<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 6, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PACIFIC BIOMETRICS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8731 93-1211114
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
<TABLE>
<S> <C>
PACIFIC BIOMETRICS, INC. PAUL G. KANAN, PRESIDENT
1370 REYNOLDS AVENUE PACIFIC BIOMETRICS, INC.
IRVINE, CA 92614 1370 REYNOLDS AVENUE
(714) 263-9933 IRVINE, CA 92614
(NAME, ADDRESS AND TELEPHONE NUMBER (714) 263-9933
OF PRINCIPAL EXECUTIVE OFFICES AND (NAME, ADDRESS AND TELEPHONE NUMBER
PRINCIPAL PLACE OF BUSINESS) OF AGENT FOR SERVICE)
</TABLE>
------------------------
Copies to:
<TABLE>
<S> <C>
ROBERT I. FISHER, ESQ. JOSEPH P. RICHARDSON, ESQ.
NEIL S. BELLOFF, ESQ. BROWN & BAIN, P.A.
ROSENMAN & COLIN LLP 2901 NORTH CENTRAL AVENUE
575 MADISON AVENUE PHOENIX, ARIZONA 85012
NEW YORK, NEW YORK 10022 (602) 351-8415
(212) 940-8800
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the Registration Statement becomes effective.
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,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
DOLLAR PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT(2) OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Units, consisting of one share of
Common Stock, par value $0.01 per
share ('Common Stock'), one
Warrant ('Warrants') entitling
the holder to purchase one share
of Common Stock.................. 1,955,000(1) $4.75 $9,286,250 $3,202.16
Common Stock includable in Units... 1,955,000(1) (3) (3) (3)
Warrants includable in Units....... 1,955,000(1) $12.00 $23,460,000 $8,089.66
Common Stock issuable upon exercise
of Warrants includable in
Units............................ 1,955,000(1) (3) (3) (3)
Underwriter's Unit Purchase Option
to purchase Units(4)............. 170,000 $.001 $170 $0.06
Units issuable upon exercise of
Underwriter's Unit Purchase
Option(5)........................ 170,000 $5.70 $969,000 $334.14
Common Stock includable in
Underwriter's Unit Purchase
Option........................... 170,000 (3) (3) (3)
Warrants includable in
Underwriter's Unit Purchase
Option........................... 170,000 $5.70 $969,000 $334.14
Common Stock issuable upon exercise
of Warrants includable in
Underwriter's Unit Purchase
Option........................... 170,000 (3) (3) (3)
TOTAL REGISTRATION FEE(6)........ $11,961
</TABLE>
(1) Includes 255,000 Units issuable upon exercise of the Underwriter's
over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 promulgated under the Securities Act of 1933, as
amended.
(3) In accordance with Rule 457, no separate registration fee is required.
(4) To be issued to the Underwriter of this Offering.
(5) Issuable upon exercise of the Underwriter's Unit Purchase Option at an
assumed price of 120% of the initial public offering price.
(6) Pursuant to Rule 416, this Registration Statement also covers such
indeterminable additional shares as may become issuable as a result of
anti-dilution adjustments in accordance with the terms of the Warrants and
Underwriter's Unit Purchase Option. Total Registration Fee is rounded up to
the nearest whole dollar.
------------------------
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PACIFIC BIOMETRICS, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM SB-2 LOCATION
ITEM NUMBER AND CAPTION IN PROSPECTUS
----------------------------------- -----------------------------------
<S> <C> <C>
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus............... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus.............. Inside Front and Outside Back Cover
Pages
3. Summary Information and Risk
Factors.......................... Prospectus Summary; Risk Factors
4. Use of Proceeds.................... Use of Proceeds
5. Determination of Offering Price.... Underwriting
6. Dilution........................... Dilution
7. Selling Security Holders........... Not Applicable
8. Plan of Distribution............... Cover Page; Underwriting
9. Legal Proceedings.................. Business--Legal Proceedings
10. Directors, Executive Officers,
Promoters and Control Persons.... Management
11. Security Ownership of Certain
Beneficial Owners and
Management....................... Principal Shareholders
12. Description of Securities.......... Description of Securities;
Underwriting
13. Interest of Named Experts and
Counsel.......................... Legal Matters; Experts
14. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities.................. Management--Indemnification
15. Organization Within Last Five
Years............................ Prospectus Summary
16. Description of Business............ Prospectus Summary; Management's
Discussion and Analysis of
Financial Condition and Results
of Operations; Business; and
Financial Statements
17. Management's Discussion and
Analysis or Plan of Operation.... Management's Discussion and
Analysis of Financial Condition and
Results of Operations
18. Description of Property............ Business--Properties
19. Certain Relationships and Related
Transactions..................... Certain Relationships and Related
Transactions
20. Market For Common Equity and
Related Stockholder Matters...... Shares Eligible for Future Sale
21. Executive Compensation............. Management--Executive Compensation
22. Financial Statements............... Financial Statements
23. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosures............ None
</TABLE>
<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.
PRELIMINARY PROSPECTUS DATED SEPTEMBER 6, 1996
SUBJECT TO COMPLETION
PROSPECTUS
PACIFIC BIOMETRICS, INC.
1,700,000 UNITS
CONSISTING OF
1,700,000 SHARES OF COMMON STOCK AND
1,700,000 WARRANTS
------------------------
Each unit (a 'Unit') consists of one share of common stock, par value $.01
per share (the 'Common Stock') and one redeemable Warrant (the 'Warrants') of
Pacific Biometrics, Inc., a Delaware corporation (the 'Company'). The components
of the Units are separately transferable immediately upon issuance and will not
trade as a unit. Each Warrant entitles the registered holder thereof to
purchase, at any time until January 31, 1998 (the 'Expiration Date'), one share
of Common Stock at an exercise price of $12.00, subject to adjustment. The
Warrants are redeemable by the Company under certain conditions, at a redemption
price of $.10 per Warrant, upon at least 30 days' prior written notice,
commencing on April 30, 1997. See 'Description of Securities--Redeemable
Warrants.'
Prior to this Offering, there has been no public market for the Units,
Common Stock or Warrants, and there can be no assurance that any such market
will develop, or if developed, will be maintained. It is anticipated that the
Common Stock and Warrants will each be quoted on the National Association of
Securities Dealers Automated Quotation ('Nasdaq') System under the symbols
'PBMI' and 'PBMIW,' respectively. The Units are not anticipated to trade and
will not be listed on Nasdaq or any other exchange.
The initial public offering price of the Units has been determined by
negotiations between the Company and Paradise Valley Securities, Inc. (the
'Underwriter') and does not necessarily relate to the Company's book value, net
worth or other established criteria of value. See 'Underwriting' for information
about factors considered in determining the initial public offering price.
------------------------
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SEE 'RISK FACTORS' BEGINNING ON PAGE 9.
----------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Unit........................ $4.75 $.475 $4.275
Total(3)........................ $8,075,000 $807,500 $7,267,500
</TABLE>
(1) Does not reflect additional compensation to be received by the Underwriter
in the form of (i) a non-accountable expense allowance of $242,250 ($.1425
per Unit) ($278,587 if the over-allotment option is exercised by the
Underwriter in full); and (ii) an option to purchase up to 170,000 Units at
a price equal to 120% of the initial public offering per Unit, exercisable
over a four-year period commencing one year from the date of this Prospectus
(the 'Underwriters's Unit Purchase Option'). In addition, the Company has
agreed to indemnify the Underwriter against certain liabilities under the
Securities Act. See 'Underwriting.'
(2) Before deducting other expenses payable by the Company, which are estimated
to be approximately $450,000.
(3) The Company has granted the Underwriter an option exercisable within 30 days
after the date of this Prospectus, to purchase up to an additional 255,000
Units on the same terms as the Units offered hereby to cover
over-allotments, if any. If the option is exercised in full, total 'Price to
Public,' 'Underwriting Discounts and Commissions' and 'Proceeds to Company'
will be $9,286,250, $928,625 and $8,357,625, respectively.
------------------------
The Units are offered by the Underwriter on a 'firm commitment' basis when,
as and if delivered to and accepted by the Underwriter, and subject to its right
to reject orders in whole or in part and to certain other conditions. It is
expected that delivery of the certificates representing the Units will be made
at the offices of Paradise Valley Securities, Inc., Phoenix, Arizona, on or
about , 1996.
------------------------
PARADISE VALLEY SECURITIES, INC.
, 1996
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Upon consummation of this Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports, proxy statements and other
information with the Securities and Exchange Commission. The Company intends to
furnish its shareholders with annual reports containing audited financial
statements examined by the Company's independent public accountants and
quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.
LIST OF TRADEMARKS
SalivaSac(Registered), SPINPRO(Registered), PBI Plus(Trademark) and
Osteopatch(Trademark) are trademarks of the Company. Fosamax(Registered) is a
registered trademark of Merck & Co.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements (including the notes thereto)
appearing elsewhere in this Prospectus. Unless otherwise indicated, the
information in this Prospectus assumes that the Underwriter's over-allotment
option described in "Underwriting" is not exercised. All references to the
"Company" contained herein refer to the Company and its wholly-owned
subsidiaries, unless the context otherwise requires, and all information
contained herein gives effect to the Mergers described under "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview".
THE COMPANY
The Company develops diagnostic and laboratory products and provides
laboratory services in the fields of cardiovascular disease and osteoporosis
laboratory testing. The Company's strategy is to focus on the development of
cost-effective, non invasive diagnostic tests and improved laboratory
techniques in order to achieve early diagnosis, prevention, and therapeutic
monitoring. The Company's strategy is to (i) finalize development and
commercialize a patented skin patch product that measures bone loss markers in
human perspiration (the "Osteopatch(TM)"); (ii) expand its specialty reference
laboratory business; (iii) explore new applications and market opportunities
for the SPINPRO(R); and (iv) evaluate the feasibility of noninvasive glucose
testing using SalivaSac(R), its patented saliva collection device.
Bone diseases and disorders, including osteoporosis, are a significant
health problem worldwide. An estimated 25 million Americans, and more than 75
million persons worldwide, suffer from osteoporosis. Although the National
Osteoporosis Foundation estimates that the costs associated with osteoporosis
exceed $10 billion annually in the U.S., medical intervention usually occurs
only after symptoms such as pain or fractures appear and when treatment is
generally too late to be effective. The Company believes that over 50 new
therapeutic products are under development and that the osteoporosis
therapeutic market, currently estimated at $2 billion annually, will grow
significantly. Thus, there is a need for diagnostic tools and assessments that
will identify those at risk, allow for early treatment and enhance the
physician's ability to monitor the effectiveness of such treatment.
The Company's specialty reference laboratory has developed an expertise
in the emerging field of osteoporosis laboratory assessments through its work
with diagnostic manufacturers of assays for bone markers (Ostex International,
Inc. ("Ostex") and Metra BioSystems, Inc. ("Metra")), in addition to
pharmaceutical manufacturers of drugs that prevent bone loss (Merck
-3-
<PAGE>
& Co., Inc. ("Merck") and The Proctor & Gamble Company ("Proctor & Gamble)).
This work has helped to establish the Company as a leader in its understanding
of biochemical markers for bone formation and bone resorption (loss).
As a result of its work in this field, the Company has recognized the
need for a reliable, cost-effective diagnostic tool that would screen and
monitor individuals that are rapidly losing bone and those at risk of
osteoporosis. The Company has licensed technology for a transdermal collection
devise, the Osteopatch(TM), and obtained exclusive rights to an antibody for
the detection of bone loss markers in perspiration. These technologies provide
the Company with the opportunity to develop a unique diagnostic tool, coupled
with a laboratory analytical service, which should prove to be a useful
indicator of bone loss. The Osteopatch(TM) product development effort is the
Company's primary focus at this time.
In addition to its work in osteoporosis, the Company's reference
laboratory is recognized as a leader in the fields of laboratory method
verification, technical consulting, clinical trials and reference materials for
cholesterol measurements and related risk factors for coronary heart disease.
The Company, through an affiliated foundation, is one of twelve Centers for
Disease Control ("CDC") reference network laboratories for the standardization
of cholesterol testing. The Company intends to expand the marketing of its
specialty laboratory services to pharmaceutical and diagnostic clients in its
areas of specific expertise. In addition, through the development and
commercialization of the Osteopatch(TM), the Company will expand its business
opportunities into clinical laboratory analysis of bone markers.
The Company also acquired the rights to a sample preparation device
which it markets under the name SPINPRO(R). SPINPRO(R) simplifies and improves
the methods used for performing certain tests in the laboratory. By reducing
the number of manual steps involved in the testing process, the laboratory can
save labor costs and achieve more consistent and accurate results. The first
application of this device is for the testing of HDL cholesterol. This device
is distributed by Sigma Diagnostics ("Sigma"), a division of Sigma
Chemical Co., a major distributor of diagnostic reagents and products to
laboratories in the U.S. and Europe. The Company is also investigating other
applications and distributors for the SPINPRO(R) technology.
The Company is exploring applications for its proprietary SalivaSac(R)
technology, which facilitates the collection of saliva without contamination
from enzymes, food particles, blood and other particulate matter. Based on
preliminary studies conducted by the Company and others, the Company believes
that this product has the potential for numerous applications, including
therapeutic drug
-4-
<PAGE>
monitoring, the detection of drugs of abuse, measurement of hormones and
analytes of infectious diseases. The Company currently has two National
Institute of Health ("NIH") Small Business Innovative Research ("SBIR") Phase I
grants to fund the research of this technology for diabetes applications.
Pending the outcome of the research being conducted under this grant, the
Company intends to fund continued development in this area by seeking
additional grants or business partners.
The Company owns or is the exclusive licensee of rights under
10 issued U.S. patents and 4 pending U.S. patents. Two of these
patents have been issued in Europe and Japan and the others are
pending in Europe and Japan.
The Company conducts its business through its wholly-owned
subsidiaries, Pacific Biometrics, Inc., a Washington corporation
("PBI-WA") and BioQuant, Inc., a Michigan corporation ("BioQuant").
The Company's principal executive office is located at 1370
Reynolds Avenue, Suite 119, Irvine, California 92614. The
telephone number is (714) 263-9933.
THE OFFERING
Securities Offered................ 1,700,000 Units, each Unit consisting of
(i) one share of Common Stock, and (ii)
one Warrant to purchase one share of
Common Stock.
Terms of Warrants................. Each Warrant is exercisable at any time
until January 31, 1998 and entitles the
holder thereof to purchase one share of
Common Stock at an exercise price of
$12.00 per share (subject to adjustment
in the event of any stock splits or
other similar events). The Warrants are
redeemable by the Company under certain
conditions, at any time commencing on
April 30, 1997, upon at least 30 days
prior written notice, at $.10 per
Warrant. See "Description of
Securities-Redeemable Warrants."
Common Stock Outstanding
Prior to Offering (1)........... 1,948,343 Shares
Common Stock Outstanding..........
After Offering (2).............. 3,648,343 Shares
Use of Proceeds................... The Company intends to apply the net
proceeds of approximately $6,575,250
-5-
<PAGE>
from this Offering primarily for product
development activities, for working
capital and general corporate purposes
and to repay the Bridge Loan. See "Use
of Proceeds."
Proposed Nasdaq Symbols (3)
Common Stock.................... "PBMI"
Warrants........................ "PBMIW"
Risk Factors...................... Investment in the Units involves a high
degree of risk and immediate substantial
dilution. See "Risk Factors" and
"Dilution."
- ---------------------------
(1) Does not include Common Stock issuable upon exercise of currently
exercisable options and warrants to purchase 634,904 shares of Common Stock,
223,911 shares of Common Stock reserved for issuance under the Company's stock
option plans and exercise of an aggregate of 300,000 warrants issued pursuant
to a private financing completed in June 1996 (the "Financing") and a private
placement (the "Bridge Loan") completed in August 1996, both consisting of
notes and warrants.
(2) Does not include (i) 255,000 shares of Common Stock and 255,000 Warrants
included in the Units issuable pursuant to the Underwriter's over-allotment
option, (ii) 170,000 shares of Common Stock and 170,000 Warrants included in
the Units issuable pursuant to the Underwriter's Unit Purchase Option, and
(iii) 1,700,000 shares of Common Stock issuable upon exercise of the Warrants
offered hereby. See "Underwriting."
(3) A Nasdaq listing does not provide any assurance that an active trading
market will develop or be maintained.
SUMMARY COMBINED FINANCIAL INFORMATION
The following table sets forth, for the periods and dates
indicated, summary historical financial information for the Company, and
unaudited proforma combined financial information for the Company and BioQuant
after giving effect to the merger of BioQuant into a wholly-owned subsidiary of
the Company and the issuance of the Units offered hereby. The summary
historical financial data for the two years ended June 30, 1996 and 1995, are
derived from the historical financial statements of the Company and should be
read in conjunction with such financial statements which are included elsewhere
in this Prospectus. The summary unaudited proforma combined financial data for
the Company and BioQuant is derived from and should be read in conjunction with
such financial statements and the notes thereto which are included elsewhere in
-6-
<PAGE>
this Prospectus. The unaudited proforma statement of operations data assumes
the merger of BioQuant into a wholly-owned subsidiary of the Company occurred
on July 1, 1995. The balance sheet information assumes the transactions
occurred on June 30, 1996. No proforma adjustments have been made to the
statement of operations. The unaudited proforma combined balance sheet data
reflects adjustments for the issuance of the 1,700,000 Units offered hereby as
of June 30, 1996 (see Note 2 below).
The proforma adjustment is based upon currently available information
and certain estimates and assumptions and, therefore, the actual adjustment may
differ from the proforma adjustment. However, management believes that the
assumptions provide a reasonable basis for presenting the significant effects
of the transactions as they relate to the fiscal year ended June 30, 1996, and
that the proforma adjustment gives approximate effect to those assumptions and
are properly applied to the proforma financial information. The following
proforma information should not be used to compare 1995 with 1996, and should
not be deemed indicative of future operating results for the consolidated
operations of Pacific Biometrics, Inc. and BioQuant, Inc.
<TABLE>
<CAPTION>
Statement of Operations
Data: Year Ended June 30, For the Period from Inception to
----------------------------------------------- June 30, 1996
1996 ---------------------------------
-------------------------------
Proforma Proforma
Combined Combined
1995 Actual (unaudited)(1) Actual (4) (unaudited)(5)
---- ------ -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Laboratory revenues
and Consulting fees $ 566,832 $ 1,657,280 $ 1,662,118 $ 2,224,112 $ 2,248,958
----------- ------------- ------------- ------------- -------------
Operating Expenses:
Laboratory 373,554 985,818 985,818 1,359,372 1,359,372
Diagnostic research
and product development 665,747 604,803 1,113,986 1,464,661 4,635,893
General and
administrative 739,149 1,281,100 1,617,229 2,766,434 4,955,532
Purchased in-process
research and development 6,373,884 6,373,884 6,373,884 6,373,884
Amortization of goodwill 428,368 428,368 428,368
---------- --------- --------- ---------- ----------
2,206,818 9,245,605 10,090,917 12,392,719 17,753,049
---------- --------- ---------- ---------- ----------
Operating loss (1,639,986) (7,588,325) (8,428,799) (10,168,607) (15,504,091)
------------ ------------ ------------ ------------- -------------
Other income (expense):
Interest expense (26,162) (39,853) (59,526) (66,015) (149,208)
Grants and other income 1,958 67,315 177,721 77,240 2,708,652
------------ ------------ ------------ ------------- -------------
(24,204) 27,462 118,195 11,225 2,559,444
------------ ------------ ------------ ------------- -------------
Net loss $ (1,664,190) $ (7,560,863) $ (8,310,604) $ (10,157,382) $ (12,944,647)
============= ============= ============= ============== ==============
Net loss per share $ (2.12) $ (7.01) $ (2.99) $ (12.78) $ (5.19)
============= ============= ============= ============== ==============
Weighted-average number of
common shares outstanding 783,423 1,079,289 2,779,289(3) 794,486 2,494,486(3)
============= ============= ============== ============== ==============
</TABLE>
-7-
<PAGE>
Balance sheet data: At June 30, 1996
----------------
Proforma
Combined
Actual (unaudited)(2)
-------- --------------
Working capital (deficit) $ (1,723,942) $ 4,851,308
Total assets $ 840,113 $ 7,415,363
Total liabilities $ 2,224,550 $ 2,224,550
Deficit accumulated during
the development stage $ (10,157,382) $(10,157,382)
Stockholders' equity
(deficit) $ (1,384,437) $ 5,190,813
- -------------------------------
(1) Reflects statement of operations data as if the merger of BioQuant into a
wholly-owned subsidiary of the Company had occurred on July 1, 1995.
(2) Reflects balance sheet data after giving proforma effect for the proceeds
of the Offering of 1,700,000 Units for net proceeds of $6,575,250.
(3) The proforma weighted-average number of shares and common stock
equivalents outstanding consists of the weighted-average number of shares
and common stock equivalents actually outstanding during the year,
computed as described in Note 2 to the consolidated financial statements
of the Company, plus the number of shares to be issued pursuant to this
Offering.
(4) Inception to date with regard to the Company is for the period from
December 1992 to June 30, 1996, with regard to BioQuant, inception to date
is for the period from October 1985 to June 30, 1996.
(5) Reflects the combined results of operations of the Company and BioQuant
for the period from inception to June 30, 1996, assuming that the
companies had been combined for their entire operating period.
UNAUDITED CONDENSED COMBINED PROFORMA FINANCIAL DATA
The following unaudited condensed combined proforma financial data
reflects the acquisition of BioQuant, as more fully described in the
accompanying notes to the financial statements. The proforma statement of
operations for the year ended June 30, 1996, assumes the transaction described
above occurred on July 1, 1995. The historical financial data for the Company
and BioQuant for the year ended June 30, 1996, are derived from the historical
financial statements of the Company and BioQuant and should be read in
conjunction with such financial statements (including the notes thereto) which
are included elsewhere in this Prospectus. The unaudited condensed combined
proforma financial data is not necessarily indicative of the results that would
have been reported had such events occurred on the dates specified, nor is it
indicative of the Company's future results. In the opinion of management, all
adjustments necessary to present fairly this proforma information have been
made.
-8-
<PAGE>
<TABLE>
<CAPTION>
For the Period from Inception to
Year Ended June 30, 1996 June 30, 1996
------------------------ --------------------------------
Unaudited
Proforma,
PBI BioQuant(1) as Adjusted Actual(4) Proforma(5)
--- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Laboratory revenues
and consulting fees $ 1,657,280 $ 4,838 $ 1,662,118 $ 2,224,112 $ 2,248,958
----------- ------------- ------------- ------------- -------------
Operating Expenses:
Laboratory 985,818 985,818 1,359,372 1,359,372
Diagnostic research
and product development 604,803 509,183 1,113,986 1,464,661 4,635,893
General and
administrative 1,281,100 336,129 1,617,229 2,766,434 4,955,532
Purchased in-process
research and
development(2) 6,373,884 6,373,884 6,373,884 6,373,884
Amortization of goodwill 428,368 428,368
---------- --------- --------- ---------- ----------
9,245,605 845,312 10,090,917 12,392,719 17,753,049
---------- --------- ---------- ---------- ----------
Operating loss (7,588,325) (840,474) (8,428,799) (10,168,607) (15,504,091)
------------ ------------ ------------ ------------- -------------
Other income (expense):
Interest expense (39,853) (19,673) (59,526) (66,015) (149,208)
Grants and other income 67,315 110,406 177,721 77,240 2,708,652
------------ ------------ ------------ ------------- -------------
27,462 90,733 118,195 11,225 2,559,444
------------ ------------ ------------ ------------- -------------
Net loss $ (7,560,863) $ (749,741) $ (8,310,604) $ (10,157,382) $ (12,944,647)
============= ============= ============= ============== ==============
Net loss per share $ (7.01) $ (2.99) $ (12.78) $ (5.19)
============= ============= ============== ==============
Weighted-average number of
common shares 1,079,289 2,779,289(3) 794,486 2,494,486(3)
============= ============= ============== ==============
</TABLE>
- ------------------------
(1) Includes the historical operations of BioQuant from July 1, 1995 to June
30, 1996, the effective date of the acquisition for accounting purposes.
(2) Represents a one-time noncash charge to operations relating to the
write-off of purchased in-process research and product development in
conjunction with the acquisition of BioQuant that had net several
milestones during the development process, but for which clinical trials
had not yet commenced and, in the opinion of management, had no
alternative use. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(3) The proforma weighted-average number of shares outstanding consists of the
weighted-average number of shares and common stock equivalents actually
outstanding during the year computed as described in Note 2 to the audited
consolidated financial statements, plus the number of shares to be issued
pursuant to this Offering.
(4) Inception to date with regard to the Company is for the period from
December 1992 to June 30, 1996, with regard to BioQuant, inception to date
is for the period from October 1985 to June 30, 1996.
(5) Reflects the combined results of operations of the Company and BioQuant
for the period from inception to June 30, 1996, assuming that the
companies had been combined for their entire operating periods.
-9-
<PAGE>
RISK FACTORS
An investment in the securities offered hereby is highly speculative and
subject to a high degree of risk, and only those who can bear the risk of the
entire loss of their investment should participate. Prospective investors
should carefully consider the following factors in analyzing this offering.
1. Early Stage of Development; Regulatory and Technological Uncertainties. The
Company is at an early stage of development. Except for the SPINPRO(R) HDL
cholesterol product and revenues from its laboratory, all of the Company's
potential products are currently in research and development, and no revenues
have been generated to date. A significant portion of the Company's resources
have been and for the foreseeable future will continue to be dedicated to the
Company's research programs and the development of potential medical diagnostic
products emanating therefrom. There can be no assurance that the Company will
be able to develop a commercial product from these projects. The Company
currently has three potential products in preclinical development, none of
which has entered human clinical trials. While the Company believes that the
results attained to date in such preclinical studies support further research
and development of these potential products, results attained in preclinical
studies are not necessarily indicative of results that will be obtained in
human clinical trials.
The potential medical diagnostic products currently under development by the
Company may require significant additional research and development and
preclinical testing and will require extensive clinical testing prior to
submission of any regulatory application for commercial use. The Company's
potential products are subject to the risks of failure inherent in the
development of medical diagnostic products based on new technologies. These
risks include the possibilities that the Company's novel approach to diagnosis
will not be successful; that any or all of the Company's potential products
will not be found to be safe and effective or otherwise fail to receive
necessary regulatory clearances; that the products, if safe and effective, will
be difficult to manufacture on a large scale or uneconomical to market; that
proprietary rights of third parties will preclude the Company from marketing
such products; or that third parties will market superior or equivalent
products. As a result, there can be no assurance that the company's research
and development activities will result in any commercially viable products.
2. Future Capital Needs; Uncertainty of Additional Funding. The Company will
require substantial additional funds in order to continue the research and
development programs and preclinical testing of its potential diagnostic
products and conduct clinical trials and marketing of such products that may be
developed. The
-10-
<PAGE>
Company's capital requirements depend on numerous factors, including the
progress of its research and development programs, the progress of preclinical
and clinical testing, the time and costs involved in obtaining regulatory
approvals, the cost of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights, competing technological and
market developments, changes in the Company's existing license and supply
relationships, the ability of the Company to establish collaborative
arrangements, the development of commercialization activities and arrangements,
and the purchase of additional capital equipment. Other than the Company's
laboratory revenues and nominal revenues from sales of the SPINPRO(R) product,
the Company has no current source of revenues or capital beyond the proceeds of
this Offering. Based upon its current plans, which the Company anticipates will
include commencing human clinical trials on the Osteopatch(TM) during the next
12 months, the Company believes that the net proceeds of this Offering,
together with cash flows from operations, will be sufficient to meet the
Company's operating expenses and capital requirements for approximately
eighteen months.
If the Company's current and projected needs change due to unanticipated events
or otherwise, the Company may be required to obtain additional capital. The
Company intends to seek such additional funding through public or private
financings or collaborative or other arrangements with corporate partners.
There can be no assurance, however, that additional financing will be available
from any of these sources, or if available, will be available on acceptable
terms. If adequate funds are not available, the Company may be required to
delay, scale back or eliminate one or more of its research and development
programs, including but not limited to the development of the Osteopatch(TM),
or to obtain funds through entering into arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies or potential products that the Company would not otherwise
relinquish.
3. History of Losses; Uncertainty of Future Profitability. The Company has
incurred significant operating losses since inception. Consolidated net loss
for the fiscal year ended June 30, 1996 was approximately $8,310,000, which
includes a one-time charge of approximately $6,374,000. The Company's
accumulated deficit at June 30, 1996 was approximately $10,157,000, including
one-time charges of an aggregate of approximately $6,802,000. The one-time
charges are related to amortization of goodwill and purchased research and
development in connection with the Company's mergers with BioQuant and PBI-WA.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." No assurance can be given that the net loss and accumulated
deficit will not continue to increase or that the Company will ever achieve
profitable operations. The Company has a limited operating history
-11-
<PAGE>
and limited revenues to date. Potential investors should be aware of the
problems, delays, expenses and difficulties encountered by an enterprise in the
Company's stage of development, many of which may be beyond the Company's
control. These include, but are not limited to, unanticipated problems relating
to the competitive and regulatory environment in which the Company operates and
marketing problems and additional costs and expenses that may exceed current
estimates. Potential investors should be aware of the difficulties normally
encountered by new enterprises and the high rate of failure of such
enterprises. The likelihood of success must be considered in light of the
problems, expenses, difficulties, complications, delays and competition
encountered in connection with the development of a business in the
biotechnology industry.
The Company will be required to conduct significant research, development,
testing and regulatory compliance activities that, together with projected
general and administrative expenses, are expected to result in significant
operating losses for at least the next 24 months. Revenues, if any, that the
Company may receive in the next 24 months will be limited to revenues received
from the Company's laboratory operations, payments under research or product
development relationships that the Company may hereafter establish, payments
under license agreements that the Company may hereafter establish and nominal
revenues received in connection with the SPINPRO(R) product. There can be no
assurance, however, that the Company will be able to establish any such
relationships or enter into any such license agreements. The Company's ability
to achieve profitability depends upon its ability to successfully complete
either alone or with others, development of its potential medical diagnostic
products, conduct clinical trials, obtain required regulatory approvals, and
manufacture and market its products or to enter into license agreements on
acceptable terms. In the event that the Company does enter into any future
license agreements, such license agreements may adversely affect the Company's
profit margins on its potential products. The Company may never achieve
significant revenue or profitable operations.
4. Explanatory Paragraph in Independent Accountants' Report. The Company's
independent auditors have included an explanatory paragraph in their report on
the Company's financial statements to the effect that certain matters raise
substantial doubt about the Company's ability to continue as a going concern,
which is contingent upon the Company's ability to secure financing and attain
profitable operations. In addition, the Company's ability to continue as a
going concern must be considered in light of the problems, expenses and
complications frequently encountered by development stage companies,
introduction of new products and the competitive environment in which the
Company operates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business," "Report of Independent
Auditors" and "Financial Statements."
-12-
<PAGE>
5. Dependence on Collaborators. The Company's strategy for the research,
development and commercialization of its potential medical diagnostic products
may require the Company to enter into various arrangements with corporate and
academic collaborators, licensors, licensees and others, and may therefore be
dependent upon the subsequent success of these outside parties in performing
their responsibilities. There can be no assurance that the Company will be able
to establish collaborative arrangements or license agreements that the Company
deems necessary or acceptable to develop and commercialize its potential
products or that such collaborative arrangements or license agreements will be
successful. Moreover, certain of the collaborative arrangements that the
Company may enter into in the future may place responsibility for preclinical
testing and human clinical trials and for preparing and submitting applications
for regulatory approval for potential products on the collaborative partner.
Should a collaborative partner fail to develop or commercialize successfully
any potential product to which it has rights, the Company's business, financial
condition and results of operations may be materially adversely affected. In
addition, there can be no assurance that the collaborative partner will not be
pursuing alternative competing technologies or developing competing products
either on their own or in collaboration with others, including the Company's
competitors, as a means for developing diagnostic processes for the diseases or
disorders targeted by the Company's collaborative programs.
6. Dependence on Licenses. The Company has licenses to technologies developed
by various companies and research institutes and universities. Pursuant to the
terms of those agreements, the Company is obligated to exercise diligence in
bringing potential products to market and to make certain royalty payments that
in some instances may be substantial. The Company is also obligated to make
royalty payments on the sales, if any, of licensed products. In addition, in
some instances, the Company is responsible for making minimum royalty payments
without generating sales and may incur costs of filing and prosecuting patent
applications. Each agreement is terminable by either party, upon notice, if the
other party defaults in its obligations. The Company licenses the technology
for development of its Osteopatch(TM) product from the owner of the patents
covering such technology pursuant to arrangements requiring minimum quarterly
royalty payments. The Company is aware that the owner of such patents is in the
process of seeking a buyer therefor. Additionally, the owner of such patents
has contracted with an affiliate of a director of the Company to facilitate the
sale process. Although the Company believes that its license agreements will
not be affected by any sale of the patents which are the subject of such
license, there can be no assurance that such patents will not be sold to a
competitor of the Company, that any conflicts of interest involving the
director of the Company engaged to facilitate the
-13-
<PAGE>
sale will be resolved in favor of the Company or that any buyer of the patents
will honor the Company's license agreement, in which case the Company will be
required to enforce its rights under the license when it may not have the
resources to do so. See "Business-Material Contracts." The termination or
cancellation of any of the Company's licensing arrangements would have a
material adverse effect on the Company's business, financial condition and
results of operations.
7. Uncertainty of Protection of Patents and Intellectual Property Rights; Risk
of Patent Infringement Liability. The Company's success depends on its ability
to obtain future patents, protect existing patents, licenses and intellectual
property rights, protect trade secrets, operate without infringing upon the
proprietary rights of others and prevent others from infringing on the
intellectual property rights of the Company. In addition, the Company has
exclusive licenses from third parties under various United States patents and
pending United States patent applications to the technology covered in whole or
in part by the claims therein. Since a patent may be invalid or circumvented by
alternative technologies, there can be no assurance as to the breadth of
protection that any such patents may afford the Company. In the event the
Company is held liable for patent infringement, insurance may not cover any or
all of the infringement damages and as such, any infringement liability would
adversely affect the business, financial condition and results of operations of
the Company.
There can be no assurance that any patent applications relating to the
Company's potential products or processes will result in patents being issued,
or that resulting patents, if any, or existing patents, will provide protection
against competitors who successfully challenge the Company's patents, obtain
patents that may have an adverse effect on the Company's ability to conduct
business, or are able to circumvent the Company's patent position. It is
possible that other parties have conducted research or made discoveries of
processes that preceded the Company's discoveries, which could prevent the
Company from obtaining patent protection of these discoveries. A substantial
number of patents have been applied for by and issued to other pharmaceutical,
biotechnology and biopharmaceutical companies, and other companies may have
filed applications for, may have been issued patents or may obtain additional
patents and proprietary rights relating to products or processes competitive
with those of the Company. In view of the time delay in patent approval and the
secrecy afforded patent applications, the Company does not know if there are
patent applications belonging to others which have priority over applications
belonging to the Company. There can be no assurance that others will not
independently develop products similar to or obsoleting those under development
by the Company, or, notwithstanding the Company's intellectual property
protections,
-14-
<PAGE>
duplicate any of the Company's products. The Company may determine there is no
economic benefit in commencing or continuing a patent infringement action.
Further, as stated above, there can be no assurance that the Company's current
or future exclusive licenses will not be challenged or that such license
arrangements will be honored by those granting such licenses or their
successors in interest. In such event, the Company would be required to enforce
its intellectual property rights at a time when it does not have the resources
to do so, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
8. No Marketing, Sales, Clinical Testing or Regulatory Compliance Experience.
In view of the early stage of the Company and its research and development
programs, the Company has restricted hiring to research scientists and a small
administrative staff and has relied on external consulting resources for
support in regulatory compliance and marketing. The Company has made no
investment in marketing, product sales or regulatory compliance resources. If
the Company successfully develops any commercially marketable medical
diagnostic products, it may seek to enter joint venture, sublicense or other
marketing arrangements with parties that have an established marketing
capability or it may choose to pursue the commercialization of such products on
its own. There can be no assurance, however, that the Company will be able to
enter into such marketing arrangements on acceptable terms, if at all. Further,
the Company will need to hire additional personnel skilled in the clinical
testing and regulatory compliance process and in marketing or product sales if
it develops products with commercial potential that it determines to
commercialize itself. There can be no assurance, however, that it will be able
to acquire such personnel. In addition, the Company's laboratory business is
subject to federal regulation under the Clinical Laboratory Improvement
Amendments of 1988 ("CLIA") and regulations promulgated thereunder and the
FDA's Good Laboratory Practices for Nonclinical Laboratory Studies regulations.
Failure to comply with applicable regulations could result in loss of
certification under CLIA and disqualification resulting in the exclusion of
studies performed in the laboratory from consideration in support of FDA
submissions, as well as civil and criminal sanctions.
9. Risk of Product Liability; Product Liability Insurance May Be Insufficient
or Unavailable. Sales of the Company's products entails risk of product
liability claims. The Company faces financial exposure to product liability
claims in the event that use of its products results in personal injury. The
Company also faces the possibility that defects in the design or manufacture of
its products might necessitate a product recall. There can be no assurance that
the Company will not experience losses due to product liability claims or
recalls in the future. The Company currently maintains product liability
insurance with coverage
-15-
<PAGE>
limits and there can be no assurance that the coverage limits of the Company's
insurance policies will be adequate. Such insurance is expensive, difficult to
obtain and may not be available in the future on acceptable terms, or at all.
No assurance can be given that product liability insurance can be maintained in
the future at a reasonable cost or in sufficient amounts to protect the Company
against losses due to liability. Any inability to maintain insurance at an
acceptable cost or to otherwise protect against potential product liability
could prevent or inhibit the continued commercialization of the Company's
products. In addition, a product liability claim in excess of relevant
insurance coverage or product recall could have a material adverse effect on
the Company's business, financial condition and results of operations.
10. Government Regulation and Product Approval. The United States Food and Drug
Administration ("FDA") and comparable agencies in state and local jurisdictions
and in foreign countries impose substantial requirements upon the testing,
manufacturing and marketing of therapeutics and diagnostics through lengthy and
detailed laboratory and clinical testing procedures, sampling activities and
other costly and time consuming procedures. Satisfaction of these requirements
may take several years or more and varies substantially based upon the type,
complexity and novelty of the diagnostic product.
Although the Company believes that its products currently under development
will be classified as "Class II" medical devices allowing the Company to use
the more expedient 510(k) notification procedure, there can be no assurance
that the FDA will not require the Company to submit the more cumbersome and
lengthy pre-market approval ("PMA") application. The Company will attempt to
market its products pursuant to Section 510(k) of the Food, Drug and Cosmetic
Act (the "FDC Act"), which would require filing a 510(k) submission but not a
PMA application. According to the FDA's Office of Device Evaluation Annual
Report, during 1995, the average 510(k) review time was approximately six
months, significantly shorter than the PMA application review process, which
approximated one year. However, there can be no assurance that the 510(k)
review process will not take more than six months or that the FDA will not
require the Company to submit a PMA application. The 510(k) process requires
that the Company show, among other things, that its product is substantially
equivalent to another legally marketed product. The Company may begin marketing
when the FDA issues an order allowing the product to be marketed. If a medical
device does not qualify for the 510(k) notification procedure, the Company must
file a PMA application, which requires more extensive clinical testing and
submissions and involves a longer process of regulatory review and approval.
The Company believes that its osteoporosis product will be classified as a
"Class II" medical device, which will permit the
-16-
<PAGE>
Company to use the 510(k) notification procedure. The Company is relying on (i)
the fact that the FDA has already cleared the skin patch, which has been
licensed to the Company by Sudormed, as a general sample collection device and
as a perspiration collection device for diagnosis of five drugs of abuse
(opiates, PCP, THC, cocaine and amphetamines) and thereby may be expected to
approve the skin patch as a collection device for pyridinoline and
deoxypyridinoline and (ii) the fact that the FDA has cleared Metra Biosystems,
Inc.'s ("Metra") 510(k) submissions for its immunoassay test kits to measure
pyridinoline and deoxypyridinoline levels in "first morning void" urine
samples. If the Company is able to demonstrate a correlation between
pyridinoline and/or deoxypyridinoline levels in perspiration and measurable
physiologic changes in patients, the Company believes that its osteoporosis
product can be shown to be substantially equivalent to medical devices (e.g.,
diagnostic kits for measurement of pyridinoline and/or deoxypyridinoline levels
in urine) which the FDA has already approved for marketing and thus qualifying
the Company's product for the 510(k) notification procedure. The FDA may
respond to the Company's 510(k) notification, however, by directing the Company
to file a PMA application for the osteoporosis product because, despite the
Company's correlation studies and clinical tests, the FDA may consider
perspiration too different from urine as a medium for pyridinoline and/or
deoxypriodinoline. If the Company is required to file a PMA application for its
osteoporosis product, the Company would be required to conduct substantial
additional research and clinical tests before doing so, and would be unable to
file a PMA application for approximately 12 to 18 months. Even if the FDA
permits the Company to proceed with a 510(k) notification, the FDA may require
the Company to support its notification with additional research and clinical
test data, resulting in a longer process of regulatory review than is typical
for 510(k) notifications.
The Company has relied on scientific, technical, clinical, commercial and other
data supplied or disclosed by others, including its collaborators, and may rely
on such data in support of applications to enter human clinical trials for its
potential products. Although the Company has no reason to believe that this
information contains errors or omissions of fact, there can be no assurance
that there are no errors or omissions of fact that would change materially the
Company's view of the future likelihood of FDA approval or commercial viability
of these potential products. There can be no assurance that clinical data from
studies performed by others will be available to the Company or acceptable to
the FDA or other regulatory agencies in support of the Company's applications
for regulatory approval, and the FDA may, among other things, require the
Company to collect additional data and conduct controlled clinical studies
prior to acceptance of any such applications.
-17-
<PAGE>
The effect of government regulation may be to delay for a considerable period
of time or prevent the marketing of any product that the Company may develop
and/or to impose costly requests for additional animal, human or other data
upon the Company, the result of which may be a delay in the marketing of its
products, thus furnishing an advantage to its competitors. There can be no
assurance that the FDA or other regulatory approval for any products developed
by the Company will be granted on a timely basis or at all. Any such delay in
obtaining or failure to obtain such approvals would adversely affect the
marketing of the Company's proposed products and the ability to earn product
revenues or royalties. As with all investigational products, additional
government regulations may be promulgated requiring additional research and
data to be submitted that could delay marketing approval of the Company's
potential products. The Company cannot predict whether any adverse government
regulation might arise from future legislation or other governmental action.
While the Company believes it is aware of all the permits it is required to
obtain and all of the governmental regulations it is required to comply with,
and believes that it can obtain such permits and comply with all such
regulations in the future, there can be no assurance that this will be the
case, that such compliance might not increase the expenses the Company will
incur or that such regulations will not be modified making it increasingly
difficult for the Company to operate its business as it presently anticipates.
11. Risks Inherent in International Transactions. The Company plans to market
its products to customers both in the United States and abroad. International
sales and operations may be limited or disrupted by the imposition of
government controls, export license requirements, economic and political
instability, price controls, trade restrictions, and changes in tariffs or
difficulties with foreign distributors. Foreign regulatory agencies often
establish product standards different from those in the United States and any
inability to obtain or maintain foreign regulatory approvals on a timely basis
could have a material adverse effect on the Company's international business
operations. Additionally, the Company's business, financial condition and
results of operations may be materially and adversely affected by fluctuations
in currency exchange rates as well as increases in duty rates and difficulties
in obtaining required licenses and permits. There can be no assurance that the
Company will be able to successfully commercialize its products in any foreign
market. In addition, the laws of some countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States.
Distribution of the Company's products outside the United States is subject to
extensive government regulation. These regulations, including the requirements
for approvals or clearance to market,
-18-
<PAGE>
the time required for regulatory review and the sanctions imposed for
violations, vary from country to country. There can be no assurance that the
Company will obtain regulatory approvals in such countries or that it will not
be required to incur significant costs in obtaining or maintaining its foreign
regulatory approvals. In addition, the export by the Company of certain of its
products which have not yet been cleared for domestic commercial distribution
may be subject to FDA export restrictions. Failure to obtain necessary
regulatory approvals, the restriction, suspension or revocation of existing
approvals or any other failure to comply with regulatory requirements would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Products" and "-- Government
Regulation."
12. Uncertainty of Market Acceptance. The commercial success of the Company's
products will depend upon their acceptance by the medical community and
third-party payors as clinically useful, cost-effective and safe. Pyridinium
crosslinks to measure bone loss, the technology used with the Company's
Osteopatch(TM), is a relatively new technology. Market acceptance will depend
on several factors, including the establishment of clinical utility of these
biochemical markers, the receipt of regulatory clearances in the United States
and elsewhere, the development of diagnostic tests that can be processed using
commercially available automated systems, the availability of third-party
reimbursement, extensive physician education and the approval and commercial
acceptance of therapies for the treatment of osteoporosis. There can be no
assurance that the Company's products will gain market acceptance. Failure to
achieve market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations.
13. Manufacturing Limitations. The Company currently does not have the
capability to manufacture products under the current Good Manufacturing
Practices ("GMP") prescribed by the FDA. Accordingly, the Company intends to
outsource its manufacturing requirements relating to the Osteopatch(TM) and the
chemical reagent and test tubes to be used in laboratory analysis. The Company
has established or is in the process of establishing arrangements with contract
manufacturers to supply sufficient quantities of such products to conduct
clinical trials as well as for the manufacture, packaging, labeling and
distribution of finished products if its potential products are approved for
commercialization. If such arrangements are terminated and if the Company is
unable to manufacture or contract for a sufficient supply of its potential
products on acceptable terms, the Company's preclinical and human clinical
testing schedule may be delayed, resulting in the delay of submission of
products for regulatory approval and initiation of new development programs,
which may have a material adverse effect on the Company. Contract manufacturers
that the Company currently
-19-
<PAGE>
uses adhere to GMP required by the FDA. The FDA may require, prior to 510(k)
clearance, and would require prior to approval of a PMA application, that the
manufacturing facility pass a GMP inspection. The Company may also be required
to obtain a license from the state in which the products will be manufactured
in order to manufacture any investigational products, which license will be
issued only if the Company is in compliance with, among others, GMP
regulations. The Company's dependence upon third parties for the manufacture of
its products may adversely affect the Company's profit margins and its ability
to develop and deliver such products on a timely and competitive basis. The
Company has limited experience in the manufacture of diagnostic products or
medical devices in clinical quantities and for commercial purposes. Should the
Company determine to manufacture products itself, the Company would be subject
to the regulatory requirements described above, would be subject to similar
risks regarding delays or difficulties encountered in manufacturing any such
products and would require substantial additional capital. In addition, there
can be no assurance that the Company will be able to manufacture any products
successfully and in a cost-effective manner. The Company has entered into a
supply agreement with an affiliate of the licensor of the technology relating
to the Osteopatch(TM) for the production of the Osteopatch(TM) product. The
supply agreement requires minimum annual purchases of the Osteopatch(TM)
product commencing during the 12 month period ending March 31, 1997. Failure to
purchase the required annual minimum amounts would result in a default under
the license agreement relating to the technology incorporated into the
Osteopatch(TM). Loss of such license, loss of the supplier or failure of the
supplier to comply with GMP will have a material adverse affect on the
Company's business, financial conditions and results of operations.
14. Competition and Technological Change. There are many companies, both public
and private, including well-known pharmaceutical companies, chemical companies
and specialized biotechnology companies, engaged in developing medical
diagnostic products for certain of the applications being pursued by the
Company. Many of these companies have substantially greater capital, research
and development, manufacturing, marketing and human resources and experience
than the Company and represent substantial long-term competition for the
Company. Such companies may develop products more quickly or products that are
more effective and less costly than any that may be developed by the Company.
The industry in which the Company proposes to compete is characterized by
extensive research efforts and rapid technological progress. New developments
are expected to continue and there can be no assurance that discoveries by
others will not render the Company's products or potential products
noncompetitive. Competition may increase further as a result of advances that
may be made in the commercial applicability of technologies and greater
availability of capital for investment in these fields.
-20-
<PAGE>
15. Uncertainty of Product Pricing; Healthcare Reform and Related Matters. The
levels of revenues and profitability of pharmaceutical and biotechnology
companies may be affected by the continuing efforts of governmental and third
party payors to contain or reduce the costs of healthcare through various
means. For example, in certain foreign markets pricing or profitability of
prescription pharmaceuticals and medical diagnostic processes are subject to
government control. In the U.S., there have been, and the Company expects that
there will continue to be, a number of federal and state proposals to implement
similar government control. It is uncertain what legislative proposals will be
adopted or what actions federal, state or private payors for healthcare goods
and services may take in response to any healthcare reform proposals or
legislation. The Company cannot predict the effect healthcare reforms may have
on its business, and no assurance can be given that any such reforms will not
have a material adverse effect on the Company. Further, to the extent that such
proposals or reforms have a material adverse effect upon the business,
financial condition and profitability of other companies that are prospective
collaborators for certain of the Company's potential products, the Company's
ability to commercialize its potential products may be adversely affected. In
addition, in both the United States and elsewhere, sales of medical products
are dependent in part on the availability of reimbursement to the consumer from
third party payors, such as government and private insurance plans. If the
Company succeeds in bringing one or more products to the market, there can be
no assurance that third party payors will provide sufficient reimbursement to
the consumer to allow the Company to sell its products competitively.
16. Reliance on Distributors, Suppliers and Manufacturers. The Company is, and
expects that it will continue to be, highly dependent upon certain
distributors, suppliers and manufacturers and the Company's ability to operate
competitively will depend, at least in part, on its ability to assure
continuous and reliable sources of distribution and supply. If the suppliers
become unable or unwilling to continue to produce products or components for
the Company according to the Company's specifications, or to meet the Company's
delivery schedules, the Company's operations could be materially disrupted,
especially over the short term, resulting in a material adverse effect on its
results of operations or the success or timing of necessary clinical trials.
There is no assurance that the Company's distributors and suppliers will remain
in business or honor their arrangements with the Company. See "Business -
Material Contracts."
17. Dependence on Key Personnel. The Company's success depends upon the
continued contribution of Paul Kanan, President, Ellen Rudnick, Chairman, G.
Russell Warnick, Chief Scientific Officer and Elizabeth Teng Leary, Vice
President and Director of Laboratories, and its ability to attract and retain
qualified personnel in the
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<PAGE>
future. The loss of services of, or a material reduction in the amount of time
devoted to the Company by, any of such persons could impair the development of
the Company's programs and would adversely affect the business of the Company.
See "Management".
18. Effective Control by Principal Shareholders. The officers and directors of
the Company currently beneficially own approximately 68.7% of the Common Stock
of the Company (approximately 41.4% after this Offering) and will have the
ability to elect or significantly influence the election of all of the
directors of the Company and otherwise control or significantly influence the
affairs of the Company.
19. Arbitrary Determination of Offering Price. The offering price of the
securities offered hereby was arbitrarily determined by the Company and the
Underwriter and bears no relationship to the Company's assets, book value,
results of operations or other established criteria of value. The factors
considered in determining the public offering price, in addition to prevailing
estimates of the business potential and earnings prospects of the Company, the
present state of the Company's development and an assessment of the Company's
management, as well as the consideration of the foregoing factors in relation
to market valuations of comparable companies, do not necessarily bear any
relationship to the Company's assets, accounting results or the book value of
the Company or other generally accepted criteria of value. See "Underwriting".
20. Absence of Dividends. The Company has not paid any cash dividends on its
capital stock and does not anticipate paying any such cash dividends in the
foreseeable future. Earnings, if any, will be retained to finance future
growth.
21. Issuance of Preferred Stock Could Delay or Prevent Corporate Takeover. The
Board of Directors has the authority to issue up to 5,000,000 shares of
undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without any further vote or action
by the shareholders. The issuance of Preferred Stock under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company or otherwise adversely affecting the rights of the
holders of Common Stock. See "Description of Securities."
22. Substantial Dilution of Book Value. The officers, directors and present
shareholders of the Company have acquired their interest in the Company at a
cost substantially less than that which investors will pay for the securities
offered hereby. An investment in such securities will result in an immediate
and substantial dilution to investors and an increase in the book value of the
securities held by the present shareholders, including management. Future
issuances of securities by the Company will
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<PAGE>
further dilute the ownership of investors purchasing securities in this
Offering.
