upon the Premises and attempt to
remedy such condition, and Tenant shall promptly pay the cost thereof to
Landlord as additional rent. Landlord shall not be liable for any damage or
injury caused to any property of Tenant or of others located on the Premises
resulting from such entry. If Landlord is unable, or elects not, to remedy such
condition, then Landlord shall have all of the remedies provided for in this
Lease in the event of a default by Tenant. Notwithstanding the foregoing
provisions of this Subparagraph 22(e), if Tenant fails to remedy as aforesaid,
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Tenant shall be in default of its obligation hereunder and Landlord shall have
no obligation to remedy such default.
(f) All policies covering real or personal property which either party
obtains affecting the Premises shall include a clause or endorsement denying the
insurer any rights of subrogation against the other party to the extent rights
have been waived by the insured before the occurrence of injury or loss, if same
are obtainable without reasonable cost. Landlord and Tenant waive any rights of
recovery against the other for injury or loss due to hazards covered by policies
of insurance containing such a waiver of subrogation clause or endorsement, to
the extent of the injury or loss covered thereby.
23. Damage or Destruction.
(a) In the event the Building or any insured alterations are damaged
by fire or other perils covered by Landlord's extended coverage insurance to an
extent not exceeding twenty-five percent (25%) of the full insurable value
thereof and if the damage thereto is such that the Building and any insured
alterations may be repaired, reconstructed or restored within a period of ninety
(90) days after the date of the happening of such casualty and Landlord will
receive insurance proceeds sufficient to cover the cost of such repairs,
Landlord shall commence and proceed diligently with the work of repair,
reconstruction and restoration and the Lease shall continue in full force and
effect. If such work of repair, reconstruction and restoration is such as to
require a period longer than ninety (90) days or exceeds twenty-five percent
(25%) of the full insurable value thereof, or if said insurance proceeds will
not be sufficient to cover the cost of such repairs, or if any lender holding
any encumbrance on the Building requires that insurance proceeds be applied to
reduce the debt secured by the encumbrance, Landlord either may elect to so
repair, reconstruct or restore the Building and any insured alterations and the
Lease shall continue in full force and effect or Landlord may elect not to
repair, reconstruct or restore the Building and any insured alterations and the
Lease shall in such event terminate. Under any of the conditions of this
Subparagraph 23(a), Landlord shall give written notice to Tenant of its
intention within thirty (30) days from the date of such event of damage or
destruction. In the event Landlord elects not to restore said Building and any
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insured alterations, this Lease shall be deemed to have terminated as of the
date of such partial destruction.
(b) Upon any termination of this Lease under any of the provisions of
this Paragraph 23, the parties shall be released thereby without further
obligation to the other from the date possession of the Premises is surrendered
to Landlord except for items which have theretofore accrued and are then unpaid.
(c) In the event of repair, reconstruction and restoration by Landlord
as herein provided, the rent provided to be paid under this Lease shall be
abated proportionately with the degree to which Tenant's use of the Premises is
impaired during the period of such repair, reconstruction or restoration.
Tenant shall not be entitled to any compensation or damages for loss in the use
of the whole or any part of the Premises and/or any inconvenience or annoyance
occasioned by such damage, repair, reconstruction or restoration.
(d) Tenant shall not be released from any of its obligations under
this Lease except to the extent and upon the conditions expressly stated in this
Paragraph 23. Notwithstanding anything to the contrary contained in this
Paragraph 23, should Landlord be delayed or prevented from repairing or
restoring the damaged Premises within six (6) months after the occurrence of
such damage or destruction by reason of acts of God, war, governmental
restrictions, inability to procure the necessary labor or materials, or other
cause beyond the control of Landlord, Landlord shall be relieved of its
obligation to make such repairs or restoration and Tenant shall be released from
its obligations under this Lease as of the end of said six (6) month period.
(e) In the event that damage is due to any cause other than fire or
other peril covered by extended coverage insurance, Landlord may elect to
terminate this Lease.
(f) It is hereby understood that if Landlord is obligated to or elects
to repair or restore as herein provided, Landlord shall be obligated to make
repairs or restoration only of those portions of the Building and the Premises
which were originally provided at Landlord's expense or which were insured by
either party, the proceeds of such insurance having been
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received by Landlord, and the repair and restoration of items not provided at
Landlord's expense shall be the obligation of Tenant.
(g) Notwithstanding anything to the contrary contained in this
Paragraph 23, Landlord shall not have any obligation whatsoever to repair,
reconstruct or restore the Premises when the damage resulting from any casualty
covered under this Paragraph 23 occurs during the last twelve (12) months of the
term of this Lease or any extension hereof. Any termination by Landlord in
connection with casualty near the end of the term as set forth above shall not
be effective in the event that (A) Tenant then has, or would with the passage of
time have, the right to extend this Lease and (B) Tenant irrevocably notifies
Landlord in writing, within 10 business days following Landlord's termination
notice, that Tenant is exercising such extension right.
(h) The provisions of California Civil Code (S) 1932, Subsection 2,
and (S) 1933, Subsection 4, are hereby waived by Tenant.
24. Eminent Domain.
(a) In case the whole of the Premises, or such part thereof as shall
substantially interfere with Tenant's use and occupancy thereof, shall be taken
for any public or quasi-public purpose by any lawful power or authority by
exercise of the right of appropriation, condemnation or eminent domain, or sold
to prevent such taking, either party shall have the right to terminate this
Lease effective as of the date possession is required to be surrendered to said
authority, Tenant shall not assert any claim against Landlord or the taking
authority for any compensation because of such taking, and Landlord shall be
entitled to receive the entire amount of any award without deduction for any
estate or interest of Tenant. In the event the amount of property or the type
of estate taken shall not substantially interfere with the conduct of Tenant's
business, Landlord shall be entitled to the entire amount of the award without
deduction for any estate or interest of Tenant, and Landlord at his option may
terminate this Lease. If Landlord does not so elect, Landlord shall promptly
proceed to restore the Premises to substantially their same condition prior to
such partial taking, and a proportionate allowance shall be made to Tenant for
the rent corresponding to the time during which, and
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to the part of the Premises of which, Tenant shall be so deprived on account of
such taking and restoration. Nothing contained in this Paragraph shall be deemed
to give Landlord any interest in any award separately made to Tenant for the
taking of personal property and trade fixtures belonging to Tenant or for moving
costs incurred by Tenant in relocating Tenant's business.
(b) In the event of taking of the Premises or any part thereof for
temporary use: (i) this Lease shall be and remain unaffected thereby and rent
shall not abate, and (ii) Tenant shall be entitled to receive for itself such
portion or portions of any award made for such use with respect to the period of
the taking which is within the term, provided that if such taking shall remain
in force at the expiration or earlier termination of this Lease, Tenant shall
then pay to Landlord a sum equal to the reasonable cost of performing Tenant's
obligations under Paragraph 15 with respect to surrender of the Premises and
upon such payment shall be excused from such obligations. For purpose of this
Subparagraph 24(b), a temporary taking shall be defined as a taking for a period
of 270 days or less.