23. Underwriter's Unit Purchase Option. Upon completion of this Offering, the
Company will grant the Underwriter a unit purchase option (the "Underwriter's
Unit Purchase Option") to purchase 170,000 Units at an exercise price equal to
120% of the public offering price of the Units offered hereby. The
Underwriter's Unit Purchase Option is being registered as part of this
Offering. The issuance of this option and underlying securities may be
considered to be additional compensation to the Underwriter. During the
four-year term (commencing one year from the date hereof) that the
Underwriter's Unit Purchase Option is exercisable, the holders thereof are
given the opportunity to profit from a rise in the market price of the
Company's Common Stock. The holders of the Underwriter's Unit Purchase Option
would be most likely to exercise the option at a time when the Company could
obtain capital by a new offering of securities, on terms more favorable than
those provided by the Underwriter's Unit Purchase Option. Consequently, the
terms on which the Company could obtain additional capital during such period
may be adversely affected. Furthermore, if any or all of the Underwriter's Unit
Purchase Option is exercised, the percentage of the Company's Common Stock held
by investors purchasing in this Offering will be reduced. See "Underwriting."
24. No Prior Public Trading Market. Prior to this Offering, there has been no
public trading market for the Units, the Common Stock or the Warrants. There
can be no assurance that a regular trading market will be established for the
Common Stock or the Warrants at the conclusion of this Offering or if
established, that such market will be sustained. There will be no market for,
or listing of, the Units. Purchasers of the securities offered hereby may,
therefore have difficulties in selling such securities should they desire to do
so. The market price for the Company's securities following this Offering may
be highly volatile. Factors such as the Company's financial results,
introduction of new products in the marketplace, and various factors affecting
the healthcare industry generally may have a significant impact on the market
price of the Company's securities, as well as price and volume volatility
affecting small and emerging growth companies, in general, and not necessarily
related to the operating performance of such companies.
See "Underwriting."
25. Possible Restrictions on Market Making Activities in Company's Securities.
The Underwriter has advised the Company that it intends to make a market in the
Company's securities following consummation of this Offering. Rule 10b-6
promulgated under the Securities Exchange Act of 1934, as amended (the "1934
Act"), may prohibit the Underwriter from engaging in any market making
activities with regard to the Company's securities for the period from two or
nine business days (or such other applicable period as
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Rule 10b-6 may provide) prior to any solicitation by the Underwriter of the
exercise of Warrants until the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right that the
Underwriter may have to receive a fee for the exercise of Warrants following
such solicitation. As a result, the Underwriter may be unable to provide a
market for the Company's securities during the period the Warrants are
exercisable. Any temporary cessation of such market-making activities could
have an adverse effect on the market price of the Company's securities. See
"Underwriting."
26. Future Sales of Common Stock Under Rule 144 or Otherwise. All of the
Company's issued and outstanding Common Stock as of the date of this Prospectus
are "restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act of 1933, as amended (the "Securities Act"). Subject to
the restrictions contained in certain agreements with the Underwriter
restricting the sale or other disposition of the Common Stock for 12 months
following the date of this Prospectus without the prior written consent of the
Underwriter, 1,595,623 restricted shares will be eligible for sale under Rule
144 commencing after such 12 month restriction. In general, under Rule 144, a
person (or persons whose shares are aggregated) who has satisfied a two-year
holding period may sell "restricted securities" within any three-month period
limited to a number of shares which does not exceed the greater of one percent
of the then outstanding shares or the average weekly trading volume during the
four calendar weeks prior to such sale. Rule 144 also permits the sale (without
any quantity limitation) of "restricted securities" by a person who is not an
affiliate of the issuer and who has satisfied a three-year holding period. See
"Shares Eligible for Future Sale" and "Principal Shareholders."
27. Current Prospectus and State Registration Required to Exercise Warrants.
Purchasers of Units will be able to exercise the Warrants only if a current
prospectus relating to the securities underlying the Warrants is then in effect
and only if such securities are qualified for sale or exempt from qualification
under the applicable securities laws of the states in which the various holders
of Warrants reside. Although the Company will use its best efforts to maintain
the effectiveness of a current prospectus covering the securities underlying
the Warrants, there can be no assurance that the Company will be able to do so.
The Company will be unable to issue Common Stock to those persons desiring to
exercise their Warrants if a current prospectus covering the securities
issuable upon the exercise of the Warrants is not kept effective or if such
securities are not qualified nor exempt from qualification in the states in
which the holders of the Warrants reside.
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<PAGE>
28. No Assurance of Nasdaq Listing. The Company has applied to have the Common
Stock and Warrants quoted on the Nasdaq System. In order to have its securities
quoted on Nasdaq, an issuer is required to have total assets of at least
$4,000,000, capital and surplus of at least $2,000,000, a minimum price per
share of not less than $3.00, at least 100,000 publicly held common shares with
a market value of at least $1,000,000 and there must be a minimum of two
registered and active market makers. No assurance can be given that the Common
Stock and Warrants will be accepted for inclusion on Nasdaq or otherwise remain
qualified for quotation on Nasdaq. If for any reason the Common Stock and
Warrants are not eligible for quotation or do not remain qualified for
quotation on Nasdaq, then in such case the securities are expected to be traded
in the over-the-counter market through the OTC Electronic Bulletin Board. Even
assuming Nasdaq eligibility, there can be no assurance that an active trading
market will develop for the Company's securities.
29. Possible Delisting of Securities from Nasdaq System; Disclosure Relating to
Low-Priced Stocks. The Company's failure to meet Nasdaq's listing maintenance
criteria in the future for any reason may result in the discontinuance of the
inclusion of the Company's securities on Nasdaq. In order to remain quoted on
Nasdaq, a company must maintain $2,000,000 in assets, a $200,000 market value
of the public float and $1,000,000 in total capital and surplus. In addition,
continued inclusion requires two marketmakers and a minimum bid price of $1.00
per share; provided, however, that if a company falls below such minimum bid
price, it will remain eligible for inclusion in Nasdaq if the market value of
the public float is at least $1,000,000 and the company has $2,000,000 in
capital and surplus. In the event of Nasdaq delisting, trading, if any, in the
Company's securities may then continue to be conducted on the OTC Electronic
Bulletin Board or in the non-Nasdaq over-the-counter market. As a result, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of the Company's securities. In addition, the
Company would be subject to Rule l5g-9 (the "Rule") promulgated under the 1934
Act, which imposes various sales practice requirements on broker-dealers who
sell securities governed by the Rule to persons other than established
customers and accredited investors (generally institutions with assets in
excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 jointly with their spouse). For
transactions covered by the Rule, the broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, the Rule may
have an adverse effect on the ability of broker-dealers to sell the Company's
securities and may affect the ability of purchasers in this offering to sell
the Company's securities in the secondary
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<PAGE>
market and otherwise affect the trading market in the Company's securities.
The Commission has adopted rules that regulate broker-dealer practices
in connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the Nasdaq
system, provided that current price and volume information with respect to
transactions in that security is provided by the exchange or system). The penny
stock rules, which generally became effective January 1, 1993, require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from the rules, to deliver a standardized risk disclosure document prepared by
the Commission that provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker dealer and
salesperson compensation information must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. These disclosure
requirements may have the effect of reducing the level of trading activity in
the secondary market for a stock that becomes subject to the penny stock rules.
If the Company's securities become subject to the penny stock rules, investors
in this offering may find it more difficult to sell their securities. However,
the Company's securities will, upon consummation of the offering, be outside
the definitional scope of a penny stock under the rules.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units offered
hereby are estimated to be $6,575,250 ($7,629,037 if the Underwriter's
over-allotment option is exercised in full) after deducting underwriting
discounts and commissions of approximately $1,049,750 ($1,207,213 if the
Underwriter's over allotment option is exercised in full) and expenses of this
Offering of approximately $450,000. The Company anticipates that the net
proceeds of this Offering will be applied substantially as follows:
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Approximate
Allocation of Proceeds Dollar Amount
- ---------------------- -------------
Osteopatch(TM) Product Development
Activities $ 3,800,000
Repayment of Bridge Loan 1,015,000
Laboratory Equipment 500,000
Working Capital 1,260,250
------------
Total $ 6,575,250
The Company anticipates, based on currently proposed plans and
assumptions relating to its operations, that the proceeds of this Offering,
together with projected cash flow from operations, will be sufficient to
satisfy its contemplated cash requirements for approximately eighteen months
following the consummation of this Offering. In the event that the Company's
plans change or its assumptions change or prove to be inaccurate or if the
proceeds of this Offering or projected cash flow prove to be insufficient to
fund operations (due to unanticipated expenses, technical problems,
difficulties or otherwise), the Company may find it necessary or advisable to
reallocate some of the proceeds within the above-described categories. The
Company has no current arrangements with respect to, or sources of, additional
financing. There can be no assurance that any such additional financing will be
available to the Company on commercially reasonable terms, or at all.
If the Underwriter's over-allotment option is exercised in full,
additional net proceeds of $1,053,787 will be added to working capital. Pending
utilization of the proceeds of the Offering, the Company may make temporary
investments in bank certificates of deposit, prime commercial paper, United
States Government obligations, investments in money-market funds or other
similar short-term low-risk investments.
CAPITALIZATION
The following table sets forth the Company's capitalization at June
30, 1996, and as adjusted to give effect to the issuance and the sale of the
1,700,000 Units offered hereby and the application of the estimated net
proceeds therefrom. This table should be read in connection with the Company's
Financial Statements and the related notes thereto included elsewhere in this
Prospectus.
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<TABLE>
<CAPTION>
June 30, 1996(1)
----------------------------------
Actual Pro Forma(2)(3)
------------- ---------------
<S> <C> <C>
Current Liabilities.................................................. $2,224,550 $2,224,550
Shareholders' Deficit:
Common Stock, par value $.01 per share, 30,000,000 shares authorized;
1,739,169 shares outstanding; 1,881,443 shares pro forma
3,439,169 shares as adjusted.................................... 17,392 34,392
------ ------
Additional Paid-in-Capital........................................ 8,755,553 15,313,803
Accumulated Deficit............................................... (10,157,382) (10,157,382)
------------ ------------
Total Shareholders' Equity (Deficit)............................ $(1,384,437) $5,190,813
============ ==========
</TABLE>
- ----------------------------------
(1) Does not reflect the issuance of 209,174 shares of Common Stock subsequent
to June 30, 1996.
(2) Reflects gross proceeds of this offering of $8,075,000 and estimated net
proceeds of $6,575,250.
(3) Does not give effect to (a) $1,211,250 gross proceeds ($1,053,787 of
estimated net proceeds) that will be realized if the Underwriter's
over-allotment option to acquire an additional 255,000 Units is exercised
in full, and (b) the exercise of the Warrants.
DILUTION
At June 30, 1996, the Company had a negative net tangible book value of
$(1,384,437) or $(0.92) per share. Negative net tangible book value per share
represents the amount of the Company's tangible assets less the amount of its
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to (i) the sale of 1,700,000 Units offered hereby, (ii) the
Company's receipt of the net proceeds of this Offering less underwriting
discounts and commissions and other estimated offering expenses, and (iii) the
conversion of certain debt of management into 142,274 shares of Common Stock at
the rate of $3.45 per share on August 1, 1996, but without giving effect to the
exercise of the Warrants, the Underwriter's over-allotment option, or the
Underwriter's Unit Purchase Option, the net tangible book value of the Company,
as adjusted, at June 30, 1996 would have been $5,469,715 or $1.53 per share.
This represents an immediate dilution to the public investors of $3.22 per
share and an aggregate increase in net tangible book value to the present
shareholders of $2.45 per share. The following table illustrates this per share
dilution:
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Public offering price per share $4.75
Negative Net tangible book value per share
before the offering $(0.92)
Increase per share attributable to new investors $2.45
=====
Pro forma net tangible book value per
share after the offering $1.53
-----
Dilution per share to new investors $3.22
=====
The following table summarizes on a pro forma basis, as of August 31,
1996, the differences between existing shareholders and purchasers of shares in
this Offering with respect to the number of shares of Common Stock purchased
from the Company, the total consideration paid and the average purchase price
per share:
Average
Shares Purchased Total Consideration Price
---------------- ------------------- -----
Per
Number Percent Amount Percent Share
------ ------- ------ -------- -----
Current
Shareholders 1,948,343 53.4% $4,914,291 37.8% $2.52
New
Investors 1,700,000 46.6% $8,075,000 62.2% $4.75
--------- ----- ---------- -----
Total 3,648,343 100.0% $12,989,291 100.0%
- --------------
The above table assumes no exercise of the Warrants, the Underwriter's
over-allotment option, the Underwriter's Unit Purchase Option or currently
outstanding options and warrants (including the Bridge Warrants). To the extent
that the over-allotment option, the Warrants, the Underwriter's Unit Purchase
Option and currently outstanding options and warrants (including the Bridge
Warrants), for which an aggregate of 3,453,815 shares are reserved for issuance
upon exercise of such warrants and options (including those options available
for grant under the Company's option plan), are exercised, there will be
further dilution to new investors.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its
capital stock. The Company currently intends to retain its earnings to finance
the growth and development of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus.
Overview
The Company was incorporated in Delaware on May 9, 1996 and conducts
its businesses through two wholly-owned subsidiaries, BioQuant, a Michigan
corporation, incorporated in 1985 and PBI-WA, a Washington corporation,
incorporated in 1989. On June 28, 1996, the Company completed the mergers (the
"Mergers") whereby BioQuant and PBI-WA became wholly-owned subsidiaries of the
Company in a stock-for-stock exchange. The merger with BioQuant was treated as
a purchase for accounting purposes in accordance with generally accepted
accounting principles ("GAAP"). As a result of this transaction, the Company's
results of operations for the year ended June 30, 1996, as reported in the
financial statements included elsewhere in this Prospectus, include only the
operations of PBI-WA for the year.
In January 1995, PBI-WA had merged with Merchant House Scientific,
Inc. ("MHS"), which merger was treated as a purchase for accounting purposes in
accordance with GAAP. As a result of that transaction, the Company's results of
operations for the year ended June 30, 1995, include only five months of the
results of operations of PBI-WA whereas fiscal 1996 results include a full year
of PBI-WA operations. The comparisons in the discussions of results of
operations below are based on proforma information which assumes that both
PBI-WA and BioQuant were merged with the Company's subsidiaries on July 1,
1994. This information is not necessarily indicative of the results that would
have been reported had such events occurred on the dates specified, nor is it
indicative of the Company's future results.
As a result of the Mergers, the Company operates a reference
laboratory that services the pharmaceutical and medical diagnostics industries,
produces a disposable HDL cholesterol testing device and is currently
developing the Osteopatch(TM) diagnostic product. The Company is also
conducting research relating to the feasibility of developing products
utilizing a patented saliva collection technology.
To date, the Company's revenues have consisted primarily of fees
charged by the laboratory for services provided to customers, a nominal amount
of sales from the SPINPRO(R) HDL cholesterol testing device, and U.S.
Government grants awarded to the Company under the NIH SBIR programs to support
research activities.
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<PAGE>
Expenses consist, and are expected to continue to consist, primarily
of operating expenses necessary to conduct the commercial laboratory operation,
research and development costs for products under development, administration
expenses and payment of license and royalty fees to acquire and maintain the
Company's intellectual property rights.
Through June 30, 1996, the Company had an accumulated deficit of
approximately $10,157,000, including a one-time charge of approximately
$6,374,000 for purchased research and development expenses relating to the
Company's mergers with BioQuant and a one-time charge of approximately $428,000
relating to PBI-WA's merger with MHS. See footnote 1 of Notes to Financial
Statements.
The audited consolidated financial statements of the Company reflect
the historical results of BioQuant as of June 28, 1996 and not for the full
fiscal year. However, the following discussion reflects the proforma results of
operations of the Company and its subsidiaries on a combined basis giving
effect to the Mergers as if they were consummated on the first day of the
fiscal periods presented.
Results of Operations
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Revenues. Revenues increased by $608,110, or 57.7%, to $1,662,218 in
fiscal 1996 as compared to $1,054,008 in fiscal 1995. The laboratory operations
accounted for substantially all of the increase in the Company's revenues. The
increase in laboratory revenues was due to an increase in the number and size
of clinical trials on new pharmaceutical products and diagnostic devices, which
the Company's laboratory conducted for third parties. Additionally, revenues
were enhanced as a result of the beginning of commercial sales of the
SPINPRO(R) HDL cholesterol device in January 1996. In addition to the
foregoing, the Company received certain NIH SBIR program and other revenues
aggregating approximately $177,000.
Expenses. Expenses related to the operation of the laboratory and
managing customer clinical trials increased by $115,477, or 13.3%, to $985,818
in fiscal 1996 as compared to $870,341 in fiscal 1995. This increase was
directly related to the increase in laboratory revenues. The Company benefited
from a productivity increase, resulting in an increase in operating margin of
the laboratory operations from 17.4% to 40.7%. General and administrative
expenses increased by $86,835, or 5.7%, to $1,617,229 in fiscal 1996 as
compared to $1,530,394 in fiscal 1995. This increase was due principally to
increased salaries and personnel. Research and product development expenses
increased to
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$1,113,986 in fiscal 1996 and from $973,850 in fiscal 1995. The increase was
due mainly to increased activity relating to the Company's osteoporosis
product, the Osteopatch(TM), including assay development and laboratory
evaluation of various technical details relating to the product specifications
in preparation for clinical trials necessary for FDA approval. Further,
increased resources were devoted to research on two potential applications for
the SalivaSac(R) technology relating to diabetes. In the coming twelve to
eighteen months, the Company expects increases in product development
activities, particularly to fund clinical trials for the Osteopatch(TM).
Net Loss. Net loss increased by $5,566,759, or 202.9% to $8,310,504 in
fiscal 1996 as compared to $2,743,745 in fiscal 1995. The net loss reported in
fiscal 1996 includes a one-time charge of approximately $6,374,000 for
purchased research and development expenses relating to the Company's merger
with BioQuant. The net loss in fiscal 1995 includes a one-time charge of
$428,000 for amortization of goodwill relating to the PBI-WA/MHS Merger.
Excluding the effect of the one-time charges associated with the Mergers in
fiscal 1996 and the merger of PBI-WA with MHS in fiscal 1995, net loss for
fiscal 1996 declined by approximately $379,000 from $2,315,000 as compared to
$1,936,000 in fiscal 1995. However, the Company expects normal operating losses
to increase substantially for at least two years due to anticipated increases in
research and development activities associated with the Osteopatch(TM) product,
establishment of a marketing program for the reference laboratory and general
and administrative expenses.
Liquidity and Capital Resources
Based on the Company's audited financial statements, the Company
sustained a deficit cash flow from operations of $729,534 for the year ended
June 30, 1996, as compared with a deficit cash flow from operations of $865,981
for the year ended June 30, 1995. The decrease in the deficit cash flow from
operations is attributable principally to increases in revenues for the year.
This deficit cash flow was financed principally by loans from stockholders of
$464,461 and sales of common stock amounting to $360,000. In June 1996, the
Company issued promissory notes amounting to $250,000 in connection with a
private placement of debt financing. These funds were used to support
additional investment in equipment, to pay expenses associated with the
Company's proposed initial public offering, to provide working capital, to
support the Company's product development and to pay administrative expenses.
Successful future operations depend primarily upon the Company's
ability to complete development of the Osteopatch(TM) product, obtain FDA
clearance, and achieve successful product commercialization. The Company's
operations also depend on its
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ability to successfully grow a profitable reference laboratory operation. In
order to achieve these results, the Company will need substantial additional
capital to fund product development and invest in the growth of laboratory
operations. Accordingly, the Company expects to continue to incur substantial
losses for at least the next two years as it funds these activities.
The Company and its subsidiaries have funded their operations to date
principally through equity financings and, to a lesser extent, through debt
financings. The debt financing includes term debt and leases used to fund
equipment purchases, as well as a bank line of credit and stockholder loans. In
June 1996, the remaining balance on a line of credit was converted to a term
loan. At June 30, 1996, the Company had $181,127 in term debt obligations
outstanding (including capital leases) and a working capital deficit of
$1,723,942. At June 30, 1996, the Company had $615,703 in trade payables and
accrued liabilities. The Company reported a negative cash flow from operations
of $729,534 for the year ended June 30, 1996. This cash flow deficit has been
funded principally through stockholder loans and sales of common stock. In
addition to the cash flow deficit from operations, the Company's requirements
to service its term debt were $62,105 for the year ended June 30, 1996, and are
expected to approximate $180,000 in the current fiscal year due to monthly
principal and interest payments.
The Company had a $200,000 line of credit with a bank which was
converted to a term loan in June 1996. The balance at the date of conversion
was $159,485. This loan bears interest at the bank's index rate plus 2.5%
(10.75% at June 30, 1996), and is payable monthly at the rate of $14,127,
including interest. The loan is due in June 1997. The Company also has a loan
from a bank with a balance outstanding of $16,522 at June 30, 1996. This loan
bears interest at the prime rate plus 1.4% (9.9% at June 30, 1996), and is
payable monthly at the rate of $2,085, including interest. The loan is due in
January 1997. The above loans are collateralized by the Company's accounts
receivable and equipment, and by personal guarantees from certain stockholders.
In June 1996, pursuant to a private financing, the Company received
$250,000 in exchange for promissory notes and 50,000 warrants. The notes issued
in connection with the Financing bear annual interest at the rate of 14% and
were repaid out of the proceeds of the Bridge Loan. The warrants issued in
connection with the Financing are exercisable until April 30, 1998, subject to
a six-month lock-up period until April 30, 1997 (which may be reduced at the
discretion of the Underwriter), at an exercise price of $5.70 per share.
In August, 1996, the Company completed a private placement of units
consisting of an aggregate of $1,000,000 in principal amount
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of promissory notes and 250,000 warrants to purchase common stock of the
Company. The Company received net proceeds of $936,000 from the Bridge Loan,
which was used to repay certain indebtedness, including the notes issued in the
Financing, to support product development activities and for working capital.
The promissory notes issued in connection with the Bridge Loan bear annual
interest at the rate of 14% and are payable upon consummation of this Offering.
The warrants issued in connection with the Bridge Loan are exercisable until
January 31, 1998, subject to a 12 month lock-up period until October, 1997
(which may be reduced at the discretion of the Underwriter), at an exercise
price of $5.70 per share.
In addition to the debt financings described above, the Company raised
$360,000 during the year ended June 30, 1996 and an additional $10,000
subsequent to the fiscal year end through private sales of its common stock.
The proceeds were used to support the Company's product development activities.
At June 30, 1996, the Company had borrowed $660,000 from certain
stockholders. These borrowings were uncollateralized and bore interest at an
index rate plus 1% (approximately 9.5% at June 30, 1996). Subsequent to year
end, the Company issued 142,274 shares at a price of $3.45 per share in
satisfaction of loans amounting to $460,000 plus accrued interest.
Additionally, $200,000 of such loans were refinanced in connection with the
Company's Bridge Loan completed in August 1996.
The Company believes that the net proceeds of this Offering, together
with anticipated cash flows from operations, will be sufficient to meet the
Company's operating expenses and capital requirements, including the purchase
of laboratory equipment of approximately $500,000, for approximately eighteen
months.
BUSINESS
General
The Company is a holding company that was formed on May 9, 1996 for
the purpose of holding all of the outstanding shares of stock of PBI-WA and
BioQuant following the mergers on June 28, 1996 of wholly-owned subsidiaries of
the Company with and into PBI-WA and BioQuant, respectively.
PBI-WA was founded in 1989 as a specialized lipoprotein laboratory
that became recognized as a leader in the fields of laboratory method
verification, technical consulting, clinical trials and reference materials for
cholesterol measurements and related risk factors for coronary heart disease.
Through an
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affiliated not-for-profit foundation, PBI-WA became one of twelve CDC reference
network laboratories established for standardization of cholesterol testing in
the world. The Company's specialty reference laboratory has developed an
expertise in the emerging field of osteoporosis laboratory assessments through
its work with diagnostic manufacturers of assays for bone markers (Ostex, Metra
and Osteometer), in addition to pharmaceutical manufacturers of drugs that
prevent bone loss (Merck and Proctor & Gamble). This has helped to establish
the Company as a leader in its understanding of biochemical markers for bone
formation and bone resorption (loss).
In January 1995, PBI-WA completed a merger with one of its former
clients, Merchant House Scientific, Inc. This merger enabled PBI-WA to offer
its first disposable product to the laboratory testing market, SPINPRO(R), a
sample preparation device which simplifies and improves the methods for
performing certain kinds of tests in the laboratory setting. This technology
facilitates sample preparation for tests that are performed "off-line" or
involve a "pretreatment" step prior to obtaining results, thus making the
testing procedure less labor intensive resulting in lower overall cost and more
consistent and accurate results.
The Company's BioQuant subsidiary was founded in 1985 and conducted
extensive research and development, mostly funded by government grants,
relating to various immunoassays. In 1989, BioQuant patented a device known as
the SalivaSac(R) that facilitates the collection of saliva without
contamination from enzymes, food particles, mucopolysaccharides, blood, and
other particulate matter. The SalivaSac(R) enables non-invasive diagnostic
testing through collection of saliva. Based on preliminary studies conducted by
the Company and others, this product has the potential for numerous
applications, including therapeutic drug monitoring, the detection of drugs of
abuse, measurement of hormones and analytes of infectious disease. The Company
currently has two NIH SBIR Phase I grants to fund the research of this
technology for diabetes applications. In 1993, BioQuant acquired a license to
utilize skin patch technology for use in the field of osteoporosis. In 1995,
BioQuant acquired rights to antibodies specific to biochemical markers of bone
loss for use with the skin patch technology. The Company has focused its
efforts on developing a product which the Company believes will become a useful
indicator of bone loss leading to osteoporosis.
The Company believes that the synergies among PBI-WA and BioQuant,
through the technical expertise and research capabilities of their respective
personnel, will expedite current development of the Osteopatch(TM) product and
the development of SalivaSac(R) diagnostic applications, completion of clinical
trials of these devices and receipt of FDA approval of these devices and their
applications. Additionally, the Company anticipates that its
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laboratory facilities will be positioned to capture a significant portion of
the analysis revenues which will be associated with the Osteopatch(TM) product.
The Company's strategy is to (i) finalize development and
commercialize the Osteopatch(TM); (ii) expand its specialty reference
laboratory business; (iii) explore new applications and market opportunities
for the SPINPRO(R); and (iv) evaluate the feasibility of noninvasive glucose
testing using, SalivaSac(R), its patented saliva collection device.
Osteoporosis. The human body and its major organs are supported and
protected by a matrix of connective tissues. Major connective tissue systems in
the body include bone, cartilage, tendons and skin. The body's principal
connective tissue systems are bone and cartilage. Major diseases and disorders
affecting bone and cartilage include osteoporosis, Paget's disease, cancers
that metastasize to bone, osteoarthritis and other disorders. Many of these
diseases and disorders can be disabling, can affect the quality of life, and
can eventually lead to death.
Bone is a dynamic tissue that is continually regenerated and
remodelled. This process consists of bone formation and resorption (loss) and
is necessary to maintain skeletal integrity. Between 10% and 20% of the adult
skeleton is replaced each year by the remodeling process. From childhood to
early adulthood, bone formation exceeds resorption, causing bone mass to
increase. After reaching peak bone mass between the ages of 30 and 40, bone
resorption begins to exceed formation, and both men and women experience a
slow, age-related phase of bone loss, lasting for the rest of their lives. Many
women also experience an accelerated phase of bone loss for several years
following menopause, primarily due to the cessation of estrogen production.
Bone resorption occurs when cells called "osteoclasts" excavate small
pits throughout the bone. This process is followed by bone formation, in which
cells called "osteoblasts" produce and deposit bone collagen to fill the pits
excavated by the osteoclasts. Remodeling takes place continuously throughout
the skeleton, at multiple locations and in different phases at the same time.
The osteoclastic and osteoblastic processes produce fragments of collagen and
other proteins, which are released into the bloodstream and eventually appear
in other bodily fluids, including urine and perspiration.
In general, the bone resorption and formation processes are tightly
coupled and balanced. When this process becomes unbalanced or exaggerated, bone
disease occurs. Additionally, certain drugs or medications can have an adverse
side effect of increasing bone loss.
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Osteoporosis is a disease characterized by low bone mass and a
deterioration of the structural integrity of bone, which significantly
increases the risks of bone fractures, primarily of the spine, hip, wrist and
pelvis, and of back pain and spinal deformity. There are three basic forms of
osteoporosis: (i) postmenopausal osteoporosis; (ii) age-associated
osteoporosis, affecting men and women over the age of 70-80; and (iii)
idiopathic osteoporosis, affecting premenopausal women and middle-aged men and
of unknown cause. In addition, there is a related condition known as secondary
osteoporosis, in which bone loss results from an identifiable agent or disease,
such as certain gastrointestinal diseases or the use of steroids to treat
autoimmune diseases.
By far the most common form of osteoporosis is postmenopausal
osteoporosis, which accounts for approximately 80% of the individuals who
suffer from osteoporosis. Postmenopausal osteoporosis typically begins to
affect women within 15 to 20 years after menopause as a result of an
accelerated rate of bone resorption related to an estrogen deficiency caused by
menopause.
Osteoporosis is widespread and represents a major health care problem.
An estimated 25 million Americans and more than 75 million people worldwide
suffer from osteoporosis. In the United States alone, approximately 1.5 million
hip and other bone fractures occur each year as a result of osteoporosis, and
many of the elderly women and men who incur these fractures are confined to
wheelchairs or have to enter nursing homes as a result and may also suffer
additional complications.
According to the National Osteoporosis Foundation, forty percent of
all women in the U.S. will have at least one fracture by the age of 70 and
expenditures in the United States related to osteoporosis currently exceed $10
billion annually, with such costs expected to triple by the year 2020 resulting
from the expected increase in the aged population in the U.S., Europe and
Japan. The Company believes that delaying the onset of severe osteoporosis
could reduce the incidence of fractures and thereby result in treatment cost
savings and improved quality of life.
Therapeutic Options. Treatment exists to prevent continued bone loss,
but as yet there is no effective treatment to restore bone mass in individuals
with advanced osteoporosis.
Estrogen replacement therapy, calcium supplementation and exercise are
used to prevent or at least forestall continued bone loss. In the United
States, estrogen replacement therapy is the treatment of choice for women with
postmenopausal osteoporosis. Recent studies suggest that estrogen replacement
therapy is required for a minimum of seven years following menopause (and
possibly for life) in order to provide protection against osteoporosis.
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Estrogen replacement therapy has a number of potential side effects,
including increased risk of endometrial cancer, possibly increased risks of
breast and other cancers, and increased risks of gallbladder disease. As a
result, approximately 70% of American women taking estrogen (which is
prescribed for a number of purposes, including the treatment of menopausal
symptoms and the prevention of cardiovascular disease) stop doing so after the
first year of use. In addition, recent studies have suggested that the standard
dosage is inadequate to stop bone loss in approximately 15% of the women using
estrogen replacement therapy.
The effective use of estrogen replacement therapy is hampered because
there is no effective means of monitoring the rate of bone loss at relatively
short intervals in order (i) to enable patients to decide whether the efficacy
of treatment outweighs the risks of its side effects and (ii) to determine the
approximately 15% of the women using estrogen replacement therapy for whom the
standard dosage is inadequate and serves only to expose them to the side
effects of therapy without its benefits.
A number of pharmaceutical companies worldwide are currently
developing other drugs for the treatment of osteoporosis. Most of these new
drugs are designed to stop bone resorption, although some effort is directed
toward agents that will stimulate bone growth. Many of these drugs are in
various stages of pre-clinical and clinical trials in the United States, Europe
and Japan, and some of them are expected to become commercially available in
the next two years. For example, Merck received FDA clearance in October 1995
for their new bisphosphonate drug, Fosamax(R). The bisphosphonates act to stop
bone resorption and are expected to increase the need for diagnostic testing in
order to identify those patients who are losing bone rapidly, and to verify
that the dose prescribed is adequate to stop bone loss in a particular patient.
Eli Lily & Co. and Proctor & Gamble also have new drugs in Phase III clinical
trials.
Diagnosis. Osteoporosis is a "silent" disease in which rapid bone loss
occurs years, and even decades, before clinical symptoms appear. Diagnosis of
osteoporosis frequently occurs only at the time of a bone fracture.
At present, bone densitometry involving quantitative computed
tomography (in the case of the vertebrae) and dual-energy absorptiometry (in
the case of the spine and hip), is used to measure the amount of bone loss in
order to diagnose osteoporosis or to assess the risks of osteoporosis. Bone
densitometry has a considerable limitation, however, because it does not permit
a convenient measurement of the rate of bone loss. In order to evaluate the
rate of bone loss, bone densitometry requires a baseline measurement and
successive measurements over a period of one to two years in order to determine
the changes in bone mass of
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a patient with actively progressing osteoporosis experiencing the average rate
of bone loss of 2 to 4% per year. Measurements must be spread over an even
longer period in order to measure rates of bone loss lower than 2 to 4%
annually.
Because of the long period of time required to measure the rate of
bone loss, the Company believes current bone densitometry techniques are not
suitable for general screening of women in the early stages of menopause or for
monitoring the efficacy of treatments for osteoporosis. More recently,
biochemical markers have been identified that are reliable indicators of the
rate of bone loss.
In a diagnostic context, a biochemical marker is a chemical produced
by the body whose presence is highly specific to a particular disease or
condition. During the last five years, there has been considerable research
devoted to developing a biochemical marker for bone resorption sufficiently
sensitive to permit rates of resorption to be determined.
Most research attention has been directed to four biochemical markers:
pyridinoline, deoxypyridinoline, N-telopeptide and Ctelopeptide. All of these
markers identify the presence of bone collagen fragments in body fluids.
Collagen is the major protein component of bone. Collagen cross-links provide
structural stability and insolubility to collagen and are released when
collagen breaks down during bone resorption.
All the markers appear highly specific to bone loss, although there is
debate in the scientific community on the specificity of each marker. All the
markers have been studied extensively in urine. These studies have shown that
(i) the markers are released into the blood stream (and ultimately into urine,
as the kidneys extract them as a waste) only when mature bone breaks down and
not when new bone is formed, (ii) markers are not metabolized further once
released into the blood stream and thus directly reflect bone resorption and
(iii) marker levels are not affected by diet (for example, foods containing
collagen).
In addition to biochemical markers for resorption, markers have been
discovered for bone formation. These include certain molecules that are
released into the blood as a result of osteoblastic activity, such as alkaline
phosphatase and osteocalcin.
Research suggests that urine tests may not provide the most accurate
information concerning resorption, particularly because urine test results
reflect only a "snapshot" of the patient's bone marker levels which may be
affected by many external variables such as exercise, hormone levels and
medications. Studies have indicated that urine tests to detect signs of
resorption are
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subject to variations in excess of 30%, much too high to be considered a
predictor of risk of osteoporosis. Such variability limits the utility of urine
tests to measuring the effectiveness of resorption-blocking drugs during
treatment only after osteoporosis has been conclusively diagnosed by other
means. This high variability rate could be avoided by using multiple urine
samplings over a 24-hour period, but at high cost and inconvenience to the
patient. To date, no effective blood serum test for bone markers is
commercially available, although several are under development. The Company
believes that the Osteopatch(TM) provides a solution to the wide variations
experienced in urine sampling, resulting in a more accurate measurement of bone
loss, which in turn will improve the ability to detect subtle changes in bone
resorption, and, when compared to control group standards, identify individuals
who are losing bone rapidly and are subject to increased risk of fracture due
to osteoporosis.
The Company's Osteopatch(TM)
The Company holds exclusive world-wide rights to the use of a
transdermal perspiration collection device, the Osteopatch(TM), for measuring
bone loss that may assist in the detection of osteoporosis. Seven patents have
been issued to the inventors of this device and one patent is expected to be
granted to the Company and additional patents are pending. The Osteopatch(TM)
is designed for extended wear (several days) and is particularly useful in
capturing biochemical markers via continuous collection from perspiration over
an extended time period. The Company will be measuring markers of bone
resorption (loss) from perspiration as an early indicator of bone loss. Since
bone metabolism is known to vary during the day and from day-to-day, the
Company believes the Osteopatch(TM) will enable the Company to reduce this
variation and thereby be able to distinguish a disease state of bone loss from
normal biological variations due to physical exertion, fluctuating hormone
levels and other factors. Along with the patented collection device, the
Company has exclusive rights to patented antibodies that are specific to known
biochemical markers of bone loss. The Company is developing a proprietary,
highly sensitive immunoassay that can measure the bone loss markers in human
perspiration.
The Company has under development a skin patch test to measure both
pyridinoline (Pyd) and deoxypyridinoline (Dpd) in perspiration as a screening,
monitoring and early diagnostic test for osteoporosis. Pyd and Dpd are well
known biochemical markers of bone resorption that have been characterized by
numerous clinical studies and publications from around the world. These markers
have been reported in the scientific literature to be highly specific to the
breakdown of bone collagen and sensitive to diseases and therapies affecting
bone metabolism and in one recent study, predictive of osteoporosis associated
fractures. The Company has
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exclusive rights, relating to bone resorption in human perspiration, to use
patented antibodies for these markers owned by Metra, a developer and marketer
of bone loss urine tests. The Company expects to introduce its Osteopatch(TM)
test in the U.S. and possibly abroad in the first half of 1998, following
completion of its immunoassay and clinical trials, which introduction is
subject to approval by the FDA. See "Risk Factors - Government Regulation and
Product Approval." The skin patch test is expected to provide patient
convenience, ease of laboratory collection and processing, and superior
accuracy.
The Company believes that the "ease of use" of the Osteopatch(TM) will
make it attractive to the "point of care" testing market. Point of care testing
occurs in the physician's office, outpatient sites and in the patient's home.
The Company believes that the point of care testing marketplace will grow
substantially over the next several years.
It is the Company's strategy to develop alliances and distribution
agreements with organizations that either currently market to the point of care
testing marketplace or are positioning themselves for this marketplace,
including pharmaceutical companies, diagnostic distributors, and consumer
health related entities. The Company has had numerous discussions with many
entities and intends to establish strategic relationships once the Company has
filed its 510(k) application with the FDA, which the Company expects will occur
in approximately twelve months. The Company has also received inquiries from
distributors outside the U.S. and will continue to explore the international
marketplace for its products.
The Company believes that the education of physicians, patients, and
insurers about the long term benefits of early diagnosis and treatment of bone
disorders is important to the success of the Company's products. As managed
care becomes increasingly more prevalent in the U.S., emphasis on disease
prevention should increase along with the demand for early and cost-effective
diagnostic tests. This emphasis on preventive health care along with the
availability of advanced drug therapies for osteoporosis from pharmaceutical
companies will continue to increase the need for cost-effective diagnostic
devices that detect osteoporosis and monitor the effectiveness of drug
therapies.
Laboratory Operations
The Company has a fully equipped 6,000 sq. ft. laboratory in Seattle,
Washington that supports product development in the diagnostics and
pharmaceutical industries. This facility provides full service laboratory
analysis, development of reference methods, protocol development, data
management and consulting services to a large number of clients, including
Abbott, Bristol-Myers, Squibb,
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DuPont, Genzyme, Merck, Metra, Ostex, Proctor & Gamble and Parke- Davis (Warner
Lambert). The Company also maintains a 1,000 sq. ft. development laboratory in
Irvine, California, to support the development and manufacture of the
SalivaSac(R) product.
The Company's laboratory has supported numerous Phase I through IV
pharmaceutical clinical trials as well as diagnostic product clinical trials.
The Company's expertise in lipid analysis includes in-house CDC reference
methodologies for total cholesterol, LDL-cholesterol, HDL-cholesterol and
triglycerides. Research and routine methodologies include quantitation of
lipids and lipoproteins by different techniques such as fractionation by
ultracentrifugation, electrophoresis, chemical precipitation and various immuno
assays. The Company's scientists have been extensively involved at the national
level in developing guidelines for lipid measurements and method improvement.
Many of the current standard lipid methods have been developed at the Company,
including the current CDC Designated Comparison Method for HDLcholesterol.
In the emerging field of osteoporosis laboratory assessments, the
Company has developed a complete test menu for bone metabolism, including the
serum markers of bone formation, the urinary markers of bone resorption, and
several related tests involving measurement of hormones and other substances.
The key services that the Company provides to the diagnostics industry
are conducting laboratory analysis including contract research to assist in
product development, providing reference materials to assess quality of
products in research and development and manufacturing stages, providing
proficiency testing and standardization services through the Company's CDC
network reference laboratory, supporting diagnostic clinical trials as a
central specialty laboratory and clinical trial manager, and consulting for
regulatory, strategic, and technical issues related to successful product
development.
In both the pharmaceutical and diagnostic market segments, the
Company's central laboratory services are highly regarded for the training and
skills of its scientists and support personnel, the techniques used for
laboratory testing, the quality control measures employed and the Company's
ability to manage complex data efficiently and creatively for its clients.
In addition to expansion of the Company's reference laboratory
services, the Company also expects that its laboratory operations will increase
concurrently with the introduction of the Osteopatch(TM) and that its revenues
will increase proportionately with market acceptance of the Osteopatch(TM),
since the perspiration collected from the Osteopatch(TM) must be analyzed in a
laboratory setting and it is expected that the Company's laboratory in Seattle
will
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conduct a significant portion of the analysis related to the Osteopatch(TM)
product. The reputation of the laboratory for quality, the consistency of doing
all testing from a single laboratory and the inherent advantages of this
technology are all expected to contribute to physician acceptance of test
results in this emerging new field. Strategically, since the Company will also
manufacture its own assay to use with the Osteopatch(TM), the Company will have
characteristics of both a diagnostic test kit manufacturer and a clinical
laboratory. This will be an unique combination in the osteoporosis field that
will enable the Company to compete effectively against both clinical
laboratories and diagnostic manufacturers since the Company should benefit from
higher profit margins by providing both services.
SalivaSac(R)
Saliva is a potentially useful body fluid for diagnostic purposes but
is difficult to handle in the laboratory because it contains
mucopolysaccharides, particulate matter, blood contamination, enzymes and other
large molecules. These substances tend to complicate the processing of saliva,
which must be frozen or centrifuged, and often interfere with sensitive assays
used to measure analytes of medical interest. The Company has a patented saliva
collection and processing device called the SalivaSac(R). The SalivaSac(R) is a
small device consisting of a semipermeable outer membrane and containing a
small quantity of a substance such as salt or sugar that acts as an osmotic
driver. When the device is placed in the mouth it rapidly fills with saliva
that is filtered as it passes through the semipermeable membrane. The resulting
fluid is clear, easy to use, and does not contain interfering substances. Based
on preliminary studies conducted by the Company and others, this product has
numerous potential applications including therapeutic drug monitoring,
detection of drugs of abuse, measurement of hormones and analytes of infectious
disease.
The Company is also researching two applications of this technology
for diabetes. One application, supported by an NIH SBIR grant, is the
development of a saliva test for long term diabetic control. The Company is
investigating the measurement of glycated proteins in saliva as a non-invasive
test to potentially replace hemoglobin A1c. A second application, also
supported by an NIH SBIR grant, involves the measurement of saliva glucose as a
non-invasive substitute for blood glucose. While previous attempts by others to
correlate saliva glucose with blood glucose have been unsuccessful, the Company
has had encouraging preliminary results using the SalivaSac(R) device as it
appears to exclude substances that interfere with accurate glucose
measurements. In addition to developing applications for the SalivaSac(R), the
Company will seek to license the SalivaSac(R) to others for applications in
markets that the Company does not intend to serve itself, such as testing for
drugs of abuse. The Company does not believe that any products
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developed using SalivaSac(R) will be available for regulatory approval or test
marketing prior to 1998.
SPINPRO(R)
The Company has licensed a patented technology that simplifies the
preparation of serum samples for tests requiring a separation step prior to
obtaining an analytical result. This technology incorporates the functions of
precise sample measurement, sample separation and reagent dispensing in a
specially designed, multiple chamber sample tube. This low cost, disposable
device enables the accurate and controlled processing of complex tests
requiring a pretreatment step by relatively unskilled laboratory personnel. The
Company has named this new technology "SPINPRO(R)" and has registered the name
as a Company trademark.
The Company has introduced its first SPINPRO(R) product to the market
in the form of a device that facilitates the testing of HDLcholesterol. A test
that previously required tedious off-line preparation in most laboratories is
now greatly facilitated by using the Company's SPINPRO(R) technology. This
device is distributed by Sigma, a large distributor of diagnostic reagents and
products to laboratories in the United States and several European countries.
In order to maintain its exclusivity rights, Sigma must purchase the following
minimum quantities over the next three years: 1.25 million units, 2.75 million
units and 4.00 million units, respectively. The Company is investigating other
applications of SPINPRO(R) technology.
Business Strategy
The Company's strategy is to focus on the development of
cost-effective, convenient diagnostic tests and improved laboratory techniques
that support the objectives of early diagnosis, prevention and therapeutic
monitoring. Critical to this strategy is focusing the development of new
products in certain disease areas. The Company, therefore, will strive to be a
leader in testing relating to common, chronic diseases of an aging population
which ensures a large and growing population for the next two to three decades.
Additionally, the Company anticipates that it will build on its leadership
reputation in laboratory testing and methods in the fields of coronary heart
disease and osteoporosis by aggressively seeking new clinical trial support
business from developers of new therapeutics and diagnostics in these fields,
and continue to maintain leadership in these areas through the support of
methods standardization and proficiency testing. Over time, if feasible, the
Company anticipates that it will build similar capabilities and expertise in
diabetes and arthritis testing and therapeutic monitoring by seeking a role in
clinical trials of new products and technology developed by others.
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The Company's business strategy is to establish the Osteopatch(TM) as
the standard collection and diagnostic device for risk assessment and
management of therapy for osteoporosis and to develop applications for the
SalivaSac(R) to aid in the treatment of diabetes and other ailments. This
strategy includes educating physicians and other healthcare professionals,
forming strategic marketing and distribution alliances with established market
leaders to establish and then expand market share for the Osteopatch(TM),
maintaining a strong proprietary position for its products and technology,
expanding laboratory operations and continued dedicated research of its
products and technologies.
A key factor driving the Company's strategy as it relates to the
Osteopatch(TM) is the belief that a small percentage of the population at risk
for osteoporosis-related fracture is currently diagnosed and that an even
smaller percentage is effectively treated. The Company believes that the
historical lack of consistent therapeutic intervention can be traced in part to
the limited availability of timely, cost-effective and accurate methods to
detect and monitor bone loss. The Company believes that the demand for its
products will be driven in part by physicians' need to easily, inexpensively
and accurately (i) identify those persons most at risk before significant bone
loss occurs, (ii) quantify the parameters of each patient's bone remodeling
process, (iii) determine therapeutic dosage and duration of therapy, and (iv)
monitor the effectiveness of, and patient compliance with, prescribed
therapies.
Material Contracts
The Company has the exclusive rights to certain patents, which it
believes substantially covers the Osteopatch(TM) technology as it relates to
osteoporosis applications. Pursuant to the terms of the Company's license
agreement with Sudor Partners, the owners of the patents, the Company is
required to pay royalties to Sudor Partners in the amount of 5% of gross sales
of patches and 5% of profits derived from after-use diagnostic analysis or
evalutive analysis revenues received through the Company's laboratory. The
Company is required to make minimum royalty payments in the amount of $15,000
each quarter. The license is terminable in the event (i) of a failure to
perform any conditions of the license agreement, (ii) the Company becomes
insolvent or institutes bankruptcy proceedings, (iii) the Company's assets are
seized or attached, (iv) of a failure to make timely royalty payments and (v)
of termination of the supply agreement discussed below. The Company is
currently in compliance with all obligations under the license agreement.
The supply agreement between the Company and Sudormed, Inc., an
affiliate of Sudor Partners, provides that such affiliate will manufacture the
Osteopatch(TM) for the Company. Sudormed currently
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subcontracts manufacture of the patch technology to The 3M Company. In the
event certain specified minimum purchases are not met by the Company, the
license agreement will become non-exclusive. The Company is required to
purchase a minimum of 25,000 Osteopatch(TM) units prior to March 31, 1997.
The Company is aware that the owners of the patents relating to the
Osteopatch(TM) technology are in the process of seeking a buyer for such
patents and have engaged Douglas Harrington, a director of the Company, to
facilitate the sale process. Although a conflict of interest may arise with
respect to such director's fiduciary obligations to the Company and his
contractual obligations with respect to the sale of the patents, the Company
believes that the ultimate sale of the patents by the owners thereof will not
have any material impact on the Company. There can be no assurance, however,
that such patents will not be sold to a competitor of the Company, that any
conflicts of interest which may arise relating to the director who has been
engaged to facilitate the sale of such patents will be resolved in favor of the
Company or that the ultimate buyer of the patents will honor the Company's
license with respect to such patents, in which event the Company may be
required to enforce its rights under the license agreement at a time when it
does not have sufficient resources to do so. See "Risk Factors -Dependence on
Licenses".
The Company has contracted with Assay Designs, Inc. to develop a
pyridinoline immunoassay and a deoxypyridinoline immunoassay and related test
kits for the Company for use with the Osteopatch(TM). Such immunoassays are
utilized in connection with biochemical markers which identify the presence of
bone collagen fragments in body fluids, such as perspiration. Pursuant to the
development agreement, the Company must satisfy specified fee arrangements and
will be assessed a late charge for any payment not timely made. The agreement
may be terminated upon the Company's failure to make a required payment. The
Company is currently in compliance with its obligations under this agreement.
The Company is the exclusive worldwide (except Japan) licensee of
antibody technology from Metra, which is used in the quantitative measurement
of pyridinium crosslinks in all body fluids. The license will convert to a
non-exclusive license upon the earlier of (i) seven years from the first
commercial sale of products incorporating the licensed technology, or (ii)
February 15, 2005. The licensee must pay a royalty per patient report. The
license is terminable (A) upon a material breach of the license agreement, (B)
upon dissolution or liquidation of the Company, or (C) the Company's failure to
invest either (i) $100,000 annually in the research and development of the
licensed technology prior to its submission for FDA approval or (ii) $40,000
annually in the research and development of the licensed technology subsequent
to
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its submission for FDA approval. The Company is currently in compliance with
its obligations under this agreement.
The Company has contracted with Irvine Scientific to manufacture its
SPINPRO HDL product. Pursuant to the manufacturing agreement, the Company is
required to purchase all SPINPRO units from Irvine Scientific. The agreement is
terminable upon ninety days written notice by the Company. The Company is
currently in compliance with all obligations under this agreement.
The Company has entered into an agreement with Sigma whereby Sigma has
the exclusive right to distribute the SPINPRO(R) HDL device in the U.S. and
certain European countries and (except for physician sales and service)
throughout the rest of the world on a non-exclusive basis. The agreement, set to
expire October 26, 1998, is automatically renewable for successive one year
terms unless the Company otherwise notifies Sigma of its intention to terminate.
The agreement is terminable in the event (i) of a failure to observe any
material term of the agreement, (ii) either party becomes insolvent or (iii) if
either party makes an order or resolution to windup or liquidate. The Company is
currently in compliance with all obligations under this Agreement.
Licensed Patents and Proprietary Rights
The Company's success will depend in part on its ability to obtain
patent protection for its products both in the United States and other
countries. The Company is the exclusive licensee of rights under ten issued
U.S. patents and four additional pending U.S. patent applications, seven of
such patents and two of such patent applications relating to the Osteopatch(TM)
technology. The patent positions of biotechnology and pharmaceutical firms are
generally uncertain and involve complex legal and factual questions. No
consistent policy has emerged regarding the breadth of claims allowed in
biotechnology patents. While the Company's licensor is currently prosecuting
its patent applications, the Company does not know whether any application will
result in the issuance of a patent or, if any patent is issued, whether claims
ultimately allowed thereunder will provide significant proprietary protection
or will be invalidated.
The commercial success of the Company will also depend in part on not
infringing patents or proprietary rights of others, and not breaching licenses
granted to the Company. The Company may be required to obtain licenses to
third-party technology necessary to conduct the Company's business. Any failure
by the Company to license at reasonable cost any technology required to
commercialize its technologies or products would have an adverse impact on the
Company.
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Litigation, which could result in substantial cost to the Company, may
also be necessary to enforce any patents issued to the Company's licensor or to
determine the scope and validity of other parties' proprietary rights. If the
outcome of any such litigation is adverse to the Company, the Company's
business could be adversely affected. To determine the priority of inventions,
the Company may have to participate in interference proceedings declared by the
U.S. Patent Office or similar proceeding in foreign patent offices, which could
result in substantial cost to the Company and may result in an adverse decision
as to the priority of the inventions licensed to the Company. The Company
believes there will continue to be significant litigation in the industry
regarding patent and other intellectual property rights.
The Company also relies upon unpatented trade secrets. Others may
independently develop substantially equivalent proprietary information and
techniques, or otherwise gain access to the Company's trade secrets or disclose
such technology. The Company requires its employees and consultants to execute
a confidentiality agreement upon the commencement of an employment or
consulting relationship with the Company. The agreement provides that all
confidential information developed by or made known to an individual during the
course of the employment or consulting relationship generally must be kept
confidential. In the case of employees, the agreement provides that all
inventions conceived by the individual while employed by the Company are the
Company's exclusive property. These agreements may not provide meaningful
protection for the Company's trade secrets in the event of unauthorized use or
disclosure of such information. See "Risk Factors -- Patents and Proprietary
Technology."
Government Regulation
The development, testing, manufacturing and marketing of the Company's
products are regulated in the U.S. by the FDA. The testing for, preparation of,
and subsequent FDA review of required applications is expensive, lengthy and
uncertain. Moreover, regulatory approval, if granted, can include significant
limitations on the indicated uses for which a product may be marketed. Failure
to comply with applicable regulations can result in fines, suspensions of
approvals, product seizures, injunctions, recalls, operating restrictions and
criminal prosecutions. Delays in receipt of or failure to receive clearances or
approvals for the products of the Company would adversely affect the marketing
of such products and the results of future operations.
Distribution of the Company's products outside the U.S. will also be
subject to regulation which varies from country to country. Japan requires the
submission of clinical data in a manner analogous to the requirements of the
FDA. France requires the submission of clinical data with local content. The
regulatory
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requirements in all countries, however, are subject to change. In addition, the
export by the Company of certain of its products which have not yet been
cleared for domestic commercial distribution may be subject to export
restrictions imposed by U.S.
regulatory agencies.
Diagnostic products marketed in the U.S. are required to obtain FDA
clearance. The Company intends to seek FDA clearance for the Osteopatch(TM) in
the form of a 510(k) "device" premarket notification procedure to demonstrate
"substantial equivalence" to a legally marketed product. Clinical test data
will be required to substantiate substantial equivalence. The Company
anticipates that its 510(k) notification will be acted upon favorably and
quickly, although there can be no assurance that this will be the case. The
Company is relying on (i) the fact that the FDA has already cleared the skin
patch as a collection device and may be expected to clear the Osteopatch(TM) as
a collection device for pyridinoline and deoxypyridinoline and (ii) the fact
that the FDA has cleared Metra's 510(k) submissions for its immunoassay test
kits to measure pyridinoline and deoxypyridinoline levels in "first morning
void" urine samples. If the Company is able to demonstrate a correlation
between pyridinoline and/or deoxypyridinoline levels in perspiration and
measurable physiologic changes in patients, the Company believes that its
osteoporosis product can be shown to be substantially equivalent to medical
devices (eg. diagnostic kits for measurement of pyridinoline and/or
deoxypyridinoline levels in urine) which the FDA has already cleared for
marketing and thus qualifies for the 510(k) notification procedure.
Furthermore, there can be no assurance that the FDA will not request the
development of additional data following the original submission, causing the
Company to incur further cost and delay. Nor can there be any assurance that
the FDA will not restrict the intended use of the product as a condition for
clearance. In addition, the Company's promotional and educational activities
regarding its diagnostic products must comply with evolving FDA policies and
regulations regarding acceptable product promotion practices.
If the FDA concludes that a device is not substantially equivalent to
another legally marketed device, submission of a PMA will be required. If the
FDA indicates that a PMA is required for the products of the Company, the
application will require the results of clinical studies and manufacturing
information, and likely review by a panel of experts outside of the FDA.
Clinical studies would need to be conducted in accordance with FDA
requirements. The failure to comply would result in the FDA's refusal to accept
the data or the imposition of regulatory sanctions. FDA review of a PMA can
take significantly longer than that for a 510(k) notification. Further, if a
company wishes to propose modifications to a product subsequent to FDA approval
under a PMA application, including changes in indications or other significant
modifications to labeling, or modifications to the
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manufacturing process, or if a company wishes to change its manufacturing
facility, a PMA supplement must first be submitted to the FDA for its review
and approval.
The FDA also requires the Company to manufacture its products in
compliance with current GMP regulations which govern the procedures, controls
and documentation used in manufacturing the Company's products. The FDA ensures
GMP compliance through periodic facility inspections. Accordingly, the
manufacturer of the components of the Company's products must comply with these
requirements.
The Company's laboratory business is subject to federal regulation by
the Department of Health and Human Services ("HHS") and the FDA. Under the
Clinical Laboratory Improvements Amendments of 1988 and regulations promulgated
thereunder, the Company's laboratory must maintain a certificate of compliance
with the regulatory requirements applicable to the types of clinical testing
performed by the laboratory. These regulatory requirements govern the
laboratory's test methods, quality control procedures and proficiency, and may
be enforced through inspections and proficiency testing by HHS or its designee.
Under the FDA's Good Laboratory Practices regulations, the Company's laboratory
must comply with regulations promulgated by the FDA that govern testing
procedures and quality control procedures relating to non-clinical testing
performed in support of applications for research or marketing permits
regulated by the FDA. These regulations may be enforced through inspections by
the FDA.
Competition
The Company expects to experience intense competition from companies
developing biochemical markers with clinical applications for bone resorption.
The Company anticipates that it will face intense competition in attempting to
establish market share. To the Company's knowledge, however, none of these
competitive products are as simple or easy to use as the Osteopatch(TM).
However, there can be no assurance that the competitive positions of these
competitors or of other companies will not be enhanced significantly through
collaborative arrangements with large pharmaceutical companies, other companies
or academic institutions. The Company's competitors may succeed in developing,
obtaining patent protection for, receiving FDA and other regulatory approvals
for, or commercializing products more rapidly than the Company. If the Company
is successful in commercializing its products, it will be required to compete
with respect to manufacturing efficiency and marketing capabilities, areas in
which it has limited expertise. The Company also competes in acquiring products
or technology from universities. Furthermore, rapid technological development
could result in actual or proposed technologies, products or processes of
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the Company becoming obsolete prior to successful commercialization.
Certain diseases and disorders targeted by the Company's products can
be diagnosed and monitored using existing imaging technologies, such as
dual-energy X-ray absorptiometry ("DEXA"). The Company believes that current
imaging systems serve a different function than products that test for
biochemical markers, since the Company's products can identify a patient's rate
of bone loss, while DEXA measures a patient's existing bone mineral density.
Two of the leading companies in this field are Lunar Corporation and Hologic,
Inc.
Other companies that measure bone loss through bone markers include
Metra and Ostex, which have allied themselves with larger diagnostic and
pharmaceutical companies. These companies and their strategic alliances have
greater financial and other resources than the Company. The Company's products
will have to compete based on technological superiority, usefulness in
commercial versus clinical environments, ease of patient use, accuracy of
results and price. There can be no assurance that the Company will be able to
effectively compete based on the foregoing factors.
Major Customers
One customer, Parke-Davis, Inc., individually accounted for
approximately 29.5% and 43.9% of the Company's total sales in fiscal 1996 and
fiscal 1995, respectively. Sales to the Company's five largest customers
represented approximately 63.0% and 64.8% of total sales in fiscal 1996 and
fiscal 1995, respectively. Except for Parke-Davis, Inc., none of these
customers was significant in more than one year. The Company has no long term
contracts or agreements with its customers. Each contract is negotiated
separately with the pharmaceutical manufacturer or research organization and is
usually limited to a specific project with limited duration. The cancellation
of any contracts with existing customers or the failure to replace such
contracts upon expiration or termination could have a material adverse affect
on the Company's laboratory operations. As the Company's laboratory operations
grow, the Company expects that its dependence on any one or group of customers
will diminish.
Employees
As of June 30, 1996, the Company employed 24 persons, including 21
full time and 3 part time, of which 4 are management personnel, 3 are
administrative personnel, 14 are laboratory staff and 3 are support staff. The
Company's employees are not covered by any collective bargaining arrangements
or unions. The Company considers its relationship with its employees to be
good.
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Facilities
The Company's executive offices are located at 1370 Reynolds Avenue,
Irvine, California and laboratory facilities are located at both the Irvine
location and in Seattle, Washington. The Company leases approximately 3,570
square feet of office space, which consists of approximately 1,000 square feet
of laboratory space in Irvine pursuant to a one year lease, and expires on
September 30, 1997, at an annual rental of $32,130. The Company also leases
approximately 7,500 square feet of office space that includes approximately
6,000 square feet of laboratory space in Seattle pursuant to a five year lease
at an annual rental of $121,092.56 that expires on September 30, 1997. The
Company is currently seeking alternate facilities which will be adequate for
its expected levels of operations after September 1997.
Legal Proceedings
The Company is not a party to any legal proceedings.
MANAGEMENT
Directors and Officers
The Directors, executive officers and key employees of the Company are
as follows:
Name Age Position
- ---- --- --------
Ellen A. Rudnick 45 Chairman
Paul G. Kanan 50 President, CEO and Director
G. Russell Warnick 52 Chief Scientific Officer
Elizabeth Teng Leary, Ph.D 48 Vice President and Director
of Laboratories
Mary L. Campbell 52 Treasurer and Director
Douglas S. Harrington, M.D. 43 Secretary and Director
Craig M. Goldstone 39 Director
Terry M. Giles 47 Director
The following is a brief description of the professional experience and
background of the officers and directors of the Company.
Ellen A. Rudnick: Ms. Rudnick has served as Chairman of the Company
since July 1996, and served from 1993 to 1996 as Chairman of the Board and a
director of BioQuant, Inc. Since 1992, she has served as Chairman of CEO
Advisors, Inc., a health care consulting company that she and Paul Kanan
founded. From 1990 through 1992,
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Ms. Rudnick served as President and CEO of Healthcare Knowledge Resources,
Inc., a health care information company in Ann Arbor, Michigan and as President
of its successor, HCIA. She was employed from 1975 to 1990 by Baxter Healthcare
Corporation, most recently as Corporate Vice President and President of its
Management Services Division. She serves on the Boards of NCCI, Lakeland Health
Services and the Chicago Network. Ms. Rudnick holds a B.A. degree from Vassar
College and an M.B.A. degree from the University of Chicago Graduate School of
Business.
Paul G. Kanan: Mr. Kanan has served since July 1996 as the President,
Chief Executive Officer and a director of the Company, and served from 1993 to
1996 as the President and a director of BioQuant, Inc. Mr. Kanan is also an
officer and director of CEO Advisors, a health care consulting firm that he and
Ellen Rudnick founded in 1992. From 1991 to 1992, Mr. Kanan operated his own
health care consulting firm, and during part of such period served as acting
CEO and CEO of SPS, Inc., a healthcare service firm. From 1988 to 1991, he
served as President and CEO of Oncotech, Inc., a medical diagnostic company in
Irvine, California involved in the development and marketing of oncological
testing. From 1976 to 1988, Mr. Kanan was employed by Baxter Healthcare
Corporation, most recently as President of its Chemotherapy Services Division.
He received his B.S.E. degree from the University of Michigan and an M.B.A.
degree from Harvard University Graduate School of Business.
G. Russell Warnick: Mr. Warnick has served as the Company's Chief
Scientific Officer since July 1996. Mr. Warnick was a co-founder of PBI-WA and
has served as its President from 1989 to 1996. From 1976 to 1990, Mr. Warnick
was associated with the University of Washington in a number of roles including
research associate, research scientist and most recently Director of the
Lipoprotein Laboratory at the Northwest Lipid Research Center. As an
internationally recognized expert in cholesterol testing, he has been
extensively involved in developing national guidelines for improving laboratory
performance. He has authored over 150 books, chapters, articles and abstracts,
primarily in areas of lipid/lipoprotein measurement and developed a method for
measurement of HDL cholesterol that has been widely adopted by other clinical
laboratories. Mr. Warnick holds a B.A. in chemistry and an M.S. in biochemistry
from Utah State University and an M.B.A. from City University of Seattle.
Elizabeth Teng Leary, Ph.D., DABCC: Dr. Leary has served as the
Company's Vice President and Director of Laboratories since July 1996. From
1989 to July 1996, she was Vice President and Director of the Laboratory
Division of PBI-WA. Dr. Leary has served in a number of clinical laboratory
management positions prior to co-founding PBI-WA in 1989 with Mr. Warnick. Dr.
Leary served as the Director of Chemistry at Cooperative Medical
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Laboratories of Providence Hospital, Everett, Washington from 1978 to 1989;
Consultant to the Northwest Lipid Research Center from 1988 to 1989; and
Director of Chemistry at the General Hospital of Everett from 1978 to 1989. Dr.
Leary is a Diplomate of the American Board of Clinical Chemistry and serves as
Chair of the American Association for Clinical Chemistry Lipid and Lipoproteins
Division. She is also the Director of the CDC Cholesterol Reference Method
Laboratory at Pacific Biometrics Research Foundation. Her focus in recent years
has been standardization and method development in lipids and osteoporosis
testing. She has authored over 25 publications and abstracts. Dr. Leary
received her B.A. from the University of California, Berkeley; her Ph.D. in
biochemistry from Purdue University; and participated in post doctoral training
in clinical chemistry at the University of Washington.
Mary L. Campbell: Ms. Campbell has served as a non-employee officer in
the capacity of Treasurer and a director of the Company since July 1996, and
served as secretary, treasurer and a director of BioQuant, Inc. from 1993 to
1996. Since 1988, she has served as the treasurer of Enterprise Management,
Inc., the general partner of Enterprise Development Fund, L.P., a venture
capital firm and investor in BioQuant, Inc. From 1984 to 1987, she was employed
by Michigan Capital and Service, Inc., a venture capital subsidiary of the
National Bank of Detroit, most recently as its president. Ms. Campbell holds
B.A. and M.B.A. degrees from the University of Michigan and an M.A. degree from
Fairfield University.
Douglas S. Harrington, M.D.: Dr. Harrington has served as the
Secretary and a director of the Company since July 1996, and from 1993 to 1996
was Chairman of the BioQuant Scientific Advisory Board and a member of the
BioQuant Board of Directors since 1995. From 1992 to early 1995, Dr. Harrington
was the President of Nichols Institute Reference Laboratory in San Juan
Capistrano, California, a major reference laboratory for esoteric testing. Dr.
Harrington also serves as an Associate Clinical Professor of pathology and
microbiology at the University of Nebraska Medical Center, where he has been a
member of the faculty since 1986. Dr. Harrington has 87 publications including
papers, book chapters and abstracts. He received his B.A. from the University
of Colorado and his M.D. from the University of Colorado Health Sciences
Center. He is board certified in anatomical and clinical pathology and
hematology. Dr. Harrington is active in a number of organizations, including a
member of the Dean's Board of the University of California-Irvine Graduate
School of Management, serving on the boards of Sigma, Specialty Laboratories,
Inc., White River Concepts and California Private Equity Fund.
Craig M. Goldstone: Mr. Goldstone, a director of the Company since
July 1996, was Chairman of the Board of PBI-WA from 1995 to 1996. He also
serves as Senior Vice President-Investments for
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PaineWebber's New York office which he joined in January, 1995. From May 1991
to January 1995, Mr. Goldstone held Vice President positions at Lehman
Brothers. Prior thereto, Mr. Goldstone was a founding partner in Axion
Partners, Inc., a broker/dealer and hedge fund.
Terry M. Giles: Mr. Giles has been a director of the Company since
July 1996 and previously a director of PBI-WA from 1995 to 1996. In 1975, Mr.
Giles founded the law firm of Giles and Burkhalter, Orange County, California,
of which he is a member. Mr. Giles has served on the board of Computerland
since 1987, and is a member of the Board of Regents of Pepperdine University.
He received his B.A. from the California State University at Fullerton and his
J.D. from Pepperdine University School of Law.
Subsequent to this Offering, the Company intends to hire a full-time
Chief Financial Officer, who will also be appointed Treasurer of the Company,
responsible for the financial affairs of the Company. The Company is currently
interviewing several candidates for this position.
Indemnification
Pursuant to the Company's Certificate of Incorporation, as amended, and
By-laws, officers and directors of the Company will be indemnified by the
Company to the fullest extent allowed under Delaware law for claims brought
against them in their capacities as officers or directors. The Company is in
the process of attempting to obtain directors and officers liability insurance.
Indemnification will not be provided if the officer or director does not act in
good faith and in a manner reasonably believed to be in the best interests of
the Company, or, with respect to any criminal proceedings, if the officer or
director had no reasonable cause to believe his conduct was lawful.
Accordingly, indemnification may be sought for liabilities arising under the
Securities Act. The Underwriting Agreement also contains provisions under which
the Company and the Underwriter have agreed to indemnify each other (as well as
the other officers and directors) for certain liabilities, as well as the
other's liabilities under the Securities Act. See "Underwriting." Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted for directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
may, therefore, be unenforceable.
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Committees of the Board
The Board of Directors has established an Audit Committee of the Board.
The Audit Committee is comprised solely of independent directors and is charged
with reviewing the Company's annual audit and meeting with the Company's
independent accountants to review the Company's internal controls and financial
management practices. The members of the Audit Committee are Douglas S.
Harrington, M.D. and Terry Giles.
The Board of Directors has established a Compensation Committee of the
Board. The Compensation Committee is comprised solely of "Non-Employee
Directors" within the meaning of Rule 16b-3(b)(3) promulgated under the
Securities Exchange Act of 1934 and "outside directors" within the
contemplation of section 162(m)(4)(C)(i) of the Internal Revenue Code of 1986.
The Compensation Committee is responsible for establishing salaries, bonuses
and other compensation for the Company's executive officers and for
administering the Company's 1996 Stock Option Plan, including granting options
and setting the terms thereof pursuant to such plan. The members of the
Compensation Committee are Mary L. Campbell, Douglas S. Harrington, M.D. and
Craig M. Goldstone.
Directors' Compensation
The Company's policy is not to pay compensation to directors who are
also employees of the Company for their services as directors. The Company's
compensation policy for non-employee directors is to grant such persons for
each meeting attended in person up to a maximum of six meetings that number of
stock options, based on the fair market value on the date of grant, equal to
$1,000. The Company will also reimburse reasonable out-of-pocket expenses of
directors for attendance at meetings.
Executive Compensation
The following table sets forth the compensation earned by the Company's
Chairman, its Chief Executive Officer and all other executive officers earning
in excess of $100,000 for the year ended June 30, 1996.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------
Other
Name and Annual All Other
Principal Compensa- Compensa-
Position Year Salary Bonus tion tion
- ----------------- -------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Ellen Rudnick
Chairman 1996 -- -- $117,500(1) --
Paul G. Kanan
President and
Chief 1996 -- -- $117,500(1) --
Executive
Officer
</TABLE>
- -------------------
(1) Amounts above reflect payments to such persons through CEO Advisors, a firm
owned by Paul Kanan and Ellen Rudnick, for management services to BioQuant.
Such persons received cash of $24,000 and a promissory note in the amount of
$93,500 in July 1996 in lieu of the remaining cash payment due under the
management contract. The promissory notes mature on July 9, 1997 and bear
interest at the rate of 7% per annum. In consideration of receipt of such notes
in lieu of cash, such persons also received stock options to purchase 27,100
shares of common stock at $3.45 per share.
Employment Agreements
The Company will enter into employment agreements with each of Paul Kanan,
Ellen Rudnick, G. Russell Warnick and Elizabeth Teng Leary providing for an
annual base salary of $180,000, $140,000, $110,000 and $100,000, respectively,
and certain other customary benefits, including disability payments and
participation in all Company stock, health and benefit plans available to other
executive officers and employees.
1996 Employee Stock Incentive Plan
The Company adopted an Employee Stock Incentive Plan (the "Plan") in July
1996 to induce certain individuals to remain in the employ or service of the
Company and its subsidiaries and to attract new employees and non-employee
directors. The Plan is administered by the Compensation Committee of the Board
of Directors (the "Committee"), which will have the exclusive power to select
the officers and employees
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of the Company who are eligible for option grants or awards, and to determine
the terms and conditions of any options or awards granted, including but not
limited to the option price, method of exercise and the term during which the
options may be exercised. The total number of shares of Common Stock reserved
for issuance under the Plan is 1,000,000. Options granted under the Plan may be
non-qualified options, options qualifying as incentive stock options within the
meaning of Section 422(b) of the Internal Revenue Code of 1986, as amended (the
"Code") or stock appreciation rights. The Committee may also award restricted
stock, performance shares, loans or tax offset payments. The option price of
each incentive stock option granted under the Plan shall be not less than the
fair market value (110% of the fair market value if the grant is to an employee
owning more than 10% of the outstanding Common Stock) of the Common Stock
subject to the option, as determined in good faith by the Committee. Incentive
Stock options granted under the Plan will be exercisable for a period, not to
exceed ten years, as determined by the Committee. The option exercise price and
period within which non-qualified options may be exercised will be determined
at the discretion of the Committee. The Plan will terminate not later than July
9, 2006.
The initial per share exercise price for an ISO may not be less than the
fair market value thereof on the date of grant, or 110% of such fair market
value with respect to a participant who, at such time, owns stock representing
more than 10% of the total combined voting power of all classes of stock of the
Company. The initial per share exercise price for a non-qualifying stock option
may not be less than 85% of the fair market value thereof on the date of grant
or 100% of such fair market value with respect to a participant who is, or may
reasonably be expected to become, a "covered employee" within the meaning of
section 162(m)(3) of the Code. The initial per share exercise price for the
options granted to non-employee directors is the fair market value of the
Common Stock on the date of grant.
No option granted pursuant to the Plan may be exercised more than 10 years
after the date of grant, except that incentive stock options granted to
participants who own more than 10% of the total combined voting power of all
classes of stock of the Company at the time the ISO is granted may not be
exercised after five years after the date of grant. No participant may be
granted incentive stock options which are exercisable for the first time in any
one calendar year with respect to Common Stock having an aggregate fair market
value in excess of $100,000 on the date of grant. No option granted under the
Plan is transferable by the optionee other than by death.
Generally, an option may be exercised only while the recipient is in the
active employ or service of the Company, or within 30 days after termination of
a participant's employment or service as a director other than by reason of
retirement or death, or within one year after termination of employment or
service by reason of death, or within 90
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days after termination of a participant's termination of employment or
service by reason of retirement.
In the event of the death or retirement of an optionee, each option
granted to him shall become immediately exercisable in full.
PRINCIPAL SHAREHOLDERS
The following table sets forth information as of the date hereof with
respect to the beneficial ownership of the outstanding Common Stock of the
Company by each director, all 5% shareholders of the Company and all directors
and officers as a group.
<TABLE>
<CAPTION>
Name of Beneficial Amount and Percentage of
Owner Outstanding Common Stock
- -------------------------- ---------------------------------------------------------
Number of Prior to Offering After Offering
Shares(1) Percent(2) Percent(3)
<S> <C> <C> <C>
Ellen A. Rudnick(4) 267,674 10.4% 6.3%
Paul G. Kanan(5) 267,674 10.4% 6.3%
G. Russell Warnick(6) 121,044 4.7% 2.8%
Elizabeth Teng Leary(7) 90,125 3.5% 2.1%
Mary L. Campbell(8) 303,910 11.8% 7.1%
Craig M. Goldstone(9) 163,293 6.3% 3.8%
Terry M. Giles(10) 540,963 20.9% 12.6%
Douglas S. Harrington(11) 18,965 * *
All directors and officers
as a group (8 persons)(12) 1,773,648 68.7% 41.4%
</TABLE>
- --------------------------------
* Less than 1%.
(1) Includes currently exercisable options and warrants to purchase shares of
Common Stock.
(2) Based on an aggregate of 1,948,343 shares of Common Stock outstanding and
634,904 shares of Common Stock subject to currently exercisable options
and warrants.
(3) Based on an aggregate of 3,648,343 shares of Common Stock to be
outstanding and 634,904 shares of Common Stock subject to options or
warrants exercisable within 60 days of the date of this Prospectus.
(4) Includes 58,991 shares of Common Stock and 208,683 shares of Common Stock
subject to currently exercisable warrants and options. Does not include
80,000 shares of Common Stock subject to options granted in July 1996
which do not vest within the next 60 days.
(5) Includes 58,991 shares of Common Stock held by the Kanan Living Trust
Dated May 15, 1990, of which Paul Kanan is a co-trustee with his wife, and
208,683 shares of Common Stock subject to currently exercisable warrants
and options. Does not include 80,000 shares of Common Stock subject to
options granted in July 1996 which do not vest within the next 60 days.
(6) Includes 114,164 shares of Common Stock and 6,880 shares of Common Stock
subject to options granted in July 1996. Does not include 80,000 shares of
Common Stock subject to options granted in July 1996 which do not vest
within the next 60 days.
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(7) Includes 86,865 shares of Common Stock and 3,260 shares of Common Stock
subject to options granted in July 1996. Does not include 80,000 shares of
Common Stock subject to options granted in July 1996 which do not vest
within the next 60 days.
(8) Includes 263,016 shares of Common Stock and 40,894 shares of Common Stock
subject to currently exercisable options and warrants all held by
Enterprise Development Fund I, L.P. ("EDF"), of which Enterprise
Management, Inc. ("EMI") acts as general partner and in which Ms. Campbell
is an officer and one of three directors. Ms. Campbell disclaims
beneficial ownership as to all of said shares, except for approximately
21,000 shares (or approximately 7% of such shares) which represents her
one-third interest in EMI which, in turn, holds an approximately 21%
interest in EDF.
(9) Includes 119,145 shares of Common Stock, 16,792 shares of Common Stock
subject to currently exercisable options and warrants and 12,773 shares of
Common Stock which were issued upon conversion of certain indebtedness in
July 1996. Does not include 80,000 shares of Common Stock subject to
options granted in July 1996 which do not vest within the next 60 days.
(10) Includes 351,668 shares of Common Stock held by Millennium Partners, L.P.,
of which Mr. Giles controls approximately 70% and is therefore deemed the
beneficial owner of such shares, 55,000 shares of Common Stock granted to
Mr. Giles in July 1996, 124,295 shares of Common Stock which were issued
upon conversion of certain indebtedness in July 1996 and 10,000 shares of
Common Stock subject to warrants issued in the June 1996 private
placement.
(11) Includes 18,965 shares of Common Stock subject to currently exercisable
options and warrants. Does not include 40,000 shares of Common Stock
subject to options granted in July 1996 which do not vest within the next
60 days.
(12) Includes 1,244,908 shares of Common Stock and 528,740 shares of Common
Stock subject to currently exercisable options and warrants. Does not
include 440,000 shares of Common Stock subject to options granted to
management in July 1996 which do not vest within the next 60 days. In the
event such options and warrants are fully exercised, management will hold
an aggregate of approximately 2,213,648 shares or approximately 66.3%
based on a total of 3,339,247 shares outstanding subsequent to such
exercise. Does not include 223,911 shares reserved for issuance under the
Company's stock option plans, or Warrants offered hereby or warrants
issued in the June 1996 Financing and August 1996 Bridge Loan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Manufacturing Agreement dated March 1, 1994
between MHS and Irvine Scientific, Terry Giles, then a director of PBI-WA and
currently a director of the Company, and three former directors of PBI-WA,
guaranteed the obligations of MHS under the Manufacturing Agreement up to an
aggregate of $350,000.
In connection with a line of credit established on April 15, 1995 by
PBI-WA from the US Bank of Washington, N.A. (the "Bank"), Terry Giles and Craig
Goldstone, then directors of PBI-WA and currently directors of the Company, and
two former directors of PBI-WA, personally guaranteed all indebtedness of
PBI-WA under t he line of credit. In consideration for such guarantees, PBI-WA
issued to such persons an aggregate of 26,066 shares (pre-Merger) of PBI-WA
common stock.
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Additionally, in connection with the conversion of the line of credit
into a term loan on June 11, 1996, Elizabeth Teng Leary and Russell Warnick,
officers of the Company, delivered guarantees to the Bank which continued prior
guarantees delivered on October 28, 1992 and April 15, 1995. Further, Russell
Warnick personally guaranteed the lease of space in Seattle, Washington.
During the period from July 1994 through June 1996, Terry Giles, a
director of the Company, provided the Company (or PBI-WA), on eight separate
occasions, with loans aggregating $400,000. These loans bore interest at annual
variable rates ranging from 8.25% to 10%. All of such loans plus interest were
converted into 124,295 shares of Common Stock of the Company on July 31, 1996
at the rate of $3.45 per share.
During the period from July 1994 through June 1996, Craig Goldstone, a
director of the Company, provided the Company (or PBIWA), on four separate
occasions, with loans aggregating $100,879. These loans bore interest at the
annual rate of 9.25%. $42,500 of such amount plus interest was converted into
12,773 shares of Common Stock of the Company on July 31, 1996 at the rate of
$3.45 per share. $58,334 of such loan amount was used in connection with the
Financing described below for which Mr. Goldstone received a promissory note in
like amount and an aggregate of 14,853 warrants to purchase Common Stock.
EDF, an entity in which Mary Campbell, a director of the Company,
maintains a minority ownership interest, converted an aggregate of $17,500 of
loans to the Company plus interest into 5,206 shares of Common Stock of the
Company on July 31, 1996 at the rate of $3.45 per share. Miss Campbell
disclaims beneficial ownership of such shares held by EDF as a result of her
minority interest therein.
On September 5, 1996, the Board of Directors adopted resolutions
assigning a certain contract and other obligations of the Company to Messrs.
Giles and Goldstone and three former directors of PBI-Wa. Specifically, the
Company is assigning its rights and obligations pursuant to that certain letter
agreement dated June 13, 1995 between PBI-WA and Irvine Scientific, whereby
70,000 shares of PBI-WA common stock were issued to Irvine Scientific, subject
to a put option whereby the Company would have to repurchase such shares for
$140,000 in the event the Company does not exercise its call option to purchase
such shares prior to January 1, 1999.
Additionally, Messrs. Giles and Goldstone and three former directors of
PBI-WA have agreed to assume the Company's obligations (i) under a severance
arrangement with a former employee whereby the Company would be obligated to
pay such former employee $50,000 upon consummation of an initial public
offering, and (ii) pursuant
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to the Agreement of Merger and Plan of Reorganization dated September 30, 1994
between MHS and PBI-WA, whereby the Company would be obligated to issue certain
additional shares of its Common Stock to former PBI-WA stockholders who have
not previously waived their rights to receive such shares as a result of the
inability of the Company to achieve certain minimum revenue targets for its
SPINPRO(R) product by June 30, 1996.
The Company believes that the transactions between the Company and its
officers and directors described above are on terms no less favorable to the
Company than could have been obtained from unaffiliated parties under similar
circumstances.
Bridge Financing
In June 1996, the Company borrowed $250,000 from private investors
payable with interest at 14% per annum. This loan was repaid in full out of the
proceeds of the Bridge Loan described below. A total of 50,000 Bridge Warrants
were issued in connection with this Loan. See "Description of Securities -
Bridge Warrants."
In August 1996, the Company completed the Bridge Loan financing (the
"Bridge Loan") consisting of 14% Promissory Notes in the aggregate principal
amount of $1,000,000 payable on the closing of this Offering together with
interest at 14% per annum and warrants to purchase an aggregate of 250,000
shares of Common Stock exercisable at $5.70 per share. The Company will use a
portion of the proceeds of this Offering to repay the Bridge Loan, together
with accrued interest thereon. See "Use of Proceeds." Additionally, the Company
has granted demand and piggyback registration rights with respect to the
Warrants issued in connection with the Bridge Loan and the June 1996 Financing
and the Common Stock issuable upon exercise thereof. Messrs. Giles and
Goldstone, directors of the Company, invested $50,000 and $58,334,
respectively, in the Bridge Loan financing and received warrants to purchase
10,000 and 14,583 shares of Common Stock, respectively, in connection
therewith.
In connection with the Bridge Loan, the Company agreed to reimburse
legal expenses and paid a fee of $64,000 to the Underwriter, which acted as the
exclusive placement agent therefor. The net proceeds to the Company from the
issuance and sale of notes and warrants pursuant to the Bridge Loan were
approximately $936,000, of which approximately $250,000 was used to repay a
loan from certain investors as described above.
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DESCRIPTION OF SECURITIES
General
The authorized capital stock of the Company consists of an aggregate of
35,000,000 shares, of which 30,000,000 shares are of Common Stock, par value
$.01 per share and 5,000,000 shares are Preferred Stock, par value $.01 per
share.
Units
Each Unit offered hereby consists of (i) one share of Common Stock and
(ii) one Warrant. At any time commencing on the date of issuance through
January 31, 1998, each Warrant will be exercisable to purchase one share of
Common Stock. The Common Stock and Warrants will be separately transferable
from the Units immediately upon completion of this Offering.
Common Stock
The Company is authorized to issue 30,000,000 shares of Common Stock,
$.01 par value per share, of which 1,948,343 shares are currently outstanding.
Holders of Common Stock are entitled to one vote for each share held of record
on all matters to be voted on by shareholders. There are no preemptive,
subscription, conversion or redemption rights pertaining to the Common Stock.
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors from funds legally available therefor and to
share ratably in the assets of the Company available upon liquidation. The
holders of Common Stock do not have the right to cumulate their votes in the
election of directors and, accordingly, the holders of more than 50% of all the
Common Stock outstanding are able to elect all directors. The officers and
directors will continue to control a majority of the votes following completion
of this Offering and, accordingly, they will be able to elect all of the
Company's directors. All of the outstanding shares of Common Stock are, and the
Common Stock offered hereby, upon issuance and when paid for, will be duly
authorized, validly issued, fully paid and non-assessable.
Warrants
In connection with this Offering, the Company has authorized the
issuance of up to 2,175,000 Warrants (including 255,000 Warrants that may be
issued upon exercise of the Underwriter's over-allotment option and 170,000
Warrants issuable upon exercise of the Underwriter's Unit Purchase Warrant) and
has reserved an equivalent number of shares of Common Stock at a price of
$12.00 per share. The Warrants will be exercisable at any time after the
original date of their issuance (which is the date of this Prospectus) through
January 31, 1998 unless earlier redeemed. The
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Warrants are redeemable by the Company at $.10 per Warrant, upon 30 days'
notice, at any time commencing April 30, 1997, if the closing average bid price
per share of the Common Stock for 20 consecutive trading days prior to the date
notice of redemption is given equals or exceeds [$16.80] per share. In the
event the Company gives notice of its intention to redeem, a holder would be
forced either to exercise his or her Warrant within 30 days after the date of
notice or accept the redemption price.
The exercise price of the Warrants may be reduced at any time from time
to time in the discretion of the Board of Directors when it appears to be in
the best interests of the Company to do so. Any such reduction would benefit
the holders who do not exercise their Warrants prior to the effective date of
the reduction.
The Warrants will be issued in registered form under a Warrant
Agreement between the Company and [Transfer Agent] (the "Warrant Agent"). The
shares of Common Stock underlying the Warrants, when issued upon exercise of a
Warrant, will be fully paid and nonassessable, and the Company will pay any
transfer tax incurred as a result of the issuance of Common Stock to the holder
upon its exercise.
The Warrants contain provisions that protect the holders against
dilution by adjustment of the exercise price in certain events, such as stock
dividends and distributions, stock splits, recapitalization, mergers or
consolidations and certain issuances below the fair market value of the Common
Stock. The Company is not required to issue fractional shares upon the exercise
of a Warrant. The holder of a Warrant will not possess any rights as a
stockholder of the Company until such holder exercises the Warrant.
The foregoing discussion of certain terms and provisions of the
Warrants is qualified in its entirety by reference to the detailed provisions
of the Warrant Agreement, the form of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
For the Company to redeem or a holder to exercise the Warrants, there
must be a current registration statement in effect with the Commission and
qualification under applicable state securities laws (or applicable exemptions
from state qualification requirements) with respect to the shares or other
securities underlying the Warrants. The Company has agreed to use all
reasonable efforts to cause a registration statement or a post-effective
amendment to this registration statement with respect to such securities under
the Securities Act to be filed and to become and remain effective during the
term of the Warrants and to take such other actions under the laws of various
states as may be required to cause the redemption of the Warrants or the sale
of Common Stock upon exercise of Warrants to be lawful. The Company will not
call for
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redemption or not be required to honor the exercise of Warrants if, in the
opinion of the Board of Directors upon advice of counsel, such would be
unlawful. See "Risk Factors -- Current Prospectus and State Registration
Required to Exercise Warrants."
Bridge Warrants
In connection with the financings completed in June, 1996 and August
1996, respectively, the Company issued an aggregate of 300,000 warrants (the
"Bridge Warrants") to purchase 300,000 shares of Common Stock at an exercise
price, in the event of an initial public offering ("IPO") of the Company's
securities, equal to 120% ($5.70) of the public offering price of the Units
offered in such IPO. The Bridge Warrants are exercisable until April 30, 1998.
The Company granted demand and piggy back registration rights with respect to
the Bridge Warrants and the Common Stock issuable upon exercise thereof.
Preferred Stock
Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is authorized to determine the rights, preference,
privileges and restriction granted to, and imposed upon any such series. The
issuance of Preferred Stock could be used, under certain circumstance, as a
method of preventing a takeover of the Company and could permit the Board of
Directors, without any action of the holders of the Common Stock to issue
Preferred Stock which could have detrimental effect on the rights of holders of
the Common Stock, including loss of voting control. Anti-takeover provisions
that could be included in the Preferred Stock when issued may have a depressive
effect on the market price of the Company's securities any may limit
shareholders' ability to receive a premium on their shares of Common Stock by
discouraging takeover and tender offer bids. There are no shares of Preferred
Stock currently outstanding.
Underwriter's Unit Purchase Option
The Company has agreed to sell to the Underwriter warrants to purchase
from the Company an aggregate of up to 170,000 Units exercisable at a price per
Unit equal to 120% ($5.70) of the public offering price of the Units offered
hereby. The Underwriter's Unit Purchase Option and the securities underlying
such option are subject to demand registration on one occasion at the request
of the Underwriter (of which the Company shall bear all expenses) and
"piggyback" registration rights in the event the Company registers any class of
equity securities (other than securities registered on Form S-8, Form S-4 or
other similar registration form) for a period of five years from the date of
this Prospectus. See "Underwriting."
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Transfer Agent and Warrant Agent
American Securities Transfer & Trust, Inc. is the transfer agent for
the Common Stock and Warrant Agent with respect to the Warrants.
Anti-Takeover Protections
The Company is a Delaware corporation, and the Delaware General
Corporation Law contains certain provisions applicable to the Company which may
have the effect of preventing a non-negotiated change of control of the
Company. These provisions, among other things, prevent anyone who owns 15% or
more of the outstanding voting stock of the Company or who is an affiliate or
associate of the Company and owned 15% or more of the outstanding shares of
stock of the Company at any time within the prior three years (in either case,
an "interested stockholder") from engaging in any business combination with the
Company for a period of three years after becoming an interested stockholder,
unless (i) prior to the date the stockholder became an interested stockholder,
the Board of Directors approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; (ii) the interested stockholder, while acquiring his or her 15%,
acquires at least 85% of the outstanding shares, excluding shares held by
directors who are also officers [and certain shares held under employee stock
option plans]; or (iii) on or subsequent to such date, the business combination
is approved by the Company's Board of Directors and by the affirmative vote of
two-thirds of the shares voting at a stockholders' meeting, excluding shares
held by the interested stockholder.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering the Company will have 3,648,343
shares of Common Stock outstanding (3,903,343 shares if the Underwriter's
over-allotment option is exercised in full), excluding shares issuable upon the
exercise of the Warrants, Bridge Warrants, outstanding stock options and
warrants and the Underwriter's Unit Purchase Option. Of these outstanding
shares, the 1,700,000 shares offered hereby (1,955,000 if the Underwriter's
over-allotment option is exercised in full) will be freely tradeable without
restriction or further registration under the Securities Act, except for any
shares purchased by an "affiliate" of the Company (in general, a person who has
a control relationship with the Company) which will be subject to the
limitations of Rule 144 adopted under the Securities Act. Of the remaining
shares, 1,595,623 shares of Common Stock are deemed to be "restricted
securities," as that term is defined under Rule 144 promulgated under the
Securities Act and will be eligible for sale under Rule 144 in October 1997.
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In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or person whose shares are aggregated), who has owned restricted
Common Stock beneficially for at least two years is entitled to sell, within
any three-month period, a number of shares that does not exceed the greater of
1% (36,483 shares after the Offering) of the total number of outstanding shares
of the same class or, if the Common Stock is quoted on the Nasdaq System, the
average weekly trading volume during the four calendar weeks preceding the
sale. A person who has not been an affiliate of the Company for at least the
three months immediately preceding the sale and who has beneficially owned such
shares of Common Stock for at least three years is entitled to sell such shares
under Rule 144 without regard to any of the limitations described above.
The directors, officers and certain stockholders of the Company have
agreed not to sell or otherwise dispose of their Common Stock for a period of
12 months from the completion of this offering without the prior written
consent of the Underwriter. In addition, the Underwriter has received certain
registration rights under the Securities Act with respect to the Underwriter's
Unit Purchase Option and the Units issuable upon exercise of the Underwriter's
Unit Purchase Option. See "Underwriting."
Prior to this offering, there has been no market for the Common Stock
and no prediction can be made as to the effect, if any, that market sales of
Common Stock or the availability of such shares for sale will have on the
market prices prevailing from time to time. Nevertheless, the possibility that
substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and could impair
the Company's ability to raise capital through the sale of its equity
securities.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement,
Paradise Valley Securities, Inc. (the "Underwriter") has agreed to purchase
1,700,000 Units from the Company.
The Underwriting Agreement provides that the obligations of the
Underwriter is subject to certain conditions precedent. The nature of the
Underwriter's obligations is that it is committed to purchase all Units offered
hereby if any of such Units are purchased.
The Company has been advised by the Underwriter that it proposes
initially to offer the Units directly to the public at the initial public
offering price set forth on the cover page of this
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Prospectus and to certain dealers (which may include the Underwriter) at such
public offering price less a concession not to exceed $___ per Unit. The
Underwriter may allow, and such dealers may reallow, a discount not to exceed
$___ per Unit in sales to certain other dealers. After the initial public
offering, the public offering price and concessions and discounts may be
changed by the Underwriter.
The Company has granted to the Underwriter an option, exercisable in
whole or in part not later than 30 business days after the date of this
Prospectus, to purchase an aggregate of 255,000 Units at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus. To the extent that the Underwriter exercises
such option, the Underwriter will have a firm commitment to purchase such
Units, and the Company will be obligated pursuant to the option to sell such
Units to the Underwriter. The Underwriter may exercise the option for the
purposes of covering over-allotments, if any, made in connection with the
distribution of the Units to the public.
The Underwriter has informed the Company that the Underwriter does not
intend to confirm sales of Units offered hereby to any accounts over which it
exercises discretionary authority.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act.
All of the Company's directors, executive officers, certain other
management of the Company who will beneficially own an aggregate of 1,773,648
shares of Common Stock upon the completion of this offering, have agreed not to
sell, offer to sell, contract to sell or otherwise dispose of any shares of
Common Stock or any other security convertible into or exchangeable for, or
options to purchase or acquire, shares of Common Stock without the prior
written consent of the Underwriter for a period of one year after the date of
this Prospectus. Certain other stockholders of the Company have agreed not to
sell or otherwise dispose of a total of 300,000 shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of the Underwriter. See "Shares Eligible for Future Sale." In addition,
the Company has agreed not to sell, issue, contract to sell, offer to sell, or
otherwise dispose of any shares of Common Stock or any other security
convertible into or exchangeable for shares of Common Stock without the prior
written consent of the Underwriter during the same period.
The Company has agreed to sell to the Underwriter, for nominal
consideration, warrants to purchase up to 170,000 Units on the closing date of
this offering. The warrants will have an exercise
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price per share of $5.70, will be exercisable beginning on the first
anniversary of the date of this Prospectus for a period of four years, and
contain certain anti-dilution, registration rights, net issuance and exercise
provisions. Until the first anniversary date of this Prospectus, the warrants
may not be sold, transferred, assigned, or hypothecated, except to the
Underwriter or certain dealers, or their officers or partners, subject to
certain conditions. During the terms of such warrants, the holders thereof will
have the opportunity to profit from an increase in the market price of the
Company's Common Stock. The existence of such warrants may adversely affect the
terms on which the Company can obtain additional financing, and the holders of
such warrants can be expected to exercise such warrants at a time when the
Company, in all likelihood, would be able to obtain additional capital by
offering shares of its Common Stock on terms more favorable to the Company than
those provided by the exercise of such warrants.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance equal to 3% of the gross proceeds raised pursuant to this offering.
Prior to this offering, there has been no public market for the Common
Stock. Accordingly, the initial public offering price has been determined
through negotiations between the Company and the Underwriter. Among the factors
in such negotiations were prevailing market conditions, certain financial
information concerning the Company, market valuations of publicly traded
companies that the Company and the Underwriter believe to be comparable to the
Company, estimates of the business potential of the Company, the present state
of the Company's development and the markets for its products and services, an
assessment of the Company's management, the economics of the industry in which
the Company operates, and the economy as a whole.
Unless granted an exemption by the Commission from Rule 10b-6, in the
event that the Company engages the Underwriter to assist in soliciting exercise
of the Warrants, the Underwriter will be prohibited from engaging in any market
making activities with regard to the Company's securities for the period from
nine business days (or such other applicable period as Rule 10b-6 may provide)
prior to any solicitation of the exercise of warrants until the later of the
termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that the Underwriter may have to receive a fee for the
exercise of IPO Warrants following such solicitation. As a result, the
Underwriter may be unable to continue to make a market in the Company's
securities during certain periods while the IPO Warrants are exercisable.
Paradise Valley Securities, Inc. acted as placement agent in
connection with a private placement of notes and warrants completed
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in July, 1996 and August, 1996 and received commissions and non-accountable
expense allowance in the aggregate amount of $64,000. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Certain Transactions".
LEGAL MATTERS
The legality of the issue of the Units and securities underlying the
Units offered hereby will be passed upon for the Company by Rosenman & Colin
LLP, New York, New York. Certain legal matters will be passed upon for the
Underwriter by Brown & Bain, P.A., 2901 North Central Avenue, Suite 2000,
Phoenix Arizona.
EXPERTS
The consolidated balance sheet as of June 30, 1996 and the consolidated
statements of operations and cash flows for each of the two years in the period
ended June 30, 1996 and for the period from inception (December 1992) to June
30, 1996 and the consolidated statement of stockholders' deficit for the period
from inception (December 1992) to June 30, 1996 of Pacific Biometrics, Inc.
included in this Prospectus, have been included herein in reliance on the
report, which includes an explanatory paragraph with respect to the entity's
ability to continue as a going concern as described in Note 18 to Consolidated
Notes to Financial Statements, of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The balance sheet as of June 30, 1996 and the statements of operations
and cash flows for each of the two years in the period ended June 30, 1996 and
for the period from inception (October 1985) to June 30, 1996 and the statement
of stockholders' deficit for the period from inception (October 1985) to June
30, 1996 of BioQuant, Inc. included in this Prospectus, have been included
herein in reliance on the report, which includes an explanatory paragraph with
respect to the entity's ability to continue as a going concern as described in
Note 11 to Financial Statements, of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The statements of income for the seven month period from July 1, 1994
to January 31, 1995 of Pacific Biometrics, Inc. included in this Prospectus,
have been included herein in reliance on the report, which includes an
explanatory paragraph with respect to the entity's ability to continue as a
going concern as described in Note 9 to Financial Statements, of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
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ADDITIONAL INFORMATION
The Company is not a reporting company. The Company has filed with the
Securities and Exchange Commission a registration statement (the "Registration
Statement") under the Securities Act with respect to the securities offered by
this Prospectus. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and this offering, reference is made to
the Registration Statement including the exhibits filed therewith. The
Registration Statement may be inspected at the Public Reference Section at the
Commission's principal office, 450 5th Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and at the Northeast Regional Office, Room 1028, 7
World Trade Center, New York, New York 10048 and the Chicago Regional Office,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies may
be obtained from the Commission's principle office upon payment of the fees
prescribed by the Commission. The Commission maintains a World Wide Web site
that contains the Company's Registration Statement and other information filed
electronically with the Commission. The address of the Commission's World Wide
Web site is http://www.sec.gov. Although the Company believes that this
Prospectus describes all material terms of those contracts or documents
referenced herein, statements contained in this Prospectus as to the contents
of any contract or other document are not necessarily complete and where the
contract or other document has been filed as an exhibit to the Registration
Statement, each such statement is qualified in all respects by such reference
to the applicable document filed with the Commission.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Pacific Biometrics, Inc. (a Delaware corporation):
Report of Independent Accountants F-2
Consolidated Balance Sheet as of June 30, 1996 F-3
Consolidated Statement of Operations for the years ended June 30,
1996 and 1995, and for the period from inception (December
1992) to June 30, 1996 F-4
Consolidated Statement of Cash Flows for the years ended June 30,
1996 and 1995, and for the period from inception (December
1992) to June 30, 1996 F-5
Consolidated Statement of Stockholders' Deficit for the period
from inception (December 1992) to June 30, 1996 F-6
Notes to Consolidated Financial Statements F-7
BioQuant, Inc. (a Michigan corporation)
Report of Independent Accountants F-18
Balance Sheet as of June 30, 1996 F-19
Statement of Operations for the years ended June 30, 1996 and
1995, and for the period from inception (October 1985) to
June 30, 1996 F-20
Statement of Cash Flows for the years ended June 30, 1996 and
1995, and for the period from inception (December 1992) to
June 30, 1996 F-21
Statement of Stockholders' Deficit for the period from inception
(October 1985) to June 30, 1996 F-22
Notes to Financial Statements F-23
Pacific Biometrics, Inc. (a Washington corporation)
Report of Independent Accountants F-30
Statement of Operations for the period from July 1, 1994, to
January 31, 1995 F-31
Notes to Financial Statements F-32
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Pacific Biometrics, Inc.
Seattle, Washington
We have audited the accompanying consolidated balance sheet of Pacific
Biometrics, Inc. (a Delaware corporation) (a company in the development stage)
as of June 30, 1996, and the related consolidated statements of operations and
cash flows for the years ended June 30, 1996 and 1995, and for the period from
inception (December 1992) to June 30, 1996, and the consolidated statement of
stockholders' deficit for the period from inception (December 1992) to June
30, 1996. These consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Pacific Biometrics, Inc. as of June 30, 1996, and the consolidated results
of its operations and its cash flows for the years ended June 30, 1996 and
1995, and for the period from inception (December 1992) to June 30, 1996, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern . As discussed in Note 18 to
the consolidated financial statements, the Company has experienced recurring
losses from operations and cash flow shortages, and has reported deficiencies in
working capital and stockholders' equity. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 18. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Coopers & Lybrand L.L.P.
Seattle, Washington
September 5, 1996
F-2
<PAGE>
PACIFIC BIOMETRICS, INC.
(a Delaware corporation)
(a company in the development stage)
CONSOLIDATED BALANCE SHEET
June 30, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 192,898
Accounts receivable, net of allowance for doubtful accounts of $11,630 252,412
Other receivable 31,200
Supplies 19,837
Prepaid expenses 4,261
-------------------
Total current assets 500,608
Property and equipment, net 131,823
Other assets:
Technology license 164,062
Prepaid financing costs 30,000
Lease deposits 8,620
Organization costs 5,000
-------------------
Total assets $ 840,113
===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to bank $ 175,967
Notes payable to related parties 849,461
Notes payable-First Bridge Loan 250,000
Accounts payable 337,827
Accrued liabilities 277,876
Advance from Pacific Biometrics Research Foundation 5,000
Deferred compensation 34,996
Advances from customers 288,263
Capital lease obligations 5,160
-------------------
Total current liabilities 2,224,550
-------------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding
Common stock, $0.01 par value, 30,000,000 shares
authorized, 1,739,169 shares issued and outstanding 17,392
Additional paid-in capital 8,755,553
Deficit accumulated during the development stage (10,157,382)
-------------------
Total stockholders' deficit (1,384,437)
-------------------
Total liabilities and stockholders' deficit $ 840,113
===================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
PACIFIC BIOMETRICS, INC.
(a Delaware corporation)
(a company in the development stage)
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended June 30, 1996 and 1995, and for the Period
from Inception (December 1992) to June 30, 1996
For the Period
from Inception
(December 1992)
1996 1995 to June 30, 1996
---- ---- ----------------
Laboratory testing revenues and
consulting fees $ 1,657,280 $ 566,832 $ 2,224,112
------------ ------------ -------------
Operating expenses:
Laboratory 985,818 373,554 1,359,372
Diagnostic research and product
development 604,803 665,747 1,464,661
General and administrative 1,281,100 739,149 2,766,434
Purchased in-process research and
product development 6,373,884 6,373,884
Amortization of goodwill 428,368 428,368
------------ ------------ -------------
Total operating expenses 9,245,605 2,206,818 12,392,719
------------ ------------ -------------
Operating loss (7,588,325) (1,639,986) (10,168,607)
------------ ------------ -------------
Other income (expense):
Interest expense (39,853) (26,162) (66,015)
Grant and other income 67,315 1,958 77,240
------------ ------------ -------------
27,462 (24,204) 11,225
------------ ------------ -------------
Net loss $(7,560,863) $(1,664,190) $(10,157,382)
============ ============ =============
Net loss per share $ (7.01) $ (2.12) $ (12.78)
============ ============ =============
Number of shares used in
per-share calculation 1,079,289 783,423 794,486
============ ============ =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
PACIFIC BIOMETRICS, INC.