(c) Landlord and Tenant hereby waive the provisions of California Code
of Civil Procedure Section 1265.130 to the extent that such provisions are
inconsistent with this Lease.
25. Defaults and Remedies.
(a) The occurrence of any one or more of the following events shall
constitute a default hereunder by Tenant:
(i) The abandonment of the Premises by Tenant. Abandonment is
herein defined to include, but is not limited to, any absence by Tenant
from the Premises for five (5) days or longer while in default of any
provision of this Lease.
(ii) The failure by Tenant to make any payment of rent or
additional rent or any other payment required to be made by Tenant
hereunder as and when due, where such failure shall continue for a period
of three (3) days after written notice thereof from Landlord to Tenant;
provided however, that any such notice shall be in lieu of, and not in
addition to, any notice required under California Code of Civil Procedure
(S) 1161.
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(iii) The failure by Tenant to observe or perform any of the
express or implied covenants or provisions of this Lease to be observed or
performed by Tenant, other than as specified in Subparagraph 25(a)(i) or
(ii) above, where such failure shall continue for a period of ten (10) days
after written notice thereof from Landlord to Tenant; provided, however,
that any such notice shall be in lieu of, and not in addition to, any
notice required under California Code of Civil Procedure (S) 1161;
provided, further, that if the nature of Tenant's default is such that more
than ten (10) days are reasonably required for its cure, then Tenant shall
not be deemed to be in default if Tenant shall commence such cure within
said ten-day period and thereafter diligently prosecute such cure to
completion, which completion shall occur not later than sixty (60) days
from the date of such notice from Landlord.
(iv) (1) The making by Tenant of any general assignment for the
benefit of creditors; (2) the filing by or against Tenant of a petition to
have Tenant adjudged a bankrupt or a petition for reorganization or
arrangement under any law relating to bankruptcy (unless, in the case of a
petition filed against Tenant, the same is dismissed within thirty (30)
days); (3) the appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where possession is not restored to Tenant within
thirty (30) days; or (4) the attachment, execution or other judicial
seizure of substantially all of Tenant's assets located at the Premises or
of Tenant's interest in this Lease where such seizure is not discharged
within thirty (30) days.
(b) In the event of any such default by Tenant in addition to any
other remedies available to Landlord at law or in equity, Landlord shall have
the right to pursue one or more of the following remedies:
(1) Landlord may terminate this Lease and all rights of Tenant
hereunder and may recover from Tenant the following:
(i) the worth at the time of award of any unpaid rent which had
been earned at the time of such termination; plus
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(ii) the worth at the time of award by which the unpaid rent
which would have been earned after termination until the time of award
exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; plus
(iii) the worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided;
plus
(iv) any other amount necessary to compensate Landlord for all
the detriment proximately cause by Tenant's failure to perform his
obligations under this Lease or which in the ordinary course of things
would be likely to result therefrom.
As used in Subparagraphs 25(b)(1)(i) and (ii) above, the "worth at the
time of award" is computed by allowing interest at the New York Prime Interest
Rate per annum. As used in Subparagraph 25(b)(1)(iii) above, the "worth at the
time of award" is computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco at the time of award plus one (1)
percentage point.
(2) Landlord may continue the Lease in effect and pursue any other
rights and remedies it may have hereunder or otherwise, including the right to
recover all rent from Tenant as it becomes due, all as permitted by California
Civil Code (S) 1951.4 (as modified or recodified from time to time) and/or as
otherwise permitted by law from time to time.
(c) In the event of any such default by Tenant, Landlord shall also
have the right, with or without terminating this Lease, to re-enter the Premises
and remove all persons and property from the Premises, such property may be
removed and stored in a public warehouse or elsewhere at the cost of and for the
account of Tenant for such period of time as may be required by applicable law
after which time Landlord may dispose of such property in accordance with
applicable law. No re-entry or taking possession of the Premises by Landlord
pursuant to this Subparagraph 25(c) shall be construed as an election to
terminate this Lease unless a written notice of such intention is given to
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Tenant or unless the termination thereof is decreed by a court of competent
jurisdiction.
(d) All rights, options and remedies of Landlord contained in this
Lease shall be construed and held to be cumulative, and no one of them shall be
exclusive of the other, and Landlord shall have the right to pursue any of or
all of such remedies or any remedy or relief which may be provided by law,
whether or not stated in this Lease. No waiver of any default of Tenant
hereunder shall be implied from any acceptance by Landlord of any rent or other
payments due hereunder or any omission by Landlord to take any action on account
of such default if such default persists or is repeated, and no express waiver
shall affect defaults other than as specified in said waiver. The consent or
approval of Landlord to or of any act by Tenant requiring Landlord's consent or
approval shall not be deemed to waive or render unnecessary Landlord's consent
or approval to or of any subsequent similar acts by Tenant.
26. Assignment and Subletting. Tenant shall not voluntarily assign or
encumber its interest in this Lease or in the Premises, or sublease all or any
part of the Premises, or allow any other person or entity to occupy or use all
or any part of the Premises, without first obtaining Landlord's prior written
consent, which consent shall not be unreasonably withheld. Any assignment,
encumbrance, or sublease without Landlord's prior written consent shall be
voidable, at Landlord's election, and shall constitute a default. For purposes
hereof, in the event Tenant is a partnership, a withdrawal or change of partners
owning more than a fifty (50%) interest in the partnership, or if Tenant is a
corporation, any transfer of more than fifty percent (50%) of its stock, shall
constitute a voluntary assignment and shall be subject to these provisions. No
consent to an assignment, encumbrance, or sublease shall constitute a further
waiver of the provisions of this Paragraph. Tenant shall notify Landlord in
writing of Tenant's intent to assign, encumber, or sublease this Lease, the name
of the proposed assignee or sublessee, information concerning the financial
responsibility of the proposed assignee or sublessee and the terms of the
proposed assignment or subletting, and Landlord shall, within thirty (30) days
of receipt of such written notice, and additional information requested by
Landlord concerning the proposed assignee's or sublessee's financial
responsibility, elect one of the following:
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(a) Consent to such proposed assignment, encumbrance or
sublease;
(b) Refuse such consent, which refusal shall be on reasonable
grounds, including without limitation the character,
reputation or credit-worthiness of any proposed sublessee or
assignee or the proposed use of the Premises or Building by
such proposed sublessee or assignee; or
(c) Elect to terminate this Lease, or in the case of a partial
sublease, terminate this Lease as to the portion of the
Premises proposed to be sublet.
As a condition for granting its consent to any assignment, encumbrance or
sublease, Landlord may require that the rent payable by such assignee or
sublessee is at least 95% of the then current published rental rates for the
Premises or comparable premises in the Building, but not less than the then
current Annual Basic Rent under this Lease and may require, whether or not
Tenant is in default under this Lease, that the assignee or sublessee remit
directly to Landlord on a monthly basis, all monies due to Tenant by said
assignee or sublessee. If any lease guaranty has been executed in connection
with this Lease, Landlord reserves the right, as a condition to its consent, to
require reaffirmation of such guaranty by the guarantor thereunder. In the
event that Landlord shall consent to an assignment or sublease under the
provisions of this Paragraph 26, Tenant shall pay Landlord's reasonable
processing costs and attorneys' fees incurred in giving such consent. If for
any proposed assignment or sublease Tenant receives rent or other consideration,
either initially or over the term of the assignment or sublease, in excess of
the rent called for hereunder, or, in case of the sublease of a portion of the
Premises, in excess of such rent fairly allocable to such portion, after
appropriate adjustments to assure that all other payments called for hereunder
are taken into account, Tenant shall pay to Landlord as additional rent
hereunder fifty percent (50%) of the excess of each such payment of rent or
other consideration received by Tenant (less (a) reasonable and customary costs
actually paid by Tenant to unaffiliated third parties in affecting such
assignment or sublease, including, but
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not limited to, brokerage fees and remodeling expenses, and (b) Monthly Basic
Rent paid by Tenant hereunder during any period that the subtenant or assignee
is entitled to occupy the Premises without paying rent, in each case amortized
over the original term of the sublease or assignment) promptly after its
receipt. Landlord's waiver or consent to any assignment or subletting shall not
relieve Tenant from any obligation under this Lease. If Tenant requests
Landlord's consent to any assignment of this Lease or any subletting of all or a
portion of the Premises, Landlord shall have the right, to be exercised by
giving written notice to Tenant within thirty (30) days of receipt by Landlord
of the financial responsibility information required by this Paragraph 26, to
terminate this Lease effective as of the date Tenant proposes to assign this
Lease or sublet all or a portion of the Premises. Landlord's right to terminate
this Lease as to all or a portion of the Premises on assignment or subletting
shall not terminate as a result of Landlord's consent to the assignment of this
Lease or the subletting of all or a portion of the Premises, or Landlord's
failure to exercise this right with respect to any assignment or subletting.
Tenant understands and acknowledges that the option, as provided in this
Paragraph 26, to terminate this Lease rather than approve the assignment thereof
or the subletting of all or any portion of the Premises, is a material
inducement for Landlord's agreeing to lease the Premises to Tenant upon the
terms and conditions herein set forth.
27. Subordination. Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, and at the
election of Landlord or any first mortgagee with a lien on the Building or any
ground lessor with respect to the Building, this Lease shall be subject and
subordinate at all times to: (a) all ground leases or underlying leases which
may now exist or hereafter be executed affecting the Building or the land upon
which the Building is situated or both, and (b) the lien of any mortgage or deed
of trust which may now exist or hereafter be executed in any amount for which
the Building, land, ground leases or underlying leases, or Landlord's interest
or estate in any of said items is specified as security. Notwithstanding the
foregoing, Landlord shall have the right to subordinate or cause to be
subordinated any such ground leases or underlying leases or any such liens to
this Lease. In the event that any ground lease or underlying lease terminates
for any reason or any mortgage or deed of trust is foreclosed or a
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conveyance in lieu of foreclosure is made for any reason, Tenant shall,
notwithstanding any subordination, attorn to and become the Tenant of the
successor in interest to Landlord and Tenant's right to possession of the
Premises shall not be disturbed if Tenant is not in default and so long as
Tenant shall pay the rent and all other amounts required to be paid to Landlord
pursuant to the terms hereof and observe and perform all of the provisions of
this Lease, unless this Lease is otherwise terminated pursuant to its terms.
Tenant covenants and agrees to execute and deliver upon demand by Landlord and
in the form requested by Landlord, any additional documents evidencing the
priority or subordination of this Lease with respect to any such around leases
or underlying leases or the lien of any such mortgage or deed of trust. Should
Tenant fail to sign and return any such documents within ten (10) business days
of receipt, Tenant shall be in default and Landlord may, at Landlord's option,
terminate this Lease provided written notice of such termination is received by
Tenant prior to Landlord's receipt of such documents.
28. Estoppel Certificate.
(a) Within ten (10) days following any written request which Landlord
may make from time to time, Tenant shall execute and deliver to Landlord a
statement, in a form substantially similar to the form of Exhibit "E" attached
hereto, certifying: (i) the Commencement Date of this Lease; (ii) the fact that
this Lease is unmodified and in full force and effect (or, if there have been
modifications hereto, that this Lease is in full force and effect, as modified,
and stating the date and nature of such modifications); (iii) the date to which
the rental and other sums payable under this Lease have been paid; (iv) the fact
that there are no current defaults under this Lease by either Landlord or Tenant
except as specified in Tenant's statement; and (v) such other matters requested
by Landlord. Landlord and Tenant intend that any statement delivered pursuant
to this Paragraph 28 may be relied upon by any mortgagee, beneficiary, purchaser
or prospective purchaser of the Building or any interest therein.
(b) Tenant's failure to deliver such statement within such time shall
be conclusive upon Tenant (i) that this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) that there
are no uncured defaults in Landlord's performance, and (iii) that not more than
one (1) month's rent has been paid in advance. Tenant's failure to
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deliver said statement to Landlord within ten (10) working days of receipt shall
constitute a default under this Lease, and Landlord may, at Landlord's option,
terminate this Lease, provided written notice of such termination is received by
Tenant prior to Landlord's receipt of said statement.
29. Building Planning. In the event Landlord requires the Premises for
use in conjunction with another suite or for other reasons connected with the
Building planning program, upon notifying Tenant in writing, Landlord shall have
the right to move Tenant to other space in the Building of which the Premises
forms a part, at Landlord's sole cost and expense, including all of Tenant's
moving expenses, telephone installation and stationery reprinting charges, and
the terms and conditions of the original Lease shall remain in full force and
effect, save and excepting that a revised Exhibit "A" shall become part of this
Lease and shall reflect the location of the new space and Paragraph 1 of this
Lease shall be amended to include and state all correct data as to the new
space. However, if the new space does not meet with Tenant's approval, Tenant
shall have the right to cancel this Lease upon giving Landlord thirty (30) days'
prior written notice within ten (10) days of receipt of Landlord's notification.
30. Rules and Regulations. Tenant shall faithfully observe and comply with
the "Rules and Regulations" a copy of which is attached hereto and marked
Exhibit "F," and all reasonable and nondiscriminatory modifications thereof and
additions thereto from time to time put into effect by Landlord. Landlord shall
not be responsible to Tenant for the violation or non-performance by any other
tenant or occupant of the Building of any of said Rules and Regulations.
31. Conflict of Laws. This Lease shall be governed by and construed
pursuant to the laws of the State of California.
32. Successors and Assigns. Except as otherwise provided in this Lease,
all of the covenants, conditions and provisions of this Lease shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
heirs, personal representatives, successors and assigns.
33. Surrender of Premises. The voluntary or other surrender of this Lease
by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall,
at the option of
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Landlord, operate as an assignment to it of any or all subleases and
subtenancies. Upon the expiration or termination of this Lease, Tenant shall
peaceably surrender the Premises and all alterations and additions thereto,
broom-clean the Premises, leave the Premises in good order, repair and
condition, reasonable wear and tear excepted, and comply with the provisions of
Subparagraphs 14(f) and 14(g). The delivery of keys to any employee of Landlord
or to Landlord's agent or any employee thereof shall not be sufficient to
constitute a termination of this Lease or a surrender of the Premises.