(a Delaware corporation)
(a company in the development stage)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended June 30, 1996 and 1995, and For the Period
from Inception (December 1992) to June 30, 1996
<TABLE>
<CAPTION>
For the Period
from Inception to
(December 1992)
1996 1995 to June 30, 1996
-------------- -------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 1,686,710 $ 538,453 $ 2,205,087
Cash paid to suppliers and employees (2,443,706) (1,384,201) (4,371,935)
Grants and other income received 67,315 5,929 77,240
Interest paid (39,853) (26,162) (66,015)
-------------- -------------- ----------------
Cash used by operations (729,534) (865,981) (2,155,623)
-------------- -------------- ----------------
Cash flows from investing activities:
Cash acquired in connection with merger of BioQuant 31,200 31,200
Cash acquired in connection with merger of Pacific
Biometrics, Inc. (a Washington corporation) 190,498 190,498
Purchases of technology licenses (100,000)
Advances to BioQuant prior to acquisition, net (145,000) (145,000)
Capital expenditures (18,592) (28,498) (61,495)
Other receivables 17,675
Organization costs (5,000) (5,000)
Deposits and other 133 (4,702)
-------------- -------------- ----------------
Cash used by investing activities (137,392) 179,808 (94,499)
-------------- -------------- ----------------
Cash flows from financing activities:
Common stock sold for cash 360,000 553,900 1,463,900
Borrowings from related parties 464,461 228,003 859,963
Issuance of notes in connection with First Bridge Loan 250,000 250,000
Repayment of bank borrowings (62,105) (8,544) (70,649)
Prepaid financing costs (30,000) (30,000)
Payments on capital lease obligations (18,534) (11,660) (30,194)
-------------- -------------- ----------------
Cash provided by financing activities 963,822 761,699 2,443,020
-------------- -------------- ----------------
Increase in cash and cash equivalents 96,896 75,526 192,898
Cash and cash equivalents:
Beginning of period 96,002 20,476
============== ============== ================
End of period $ 192,898 $ 96,002 $ 192,898
============== ============== ================
Reconciliation of Net Loss to Net Cash
Used by Operating Activities:
Net loss $ (7,560,863) $ (1,664,190) $ (10,157,382)
Purchased in-process research and product
development expense 6,373,884 6,373,884
Amortization of goodwill 428,368 428,368
Common stock issued for services 466,026 80,500 546,526
Services provided for subscription receivable 16,978 55,556
Depreciation and amortization 29,992 27,378 64,642
Amortization of technology license 11,111 49,722 100,000
Changes in operating accounts:
Accounts receivable 22,789 (117,979) (95,190)
Other receivables (9,946) 3,399 6,551
Supplies 15,063 2,345 6,671
Prepaid expenses 14,308 (13,962) (1,534)
Accounts payable and accrued liabilities (99,781) 218,182 405,124
Deferred compensation 22,496 12,500 34,996
Advances from clients (14,613) 90,778 76,165
============== ============== ================
Cash used by operations $ (729,534) $ (865,981) $ (2,155,623)
============== ============== ================
</TABLE>
See Note 16 for noncash transactions.
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
PACIFIC BIOMETRICS, INC.
(a Delaware corporation)
(a company in the development stage)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the Period from Inception (December 1992) to June 30, 1996
<TABLE>
<CAPTION>
Deficit
Accumulated
Per Common Stock Additional during the
Share ----------------------- Subscription Paid-in Development
Amounts Shares Amount Receivable Capital Stage Total
------- ------ ------ ---------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock issued for
cash at inception
(December 1992) $0.98 511,862 $ 5,119 $ (245,000) $ 494,881 $ 255,000
Cash received in
satisfaction of
subscription
receivable 161,000 161,000
Net loss $ (199,455) (199,455)
-------------------------------------------------------------------------------------------------
Balance, June
30, 1993 511,862 5,119 (84,000) 494,881 (199,455) 216,545
Common stock issued in
connection with
purchase of technology
license and services $0.89 62,561 569 (55,556) 54,987
Cash received in
satisfaction of
subscription receivable 84,000 84,000
Cash received in
satisfaction of
subscription receivable 38,578 38,578
Stockholder loans
converted to equity 310,000 310,000
Common stock issued
for cash $10.55 4,739 47 49,953 50,000
Net loss (732,874) (732,874)
-------------------------------------------------------------------------------------------------
Balance,
June 30, 1994 579,162 5,735 (16,978) 909,821 (932,329) (33,751)
Services provided
in satisfaction
of subscription
receivable 16,978 16,978
Stockholder loans
converted to equity 324,963 324,963
Common stock issued
for services and
loan guarantees $1.68 47,867 479 80,021 80,500
Common stock issued
in connection with
acquisition of Pacific
Biometrics, Inc. (a
Washington corporation) $0.77 189,061 1,891 143,109 145,000
Common stock issued
for cash $13.13 42,181 422 553,478 553,900
Conversion from $0.01
par value common stock
to no par value common
stock 2,011,392 (2,011,392)
Net loss (1,664,190) (1,664,190)
-------------------------------------------------------------------------------------------------
Balance, June 30, 1995 858,271 2,019,919 (2,596,519) (576,600)
Common stock issued
for cash $7.91 45,500 360,000 360,000
Common stock issued
for services $3.45 135,080 466,026 466,026
Issuance of $0.01 par
value common stock
in exchange for no par
value common stock in
connection with
acquisitions of
BioQuant and Pacific
Biometrics, Inc. (a
Washington corporation) (2,835,556) 2,835,556
Common stock issued in
connection with
acquisition of BioQuant $8.46 700,318 7,003 5,919,997 5,927,000
Net loss (7,560,863) (7,560,863)
-------------------------------------------------------------------------------------------------
Balance, June 30,
1996 1,739,169 $ 17,392 $ $ 8,755,553 $ (10,157,382) $ (1,384,437)
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
PACIFIC BIOMETRICS, INC.
(a Delaware corporation)
(a company in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BASIS OF PRESENTATION AND PROPOSED INITIAL PUBLIC OFFERING
Organization and Basis of Presentation
Pacific Biometrics, Inc. ("PBI-Delaware" or the "Company") was
incorporated in Delaware in May 1996. PBI-Delaware was formed in
connection with the acquisition of BioQuant, Inc. ("BioQuant"), a
Michigan corporation, and Pacific Biometrics, Inc. ("PBI"), a Washington
corporation. The merger of PBI-Delaware, BioQuant and PBI was completed
in June 1996, whereby the majority of the outstanding stock of
PBI-Delaware is owned by the former stockholders of PBI. All outstanding
shares of stock, options and warrants of PBI and BioQuant were exchanged
for similar securities of PBI-Delaware. The merger has been accounted
for as a purchase transaction with PBI as the accounting acquirer of
BioQuant. Prior to the merger, the operations of PBI-Delaware consisted
of its initial formation and the issuance of one share of common stock
for cash consideration of $4.00.
These financial statements present the consolidated balance sheet of
PBI-Delaware, PBI and BioQuant as of June 30, 1996, as the merger
occurred on June 28, 1996. The consolidated statements of operations,
cash flows and stockholders' deficit include the results of PBI-Delaware
and PBI for the periods presented. The Company is at an early stage of
development. Except for the revenues from the laboratory and from the
sale of the Company's cholesterol diagnostic product, all of the
Company's potential products are currently in research and development,
and no revenues have been generated to date. Consequently, the Company
is a development stage enterprise.
All material intercompany balances and transactions have been eliminated
in the accompanying consolidated financial statements.
BioQuant was incorporated in 1985 and has been engaged in research and
product development activities since inception. BioQuant is currently
engaged in the development of a diagnostic test related to osteoporosis.
The BioQuant product line includes a patented skin patch technology,
patented antisera and proprietary immunoassays for the measurement of
human perspiration. BioQuant also owns a patented saliva collection
device which is currently being developed for non-invasive diabetes
tests.
PBI was incorporated in 1989 and has been engaged in providing laboratory
and clinical research support services to the pharmaceutical and
diagnostic industries. PBI provides services on normal credit terms to
commercial and research organizations throughout the United States.
In January 1995, PBI was acquired by Merchant House Scientific, Inc., a
California corporation ("Merchant House"), which had been incorporated in
December 1992. Merchant House issued shares of common stock for the
acquisition of PBI. Certain of these shares were issued on a contingent
basis. Rights to substantially all of the contingent shares were
subsequently waived. Consequently, this transaction was treated as a
purchase in accordance with generally accepted accounting principles with
Merchant House as the acquiring entity.
F-7
<PAGE>
A summary of the allocation of purchase price based on an independent
appraisal is as follows:
Assets acquired:
Cash $ 190,498
Accounts receivable 156,944
Accounts receivable from related parties 37,751
Supplies 15,892
Property and equipment 116,773
Other assets 3,641
Goodwill 428,368
----------------
Total assets acquired 949,867
Liabilities assumed 804,867
----------------
$ 145,000
================
Goodwill recorded in the acquisition of PBI was written off in 1995 due
to the recurring net operating losses of PBI and the expectation that
losses would continue for the foreseeable future.
On June 28, 1996, PBI-Delaware acquired BioQuant. This acquisition was
accomplished through the issuance of three classes of common stock. All
classes of common stock held equal voting rights; however, two classes of
common stock were restricted as to their trading rights (the "restricted
stock"). The right to trade the restricted stock was dependent on the
Company's ability to achieve certain performance milestones. In July
1996, a majority of the Company's stockholders voted to convert all of
the outstanding classes of common stock to a single class of common stock
thereby eliminating any trading restrictions on the stock. The
accompanying consolidated financial statements reflect all the
outstanding common stock as a single class of stock as if the conversion
had occurred as of the earliest period presented.
A summary of the allocation of purchase price based on an independent
appraisal is as follows:
<TABLE>
<S> <C>
Assets acquired:
Cash $ 31,200
Supplies 10,616
Property and equipment 18,197
Technology license 164,062
Other assets 3,282
Purchased in-process research and product development 6,373,884
----------------
Total assets acquired 6,601,241
Liabilities assumed 674,241
----------------
$ 5,927,000
================
</TABLE>
The purchased in-process research and product development had met several
technical milestones during the development process, but at the date of
acquisition clinical trials had not yet commenced. Consequently, the
purchased in-process research and development had not yet reached
technological feasibility, as defined by generally accepted accounting
principles. In management's opinion, this technology had no alternative
future use. Therefore, the amount was charged to expense in accordance
with generally accepted accounting principles.
F-8
<PAGE>
The following presents the results of operations of the Company on a
proforma basis for the years ended June 30, 1996 and 1995, as if the
acquisitions of PBI by Merchant House and BioQuant by PBI (formerly
Merchant House) had occurred on July 1, 1994:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Laboratory testing revenues
and consulting fees $ 1,662,118 $ 1,054,008
=============== ================
Purchased in-process research and
product development $ 6,373,884
================
Goodwill amortization $ 428,368
================
Net loss $ (1,936,720) $ (9,117,629)
=============== ================
Net loss per share $ (1.79) $ (11.64)
=============== ================
</TABLE>
Initial Public Offering
The Company is currently in the process of raising approximately $8
million through an initial public offering of its common stock. The
Company has engaged an underwriter and retained legal counsel to pursue
this financing plan and, although the success of the offering cannot be
predicted with certainty, the Company plans to complete the offering
later in 1996. The Company intends to use the proceeds of this financing
to repay certain debt and support the financial requirements associated
with implementing its business plan. (See Note 18.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consist of a money market fund which is
maintained at a bank. The Company considers all investments with an
initial maturity of three months or less at the time of purchase to be
cash equivalents.
Supplies
Supplies consist of items used to calibrate test equipment or verify
testing methods related to lipids and saliva collection devices. These
items are recorded at the lower of estimated cost (weighted- average) or
market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and
amortization are provided using straight-line and accelerated methods
over the useful lives of the related assets. Leasehold improvements are
amortized over the terms of the respective leases. The cost and related
accumulated depreciation of property or equipment sold or otherwise
disposed of are removed from the accounts and the resulting gains or
losses are included in the statement of operations.
Licensing Fees
Licensing fees have been recorded at cost and are being amortized over
useful lives of three to four years. The amount charged to expense in
connection with amortizing these licensing fees was $11,111 and $49,722
for the years ended June 30, 1996 and 1995, and $100,000 for the period
from inception to June 30, 1996.
F-9
<PAGE>
Customer Advances
The Company receives advances from certain customers to perform
consulting, laboratory services and clinical studies. These advances are
deferred and recognized as revenue in the period the related services are
performed.
Income Taxes
Deferred tax assets and liabilities are recorded for differences between
the financial statement and tax bases of the assets and liabilities that
will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is recorded for the
amount of income tax payable or refundable for the period increased or
decreased by the change in deferred tax assets and liabilities during the
period.
Financial Instruments
The carrying amounts of cash and cash equivalents approximate fair value
due to the short-term maturities of these instruments. The carrying
value of the Company's debt approximates their estimated fair values
because the rates of interest on the debt approximates current interest
rates for similar obligations with like maturities.
Recent Pronouncements
During March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (SFAS No. 121), which
requires the Company to review for impairment its long-lived assets and
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In certain
situations, an impairment loss would be recognized. SFAS No. 121 will
become effective for the Company's 1997 fiscal year.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123) which establishes a fair value method of accounting for stock-based
compensation plans, and requires additional disclosures for those
companies which elect not to adopt the new method of accounting. SFAS
No. 123 will be effective for the Company's 1997 fiscal year. The
Company does not intend to adopt the fair value method of accounting for
stock-based compensation, and will provide the required additional
disclosures beginning in its fiscal year ending June 30, 1997.
Net Loss Per Share
Net loss per share is computed using the weighted-average number of
common stock and common stock equivalent shares outstanding during the
periods. Common equivalent shares from stock options and warrants are
excluded from the computation if their effect is antidilutive, except
that pursuant to the requirements of the Securities and Exchange
Commission Staff Accounting Bulletin No. 83, common equivalent shares
relating to stock, options and warrants (using the treasury stock method
and the anticipated offering price) issued subsequent to September 5,
1995, have been included in the computation for all periods presented.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ
from those estimates and assumptions
F-10
<PAGE>
Risks and Uncertainties
The Company's products require approvals from the Food and Drug
Administration (FDA) and international regulatory agencies prior to
commercialized sales. There can be no assurance that the Company's
products will receive any of the required approvals. If the Company is
denied such approvals or if such approvals are delayed, it would have a
material adverse effect on the Company.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30, 1996:
<TABLE>
<S> <C>
Laboratory equipment $ 104,838
Computer equipment 39,619
Office furniture and equipment 10,644
Leasehold improvements 13,358
Equipment held under capital leases 28,006
----------------
196,465
Less accumulated depreciation and amortization (64,642)
----------------
$ 131,823
================
</TABLE>
At June 30, 1996, the Company had equipment under capital leases with a
book value of $20,071, net of accumulated amortization of $7,935.
4. FINANCING
First Bridge Loan
In June 1996, the Company completed its First Bridge Loan financing of
$250,000. These loans bear interest at the rate of 14% and were due on
completion of the Company's Second Bridge Loan financing (see Note 16).
The Company issued 50,000 warrants in connection with this financing.
Each warrant entitles the holder to purchase a share of the Company's
common stock at a price equal to 120% of the price realized in the
Company's proposed initial public financing (see Note 1). A discount was
not recorded for the value of the warrants because the amount is not
material.
Bank Financing
The Company had a $200,000 line of credit with a bank which was converted
to a term loan in June 1996. The balance at the date of conversion was
$159,485. This loan bears interest at the bank's index rate plus 2.5%
(10.75% at June 30, 1996), and is due on demand; however, if no demand
is made the Company must make monthly payments of $14,127, including
interest. The loan is due in June 1997.
The Company has a loan from a bank with a balance outstanding of $16,522
at June 30, 1996. This loan bears interest at the prime rate plus 1.4%
(9.9% at June 30, 1996). The loan is due on demand; however, if no
demand is made the Company must make monthly payments of $2,085,
including interest. The loan is due in January 1997.
The above loans are collateralized by the Company's accounts receivable
and equipment, and by personal guarantees from certain stockholders. The
loans require, among other matters, that the Company maintain a minimum
tangible net worth of $200,000. The Company is not in compliance with this
covenant at June 30, 1996. The bank has waived the violation of this
covenant and subsequent to June 30, 1996, the loan agreement was modified
to remove the covenant.
F-11
<PAGE>
Stockholder Loans
At June 30, 1996, the Company had borrowed $660,000 from certain
stockholders. These borrowings are uncollateralized and bear interest at
an index rate plus 1% (approximately 9.5% at June 30, 1996). These
borrowings require monthly payments of interest only until due. Certain
of these loans matured in May 1995; however, no demand for repayment has
been asserted. Subsequent to year end, the Company issued 133,333 shares
at a price of $3.45 per share in satisfaction of loans amounting to
$460,000. The remaining balance owing to stockholders of $200,000 was
refinanced in connection with the Second Bridge Loan (see Note 17).
Interest paid to these stockholders during the years ended June 30, 1996
and 1995, was $2,469 and $8,832, respectively, and $11,301 for the period
from inception to June 30, 1996.
5. DEFERRED COMPENSATION
The Company has entered into deferred compensation agreements with two of
its senior executives. The agreements provide that a specified portion of
their salaries be deferred until they elect to receive the deferred
amount. At June 30, 1996, the Company's deferred compensation obligation
was $34,996 which is reflected as a liability on the accompanying
consolidated balance sheet. Compensation expense in connection with these
agreements was $22,496 and $12,500 for the years ended June 30, 1996 and
1995, respectively, and $34,996 for the period from inception to June 30,
1996.
6. EMPLOYMENT AND NONCOMPETITION AGREEMENTS
The Company has entered into employment and noncompetition agreements
with certain executives. These agreements specify that the executives
may not engage in any competitive activity for a one-year period
following termination.
7. ROYALTY OBLIGATION
In 1992, the Company entered into an exclusive licensing agreement for
diagnostic technology related to cholesterol testing. The Company paid a
licensing fee of $100,000 (see Note 2). The agreement indicates that the
Company must make royalty payments of 5% of sales (subject to certain
minimum amounts) to retain the exclusive right to the technology. The
Company did not make the prescribed minimum payment due on June 30, 1996.
Management is currently negotiating with the other parties for
modification of the terms of the agreement.
8. RELATED PARTY TRANSACTIONS
The Company paid $27,661 and $27,754 to related parties for consulting
services provided during the years ended June 30, 1996 and 1995,
respectively, and $55,415 for the period from inception to June 30, 1996.
In September 1993, the Company entered into a contract for management and
consulting services with a company owned by certain of the Company's
stockholders. The Company incurred $186,000 and $108,726 for management
and consulting services provided during the years ended June 30, 1996 and
1995, respectively, and $300,098 for the period from inception to June 30,
1996. The liability for management consulting services under this
contract at June 30, 1996, of $189,461 was converted to a promissory note
bearing annual interest at 7% with no specific due date. This obligation
is included with notes payable to related parties on the accompanying
balance sheet.
F-12
<PAGE>
9. INCOME TAXES
At June 30, 1996, the Company had accumulated net operating loss
carryforwards for tax purposes of approximately $5.5 million which expire
through 2011. As a result of the merger with Merchant House, the
availability of these net operating losses will be limited to a prescribed
amount each year as specified in the Internal Revenue Code. Losses
accumulated through the date BioQuant and PBI were acquired of
approximately $2.8 million and $2.7 million, respectively, will be limited
to use by the respective company which generated the net operating losses.
The following is a reconciliation of income tax benefit to the amount
based on the U.S. statutory rate of 34%:
<TABLE>
<CAPTION>
For the Period
Years Ended June 30, from Inception
-------------------- (December 1992)
1996 1995 to June 30, 1996
---- ---- ----------------
<S> <C> <C> <C>
Income tax benefit based on U.S. statutory rate $ (2,570,693) $ (565,825) $ (3,453,510)
Write-off of purchased research and development 2,167,121 2,167,121
Amortization of goodwill 145,645 145,645
Losses which provide no current tax benefit 403,572 420,180 1,140,744
--------------- ---------------- -----------------
Income tax benefit $ 0 $ 0 $ 0
=============== ================ =================
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows at June 30, 1996:
<TABLE>
<S> <C>
Deferred tax assets:
Start-up costs $ 292,684
Deferred compensation 75,479
Depreciation 35,150
Technology license fees and other 25,621
Tax loss carryforwards 1,879,210
----------------
Total deferred tax assets 2,308,144
Valuation allowance (2,308,144)
----------------
Net deferred tax assets $ 0
================
</TABLE>
The provision for income taxes was as follows:
<TABLE>
For the Period
from Inception
(December 1992)
1996 1995 to June 30, 1996
---- ---- ----------------
<S> <C> <C> <C>
Current provision $ $ $
Deferred provision (403,572) (475,988) (1,367,479)
Change in valuation allowance 403,572 475,988 1,367,479
--------------- ---------------- -----------------
Provision for income taxes $ 0 $ 0 $ 0
=============== ================ =================
</TABLE>
F-13
<PAGE>
10. CONTINGENT OBLIGATION TO SUPPLIER
The Company has entered into a manufacturing agreement with a supplier to
produce one of the Company's products for distribution. The agreement
requires the supplier to incur certain costs to produce the product, and
entitles the supplier to a surcharge on units purchased until those costs
have been fully recovered. The Company is contingently obligated to
reimburse the supplier in the event the Company's purchases are
insufficient to enable the supplier to recover its investment in the
equipment. At June 30, 1996, the Company is obligated to the supplier for
amounts ranging from $16,000 to $50,000 in connection with purchases of
product under this agreement. The accompanying consolidated financial
statements include an accrual of $16,000 relating to these obligations.
The Company is also contingently obligated to the supplier for
approximately $317,000 at June 30, 1996, in connection with the
supplier's purchase of manufacturing equipment used to produce the
Company's product.
11. COMMITMENTS
Technology and Manufacturing Agreements
The Company has entered into a license agreement with respect to its
osteoporosis technology. This agreement provides for royalty payments to
the licensors of 5% of gross sales as defined in the agreement, with
minimum royalty payments of $15,000 each quarter.
The Company has also entered into a manufacturing agreement with an
affiliate of the owners of the technology which requires certain minimum
purchases to retain the exclusive use of the licensed technology. This
agreement requires that the Company purchase a minimum of 25,000 units
prior to March 31, 1997.
Commitment to Repurchase Common Stock
During the year ended June 30, 1995, the Company issued 13,270 shares of
common stock to a supplier in satisfaction of a $70,000 obligation.
Concurrently, the Company obtained the right to reacquire these shares at
specified prices through December 31, 1998. If the stock is not
reacquired by December 31, 1998, the supplier has the right to require
repurchase by the Company for $140,000. The obligation to repurchase
these shares will be recorded through charges for accretion to the
accumulated deficit account over the term of the agreement.
12. SEVERANCE AGREEMENTS
In September 1994 the Company terminated an employment contract with one
of its employees. Concurrently, the Company entered into a consulting
agreement with the executive which provided for monthly payments of
$5,000 beginning November 1, 1994, and ending October 1, 1995. All
amounts owed under this agreement were paid. The agreement also provides
for a lump-sum payment of $50,000 in the event the Company completes an
initial public offering. This obligation has been assumed by a Director
of the Company.
In September 1995 the Company entered into a severance agreement with one
of its executives which provided for fifteen monthly payments of $10,000
beginning in September 1995. The Company is current on its payment
obligations on this agreement. The Company also agreed to issue 4,739
warrants for the purchase of common stock which are exercisable at $10.55
per share.
In September 1995 the Company terminated its consulting contract with a
stockholder. Under the termination agreement, the Company agreed to pay
a fee to the consultant based on the proceeds of capital raised through
December 31, 1995, arising through the efforts of the consultant. The
amount due under this arrangement was $14,000 which was paid through the
issuance of 2,836 shares of the Company's common stock.
In November 1995 the Company entered into a severance agreement with one
of its executives whereby the executive received 4,068 shares of the
Company's common stock valued at $20,000, and salary continuation through
January 1996.
13. STOCK OPTION PLANS AND STOCK PURCHASE WARRANTS
In prior years, PBI had adopted an Incentive Stock Option Plan ("ISO
Plan") and a Nonstatutory Stock Option Plan ("NSO Plan"). The ISO Plan
provided that any options granted would be exercisable at no less than
the fair value of the underlying common stock, and were to expire five
years from the date of grant. The options granted, if any, were intended
to conform to all requirements of Section 422A of the Internal Revenue
Code, as amended. No options were issued under the ISO Plan.
Options were granted under the NSO Plan at exercise prices to be
determined by the Board of Directors. Any options granted vested 20% on
December 31 of the year granted, and 20% on the same date of each year
until fully vested. Any options granted were to expire ten years from
the date of grant. To date, all options under the NSO Plan were granted
with an exercise price equal to the estimated fair value of the
underlying common stock at the time of grant.
The following is a summary of the activity in the NSO Plan for the period
from inception:
<TABLE>
<CAPTION>
Exercise
Price Options
----- -------
<S> <C> <C>
Granted $0.79 1,422
Canceled $0.79 (948)
-------------
Balance, June 30, 1990 474
Granted $0.79 4,739
Canceled $0.79 (1,896)
-------------
Balance, June 30, 1991 3,317
Granted $0.79 21,517
-------------
Balance, June 30, 1992 24,834
Granted $0.79-$5.27 3,886
Canceled $1.58 (190)
-------------
Balance, June 30, 1993 28,530
Granted $0.37-$5.27 48,081
Canceled $5.27 (1,896)
-------------
Balance, June 30, 1994 74,715
Exercised $0.37-$5.27 (74,715)
-------------
Balance, June 30, 1995 and 1996
=============
</TABLE>
All outstanding options were fully vested and exercised in connection
with the merger between PBI and Merchant House, at which time both stock
option plans were terminated.
F-14
<PAGE>
1996 Employee Incentive Stock Option Plan
In July 1996, the Company adopted an Employee Stock Incentive Plan (the
"Plan") with 1,000,000 shares of common stock reserved for issuance under
this Plan. Options granted under this plan may be either incentive stock
options within the meaning of Section 422(b) of the Internal Revenue
Code, or nonqualified options. The Company may also award stock
appreciation rights, restricted stock, performance shares, loans or tax
offset payments. The option price of each incentive stock option granted
shall not be less than the fair value of the underlying common stock, and
will expire no later than ten years following the date of grant. With
respect to nonqualified options, the exercise price and term will be
determined at the discretion of the Board. However, the exercise price
will not be less than 85% of the fair value of the underlying stock, and
the term will not exceed a period of ten years. There were no options or
warrants outstanding under this Plan at June 30, 1996.
14. LEASES
The Company has entered into noncancelable operating leases for office
facilities. Under these leases, the Company is responsible for its
proportionate share of real estate taxes, insurance and common area
maintenance costs. Rent expense on these lease agreements was $205,128
and $93,433 for the years ended June 30, 1996, and 1995, respectively,
and and $338,421 for the period from inception to June 30, 1996.
Future minimum lease payments are as follows:
Year Ended
June 30,
--------------
1997 $ 156,120
1998 15,061
---------------
$ 171,181
===============
15. MAJOR CUSTOMERS
The Company's sales to its largest customer represented approximately
29.5% and 43.9% of its total sales in 1996 and 1995, respectively, and
sales to its five largest customers represented approximately 63.0% and
64.8% of total sales in 1996 and 1995, respectively.
16. SUPPLEMENTARY INFORMATION ON NONCASH TRANSACTIONS
Stockholder Loans Converted to Equity
In 1994 and 1995, certain of the Company's stockholders converted their
loans to the Company to equity. The amount converted was $324,963 and
$310,000 during the years ended June 30, 1995 and 1994, respectively, and
$634,963 for the period from inception to June 30, 1996.
F-15
<PAGE>
Common Stock Issued for Technology Licenses, Services and Loan Guarantees
The Company has issued common stock for technology licenses, services and
loan guarantees as follows:
Year Number of Estimated
Issued Shares Fair Value
------ -------- -----------
1994 62,561 $ 55,556
1995 47,867 $ 80,500
1996 135,080 $ 466,026
For the period from
inception to June 30, 1996 245,508 $ 602,082
Common Stock Issued in Connection with Acquisitions
In 1995, the Company acquired PBI through an exchange of common stock as
described in Note 1. The Company issued 189,061 shares of common stock to
the stockholders of PBI in connection with this acquisition.
In 1996, the Company acquired BioQuant through an exchange of common
stock as described in Note 1. The Company issued 700,318 shares of
common stock to the stockholders of BioQuant in connection with this
acquisition.
17. SUBSEQUENT EVENTS
Second Bridge Loan
Subsequent to year end, the Company arranged additional financing in the
form of a Second Bridge Loan of $1,000,000. This loan bears interest at
14% and is due on completion of the Company's proposed initial public
offering (see Note 1). The Company issued 250,000 warrants in connection
with this financing. Each warrant entitles the holder to purchase a
share of the Company's common stock at a price equal to 120% of the price
realized in the Company's proposed initial public offering (see Note 1).
The proceeds of this financing were used, in part, to repay the notes
issued in the First Bridge Loan (see Note 4). The balance will be used
for working capital and to support the Company's product development
activities.
Common Stock Issued in Exchange for Stockholder Loans
Subsequent to year end, the Company issued 12,773 shares of common stock
in exchange for $42,500 in loans from a stockholder.
Common Stock Issued for Services
Subsequent to year end, the Company issued 9,000 shares of common stock
to a Director in exchange for services.
Stock Options and Warrants Exchanged for Similar Securities in Subsidiary
Subsequent to year end, the Company granted options and warrants to
purchase 570,564 shares of common stock to certain individuals who held
similar securities in BioQuant prior to the merger. These securities
were granted with an exercise price of $3.45 per share pursuant to the
terms of the respective option and warrant agreements.
F-16
<PAGE>
Stock Options Granted for Services
Subsequent to year end, the Company granted to employees and Directors
520,340 options to purchase its common stock pursuant to its ISO Plan.
The Company also granted 50,000 options to a Director to purchase its
common stock pursuant to its NSO Plan subject to the completion of its
proposed initial public offering. These options have an exercise price
of $3.45 per share, and vest in varying periods ranging up to four years.
Common Stock Sold for Cash
Subsequent to year end, the Company sold 2,900 shares of common stock for
cash consideration of $10,005.
18. GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has
sustained recurring losses from operations and cash flow shortages, and is
reporting deficits in working capital and stockholders' equity at June 30,
1996. These matters raise substantial doubt about the Company's ability
to continue as a going concern.
The ability of the Company to sustain itself as a going concern is
dependent on its ability to generate sufficient cash to meet its
financial requirements and, ultimately, upon achieving profitable
operations. As discussed in Note 1, the Company is currently in the
process of raising approximately $8 million through an initial public
offering of its common stock and, although the success of the offering
cannot be predicted, the Company plans to complete this financing later
in 1996. The outcome of the Company's efforts to complete the initial
public offering is not determinable at this time. As discussed in Note
17, the Company raised $1,000,000 in bridge loan financing subsequent to
year end which was used to repay certain outstanding obligations and
support the Company's current working capital requirements.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
F-17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
BioQuant, Inc.
Irvine, California
We have audited the accompanying balance sheet of BioQuant, Inc. (a
Michigan corporation) (a company in the development stage) as of June 30,
1996, and the related statements of operations and cash flows for the
years ended June 30, 1996 and 1995, and for the period from inception
(October 1985) to June 30, 1996, and the statement of stockholders'
deficit for the period from inception (October 1985) to June 30, 1996.
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 BioQuant, Inc. as of
June 30, 1996, and the results of its operations and its cash flows for
the years ended June 30, 1996 and 1995, and for the period from inception
(October 1985) to June 30, 1996, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 11 to the
financial statements, the Company has sustained recurring losses from
operations and cash flow shortages, and is reporting deficiencies in
working capital and stockholders' equity. These matters raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note
11. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Coopers & Lybrand L.L.P.
Seattle, Washington
September 5, 1996
F-18
<PAGE>
BIOQUANT, INC.
(a Michigan corporation)
(a company in the development stage)
BALANCE SHEET
June 30, 1996
<TABLE>
<S> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 31,200
Accounts receivable 278
Advance to PBI 100,000
Supplies 10,616
Prepaid expenses 2,727
-------------------
Total current assets 144,821
Property and equipment, net 18,197
Other assets:
Technology license, net of accumulated amortization of $85,938 164,062
Lease deposits 277
-------------------
Total assets $ 327,357
===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Notes payable to related parties $ 429,461
Notes payable to affiliate 90,000
Advances from PBI-Delaware 155,000
Accounts payable 34,364
Accrued liabilities 65,416
-------------------
Total liabilities 774,241
-------------------
Commitments and contingencies
Stockholders' deficit:
Common stock, no par value, 1,000 shares authorized,
one share issued and outstanding 2,340,381
Accumulated deficit (2,787,265)
-------------------
Total stockholders' deficit (446,884)
-------------------
Total liabilities and stockholders' deficit $ 327,357
===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
BIOQUANT, INC.
(a Michigan corporation)
(a company in the development stage)
STATEMENT OF OPERATIONS
For the Years Ended June 30, 1996 and 1995,
and for the Period from Inception (October 1985) to June 30, 1996
<TABLE>
<CAPTION>
For the Period
From Inception
(October 1985) to
1996 1995 June 30, 1996
---- ---- -------------
<S> <C> <C> <C>
Revenues $ 4,838 $ 16,270 $ 24,846
--------------- ---------------- -------------------
Operating expenses:
Research and product development 509,183 308,103 3,171,232
General and administration 336,129 338,593 2,189,098
--------------- ---------------- -------------------
Total operating expenses 845,312 646,696 5,360,330
--------------- ---------------- -------------------
Operating loss (840,474) (630,426) (5,335,484)
--------------- ---------------- -------------------
Other income (expense):
Interest expense (19,673) (2,040) (83,193)
Grant income 101,714 32,420 2,576,914
Interest and other income 8,692 10,687 54,498
--------------- ---------------- -------------------
Other income (expense), net 90,733 41,067 2,548,219
--------------- ---------------- -------------------
Net loss $ (749,741) $ (589,359) $ (2,787,265)
=============== ================ ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
BIOQUANT, INC.
(a Michigan corporation)
(a company in the development stage)
STATEMENT OF CASH FLOWS
For the Years Ended June 30, 1996 and 1995,
and for the Period from Inception (October 1985) to June 30, 1996
<TABLE>
<CAPTION>
For the Period
From Inception
(October 1985) to
1996 1995 June 30, 1996
---- ---- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 6,070 $ 17,669 $ 24,568
Cash paid to suppliers and employees (857,349) (617,068) (5,109,502)
Grants and interest received 110,406 42,116 2,631,412
Interest paid (19,673) (2,040) (83,193)
--------------- ---------------- -------------------
Cash used by operations (760,546) (559,323) (2,536,715)
--------------- ---------------- -------------------
Cash flows from investing activities:
Purchase of equipment (3,518) (8,167) (168,347)
Loan to affiliate (100,000) (100,000)
Purchase of technology license (50,000) (20,000) (70,000)
Deposits 20 (252) (277)
--------------- ---------------- -------------------
Cash used by investing activities (153,498) (28,419) (338,624)
--------------- ---------------- -------------------
Cash flows from financing activities:
Preferred stock sold for cash 298,000 613,743 2,267,771
Financing costs incurred in connection with
issuance of preferred stock (26,725) (26,725)
Common stock sold for cash 10,000 54,200
Repurchase of common stock (67,086)
Borrowings from related parties 456,961 456,961
Borrowings from affiliates 137,500 170,000
Issuance of convertible subordinated notes 51,418
--------------- ---------------- -------------------
Cash provided by financing activities 892,461 597,018 2,906,539
--------------- ---------------- -------------------
(Decrease) increase in cash and cash equivalents (21,583) 9,276 31,200
Cash and cash equivalents:
Beginning balance 52,783 43,507
--------------- ---------------- -------------------
Ending balance $ 31,200 $ 52,783 $ 31,200
=============== ================ ===================
Reconciliation of Net Loss to Cash Used by Operations:
Net loss $ (749,741) $ (589,359) $ (2,787,265)
Adjustments to reconcile net loss to
cash used by operations:
Depreciation and amortization 76,024 44,369 236,088
Common stock issued for services and
subordinated convertble notes 35,803
Reduction in notes payable to affiliate in lieu of
payment of management fees (47,500) (47,500)
Changes in operating accounts:
Accounts receivable 1,232 1,399 (278)
Supplies (5,021) 5,530 (10,616)
Prepaid expenses 3,128 (3,436) (2,727)
Accounts payable and accrued liabilities (38,668) (17,826) 39,780
--------------- ---------------- -------------------
Cash used by operations $ (760,546) $ (559,323) $ (2,536,715)
=============== ================ ===================
</TABLE>
See Note 8 for noncash transactions.
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
BIOQUANT, INC.
(a Michigan corporation)
(a company in the development stage)
STATEMENT OF STOCKHOLDERS' DEFICIT
For the Period from Inception (October 1985) to June 30, 1996
<TABLE>
<CAPTION>
Class A Convertible Class B Convertible
Amount Preferred Stock Preferred Stock Common Stock
per --------------- --------------- ------------
Share Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Stock issued for cash
between October 1985
and January 1991: $0.88 710,715 $ 71,072
Preferred stock,
Class A $2.00 125,000 $ 250,000
Preferred stock,
Class B $0.13 428,700 $ 46,650
Common stock
Stock repurchased and
canceled between
December 1986 and
November 1990 $0.58 (116,100) (12,060)
Stock issued for
services between
December 1987 and
March 1991 $0.37 35,750 8,345
Conversion of $1.00
par value common
stock to $0.10 par
value common stock
in March 1988 (8,100)
Preferred stock issued
for subordinated
convertible notes in
March 1992 $2.00 142,800 285,600
Preferred stock
converted to common
stock in July 1993 (710,715) (71,072) (267,800) (535,600) 978,515 606,672
Common stock issued
for subordinated
convertible notes
in October 1993 $1.03 49,743 51,418
Effect of 1-for-4
reverse stock split
in October 1993 (1,032,456)
Preferred stock
issued for cash
in October 1993 $0.52 403,979 210,073
Common stock issued
for license agreement
in October 1993 $0.06 210,375 12,623
Conversion of $0.10
par value common
stock to no par
value common stock
in 1993 519,387
Net loss for the
period from
inception
(October 1985) to
June 30, 1994
_______ _______ _______ ___________ ________ _________
Balance, June 30, 1994 403,979 210,073 554,527 1,224,935
Issuance of Class B
convertible preferred
stock $1.74 363,840 634,098
Financing costs paid
in connection with
issuance of
convertible
preferred stock
Class B (26,725)
Common stock issued
as financing costs
associated with the
Class B convertible
preferred stock (10,000) 5,715 10,000
Net loss
Balance, June 30, 1995 403,979 210,073 363,840 597,373 560,242 1,234,935
Issuance of Class B
convertible preferred
stock $2.00 149,000 298,000
Redemption of shares
in connection with
acquisition by PBI-
Delaware (403,979) (210,073) (512,840) (895,373) (560,241) 1,105,446
Net loss
========= ========= ========= ======== ======== ==========
Balance, June 30, 1996 $ $ 1 $2,340,381
========= ========= ========= ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional during the
Paid-in Development
Capital Stage Total
------------ ------------ -------------
<S> <C> <C> <C>
Stock issued for cash
between October 1985
and January 1991: $ 553,928 $ 625,000
Preferred stock,
Class A 250,000
Preferred stock,
Class B 7,550 54,200
Common stock
Stock repurchased and
canceled between
December 1986 and
November 1990 (55,026) (67,086)
Stock issued for
services between
December 1987 and
March 1991 4,835 13,180
Conversion of $1.00
par value common
stock to $0.10 par
value common stock
in March 1988 8,100
Preferred stock issued
for subordinated
convertible notes in
March 1992 285,600
Preferred stock
converted to common
stock in July 1993
Common stock issued
for subordinated
convertible notes
in October 1993 51,418
Effect of 1-for-4
reverse stock split
in October 1993
Preferred stock
issued for cash
in October 1993 210,073
Common stock issued
for license agreement
in October 1993 12,623
Conversion of $0.10
par value common
stock to no par
value common stock
in 1993 (519,387)
Net loss for the
period from
inception
(October 1985) to
June 30, 1994 $(1,448,165) (1,448,165)
___________ ____________ ____________
Balance, June 30, 1994 (1,448,165) (13,157)
Issuance of Class B
convertible preferred
stock 634,098
Financing costs paid
in connection with
issuance of
convertible
preferred stock
Class B (26,725)
Common stock issued
as financing costs
associated with the
Class B convertible
preferred stock
Net loss (589,359) (589,359)
___________ ___________ _____________
Balance, June 30, 1995 (2,037,524) 4,857
Issuance of Class B
convertible preferred
stock 298,000
Redemption of shares
in connection with
acquisition by PBI-
Delaware
Net loss (749,741) (749,741)
============ ============ =============
Balance, June 30, 1996 $ $ (2,787,265) $ (446,884)
============ ============ =============
</TABLE>
- --------------------
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
BIOQUANT, INC.
(a Michigan corporation)
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
BioQuant, Inc. (the "Company") was incorporated in 1985 and has been
engaged in research and product development activities since inception.
The Company is currently engaged in the development of a diagnostic
product test related to osteoporosis. The Company's product line includes
a patented skin patch technology, patented antisera and proprietary
immunoassays for the measurement of human perspiration. The Company also
owns a patented saliva collection device which is currently being
developed for non-invasive diabetes tests. The Company has financed its
operations principally through sales of preferred and common stock,
research grants and loans from certain stockholders.
In June 1996 the Company was acquired by Pacific Biometrics, Inc.
("PBI-Delaware"), a Delaware corporation, through an exchange of common
stock. The Company now operates as a wholly-owned subsidiary of
PBI-Delaware. The Company is an affiliate of Pacific Biometrics, Inc.
("PBI"), a Washington corporation, through a common parent corporation.
Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents consist of a money market fund which is
maintained at a bank. The Company considers all investments with an
initial maturity of three months or less at the time of purchase to be
cash equivalents.
Supplies
Supplies consist of devices related to the Company's saliva collection
technology and other items related to the Company's patented skin patch
technology. These items are recorded at the lower of estimated cost
(weighted-average) or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line and accelerated methods over the
useful lives of the related assets. Leasehold improvements relating to the
Company's office facilities are being amortized over the term of the
lease. The cost and related accumulated depreciation or amortization of
property or equipment sold of otherwise disposed of are removed from the
accounts and the resulting gains or losses are included in the statement
of operations.
Licensing Fees
In 1995, the Company licensed certain diagnostic technology related to
osteoporosis testing for $250,000. The Company paid $50,000 and $20,000
during the years ended June 30, 1996 and 1995, respectively, and the
balance of $180,000 in July 1996. The total licensing fee of $250,000 is
being amortized using the straight-line method over a period of four
years. The amount charged to expense in connection with amortizing these
licensing fees was $62,500 and $23,438 for the years ended June 30, 1996
and 1995, and $85,938 for the period from inception (October 1985) to June
30, 1996.
F-23
<PAGE>
Grant Income
The Company has received several government grants to support its research
activities. Grant revenue is recognized as the related expenses are
incurred to fulfill the specific grant requirements.
Income Taxes
Deferred tax assets and liabilities are recorded for differences between
the financial statement and tax bases of the assets and liabilities that
will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is recorded for the amount of
income tax payable or refundable for the period increased or decreased by
the change in deferred tax assets and liabilities during the period.
Financial Instruments
The carrying amounts of cash and cash equivalents approximate fair value
due to the short-term maturities of these instruments. The carrying values
of the Company's debt approximates their estimated fair values because the
rates of interest on the debt approximates current interest rates for
similar obligations with like maturities.
Recent Pronouncements
During March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" (SFAS No. 121), which requires
the Company to review for impairment its long-lived assets and intangibles
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In certain situations, an
impairment loss would be recognized. SFAS No. 121 will become effective
for the Company's 1997 fiscal year. Management does not expect this
Statement to have a material impact on the Company's financial condition
or results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123) which establishes a fair value method of accounting for stock-based
compensation plans, and requires additional disclosures for those
companies which elect not to adopt the new method of accounting. SFAS No.
123 will be effective for the Company's 1997 fiscal year. The Company does
not intend to adopt the fair value method of accounting for stock-based
compensation, and will provide the required additional disclosures
beginning in its fiscal year ending June 30, 1997.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ from
those estimates and assumptions
Risks and Uncertainties
The Company's products require approvals from the Food and Drug
Administration (FDA) and international regulatory agencies prior to
commercialized sales. There can be no assurance that the Company's
products will receive any of the required approvals. If the Company is
denied such approvals or if such approvals are delayed, it would have a
material adverse effect on the Company.
2. ADVANCE TO PBI
During the year ended June 30, 1996, the Company loaned $100,000 to PBI.
This loan is uncollateralized and bears interest at 9.25%. The loan is due
March 1, 1997.
F-24
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 1996:
<TABLE>
<S> <C>
Laboratory equipment $ 112,959
Computer equipment 40,095
Office furniture and equipment 13,808
Leasehold improvements 1,485
----------------
168,347
Less accumulated depreciation and amortization (150,150)
----------------
$ 18,197
================
</TABLE>
Depreciation expense for the years ended June 30, 1996 and 1995, was
$13,522 and $18,673, respectively, and $150,150 for the period from
inception (October 1985) to June 30, 1996.
4. FINANCING
Notes Payable to Related Parties
At June 30, 1996, the Company had received loans from certain stockholders
amounting to $222,500. These loans were uncollateralized and bear interest
at the prime rate plus 1% (9.25% at June 30, 1996). These loans were
scheduled to mature at various dates from September 1996 to October 1996.
Subsequent to year end, loans amounting to $200,000 were refinanced in
connection with a bridge loan completed by PBI-Delaware. The remaining
$22,500 in stockholder loans was converted to equity in PBI-Delaware.
Interest paid in connection with these loans was $15,647 for the year
ended June 30, 1996, for the period from inception (October 1985) to June
30, 1996. There was no interest paid in 1995.
At June 30, 1996, the Company had received loans from an affiliate
amounting to $90,000. These loans are uncollateralized and bear interest
at the prime rate plus 1% (9.25% at June 30, 1996). These loans mature at
various dates ranging from October 1996 through December 1996.
At June 30, 1996, the Company had demand loans outstanding to an affiliate
amounting to $17,500. These loans carried interest at 8% and were
collateralized by substantially all the Company's assets. These loans were
converted to equity in PBI-Delaware subsequent to year end.
Advances from PBI-Delaware
During the year ended June 30, 1996, the Company received advances from
PBI-Delaware amounting to $155,000. These advances are uncollateralized
with no specified interest rate or repayment terms.
5. RELATED PARTY TRANSACTIONS
In September 1993, the Company entered into a contract for management and
consulting services with a company owned by certain of the Company's
stockholders. The Company incurred $138,500 and $108,726 for management
and consulting services provided during the years ended June 30, 1996 and
1995, respectively, and $300,098 for the period from inception (October
1985) to June 30, 1996. The expense reported for the year ended June 30,
1996, is net of amounts reimbursed by PBI of $47,500 for shared management
and consulting services. This amount was reimbursed through a reduction in
amounts owed to the affiliate. The accrued liability for management and
consulting services at June 30, 1996, of $189,461 was converted to a
promissory note bearing annual interest at 7% with no specific due date.
This note is included in notes payable to related parties on the
accompanying balance sheet.
F-25
<PAGE>
6. LEASES
In September 1995, the Company agreed to sublease its office facilities
from PBI. Under this agreement, the Company is responsible for its
proportionate share of real estate taxes, insurance and common area
maintenance costs. Rent expense under this agreement and other rental
agreements was $5,707 and $25,897 for the years ended June 30, 1996 and
1995, respectively, and approximately $264,000 for the period from
inception (October 1985) to June 30, 1996. The agreement with the
affiliate was scheduled to expire in October 1996. The Company has entered
into a new lease for the facilities which extends to September 1997. Under
this lease, the Company is responsible for its proportionate share of real
estate taxes, insurance and common area costs. Future minimum payments on
this lease are $31,662 and $8,033 for the years ended June 30, 1997 and
1998, respectively.
7. STOCKHOLDERS' DEFICIT
Preferred Stock
In 1988, the Company sold 357,145 shares of Preferred Stock, Class A, for
$300,000. In 1989, the Company sold an additional 178,570 shares of
Preferred Stock, Class A, for $150,000. In 1989 and 1990, the Company sold
125,000 shares of Preferred Stock, Class B, for $250,000. In March 1992,
the Company issued 142,800 shares of Preferred Stock, Class B, in exchange
for $285,600 in subordinated convertible promissory notes. In July 1993,
all of the Company's outstanding shares of Preferred Stock, Class A, and
Preferred Stock, Class B, were exchanged for 978,515 shares of the
Company's common stock.
In October 1993, the Company issued 403,979 shares of Preferred Stock,
Class A, for $210,073. In 1994, the Company issued 362,292 shares of
Preferred Stock, Class B, for $610,082, and in 1995, the Company issued
149,000 shares of Preferred Stock, Class B, for $298,000. In June 1996,
all of the Company's outstanding shares of Preferred Stock, Class A, and
Preferred Stock, Class B, were redeemed in connection with the acquisition
by PBI-Delaware in exchange for common stock in PBI-Delaware.
Common Stock
In 1985 and 1986, the Company issued 426,700 shares of common stock for
$54,200. The Company redeemed 116,100 of these shares for $67,086 during
the period from 1986 through 1990.
In 1988, the Company converted its $1.00 par value common stock to $0.10
par value common stock. In 1993, the Company converted its $0.10 par value
common stock to no par value common stock, and effected a 1-for-4 reverse
stock split.
In December 1993, the Company issued 210,375 shares of common stock valued
at $12,623 in connection with the assignment of a license and supply
agreement covering certain medical technology.
In June 1996, the Company was acquired by PBI-Delaware in a
stock-for-stock exchange resulting in the redemption of all except one of
the Company's shares of common stock.
F-26
<PAGE>
Stock Options
The Company has adopted an Incentive Stock Option plan ("ISO Plan") and a
Nonqualified Stock Option plan ("NSO Plan") under which the Board of
Directors is authorized to grant options to purchase the Company's common
stock. Options granted under the ISO Plan were granted at no less than
the fair value of the underlying common stock, and generally expired ten
years from the date of grant. The ISO Plan is designed to conform to the
requirements of Section 422A of the Internal Revenue Code, as amended.
Options were granted under the NSO Plan at exercise prices to be
determined by the Board of Directors. Generally, options vested over a
four year period, and expired five years from the date of grant.
The following is a summary of the activity in the Company's stock option
plans for the period from inception (October 1985) to June 30, 1996:
<TABLE>
<CAPTION>
ISO Plan NSO Plan
Exercise Number of Exercise Number of
Price Options Price Options
<S> <C> <C> <C> <C>
Granted $2.00 13,313 $0.50 4,375
Canceled $2.00 (500)
------------ ------------
Balance, June 30, 1989 12,813 4,375
Granted $2-$3.00 32,625 $3.00 12,125
Canceled $2.00 (2,500)
------------ ------------
Balance, June 30, 1990 42,938 16,500
Granted $3.00 12,563 $3.00 3,488
Canceled $2-$3.00 (5,563) $3.00 (2,500)
------------ ------------
Balance, June 30, 1991 49,938 17,488
Granted $2.96 750 $3.00 4,500
------------ ------------
Balance, June 30, 1992 50,688 21,988
Granted $1.00 6,438
Canceled $2.00 (500)
------------ ------------
Balance, June 30, 1993 56,626 21,988
Granted $0.06 42,000 $0.06 676,000
Canceled $2.00 (6,750) $0.50 (4,375)
------------ ------------
Balance, June 30, 1994 91,876 693,613
Granted $0.20 52,000 $0.20 86,918
Canceled $3.00 (38,875) $3.00 (4,625)
------------ ------------
Balance, June 30, 1995 105,001 775,906
Granted 5,500 $0.30 150,000
Canceled $0.06-$3.00 (110,501)$0.06-$3.00 (925,906)
============ ============
Balance, June 30, 1996
============ ============
</TABLE>
Stock Purchase Warrants
The following is a summary of the activity relating to stock purchase
warrants granted from the Company's inception (October 1985) to June 30,
1996:
<TABLE>
<CAPTION>
Preferred Preferred
Common Stock, Stock,
Stock Class A, Class B,
Exercise Purchase Purchase Purchase
Price Warrants Warrants Warrants
<S> <C> <C> <C> <C>
Granted $1.00 175,000
-------------
Balance, June 30, 1990 175,000
Granted $4.00 18,438
Exercised $1.00 (175,000)
------------
Balance, June 30, 1991, 1992 and 1993 18,438
Granted $0.20-$0.25 21,250
Canceled $4.00 (6,250)
------------
Balance, June 30, 1994 33,438
Granted $0.20 15,000
------------
Balance, June 30, 1995 48,438
Granted $2.00 175,000
Canceled $0.20-$4.00 (48,438) (175,000)
-------------------------------------
Balance, June 30, 1996
=====================================
</TABLE>
All outstanding options and warrants became fully vested and were
exchanged for similar options and warrants in PBI-Delaware in accordance
with the terms of the options and warrant agreements.