34. Professional Fees. In the event that Landlord should bring suit for
the possession of the Premises or for the recovery of any sum due under this
Lease, or should either party bring suit against the other with respect to
matters arising from or growing out of this Lease, then all costs and expenses,
including without limitation, its actual professional fees such as appraisers',
accountants' and attorneys' fees, incurred by the prevailing party therein shall
be paid by the other party, which obligation on the part of the other party
shall be deemed to have accrued on the date of the commencement of such action
and shall be enforceable whether or not the action is prosecuted to judgment.
35. Performance by Tenant. All covenants and agreements to be performed
by Tenant under any of the terms of this Lease shall be performed by Tenant at
Tenant's sole cost and expense and without any abatement of rent. If Tenant
shall fail to pay any sum of money, other than Annual Basic Rent, required to be
paid by it hereunder or shall fail to perform any other act on its part to be
performed hereunder, and such failure shall continue for ten (10) days after
notice thereof by Landlord, Landlord may, without waiving or releasing Tenant
from obligations of Tenant, but shall not be obligated to, make any such payment
or perform any such other act on Tenant's part to be made or performed as in
this Lease provided. All sums so paid by Landlord and all necessary incidental
costs together with interest thereon at the New York Prime Interest Rate, from
the date of such payment by Landlord, shall be payable to Landlord on demand.
Tenant covenants to pay any such sums, and Landlord shall have (in addition to
any other right or remedy of Landlord) the same rights and remedies in the event
of the nonpayment thereof by Tenant as in the case of default by Tenant in the
payment of rent. Following each second consecutive late payment of rent,
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Landlord shall have the option to require that Tenant increase the amount of the
Security Deposit required under Paragraph 7 hereinabove by one hundred percent
(100%), which additional Security Deposit shall be retained by Landlord and may
be applied by Landlord in the manner provided in said Paragraph 7. Tenant
acknowledges that the late payment by Tenant to Landlord of any sums due under
this Lease will cause Landlord to incur costs not contemplated by this Lease,
the exact amount of such cost being extremely difficult and impractical to fix.
Such costs include, without limitation, processing and accounting charges, and
late charges that may be imposed upon Landlord by the terms of any encumbrance
and note secured by any encumbrance covering the Premises or the Building of
which the Premises are a part. Therefore, if any monthly installment of Annual
Basic Rent is not received by Landlord by the date when due, or if Tenant fails
to pay any other sum of money due hereunder and such failure continues for ten
(10) days after notice thereof by Landlord, Tenant shall pay to Landlord, as
additional rent, the sum of five percent (5%) of the overdue amount as a late
charge. Landlord's acceptance of any late charge shall not constitute a waiver
of Tenant's default with respect to the overdue amount or prevent Landlord from
exercising any of the other rights and remedies available to Landlord under this
Lease or any law now or hereafter in effect. Further, in the event such late
charge is imposed by Landlord for two (2) consecutive months for whatever
reason, Landlord shall have the option to require that, beginning with the first
payment of rent due following the imposition of the second consecutive late
charge, rent shall no longer be paid in monthly installments but shall be
payable three (3) months in advance.
36. Mortgagee Protection. No act or failure to act on the part of
Landlord which would entitle Tenant under the terms of this Lease, or by law, to
be relieved of Tenant's obligation hereunder or to terminate this Lease, shall
result in a release of such obligations or a termination of this Lease unless
(a) Tenant has given notice by registered or certified mail to any beneficiary
of a deed of trust or mortgage covering the Premises whose address shall have
been furnished to Tenant, and (b) Tenant offers such beneficiary or mortgagee a
reasonable opportunity to cure the default, including time to obtain possession
of the Premises by power of sale or of judicial foreclosure, if such should
prove necessary to effect a cure.
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37. Definition of Landlord. The term "Landlord" as used in this Lease, so
far as covenants or obligations on the part of Landlord are concerned, shall be
limited to mean and include only the owner or owners, at the time in question,
of the fee title to, or a lessee's interest in a ground lease of the Site or the
Building. In the event of any transfer, assignment or other conveyance or
transfers of any such title or interest, Landlord herein named (and in case of
any subsequent transfers or conveyances, the then grantor) shall be
automatically freed and relieved from and after the date of such transfer,
assignment or conveyance of all liability as respects the performance of any
covenants or obligations on the part of Landlord contained in this Lease
thereafter to be performed and, without further agreement, the transferee of
such title or interest shall be deemed to have assumed and agreed to observe and
perform any and all obligations of Landlord hereunder, during its ownership of
the Premises. Landlord may transfer its interest in the Premises without the
consent of Tenant and such transfer or subsequent transfer shall not be deemed a
violation on Landlord's part of any of the terms and conditions of this Lease.
38. Waiver. The failure of Landlord to seek redress for violation of, or
to insist upon strict performance of, any term, covenant or condition of this
Lease or the Rules and Regulations attached hereto as Exhibit "F," shall not be
deemed a waiver of such violation or prevent a subsequent act which would have
originally constituted a violation from having all the force and effect of an
original violation, nor shall the failure of Landlord to enforce any of said
Rules and Regulations against any other tenant of the Building be deemed a
waiver of any such Rule or Regulation, nor shall any custom or practice which
may become established between the parties in the administration of the terms
hereof be deemed a waiver of, or in any way affect, the right of Landlord to
insist upon the performance by Tenant in strict accordance with said terms. The
subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a
waiver of any preceding breach by Tenant of any term, covenant or condition of
this Lease, other than the failure of Tenant to pay the particular rent so
accepted, regardless of Landlord's knowledge of such preceding breach at the
time of acceptance of such rent.
39. Identification of Tenant. Unless the provisions of Paragraph 55,
below, are applicable to this Lease, then if more than one person executes this
Lease as Tenant, (a) each of them
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is jointly and severally liable for the keeping, observing and performing of all
of the terms, covenants, conditions, provisions and agreements of this Lease to
be kept, observed and performed by Tenant, and (b) the term "Tenant" as used in
this Lease shall mean and include each of them jointly and severally and the act
of or notice from, or notice or refund to, or the signature of, any one or more
of them, with respect to the tenancy of this Lease, including, but not limited
to, any renewal, extension, expiration, termination or modification of this
Lease, shall be binding upon each and all of the persons executing this Lease as
Tenant with the same force and effect as if each and all of them had so acted or
so given or received such notice or refund or so signed.