F-27
<PAGE>
8. COMMITMENTS
The Company has entered into a license agreement with respect to its
osteoporosis technology. This agreement provides for royalty payments to
the licensors of 5% of gross sales as defined in the agreement, with
minimum royalty payments of $15,000 each quarter.
The Company has also entered into a manufacturing agreement with an
affiliate of the owners of the technology which requires certain minimum
purchases to retain the exclusive use of the licensed technology. This
agreement requires that the Company purchase a minimum of 25,000 units
prior to March 31, 1997.
9. SUMMARY OF NONCASH TRANSACTIONS
The Company entered into the following noncash transactions during the
period from inception (October 1985) to June 30, 1996:
<TABLE>
<S> <C>
Common stock issued for services in 1987, 1988
and 1991 $ 35,803
================
Issuance of preferred stock in connection with exercise
of warrants in 1990 and 1991 $ 175,000
================
Preferred stock issued in exchange for convertible
subordinated notes in March 1992 $ 285,600
================
Common stock issued in exchange for preferred stock,
Class A and Class B in July 1993 $ 606,672
================
Common stock issued for convertible subordinated debt
in October 1993 $ 51,418
================
Common stock issued for license agreement in
December 1993 $ 12,623
================
Preferred stock issued in exchange for loan from affiliate
in 1995 $ 25,000
================
Reduction in notes payable in lieu of payment of
management fees in 1996 $ 47,500
================
Redemption of preferred stock and common stock in
connection with the Company's acquisition by
PBI-Delaware in June 1996 $ 1,105,446
================
</TABLE>
10. INCOME TAXES
At June 30, 1996, the Company had accumulated net operating loss
carryforwards for tax purposes of approximately $2.7 million which expire
through 2011. As a result of previous financing transactions, the
availability of these net operating losses will be limited each year as
specified in the Internal Revenue Code. The availability of these net
operating losses will be limited to use by the Company.
The following is a reconciliation of income tax benefit to the amount
based on the U.S. statutory rate of 34% for the years ended June 30, 1996
and 1995, and for the period from inception (October 1985) to June 30,
1996:
<TABLE>
<CAPTION>
For the Period
from Inception
(October 1985)
1996 1995 to June 30, 1996
---- ---- ----------------
<S> <C> <C> <C>
Income tax benefit based on U.S. statutory rate $ (254,912) $ (200,382) $ (947,670)
Other 7,192
Losses which provide no current tax benefit 254,912 200,382 940,478
--------------- ---------------- -------------------
Income tax benefit $ 0 $ 0 $ 0
=============== ================ ===================
</TABLE>
F-28
<PAGE>
Significant components of the Company's deferred tax assets and
liabilities are as follows at June 30, 1996:
<TABLE>
<S> <C>
Deferred tax assets:
Depreciation $ 590
Technology license fees and other 21,191
Tax loss carryforwards 918,697
----------------
Total deferred tax assets 940,478
Valuation allowance (940,478)
----------------
Net deferred tax assets $ 0
================
</TABLE>
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
For the Period
from Inception
(October 1985)
1996 1995 to June 30, 1996
---- ---- ----------------
<S> <C> <C> <C>
Current provision $ $ $
Deferred provision 254,912 279,043 940,478
Change in valuation allowance (254,912) (279,043) (940,478)
=============== ================ ===================
Provision for income taxes $ 0 $ 0 $ 0
=============== ================ ===================
</TABLE>
11. GOING CONCERN
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has sustained
recurring losses from operations and cash flow shortages, and is reporting
deficits in working capital and stockholders' equity. These matters raise
substantial doubt about the Company's ability to continue as a going
concern.
The ability of the Company to sustain itself as a going concern is
dependent on its ability to generate sufficient cash to meet its financial
requirements and, ultimately, upon achieving profitable operations. As
discussed in Note 1, PBI-Delaware is currently in the process of raising
approximately $8 million through an initial public offering of its common
stock and, although the outcome of the public offering cannot be predicted
with certainty, PBI-Delaware plans to complete this financing later in
1996. The outcome of PBI-Delaware's efforts to complete its initial public
offering is not determinable at this time. Subsequent to June 30, 1996,
PBI-Delaware raised $1,000,000 in bridge loan financing which was used to
repay certain outstanding obligations and support the Company's current
working capital requirements.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
F-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Pacific Biometrics, Inc.
Seattle, Washington
We have audited the accompanying statement of operations of Pacific
Biometrics, Inc. (a Washington corporation) for the seven month period
from July 1, 1994, to January 31, 1995. This financial statement is the
responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents
fairly, in all material respects, the results of operations of Pacific
Biometrics, Inc. for the seven month period from July 1, 1994, to January
31, 1995, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Seattle, Washington
September 5, 1996
F-30
<PAGE>
PACIFIC BIOMETRICS, INC.
(a Washington corporation)
STATEMENT OF OPERATIONS
For the Seven Month Period from July 1, 1994, to January 31, 1995
Laboratory testing revenues and consulting fees $ 470,906
----------
Operating expenses:
Laboratory 496,787
General and administrative 452,652
----------
Total operating expenses 949,439
----------
Operating loss (478,533)
----------
Other income (expense):
Interest expense (16,190)
Interest and other income 4,527
----------
(11,663)
----------
Net loss $ (490,196)
===========
The accompanying notes are an integral part of this financial statement.
F-31
<PAGE>
PACIFIC BIOMETRICS, INC.
(a Washington corporation)
NOTES TO STATEMENT OF OPERATIONS
For the Seven Month Period from July 1, 1994, to January 31, 1995
1. THE COMPANY, BASIS OF PRESENTATION AND PROPOSED INITIAL PUBLIC OFFERING
Organization and Basis of Presentation
Pacific Biometrics, Inc. ("PBI" or the "Company") was incorporated in
Washington in 1989, and has been engaged in providing laboratory and
clinical research support services to the pharmaceutical and diagnostic
industries. PBI provides services on normal credit terms to commercial
and research organizations throughout the United States.
In January 1995, PBI was acquired by Merchant House Scientific, Inc., a
California corporation ("Merchant House), which had been incorporated in
December 1992. In June 1996, PBI was acquired by a holding company
(Pacific Biometrics, Inc., a Delaware corporation, "PBI-Delaware"), which
was formed in May 1996 for the purpose of acquiring the Company and an
affiliated company (BioQuant, Inc., a Michigan corporation, "BioQuant").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Depreciation
Property and equipment are recorded at cost. Depreciation and
amortization are provided using straight-line and accelerated methods over
the useful lives of the related assets. Leasehold improvements are
amortized over the term of the lease. The cost and accumulated
depreciation of property or equipment sold or otherwise disposed of are
removed from the accounts and the resulting gains or losses are included
in the statement of operations.
Income Taxes
Deferred tax assets and liabilities are recorded for differences between
the financial statement and tax bases of the assets and liabilities that
will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is recorded for the amount of
income tax payable or refundable for the period increased or decreased by
the change in deferred tax assets and liabilities during the period.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ
from those estimates and assumptions
F-32
<PAGE>
3. EMPLOYMENT AND NONCOMPETITION AGREEMENTS
The Company has entered into employment and noncompetition agreements with
certain executives. These agreements specify that the executives may not
engage in any competitive activity for a one-year period following
termination.
4. INCOME TAXES
As a result of the merger with Merchant House, the availability of the
Company's net operating losses will be limited to a prescribed amount each
year as specified in the Internal Revenue Code, and will be limited to use
by the Company following its acquisition by PBI-Delaware in 1996.
The following is a reconciliation of income tax expense (credit) to the
amount based on the U.S. statutory rate of 34% for the period from July 1,
1994, to January 31, 1995:
<TABLE>
<S> <C>
Income tax benefit based on U.S. statutory rate $ (166,667)
Stock options exercised (13,881)
Other 432
Losses which provide no current tax benefit 180,116
-----------------
Income tax benefit $ 0
=================
</TABLE>
The provision for income taxes was as follows for the period from July 1,
1994, to January 31, 1995:
<TABLE>
<S> <C>
Current provision $
Deferred provision 180,116
Change in valuation allowance (180,116)
=================
Provision for income taxes $ 0
=================
</TABLE>
5. SEVERANCE AGREEMENT
In September 1994 the Company terminated an employment contract with one
of its employees. Concurrently, the Company entered into a consulting
agreement with the executive which provided for monthly payments of
$5,000 beginning November 1, 1994, and ending October 1, 1995. All
amounts owed under this agreement were paid. The agreement also provides
for a lump-sum payment of $50,000 in the event the Company completes an
initial public offering. This obligation has been assumed by a Director
of the Company.
6. LEASES
The Company has entered into noncancellable operating leases for office
facilities. Under these leases, the Company is responsible for its
proportionate share of real estate taxes, insurance and common area
maintenance costs. Rent expense on these lease agreements was $82,764
for the seven month period from July 1, 1994, to January 31, 1995.
7. MAJOR CUSTOMERS
The Company's sales to its largest customer represented approximately
14.3% of its total sales for the seven months ended January 31, 1995.
Sales to its largest five customers represented approximately 52.8% of
its total sales for the seven months ended January 31, 1995.
F-33
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or representations other than those contained in this Prospectus,
and if given or made,such information or representations must not be relied
upon as having been authorized by the Company or the Underwriters. This
Prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any security offered by this Shares Prospectus, or an offer to sell or a
solicitation of an offer to buy any security, by any person in any jurisdiction
in which such offer or solicitation would be unlawful. Neither the delivery of
this Prospectus nor any sale made hereunder shall under any circumstances,
imply that the information in this Prospectus is correct as of any time
subsequent to the date of this Prospectus.
TABLE OF CONTENTS
Page
Prospectus Summary................................................... 5
Summary Consolidated Financial
Information........................................................ 9
Risk Factors......................................................... 10
Use of Proceeds...................................................... 24
Capitalization....................................................... 27
Dilution............................................................. 25
Dividend Policy...................................................... 27
Management's Discussion and Analysis
of Financial Condition and Results of
Operations......................................................... 28
Business............................................................. 28
Management........................................................... 31
Principal Shareholders............................................... 40
Certain Transactions................................................. 41
Description of Securities............................................ 41
Shares Eligible for Future Sale...................................... 44
Underwriting......................................................... 45
Legal Matters........................................................ 48
Experts.............................................................. 48
Additional Information............................................... 48
Index to Combined Financial
Statements................................................... F-1
Until _____ , 1996 (25 days from the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
PACIFIC BIOMETRICS, INC.
1,700,000 Units
consisting of
1,700,00 Shares of Common Stock
1,700,000 Redeemable Warrants
-----------------
PROSPECTUS
-----------------
PARADISE VALLEY
SECURITIES, INC.
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a
corporation, within certain limitations, to indemnify any person by reason of
the fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's
fees) judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with an action, suit or proceeding, if such person
acted, in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, in criminal actions or
proceedings, in addition, had no reasonable cause to believe that his conduct
was unlawful.
Article EIGHTH of the Registrant's Certificate of Incorporation, as
amended, provides that:
No director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director; provided, however, that nothing in this
Article EIGHTH shall eliminate or limit the liability of any director
(i) for breach of the director's duty of loyalty to the Corporation or
its stockholders, (ii) for acts or omissions not in good faith or which
involves intentional misconduct or knowing violation of law, (iii)
under Section 174 of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which the director derived
an improper personal benefit. Neither the amendment nor repeal of this
Article EIGHTH, nor the adoption of any provision of the Certificate of
Incorporation inconsistent with this Article EIGHTH, shall eliminate or
reduce the effect of this Article EIGHTH in respect of any matter
occurring, or any cause of action, suit or claim that, but for this
Article EIGHTH, would accrue or arise, prior to such amendment, repeal
or adoption of an inconsistent provision.
In addition, the Registrant's By-laws provides that the Registrant
shall indemnify all persons to the full extent permitted, and in the manner
provided, by the Delaware General Corporation Law.
II-1
<PAGE>
The Registrant intends to maintain director and officer liability
insurance which would provide coverage against certain securities law
liabilities.
Item 25. Other Expenses of Issuance and Distribution
The expenses payable by the Registrant in connection with the issuance
and distribution of the securities being registered (other than underwriting
discounts) are estimated as follows:
SEC Registration Fee..................................$ 11,961
National Association of Securities
Dealers, Inc. Fee.....................................$ 7,437
Transfer Agent's Fee..................................$ 6,000
Printing and Engraving Expenses.......................$ 75,000
Legal Fees and Expenses...............................$ 180,000
State Securities Qualification Fees...................$ 25,000
Nasdaq Exchange Listing and Expenses..................$ 8,500
Accounting Fees and Expenses..........................$ 105,000
Miscellaneous.........................................$ 31,102
--------
Total: $ 450,000
==========
Item 26. Recent Sale of Unregistered Securities
(a) On June 28, 1996, the Company issued an aggregate of 700,318
shares of Common Stock pursuant to a reverse triangular merger, for all issued
and outstanding shares of BioQuant in a tax-free exchange whereby BioQuant
became a wholly-owned subsidiary of the Company.
(b) On June 28, 1996, the Company issued an aggregate of 1,038,851
shares of Common Stock pursuant to a reverse triangular merger, for all issued
and outstanding shares of PBI-WA in a tax-free exchange whereby PBI-WA became a
wholly-owned subsidiary of the Company.
(c) On June 28, 1996, the Company issued a total of 50,000 warrants
to certain accredited investors, including 10,000 warrants to a director of the
Company, in connection with a private placement of an aggregate of $250,000
principal amount of promissory notes. The warrants entitle the holders to
purchase one share of Common Stock at an exercise price of $5.70 per share
until April 30, 1998.
(d) Pursuant to a private offering of Units consisting of promissory
notes and warrants, which closed on July 22 and August 15, 1996, the Company
issued an aggregate of 250,000 warrants to certain accredited investors,
including 14,583 warrants
II-2
<PAGE>
to a director of the Company, in connection with a $1,000,000 debt offering.
The warrants entitle the holders to purchase one share of Common Stock at an
exercise price of $5.70 per share until April 30, 1998. The Placement Agent for
this offering was Paradise Valley Securities, Inc., which received an aggregate
commission of $64,000.
(e) On August 30, 1996, the Company issued 2,900 shares of Common
Stock to an accredited individual for an aggregate purchase price of $10,005 or
$3.45 per share.
(f) Prior to the mergers described above, both BioQuant and PBI-WA
funded their capital needs primarily through sales of equity and debt
securities. Generally, such sales were made to accredited investors in separate
privately negotiated transactions at various prices ranging from between $1.00
and $2.00 per share of common stock or convertible securities. All of the
securities of BioQuant and PBI-WA were exchanged in the mergers described in
(a) and (b) above.
All of the transactions described above were exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof as transactions by an issuer not involving a public offering.
Item 27. Exhibits
- ------------------
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant.
3.2 By-Laws of the Registrant.
4.1 Specimen Stock Certificate. *
4.2 Specimen Warrant Certificate. *
4.3 Form of Warrant Agreement.
5.1 Securities Opinion of Rosenman & Colin LLP.*
10.1 License Agreement, dated December 31, 1992, by and
between Sudor Partners and CEO Advisors, Inc.
10.2 Amendment No. 1 To License Agreement, dated August
6, 1993 by and between Sudor Partners and CEO
Advisors, Inc.
10.3 Supply Agreement, dated August 6, 1993, by and
between Sudormed, Inc. and CEO Advisors, Inc.
II-3
<PAGE>
10.4 Assignment of License and Supply Agreements -
Consent, dated September 7, 1993, October 7, 1993
and October 11, 1993, by and between CEO Advisors,
Inc. and Bioquant, Inc.
10.5 License Agreement, dated February 15, 1995, by and
between Metra and BioQuant. *
10.6 Development Agreement, dated October 4, 1995, by
and between BioQuant and Assay Designs.
10.7 Agreement, dated October 26, 1995, by and between
PBI-WA and Sigma Diagnostics.
10.8 Manufacturing Agreement, dated March 1, 1996, by
and between Merchant House Scientific; together
with Assignment and Guaranty.
10.9 Agreement and Plan of Merger, dated May 15, 1996,
by and among BioQuant, Inc., Pacific Biometrics
Inc. and BioQuant-Acquisition, Inc.
10.10 Agreement and Plan of Merger, dated May 15, 1996,
by and among Pacific Biometrics,Inc. (Washington),
Pacific Biometrics, Inc. (Delaware), and PBI-
Acquisition, Inc.
10.11 Office Lease, dated January 15, 1990, by and
between Bruce M. and Ann Stever Blume and Pacific
Biometrics, Inc.
10.12 Amendment No. 1 to Lease Agreement, dated June 15,
1992, by and between Blume 1100 Limited Partnership
and Pacific Biometrics, Inc.
10.13 Office Lease, dated August 13, 1992, by and between
Blume 1100 Limited Partnership and Drake Mortgage.
10.14 Assignment of Lease, dated November 30, 1993, by
and between Pacific Biometrics, Inc. and Columbia
First Service, Inc.
II-4
<PAGE>
10.15 Standard Form Lease, dated May 23, 1993, by and
between Merchant House Scientific and Harris Trust
and Savings Bank.
10.16 First Amendment to Lease, dated July 11, 1996, by
and between Bank of New York, as directed Trustee
for Unisys Master Trust and Registrant.
10.17 Stock Option Plan. *
10.18 Employment Agreement, dated September ___, 1996, by
and between Registrant and Ellen A. Rudnick. *
10.19 Employment Agreement, dated September ___, 1996 by
and between Registrant and Paul G. Kanan. *
10.20 Employment Agreement, dated September ___, 1996 by
and between Registrant and G. Russell Warnick. *
10.21 Employment Agreement, dated September ___, 1996 by
and between Registrant and Elizabeth Teng Leary,
Ph.D. *
21.1 Subsidiaries.
23.1 Consent of Rosenman & Colin LLP (included in
Exhibit 5.1 of this Registration Statement).
23.2 Consent of Coopers & Lybrand L.L.P., certified
public accountants.
25.1 Powers of Attorney appear on the signature page in
Part II of the Registration Statement.
27.1 Financial Data Schedule.
- ----------------------------------------
* To be filed by amendment.
Item 28. Undertakings
- ----------------------
The Registrant hereby undertakes:
(I) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a) (3)
of the Securities Act of 1933, as amended (the "Act");
II-5
<PAGE>
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement;
(iii) Include any additional or changed material
information on the plan of distribution.
(2) That, for determining liability under the Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) To file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
(4) To provide to the Underwriter at the closing specified in
the underwriting agreement certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser.
(5) Insofar as indemnification for liabilities arising under
the Act may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a Director, officer
or controlling person of the small business issuer in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
(6) For determining any liability under the Securities Act, to
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424 (b) (1), or (4) or
497(h) under the Securities Act as part of this registration statement as of
the time the Commission declared it effective.
(7) For determining any liability under the Securities Act, to
treat each post-effective amendment that contains a form of
II-6
<PAGE>
prospectus as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that time as the
initial bona fide offering of these securities.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Irvine, California on the 5th day of September, 1996.
PACIFIC BIOMETRICS, INC.
By: /s/ Paul G. Kanan
------------------------------
Paul G. Kanan, President
POWER OF ATTORNEY
Each of the undersigned hereby authorizes Paul G. Kanan as his
attorney-in-fact to execute in the name of each such person and to file such
amendments (including post-effective amendments) to this registration statement
as the Registrant deems appropriate and appoints such person as
attorney-in-fact to sign on his behalf individually and in each capacity stated
below and to file all amendments, exhibits, supplements and post-effective
amendments to this registration statement.
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the dates stated:
Signature Title Date
--------- ----- ----
/s/ Paul G. Kanan President, Chief September 5, 1996
- ------------------------- Executive Officer
Paul G. Kanan and Director
/s/ Ellen A. Rudnick Chairman of the September 5, 1996
- ------------------------- Board of Directors
Ellen A. Rudnick
/s/ Douglas S. Harrington September 5, 1996
- ------------------------- Secretary and
Douglas S. Harrington, M.D. Director
/s/ Mary L. Campbell Treasurer and September 5, 1996
- ------------------------- Director
Mary L. Campbell
II-8
<PAGE>
/s/ Craig M. Goldstone Director September 5, 1996
- -------------------------
Craig M. Goldstone
/s/ Terry Giles Director September 5, 1996
- -------------------------
Terry Giles
II-9
<PAGE>
UNDERWRITING AGREEMENT
between
PACIFIC BIOMETRICS, INC.,
its wholly-owned subsidiaries
PACIFIC BIOMETRICS, INC.,
BIOQUANT, INC.
and
PARADISE VALLEY SECURITIES, INC.
______________, 1996
[Draft August 6, 1996]
<PAGE>
UNDERWRITING AGREEMENT
PACIFIC BIOMETRICS, INC.
1,700,000 Shares of Common Stock
1. PARTIES AND INTRODUCTION.
The parties to this agreement (the "Agreement") are Pacific Biometrics,
Inc., a Delaware corporation (the "Company"), its wholly owned subsidiaries
Pacific Biometrics, Inc., a Washington corporation, and BioQuant, Inc., a
Michigan corporation (collectively referred to as the "Subsidiaries"), and
Paradise Valley Securities, Inc. ("Paradise"), an Arizona corporation. Paradise
is sometimes referred to as the "Underwriter".
The Company proposes to issue and sell to the Underwriter 1,700,000 units
(individually a "Unit" and collectively the "Units"), each Unit consisting of
one share of the Company's authorized but unissued common stock, $.01 par value,
(the "Common Stock") and a warrant (individually a "Warrant" and collectively
the "Warrants"). Each Warrant will entitle the holder thereof to purchase one
share of Common Stock at a price of $12.00, subject to certain conditions. Such
1,700,000 Units are herein called the "Firm Units". The Firm Units, together
with (a) the shares of Common Stock and the Warrants comprising such Units and
(b) the shares of Common Stock issuable upon exercise of such Warrants, are
collectively referred to herein as the "Underwritten Securities". In addition,
the Company proposes to grant to the Underwriter an option (the "OverAllotment
Option") to purchase up to 255,000 additional Units (hereinafter called the
"Option Units") solely to cover over-allotments, if any. The Option Units,
together with (a) the shares of Common Stock and the Warrants comprising such
Units and (b) the shares of Common Stock issuable upon exercise of such
Warrants, are collectively referred to herein as the "Option Securities". The
Underwritten Securities and the Option Securities are herein collectively
referred to as the "Unit Securities". The offer and sale of the Unit Securities
as contemplated in this Agreement are herein called the "Offering". Upon
completion of the Offering, the Units will not be traded, but the shares of
Common Stock and the Warrants shall be registered pursuant to paragraph 2 below,
and shall separately trade.
In addition, the Company proposes to sell to the Underwriter, for its own
account, warrants (collectively the "Underwriter's Unit Warrants") to purchase
170,000 Units (the "Underwriter's Warrant Units"), as more fully described in
Section 3 herein, and in such Underwriter's Unit Warrants. The Unit Securities,
the Underwriter's Unit Warrants, the Underwriter's Warrant Units, the shares of
Common Stock and the Warrants comprising the Underwriter's Warrant Units and the
shares of Common Stock issuable upon exercise of the Warrants included within
the Underwriter's Warrant Units are more fully described in the Registration
Statement and the Prospectus (as those terms are defined and referred to in
Section 2 herein), and are called collectively herein the "Securities".
2. REGISTRATION STATEMENT AND PROSPECTUS.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and amendments thereto,
on Form SB-2 (File No. 333-____), including the related preliminary prospectus,
for the registration under the Securities Act of 1933, as amended ("the Act"),
of the Securities, copies of each of which have been delivered to the
Underwriter. The registration statement (including the prospectus, financial
statements, exhibits, and all other documents filed as a part thereof or
incorporated therein), as amended on the date on which such registration
[Draft August 6, 1996]
<PAGE>
2
statement is declared effective (the "Effective Date") by the Commission and
deemed by virtue of Rule 430A of the General Rules and Regulations of the
Commission under the Act (the "Regulations") to be part of such registration
statement at the time it was declared effective, is hereinafter referred to as
the "Registration Statement"; and the term "Prospectus" shall mean the
prospectus so filed with the Commission pursuant to Rule 424(b) of the
Regulations. The term "preliminary Prospectus" as used herein shall mean each
prospectus used prior to the date the Registration Statement became effective
and included as a part of the Registration Statement, including any prospectus
filed with the Commission pursuant to Rule 424(a).
3. SALE, ISSUANCE AND DELIVERY OF UNITS.
3.1 Purchase and Sale of Units; Public Offering. Subject to the terms
and conditions set forth herein and on the basis of the representations,
warranties and agreements contained herein, the Company hereby agrees to issue
and sell and the Underwriter hereby agrees to purchase from the Company the
1,700,000 Firm Units at a price equal to ninety percent (90%) of the public
offering price of $4.75 per Unit (the "Offering Price"). The difference of
$0.475 per Firm Unit between the Offering Price and the price at which the
Company will sell the Firm Units to the Underwriter is the "Underwriter's
Discount".
The Underwriter will make a public offering of the Units as promptly
as is expedient in the judgment of the Underwriter, after the Registration
Statement shall have become effective, upon the terms hereof and at the Offering
Price.
3.2 Underwriter's Warrants. On the Firm Closing Date (which term is
defined in paragraph 3.4, below) the Company will issue and sell to the
Underwriter, at an aggregate price of $100, the Underwriter's Unit Warrants for
the purchase of 170,000 Units (which is equal to 10% of the total number of Firm
Units sold in the Offering), at an exercise price of $5.70 per share (120% of
the Offering Price). The Underwriter's Unit Warrants shall be exercisable during
the period commencing one year and ending five years after the Effective Date.
The Underwriter's Unit Warrants shall contain the terms and provisions
hereinbelow more fully described and as set forth more particularly therein,
including, but not limited to, provisions protecting the holder(s) against
dilution by reason of stock dividends, stock splits, combinations,
recapitalization, mergers and consolidations or otherwise, provisions relating
to registration rights (both one demand and unlimited "piggy back" registration
rights) with respect to the shares of Common Stock included within the
Underwriter's Unit Warrants and the shares of Common Stock issuable upon
exercise of the Warrants included within the Underwriter's Unit Warrants, and
such other terms as are agreed upon by the Company and the Underwriter. As
further provided therein, no transfer, assignment or hypothecation of the
Underwriter's Unit Warrants (or of any of the Units, shares of Common Stock or
Warrants included therein) shall be made except to certain directors, officers,
and employees and shareholders of the Underwriter. The Underwriter's Unit
Warrants shall be issued and sold to the Underwriter as an additional
underwriting fee. The Company shall not be obligated to issue the Underwriter's
Unit Warrants until the Firm Units have been issued, sold and paid for as herein
provided.
3.3 Over-Allotment Option. Subject to the terms and conditions of this
Agreement, the Company hereby grants to the Underwriter an option to purchase
all or any portion of the Option Units, at the same price per Unit as the
Underwriter is to pay for the Firm Units, provided that the Over-Allotment
Option may be exercised only for the purpose of covering over-allotments in the
sale of the Firm Units. The Over-Allotment Option may be exercised at any time,
in whole or in part, on one occasion within 30 days from the Effective Date and
upon written notice to the Company by the Underwriter. Such notice shall set
forth the aggregate number of Option Units as to which the Over-
[Draft August 6, 1996]
<PAGE>
3
Allotment Option is being exercised and the time at which such Option Units will
be purchased and delivered.
3.4 Delivery and Payment. Delivery and payment for the Firm Units
shall be made at the offices of the Underwriter in Phoenix, Arizona, on such
date (the "Firm Closing Date") as the Underwriter shall designate, or at such
other place or date as may be mutually agreed upon by the Company and the
Underwriter, not later than the third (or if the Firm Units are priced, as
contemplated by Rule 15c6-1 of the Securities Exchange Act of 1934 (the
"Exchange Act"), after 4:30 p.m. Washington, D.C. time, the fourth) full
business day following the date that any of the Units are released to the
Underwriter for sale to the public; provided, however, that in the event the
Registration Statement is amended or the Prospectus is supplemented between the
Effective Date and the Firm Closing Date, the Underwriter shall have the right
to delay the Firm Closing Date to a date that shall allow the Underwriter
sufficient time to distribute the Prospectus as amended or supplemented. The
certificates for the shares of Common Stock and the Warrants comprising the Firm
Units shall be delivered in definitive form or shall be recorded by the
Depository Trust Corporation in such names and in such denominations as the
Underwriter shall request by notice at least two business days prior to the Firm
Closing Date, against payment by official bank or certified check, wire transfer
to or upon the order of the Company, in such method as is agreed upon between
the Underwriter and the Company.
Delivery and payment for any Option Units which the Underwriter may
elect to purchase shall be made at the offices of the Underwriter, on a date
(the "Option Closing Date") which shall not be earlier than two nor later than
five full business days after exercise of the Over-Allotment Option, but in no
event earlier than the Firm Closing Date, unless otherwise agreed by the
Underwriter and the Company. Delivery of certificates, in definitive form, for
the shares of Common Stock and the Warrants comprising the Units being
purchased, registered in such names and denominations as the Underwriter shall
request by at least two business days' prior notice in writing, shall be made to
the Underwriter or shall be recorded by the Depository Trust Corporation for the
account of the Underwriter (or its nominee) against payment for the purchase
price thereof by official bank or certified check or checks payable to the order
of the Company.
The Firm Closing Date and the Option Closing Date are sometimes
referred to collectively as the "Closing Date(s)". On any Closing Date with
respect to Option Units, there shall be delivered to the Underwriter opinions
and certificates, dated as of such Closing Date, to the same effect as those
required to be delivered on the Firm Closing Date pursuant to Section 6 hereof.
3.5 Inspection of Certificates. For the purpose of expediting the
checking and packaging of the certificates for the shares of Common Stock and
the Warrants comprising the Units, the Company agrees to make the certificates
available for inspection by the Underwriter at the offices of the Transfer Agent
(as defined in paragraph 4.8 below), not less than 24 hours prior to the
respective Closing Dates.
3.6 Use of Prospectus. The Company authorizes the Underwriter and any
dealers acquiring the Units to use the Prospectus, as from time to time amended
or supplemented, in connection with the offering and sale of the Units for a
period of 25 days after the Effective Date (and for such longer period as the
Underwriter may request if, in the opinion of the Underwriter's counsel, the
Prospectus is required by the Act and applicable Regulations to be delivered
after the expiration of such 25-day period).
3.7 Selected Dealers. The Underwriter may associate itself with other
duly licensed and authorized securities dealers ("Selected Dealers") that are
members of the National Association of
[Draft August 6, 1996]
<PAGE>
4
Securities Dealers, Inc. ("NASD"), and may allow all members of any such selling
group such part of its discount as they may determine pursuant to the Selected
Dealers Agreement between the Underwriter and each Selected Dealer.
3.8 Subscriptions. The Underwriter may allocate Units among, or
reject, any subscriptions, in whole or in part.
3.9 Reservation of Shares. The Company shall set aside and at all
times have reserved and available a sufficient amount of Common Stock to cover
the issuance of (i) the shares subject to the Warrants, (ii) the shares subject
to the Underwriter's Unit Warrants, and (iii) the shares subject to the Warrants
included within the Warrants which comprise a part of the Units subject to the
Underwriter's Unit Warrants.
4. AGREEMENTS OF THE COMPANY.
The Company further covenants and agrees with the Underwriter as follows:
4.1 Effectiveness of Registration Statement. The Company will use its
best efforts to cause the Registration Statement, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective. The Company will advise the Underwriter promptly, and confirm
that advice in writing, (a) when the Registration Statement has become effective
and when any post-effective amendment to the Registration Statement shall have
become effective, (b) of the mailing or the delivery to the Commission for
filing of any amendment or post-effective amendment to the Registration
Statement or any amendment or supplement to the Prospectus, (c) of any request
by the Commission for amendment or supplement to the Registration Statement or
the Prospectus, or for additional information, promptly supplying the
Underwriter with copies of all comment letters and all other correspondence with
the Commission, (d) of the issuance by the Commission of any stop order
suspending effectiveness of the Registration Statement or of the suspension of
the qualification of the Company's Securities for sale in any jurisdiction, or
of any initiation or threat of any proceeding for any such purpose known to the
Company, and (e) of the issuance by any state securities commission or other
regulatory authority of any order suspending the qualification or the exemption
from qualification of the Company's Securities under state securities or Blue
Sky laws or the initiation or threat of any proceedings for that purpose.
4.2 Rule 430A Prospectus; Amendments to the Registration Statement. If
Rule 430A of the Regulations is employed, the Company will timely file the
Prospectus pursuant to and in compliance with Rule 424(b) of the Regulations and
will advise the Underwriter of the time and manner of such filing. The Company
will give the Underwriter advance notice of its intention to file or make any
post-effective amendment to the Registration Statement or any amendment or
supplement to the Prospectus and will submit all such amendments or supplements
to the Underwriter and the Underwriter's counsel for comments, as soon as
possible, but not later than three (3) business days before the Company proposes
to file such amendments or supplements with the Commission.
4.3 Compliance with Securities Act. The Company will comply with the
Act and the Regulations, so as to permit the continuance of offers and sales of,
and dealings in, the shares of Common Stock and the Warrants for as long as may
be necessary to complete the distribution of the Units as contemplated hereby.
If at any time when a prospectus relating to the Units is required to be
delivered under the Act, any event occurs as a result of which, in the judgment
of the Company or the Underwriter
[Draft August 6, 1996]
<PAGE>
5
or the Underwriter's counsel, the Prospectus, as then amended or supplemented,
would include any untrue statement of a material fact, or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which made, not misleading, or if it is necessary at any
time to amend or supplement the Prospectus to comply with the Act, the Company
will promptly notify the Underwriter, or the Underwriter will promptly notify
the Company, as the case may be, and the Company shall promptly prepare and file
with the Commission, if the Company determines such filing to be appropriate, an
amendment or supplement to the Registration Statement which will correct such
statement or omission, or an amendment or supplement which will effect such
compliance, and deliver to the Underwriter in connection therewith such
prospectus or prospectuses in such quantity as may be necessary to permit
compliance with the requirements of the Act. The Company agrees to file with the
Commission all required reports on Form SR in accordance with the provisions of
Rule 463 promulgated under the Act and provide a copy of such reports to the
Underwriter and its counsel.
4.4 Copies of the Registration Statement and Prospectus. The Company
will promptly deliver to the Underwriter, without charge, (a) two copies of the
Registration Statement, as originally filed, and of each amendment thereto, and
of each post-effective amendment thereto filed at any time when a prospectus
relating to the Securities to be sold hereunder is required to be delivered
under the Act, in each such case manually executed by the proper officers and a
majority of the directors of the Company (or, in case of amendments, by their
duly constituted attorneys-in-fact) and including signed copies of each consent
of experts named in the Registration Statement and all financial statements,
schedules and exhibits filed therewith (including those incorporated by
reference to the extent not previously furnished to the Underwriter), and (b)
such number of conformed copies of the Registration Statement, as originally
filed, and of each amendment and post-effective amendment thereto (in each such
case excluding exhibits), as the Underwriter may reasonably require. The Company
will promptly deliver, without charge, to the Underwriter or such others whose
names and addresses are designated by the Underwriter as soon as possible after
the Effective Date and thereafter from time to time during the period when
delivery of a prospectus relating to the Securities to be sold hereunder is
required by the Act, as many printed copies as the Underwriter may reasonably
request of the final Prospectus and any amendment or supplement thereto. The
Company will promptly deliver without charge as soon as practicable following
the public offering or sale of the Units, and thereafter from time to time for
such period as delivery of a prospectus or any amendments or supplement thereto
may be required, to the Underwriter or Selected Dealers to or through whom Units
may be issued, as many copies as the Underwriter reasonably requests of the
Prospectus and any amendment or supplement thereto.
4.5 Blue Sky Qualification. Prior to any public offering of the Units
by the Underwriter, the Company will endeavor in good faith, using counsel
reasonably designated by the Underwriter, to take such action as may be
necessary, to register or qualify the Securities for offer and sale under the
applicable securities (or "Blue Sky") laws of any states or jurisdictions of the
United States as the Underwriter may reasonably designate and will maintain such
qualifications in effect for so long as may be required for the distribution of
the Securities. The Company shall pay for all reasonable Blue Sky counsel fees
and expenses. The Company will file such statements and reports as may be
required by the laws of each jurisdiction in which the Shares have been
registered or qualified.
4.6 Periodic and Other Reports. The Company will deliver to the
Underwriter, for a period of at least five years from the last Closing Date(s):
(a) copies of all other statements, documents, or other information which the
Company shall mail or otherwise make available to any class of its security
holders, to the financial press or to the public, or shall file with the
Commission, including, but not limited to, periodic reports required to be filed
under Sections 13 and 15 of the Exchange Act, such as reports on
[Draft August 6, 1996]
<PAGE>
6
Forms 10-C, 10-K (or 10-KSB), 10-Q (or 10-QSB) and 8-K (which shall be provided
within the same period that such reports are required to be filed with the
Commission); and (b) upon request in writing, such other information as may
reasonably be requested with reference to the property, business and affairs of
the Company as long as such information is available to securities holders
generally.
4.7 Section 11(a) Financials. The Company will make generally
available to its stockholders, will file as an exhibit to a report filed under
the Exchange Act, and will deliver to the Underwriter, as soon as practicable,
but in no event later than the first day of the 18th full calendar month
following the Effective Date, an earnings statement (which need not be audited
but which will satisfy the provisions of Section 11(a) of the Act) covering a
period of at least twelve (12) months beginning after the Effective Date.
4.8 Transfer Agent. The Company shall appoint [___________
_____________, of _________, _________,] as the transfer agent (the "Transfer
Agent"), with respect to the Common Stock and the Warrants and will make
arrangements to have available, at the office of the Transfer Agent,
certificates representing the Common Stock and the Warrants in such quantities
as may, from time to time, be necessary. In addition, the Company shall obtain a
CUSIP number for each of the Common Stock and the Warrants as promptly as
possible after filing the Registration Statement with the Commission.
4.9 Copies for Compliance with the NASD. The Company will supply the
Underwriter's counsel with such copies of the Registration Statement, any
amendment or supplement to the Registration Statement, any preliminary
Prospectus or final Prospectus and related underwriting agreements as
appropriate to satisfy filing requirements of the NASD.
4.10 Nasdaq Small Cap Market. The Company shall use its best efforts
to meet the requirements (as the NASD may from time to time impose) for the
quotation of the Common Stock and the Warrants on the Nasdaq Small Cap Market
(the "Nasdaq Market") and continue to meet the requirements for the inclusion of
the Common Stock and the Warrants on the Nasdaq Market.
4.11 Costs and Expenses; Nonaccountable Expense Allowance. Whether or
not the transactions contemplated by this Agreement are consummated or this
Agreement becomes effective or is terminated, the Company shall bear all costs
and expenses incident to the issuance, offer, sale and delivery of the
Securities including, but not limited to, all expenses and fees incident to the
filing of the Registration Statement and other appropriate filings with the
Commission pursuant to the Act and the Exchange Act, respectively, the costs,
expenses and filing fees incurred in connection with the qualification under
Blue Sky laws (including fees of Blue Sky counsel) and in connection with the
review of the terms of the Offering by the NASD (excluding counsel fees relating
to the NASD's review, which fees shall be paid by the Underwriter), fees and
disbursements of counsel and accountants for the Company, Nasdaq Market filing
and other fees, the costs of "tombstone" advertisements, costs of preparing and
printing the Registration Statement (and all amendments and supplements thereto)
and as many copies of the preliminary Prospectus and Prospectus as the
Underwriter may deem reasonably necessary.
In addition to the foregoing, the Company shall pay to the
Underwriter, as reimbursement for the Underwriter's expenses on the basis of a
nonaccountable expense allowance, an amount equal to 3% of the gross offering
proceeds from the sale of the Units (including the Option Units sold by the
Company), and all of the Underwriter's costs in excess of the nonaccountable
expense allowance shall be paid by the Underwriter. Expenses to which the
nonaccountable allowance shall be applied include fees of the Underwriter's
counsel, but shall not include any of the following (all of which shall be paid
by the
[Draft August 6, 1996]
<PAGE>
7
Company): fees of the Company's counsel; Commission and Blue Sky filing fees;
Blue Sky counsel fees and expenses; NASD filing fees; Nasdaq Market or other
Nasdaq fees; printing; "tombstone" advertisements; and any and all other
expenses customarily paid by the issuer in a public offering. The nonaccountable
expense allowance, based on the gross proceeds from the sale of the Units, shall
be paid on each of the Closing Date(s). The Company warrants, represents and
agrees that all such payments and reimbursements will be promptly and fully made
to the Underwriter.
Notwithstanding any other provision of this Agreement, if (a) the
Company decides not to proceed with the proposed offering, (b) there is a
material adverse change in the business or financial condition of the Company
and the Subsidiaries taken as a whole, (c) there exists any material
misrepresentation of the Company contained herein or otherwise, (d) the
Underwriter discovers in the course of its due diligence examination of the
Company and the Subsidiaries facts which the Underwriter reasonably determines,
in its reasonable discretion, could adversely affect the sale of the Units, or
(e) the Underwriter elects to terminate this Agreement pursuant to Section 8
hereof, the Company shall reimburse the Underwriter for its actual out-of-pocket
expenses relating to the proposed offering. The Underwriter's expenses shall
include, but are not to be limited to, reimbursement for the services and
disbursements of the Underwriter's counsel, plus any additional expenses and
fees including, but not limited to, postage expenses, duplication expenses, long
distance telephone expenses, and other expenses incurred by the Underwriter in
connection with the proposed offering. If the Company shall fail to pay to the
Underwriter any portion of the expense allowance set forth herein after having
received five (5) days' notice of such default, the Company shall be liable to
the Underwriter for reasonable attorneys' fees and costs incurred in the
collection of said amount, and interest on said amount at the rate of 18% per
annum, or the maximum applicable legal rate, whichever is lower.
4.12 List of Stockholders. The Company shall furnish to the
Underwriter a list of the names and addresses of all stockholders subsequent to
the last Closing Date and shall cause the Transfer Agent to furnish to the
Underwriter a copy of all transfer sheets for a period of two years from the
last Closing Date.
4.13 Compliance with Undertakings. The Company will comply with all of
the undertakings contained in the Registration Statement.
4.14 Information. Prior to the Closing Date(s), the Company will
supply and deliver to the Underwriter or its counsel, all information required
to enable them to make such investigation of the Company and its business
prospects as they shall reasonably request and shall make available to them such
persons as they deem reasonably necessary or appropriate in order to verify or
substantiate any information regarding the Company and the Subsidiaries. In
addition, the Underwriter or its counsel shall have the right to review any
materials prepared in connection with any offering of securities of the Company
conducted prior to the Offering for compliance with applicable federal and state
law.
4.15 Financial Reports. From and after the date of the audited
financial statements of the Company contained in the Prospectus through the
Closing Date(s), the Company will furnish to the Underwriter unaudited monthly
operating statements and quarterly financial statements in addition to any other
reports which may be required by this Agreement to be furnished to the
Underwriter.
4.16 Limitation on Options, Warrants and Rights. The Company will not,
without the prior written consent of the Underwriter, directly or indirectly
grant any options, warrants or rights to purchase or acquire Common Stock for a
period of 120 days commencing on the Effective Date or permit to be
[Draft August 6, 1996]
<PAGE>
8
outstanding during such period any such options, warrants or rights, other than
(i) an aggregate of up to 700,000 options and warrants that may be outstanding
as of the Effective Date; provided, however, that no such options shall be
exercisable prior to _____________, 1996; (ii) warrants or other rights which
are outstanding on the Effective Date and described in the Prospectus; (iii) the
Warrants; and (iv) and the Underwriter's Unit Warrants. The Company will not,
without the prior written of the Underwriter, grant any options, warrants or
rights to purchase or acquire Common Stock for a price below the greater of the
Offering Price or the market price for the Common Stock on the date of grant,
for a period of one year commencing on the Effective Date. The Company will not,
without the prior written consent of the Underwriter, file a Registration
Statement on Form S-8 during the 90-day period following the Effective Date.
4.17 Lock-Up Agreements. The Company shall cause each officer, each
director, and each stockholder listed on Schedule 4.17A, to enter into an
agreement substantially in the form of Schedule 4.17B (a "Lock-Up Agreement").
4.18 Limitation on Securities Issuances. Without the prior written
consent of the Underwriter, the Company will not, directly or indirectly, (a)
sell, offer, contract to sell, pledge or otherwise dispose of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any rights to purchase or acquire Common Stock or (b) grant to any person
or entity any right to have any shares of Common Stock or any other security of
the Company registered under the Act or any state securities laws, for a period
of [180/365 days] commencing on the Effective Date (the "Lock-Up Period"), other
than (i) the shares of Common Stock, the Warrants, the shares of Common Stock
issuable upon exercise of the Warrants, and the Underwriter's Unit Warrants, and
(ii) options to purchase shares of Common Stock granted pursuant to the
Company's stock option plan(s) in effect from time to time (provided, however,
that such options shall comply with the requirements of paragraph 4.16). Prior
to the Offering, there shall be no more than 2,750,000 shares of Common Stock
issued and outstanding.
4.19 Limitation on Compensation Increases. Without the prior written
consent of the Underwriter, neither the Company nor any direct or indirect
subsidiary of the Company shall, during the 120-day period following the
Effective Date, increase, directly or indirectly, the Compensation of any
director, officer or employee that has as of the date hereof, or had at any time
since June 28, 1996, an aggregate compensation level greater than $90,000 per
annum. As used herein, "Compensation" includes, but is not limited to, salary,
wages, bonuses, commissions and taxable fringe benefits. In addition, during
such period, the Company will not increase the Compensation paid or accrued to
any director in connection with the director's service as a member of the Board
of Directors of the Company or any direct or indirect subsidiary of the Company.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to, and agrees with, the Underwriter
that:
5.1 Accuracy of Registration Statement. The Registration Statement
conforms, and the Prospectus and any further amendments or supplements to the
Registration Statement or the Prospectus will conform, in all material respects,
to the requirements of the Act and the Regulations and the Registration
Statement and the Prospectus did not and will not, as of the applicable
effective date as to the Registration Statement and any amendment thereto and as
of the applicable filing date as to the Prospectus and any amendment or
supplement thereto, contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not
[Draft August 6, 1996]
<PAGE>
9
misleading; when the Registration Statement becomes effective, and when the
Prospectus is filed with the Commission, and at all times subsequent thereto up
to and including the Closing Date(s), or for such longer period as the
Prospectus is required to be delivered under the Act and the Regulations in
connection with sales by the Underwriter or Selected Dealers, the Registration
Statement and the Prospectus and any amendments or supplements thereto will
conform, in all material respects, to the requirements of the Act and the
Regulations, and will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted from the
Registration Statement or the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished in writing to
the Company with respect to the underwriting, by or on behalf of the
Underwriter, expressly for use therein.
5.2 Financial Statements Accurate. Coopers & Lybrand LLP, whose
reports appear in the Prospectus, is an independent public accountant within the
meaning of the Act and the Regulations. The financial statements of the Company
and of the Subsidiaries (including any supplementary financial information and
related schedules and notes) included in any preliminary Prospectus, the
Prospectus and the Registration Statement fairly present the financial condition
of the Company and the Subsidiaries on a consolidated basis as of the respective
dates thereof, and the results of operations and cash flows of the Company and
the Subsidiaries on a consolidated basis for the periods indicated therein, and
such financial statements have been prepared in conformity with generally
accepted accounting principles consistently applied and are in conformance with
the books and records of the Company. The financial data set forth in the
Prospectus under the captions "Prospectus Summary," "Selected Consolidated
Financial Data," "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" fairly present on the basis
stated in the Prospectus the information set forth therein and has been compiled
on a basis consistent with that of the audited financial statements included in
the Prospectus. The pro forma financial statements and other pro forma financial
information included in the Registration Statement, any preliminary Prospectus
and the Prospectus have been prepared in accordance with the Commission's rules
and guidelines with respect to pro forma financial statements, have been
properly compiled on the pro forma bases described therein and, in the
reasonable opinion of the Company, the assumptions used in the preparation
thereof are reasonable and the adjustments used therein are appropriate to give
effect to the transactions or circumstances referred to therein.
5.3 Accounting Controls. The Company and the Subsidiaries maintain
(and in the future will maintain) a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
5.4 Compliance with Organizational Documents and Other Instruments.
The execution, delivery and performance of this Agreement, the Warrants, the
Underwriter's Unit Warrants, and the Warrants included within the Underwriter's
Unit Warrants by the Company and the execution, delivery and performance of this
Agreement by the Subsidiaries, and the consummation of the transactions
contemplated hereby and thereby, does not and will not, with or without the
giving of notice or the lapse of time, or both, (i) conflict with any terms or
provisions of the charter or Bylaws of the Company or any Subsidiary, as amended
to the date hereof and the Firm Closing Date or Option Closing Date, as the case
[Draft August 6, 1996]
<PAGE>
10
may be; (ii) result in a breach of, constitute a default under, result in the
termination or modification of or result in the creation or imposition of any
lien, security interest, charge or encumbrance upon any of the properties of the
Company or a Subsidiary pursuant to any indenture, mortgage, deed of trust,
contract, commitment or other agreement or instrument to which the Company or
any Subsidiary is a party or by which any of their respective properties or
assets are bound or affected; (iii) violate any law, rule, regulation, judgment,
order or decree of any government or governmental agency, instrumentality or
court, domestic or foreign, having jurisdiction over the Company or any
Subsidiary or any of their respective properties or businesses; or (iv) result
in a breach, termination or lapse of the power and authority of the Company or
any Subsidiary to own or lease and operate their respective properties and
conduct their respective businesses as described in the Prospectus.
5.5 No Material Adverse Change. Except as disclosed in the
Registration Statement and in the Prospectus, subsequent to the dates as of
which information is given in the Registration Statement and in the Prospectus,
neither the Company, nor any Subsidiary has or will have incurred any material
liabilities or obligations, direct or contingent, or entered into any material
transactions not in the normal course of business, and there has not been or
will have been any change in the Company's consolidated capitalization, or any
material change in the Company's and the Subsidiaries' condition (financial or
otherwise), business, prospects, operations, properties or assets, taken as a
whole.
5.6 Incorporation and Standing. The Company currently is not engaged
in any business other than acting as a holding company for the capital stock of
the Subsidiaries. The Company does not own any stock or other equity interest
in, or control, directly or indirectly, any corporation, partnership or other
entity other than the Subsidiaries. The Company is a corporation duly organized,
validly existing and in good standing under the laws of Delaware, with all
requisite corporate power and authority and all necessary licenses, permits,
certifications, registrations, approvals, consents and franchises to own or
lease and operate its properties and to conduct its business as now being
conducted and as described in the Prospectus, and has not received any notice of
any proceeding relating to the revocation or modification of any thereof, nor is
it aware of any basis therefor. The Company is duly qualified to do business and
is in good standing as a foreign corporation in each jurisdiction in which the
nature of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the Company.
5.7 Incorporation and Standing of Subsidiaries. Each Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its organization, with all requisite power and authority,
corporate and other, and all necessary licenses, permits, certifications,
registrations, approvals, consents and franchises to own or lease and operate
its properties and to conduct its business now being conducted and as described
in the Prospectus, and has not received any notice of any proceeding relating to
the revocation or modification of any thereof, nor is the Company aware of any
basis therefor. Each Subsidiary is duly qualified and is in good standing as a
foreign corporation authorized to do business in each jurisdiction in which the
nature of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the Company and the Subsidiaries, considered as one
enterprise. Except as disclosed in the Prospectus, the Company owns all of the
outstanding capital stock of each Subsidiary free and clear of any security
interest, claim, lien, charge, encumbrance or adverse interest of any nature.