40. Parking. Unless Tenant is in default hereunder, Tenant shall be
entitled to the number of vehicle parking spaces designated in Subparagraph
1(k), free of charge during the initial term of this Lease and subject to a
monthly parking fee thereafter, on those portions of the Common Areas designated
by Landlord for parking. Tenant shall not use more parking spaces than said
number. Landlord reserves the right to institute and enforce a charge and
validation system for guest parking, provided, however, during the initial term
of this Lease, Landlord shall provide parking validations free of charge to
Tenant for Tenant's guest parking. Landlord may assign any unreserved and
unassigned parking spaces and/or make all or a portion of such spaces reserved,
if it determines in its sole discretion that it is necessary for orderly and
efficient parking. In the event Landlord has not assigned specific spaces to
Tenant, Tenant shall not use any spaces which have been so specifically assigned
by Landlord to other tenants or for such other uses as visitor parking or which
have been designated by governmental entities with competent jurisdiction as
being restricted to certain uses. Tenant shall provide Landlord with the
license plate numbers of vehicles belonging to Tenant's employees.
(a) Tenant shall not permit or allow any vehicles that belong to or
are controlled by Tenant or Tenant's employees, suppliers, shippers, customers,
or invitees to be loaded, unloaded, or parked in areas other than those
designated by Landlord for such activities.
46
<PAGE>
(b) If Tenant permits or allows any of the prohibited activities
described in this Paragraph 40, then Landlord shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Tenant, which
cost shall be immediately payable upon demand by Landlord.
(c) Landlord reserves the right at any time to substitute an
equivalent number of parking spaces in a parking structure or subterranean
parking facility or in a surface parking area adjacent to the Premises.
41. Terms and Headings. The words "Landlord" and "Tenant" as used herein
shall include the plural as well as the singular. Words used in any gender
include other genders. The Paragraph headings of this Lease are not a part of
this Lease and shall have no effect upon the construction or interpretation of
any part hereof.
42. Examination of Lease. Submission of this instrument for examination
or signature by Tenant does not constitute a reservation of or option for lease,
and it is not effective as a lease or otherwise until execution by the delivery
to both Landlord and Tenant.
43. Time. Time is of the essence with respect to the performance of every
provision of this Lease in which time or performance is a factor.
44. Prior Arrangements; Amendments. This Lease contains all of the
agreements of the parties hereto with respect to any matter covered or mentioned
in this Lease, and no prior agreement or understanding, oral or written, express
or implied, pertaining to any such matter shall be effective for any purpose.
No provision of this Lease may be amended or added to except by an agreement in
writing signed by the parties hereto or their respective successors in interest.
The parties acknowledge that all prior agreements, representations and
negotiations are deemed superseded by the execution of this Lease to the extent
they are not incorporated herein.
45. Severability. Any provision of this Lease which shall prove to be
invalid, void or illegal in any way affects, impairs
47
<PAGE>
or invalidates any other provision hereof, and such other provisions shall
remain in full force and effect.
46. Recording. Neither Landlord nor Tenant shall record this Lease nor a
short form memorandum thereof without the consent of the other.
47. Limitation on Liability. The obligations of Landlord under this Lease
do not constitute personal obligations of the individual directors, officers or
shareholders of Landlord, and Tenant shall not seek recourse against the
individual directors, officers or shareholders of Landlord or any of their
personal assets for satisfaction of any liability in respect to this Lease.
48. Riders. Clauses, plats and riders, if any, signed by Landlord and
Tenant and affixed to this Lease are a part hereof.
49. Signs and Auctions. Tenant shall not place any sign upon the Premises
or the Building or conduct any auction thereon without Landlord's prior written
consent.
50. Modification for Lender. If, in connection with obtaining
construction, interim or permanent financing for the Building, the lender shall
request reasonable modifications in this Lease as a condition to such financing,
Tenant will not unreasonably withhold, delay or defer its consent thereto,
provided that such modifications do not increase the obligations of Tenant
hereunder or materially adversely affect the leasehold interest hereby created
or Tenant's rights hereunder.
51. Accord and Satisfaction. No payment by Tenant or receipt by Landlord
of a lesser amount than the rent payment herein stipulated shall be deemed to be
other than on account of the rent, nor shall any endorsement or statement on any
check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction, and Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance of such rent or pursue any
other remedy provided in this Lease.
Tenant agrees that each of the foregoing covenants and agreements
shall be applicable to any covenant or agreement
48
<PAGE>
either expressly contained in this Lease or imposed by any statute or at common
law.
52. Financial Statements. At any time during the term of this Lease,
Tenant shall, upon ten (10) days prior written notice from Landlord, provide
Landlord with a current financial statement and financial statements of the two
(2) years prior to the current financial statement year. Such statement shall
be prepared in accordance with generally accepted accounting principles and, if
such is the normal practice of Tenant, shall be audited by an independent
certified public account.
53. Signs. Landlord may at any time place on or about the Premises any
ordinary "For Sale" signs and Landlord may at any time during the last one
hundred eighty (180) days of the Term hereof place on or about the Premises any
ordinary "For Lease" signs, all without rebate of rent or liability to Tenant.
54. Quiet Enjoyment. Landlord covenants and agrees with Tenant that, as
long as Tenant is not in default under the terms of this Lease, Tenant shall and
may peaceably and quietly have, hold and enjoy the Premises in accordance with
the terms of this Lease without interference or interruption.
55. Tenant as Corporation. If Tenant executes this Lease as a
corporation, then Tenant and the persons executing this Lease on behalf of
Tenant represent and warrant that the individuals executing this Lease on
Tenant's behalf are duly authorized to execute and deliver this Lease on its
behalf in accordance with a duly adopted resolution of the board of directors of
Tenant, a copy of which is to be delivered to Landlord on execution hereof, and
in accordance with the Bylaws of Tenant and that this Lease is binding upon
Tenant in accordance with its terms.
56. Letter of Credit.
(a) Simultaneously with its execution and delivery of this Lease to
Landlord, Tenant shall deliver to Landlord an irrevocable and unconditional
letter of credit (the "Letter of Credit"), which is transferable to Landlord's
successor(s)-in-interest as owner(s) of the Building, issued by an institutional
lender acceptable to Landlord and otherwise in form and content satisfactory to
Landlord, as part of the Security Deposit for the
49
<PAGE>
faithful performance and observance by Tenant of all of the terms, provisions
and conditions of this Lease.
(b) The Letter of Credit shall remain in effect until May 31, 1995.
If the expiry date of the Letter of Credit is sooner than May 31, 1995, Tenant
shall renew or replace the Letter of Credit at least thirty (30) days prior to
its expiry date. If Tenant fails to so renew or replace the Letter of Credit
within such time period, Tenant shall be deemed to be in default under this
Lease, without any notice or opportunity to cure.
(c) The Letter of Credit shall be in the face amount of Sixty-Five
Thousand Dollars ($65,000.00). So long as the Letter of Credit has not been
drawn upon, the face amount of the Letter of Credit shall reduce to Thirty-Five
Thousand Dollars ($35,000.00) on June 1, 1994.
(d) Although Landlord hereby agrees that it may only draw upon the
Letter of Credit if Tenant is in default under this Lease, the Letter of Credit
shall, on its face, provide that Landlord may draw upon the Letter of Credit by
presenting appropriate identification to the issuing bank and requesting a draw.
In the event Landlord draws upon the Letter of Credit, Tenant shall reinstate
the Letter of Credit to its full face amount within fifteen (15) days of such
draw. If Tenant fails to so reinstate the Letter of Credit within such 15-day
period, Tenant shall be deemed to be in default under this Lease, without any
notice or opportunity to cure.
(e) Tenant may at any time deliver to Landlord cash in the full amount
of the Letter of Credit. Landlord shall deposit such cash in an interest-
bearing account, with interest accruing for the benefit of Tenant, and return to
Tenant the Letter of Credit.
57. Environmental Matters.
(a) During the term of this Lease, Landlord shall not, and will cause
its tenants and contractors to not, handle, use, store, generate or dispose of
any Hazardous Materials at or upon the Site, except for such Hazardous Materials
reasonably necessary for the operation and maintenance of the Site, in which
case, Landlord, its tenants and contractors shall handle, use,
50
<PAGE>
store, generate or dispose of such Hazardous Materials in compliance with all
laws, ordinances, rules and regulations. For the purposes of this Lease, the
term "Hazardous Materials" means any hazardous or toxic wastes, substances, or
related materials as defined in, or otherwise subject to, regulation under any
federal, state or local statute, regulation, rule or ordinance (including,
without limitation, the Comprehensive Environmental Response Compensation and
Liability Act of 1980, as amended, 42 U.S.C. (S) 9601 et seq., and the Resource
-- ---
Conservation and Recovery Act, 42 U.S.C. (S) 9601 et seq.), now or in effect
-- ---
after the date of this Lease.
(b) During the term of this Lease, Tenant shall not, and will cause
its contractors, subtenants and assignees to not, handle, use, store, generate
or dispose of any Hazardous Materials at or upon the Premises, except for such
Hazardous Materials reasonably necessary for Tenant or its subtenant or assignee
to conduct their respective businesses at the Premises, in which case, Tenant
and its contractors or its subtenant or assignee shall handle, use, store,
generate or dispose of such Hazardous Materials in compliance with all laws,
ordinances, rules and regulations.
58. Americans with Disabilities Act.
(a) Landlord warrants and represents that, to the best of its
knowledge and belief, and to the extent required by law, the Building and the
Premises comply with the "Americans with Disabilities Act of 1990" (the "ADA"),
and Landlord shall, to the extent required by the ADA and not required as a
result of Tenant's specific manner of use or occupancy of the Premises, or as a
result of any alterations to the Premises made by or at the request of Tenant,
in each case as described below, cause the Building and/or the Premises to
continue to comply with the ADA and pass the costs incurred with respect to such
compliance through as an Operating Expense.
(b) Landlord shall construct the Leasehold Improvements in the
Premises in compliance with the ADA and shall make any modifications to the
Building or the Premises which are required as a result of Landlord's
construction of the Leasehold Improvements. The Leasehold Improvements will be
constructed by Landlord to comply with the requirements of "Group B.2"
occupancy, as set forth in Division 7 of the Los Angeles Building
51
<PAGE>
Code. To the extent any modifications to the Building or the Premises are
required as a result of Tenant's using the Premises for any purpose not included
within "Group B.2" occupancy, or as a result of any alterations to the Premises
from the approved plans and specifications, which alterations are made by or at
the request of Tenant, Tenant, or, at Landlord's option, Landlord, shall effect
such modification at Tenant's sole cost and expense.
59. Termination of Suite 220 Lease. Concurrently with their entry into
this Lease, Landlord and Tenant have entered into that certain Lease Termination
Agreement (the "Termination Agreement") dated as of even date with this Lease
with respect to that certain Standard Form Office Lease (the "Suite 220 Lease")
dated as of January 19, 1990, by and between Landlord's predecessor in interest
and Tenant. Among other things, the Termination Agreement sets forth the terms
and conditions pursuant to which the Suite 220 Lease shall terminate.
IN WITNESS WHEREOF, the parties have executed this Lease as of the day
and year first above written.
TENANT: LANDLORD:
THE TRYLON CORPORATION NISSAN REAL ESTATE
a Delaware corporation CORPORATION U.S.A.,
a California corporation
By /s/ By /s/
------------------------- ------------------------
Junichi Ogasawara,
Its President
-------------------------
(Printed Name and Title)
By
-------------------------
------------------------
(Printed Name and Title)
52
<PAGE>
STANDARD FORM
OFFICE LEASE
LANDLORD: NISSAN REAL ESTATE CORPORATION U.S.A., a California corporation
TENANT: THE TRYLON CORPORATION, a Delaware corporation
Dated for reference purposes as of: April 15, 1993
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C> <C>
1. Terms and Definitions........................................... 1
2. Premises and Common Areas Leased................................ 3
3. Term............................................................ 5
4. Possession...................................................... 6
5. Annual Basic Rent............................................... 6
6. Rental Adjustments.............................................. 7
7. Security Deposit................................................ 11
8. Use............................................................. 12
9. Payments and Notices............................................ 13
10. Brokers......................................................... 13
11. Holding Over.................................................... 14
12. Taxes on Tenant's Property...................................... 14
13. Condition of Premises........................................... 15
14. Alterations..................................................... 15
15. Repairs......................................................... 19
16. Liens........................................................... 20
17. Entry by Landlord............................................... 20
18. Utilities and Services.......................................... 21
19. Bankruptcy...................................................... 22
20. Indemnification................................................. 23
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C> <C>
21. Damage to Tenant's Property..................................... 23
22. Insurance....................................................... 24
23. Damage or Destruction........................................... 26
24. Eminent Domain.................................................. 28
25. Defaults and Remedies........................................... 29
26. Assignment and Subletting....................................... 31
27. Subordination................................................... 33
28. Estoppel Certificate............................................ 33
29. Building Planning............................................... 34
30. Rules and Regulations........................................... 34
31. Conflict of Laws................................................ 34
32. Successors and Assigns.......................................... 35
33. Surrender of Premises........................................... 35
34. Professional Fees............................................... 35
35. Performance by Tenant........................................... 35
36. Mortgagee Protection............................................ 36
37. Definition of Landlord.......................................... 36
38. Waiver.......................................................... 37
39. Identification of Tenant........................................ 37
40. Parking......................................................... 37
41. Terms and Headings.............................................. 38
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C> <C>
42. Examination of Lease............................................ 38
43. Time............................................................ 38
44. Prior Arrangements; Amendments.................................. 38
45. Severability.................................................... 39
46. Recording....................................................... 39
47. Limitation on Liability......................................... 39
48. Riders.......................................................... 39
49. Signs and Auctions.............................................. 39
50. Modification for Lender......................................... 39
51. Accord and Satisfaction......................................... 39
52. Financial Statements............................................ 40
53. Signs........................................................... 40
54. Quiet Enjoyment................................................. 40
55. Tenant as Corporation........................................... 40
56. Letter of Credit................................................ 40
57. Environmental Matters........................................... 41
58. Americans with Disabilities Act................................. 42
59. Termination of Suite 220 Lease.................................. 42
</TABLE>
iii
<PAGE>
EXHIBIT 10.11
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this ____ day of
____________, 199 by and between _______________________________, a
_____________ corporation (the "Company"), and _______________________________
("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the difficulty in obtaining
directors' and officers' liability insurance, the substantial cost of such
insurance and the limitations in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial level
of corporate litigation in general, subjecting officers and directors to
expensive litigation risks while the availability and coverage of liability
insurance is severely limited;
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee and other officers and
directors of the Company may not be willing to continue to serve as officers and
directors without additional protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee if
-----------------------
Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprises,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with the action, suit or proceeding if Indemnitee acted
in good faith and in a manner Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe Indemnitee's conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that Indemnitee did not
act in good faith and in a manner which Indemnitee reasonably believed to be in
or not opposed to the best interests of the Company, and that with respect to
any criminal action or proceeding, he or she had reasonable cause to believe
that Indemnitee's conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding by or
in the right of the Company or any subsidiary of the Company to procure a
judgment in its favor by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) and, to the fullest extent
permitted by law, amounts paid in settlement, in each case, to the extent
actually and reasonably incurred by Indemnitee in connection with the defense or
settlement of such
<PAGE>
action, suit or proceeding if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company and its shareholders, except that no indemnification shall be made
in respect of any claim, issue or matter as to which Indemnitee shall have been
adjudged by a court of competent jurisdiction, after exhaustion of all appeals
therefrom to be liable to the Company or for amounts paid in settlement to the
Company in the performance of Indemnitee's duty to the Company and its
shareholders unless and only to the extent that the court in which such action,
suit or proceeding is or was pending shall determine upon application that, in
view of all the circumstances of the case, Indemnitee is fairly and reasonably
entitled to indemnity for such expenses as the court deems and then only to the
extent that the court shall determine.