The outstanding capital stock of each Subsidiary has been duly and validly
issued and is fully paid and nonassessable. Except as described in the
Prospectus, there are no outstanding subscriptions, rights, warrants or options
to acquire, or instruments convertible into or exchangeable for, any shares of
capital stock of any of the Subsidiaries.
[Draft August 6, 1996]
<PAGE>
11
5.8 Valid and Binding Agreements of the Company. Each of this
Agreement, the Warrants, and the Underwriter's Unit Warrants has been duly
authorized, executed and delivered by the Company, and constitutes its legal,
valid and binding obligation, enforceable against the Company in accordance with
its respective terms except to the extent that enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws
affecting the rights of creditors generally or general equitable principles, and
except that the rights of indemnity hereunder and thereunder may be limited by
federal or state securities laws or the public policy underlying such laws. The
Warrants included within the Underwriter's Unit Warrants have been duly
authorized and, when executed and delivered by the Company in accordance with
the terms of the Underwriter's Unit Warrants upon the due exercise thereof, will
constitute legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with the terms of such Warrants except to the
extent that enforceability and rights of indemnity thereunder may be limited as
aforesaid.
5.9 Valid and Binding Agreement of the Subsidiaries. This Agreement
has been duly authorized, executed and delivered by each Subsidiary and
constitutes its legal, valid and binding obligation, enforceable against each
Subsidiary in accordance with its terms except to the extent that enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
or similar laws affecting the rights of creditors generally or general equitable
principles, and except that the rights of indemnity hereunder may be limited by
federal or state securities laws or the public policy underlying such laws.
5.10 Compliance with Applicable Law. The Company and each Subsidiary
has conducted, is conducting and will conduct its business so as to comply in
all material respects with all applicable statutes and regulations, and neither
the Company nor any Subsidiary is charged with nor, to the knowledge of the
Company, is under investigation with respect to any violation of any statutes or
regulations nor the subject of any pending or threatened adverse proceedings by
any regulatory authority having jurisdiction over its business or operations
except as disclosed in the Registration Statement and the Prospectus.
5.11 Absence of Conflict and Approvals. Except as disclosed in the
Prospectus, neither the Company nor any Subsidiary is in default, nor has any
event occurred that with notice or lapse of time, or both, would constitute a
default, in any respect in the performance of any obligation, covenant or
condition contained in any indenture, mortgage, deed of trust or other material
agreement or instrument to which the Company or any Subsidiary is a party or by
which the Company is bound or to which any of its properties or assets is
subject; and no consent, approval, authorization, order, registration or
qualification of or with any court or regulatory authority or other governmental
body is required for the issue and sale of the Securities, or the consummation
of the other transactions contemplated by this Agreement, except the
registration of the Securities under the Act, and such consents, approvals,
authorizations, registrations or qualifications as may be required by the NASD
or under the Blue Sky laws in connection with the purchase and distribution of
the Units by the Underwriter and the purchase of the Underwriter's Unit Warrants
by the Underwriter.
5.12 Capitalization. The authorized, issued and outstanding capital
stock of the Company conforms to the descriptions thereof in the Registration
Statement and in the Prospectus, has been duly and validly issued and is fully
paid and nonassessable and, except as disclosed in the Prospectus, there are no
outstanding options, warrants or other rights for the issuance of, and no
commitment, plan or arrangement to issue, any share of capital stock of the
Company or any security convertible into or exchangeable for capital stock of
the Company.
[Draft August 6, 1996]
<PAGE>
12
5.13 No Pre-emptive or Registration Rights. The holders of the
outstanding capital stock of the Company are not entitled to pre-emptive or
other rights to subscribe for the Units or shares of Common Stock. Except as
disclosed in the Registration Statement and the Prospectus, the offering of the
Securities as contemplated by this Agreement and the Prospectus does not give
rise to any rights relating to the registration of any shares of Common Stock or
other securities of the Company.
5.14 Legality of Securities. The Securities, when issued and paid for
in accordance with the terms of this Agreement, the Warrants, the Underwriter's
Unit Warrants, and the Warrants issuable upon exercise of the Underwriter's Unit
Warrants, as the case may be, will be validly issued and (with respect to all
shares of Common Stock included within the Securities) fully paid and
nonassessable shares of Common Stock of the Company, free of pre-emptive rights.
5.15 No Stop Orders. To the best knowledge of the Company, the
Commission has not issued any order preventing or suspending the use of any
preliminary Prospectus or the Prospectus or any part thereof and no proceedings
for that purpose have been instituted.
5.16 Contracts. All contracts and other documents required to be filed
as exhibits to the Registration Statement have been filed with the Commission
and are fully and accurately described in all material respects in the
Prospectus.
5.17 Employee Plans. Except as disclosed in the Registration Statement
and the Prospectus, neither the Company nor any Subsidiary has any employee
benefit plans (including, without limitation, pension, profit sharing, and
welfare benefit plans) or deferred compensation arrangements.
5.18 Use of Proceeds. The Company will apply the proceeds of the
Offering substantially in the manner stated in the Prospectus.
5.19 Patents, Trademarks, etc. The Company and the Subsidiaries own or
possess, or can acquire on reasonable terms, adequate patents, patent rights,
licenses, inventions, copyrights, the trademarks, service marks, trade names and
other proprietary rights and know-how (including trade secrets and other
patentable and/or unpatentable proprietary or confidential information or
procedures) (collectively, "Proprietary Rights") necessary to conduct the
business now conducted by them, and, except as described in the Prospectus or
specifically disclosed in writing to the Underwriter, neither the Company nor
any Subsidiary has received any notice or is otherwise aware of any infringement
of or conflict with asserted rights of others with respect to any Proprietary
Rights, except where such infringement or conflict (including, without
limitation, any alleged infringement or conflict described in the Prospectus),
if the subject of an unfavorable decision, ruling or finding, would not have a
material adverse effect on the business affairs, business prospects, properties,
financial condition or results of operations of the Company and the
Subsidiaries, taken as a whole.
5.20 Title to Property. Neither the Company nor any Subsidiary owns
any real property in fee simple, and the Company and each Subsidiary has good
and valid title to all personal property (including securities) owned by it,
free and clear of all liens, encumbrances and defects except such as are
described in the Prospectus or as do not materially affect the value or
interfere with the use of such property by the Company or any Subsidiary. Except
as otherwise disclosed in the Prospectus, the Company or a Subsidiary owns or
leases all such property, real, personal and mixed, tangible and intangible, as
is necessary to carry on its operations as presently conducted and as presently
proposed to be conducted.
[Draft August 6, 1996]
<PAGE>
13
5.21 No Litigation. Except as described in the Prospectus or disclosed
in writing to the Underwriter, there are no actions, suits or proceedings
pending or, to the Company's knowledge, threatened before any court or
governmental agency, arbitrator, authority or body to which the Company or any
of the Subsidiaries is a party or of which the business or property of the
Company or any of the Subsidiaries is the subject in which an unfavorable result
or decision would materially adversely affect the business affairs, business
prospects, properties, financial condition or results of operations of the
Company and the Subsidiaries, taken as a single enterprise, or which seek to
prevent or restrict the consummation of the transactions contemplated by this
Agreement.
5.22 No Undisclosed Sales of Securities. To the best of the Company's
knowledge, based on an examination of the Company's books and records by its
officers and its counsel, no securities of the Company have been sold by the
Company or any controlling person of the Company since the date of the Company's
formation, except as disclosed in the Registration Statement or Prospectus or
otherwise disclosed to the Underwriter.
5.23 Prohibited Payments. None of the Company, any Subsidiary, or any
of its or their agents or employees in his or her capacity as such has made any
payment of funds of the Company or received or retained any funds in violation
of any law, rule or regulation the violation of which would have a material
adverse effect on the Company and the Subsidiaries, taken as a whole.
5.24 Taxes. The Company and each Subsidiary has filed all federal,
state, local and foreign tax returns which are required to be filed through the
date hereof, or has received valid extensions thereof, and has paid all taxes
shown as due thereon. All such returns, as amended if applicable, are complete,
accurate and correct in all material respects. Neither the Company nor any
Subsidiary has any knowledge of any tax deficiency which might be asserted
against it which would materially and adversely affect the business affairs,
business prospects, properties, financial condition or results of operations of
the Company and the Subsidiaries, taken as a whole. The provisions and reserves
on the books of the Company and the Subsidiaries in respect of federal, state,
local and other taxes are, in the reasonable opinion of the Company, adequate.
5.25 Insurance. The Company and the Subsidiaries maintain insurance of
the types and amounts required by governmental regulation and generally deemed
adequate for its and their assets, properties and business as it is presently
conducted or contemplated and consistent with insurance coverage maintained by
similar companies and businesses, including, but not limited to, insurance
covering real and personal property owned or leased against theft, damage,
destruction, acts of vandalism, products liability, and all other risks
customarily insured against, all of which insurance is in full force and effect
and not in default in any material respect thereunder. [The Company maintains
"key person" life insurance in full force and effect on the person(s) and in the
amounts described in the Prospectus.]
5.26 Labor Relations. No labor disturbance by the employees of the
Company or any Subsidiary exists or, to the Company's knowledge, is imminent
which could reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), business, prospects, properties or assets of
the Company and the Subsidiaries, taken as a whole.
5.27 No Operation as Investment Company. The Company has conducted and
will continue to conduct its business and financial affairs in such a manner as
to ensure that it is not and will not become an "investment company" within the
meaning of the Investment Company Act of 1940, as amended, and the rules and
regulations promulgated thereunder.
[Draft August 6, 1996]
<PAGE>
14
5.28 No NASD Affiliation. Except as disclosed in the Registration
Statement and the Prospectus or as otherwise disclosed to the Underwriter in
writing prior to the date hereof, no officer, director or greater than 5%
stockholder of the Company is, directly or indirectly, associated with an NASD
member broker-dealer and the Company has no management or financial consulting
agreement with any third party.
5.29 No Finders Fees. No person is entitled, directly or indirectly,
to compensation from the Company or any Subsidiary for services as a finder in
connection with the transactions contemplated by this Agreement.
5.30 Registration Under Exchange Act and Nasdaq Approval. The Common
Stock and the Warrants have been registered under Section 12 of the Exchange Act
and have been approved for quotation through the Nasdaq Market.
5.31 Effect of Officer's Certificate. Any certificate signed by any
officer of the Company or any Subsidiary and delivered to the Underwriter or its
counsel on or prior to the Firm Closing Date or the Option Closing Date pursuant
to this Agreement or in connection with the transactions contemplated hereby
shall be deemed a representation and warranty by the Company or the Subsidiary,
as the case may be, to the Underwriter as to the matters covered thereby.
[Draft August 6, 1996]
<PAGE>
15
6. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITER.
The obligations of the Underwriter to purchase and offer the Units shall be
subject to the accuracy in all material respects of the representations and
warranties of the Company, in the case of the Firm Units as of the date hereof
and the Firm Closing Date (as if made on and as of the Firm Closing Date) and,
in the case of the Option Units, as of the date hereof and the Option Closing
Date (as if made on and as of the Option Closing Date), to the performance by
the Company and the Subsidiaries in all material respects of their respective
obligations hereunder, and to the satisfaction of the following additional
conditions on or before the Firm Closing Date in the case of the Firm Units and
on or before the Option Closing Date in the case of the Option Units:
6.1 Effectiveness of the Registration Statement. The Registration
Statement shall have become effective not later than 12:00 noon, Washington,
D.C. time, on the date following the date of this Agreement, or such later time
or date as shall have been consented to in writing by the Underwriter. The
information concerning the public offering price of the Shares and other
information omitted from the Registration Statement at the time it was declared
effective shall have been transmitted to the Commission for filing pursuant to
Rule 424(b) within the prescribed period and the Company shall have provided
evidence satisfactory to the Underwriter of such timely filing (or a
post-effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rules 430A and
424(b)). No stop order suspending the effectiveness thereof shall have been
issued, and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company, threatened by the Commission or any state securities
commission or similar regulatory body. Any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to the satisfaction of
the Underwriter.
6.2 No Material Misstatements or Omissions. It shall not have been
discovered prior to any of the respective Closing Dates that the Registration
Statement or Prospectus or any amendment or supplement thereto contains an
untrue statement of fact which, in the opinion of the Underwriter after
consultation with its counsel, is material, or that the Registration Statement
or any amendment or supplement thereto omits to state a fact which, in the
opinion of the Underwriter after consultation with its counsel, is material and
is required to be stated therein or is necessary to make the statements therein
not misleading or that the Prospectus or any amendment or supplement thereto
omits to state a fact which, in the opinion of the Underwriter after
consultation with its counsel, is material and is required to be stated therein
or is necessary in order to make the statements therein not misleading.
6.3 No Litigation. Between the date hereof and the Closing Date(s),
there shall be no litigation instituted or threatened against the Company, any
Subsidiary, or any of its or their respective officers or directors, and there
shall be no proceeding instituted or threatened against the Company, any
Subsidiary, or any of its or their respective officers or directors, before or
by any federal or state commission, regulatory body or administrative agency or
other governmental body, domestic or foreign, wherein an unfavorable ruling,
decision or finding would materially adversely affect the condition (financial
or otherwise), business, prospects, properties or assets of the Company and the
Subsidiaries, taken as a whole.
6.4 Change in Capitalization. Subsequent to the respective dates as of
which information is given in the Registration Statement and the Prospectus,
there shall not have been, except as contemplated in the Prospectus, any
material change or decrease in any amounts described in clause (c) of
subparagraph 6.10.2 or 6.10.3 herein, which change or decrease is specified in
any letter referred to in paragraph 6.10,
[Draft August 6, 1996]
<PAGE>
16
that makes it impractical or inadvisable in the opinion of the Underwriter to
proceed with the public offering or the delivery, as the case may be, of the
Units as contemplated by the Prospectus.
6.5 Opinion of Company's Counsel. The Underwriter shall have received
the opinion, satisfactory in form and substance to the Underwriter and its
counsel, of Rosenman & Colin LLP, counsel for the Company and the Subsidiaries,
dated as of the relevant Closing Date, covering such matters as are set forth at
Schedule 6.5.
In giving such opinion, such counsel may rely as to matters of fact
upon statements and certificates of officers of the Company and of the
Subsidiaries or public officials as to matters of fact of which the maker of
such certificate has knowledge, and as to matters of law of jurisdictions other
than the States of Delaware, [Michigan and Washington], and the United States,
such counsel may rely on opinions of local counsel reasonably acceptable to the
Underwriter, copies of which certificates and opinions shall be attached to the
said opinion.
6.6 Opinion of Underwriter's Counsel. The Underwriter shall have
received from Brown & Bain, P.A., its counsel, such opinion or opinions as the
Underwriter may reasonably request, dated as of the Firm Closing Date or the
Option Closing Date, as the case may be, and satisfactory in form and substance
to the Underwriter, with respect to the sufficiency of corporate proceedings and
other legal matters relating to this Agreement and the transactions contemplated
hereby, and the Company shall have furnished to said counsel such documents as
they may have reasonably required for the purpose of enabling them to pass upon
such matters. In connection with the foregoing opinion, as to matters of fact
relevant to conclusions of law, such counsel may rely, to the extent that they
deem proper, upon representations or certificates of public officials and of
responsible officers of the Company.
6.7 Blue Sky Survey. The Underwriter shall have received at or prior
to the Firm Closing Date from Brown & Bain, P.A., a memorandum or survey, in
form and substance satisfactory to the Underwriter, with respect to the
qualification or exemption for offering and sale by the Underwriter of the Units
under the state securities or Blue Sky laws of such jurisdictions as the
Underwriter may reasonably have designated to the Company. Such qualification or
exemption shall continue in effect to and including the Firm Closing Date and
the Option Closing Date.
6.8 Nasdaq Market. The Common Stock and the Warrants shall have been
approved for quotation through the Nasdaq Market.
6.9 Officers' Certificate. The Company shall have furnished to the
Underwriter a certificate, addressed to the Underwriter, of the President and of
the [Chief Financial Office] of the Company, dated the Closing Date, to the
effect that the signers of such certificate have examined the Registration
Statement, the Prospectus, and this Agreement and have consulted with legal
counsel with respect thereto, and that to the best of their knowledge:
6.9.1 Representations and Warranties True and Correct. The
representations and warranties of the Company in this Agreement are true
and correct on and as of the Closing Date; with the same effect as if made
on the Closing Date and the Company has complied with all the agreements
and has satisfied all the conditions on its part to be performed or
satisfied at or prior to the Closing Date.
[Draft August 6, 1996]
<PAGE>
17
6.9.2 No Stop Orders. The Registration Statement has become effective
under the Act. No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose
have been commenced or are threatened or, to their knowledge, contemplated
by the Commission and no stop order suspending the qualification or
registration of any of the Securities under the Blue Sky laws of any
jurisdiction (whether or not a jurisdiction the Underwriter has specified)
has been issued, and no proceedings for such purposes have been commenced
or, to their knowledge, are threatened or contemplated by any jurisdiction.
6.9.3 Registration Statement Accurate. (a) Neither the Registration
Statement, as of the time it became effective, nor any post-effective
amendment thereto, at the time it was filed, contained an untrue statement
of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading,
and (b) neither the Prospectus nor any amendment thereof or supplement
thereto, as of the date thereof and as of the Closing Date, contained or
contains any untrue statement of a material fact or omitted or omits to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading, and (c) since the effective date of
the Registration Statement, there has occurred no event required to be set
forth in an amended or supplemented prospectus which has not been so set
forth. None of the representations and warranties in the certificate
delivered pursuant to this paragraph 6.9.3 shall apply to statements in, or
omissions from, the Registration Statement or the Prospectus or any
amendment thereof or supplement thereto, which are based upon and conform
to written information furnished to the Company by the Underwriter
specifically for use in the preparation of the Registration Statement or
the Prospectus or any amendment or supplement thereto.
6.9.4 No Material Adverse Change. Subsequent to the respective dates
as of which information is given in the Registration Statement and
Prospectus, and, except as disclosed or contemplated in the Registration
Statement and the Prospectus, (a) the Company and the Subsidiaries have not
incurred any material obligations, liabilities or commitments, except in
the ordinary course of business, (b) neither the Company nor any Subsidiary
has entered into any material transaction not in the ordinary course of
business, (c) the Company has not paid or declared any dividends or other
distributions on its capital stock, (d) there has not been any change in
the capital stock or debt of the Company or any Subsidiary or any material
adverse change in the condition (financial or otherwise), business,
prospects, properties or assets of the Company and the Subsidiaries
considered as a whole, and (e) the conduct of the business and operations
of the Company or any Subsidiary has not been materially interfered with by
strike, fire, flood, hurricane, accident or other calamity (whether or not
insured), or by any court or governmental action, order or decree, and the
properties of the Company and the Subsidiaries, considered as a single
enterprise, have not sustained any material loss or damage (whether or not
insured) as a result of any such occurrence.
6.9.5 Litigation; Contracts. There are no legal proceedings pending
or, to the best knowledge of such officers, threatened against the Company
or any Subsidiary of a character affecting the validity of this Agreement
or required to be disclosed in the Registration Statement; there are no
transactions or contracts which are not so disclosed; and there are no
material contracts or documents required to be filed as exhibits to the
Registration Statement which are not so filed.
[Draft August 6, 1996]
<PAGE>
18
6.10 Accountant's Letter. On the Date hereof, Coopers & Lybrand LLP
shall have furnished to the Underwriter a letter, dated as of the date hereof,
in form and substance satisfactory to the Underwriter and its counsel,
confirming that they are independent public accountants with respect to the
Company within the meaning of the Act, the Exchange Act and the applicable rules
and regulations, and stating to the effect that:
6.10.1 Compliance with the Act. It is their opinion that the audited
consolidated financial statements and financial statement schedules of the
Company [and the audited financial statements and financial statement
schedules of the Subsidiaries] included in the Registration Statement
covered by their reports therein comply as to form in all material respects
with the applicable accounting requirements of the Act and the regulations
promulgated thereunder.
6.10.2 Examination of Company Books and Records. On the basis of
procedures (but not an audit in accordance with generally accepted auditing
standards) consisting of (a) reading the minutes of meetings of the
stockholders and the Board of Directors of the Company and the Subsidiaries
since the date of the latest audited balance sheet as set forth in the
Prospectus through a specified date not more than five business days prior
to the date of this Agreement, (b) performing the procedures specified by
the American Institute of Certified Public Accountants for a review of
interim financial information as described in SAS No. 71, Interim Financial
Information, on the unaudited condensed consolidated interim financial
statements of the Company included in the Registration Statement and
reading the unaudited condensed consolidated interim financial statements
of the Company for the period from July 1, 1996, to the date of latest
available interim financial statements, and (c) making inquiries of certain
officials of the Company who have responsibility for financial and
accounting matters, nothing has come to their attention that causes them to
believe that at a specified date not more than five business days prior to
the date of this Agreement, there was any change in the capital stock,
increase in the long-term debt, or decrease in consolidated net current
assets or stockholders' equity, of the Company as compared with the amounts
shown in the June 30, 1996 audited consolidated balance sheet included in
the Registration Statement or, during the period from July 1, 1996 to a
specified date not more than five business days prior to the date of this
Agreement, there were any decreases, as compared with the corresponding
period in the preceding year in the combined net revenue, income from
operations or the total or per share amounts of net income of the Company
and the Subsidiaries, except in all instances for changes, increases or
decreases which the Registration Statement discloses have occurred or may
occur, or except as specifically stated in such letter.
6.10.3 Pro Forma Financial Statements. Although they are unable to and
do not express an opinion on the unaudited pro forma condensed combined
statement of operations (the "Pro Forma Financial Statements") included in
the Registration Statement, they have (a) read the Pro Forma Financial
Statements, (b) made inquiries of appropriate officials of the Company who
have responsibility for financial and accounting matters about the basis
for their determination of the pro form adjustments to the historical
amounts in the Pro Forma Financial Statements and whether the Pro Forma
Financial Statements comply in form in all material respects with the
applicable accounting requirements of Item 310 of Regulation S-B, and (c)
proved the arithmetic accuracy of the application of the pro forma
adjustments to the historical amounts in the Pro Forma Statements; on the
basis of such procedures, and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that the Pro Forma Financial Statements do not comply in form in
all material respects with the applicable
[Draft August 6, 1996]
<PAGE>
19
requirements of Item 310 of Regulation S-B and that the pro forma
adjustments have not been properly applied to the historical amounts in the
compilation of such statements; and
6.10.4 Certain Procedures. They have performed certain procedures with
respect to certain amounts, percentages and financial information, which
are included in the Registration Statement and Prospectuses and which have
been specified by the Underwriter, and have found such amounts, percentages
and financial information to be in agreement with the relevant accounting
and financial records of the Company and the Subsidiaries identified in
such letter.
6.11 Bring-Down Letter. At the Firm Closing Date or the Option Closing
Date, as the case may be, the Underwriter shall have received from Coopers &
Lybrand LLP a letter, dated as of the Firm Closing Date or the Option Closing
Date, as the case may be, to the effect that (a) they confirm the statements
made in the letter furnished pursuant to paragraph 6.10 hereof, except that the
"specified date" referred to in such letter shall be a date not more than five
days prior to the Firm Closing Date or the Option Closing Date, as the case may
be, and, if the Company has elected to rely on Rule 430A of the Rules and
Regulations, to the further effect that they have carried out procedures as
specified in subparagraph 6.10.4 with respect to certain amounts, percentages
and financial information specified by the Underwriter and deemed to be a part
of the Registration Statement pursuant to Rule 430(A)(b) and have found such
amounts, percentages and financial information to be in agreement with the
relevant accounting and financial records of the Company and the Subsidiaries
identified in such letter and (b) in their opinion, the audited financial
statements included in the Registration Statement comply as to form in all
material respects with the applicable requirements of the Act and the
Regulations.
6.12 Secretary's Certificates. The Underwriter shall have received,
dated as of the Firm Closing Date or the Option Closing Date, as appropriate,
from the Secretary of the Company, and from the Secretary of each Subsidiary, a
certificate of incumbency certifying the names, titles and signatures of the
officers authorized to execute this Agreement pursuant to the resolutions of the
Board of Directors of the Company or the Subsidiaries, as the case may be,
authorizing and approving the execution, delivery and performance of this
Agreement, a copy of such resolutions to be attached to such certificate,
certifying such resolutions and certifying that the Certificate or Articles of
Incorporation of the Company or the Subsidiaries and the Bylaws of the Company
or the Subsidiaries, as the case may be, have not been amended or modified,
except as described in the Prospectus.
6.13 Delivery of Shares, Warrants and Underwriter's Warrants. The
Company shall have duly executed the certificates for the shares of Common
Stock, the Warrants and the Underwriter's Unit Warrants and shall have delivered
the same to or at the direction of the Underwriter on the Closing Date.
6.14 Fees, Commissions and Expense Allowances Paid. The Company shall
have paid and delivered to the Underwriter in cash or Clearinghouse funds, free
from any rights, claims, liens or encumbrances of any other person, the
non-accountable expense allowance of 3% of the gross offering proceeds from the
sale of the Units being sold and delivered on such Closing Date.
6.15 Lock-Up Agreements.
6.15.1 Officers, Directors and Certain Stockholders. Each officer and
each director of the Company, and each stockholder of the Company listed on
Schedule 4.17A to this Agreement, shall have executed and shall have become
bound by a written Lock-Up Agreement addressed to the Underwriter.
[Draft August 6, 1996]
<PAGE>
20
6.15.2 Instructions to Transfer Agent. The Company shall have
communicated appropriate stop transfer instructions to the Transfer Agent
to cause the restrictions contained in the Lock-Up Agreements to be
effective and shall have provided the Underwriter a copy of such
communication and the Transfer Agent's written acknowledgement of receipt
thereof and its agreement to comply therewith.
6.16 Documents Satisfactory to Underwriter. All opinions,
certificates, letters and documents delivered pursuant to this Agreement will be
in compliance with the provisions of this Section 6 only if they are
satisfactory to the Underwriter and its counsel. The Company shall furnish to
the Underwriter such conformed copies of such opinions, certificates, letters
and documents in such quantities as the Underwriter shall reasonably request and
such further information, certificates and documents as the Underwriter and its
counsel may reasonably request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Underwriting Agreement, or if any of
the certificates, opinions, written statements, or letters furnished to the
Underwriter or its counsel pursuant to this Section 6 shall not be in all
material respects reasonably satisfactory in form and substance to the
Underwriter or its counsel, this Underwriting Agreement and all obligations of
the Underwriter hereunder may be canceled at, or at any time prior to, the
Closing Date(s) by the Underwriter. Notice of such cancellation shall be given
to the Company in writing, or by telephone call confirmed in writing. The
Underwriter may waive in writing the performance of any one or more of the
conditions specified in this Section 6 or extend the time for their performance.
7. INDEMNIFICATION AND CONTRIBUTION.
7.1 Indemnification by the Company and the Subsidiaries. The Company
and the Subsidiaries, jointly and severally, shall indemnify and hold harmless
the Underwriter and each person, if any, who controls the Underwriter within the
meaning of the Act or the Exchange Act and each employee or agent of the
Underwriter, against any losses, claims, damages or liabilities, joint or
several, to which the Underwriter and any such controlling person, employee or
agent may become subject, under the Act, or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon an untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; and the Company will
reimburse the Underwriter and each such controlling person, employee or agent
for any legal or other expenses reasonably incurred by the Underwriter or such
controlling person, employee or agent in connection with investigating or
defending any such action or claim; provided, however, that the Company will not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in any preliminary Prospectus,
the Registration Statement or the Prospectus or any such amendment or supplement
in reliance upon and in conformity with written information furnished to the
Company by the Underwriter expressly for use therein.
7.2 Indemnification by the Underwriter. The Underwriter shall
indemnify and hold harmless the Company, each of the Company's directors, each
of the Company's officers who signed the Registration Statement, and each person
who controls the Company within the meaning of the Act, against any losses,
claims, damages or liabilities to which the Company or any such director,
officer or controlling
[Draft August 6, 1996]
<PAGE>
21
person may become subject, under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon an untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any preliminary
Prospectus, the Registration Statement or the Prospectus or any amendment or
supplement in reliance upon and in conformity with written information furnished
to the Company by the Underwriter expressly for use therein; and will reimburse
any legal or other expenses reasonably incurred by the Company or any such
director, officer or controlling person in connection with investigating or
defending against any such action or claim as such expenses are incurred.
7.3 Claims. Promptly after receipt by an indemnified party under
paragraphs 7.1 or 7.2 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against any
indemnifying party under this paragraph, notify in writing the indemnifying
party of the commencement thereof. The omission so to notify the indemnifying
party will not relieve it from any liability under this Section 7, unless and to
the extent that such omission so to notify prejudices in any material respect
the indemnifying party's ability to defend such action. In case any such action
is brought against any indemnified party, and the indemnified party notifies an
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel who shall be reasonably satisfactory to such indemnified
party; and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section 7 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided, however,
that any indemnified party shall have the right to employ separate counsel to
represent it and all other parties and their controlling or other persons who
may be subject to liability arising out of any claim in respect of which
indemnity may be sought by the Underwriter against the Company and the
Subsidiaries or by the Company against the Underwriter hereunder, as the case
may be, if (i) the use of counsel chosen by the indemnifying party to represent
the indemnified party would present such counsel with a conflict or potential
conflict of interest which, in the judgment of the indemnified party, could
affect in any material respect the defense of such action on behalf of the
indemnified party (in which case the indemnifying party will not have the right
to direct the defense of such action on behalf of the indemnified party), (ii)
the actual or potential defendants in, or targets of, any such action include
both the indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded, based on the advice of counsel, that there may
be one or more legal defenses available to it and/or other indemnified parties
that are different from or in addition to those available to the indemnifying
party, or (iii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of the institution of such action
the indemnified party or parties shall have the right to select separate counsel
to assume such defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties, in which event the fees
and expenses of one such separate counsel shall be borne by the indemnifying
party. Any such indemnifying party shall not be liable to any such indemnified
party on account of any settlement of any claim or action effected without the
consent of such indemnifying party, which consent shall not be unreasonably
withheld in light of all factors of importance to such indemnified party.
[Draft August 6, 1996]
<PAGE>
22
7.4 Contribution. If the indemnification provided for in this Section
7 is unavailable to or insufficient to hold harmless an indemnified party under
paragraph 7.1 or 7.2 in respect of any losses, claims, damages or liabilities or
actions in respect thereof referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities or actions in respect
thereof in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Subsidiaries on the one hand and the Underwriter
on the other from the Offering. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only the
relative benefits but also the relative fault of the Company and the
Subsidiaries on the one hand and the Underwriter on the other in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as other relevant equitable
considerations. The Company, the Subsidiaries, and the Underwriter agree that
contribution determined by per capita allocation would not be equitable. The
respective relative benefits received by the Company and the Subsidiaries on the
one hand and the Underwriter on the other hand shall be deemed to be in the same
proportion as the total price paid to the Company and the Subsidiaries for the
Units by the Underwriter (net of underwriting discount received but before
deducting expenses) on the one hand and the aggregate Underwriter's Discount
received by the Underwriter with respect to the Units purchased under this
Agreement on the other hand, in each case as set forth in the table on the cover
page of the Prospectus, bear to the aggregate public offering price of the
Units. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Subsidiaries on the one hand or the Underwriter
on the other hand and the parties' relative intent, knowledge, access to
information and the opportunity to correct or prevent such statement or
omission.
The amount paid or payable by a party as a result of the losses,
claims, damages and liabilities (or actions in respect thereof) referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any action
or claim. Notwithstanding the provisions of this Section 7, the Underwriter
shall not be required to contribute any amount in excess of the Underwriter's
Discounts received by it. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
8. EFFECTIVE DATE AND TERMINATION.
8.1 Effective Date. This Agreement shall become effective (a)
immediately as to paragraphs 4.11 and 9.1, Sections 7 and 8 and (b) as to all
other provisions, as of the later of (i) the date and time of the execution and
delivery hereof and (ii) the date and time the Registration Statement becomes
effective.
8.2 Termination. Until the Firm Closing Date, this Agreement may be
terminated by the Underwriter, at its option, by giving written notice to the
Company, if in the opinion of the Underwriter (i) the Company or any Subsidiary
shall have sustained a loss by fire, flood, accident, or other calamity which is
material with respect to the business of the Company and the Subsidiaries
considered as a single enterprise, whether or not such loss shall have been
insured; the Company or any Subsidiary shall have become a party to any action,
suit or proceeding of the type required to be disclosed but not disclosed in the
Prospectus; or there shall have been, since the respective dates as of which
information is given in the
[Draft August 6, 1996]
<PAGE>
23
Registration Statement or the Prospectus, any material adverse change in the
business, key personnel, capitalization, financial position or business
prospects of the Company and the Subsidiaries considered as a single enterprise,
whether or not arising in the ordinary course of business; (ii) trading in
securities generally on the New York Stock Exchange or the over-the-counter
market shall have been suspended or limited or minimum or maximum prices shall
have been generally established on such exchange or market, or additional
material governmental restrictions, not in force on the date of this Agreement,
shall have been imposed upon trading in securities generally by such exchange or
by order of the Commission or any court or governmental authority; (iii) a
general banking moratorium shall have been declared by federal or New York
authorities; (iv) there shall have been such a material adverse change in
general economic, monetary, political, or financial conditions, or the effect of
international conditions on the financial markets in the United States; or (v)
there shall have occurred a material outbreak of hostilities or material
escalation and deterioration in the political and military situation between the
United States and any foreign power, or a formal declaration of war or national
emergency by the United States of America; in each case, the effect of which is
such as to make it, in the sole judgment of the Underwriter, impracticable to
market the Units. Any such termination shall be without liability of any party
to any other party (except for the expenses to be paid or reimbursed by the
Company as provided in paragraph 4.11 hereof and except to the extent provided
in paragraph 9.1 and Section 7 hereof).
8.3 Notice of Termination. If the Underwriter elects to prevent this
Agreement from becoming effective or to terminate this Agreement as provided in
this Section 8, it shall notify the Company promptly by telefacsimile or
telephone, confirmed by letter sent to the address specified in paragraph 9.3
hereof.
9. GENERAL AND MISCELLANEOUS.
9.1 Representations, Warranties, Covenants and Indemnities to Survive
Delivery. The respective representations, warranties, agreements, covenants,
indemnities and other statements of the Company, its officers, the Subsidiaries,
and the Underwriter set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall remain in full force and effect,
regardless of (i) any investigation made by or on behalf of the Company, the
Subsidiaries, any of its or their officers or directors, the Underwriter or any
controlling person referred to in Section 7 hereof and (ii) delivery of and
payment for the Securities. The respective agreements, covenants, indemnities
and other statements set forth in Section 7 hereof shall remain in full force
and effect, regardless of any termination or cancellation of this Agreement.
9.2 Information Furnished by the Underwriter. The statements set forth
in the last paragraph on the cover page of, and under the caption
"Underwriting," in the Prospectus constitute the only written information
furnished by the Underwriter expressly for use therein.
9.3 Notices. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed to have been duly
given on the date of delivery if delivered personally or sent by overnight
courier, with acknowledgement of receipt, to the party to whom notice is to be
given, or on the fifth day after mailing if mailed to the party to whom notice
is to be given, by registered or certified mail, return receipt requested,
postage prepaid, and properly addressed as follows: if to the Underwriter, at
11811 North Tatum Boulevard, Suite 4040, Phoenix, Arizona 85028, attention of
Emmett Mitchell, with a copy to Joseph P. Richardson, Esq., Brown & Bain, P.A.,
2901 North Central Avenue, Suite 2000, Phoenix, Arizona 85012; and if to the
Company, 1370 Reynolds Avenue, Suite 119, Irvine, California 92614, attention of
Paul G. Canon, with a copy to Robert I. Fisher, Esq., Rosenman &
[Draft August 6, 1996]
<PAGE>
24
Colin LLP, 545 Madison Avenue, New York, New York 10022. Any party may change
its address for purposes of this paragraph by giving the other party written
notice of the new address in the manner set forth above.
9.4 Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors, and, to the
extent and only to the extent stated in this Section 9, the officers, directors,
controlling and other persons referred to in Section 7 herein. Nothing in this
Agreement is intended or shall be construed to give to any other person, firm or
corporation any legal or equitable right, remedy or claim under or in respect of
this Agreement or any provision contained herein. The term "successor" as used
in this Agreement shall not include any purchaser of the Units from the
Underwriter.
9.5 Waiver. The waiver of any breach of this Agreement shall not
constitute the waiver of any different or subsequent breach. To be effective,
all waivers must be in writing and signed by the party to be charged.
9.6 Severability. Any provision of this Agreement held by a court of
competent jurisdiction to be illegal, invalid or unenforceable shall be
construed and enforced, to the extent practicable and lawful, as if it had been
more narrowly drawn so as not to be illegal, invalid or unenforceable or else
shall be deemed severable from the remainder of this Agreement. The remaining
provisions of this Agreement shall remain in effect and be enforceable in
accordance with their terms.
9.7 Headings. Titles and headings to sections herein are inserted for
the convenience of reference only and are not intended to be a part of or to
affect the meaning or interpretation of this Agreement.
9.8 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of Arizona, without giving effect to conflict of
laws.
9.9 Entire Agreement. This Agreement constitutes the entire agreement
between the parties concerning the subject matter hereof and supersedes all
prior agreements and understandings.
9.10 Counterparts. This Agreement may be executed in several
counterparts, each of which when together shall constitute a single document.
DATED: _______________, 1996.
PACIFIC BIOMETRICS, INC., PARADISE VALLEY SECURITIES, INC.,
a Delaware corporation an Arizona corporation
By_____________________________ By_______________________________
Its:______________________ Its:________________________
[Draft August 6, 1996]
<PAGE>
25
Each of the undersigned acknowledges that its agreement to be a party to this
Agreement with respect to joint and several liability arising pursuant to
Section 7 hereof is a material inducement to the Underwriter entering into this
Agreement, and each of the undersigned agrees to be bound by the terms of this
Agreement.
PACIFIC BIOMETRICS, INC.,
a Washington corporation
By__________________________
Its:__________________
BIOQUANT, INC.,
a Michigan corporation
By__________________________
Its:__________________
[Draft August 6, 1996]
<PAGE>
CERTIFICATE OF INCORPORATION
OF
PACIFIC BIOMETRICS, INC.
(Pursuant to Sections 101 and 102 of the
General Corporation Law of the State of Delaware)
The undersigned, in order to form a corporation pursuant to Sections
101 and 102 of the General Corporation Law of the State of Delaware, does hereby
certify as follows:
FIRST: The name of the corporation (the "Corporation") is "Pacific
Biometrics, Inc."
SECOND: The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, City of Wilmington 19801, County of Newcastle.
The name of the registered agent of the Corporation in the State of Delaware at
such address is CT Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The total number of shares of capital stock which the Corporation
shall have the authority to issue is thirty-five million (35,000,000), which
shall consist of:
Twenty-six million (26,000,000) shares of Class A common stock, par value
$0.01 per share;
Two million (2,000,000) shares of Class E-1 common stock, par value $0.01
per share;
Two million (2,000,000) shares of Class E-2 common stock, par value $0.01
per share;
Five million (5,000,000) shares of preferred stock, par value $0.01 per
share;
A. The Board of Directors has the express power, subject to limitations
prescribed by law and the provisions of this Article FOURTH, to fix by
resolution the voting powers, full or limited, or no voting powers, and the
designations, preferences and relative, participating, optional or other special
rights of shares of each class or series and the qualifications,
<PAGE>
limitations or restrictions of the (i) Class E-1 common stock and (ii) Class E-2
common stock.
The authority of the Board with respect to the (1) Class E-1 common stock
and (ii) Class E-2 common stock shall include, but not be limited to,
determination of the following:
a. Whether the class will have voting rights, and, if so, the terms of
the voting rights;
b. Whether the class will have conversion privileges, and, if so, the
terms and conditions of the conversion, including provision for
adjustment of the conversion rate in such events as the Board of
Directors determines;
c. Whether or not the shares of the class will be redeemable, and, if so,
the terms and conditions of redemption, including the date or dates
upon or after which they shall be redeemable, and the amount per share
payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
d. The rights of the shares of the class in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation,
and the relative rights or priority, if any, of payment of shares of
the class; and
e. Any other powers, terms, rights, qualifications, preferences,
limitations and restrictions, if any, of the class as the Board of
Directors may lawfully fix under the laws of the State of Delaware as
in effect at the time of the creation of such series.
Any of the powers, voting powers, designations, preferences, rights and
qualifications, limitations or restrictions of the (i) Class E-1 common stock or
(ii) Class E-2 common stock may be made dependent upon facts ascertainable
outside this Certificate of Incorporation or of any amendment thereof, or
outside the resolution or resolutions providing for the issue of such common
stock adopted by the Board of Directors pursuant to the authority expressly
granted herein, provided that the manner in which such facts shall operate upon
the powers, voting powers, designations, preferences, rights and qualifications,
limitations or restrictions of such common stock is clearly and expressly set
forth in this Certificate of Incorporation or in the resolution or resolutions
providing for the issue of such common stock adopted by the Board of Directors.
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B. The Board of Directors has the express power, subject to limitations
prescribed by law and the provisions of this Article FOURTH, to provide for the
issuance of any or all of the shares of preferred stock in classes or series,
and to establish from time to time the number of shares to be included in each
class or series, and to fix by resolution the voting powers, full or limited, or
no voting powers, and the designations, preferences and relative, participating,
optional or other special rights of shares of each class or series and the
qualifications, limitations or restrictions thereof.
The authority of the Board with respect to each class or series of
preferred stock shall include, but not be limited to, determination of the
following:
a. The number of shares constituting the class or series and the
distinctive designation of the class or series;
b. The dividend rate on the shares of the class or series, whether
dividends shall be cumulative, and, if so, from which date or dates,
and the relative rights of priority, if any, of payments of dividends
on shares of the class or series;
c. Whether the class or series will have voting rights, and, if so, the
terms of the voting rights;
d. Whether the class or series will have conversion privileges, and, if
so, the terms and conditions of the conversion, including provision
for adjustment of the conversion rate in such events as the Board of
Directors determines;
e. Whether or not the shares of the class or series will be redeemable,
and, if so, the terms and conditions of redemption, including the date
or dates upon or after which they shall be redeemable, and the amount
per share payable in case of redemption, which amount may vary under
different conditions and at different redemption dates;
f. Whether the class or series shall have a sinking fund for the
redemption or purchase of shares of the class or series, and, if so,
the terms and amount of the sinking fund;
g. The rights of the shares of the class or series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights or priority, if any, of payment
of shares of the class or series; and
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h. Any other powers, terms, rights, qualifications, preferences,
limitations and restrictions, if any, of the class or series as the
Board of Directors may lawfully fix under the laws of the State of
Delaware as in effect at the time of the creation of such series.
Any of the powers, voting powers, designations, preferences, rights and
qualifications, limitations or restrictions of such class or series of preferred
stock may be made dependent upon facts ascertainable outside this Certificate of
Incorporation or of any amendment thereof, or outside the resolution or
resolutions providing for the issue of such preferred stock adopted by the Board
of Directors pursuant to the authority expressly granted herein, provided that
the manner in which such facts shall operate upon the powers, voting powers,
designations, preferences, rights and qualifications, limitations or
restrictions of such class or series of preferred stock is clearly and expressly
set forth in this Certificate of Incorporation or in the resolution or
resolutions providing for the issue of such preferred stock adopted by the Board
of Directors.
FIFTH: The name and mailing address of the sole incorporator is as follows:
NAME ADDRESS
---- -------
David M. Perla c/o Rosenman & Colin LLP.
575 Madison Avenue
New York, NY 10022-2585
SIXTH: The board of directors of the Corporation shall have the power to
adopt, amend and repeal the by-laws of the Corporation.
SEVENTH: Election of directors need not be by written ballot.
EIGHTH: No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; provided, however, that nothing in this Article EIGHTH shall
eliminate or limit the liability of any director (i) for breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit. Neither the amendment nor repeal of this
Article EIGHTH, nor the adoption of any provision of the Certificate of
Incorporation inconsistent with this Article EIGHTH, shall eliminate or reduce
the effect of this Article EIGHTH in respect of any matter occurring, or any
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cause of action, suit or claim that, but for this Article EIGHTH, would accrue
or arise, prior to such amendment, repeal or adoption or an inconsistent
provision.
NINTH: The Corporation shall, to the fullest extent permitted by the
provisions of Section 145 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented, indemnify any and all
persons whom it shall have power to indemnify under said section from and
against any and all expenses, liabilities, or other matters referred to in or
covered by said section, and the indemnification provided for herein shall not
be deemed exclusive of any other rights to which those indemnified may be
entitled under any By-Law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of such a
person.
IN WITNESS WHEREOF, I have hereunto signed my name and affirm, under
penalty of perjury, that this Certificate is my act and deed and that the facts
stated herein are true this 9th day of May 1996.
------------------------------------
David M. Perla,
Sole Incorporator
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BY-LAWS
of
Pacific Biometrics, Inc.
ARTICLE I
Stockholders
Section 1. Annual Meeting. The annual meeting of the stockholders of the
Corporation shall be held annually at such place within or without the State of
Delaware, at such time and on such date, as may from time to time be designated
by the Board of Directors, for the election of directors and for the transaction
of any other proper business.
Section 2. Special Meetings. Special meetings of the stockholders of the
Corporation may be called at any time and from time to time by the President or
by a majority of the directors then in office, and shall be called by the
Secretary upon the written request of stockholders holding of record at least a
majority in number of the issued and outstanding shares of the Corporation
entitled to vote at such meeting. Special meetings shall be held at such place
within or without the State of Delaware, at such time and on such date as shall
be specified in the call thereof.
Section 3. Notice of Meetings. Written notice of each meeting of the
stockholders, stating the place, date and hour thereof and, in the case of a
special meeting, the purpose or
<PAGE>
purposes for which it is called, shall be given, not less than ten nor more than
sixty days before the date of such meeting (or at such other time as may be
required by statute), to each stockholder entitled to vote at such meeting. If
mailed, such notice is given when deposited in the United States mail, postage
prepaid, directed to each stockholder at his or her address as it appears on the
records of the Corporation.
Section 4. Waiver of Notice. Whenever notice is required to be given of any
annual or special meeting of the stockholders, a written waiver thereof, signed
by the person entitled to notice, whether before or after the time stated in
such notice, shall be deemed equivalent to notice. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice. Attendance of a
person at a meeting of the stockholders shall constitute a waiver of notice of
such meeting, except when the person attends a meeting for the express purpose
of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.
Section 5. Adjournment. When any meeting of the stockholders is adjourned
to another time or place, notice need not be given of the adjourned meeting if
the time and place to which the meeting is adjourned are announced at the
meeting at which the adjournment is taken. At the adjourned meeting any business
may be transacted which might have been transacted at
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the original meeting. If the adjournment is for more than 30 days, or if after
such adjournment the Board of Directors shall fix a new record date for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at such meeting.
Section 6. Quorum. At any meeting of the stockholders the presence, in
person or by proxy, of the holders of a majority of the issued and outstanding
shares of the Corporation entitled to vote at such meeting shall be necessary in
order to constitute a quorum for the transaction of any business. If there shall
not be a quorum at any meeting of the stockholders, the holders of a majority of
the shares entitled to vote present at such meeting, in person or by proxy, may
adjourn such meeting from time to time, without further notice to the
stockholders other than an announcement at such meeting, until holders of the
amount of shares required to constitute a quorum shall be present in person or
by proxy.
Section 7. Voting. Each stockholder shall be entitled to one vote for each
share of capital stock held by such stockholder. Voting need not be by ballot,
except that all election of directors shall be by written ballot unless
otherwise provided in the Certificate of Incorporation. Whenever any corporate
action is to be taken by vote of the stockholders, it shall, except as otherwise
required by law or by the Certificate of Incorporation, be authorized by a
majority of the votes cast at a meeting of stockholders of the holders of shares
entitled to
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vote thereon, except that all elections shall be decided by a plurality of the
votes cast.
Section 8. Action Without a Meeting. Any action required or permitted to be
taken at any annual or special meeting of stockholders may be taken without a
meeting thereof, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
such corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
Section 9. Record Date. The Board of Directors may fix, in advance, a
record date, which shall not be more than sixty nor less than ten days before
the date of any meeting of stockholders, nor more than sixty days prior to any
other action, as the record date for the purpose of determining the stockholders
entitled to notice of or to vote at any meeting of the stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action.
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Section 10. Proxies. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him or her
by proxy, but no such proxy shall be voted or acted upon after three years from
its date, unless the proxy provides for a longer period.
ARTICLE II
Directors
Section 1. Number; Qualifications. The Board of Directors shall consist of
one or more members. The number of directors shall be fixed by the Board of
Directors, but shall not be more than nine or less than three. If at any time
there are less than three stockholders, there may be the same number of
directors as there are stockholders. Directors need not be stockholders of the
Corporation.
Section 2. Term of Office. Each director shall hold office until his or her
successor is elected and qualified or until his or her earlier death,
resignation or removal.
Section 3. Meetings. A meeting of the Board of Directors shall be held for
the election of officers and for the transaction of such other business as may
come before such meeting as soon as practicable after the annual meeting of the
stockholders. Other regular meetings of the Board of Directors may be held at
such times as the Board of Directors of the
5
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Corporation may from time to time determine. Special meetings of the Board of
Directors may be called at any time by the President of the Corporation or by a
majority of the directors then in office. Meetings of the Board of Directors may
be held within or without the State of Delaware.
Section 4. Notice of Meetings; Waiver of Notice; Adjournment. No notice
need be given of the first meeting of the Board of Directors after the annual
meeting of stockholders or of any other regular meeting of the Board of
Directors. Notice of a special meeting of the Board of Directors, specifying the
place, date and hour thereof, shall be delivered personally, mailed or
telegraphed to each director at his or her address as such address appears on
the books of the Corporation at least two business days (Saturdays, Sundays and
legal holidays not being considered business days for the purpose of these
By-Laws) before the date of such meeting. Whenever notice is required to be
given under any provision of the Certificate of Incorporation or these By-Laws,
a written waiver thereof, signed by the person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a director at a special meeting shall constitute a waiver of
notice of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
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<PAGE>
of the stockholders, the directors or any committee of directors need be
specified in any written waiver of notice unless so required by the Certificate
of Incorporation or these By-Laws. A majority of the directors present whether
or not a quorum is present, may adjourn any meeting to another time and place.
Notice need not be given of the adjourned meeting if the time and place to which
the meeting is adjourned are announced at the meeting at which the adjournment
is taken, and at the adjourned meeting any business may be transacted that might
have been transacted at the original meeting.
Section 5. Quorum; Voting. A majority of the total number of directors
shall constitute a quorum for the transaction of business. The vote of the
majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors.
Section 6. Participation by Telephone. Members of the Board of Directors or
any committee thereof may participate in a meeting of the Board of Directors or
such committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting by such means shall constitute
presence in person at such meeting.
Section 7. Action Without a Meeting. Any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee thereof may
be taken without a
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<PAGE>
meeting if all members of the Board of Directors or such committee, as the case
may be, consent thereto in writing, and the writing or writings are filed with
the minutes of proceeding of the Board of Directors or of such committee.
Section 8. Committees. The Board of Directors may, by resolution passed by
a majority of the whole Board, designate one or more committees, each committee
to consist of one or more of the directors. Any such committee, to the extent
provided in the resolution of the Board of Directors, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed by the officers on all papers which may
require it, but no such committee shall have the power or authority in reference
to (a) amending the Certificate of Incorporation (except that a committee may,
to the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the Board of Directors, fix the
designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of the assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the Corporation, or fix the number of shares of any
series of stock or authorize the increase or decrease of the shares of any
series); (b) adopting an agreement of merger or consolidation;
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<PAGE>
(c) recommending to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets; (d) recommending to
the stockholders a dissolution of the Corporation or a revocation of a
dissolution; or (e) amending these By-Laws and, unless the resolution expressly
so provides, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock. The Board of Directors may
designate one or more directors as alternate members of any such committee, who
may replace any absent or disqualified member at any meeting of such committee.
In the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not constituting a quorum, may unanimously appoint another director to act at
the meeting in the place of such absent or disqualified member.
Section 9. Removal; Resignation. Any director or the entire Board of
Directors may be removed with or without cause, by the holders of a majority of
the shares then entitled to vote at an election of directors. Any director may
resign at any time, upon written notice to the Corporation.