2. Agreement to Serve. In consideration of the protection afforded by
------------------
this Agreement, if Indemnitee is a director of the Company, Indemnitee agrees to
serve at least for the balance of the current term as a director and not to
resign voluntarily during such period without the written consent of a majority
of the Board of Directors. If Indemnitee is an officer of the Company not
serving under an employment contract, Indemnitee agrees to serve in such
capacity at least for the balance of the current fiscal year of the Company and
not to resign voluntarily during such period without the written consent of a
majority of the Board of Directors. Following the applicable period set forth
above, Indemnitee agrees to continue to serve in such capacity at the will of
the Company (or under separate agreement, if such agreement exists) so long as
Indemnitee is duly appointed or elected and qualified in accordance with the
applicable provisions of the Bylaws of the Company or any subsidiary of the
Company or until such time as Indemnitee tenders Indemnitee's resignation in
writing. Nothing contained in this Agreement is intended to create in
Indemnitee any right to continued employment.
3. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action or proceeding referenced in Section
1(a) or (b) hereof (but not amounts actually paid in settlement of any such
action or proceeding). Indemnitee hereby undertakes to repay such amounts
advanced if, and to the extent that, it shall ultimately be determined that the
expenses incurred by Indemnitee were not reasonable or that Indemnitee is not
entitled to be indemnified by the Company as authorized hereby. The advances to
be made hereunder shall be paid by the Company to Indemnitee within twenty (20)
days following delivery of a written request therefor by Indemnitee to the
Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
--------------------------------
precedent to Indemnitee's right to be indemnified under this Agreement, give the
Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address shown on the signature page of this
Agreement (or such other address as the Company shall designate in writing to
Indemnitee). Notice shall be deemed received three business days after the date
postmarked if sent by domestic certified or registered mail, properly addressed;
otherwise notice shall be deemed received when such notice shall actually be
received by the Company. In addition, Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
2
<PAGE>
(c) Procedure. If a claim under this Agreement, under any statute or under
---------
any provision of the Company's Certificate of Incorporation or Bylaws providing
for indemnification is not paid in full by the Company within ninety (90) days
after a written request for payment therefor has first been received by the
Company, then Indemnitee may, but need not, at any time thereafter bring an
action against the Company to recover the unpaid amount of the claim and,
subject to Section 14 of this Agreement, Indemnitee shall also be entitled to be
paid for the expenses (including attorneys' fees) of bringing such action. It
shall be a defense to any such action that Indemnitee has not met the standards
of conduct which make it permissible under applicable law or this Agreement for
the Company to indemnify Indemnitee for the amount claimed, but the burden of
proving such defense shall be on the Company. It is the parties' intention that
if the Company contests Indemnitee's right to indemnification, the question of
Indemnitee's right to indemnification shall be for the court to decide, and
neither the failure of the Company (including its Board of Directors, any
committee or subgroup of its Board of Directors, its independent legal counsel
or its shareholders) to have made a determination that indemnification of
Indemnitee is proper in the circumstances because Indemnitee has met the
applicable standard of conduct required by applicable law or this Agreement, nor
an actual determination by the Company (including its Board of Directors, any
committee or subgroup of its Board of Directors, its independent legal counsel
or its shareholders) that Indemnitee has not met such applicable standard of
conduct, shall create a presumption that Indemnitee has or has not met the
applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of a
------------------
claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, then the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or appropriate action to cause such insurers to pay, on
behalf of Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) Selection of Counsel. If the Company shall be obligated under Section
--------------------
3(a) hereof to pay the expenses of any proceeding against Indemnitee, then the
Company, if appropriate, shall be entitled to assume the defense of such
proceeding, with counsel approved by Indemnitee, which approval shall not be
unreasonably withheld, upon the delivery to Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
Indemnitee and the retention of such counsel by the Company, the Company will
not be liable to Indemnitee under this Agreement for any fees of counsel
subsequently incurred by Indemnitee with respect to the same proceeding,
provided that (i) Indemnitee shall have the right to employ Indemnitee's counsel
in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment
of counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense
or (C) the Company shall not have employed counsel to assume the defense of such
proceeding, then the fees and expenses of Indemnitee's counsel shall be at the
expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify Indemnitee to the fullest extent permitted by
law, notwithstanding that such indemnification is not specifically authorized by
the other provisions of this Agreement, the Company's Certificate of
Incorporation, the Company's Bylaws or by statute. In the event of any change,
after the date of this Agreement, in any applicable law, statute or rule which
expands the right of a Delaware corporation to indemnify a member of its board
of directors or an officer, such changes shall be, ipso facto, within the
purview of Indemnitee's rights and Company's obligations, under this Agreement.