Section 10. Vacancies. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of directors then in office, although less than a quorum, or by a sole
remaining director. When one or more directors shall resign from the Board of
Directors, effective at a future date, a majority of the
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directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold office as provided above in the filling of other vacancies. A
director elected to fill a vacancy shall hold office for the unexpired term of
his or her predecessor.
Section 11. Compensation. The Board of Directors may fix the compensation
of directors.
ARTICLE III
Officers
Section 1. Election; Qualifications. At the first meeting of the Board of
Directors and as soon as practicable after each annual meeting of stockholders,
the Board of Directors shall elect or appoint a President, one or more
Vice-Presidents, a Secretary and a Treasurer, and may elect or appoint at such
time or from time to time such additional officers, with such titles as the
Board of Directors shall designate by resolution, as the Board of Directors
deems advisable. No officer need be a director of the Corporation. Any number of
offices may be held by the same person.
Section 2. Term of Office; Vacancies. Each officer shall hold office until
the election and qualification of his or her successor or until his or her
earlier death, resignation or removal. Any vacancy occurring in any office,
whether because of
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death, resignation or removal, with or without cause, or otherwise, shall be
filled by the Board of Directors.
Section 3. Removal; Resignation. Any officer may be removed from office at
any time with or without cause by the Board of Directors. Any officer may resign
his or her office at any time upon written notice to the Corporation.
Section 4. Powers and Duties of the President. The President shall be the
chief executive officer of the Corporation and shall have general charge and
supervision of its business, affairs, administration and operations. The
President shall from time to time make such reports concerning the Corporation
as the Board of Directors of the Corporation may require. The President shall
preside at all meetings of the stockholders and the Board of Directors. The
President shall have such other powers and shall perform such other duties as
may from time to time be assigned to him or her by the Board of Directors.
Section 5. Powers and Duties of the Vice-Presidents. Each of the
Vice-Presidents shall be given such titles and designations and shall have such
powers and perform such duties as may from time to time be assigned to him or
her by the Board of Directors.
Section 6. Powers and Duties of the Secretary. The Secretary shall record
and keep the minutes of all meetings of the stockholders and of the Board of
Directors in a book to be kept for that purpose. The Secretary shall attend to
the giving
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<PAGE>
and serving of all notices by the Corporation. The Secretary shall be the
custodian of, and shall make or cause to be made the proper entries in, the
minute book of the Corporation and such other books and records as the Board of
Directors may direct. The Secretary shall be the custodian of the corporate seal
of the Corporation and shall affix or cause to be affixed such seal to such
contracts and other instruments as the Board of Directors may direct. The
Secretary shall have such other powers and shall perform such other duties as
may from time to time be assigned to him or her by the Board of Directors.
Section 7. Powers and Duties of the Treasurer. The Treasurer shall be the
custodian of all funds and securities of the Corporation. Whenever required by
the Board of Directors, the Treasurer shall render a statement of the
Corporation's cash and other accounts, and shall cause to be entered regularly
in the proper books and records of the Corporation to be kept for such purpose
full and accurate accounts of the Corporation's receipts and disbursements. The
Treasurer shall at all reasonable times exhibit the Corporation's books and
accounts to any director of the Corporation upon application at the principal
office of the Corporation during business hours. The Treasurer shall have such
other powers and shall perform such other duties as may from time to time be
assigned to him or her by the Board of Directors.
Section 8. Delegation. In the event of the absence of any officer of the
Corporation or for any other reason that the
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Board of Directors may deem sufficient, the Board of Directors may at any time
or from time to time delegate all or any part of the powers or duties of any
officer to any other officer or officers or to any director or directors.
ARTICLE IV
Stock
The shares of the Corporation shall be represented by certificates signed
by the President or any Vice-President and by the Treasurer, an Assistant
Treasurer, the Secretary or an Assistant Secretary. Any of or all the signatures
on the certificate may be a facsimile.
ARTICLE V
Execution of Documents
All contracts, agreements, instruments, bills payable, notes, checks,
drafts, warrants or other obligations of the Corporation shall be made in the
name of the Corporation and shall be signed by such officer or officers as the
Board of Directors may from time to time designate.
ARTICLE VI
Seal
The seal of the Corporation shall contain the name of the Corporation, the
words "Corporate Seal", the year of its organization and the word "Delaware."
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ARTICLE VII
Fiscal Year
The fiscal year of the Corporation shall end on such date of each year as
the Board of Directors may proscribe.
ARTICLE VIII
Indemnification
The Corporation shall indemnify all persons to the full extent permitted,
and in the manner provided, by the Delaware General Corporation Law, as the same
now exists or may hereafter be amended.
ARTICLE IX
Amendment of By-Laws
These By-Laws may be amended or repealed, and any new By-Law may be
adopted, by the stockholders entitled to vote or by the Board of Directors.
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WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of __________________, 1996, between PACIFIC
BIOMETRICS, INC., a Delaware corporation (the "Company"), and
___________________ as warrant agent (the "Warrant Agent");
WHEREAS, the Company proposes to issue (a) 1,700,000 Warrants (hereinafter
called the "Warrants"), each entitling the holder thereof to purchase one share
of common stock, $.01 par value, of the Company ("Common Stock"), in connection
with the proposed issuance by the Company of 1,700,000 Units ("Units"), each
Unit consisting of one share of Common Stock and one Warrant, (b) up to 255,000
Warrants underlying the Underwriter's over-allotment option, and (c) 170,000
Warrants underlying a warrant to purchase Units to be granted to the Underwriter
pursuant to a certain Underwriting Agreement, dated ______________, 1996, by and
among the Company and Paradise Valley Securities, Inc., as the Underwriter; and
WHEREAS, the Company proposes to register the Units on a Form SB-2
Registration Statement filed with the Securities and Exchange Commission
("Registration Statement");
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, registration, transfer, exchange, replacement and exercise of Warrants
and other matters as provided herein;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
1. Appointment of Warrant Agent. The Company hereby appoints the Warrant
Agent to act as agent for the Company in accordance with the instructions set
forth in this Agreement, and the Warrant Agent hereby accepts such appointment.
2. Warrant Certificates. The Warrant Certificates shall be registered form
only. The text of the Warrant Certificates shall be substantially as set forth
in Exhibit A attached hereto. Warrant Certificates shall be executed on behalf
of the Company by the manual or facsimile signature of the President or a Vice
President of the Company and its Secretary or any Assistant Secretary, and shall
bear a facsimile of the Company's corporate seal. Warrant Certificates shall be
dated as of the date of issuance thereof by the Warrant Agent either upon
initial issuance or upon transfer or exchange.
3. Countersignature and Registration. The Warrant Agent shall maintain
books for the transfer and registration of the Warrant Certificates. Warrant
Certificates shall be countersigned by the Warrant Agent and shall not be valid
for any purpose unless so countersigned. Warrant Certificates may be so
countersigned, however, by the Warrant Agent and be delivered by the Warrant
Agent, notwithstanding that the persons whose manual or facsimile signatures
appear thereon as proper officers of the Company shall have ceased to be such
officers at the time of such counter signature or delivery.
4. Registration of Transfers and Exchanges. The Warrants are exercisable,
detachable and separately transferable immediately after the sale of the Units
upon the effectiveness of the Registration Statement. The Warrant Agent shall
register the transfer from time to time of any outstanding Warrant Certificates
upon records to be maintained by the Warrant Agent for that purpose, upon
surrender thereof for transfer properly endorsed or accompanied by appropriate
instructions for transfer. Upon any such transfer, a new Warrant Certificate
shall be issued to the transferee and the surrendered Warrant Certificate shall
be canceled by the Warrant Agent. Warrant Certificates so canceled shall be
delivered by the Warrant Agent to the Company from time to time. Warrant
Certificates may be exchanged at the option
<PAGE>
of the holder thereof, when surrendered at the office of the Warrant Agent, for
another Warrant Certificate or other Warrant Certificates of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of shares of Common Stock. The Warrant Agent is hereby
irrevocably authorized to countersign in accordance with Section 3 of this
Agreement the new Warrant Certificates required pursuant to the provisions of
this Section, and the Company, whenever required by the Warrant Agent, will
supply the Warrant Agent with Warrant Certificates duly executed on behalf of
the Company for such purpose.
5. Exercise of Warrants. The Warrants shall expire at 5:00 p.m., New York
City time ("Warrant Expiration Date").
Subject to the provisions of this Agreement, any whole number or all of the
Warrants evidenced by a Warrant Certificate may be exercised at any time before
the Warrant Expiration Date. A Warrant shall be exercised by surrender to the
Warrant Agent of the Warrant Certificate with the exercise form thereon duly
completed and executed and payment to the Warrant Agent in lawful money of the
United States of the Exercise Price for each share of Common Stock purchased.
Upon such surrender of a Warrant Certificate and payment of the Exercise
Price as aforesaid, the Company shall issue and cause to be delivered with all
reasonable dispatch to or upon the written order of the registered holder of
such Warrant Certificate and in such name or names as such registered holder may
designate, a certificate or certificates for the number of full shares of Common
Stock so purchased upon the exercise of such Warrants. Such certificate or
certificates shall be deemed to be issued as of the date of the surrender of
such Warrant Certificates and payment of the Exercise Price, whichever shall
last occur.
If less than all of the Warrants evidenced by a Warrant Certificate are
exercised upon a single occasion, a new Warrant Certificate will be issued for
the balance of the Warrants not so exercised shall be issued and delivered to,
or in accordance with instructions given by, the holder of such Warrant, and the
Warrant Agent is hereby irrevocably authorized to countersign and to deliver the
required new Warrant Certificates pursuant to the provisions of this Section and
of Section 3 of this Agreement and the Company, whenever required by the Warrant
Agent, will supply the Warrant Agent with Warrants duly executed on behalf of
the Company for such purpose.
6. Reservation and Registration of Common Stock.
a. The Company shall at all times reserve and keep available for
issuance the full number of shares of Common Stock issuable upon the
exercise of all outstanding Warrants. The Transfer Agent for the Common
Stock is hereby irrevocably authorized and directed at all times to reserve
such number of authorized and unissued shares as shall be requisite for
such purpose. The Warrant Agent is hereby irrevocably authorized to
requisition from time to time such Transfer Agent for stock certificates
required to honor outstanding Warrant Certificates. The Company will supply
such Transfer Agent with duly executed stock certificates for such purpose
and will itself provide or otherwise make available any cash or scrip which
may be issuable as provided in Section 8 of this Agreement. All Warrant
Certificates surrendered in the exercise of the rights thereby evidenced
shall be canceled by the Warrant Agent and shall thereafter be delivered to
the Company, and such canceled Warrants shall constitute sufficient
evidence of the number of shares of Common Stock which have been issued
upon the exercise of such Warrants. The Company covenants that all shares
of Common Stock which may be issued upon exercise of the Warrants will upon
issue be fully paid and nonassessable.
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<PAGE>
b. Upon the effectiveness of the Registration Statement, the Company
represents that it will have registered under the Securities Act of 1933,
as amended, the shares of Common Stock issuable upon exercise of the
Warrants ("Warrant Shares") and will use its best efforts to maintain the
effectiveness of such registration by post-effective amendment during the
entire period in which the Warrants are exercisable, and that it will use
its best efforts to qualify such Common Stock for sale under the securities
laws of such states of the United States as may be necessary to permit the
exercise of the Warrants in the states in which the Units are initially
qualified and to maintain such qualifications during the entire period in
which the Warrants are exercisable.
7. Exercise Price; Adjustments.
a. The price at which Common Stock shall be purchasable upon exercise
of Warrants at any time after the Common Stock and Warrants become
separately tradeable until the Warrant Expiration Date shall be twelve
dollars ($12.00) per share of Common Stock or, if adjusted as provided in
this Section, shall be such price as so adjusted (the "Exercise Price").
[The Company may in its discretion at any time and from time to time
decrease the Exercise Price below the price then in effect, notwithstanding
any provision to the contrary herein. Any such decrease shall be determined
by the Board of Directors of the Company and shall be described in a
statement filed with the Warrant Agent.]
b. The Exercise Price shall be subject to adjustment from time to time
as follows:
(1) In case the Company shall at any time after the date of this
Agreement (a) declare a dividend on the Common Stock payable in the capital
stock of the Company (whether Common Stock or capital stock of any other
class), (b) subdivide the outstanding Common Stock, (c) combine the
outstanding Common Stock into a smaller number, or (d) other than in a
transaction to which Section 7(b)(7) hereof applied, issue any shares of
its capital stock in a reclassification in connection with a consolidation
or merger in which the Company is the continuing corporation), the Exercise
Price in effect at the time of the record date for that dividend or of the
effective date of that subdivision, combination or reclassification and/or
the number and kind of shares of capital stock issuable on that date shall
be proportionately adjusted so that the holder of any Warrant exercised
after such time shall be entitled to receive the aggregate number of kind
of shares of capital stock which, if the Warrant had been exercised
immediately prior to that date, he or she would have owned upon exercise
and been entitled to receive by virtue of that dividend, subdivision,
combination or reclassification. The foregoing adjustment shall be made
successively whenever any event listed above shall occur.
(2) In case the Company shall fix a record date for the making of
a distribution to all holders of Common Stock (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing corporation) of evidences of indebtedness or
assets (other than cash dividends or cash distributions payable out of
consolidated earnings or earned surplus or dividends payable in ordinary
shares) or subscription rights or warrants, the Exercise Price to be in
effect after that record date shall be determined by multiplying the
Exercise Price in effect immediately prior to that record date by a
fraction, of which the numerator shall be the current market price per
share of Common Stock on that record date, less the fair market value (as
determined by the Board of Directors of the Company, whose determination
shall be conclusive, and described in a statement filed with the Warrant
Agent) of the portion of the assets or evidences of indebtedness so to be
distributed or of the subscription rights or warrants applicable to one
share of Common Stock and of which the denominator shall be the current
market price per share of Common Stock. The adjustment shall be made
3
<PAGE>
successively whenever a record date is fixed; and in the event that the
distribution is not so made, the Exercise Price shall again be adjusted to
be the Exercise Price which would then be in effect if the record date had
not been fixed, but the subsequent adjustment shall not affect the number
of Warrant Shares issued upon the exercise of any Warrants prior to the
date the subsequent adjustment is made.
(3) For the purpose of any computation under Section 7(b) the
current market price per share of Common Stock on any date shall be the
last reported sale price, or if none is reported, the average of the
reported closing bid and asked prices, in the over-the-counter market, in
each such case averaged over a period of ten consecutive trading days prior
to the day as of which the market price is being determined. If there is no
such closing price or closing bid and asked prices, the market price shall
be determined in any reasonable manner approved by the Board of Directors
of the Company.
(4) No adjustment in the Exercise Price shall be required unless
the adjustment would require an increase or decrease of at least $.01;
provided, however, that any adjustments which by reason of this Section
7(b) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section
7(b) shall be made to the nearest cent or the nearest one-hundredth of a
share, as the case may be, but in no event shall the Company be obligated
to issue fractional shares upon the exercise of any Warrant.
(5) In any case in which this Section 7 shall require that any
adjustment in the Exercise Price be made effective as of a record date for
a specified event, the Company may elect to defer until the occurrence of
the event the issuing to the holder of any Warrant exercised after that
record date the Warrant Shares and other capital stock of the Company, if
any, issuable upon the exercise over and above the Warrant Shares and other
capital stock of the Company, if any, issuable upon the exercise on the
basis of the Exercise Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to the holder an appropriate
instrument evidencing the holder's right to receive such additional shares
upon the occurrence of the event requiring such adjustment.
(6) Upon each adjustment of the Exercise Price as a result of the
calculation made in Section 7(b)(1) or (2), each Warrant Certificate
outstanding immediately prior to the making of that adjustment shall
thereafter evidence the right to purchase, at the adjusted Exercise Price,
that number of Warrant Shares (calculated to the nearest hundredth)
obtained by (A) multiplying the number of Warrant Shares purchasable upon
exercise of a Warrant immediately prior to that adjustment of the number of
Warrant Shares by the Exercise Price in effect immediately prior to that
adjustment of the Exercise Price, and (B) dividing the product so obtained
by the Exercise Price in effect immediately after that adjustment of the
Exercise Price.
(7) In case of any capital reorganization of the Company, or of
any reclassification of the Common Stock (other than a change in par value
or as a result of subdivision or combination), or in the case of the
consolidation of the Company with or the merger of the Company into any
other corporation (other than a consolidation or merger in which the
Company is the continuing corporation) or of the sale of the properties and
assets of the Company as, or substantially as, an entirety to any other
corporation, each Warrant shall after such reorganization,
reclassification, consolidation, merger or sale be exercisable, upon the
terms and conditions specified in this Agreement, for the number of shares
of stock or other securities or property to which a holder of the number of
Warrant Shares purchasable (at the time of such
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<PAGE>
reorganization, reclassification, consolidation, merger or sale) upon
exercise of the Warrant would have been entitled upon that reorganization,
reclassification, consolidation, merger or sale; and in any such case, if
necessary, the provisions set forth in this Agreement with respect to the
rights and interests thereafter of the holders of the Warrants shall be
appropriately adjusted so as to be applicable, as nearly as may reasonably
be, to any shares of stock or other securities or property thereafter
deliverable on the exercise of the Warrants. The subdivision or combination
of shares of Common Stock at any time outstanding into a greater or lesser
number of shares shall not be deemed to be a reclassification of the Shares
for the purposes of this Section. The Company shall not effect any
consolidation, merger or sale, unless prior to or simultaneously with the
consummation thereof the successor corporation (if other than the Company)
resulting from the consolidation or merger of the corporation purchasing
the assets or other appropriate corporation or entity shall assume, by
written instrument executed and delivered to the Warrant Agent, the
obligation to deliver to the holder of each Warrant the shares of stock
securities or assets as, in accordance with the foregoing provisions, the
holders may be entitled to purchase and the other obligations under this
Agreement. Notwithstanding an adjustment pursuant to this Section in the
number of Warrant Shares purchasable upon the exercise of a Warrant, the
Company shall not be required to issue fractions of Warrant Shares upon
exercise of the Warrants or to distribute certificates which evidence
fractional Warrant Shares. In lieu of fractional Warrant Shares, there
shall be paid to the registered holders of Warrants at the time such are
exercised as herein provided an amount in cash equal to the same fraction
of the current market value of the Common Stock as the fraction of a share
which the Warrant would otherwise entitle the holder to purchase. For
purposes of this Section 7(b)(7) the current market value of the Common
Stock shall be determined pursuant to Section 7(b)(3) hereof.
8. Notice to Warrantholders.
a. No holder of any of the Warrants, as such, shall have any rights of
a stockholder of the Company, either at law or equity, and the rights of
the holders of the Warrants, as such, are limited to those rights expressly
provided in this Agreement or in the Warrant Certificates.
b. The Company and the Warrant Agent may treat the registered holder
of any Warrant Certificate as the absolute owner thereof for all purposes
notwithstanding any notice to the contrary.
c. If the Company shall make any distribution on, or to holders of,
its Common Stock (or other property which may be purchasable in lieu
thereof upon the exercise of Warrants) of any property (other than a cash
dividend), the Company shall cause a notice thereof to be given to the
registered holders of the outstanding Warrants as aforesaid at least twenty
(20) days prior to the date fixed as a record date or the date of closing
the transfer books for the determination of the stockholders entitled to
receive such distribution. Failure to mail or to receive such notice or any
defect therein or in the mailing thereof shall not affect the validity of
any action taken in connection with such distribution.
9. Disposition of Proceeds on Exercise of Warrants.
a. The Warrant Agent shall account promptly to the Company with
respect to Warrants exercised and concurrently pay to the Company all
monies received by the Warrant Agent for the purchase of shares of the
Company's stock through the exercise of such Warrants.
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<PAGE>
b. The Warrant Agent shall keep copies of this Agreement available for
inspection by holders of Warrants during normal business hours at its
principal office.
10. Redemption of Warrants.
a. At any time the Company may, at its option, redeem some or all of
the outstanding Warrants at ten cents ($0.10) per Warrant, upon thirty (30)
days prior written notice, if the closing sale price of the Common Stock on
any national securities exchange or the closing sale price quotation or the
average of the closing bid and asked price quotation, the case may be, on
the NASDAQ Small-Cap Market, as the case may be, has equaled or is more
than sixteen dollars and eighty cents ($16.80) for twenty (20) consecutive
trading days within the ninety (90) day period immediately preceding the
date notice of redemption is given (the "Redemption Price"). In the event
of an adjustment in the Exercise Price pursuant to Section 7, the
Redemption Price shall not be adjusted.
b. The election of the Company to redeem some or all of the Warrants
shall be evidenced by a resolution of the Board of Directors of the
Company.
c. Warrants may be exercised at any time on or before the date fixed
for redemption (the "Redemption Date").
d. Notice of redemption shall be given by first class mail, postage
prepaid, mailed not less than thirty (30) nor more than sixty (60) days
prior to the Redemption Date, to each holder of Warrants, at his address
appearing in the Warrant register.
All notices of redemption shall state:
(1) The Redemption Date;
(2) That on the Redemption Date the Redemption Price will become
due and payable upon each Warrant;
(3) The place where such Warrants are to be surrendered for
redemption and payment of the Redemption Price; and
(4) The current Exercise Price of the Warrants, the place or
places where such Warrants may be surrendered for exercise, and the
time at which the right to exercise the Warrants will terminate in
accordance with this Agreement.
e. Notice of redemption of Warrants at the election of the Company
shall be given by the Company or, at the Company's request, by the Warrant
Agent in the name and at the expense of the Company.
f. Prior to any Redemption Date, the Company shall deposit with the
Warrant Agent an amount of money sufficient to pay the Redemption Price of
all the Warrants which are to be redeemed on that date. If any Warrant is
exercised pursuant to Section 5 prior to the Redemption Date, any money so
deposited with the Warrant Agent for the redemption of such Warrant shall
be paid to the Company.
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<PAGE>
g. Notice of redemption having been given as aforesaid, the Warrants
so to be redeemed shall, on the Redemption Date, become redeemable at the
Redemption Price therein specified, and on such date (unless the Company
shall default in the payment of the Redemption Price) such Warrants shall
cease to be exercisable and thereafter represent only the right to receive
the Redemption Price. Upon surrender of such Warrants for redemption in
accordance with said notice, such Warrants shall be redeemed by the Company
for the Redemption Price.
11. Merger or Consolidation or Change of Name of Warrant Agent. Any
corporation into which the Warrant Agent may be merged or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which the Warrant Agent shall be a party, or any corporation succeeding to the
corporate trust business of the Warrant Agent, shall be the successor to the
Warrant Agent hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor warrant agent under
the provisions of Section 14 of this Agreement. In case at the time such
successor to the Warrant Agent shall succeed to the agency created by this
Agreement and at such time any of the Warrants shall have been countersigned but
not delivered, any such successor to the Warrant Agent may adopt the
countersignature of the Warranty Agent and deliver such Warrants so
countersigned; and in case at the time any of the Warrants shall not have been
countersigned, any successor to the Warrant Agent may countersign such Warrants
either in the name of the predecessor Warrant Agent or in the name of the
successor warrant agent; and in all such cases such Warrants shall have the full
force provided in the Warrant and in this Agreement.
In case at any time the name of the Warrant Agent shall be changed and at
such time any of the Warrants shall have been countersigned but not delivered,
the Warrant Agent may adopt the countersignature under its prior name and
deliver Warrants so countersigned; and in case at that time any of the Warrants
shall not have been countersigned, the Warrant Agent may countersign such
Warrants whether in its prior name or in its changed name; and in all such cases
such Warrants shall have the full force provided in the Warrants and in this
Agreement.
12. Duties of Warrant Agent. The Warrant Agent undertakes the duties and
obligations imposed by this Agreement upon the following terms and conditions,
by all of which the Company and the holders of Warrants, by their acceptance
thereof, shall be bound:
a. The statements contained herein and in the Warrants shall be taken
as statements of the Company, and the Warrant Agent assumes no
responsibility for the correctness of any of the same except such as
describe the Warrant Agent or action taken or to be taken by it. The
Warrant Agent assumes no responsibility with respect to the distribution of
the Warrants or the Warrant Certificates except as herein otherwise
provided.
b. The Warrant Agent shall not be responsible for any failure of the
Company to comply with any of the covenants contained in this Agreement or
in the Warrant Certificates to be complied with by the Company.
c. The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it to perform any duty hereunder either itself or
by or through its attorneys, agents or employees.
d. The Warrant Agent may consult at any time with counsel satisfactory
to it (who may be counsel for the Company) and the Warrant Agent shall
incur no liability or responsibility to the Company or to any holder of any
Warrant in respect of any action taken, suffered or
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<PAGE>
omitted by it hereunder in good faith and in accordance with the opinion or
the advice of such counsel, provided the Warrant Agent shall have exercised
reasonable care in the selection and continued employment of such counsel.
e. The Warrant Agent shall incur no liability or responsibility to the
Company or to any holder of any Warrant for any action taken in reliance on
any notice, resolution, waiver, consent, order, certificate, or other
paper, document or instrument believed by it to be genuine and to have been
signed, sent or presented by the proper party or parties.
f. The Company agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the
execution of this Agreement, to reimburse the Warrant Agent for all
expenses, taxes and governmental charges and other charges of any kind and
nature incurred by the Warrant Agent in the execution of this Agreement and
to indemnify the Warrant Agent and save it harmless against any and all
liabilities, including judgments, costs and reasonable counsel fees, for
anything done or omitted by the Warrant Agent in the execution of this
Agreement except as a result of the Warrant Agent's negligence or bad
faith.
g. The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action likely to
involve expense unless the Company or one or more registered holders of
Warrants shall furnish the Warrant Agent with reasonable security and
indemnity for any cost and expense which may be incurred, but this
provision shall not affect the power of the Warrant Agent to take such
action as the Warrant Agent may consider proper, whether with or without
any such security or indemnity. All rights of action under this Agreement
or under any of the Warrants may be enforced by the Warrant Agent without
the possession of any of the Warrants or the production thereof at any
trial or other proceeding relative thereto, and any such action, suit or
proceeding instituted by the Warrant Agent shall be brought in its name as
Warrant Agent, and any recovery of judgment shall be for the ratable
benefit of the registered holders of the Warrants, as their respective
rights or interests may appear.
h. The Warrant Agent and any stockholder, director, officer or
employee of the Warrant Agent may buy, sell or deal in any of the Warrants
or other securities of the Company or become peculiarly interested in any
transaction in which the Company may be interested, or contract with or
lend money to or otherwise act as fully and freely as though it were not
Warrant Agent under this Agreement. Nothing herein shall preclude the
Warrant Agent from acting in any other capacity for the Company or for any
other legal entity.
i. The Warrant Agent shall act hereunder solely as agent and not in a
ministerial capacity, and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not be liable for anything which
it may do or refrain from doing in connection with this Agreement except as
a result of its own negligence or bad faith.
13. Change of Warrant Agent. The Warrant Agent may resign and be discharged
from its duties under this Agreement by giving to the Company notice in writing,
and by giving notice in writing to the holders of the Warrants at their
respective addresses appearing on the Warrant register prior to the date so
specified, specifying a date when such resignation shall take effect, which
notice shall be sent at least 30 days prior to the date so specified. The
Warrant Agent may be removed by like notice to the Warrant Agent from the
Company. If the Warrant Agent shall resign or be removed or shall otherwise
become incapable of acting, the Company shall appoint a successor to the Warrant
Agent. If the Company shall fail to make such appointment within a period of
thirty (30) days after such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Warrant Agent
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<PAGE>
or by any registered holder of a Warrant, then any registered holder of a
Warrant may apply to any court of competent jurisdiction for the appointment of
a successor to the Warrant Agent. Any successor warrant agent, whether appointed
by the Company or by such a court, shall be a bank or trust company having its
principal office, and having capital and surplus as shown by its last published
report to its stockholders, of at least five million dollars ($5,000,000). After
appointment, the successor warrant agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as
Warrant Agent without further act or deed; but the former Warrant Agent shall
deliver and transfer to the successor warrant agent any property at the time
held by it hereunder, and execute and deliver any further assurance, conveyance,
act or deed necessary for the purpose. Failure to give any notice provided for
in this Section, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Warrant Agent or the
appointment of the successor warrant agent, as the case may be.
14. Identity of Transfer Agent. Forthwith upon the appointment of any
Transfer Agent for the Common Stock or of any subsequent Transfer Agent for
shares of the Common Stock or other shares of the Company's capital stock
issuable upon the exercise of the rights of purchase represented by the Warrant
Certificates, the Company will file with the Warrant Agent a statement setting
forth the name and address of such Transfer Agent.
15. Mutilated or Missing Warrant Certificates. In case any of the Warrant
Certificates shall be mutilated, lost, stolen or destroyed, the Company will
issue and the Warrant Agent will countersign and deliver in exchange and
substitution for and upon cancellation of the mutilated Warrant Certificate, or
in lieu of and substitution for the Warrant Certificate lost, stolen or
destroyed, a new Warrant Certificate of like tenor and representing an
equivalent right or interest; but only upon receipt of evidence satisfactory to
the Company and the Warrant Agent of such loss, theft or destruction of such
Warrant Certificate and indemnity, if requested, also satisfactory to them.
Applicants for such substitute Warrant Certificates shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Company or the Warrant Agent may prescribe.
16. Notices. Any notice pursuant to this Agreement to be given or made by
the Warrant Agent or the registered holder of any Warrant to or on the Company
shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed (until another address is filed in writing by the Company
with the Warrant Agent) as follows:
Pacific Biometrics, Inc.
1370 Reynolds Avenue
Suite 119
Irvine, California 92714
Attention: President
Any notice pursuant to this Agreement to be given or made by the Company or the
registered holder of any Warrant to or on the Warrant Agent shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing by the Warrant Agent with
the Company) as follows:
___________________________
___________________________
___________________________
___________________________
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17. Supplements and Amendments. The Company and the Warrant Agent may from
time to supplement or amend this Agreement without the approval of any holders
of Warrants in order to cure any ambiguity or to correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provision herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Warrant Agent may deem
necessary or desirable and which shall not be inconsistent with the provisions
of the Warrants and which shall not adversely affect the interests of the
holders of Warrants.
18. Successors. All the covenants and provisions of this Agreement by or
for the benefit of the Company or the Warrant Agent shall bind and inure to the
benefit of their respective successors and assigns hereunder.
19. Merger or Consolidation of the Company. The Company shall not effect
any consolidation or merger with, or sale of substantially all its property to,
any other corporation unless the corporation resulting from such merger (if not
the Company) or consolidation or the corporation purchasing such property shall
expressly assume, by supplemental agreement satisfactory in form to the Warrant
Agent and executed and delivered to the Warrant Agent, the due and punctual
performance and observance of each and every covenant and condition of this
Agreement to be performed and observed by the Company.
20. Benefits of This Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company, the
Warrant Agent and the registered holders of the Warrants any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Warrant Agent and the registered
holders of the Warrants.
21. Governing Law. This Agreement and each Warrant Certificate issued
hereunder shall be governed by and construed in accordance with the laws of the
State of Delaware.
22. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes by deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first above written.
PACIFIC BIOMETRICS, INC.
By: /s/Paul G. Kanan
---------------------------------------
Paul G. Kanan, President and Chief
Executive Officer
[Name of Warrant Agent]
--------------------------------------
By: __________________________________
[Name and Title]
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EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
No. ___________
For the Purchase of ___ Shares
of Common Stock
_______________, 1996
PACIFIC BIOMETRICS, INC.
Redeemable Common Stock Purchase Warrants
Void After _______, 199__ ("Warrant Expiration Date")
THIS CERTIFIES that _____________________ is entitled to purchase from
PACIFIC BIOMETRICS, INC., a Delaware corporation (hereinafter called the
"Company"), upon the surrender of this Warrant Certificate to the Company at the
principal office of the Warrant Agent hereinafter mentioned (or of its successor
as Warrant Agent), provided, and only if, this Warrant Certificate shall be
surrendered and before 5:00 p.m., New York City time, on the Warrant Expiration
Date, the number of fully paid and nonassessable shares of Common Stock, $.01
par value of the Company ("Common Stock"), set forth above, evidenced by a
certificate therefor, upon payment of the Exercise Price for the number of
shares in respect of which this Warrant Certificate is exercised; provided,
however, that under certain conditions set forth in the Warrant Agreement
hereinafter mentioned, the number of shares of Common Stock which may become
purchasable pursuant to this Warrant may be adjusted, or property other than
shares of Common Stock may become purchasable pursuant to the Warrants evidenced
hereby. The Exercise Price at which the Common Stock shall be purchasable upon
the exercise of Warrants shall be $12.00 per share, payable upon exercise,
either in cash or by certified or official bank check, in United States dollars,
to the order of the Warrant Agent. No adjustment shall be made for any dividends
on any shares of stock issuable upon exercise of this Warrant and no fractional
shares shall be issued. The right of purchase represented by this Warrant is
exercisable, at the election of the registered holder hereof, either as an
entirety or from time to time in part only of the shares specified herein and,
in the event that this Warrant Certificate is exercised in respect of fewer than
all of such shares, a new Warrant Certificate for the remaining number of such
shares will be issued on such surrender.
The Warrant is issued under, and the rights represented hereby are subject
to the terms and provisions contained in a Warrant Agreement dated as of
_______________, 1996, between the Company and the Warrant Agent named therein,
to all the terms and provisions of which the registered holder of this Warrant
Certificate, by acceptance hereof, assents. Reference is hereby made to said
Warrant Agreement for a more complete statement of the rights and limitations of
rights of the registered holder hereof, the rights and duties of the Warrant
Agent and the rights and obligations of the Company thereunder. Copies of the
Warrant Agreement are on file at the office of the Warrant Agent.
<PAGE>
The Warrants represented by this Warrant Certificate may be redeemed by the
Company, at its option, at any time, on thirty days' prior written notice, at
$.10 per Warrant, if the closing sale price of the Common Stock on any national
securities exchange or the average of closing bid and asked quotation of the
Common Stock on the NASDAQ Small-Cap Market has equaled or is greater than
sixteen dollars and eighty cents ($16.80) for twenty (20) consecutive trading
days. This Warrant Certificate may not be exercised after the close of business
on the day preceding the redemption date.
The Warrant Certificate is transferable at the office of the Warrant Agent
(or its successor as warrant agent) by the registered holder hereof in person or
by attorney duly authorized in writing, but only in the manner and subject to
the limitations provided in the Warrant Agreement, and upon surrender of this
Warrant Certificate. Upon any such transfer, a new Warrant Certificate, or new
Warrant Certificates of different denominations, of like tenor and representing
in the aggregate the right to purchase a like number of shares of Common Stock
will be issued to the transferee in exchange for this Warrant Certificate.
This Warrant Certificate and similar Warrant Certificates when surrendered
at the office of the Warrant Agent (or its successor as warrant agent) by the
registered holder in person or by attorney duly authorized in writing may be
exchanged, in the manner and subject to the limitations provided in the Warrant
Agreement, for another Warrant Certificate, or other Warrant Certificates of
different denominations, of like tenor and representing in the aggregate the
right to purchase a like number of shares of Common Stock.
This Warrant Certificate may be exercised only if a current prospectus
relating to the Common Stock is then in effect and only if the shares of Common
Stock are qualified for sale under the securities law of the state or states in
which the Warrantholder resides.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, PACIFIC BIOMETRICS, INC. has caused to be printed
herein the facsimile signature of its President or a Vice President as of the
date written above.
PACIFIC BIOMETRICS, INC.
By: ______________________________
President
[Name of Warrant Agent]
----------------------------------
As Warrant Agent
By: ______________________________
Authorized Signature
2
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[FORM OF]
ELECTION TO PURCHASE
PACIFIC BIOMETRICS, INC.
1370 Reynolds Avenue
Suite 119
Irvine, California 92714
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant(s) for, and to purchase thereunder, __________
shares of the stock provided for therein, and requests that certificates for
such shares shall be issued in the name of ______________________ (Please Print)
and be delivered to ____________________ at _________________________________
and, if said number of shares shall not be all of the shares purchasable
thereunder, that a new Warrant Certificate for the balance remaining of the
shares purchasable under the within Warrant Certificate be registered in the
name of, and delivered to, the undersigned at the address stated below.
Dated: ____________________, 199__
Name of Warrantholder: ___________________________________________________
( Please Print )
Address: _________________________________________________________________
Signature: _______________________________________________________________
Note: The above signature must correspond with the name
as written upon the face of this Warrant in every
particular, without alteration or enlargement or any
change whatever.
3
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LICENSE AGREEMENT
This License Agreement is entered into and made effective as of the 31st
day of December, 1992 by and between Sudor Partners, a partnership organized
under the laws of the State of California, having its principal place of
business at 12341 Newport Avenue, D-200, Santa Ana, California 92705
(hereinafter "LICENSOR"), and CEO Advisors, Inc., an Illinois corporation having
a regular and established place of business at 255 Revere Drive, Suite 108,
Northbrook, Illinois 60062 (hereinafter "LICENSEE").
WHEREAS, LICENSOR is the exclusive owner with right to grant licenses of
certain proprietary information relating to a METHOD AND APPARATUS FOR
DETERMINATION OF CHEMICAL SPECIES IN BODY FLUID, including that disclosed and
claimed in United States Patents Nos. 4,957,108, 5,076,273, in United States
Patent Applications Serial Nos. 07/569,007, 07/929,628, in foreign patent
filings in Japan, Austria, Belgium, Switzerland/Liechtenstein, Germany, Denmark,
Spain, France, United Kingdom, Italy, Luxembourg, Netherlands, Greece and Sweden
which began in August of 1991, and in additional patent applications to be filed
in the future that will claim priority from any of the foregoing applications
under the provisions of 35 U.S.C. Section 120 (hereinafter "PROPRIETARY
INFORMATION"); and
WHEREAS, LICENSEE desires a certain exclusive license under said
PROPRIETARY INFORMATION, which license LICENSOR is willing to grant.
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
hereinafter set forth, the parties hereto agree as follows:
1. Definitions
As used herein, the following terms shall have the following
meanings:
a. The term "FIELD OF USE" shall mean detecting and/or measuring
biochemical markers pyridinoline and deoxypyridoline, but only for the purposes
of diagnosing bone loss which leads to osteoporosis and of monitoring preventive
care and treatment of osteoporosis. It is recognized and understood by both
parties that it may also be necessary to measure certain hormones and other
substances in order to calibrate and/or quantify the biochemical markers listed
above. In addition, "FIELD OF USE" shall include the detection and/or
measurements of other biochemical markers and substances that may in the future
offer a superior method of diagnosing bone loss leading to osteoporosis and
therapy;
b. The term "LICENSED PRODUCTS" shall mean:
(1) any product which embodies the apparatus of
said PROPRIETARY INFORMATION or which is used to perform the method of said
PROPRIETARY INFORMATION, the LICENSED PRODUCTS being used solely within the
FIELD OF USE; and
(2) parts, components, subassemblies or materials designed
primarily for use in any of the products of (1) above, but excluding parts,
components, subassemblies or
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materials which are developed or designed primarily either for general use or
for specific use other than the use in such products.
c. The term "OSTEOPOROSIS" shall have its ordinary medical meaning,
namely the abnormal decrease in density, but not volume, of bone.
d. The term "GROSS SALES" shall mean the aggregate amount to be paid
to LICENSEE for the LICENSED PRODUCTS before the addition of sales or use taxes
and freight, including, without limitation, fixed and percentage amounts.
e. The term "ADJUSTED GROSS DIAGNOSTIC REVENUES" shall mean the
cumulative fees charged for after-use diagnostic or evaluative analysis of the
LICENSED PRODUCTS, whether by LICENSEE, any affiliated company of LICENSEE or
any other company, minus (i) the cumulative price paid by LICENSEE to LICENSOR
for purchase of those units of the LICENSED PRODUCTS, and (ii) LICENSOR's actual
and direct costs of any test kits which LICENSEE purchased from an unaffiliated
party and included in the sale to such customer.
f. The term "IMPROVEMENTS" shall mean all modifications of a product
or method of PROPRIETARY INFORMATION or LICENSED PRODUCTS.
g. The term "LICENSED PATENT" shall mean all issued United States
patents which contain one or more claims that read on inventions or designs
applicable to LICENSED PRODUCTS or IMPROVEMENTS, and as to which LICENSOR has at
any time
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during the term of this Agreement the right to grant licenses. The LICENSED
PATENTS include, but are not limited to, United States Patents Nos. 4,957,108,
5,076,273, and any patents issuing on United States Patent Applications Serial
Nos. 07/569,007, 07/929,628, or on addition patent applications to be filed in
the future that will claim priority from any of the foregoing applications under
the provisions of 35 U.S.C. Section 120, so long as such additional patent
applications contain one or more claims that read on inventions applicable to
LICENSED PRODUCTS or IMPROVEMENTS. These additional patent applications include
all continuations-in-part of the foregoing applications regardless of whether
such continuation-in-part applications contain claims that have the effective
filing date of any earlier-filed application, so long as such
continuation-in-part applications contain one or more claims that read on
inventions applicable to LICENSED PRODUCTS or IMPROVEMENTS.
2. License Grant
a. Subject to the payment of royalties and the other conditions
hereinafter set forth, LICENSOR hereby grants to LICENSEE an exclusive,
worldwide license to use and sell LICENSED PRODUCTS but solely for application
within the FIELD OF USE.
b. LICENSEE may grant sublicenses to others, including end-users, to
use or sell LICENSED PRODUCTS purchased by LICENSEE from LICENSOR but only if
such sublicenses are expressly limited in writing to applications within the
FIELD OF USE, it being the intention that all purchasers, including the
end-users, of LICENSED PRODUCTS are to be limited in writing to use of the
LICENSED PRODUCTS within the FIELD
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OF USE. No other sublicenses may be granted by LICENSEE. LICENSEE shall notify
the LICENSOR of all sublicenses granted by LICENSEE within 10 days of execution
of such a sublicense.
c. In respect to sublicenses granted by LICENSEE under the preceding
paragraph, except as provided in paragraph 3.b.(4)(a), LICENSEE shall pay over
to LICENSOR royalties on GROSS SALES or ADJUSTED GROSS DIAGNOSTIC REVENUES
obtained by sublicensees as is necessary to yield to LICENSOR returns by such
sublicensees equal to the amounts which LICENSOR would have received from
LICENSEE had the LICENSED PRODUCTS been sold or used by LICENSEE.
d. Termination under any of the provisions of paragraph 9 of the
license granted to LICENSEE in this Agreement shall terminate all sublicenses
which may have been granted by LICENSEE, provided that all sublicensees may
thereafter use within the FIELD OF USE any LICENSED PRODUCTS then in the
possession of sublicensee and, provided further, that LICENSOR may elect to
continue any license granted under a sublicense of LICENSEE by advising any
sublicensee within sixty (60) days of such termination of its desire to continue
the sublicense and provided the sublicensee agrees in writing to assume in
respect to LICENSOR all the obligations (including obligations for payment)
contained in its sublicensing agreement with LICENSEE. Any sublicense granted by
LICENSEE
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shall contain provisions corresponding to those of this paragraph
respecting termination and the conditions of continuance of sublicenses.
e. The granting by LICENSEE of sublicenses under the LICENSED
PRODUCTS shall be in the discretion of LICENSEE, and LICENSEE shall have the
sole power to determine whether or not to grant such sublicenses, the identity
of the sublicensees, and the conditions of such sublicenses other than those
dictated by this License Agreement.
3. Payment
a. Payment for LICENSED PRODUCTS
LICENSEE shall purchase the LICENSED PRODUCTS only from
LICENSOR. The terms and conditions of purchase shall be set forth in a separate
SUPPLY AGREEMENT, to be negotiated and agreed to by LICENSOR and LICENSEE. If
LICENSOR and LICENSEE do not agree to the terms of the SUPPLY AGREEMENT within
nine (9) months of the date of execution of this License Agreement, this License
Agreement shall become void in its entirety.
b. Royalty Terms
(1) Temporary Royalty-Free License: No royalties shall be due
or accrue through June 30, 1993.
(2) GROSS SALES AND ADJUSTED GROSS DIAGNOSTIC REVENUES:
LICENSEE shall pay to LICENSOR a royalty equal to five percent (5%) of
LICENSEE's total GROSS SALES, plus five percent (5%) of LICENSEE's total
ADJUSTED GROSS DIAGNOSTIC
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REVENUES. This royalty shall be first calculated for the three (3) months ending
September 30, 1993, and again at the end of each and every three-month period
thereafter (each such three-month period shall be referred to herein as a
PAYMENT PERIOD). The minimum royalty provided for in (3) below shall be paid on
the last day of each PAYMENT PERIOD and any additional royalty for such PAYMENT
PERIOD shall be paid within thirty (30) days after such PAYMENT PERIOD.
(3) Minimum Royalty Payment: The MINIMUM ROYALTY due at the
end of each PAYMENT PERIOD shall be $15,000. If the royalty due under
subparagraph (2) at the end of any PAYMENT PERIOD is less than $15,000, LICENSEE
shall pay no royalty under the terms of subparagraph (2) and shall instead pay
$15,000 for that PAYMENT PERIOD.
(4) Examples: In all of the following examples, assume that
LICENSEE purchases product from LICENSOR for $5.00 and test kits for $2.00. This
term is stated for example purposes only and not to suggest any price to be
negotiated in a separate SUPPLY AGREEMENT.
(a) If LICENSEE sells LICENSED PRODUCT to an
unaffiliated customer for $10.00, the revenue to LICENSOR is 5% of the GROSS
SALES of $10.00, or $0.50. If this unaffiliated customer resells (but only as
permitted within this Agreement) the LICENSED PRODUCT to its customer for $20.00
and LICENSEE does not receive any further consideration or compensation with
respect to the LICENSED PRODUCT so resold, LICENSOR shall not be entitled to any
further royalty on this resale.
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<PAGE>
(b) If LICENSEE gives LICENSED PRODUCT to its customers
at no charge and a customer sends LICENSED PRODUCT to LICENSEE for analysis at a
$20.00 fee, the revenue to LICENSOR is 5% of the ADJUSTED GROSS DIAGNOSTIC
REVENUES of $13.00 ($20.00 - $5.00 - $2.00), or $0.65.
(c) If LICENSEE gives LICENSED PRODUCT to its customers
at no charge, a customer sends LICENSED PRODUCT to a laboratory other than
LICENSEE or an affiliated company of LICENSEE, and the laboratory charges the
customer a $20.00 fee of which $10.00 is paid to LICENSEE, then the revenue to
LICENSOR is 5% of the ADJUSTED GROSS DIAGNOSTIC REVENUES of $13.00 ($20.00 -
$5.00 - $2.00), or $0.65.
(d) If LICENSEE sells LICENSED PRODUCT to its customer
for $5.00 and a customer sends LICENSED PRODUCT to LICENSEE for analysis at a
$15.00 fee, the revenue to LICENSOR is 5% of GROSS SALES of $5.00 plus 5% of the
ADJUSTED GROSS DIAGNOSTIC REVENUES of $8.00 ($15.00 - $5.00 - $2.00), $0.25 and
$0.40, respectively, for a total revenue to LICENSOR of $0.65.
(5) Payee: All royalty payments under this License Agreement
shall be made payable to William R. Miller, an individual currently having a
place of residence at 10841 Hideaway Drive, Santa Ana, California 92705, and
Donald W. Schoendorfer, an individual currently having a place of residence at
1842 White Stone Terrace, Santa Ana, California 92605. One-half of each payment
shall be made payable to William R. Miller and one-half of each payment shall be
made payable to Donald W. Schoendorfer.
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<PAGE>
(6) Late Payment: Failure to make any royalty payment on the
date due under this License Agreement shall result in the immediate, automatic
termination of this License Agreement without any further action by either
party. LICENSOR and LICENSEE may agree to revive this License Agreement only in
writing.
4. Reports
LICENSEE shall submit a written report to LICENSOR, together with
each royalty payment made pursuant to paragraph 3, setting forth the following
as to LICENSEE's sales and the sales of each of LICENSEE's sublicensees, if any:
a. The total quantity of LICENSED PRODUCTS sold by LICENSEE or its
sublicensees for the preceding PAYMENT PERIOD;
b. The GROSS SALES PRICE at which each LICENSED PRODUCT was sold
during the preceding PAYMENT PERIOD by LICENSEE or its sublicensees;
c. The total number of LICENSED PRODUCTS for which LICENSEE or its
sublicensees charged its customers for after-use diagnostic or evaluative
analysis;
d. The fee per unit charged by LICENSEE for such analysis; and
e. The calculated royalty due.
5. Books and Records
a. LICENSEE agrees to keep full and accurate books and records
regarding the sale, use and sublicensing of LICENSED PRODUCTS, and to retain
such books and records for at
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least five (5) years, in sufficient detail to enable royalties payable hereunder
to be determined on a day-to-day basis. Such books and records shall include an
identification by: (1) invoice number, (2) invoice date, (3) customer or
sublicensee, (4) invoice price, (5) actual fee or price paid, (6) trade
discounts, and (7) freight, taxes and duties of each LICENSED PRODUCT.
Such books and records shall additionally include:
(1) copies of purchase orders placed by LICENSEE, and invoices
received from LICENSOR, for each LICENSED PRODUCT or use thereof; and
(2) a count of LICENSED PRODUCTS in inventory as of the final
day of each calendar month.
b. LICENSEE agrees that such books and records shall be maintained
in accordance with generally accepted accounting principles and that LICENSEE
shall make such books and records available for inspection by LICENSOR, or its
representatives, upon a reasonable advance request in writing, but not more
often than one time within any twelve-month period. If LICENSEE underpays any
royalty amount, such amount shall bear interest at Bank of America's prime rate
(but not in excess of that permitted by law) from the due date thereof.
6. Testing and Data
a. Written protocols for any proposed tests which LICENSEE intends
to conduct as part of an effort to obtain approval or funding from a government
agency for a use of the
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LICENSED PRODUCTS shall be submitted to LICENSOR for approval before conducting
the tests. LICENSOR may review the protocol for each proposed test and may
require LICENSEE to make changes in the protocol. All such required changes must
be sent by overnight courier to LICENSEE within ten (10) days of receipt of the
proposed test. LICENSEE shall not submit any proposed test to any government
agency until LICENSEE has incorporated the changes required by LICENSOR, or
until one day after the above- identified 10-day period has expired without the
receipt of any changes required by LICENSOR.
b. Any report of data generated by LICENSEE which LICENSEE intends
to submit to a government agency as part of an effort to obtain approval or
funding from a government agency for a use of the LICENSED PRODUCT shall be
submitted to LICENSOR before submission to the government agency. LICENSOR may
review the report and may require LICENSEE to make changes therein. All such
changes must be sent by overnight courier to LICENSEE within ten (10) days of
receipt of the data. LICENSEE shall not submit any data to any government agency
until LICENSEE has incorporated the changes required by LICENSOR or until one
day after the above-defined 10-day period has expired without the receipt of any
changes required by LICENSOR.
c. Any documents drafted by LICENSEE which LICENSEE intends to
submit to a government agency as part of an effort to obtain approval or funding
for a use of the LICENSED PRODUCT shall be submitted to LICENSOR before
submission to the
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<PAGE>
government agency. LICENSOR may review the documents and may require LICENSEE to
make changes thereto. All such changes must be sent by overnight courier to
LICENSEE within ten (10) days of receipt of the data. LICENSEE shall not submit
any such documents to any government agency until LICENSEE has incorporated the
changes required by LICENSOR or until one day after the above-defined 10-day
period has expired without the receipt of any changes required by LICENSOR.
d. LICENSEE shall hold title to and own in its own name, any
registrations of approval from a government agency, such as the United States
Food and Drug Administration (FDA), for the LICENSED PRODUCTS. However, if this
License Agreement is terminated for any reason, then title to any such
registrations shall be transferred to LICENSOR. In the event of such
termination, LICENSEE agrees to execute any and all documents necessary to
transfer and fully vest title to such registrations in LICENSOR.
e. In the event LICENSEE has obtained a registration with the right
to sell LICENSED PRODUCTS thereunder and title to such registration is to be
transferred to LICENSOR under Paragraph 6, part d, of this License Agreement,
then LICENSOR shall compensate LICENSEE for expenses incurred obtaining such
registrations, such as clinical trials, laboratory analysis, regulatory
submissions and the portion of overhead expenses associated with the foregoing.
This compensation shall be
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equal to the sum of $240,000 paid in 12 equal installments of $20,000 quarterly
over three years.