In the event of any change in any applicable law, statute or rule which narrows
the right of a Delaware corporation to indemnify a member of its Board of
Directors or an officer, such changes, to the extent not otherwise required by
such law, statute or rule to be applied to this Agreement shall have no effect
on this Agreement or the parties, rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement shall
--------------
not be deemed exclusive of any rights to which Indemnitee may be entitled under
the Company's Certificate of Incorporation, its Bylaws, any agreement, any vote
of shareholders of disinterested directors, the General Corporation Law of the
State of
3
<PAGE>
Delaware or otherwise, both as to action in Indemnitee's official capacity and
as to action in another capacity while holding such office. The indemnification
provided under this Agreement shall continue as to Indemnitee for any action
taken or not taken while serving in an indemnified capacity even though
Indemnitee may have ceased to serve in such capacity at the time of any action
or other covered proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by Indemnitee in the investigation, defense, appeal or settlement of
any civil or criminal action or proceeding, but not, however, for the total
amount thereof, the Company shall nevertheless indemnify Indemnitee for the
portion of such expenses, judgments, fines or penalties to which Indemnitee is
entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. Directors' and Officers' Liability Insurance. The Company shall, from
--------------------------------------------
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among
other considerations, the Company will weigh the costs of obtaining such
insurance coverage against the protection afforded by such coverage. In all
policies of directors' and officers' liability insurance, Indemnitee shall be
named as an insured in such a manner as to provide Indemnitee the same rights
and benefits as are accorded to the most favorably insured of the Company's
directors, if Indemnitee is a director, or of the Company's officers, if
Indemnitee is not a director of the Company but is an officer; or of the
Company's key employees, if Indemnitee is not an officer or director but is a
key employee. Notwithstanding the foregoing, the Company shall have no
obligation to obtain or maintain such insurance if the Company determines in
good faith that such insurance is not reasonably available, if the premium costs
for such insurance are disproportionate to the amount of coverage provided, if
the coverage provided by such insurance is limited by exclusions so as to
provide an insufficient benefit or if Indemnitee is covered by similar insurance
maintained by a subsidiary or parent of the Company.
8. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Acts. To indemnify Indemnitee for any acts or omissions
-------------
or transactions from which a director may not be relieved of liability under the
Delaware General Corporation Law;
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors has approved the initiation or bringing of such suit;
4
<PAGE>
(c) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement) which have been paid directly
to Indemnitee by an insurance carrier under a policy of director and officer
liability insurance maintained by the Company; or
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Effectiveness of Agreement. To the extent that the indemnification
--------------------------
permitted under the terms of certain provisions of this Agreement exceeds the
scope of the indemnification provided for in the Delaware General Corporation
Law, such provisions shall not be effective unless and until the Company's
Certificate of Incorporation authorizes such additional rights of
indemnification. In all other respects, the balance of this Agreement shall be
effective as of the date set forth on the first page and may apply to acts or
omissions of Indemnitee which occurred prior to such date if Indemnitee was an
officer, director, employee or other agent of the Company, or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, at the time
such act or omission occurred.
11. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees or agents, so that if
Indemnitee is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, then Indemnitee shall stand in the
same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants or its beneficiaries.
12. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original, and all of which shall
constitute one and the same agreement.
13. Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of and be enforceable by the parties hereto and their
respective successors, assigns, including any direct or indirect successor by
purchase, merger consolidation or otherwise to all or substantially all of the
business and/or assets of the Company, spouses, heirs and personal and legal
representatives. The Company shall require and cause any successor (whether
direct or indirect by purchase, merger, consolidation or otherwise) to all,
substantially all or a substantial part of the business or assets of the
Company, by written agreement in form and substance satisfactory to Indemnitee,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that the Company would be required to perform if no such
succession had taken place. This Agreement shall continue in effect regardless
of whether Indemnitee continues to serve as a director, officer or agent of the
Company or of any other enterprise at the Company's request.
14. Attorneys Fees. In the event that any action is instituted by
--------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
and such action is successful in whole or in part, Indemnitee shall be entitled
to be paid all court costs and expenses, including reasonable attorneys' fees,
incurred by Indemnitee with respect to such action. In the event of an action
instituted by or in the name of the Company under this Agreement
5
<PAGE>
or to enforce or interpret any of the terms of this Agreement, if Indemnitee is
successful in its defense of such action in whole or in part, Indemnitee shall
be entitled to be paid all court costs and expenses, including attorneys' fees,
incurred by Indemnitee in defense of such action (including with respect to
Indemnitee's counterclaims and cross-claims made in such action).
15. Notice. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid on the third business day after the date postmarked, Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
16. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement.
17. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
By:
--------------------------
Name:
------------------------
Title:
-------------------------
AGREED TO AND ACCEPTED:
INDEMNITEE:
- --------------------------------
Address:
------------------------
------------------------
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- --------------------
1993 1994 1995 1995 1996
--------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net income (loss)....... $(252,186) $431,459 $(1,008,768) $(724,375) $(738,948)
Less: Preferred stock
dividends.............. -- (75,301) (76,491) (25,498) (38,223)
--------- -------- ----------- --------- ---------
Net income (loss)
attributable to common
stockholders........... $(252,186) $356,158 $(1,085,259) $(749,873) $(777,171)
========= ======== =========== ========= =========
Common Stock:
Shares outstanding
from beginning of
period............... 37,609.6 52,420.4 55,160.4 55,160.4 74,286.4
Dilutive effect of
stock issuances
pursuant to SEC
Rules................ 23,008.0 23,008.0 23,008.0 23,008.0 9,582.0
Pro-rata shares--stock
issuance(1).......... 8,541.5 1,313.3 5,700.0 5,700.0 --
--------- -------- ----------- --------- ---------
Weighted average
shares--historical..... 69,159.1 76,741.7 83,868.4 83,868.4 83,868.4
========= ======== =========
Conversion of
preferred stock(2)... 3,549.5 3,549.5
----------- ---------
Weighted average
shares--pro forma(2)... 87,417.9 87,417.9
=========== =========
Net income (loss) per
common share:
Historical............ $ (3.65) $ 4.64 $ (12.94) $ (8.94) $ (9.27)
========= ======== =========== ========= =========
Pro forma(2).......... $ (11.54) $ (8.45)
=========== =========
</TABLE>
- ---------------------
(1) Share amounts represent common shares issued during the related period
weighted by the fraction of the period in which they were outstanding.
(2) See Note 10 of Notes to Consolidated Financial Statements. Pro forma net
loss per common share amounts are based on total net loss amounts for the
periods presented.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Los Angeles, California
October 9, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 1,417,969 1,043,330
<SECURITIES> 0 0
<RECEIVABLES> 956,314 348,334
<ALLOWANCES> 15,000 3,000
<INVENTORY> 63,201 70,835
<CURRENT-ASSETS> 2,422,484 1,598,380
<PP&E> 101,017 108,594
<DEPRECIATION> (75,118) (80,549)
<TOTAL-ASSETS> 2,485,813 1,670,302
<CURRENT-LIABILITIES> 855,720 720,205
<BONDS> 0 0
0 0
849,876 849,876
<COMMON> 742 747
<OTHER-SE> 779,475 99,474
<TOTAL-LIABILITY-AND-EQUITY> 2,485,813 1,670,302
<SALES> 628,748 608,196
<TOTAL-REVENUES> 628,748 608,196
<CGS> 295,632 350,277
<TOTAL-COSTS> 295,632 350,277
<OTHER-EXPENSES> 1,405,774 1,025,182
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (84,631) (4,956)
<INCOME-PRETAX> (1,007,968) (738,148)
<INCOME-TAX> 800 800
<INCOME-CONTINUING> (1,008,768) (738,948)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,008,768) (738,948)
<EPS-PRIMARY> (11.70) (8.57)
<EPS-DILUTED> 0 0
</TABLE>