7. Enforcement of LICENSED PATENTS
a. In the event that LICENSOR or LICENSEE determines or otherwise
becomes aware that a third party is infringing a LICENSED PATENT, it will
promptly notify the other party. LICENSOR may (but shall not be obligated in any
event to) commence legal action leading toward an infringement suit against such
third party and have the right to select counsel of its choice and to control
such action as it deems appropriate. For purposes hereof, "legal action" does
not mean the actual filing of a lawsuit, but rather the taking of affirmative
legal steps shall suffice for purposes of commencing such action. If LICENSOR
does not commence such action within ninety (90) days of such notice, LICENSEE
shall have the right, but not the obligation, to institute a suit or take other
legal action against such third party subject to and consistent with the
respective rights of the other licensees of LICENSOR with respect to fields of
use other than the FIELD OF USE to do the same and to join in such suit or legal
action. If suit is commenced by LICENSOR and the court determines that LICENSEE
is a necessary or indispensable party to such lawsuit, LICENSEE shall join in
such suit. In any event, each party shall reasonably assist the other party in
the prosecution of such suit or legal action and in the protection and
enforcement Of LICENSOR's rights in and to the LICENSED PRODUCTS, the
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LICENSED PATENTS and the PROPRIETARY INFORMATION. Subject to the terms and
provisions of paragraph b. below, the party instituting such suit or legal
action shall bear the costs and expenses of such suit or legal action and be
entitled to any awards resulting therefrom. Notwithstanding anything herein to
the contrary, LICENSEE may not settle any such action without the prior written
approval of LICENSOR, which approval will not be unreasonably withheld.
b. In the event that LICENSOR or LICENSEE, whichever is the party
initiating the action pursuant to the terms of this paragraph 7 (the "INITIATING
PARTY"), as a result of a judgment or a reasonable settlement entered into in
good faith as a result of such action, recovers royalties or other amounts from
a third party, the INITIATING PARTY shall deduct and retain from such recoveries
an amount equal to all of such party's out-of-pocket costs and expenses,
including, without limitation, attorneys' fees, incurred as a result of such
action. The remaining amount (hereinafter referred to as the "REMAINDER") shall
be allocated among the appropriate parties in an equitable manner taking into
account the respective monetary damages to such parties, or as otherwise
allocated by the court in which such suit or legal action is pursued or pursuant
to a settlement agreement or other binding arrangement among the parties
involved in such suit or legal action. Any REMAINDER paid to LICENSEE shall be a
GROSS SALE for purposes of Section 3 above.
c. LICENSEE shall use reasonable efforts to detect every suspected
infringement of the LICENSED PATENTS and to
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cause each of its purchasers to do the same and shall take and cause such
purchasers to take all reasonable measures to protect LICENSOR's rights in and
to the LICENSED PATENTS and the LICENSED PRODUCTS and to reasonably assist
LICENSOR and LICENSEE in connection with any litigation or legal action related
thereto.
8. Improvements
a. In the event LICENSOR should make any IMPROVEMENTS, it shall
communicate the same to LICENSEE and LICENSEE shall have the right to use such
IMPROVEMENTS under the terms of this Agreement. In the event LICENSOR should
secure the grant of Letters Patent on the LICENSED PRODUCTS or on any such
IMPROVEMENTS, it will notify LICENSEE, which shall have the right, at its
option, to include the same as a LICENSED PATENT within the terms of the present
Agreement. Only one royalty per device sold or used shall be due, regardless of
the number of patents covering a licensed device.
b. In the event LICENSEE should make any IMPROVEMENTS, LICENSEE
grants and agrees to grant title and ownership of such IMPROVEMENTS to LICENSOR.
LICENSEE agrees to promptly communicate to LICENSOR any facts known to LICENSEE
respecting said IMPROVEMENTS and to testify in any legal proceedings, sign all
lawful papers, execute all patent applications, make all rightful oaths and
generally aid LICENSOR to obtain and enforce proper patent projection for
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said IMPROVEMENTS in any and all countries. Such IMPROVEMENTS shall thereafter
be treated as in (a) above.
c. LICENSEE shall require that all of its sublicensees agree in
writing that should such sublicensee make any IMPROVEMENTS, that the sublicensee
grants and agrees to grant title and ownership of IMPROVEMENTS to LICENSOR.
LICENSEE shall also require that all of its sublicensees agree to promptly
communicate to LICENSOR any facts known to the sublicensee respecting said
IMPROVEMENTS and to testify in any legal proceedings, sign all lawful papers,
execute all patent applications, make all rightful oaths and generally aid
LICENSOR to obtain and enforce proper patent protection for said IMPROVEMENTS in
any and all countries. Such IMPROVEMENTS shall thereafter be treated as in (a)
above.
9. Termination
a. In the event that either LICENSOR or LICENSEE fails to perform
any of its obligations under this Agreement, the other party may, in addition to
any other remedy they may have, terminate this Agreement by giving thirty (30)
days' written notice to the defaulting party of their intention to do so,
specifying the default and the intended effective date of the termination
notice. Such termination notice will be effective to terminate this Agreement on
the stated date unless such defaulting party has, within the thirty (30) day
cure period, cured the alleged default and provided written verification
establishing that the default has been cured. If,
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before the stated termination date, such defaulting party has cured all actual
defaults, then the notifying party shall, upon written request, acknowledge in
writing that the default has been cured.
b. This Agreement shall terminate automatically without notice in
any of the following circumstances:
(1) In the event that LICENSEE is insolvent or is ordered or
adjudged bankrupt or is placed in the hands of a receiver, or is the subject of
any insolvency proceeding or proceeding under any chapter of the Federal
Bankruptcy Laws, or otherwise enters into any compromise with its creditors or
makes an unauthorized assignment for the benefit of creditors.
(2) In the event that the assets of LICENSEE are seized or
attached in conjunction with any action against it by any third party, and said
seizure or attachment is not released within thirty (30) days.
(3) In the event that payment is not timely made, as further
stated in paragraph 3, part b, subparagraph (6) of this License Agreement.
c. This License Agreement shall terminate on the date of the last to
expire of the LICENSED PATENTS that contains at least one claim that reads on
the LICENSED PRODUCTS.
10. Effect of Termination
Upon termination of this Agreement for any reason prior to the
expiration of the LICENSED PATENT, LICENSEE shall
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cease and desist from using and selling LICENSED PRODUCTS and/or IMPROVEMENTS.
11. Confidentiality
a. Confidential Information. Confidential information shall consist
of (i) any information designated as confidential, and (ii) any information
relating to the LICENSED PRODUCTS, LICENSED PATENTS, PROPRIETARY INFORMATION and
IMPROVEMENTS.
b. Exceptions. The restrictions set forth in Section a. shall not
apply to confidential information that (i) was generally known or otherwise
generally available to the public prior to disclosure hereunder, or becomes
generally known to the public subsequent to such disclosure through no wrongful
act or omission of the receiving party, (ii) was known to the receiving party at
time of disclosure, (iii) was received by the receiving party, without
restriction, from a third party not under any obligation to the other party not
to disclose it and otherwise not in violation of the other party's rights, (iv)
is disclosed by the receiving party pursuant to the order or requirement of a
court, administrative agency or governmental body, provided, however, that the
receiving party shall provide prompt notice thereof to the disclosing party to
enable the disclosing party to seek a protective order or otherwise prevent such
disclosure, or (v) has been approved for release in writing by the disclosing
party.
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c. Remedies. Any breach of the restrictions contained in this
Section 11 by a party to this Agreement is a breach of this Agreement which may
cause irreparable harm to the other party entitling such other party to
injunctive relief in addition to all legal remedies.
12. General
a. Entire Agreement: This Agreement sets forth the entire Agreement
and understanding of the parties relating to the subject matter contained herein
and merges all prior discussions between them. No claimed oral agreement in
respect hereto shall be considered as any part thereof. No modification or
claimed waiver of any of the provision hereof shall be valid unless in writing
and signed by authorized representatives of the party against whom such
modification or waiver is sought to be enforced.
b. Severability: Should any part or provision of this Agreement be
held unenforceable or in conflict with the law of any jurisdiction, the validity
of the remaining parts or provisions shall not be affected by such holding.
c. Assignability: LICENSEE agrees that it can neither assign its
rights nor delegate its duties under this Agreement. Notwithstanding the
foregoing, LICENSEE may assign its rights and delegate its duties under this
Agreement to an entity formed by LICENSEE together with equity investors
providing adequate capital for the commercialization of the LICENSED PRODUCTS
within the FIELD OF USE, provided that such
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assignee expressly agrees in writing to be bound by this Agreement and to
maximize the exploitation of the LICENSED PRODUCTS within the FIELD OF USE.
d. Governing Law: This Agreement shall be interpreted ana construed
and the legal relations created herein shall be determined in accordance with
the laws of the State of
California.
e. General Assurances: The parties agree to execute, acknowledge,
and deliver all such further instruments, and do all such other acts, as may be
necessary or appropriate from time to time in order to carry out the intent and
purpose of this Agreement.
f. Notices and Statements: Any notice, statement, or report
permitted or required to be given under the provision of this Agreement shall be
in writing signed by the party giving such notice, statement or report and shall
be sent to the appropriate address given below, unless such party has been
previously given ten (10) days' written notice of a change of address of the
party to receive such notice, statement or report shall be sent to the changed
address.
LICENSOR:
Sudor Partners
12341 Newport Avenue, D-200
Santa Ana, California 92705
LICENSEE:
CEO Advisors, Inc.
255 Revere Drive
Northbrook, Illinois 60062
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Any such notice, statement or report that is dispatched by prepaid
registered or certified mail shall be deemed to have been duly given upon
mailing thereof.
g. Waiver of Default Not Being a Waiver Forever: No waiver by
LICENSOR of any provision of this Agreement shall be deemed a waiver of any
other provision hereof or of any subsequent breach by LICENSEE of the same or
any other provision. LICENSOR's consent to, or approval of, any act shall not be
deemed to render unnecessary the obtaining of LICENSOR's consent to, or approval
of, any subsequent act by LICENSEE. The acceptance of late payment of fees due
hereunder by LICENSOR shall not be a waiver of the automatic termination
provisions of this License Agreement. No remedy or election as provided for in
this Agreement shall be deemed exclusive but shall, wherever possible, be
cumulative with all other remedies at law or in equity.
h. Product Liability Insurance: Prior to the first use of a LICENSED
PRODUCT clinically, LICENSEE shall add LICENSOR as a "NAMED INSURED" on its
product liability insurance coverage and provide satisfactory evidence thereof
to LICENSOR, and LICENSOR shall add LICENSEE as a "NAMED INSURED" on its product
liability insurance coverage.
i. Binding Effect. This Agreement shall be binding on and inure to
the benefit of LICENSOR and LICENSEE and their respective heirs, successors and
permitted assignees.
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j. Representations.
LICENSOR hereby represents as follows:
(1) LICENSOR is the owner of the LICENSED PATENTS;
(2) LICENSOR has not licensed to any other person or entity
any rights to the LICENSED PATENTS within the FIELD OF USE;
(3) to LICENSOR's knowledge, there are no actions, suits or
proceedings pending or threatened against LICENSOR in any way relating to the
LICENSED PATENTS; and
(4) to LICENSOR's knowledge, LICENSEE's use and sale of the
LICENSED PRODUCTS within the FIELD OF USE does not and will not infringe the
intellectual property rights of any third party.
LICENSOR
SUDOR PARTNERS
Dated: January 12, 1993 Signed: /s/ William R. Miller
--------------------------------
William R. Miller
Dated: January 12, 1993 Signed: /s/ Donald W. Schoendorfer
--------------------------------
Donald W. Schoendorfer
LICENSEE
CEO ADVISORS, INC.
Dated: January 11, 1993 Signed: /s/ Ellen A. Rudnick
--------------------------------
By: Ellen A. Rudnick, Chairman
Signed: /s/ Paul G. Kanan
--------------------------------
By: Paul G. Kanan, President
-22-
<PAGE>
AMENDMENT NO. ONE TO LICENSE AGREEMENT
This Amendment No. One to License Agreement (this "Amendment") is entered
into and made effective as of the 6th day of August, 1993, between Sudor
Partners ("Licensor") and CEO Advisors, Inc. ("Licensee").
R E C I T A L S:
A. Licensor and Licensee entered into a License Agreement dated December
31, 1992 (the "Original License"). Pursuant to the Original License, Licensor
and Licensee were to enter into a "Supply Agreement" with respect to any
"Licensed Product" under the Original License.
B. Concurrently herewith, (i) Licensor is licensing to Sudormed, Inc. (the
"Supplier") the right to manufacture and sell the "Licensed Product" and (ii)
Licensee and the Supplier are entering into a Supply Agreement for the purchase
and sale of "Licensed Product" (the "Supply Agreement").
C. As a material inducement to Licensor to agree to these arrangements and
the terms of the Supply Agreement, Licensor and Licensee agree to amend the
Original License as hereinafter provided.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. The term "Licensed Products", as defined in paragraph b. of section 1
of the Original License, shall mean the "Product" as defined in the Supply
Agreement.
2. There is hereby added to paragraph a. of section 2 of the Original
License the following sentence:
"If Licensee does not purchase for any year the Minimum Quantity, as
provided in paragraph 3.2 of Section 3 of the Supply Agreement, then the
foregoing license grant shall become nonexclusive as provided in such
paragraph 3.2."
3. The "Supply Agreement' referred to in paragraph a. of section 3 of the
Original License shall mean the Supply Agreement between Licensee and the
Supplier.
<PAGE>
4. There is hereby added to paragraph b. of section 9 of the Original
License a new item (4), which item (4) shall read in full as follows:
"(4) upon the termination of that certain Supply Agreement between
Licensee and Sudormed, Inc. dated August 6, 1993."
5. There is hereby added to paragraph a. of section 11 of the Original
License the following two sentences:
"Licensee shall not use any such confidential information other than to
exercise its rights hereunder, or disclose confidential information to any
third party without the prior written consent of Licensor. Any agent,
consultant or employee of Licensor must have signed a confidentiality
agreement agreeing to the foregoing prior to any such confidential
information being disclosed to such agent, consultant or employee."
IN WITNESS WHEREOF, the parties have executed this Amendment as of the day
and year first above written.
SUDOR PARTNERS
By:/s/ William R. Miller
--------------------------
William R. Miller, Partner
By:/s/ Donald W. Schoendorfer
--------------------------
Donald W. Schoendorfer,
Partner
CEO ADVISORS, INC.
By:__________________________
Ellen A. Rudnick, Chairman
By:__________________________
Paul G. Kanan, President
2
<PAGE>
SUPPLY AGREEMENT
THIS SUPPLY AGREEMENT (this "Agreement") is entered into as of the 6th day
of August, 1993 by and between SUDORMED, INC., a California corporation
("Sudormed"), and CEO ADVISORS, INC., an Illinois corporation ("Customer").
R E C I T A L S:
A. Customer and Sudor Partners entered into a License Agreement dated as of
December 31, 1992 (the "License Agreement").
B. The License Agreement provides that the Customer shall purchase from
Sudor Partners the "Licensed Products", as defined in the License Agreement,
pursuant to a "Supply Agreement".
C. Sudor Partners has licensed to Sudormed the right to manufacture and
sell to Customer the "Product' as defined in Section 1 below.
D. Sudormed and Customer desire to enter into this Agreement and
acknowledge that this Agreement constitutes the "Supply Agreement" referred to
in Recital B above. Concurrent herewith, Customer and Sudor Partners are
amending the License Agreement, and such amendment is a material inducement to
Sudormed to agreeing to the terms of this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt of which
is hereby acknowledged, the parties agree as follows:
1. Product Definition.
For purposes of this Agreement, "Product" shall mean an adhesive patch
meeting the specifications set forth on Exhibit A.
<PAGE>
2. Term and Termination.
2.1 Term. The term of this Agreement shall commence on the date hereof
and shall continue for a period terminating on the earlier to occur of (i) the
termination of the License Agreement or (ii) as otherwise provided in this
Agreement.
2.2 Termination Due to Monetary Default. If Customer fails to make
payment of any monetary amount when due under this Agreement, Sudormed may, at
its sole discretion, terminate this Agreement by providing notice of termination
to Customer, and, if such monetary amount is not paid in full within five (5)
days of such notice, such termination shall take effect immediately upon the
expiration of such five (5) day period.
2.3 Termination Due to Other Defaults. Except as provided in paragraph
2.2, upon a default by a party of any material obligation of such party in this
Agreement, the non-defaulting party may give notice in writing to the party in
default and the defaulting party shall have sixty (60) days from such notice to
cure the default. If the defaulting party does not cure the default within such
sixty (60) days, the non-defaulting party may terminate this Agreement by
providing notice of termination which shall take effect ten (10) days from the
giving of such notice by the defaulting party.
2.4 No Waiver. Termination under this Section 2 shall not relieve
either party of any obligation existing upon the date of termination or relieve
the defaulting party from liability for breach of this Agreement. Waiver by
either party of a single default or a succession of defaults shall not deprive
such party of any right to terminate this Agreement arising by reason of any
subsequent default.
2.5 Continuing Provisions. The termination of this Agreement shall not
relieve Sudormed and Customer of their respective obligations set forth in
Sections 4, 8, 9, 10 and 11, and obligations under then existing Quarterly
Purchase Orders for purchase and delivery
2
<PAGE>
of Product, except that the terminating party may elect whether such Quarterly
Purchase Orders will remain in effect.
3. Requirements.
3.1 Purchase and Sale. Customer agrees, for itself, its sublicensees,
and any entity controlled by or in control of Customer, to purchase all the
Product requirements of each of the foregoing from Sudormed and Sudormed shall
use its best efforts to supply all such Product, subject to the terms and
provisions of this Agreement. Notwithstanding anything in this Agreement to the
contrary, if (i) Sudormed proposes to give Customer credit under either
paragraphs 7.2 or 8.5 for more than five percent (5%) of any order (rather than
promptly replacing the defective Product), or (ii) Sudormed is unable to correct
a recurring problem in delivering non-defective Product timely, then Customer
shall not be obligated to purchase all of its requirements from Sudormed (in so
doing, Customer shall not be waiving any claims for breaches which may have
occurred). The use and sale by Customer of all Product so purchased shall be
subject to the restrictions, terms and provisions contained in the License
Agreement, and the sale of Product to Customer is conditioned upon Customer
complying fully with such restrictions, terms and provisions. It is understood
that Sudormed shall have the right to contract with respect to the manufacture
of the Product with such third parties as Sudormed deems advisable.
3.2 Minimum Purchase Orders. Notwithstanding anything in this
Agreement to the contrary, if Customer does not place purchase orders for any
year for the minimum number of units of Product set forth opposite such year on
Exhibit B to be delivered within ninety (90) days of the placement thereof (the
"Minimum Quantity"), then commencing on the first day of the next succeeding
year, and for all years thereafter irrespective of the quantity of Product
ordered, the license grant in paragraph 2.a. of the License Agreement shall
become and
3
<PAGE>
remain nonexclusive in accordance with the terms of the License Agreement. For
purposes hereof, the first year shall commence on the earlier of (i) the first
day of the calendar quarter following the calendar quarter in which the Customer
received approval from the United States Food and Drug Administration ("FDA") to
market the Product within the Field of Use (as defined in the License Agreement)
or (ii) March 30, 1996, and the first year shall be the successive twelve months
beginning with such date. The years thereafter shall be the successive twelve
month periods.
4. Price and Terms of Payment.
4.1 Purchase Price. The initial purchase price of the Product shall be
as set forth on Exhibit C. The Customer agrees that Sudormed may change the
price at any time and from time to time, provided, however, that any price
change shall be due to changes in Sudormed's direct Product costs. Sudormed
shall provide to the Customer such documents confirming any cost increases as
shall reasonably be requested from time to time by the Customer. In the event
that any such price change is such that the business relationship between the
parties is not beneficial economically, then the parties agree to negotiate the
price and, if a new price cannot be mutually agreed upon, the Customer may
either accept such price change as announced by Sudormed or terminate the
relationship by giving Sudormed written notice of such termination within thirty
(30) days of the announcement of such change, which termination shall be
effective upon the expiration of such thirty (30) day period. In addition to the
foregoing price, Customer shall be responsible for and pay or reimburse Sudormed
for any sales or use tax which may be imposed on any sale of Product under this
Agreement.
4.2 Terms of Payment. Sudormed will submit after each shipment an
invoice for the purchase price of the Product so shipped. The Customer shall
make payment to Sudormed the amount of such invoice within thirty (30) days of
the date of such invoice.
4
<PAGE>
5. Initial Order, Forecasts, Quarterly Orders, Minimums and Acceptance.
5.1 Initial Order. Sudormed shall deliver to Customer 2,000 units of
the Product as set forth on Exhibit D (the "Initial Order"). Customer does not
have to pay the purchase price provided for in paragraph 4.1 above for these
2,000 units.
5.2 Forecasts. For the first calendar quarter after the completion of
the Initial Order, and during the remaining term of this Agreement, the Customer
shall provide Sudormed at least one hundred eighty (180) days prior to the
beginning of each calendar quarter, a written forecast of the Customer's
anticipated maximum and minimum requirements of the Product for such quarter and
the succeeding three (3) calendar quarters.
5.3 Quarterly Orders; Minimums. For the first calendar quarter
commencing after the completion of the Initial Order, and during the remaining
term of this Agreement, the Customer shall provide to Sudormed at least one
hundred twenty (120) days prior to the beginning of each calendar quarter, a
written purchase order for Product for such calendar quarter (the "Quarterly
Purchase Order"). Each and every quarter the purchase order will include without
limitation the shipment destination and a requested delivery date or, in the
event that the Customer desires that Product be shipped in more than one
shipment, a shipment destination and a requested delivery date for each such
shipment. The Quarterly Purchase Order shall be for Product within the estimated
maximum and minimum requirements last provided to Sudormed by the Customer
pursuant to paragraph 5.2 above.
5.4 Acceptance. Within thirty (30) days after receipt of any Quarterly
Purchase Order, Sudormed shall accept such Quarterly Purchase Order in writing;
provided, however, that the Customer delivered such Quarterly Purchase Order to
Sudormed in accordance with the above. Acceptance of any order placed by
Customer does not constitute acceptance by
5
<PAGE>
Sudormed of any of the terms and conditions of those orders, except as to
quantity of Product involved. All orders are governed by the provisions of this
Agreement.
6. Shipment.
6.1 Reasonable Efforts. Sudormed shall use reasonable efforts to ship
all orders according to any reasonable shipping schedule and method of shipment
specified by the Customer, but Sudormed shall not be liable for failure to meet
shipping schedules.
6.2 Risk of Loss. All shipments of Product will be F.O.B. delivery to
the carrier at Sudormed's facilities or other domestic place of shipment to a
shipment destination selected by the Customer. Title and risk of loss or damage
shall pass to the Customer at the time of delivery of the Product to the
carrier.
6.3 Containers. Sudormed shall ship the Product to the Customer in
containers to be selected by Sudormed, provided that such containers are
reasonably acceptable to the Customer.
6.4 Costs of Shipment. All freight, insurance, and other shipping
expenses shall be borne by the Customer. The Customer shall also bear any and
all applicable taxes, duties, customs, brokerage fees and other similar charges
that may be assessed against shipments of the Product. The Customer shall
be-responsible for filing all freight claims.
6.5 Risk of Loss and Costs - Special Arrangements. Notwithstanding the
foregoing, if Sudormed has the Product manufactured by a third party and such
third party has agreed to retain title and bear the risk of loss until the
Product is delivered and has agreed to drop ship the Product directly to
Customer at such party's cost, then Customer shall be entitled to the same terms
as Sudormed with respect to such shipment.
6
<PAGE>
7. Manufacturing Standards and Quality Assurance.
7.1 Specifications. Sudormed will manufacture Product for Customer in
accordance with the manufacturing specifications set forth in the attached
Exhibit A, and any further specifications as shall be furnished by Customer and
agreed to in writing by Sudormed (the "Specifications").
7.2 Acceptance of Product. Customer may reject any Product which does
not conform to the Specifications within forty-five (45) days after receipt of
such Product and, if not so rejected, shall be deemed to have been accepted. Any
such rejection must be accompanied by a detailed explanation of the
nonconformance. IF ANY PRODUCT IS NOT IN COMPLIANCE WITH THE SPECIFICATIONS,
SUDORMED'S SOLE OBLIGATION SHALL BE TO PROMPTLY REPLACE THE DEFECTIVE PRODUCT OR
TO CREDIT CUSTOMER'S ACCOUNT.
7.3 Manufacturing Practices. Sudormed will manufacture Product in
accordance with good manufacturing practices as defined under the United States
Food, Drug and Cosmetic Act, and maintain records and files, as legally
required.
8. Indemnities, Product Warranty, Liability Limitation.
8.1 Customer's Indemnity. Customer shall defend, indemnify and hold
harmless Sudormed from any and all loss or liability for any and all claims,
causes of action, suits, proceedings, losses, damages, demands, fees, expenses,
fines, penalties and costs (including without limitation attorney's fees, costs
and disbursements) arising from any injury or alleged injury to any person or
business for property damage, personal injury or incidental, special or
consequential damages arising out of or based upon the Product or its use unless
any such loss or liability was due primarily to Sudormed's failure to
manufacture the Product in accordance with the specifications set forth in
Exhibit A.
7
<PAGE>
8.2 Sudormed's Indemnity. Sudormed shall defend, indemnify and hold
harmless Customer from any and all loss or liability for any and all claims,
causes of action, suits, proceedings, losses, damages, demands, fees, expenses,
fines, penalties or costs (including without limitation attorney's fees, costs
and disbursements) arising from any injury or alleged injury to any person or
business for property damage, personal injury or incidental, special or
consequential damages to the extent that it results from Sudormed's failure to
manufacture the Product in accordance with the specifications set forth in
Exhibit A as determined at the time the Product is delivered to the carrier as
provided in paragraph 6.2 above; provided, however, Sudormed shall be liable
only to the extent its failure to meet specifications at the time of delivery
resulted in the harm or injury for which Customer seeks indemnification.
Sudormed shall also not be obligated to indemnify Customer for any loss or
liability which results from or is caused by or is based upon any loss or
liability referred to above in paragraph 8.1 for which Sudormed is entitled to
indemnification.
8.3 Defense. Customer and Sudormed shall promptly notify each other of
any claims under paragraphs 8.1 and 8.2 of this Agreement. Each party shall be
entitled to control its own legal defense of any claim. To the extent that one
party is indemnifying the other party pursuant to paragraph 8.1 or 8.2 of this
Agreement, the indemnifying party shall have the sole control of the defense
and, in such event, to the extent that the indemnified party incurs its own
legal costs, such legal costs shall be borne by the indemnified party.
Furthermore, the indemnified party shall provide, at the indemnifying parry's
expense, information and assistance as the indemnifying party may reasonably
request for the purpose of defense. In no event shall the indemnified party be
entitled to settle any claim without the consent of the indemnifying party,
which consent shall not be unreasonably withheld.
8
<PAGE>
8.4 Product Warranty. Sudormed warrants only that the Product will
meet the applicable physical product specifications set forth in Exhibit A at
the time of delivery to the carrier for shipment. Sudormed specifically does not
warrant the Product for any unintended uses (whether or not foreseeable), for
incompatibility or unsuitability with other product components or with
pharmaceutical compounds, for noninfringement (other than to the same extent as
warranted by Sudor Partners under the License Agreement), for intolerance to
methods of sterilization, handling or storage, or for the suitability or
acceptability of the product specifications, nor does Sudormed make any warranty
on whether the Product will perform as anticipated. Customer shall make its own
independent determination of the Product's suitability and acceptability. THIS
WARRANTY IS MADE IN PLACE OF ANY OTHER WARRANTIES. SUDORMED NEITHER EXPRESSES
NOR IMPLIES ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
8.5 Exclusive Remedy. CUSTOMER'S SOLE AND EXCLUSIVE REMEDY FOR ANY
DEFECTIVE PRODUCTS OTHER THAN AS SPECIFIED IN PARAGRAPHS 8.1 THROUGH 8.4 IS, AT
SUDORMED'S OPTION, TO SEEK REPLACEMENT OR TO SEEK A CREDIT TO ITS ACCOUNT FOR
THE DEFECTIVE PRODUCTS.
8.6 Limited Liability. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO
THE CONTRARY, SUDORMED WILL NOT BE LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF
THIS AGREE UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGEND OR
EQUITABLE THEORY (i) FOR ANY LOST PROFITS, INCIDENTAL OR CONSEQUENTIAL DAMAGES,
EVEN IF SUDORMED HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, OR (ii)
FOR COST OF PROCUREMENT OF SUBSTITUTE GOODS.
9
<PAGE>
9. Insurance.
Customer will maintain liability insurance covering such risks as are
appropriate in accordance with sound business practice and its obligations under
this Agreement including, but not limited to, at least the following liability
coverages and limits:
Annual Product Amount of Insurance
Sales Revenue Coverage
------------- --------
Under $1,000,000 $2,000,000
$1,000,000 to $5,000,000 $5,000,000
$5,000,001 to $10,000,000 $10,000,000
Over $10,000,000 $20,000,000
Customer shall provide Sudormed with a certificate of insurance
evidencing the existence of these coverages.
10. Product Approvals: Regulatory Compliance.
Sudormed does not represent that the Product has been approved for
marketing by the FDA or is covered by any application for approval for marketing
filed with the FDA, or any comparable regulatory authority in the world.
Customer shall, with respect to the use, sale or promotion of the Product, (i)
comply with all applicable laws, regulations and standards of industry
(including the maintenance and retention of records regarding sales and
customers), and (ii) obtain and maintain all applicable approvals, registrations
or notifications. Customer shall immediately notify Sudormed of any adverse or
unexpected result or any actual or potential government action with respect to
the Product.
11. Trademarks; Confidential Information.
11.1 Trademarks; Approval of Certain Materials, Etc. The parties agree
that Sudormed is to use Customer's own trademark(s) on the packaging of the
Products. It is agreed that Customer is not authorized or licensed to use
Sudormed's trademark(s) for any purpose, except as permitted by Sudormed, either
during the term of this Agreement or thereafter.
10
<PAGE>
Customer agrees that all labels and any other written material mentioning either
the Product or Sudormed's name shall not be used or distributed without the
prior written consent of Sudormed.
11.2 Confidential Information. Customer and Sudormed acknowledge that
each will receive confidential information from the other party. Both parties
agree that during the term of this Agreement each shall only use confidential
information to carry out the purposes of this Agreement, shall keep secret all
such confidential information and shall use such care as each uses in
maintaining the confidentiality of its own secret information. The obligations
under this Section 11.2 shall survive termination of the Agreement.
11.3 Exceptions. The obligation of confidentiality under paragraph
11.2 shall not apply:
(a) to information known, as shown by written record, at the time
of receipt thereof from the other party; or
(b) to information which is lawfully received from a third party
under no obligation of confidentiality; or
(c) to information which at the time of disclosure was in the
public domain or thereafter becomes part of the public domain through no breach
of this Agreement.
12. Miscellaneous.
12.1 Excused Performance. Neither Customer nor Sudormed shall be
considered in default or be liable to the other party for any delay in
performance or non-performance caused by circumstances beyond the reasonable
control of such party, including but not limited to acts of God, explosion,
fire, flood, war (whether declared or not), accident, labor strike or labor
disturbances, inability to procure supplies from third party vendors, sabotage,
order or decree of any court or action of government authority.
11
<PAGE>
12.2 No Assignment. Customer may not assign this Agreement or the
rights herein granted or obligations undertaken to any other party without the
express written consent of Sudormed. Notwithstanding the foregoing, Customer
shall be entitled to assign its rights and delegate its duties under this
Agreement as provided in Section 12.c. of the License Agreement.
12.3 Governing Law. This Agreement shall be interpreted under and
governed by the laws of the State of California notwithstanding any choice of
law provision to the contrary. The courts in Orange County, California (with the
Federal court being the first choice) shall have exclusive jurisdiction over and
venue to hear any and all disputes arising under or concerning this Agreement,
and each of the parties hereby submits itself to the exclusive jurisdiction and
venue of such courts for the purpose of such actions.
12.4 Severability. The provisions of this Agreement shall be deemed
severable. If any part of this Agreement is rendered void, invalid or
unenforceable, such rendering shall not affect the validity and enforceability
of the remainder of this Agreement unless the part or parts which are void,
invalid or unenforceable as aforesaid shall substantially impair the value of
the whole Agreement to either party.
12.5 Entire Agreement; Modification. This Agreement and Exhibits A, B
and C attached to this Agreement set forth the entire agreement between the
parties relating to the subject matter contained in this Agreement. This
Agreement may not be modified, amended or discharged except as expressly stated
in this Agreement or by a written agreement signed by the parties hereto.
12.6 Notices. Any and all communications provided for in this
Agreement shall be in writing and sent by first class mail, postage prepaid and
addressed to the last known address of the parties to be served therewith.
Communications sent by Certified Mail - Return
12
<PAGE>
Receipt Requested, shall be deemed to have been duly given upon the mailing
thereof. Any communication to be given to Sudormed shall be addressed to:
Sudormed, Inc.
12341 Newport Avenue, Suite D200
Santa Ana, California 92705
Any communication to be given to Customer shall be addressed to:
CEO Advisors, Inc.
255 Revere Drive, Suite 108
Northbrook, Illinois 60062
Any change in address shall be promptly communicated in writing from either
party to the other party.
12.7 Binding Effect. This Agreement shall be binding on and inure to
the benefit of the parties hereto and their respective successors and assigns.
12.8 Attorneys' Fees. If legal action is instituted on this Agreement,
the prevailing party shall be entitled to recover all costs of suit, including
reasonable attorneys' fees.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
SUDORMED, INC., CEO ADVISORS, INC.,
a California corporation an Illinois corporation
By:/s/ William R. Miller By:/s/ Paul G. Kanan
--------------------- ------------------
Its: President Its: President
13
<PAGE>
ASSIGNMENT OF LICENSE AND SUPPLY AGREEMENTS - CONSENT
This Agreement is made and entered into by and between SUDOR PARTNERS, a
partnership organized under the laws of the State of California ("Sudor"), CEO
ADVISORS, INC., an Illinois corporation ("CEO") and BIOQUANT, INC., a Michigan
corporation ("BioQuant").
W I T N E S S E T H:
WHEREAS, Sudor and CEO have previously entered into a License Agreement
related to osteoporosis, effective as of December 31, 1992, and amended August
6, 1993; a Supply Agreement related to osteoporosis effective as of August 6,
1993; and a License Agreement related to lead effective as of October 1, 1993;
all of the foregoing referred to herein as the "Agreements" and attached hereto
as Exhibit A; and
WHEREAS, CEO desires to assign all of its right, title and
interest in and to the Agreements to BioQuant; and
WHEREAS, BioQuant desires to obtain an assignment of the rights of CEO
under the Agreements provided that Sudor consents to this assignment;
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties, Sudor, CEO and BioQuant hereby agree as follows:
1. Assignment. CEO hereby assigns to BioQuant, effective as of October 15,
1993 (the "Effective Date"), all of its right, title and interest in and to the
Agreements. CEO represents and warrants to BioQuant that, as of the Effective
Date, the Agreements are in full force and effect, neither Sudor nor CEO is in
default of any of their respective obligations under the Agreements, and the
Agreements have not been amended or modified, other than as already indicated
above.
BioQuant agrees to accept an assignment of the Agreements and to be bound
by all of their terms and to perform all of the obligations of CEO under the
Agreements from and after the Effective Date with a view to maximizing the
exploitation of the licensed products within the field of use.
2. Indemnifications.
(a) CEO agrees to indemnify and hold BioQuant harmless from any
liabilities, claims or obligations arising under the Agreements prior to the
Effective Date.
<PAGE>
(b) BioQuant agrees to indemnify and hold CEO harmless from any
liabilities, claims or obligations (including reasonable attorneys' fees)
arising under the Agreements from and after the Effective Date.
3. Acknowledgement and Consent to Assignment. Sudor has executed this
Agreement solely for the purpose of acknowledging, and consenting to, the
assignment of the rights of CEO under the Agreements to BioQuant. In connection
therewith, Sudor represents and warrants to BioQuant that as of the date of its
execution of this Agreement, the Agreements are in full force and effect,
neither Sudor or CEO is in default of any of their respective obligations under
the Agreements, and the Agreements have not been further amended or modified.
IN WITNESS WHEREOF, the parties hereby have executed this Agreement on the
dates set forth below.
SUDOR PARTNERS
Dated: October 7, 1993 By:/s/ William R. Miller
---------------------------
William R. Miller, Partner
Dated: September 7, 1993 By:/s/ Donald W. Schoendorfer
-------------------------------
Donald W. Schoendorfer, Partner
CEO ADVISORS, INC.
Dated: October 14, 1993 By:/s/Paul G. Kanan
---------------
Its: President
BIOQUANT, INC.
Dated: October 14, 1993 By:/s/ Mary L. Campbell
------------------
Its: Secretary
2
<PAGE>
Development Agreement
This Agreement is entered into as of October 4, 1995 (the "Effective
Date") by BioQuant, Inc., a Michigan corporation ("BioQuant"), and Assay
designs, inc., a Georgia corporation ("ADI").
Recitals
A. BioQuant is engaged in the business of developing non- invasive
diagnostic products for the early detection of serious health problems affecting
a large population.
B. ADI is engaged in the business of designing and developing immunoassays
and immunoassay test kits.
C. BioQuant wants ADI to develop immunoassays and immunoassay test kits
for BioQuant on the following terms and subject to the following conditions.
In consideration of their mutual promises, the parties agree as follows:
Article 1
Immunoassay Development
1.1 General. This Agreement relates to ADI's development for BioQuant of a
pyridinoline immunoassay and a deoxypyridinoline immunoassay (the
"Immunoassays") and related test kits.
1.2 Specifications. The specifications for the Immunoassays and related
test kits (the "Specifications") shall be determined as follows:
(a) Within 30 days after the Effective Date, BioQuant shall provide ADI
with proposed specifications for the Immunoassays and related test
kits.
(b) Within 15 days after receipt of BioQuant's proposed specifications,
ADI shall provide BioQuant with any comments and suggested
revisions.
(c) If ADI does not have any suggested revisions, BioQuant's proposed
specifications shall be the Specifications.
(d) If ADI has any suggested revisions and BioQuant agrees to them,
BioQuant's proposed specifications as so revised shall be the
Specifications. If BioQuant does not agree to ADI's suggested
revisions, BioQuant and ADI shall attempt to resolve their
differences as promptly as possible. If BioQuant and ADI are unable
to agree on the
<PAGE>
Specifications within 15 days after BioQuant's receipt of ADI's
suggested revisions, either party may terminate this Agreement by
written notice to the other.
(e) If and when agreed on, the Specifications shall be attached to this
Agreement as Exhibit A.
1.3 Development Timetable. A timetable for ADI's development of the
Immunoassays and related test kits is attached to this Agreement as Exhibit B
(the "Timetable"). The Timetable identifies the various steps and specifies the
required date of completion of each step by ADI. BioQuant and ADI have agreed as
follows in respect of the Timetable:
(a) The Timetable assumes that the Specifications were agreed on as of
October 1, 1995. If and when the Specifications are agreed on, the
date for ADI's completion of each step on the Timetable shall be
extended by the same number of days as the number of days after
October 1, 1995 that the Specifications were actually agreed on.
(b) The Timetable requires ADI's delivery to BioQuant of clinical trial
test kits for both Immunoassays no later than May 1, 1996 (as this
date may be extended in accordance with Paragraph 1.3(a)). The
quantity to be delivered shall be sufficient to provide at least
10,000 immunoassay determinations for the Immunoassays (divided
equally between pyridinoline and deoxypyridinoline unless BioQuant
and ADI agree otherwise). At least 10 days prior to ADI's delivery
of the test kits, ADI shall provide BioQuant with samples to permit
it to validate that the test kits to be delivered by ADI will
conform to the Specifications.
(c) ADI shall supply all clinical trial test kits delivered to BioQuant
in compliance with current standards of the U.S. Food and Drug
Administration (the "FDA") for good manufacturing practices ("GMP").
With the exception of this obligation on the part of ADI, BioQuant
shall be solely responsible for making or obtaining any submissions
or regulatory approvals and for otherwise complying with all
applicable requirements of the FDA (or any foreign equivalent)
relating to the manufacture or use of the clinical trial test kits.
(d) BioQuant may terminate this Agreement by written notice to ADI if
ADI fails to complete any step on the Timetable by the date required
for its completion (as
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<PAGE>
that date may be extended in accordance with Paragraph 1.3(A)).
Article 2
Payments
2.1 Payments. Subject to Paragraph 2.2, BioQuant shall pay ADI for its
development of the Immunoassays and related test kits as follows:
(a) BioQuant shall pay ADI $25,000 on the Effective Date;
(b) BioQuant shall pay ADI $10,000 on the first day of each month for 12
consecutive months beginning on November 1, 1995 and ending on
October 1, 1996;
(c) BioQuant shall pay ADI $25,000 when ADI delivers clinical trial test
kits supplied in compliance with GMP in a quantity sufficient to
provide at least 10,000 immunoassay determinations; and
(d) BioQuant shall pay ADI $26,000 when ADI completes the last step
specified on the Timetable.
BioQuant shall pay a late charge of 5% of any payment which is not made within
10 days after ADI gives BioQuant written notice that ADI did not receive the
payment when due. If BioQuant fails to make any payment within 30 days after it
becomes due, ADI may terminate this Agreement by written notice to BioQuant. The
$25,000 payable under Paragraph 2.1(c) shall be reduced by $250 per day for each
day that ADI is late in delivering the pyridinoline clinical trial test kits and
by $100 per day for each day that ADI is late in delivering the
deoxypyridinoline clinical trial test kits. ADI shall not be considered late in
delivering clinical trial test kits to BioQuant to the extent that ADI's delay
in delivery is attributable to (1) any delay by BioQuant in validating the
samples that ADI provides to BioQuant pursuant to Paragraph 1.3(b) or (ii) any
delay by BioQuant in supplying ADI with rare reagent raw materials in accordance
with Paragraph 5.1.
2.2 Termination of Payments. BioQuant's payments under Paragraph 2.1 shall
be subject to the following conditions:
(a) If either BioQuant or ADI terminates this Agreement under Paragraphs
1.2(d) (because BioQuant and ADI are unable to agree on the
Specifications), BioQuant shall have no obligation to make any
further payments to ADI under Paragraph 2.1, and ADI shall promptly
refund BioQuant's payment under Paragraph 2.1(a), and any payments
under Paragraph 2.1(b), less ADI's reasonable disbursements and
expenses prior to termination.
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<PAGE>
(b) If BioQuant terminates this Agreement under Paragraph 1.3(d)
(because ADI failed to complete any step on the Timetable by the
date required for its completion), BioQuant shall have no obligation
to make any further payments under Paragraph 2.1.
(c) If ADI terminates this Agreement under Paragraph 2.1 (because
BioQuant failed to make a payment within 30 days after the payment
became due), BioQuant shall not be relieved of its obligation to
make the delinquent payment (or payments) but shall have no
obligation to make any other payments under Paragraph 2.1.
Article 3
Reports
3.1 Monthly Reports. No later than 10 days after the end of November 1995
and each subsequent month during the term of this Agreement, ADI shall provide
BioQuant with a written report (i) describing in reasonable detail all research
and other work that ADI performed under this Agreement during the month and any
new scientific information and data to emerge from this work, (ii) identifying
the personnel performing the work (by job title or classification) and listing
the number of hours that each of them worked and (iii) evaluating the rate of
progress during the month (relative to the Timetable). The information required
to be included in the monthly report pursuant to clause (i) shall include such
of ADI's laboratory data as ADI and BioQuant may agree shall be included (but
ADI shall not be required to include laboratory data which is proprietary to ADI
or to other of its clients).
3.2 Quarterly Meetings. At BioQuant's request, representatives of ADI
(including Russell Hart, Ph.D.) shall meet with representatives of BioQuant for
no longer than one business day at least once each calendar quarter, on a
mutually convenient date, to review ADI's progress and its plans for future
work. These meetings shall take place at ADI's offices in Ann Arbor, Michigan
unless BioQuant agrees to pay the reasonable expenses of ADI's representatives
to attend a meeting at BioQuant's offices in Irvine, California or at another
location specified by BioQuant.
3.3 Special Deoxypyridinoline Report. At BioQuant's request at any time
after 12 weeks from the Effective Date, ADI shall provide BioQuant with a
special report describing in reasonable detail ADI's progress to date in
developing the deoxypyridinoline Immunoassay.
Article 4
Technical Information
4.1 Technical Information. At BioQuant's request, ADI shall provide
BioQuant with copies of all Technical Information required to manufacture the
Immunoassays and related test kits in order to enable BioQuant itself to
manufacture them (or have a third party manufacture them). The term "Technical
Information" means any written protocols for the manufacturing, testing and
storage of the subject immunoassay determinations and any written descriptions
of the relevant techniques, processes and know-how.
4.2 Patents. BioQuant shall determine whether any Technical Information is
or may be appropriate for patent protection. If BioQuant determines that patent
protection is appropriate, BioQuant shall be the owner of any patent that may be
issued regardless of who performed the development work or who the inventors
were. ADI shall cooperate in all patent applications or maintenance activities
that BioQuant reasonably requests (subject to reimbursement of ADI's reasonable
expenses).
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<PAGE>
4.3 Qualifications. ADI's obligation under Paragraph 4.1 to provide copies
of all Technical Information to BioQuant at its request shall be subject to the
condition that BioQuant has made all payments to ADI that BioQuant is required
at the time to have made under Paragraph 2.1.
Article 5
Miscellaneous
5.1 Rare Reagents. BioQuant shall supply ADI with the quantities of all
rare reagent raw materials (including antibodies, antigens and conjugates) that
ADI reasonably requires in connection with its development of the Immunoassays
and that BioQuant is able to purchase under its license agreement with Metra
Biosystems, Inc.
5.2 Confidentiality. During the term of this Agreement, either party (the
"Disclosing Party") may disclose to the other (the "Receiving Party")
information that the Disclosing Party considers confidential or proprietary.
Both parties desire to protect their respective confidential or proprietary
information from unauthorized disclosure or use. In addition, BioQuant wants
similar protection for all information relating to the Immunoassays and related
test kits. The parties accordingly agree as follows:
(a) The Receiving Party shall keep all Confidential Information in
strictest confidence, using the same degree of care that the
Receiving Party uses to protect the confidentiality of its own
confidential or proprietary information (but, in any case, using
reasonable care).
(b) The Receiving Party may use Confidential Information only for the
purpose of performing this Agreement and may disclose Confidential
Information only to those of its employees and independent
contractors whose knowledge of or access to the Confidential
Information is required for this purpose. The Receiving Party shall
take appropriate steps to insure that its employees observe the
restrictions of this Paragraph 5.2.
(c) Except as permitted under Paragraph 5.2(b), the Receiving Party
shall not under any circumstances, either during the term of this
Agreement or at any time prior to the fifth anniversary of the
termination of this Agreement (whether by completion of performance
of otherwise), directly or indirectly use any Confidential
Information for its own benefit or disclose any Confidential
Information to a third party.
(d) The term "Confidential Information" means:
(1) any information relating to the Disclosing Party or its
business (for example, its suppliers or its licenses and other
contractual relationships) which is not a matter of public
knowledge; and
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<PAGE>
(2) any other information in any form which the Disclosing Party
discloses to the Receiving Party and which (i) if the
information is in a tangible form, the Disclosing Party stamps
or marks "confidential" or "proprietary" or which (ii) if the
information is disclosed orally, the Disclosing Party then
provides in tangible form stamped or marked "confidential" or
"proprietary" (or otherwise confirms as confidential or
proprietary by written notice to the Receiving Party) within
10 days after the oral disclosure.
The term "Confidential Information" does not include: (i)
information which was a matter of public knowledge as of the
Effective Date or which becomes a matter of public knowledge during
the term of this Agreement other than as a result of the Receiving
Party's violation of this Paragraph 5.2; or (ii) information which
the Receiving Party acquires during the term of this Agreement other
than as a result of a third party's violation of a duty of
confidentiality.
(e) Paragraphs 5.2(a), (b) and (c) shall apply to ADI in respect of all
Technical Information specifically relating to the development,
evaluation, composition or manufacture of the Immunoassays or
related test kits (as if this information were Confidential
Information that BioQuant disclosed to ADI).
(f) The parties agree that all information subject to the
confidentiality agreement that they entered into as May 17, 1994,
together with all information that would have been subject to that
agreement but for its expiration, shall be considered "Confidential
Information" for purposes of this Agreement.
5.3 Indemnification. BioQuant shall indemnify ADI and its officers,
directors, employees and agents against, and hold them harmless from, any and
all claims, suits, liabilities, losses and expenses arising out of or relating
to the manufacture or use of the Immunoassays and related test kits (except for
any such matters arising out of ADI's failure to supply clinical trial test kits
in compliance with GMP).
5.4 Supply Agreement. At BioQuant's request, BioQuant and ADI shall
negotiate in good faith regarding an agreement under which ADI would supply
BioQuant with conjugate controls, control reagents and antibodies for purposes
of manufacturing test kits following the completion of this Agreement upon the
development of the Immunoassays and related test kits.
5.5 Notices. All notices under this Agreement shall be in writing and sent
by certified or registered mail, overnight courier service, telecopier or
personal delivery, as follows:
(a) if to BioQuant, to:
BioQuant, Inc.
1370 Reynolds Avenue
Suite 119
Irvine, California 92714
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<PAGE>
Attention: Mr. Paul G. Kanan
Telecopier: (714) 263-9939
(b) if to ADI, to:
Assay designs, inc.
1919 Green Road
Ann Arbor, Michigan 48105
Attention: Dr. Russell Hart
Telecopier: (313) 668-2793
All notices sent by certified or registered mail shall be considered to have
been given three business days after being deposited in the mail, and all
notices sent by overnight courier service, telecopier or personal delivery shall
be considered to have been given when actually received by the intended
recipient. A party may change its address or telecopier number for purposes of
this Agreement by notice in accordance with this Paragraph.
5.6 Entire Agreement. This Agreement (with Exhibit B, and with Exhibit A
when attached) represents the entire agreement of the parties with respect to
its subject matter, and supersedes all prior written or oral agreements or
understandings by the parties with respect to its subject matter.
5.7 Captions. The captions of articles and paragraphs of this Agreement
have been inserted for convenience only and shall not affect the interpretation
of this Agreement.
5.8 Relationship of Parties. BioQuant and ADI shall not be considered
partners, joint venturers or one another's agents or employees, and neither of
them shall have the right to act on the other's behalf except as they expressly
agree in writing.
5.9 Amendment. No amendment or modification of this Agreement shall be
effective unless it is in writing and signed by both parties.
5.10 Governing Law. This Agreement shall be governed by the laws of the
State of Michigan (excluding its choice-of-law rules).
5.11 Binding Effect. This Agreement shall be binding on and inure to the
benefit of the parties and their successors and permitted assigns.
*
*
*
*
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<PAGE>
In witness, the parties have signed this Agreement.
BioQuant Inc.
a Michigan corporation
By /s/ Paul G. Kanan
-----------------
Paul G. Kanan
President
Assay designs, inc.,
a Georgia corporation
By /s/ Russell Hart
-----------------
Russell Hart, Ph.D.
President
October 9, 1995
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<PAGE>
AGREEMENT BETWEEN PACIFIC BIOMETRICS, INC. AND SIGMA DIAGNOSTICS
This Agreement (hereinafter the "Agreement") is made in St.
Louis, Missouri by and between Pacific Biometrics Inc., Seattle,
Washington (hereinafter "PBI"), and Sigma Diagnostics (hereinaf-
ter "SIGMA"), a division of Sigma Chemical Company.
WHEREAS, PBI desires to sell and/or market its products and
SIGMA desires to purchase certain of PBI's products for resale to
customers bearing a SIGMA logo and a Pacific Biometrics Inc.
(PBI), Seattle, Washington, trademark reference on product la-
bels, inserts, applications, and promotional pieces (to include
advertisements) to the SPINPRO(R) and PBI PLUS(TM) trademarks.
WHEREAS, the parties desire to enter into an agreement set-
ting forth the terms of their relationship;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, the parties do hereby agree as fol-
lows:
1. Products. The products of PBI covered by this Agree-
ment are set forth on Exhibit A attached hereto (here-
inafter the "Product(s)"). PBI reserves the right to
discontinue or modify the Products from time to time,
and shall give SIGMA at least six (6) months prior
written notice before discontinuation or changes which
would impact product labeling or promotional litera-
ture; provided, however, that PBI shall be required to
provide SIGMA with only reasonable advance notice where
such discontinuance or modification is required to
comply with any applicable legal or regulatory require-
ment or the unanticipated modification or unavailabili-
ty of raw material. Additional Products may be added
to the Exhibit by mutual written consent of the par-
ties.
2. Appointment and Acceptance.
(a) SIGMA shall be permitted to exclusively distribute
(with the exception of Physician Sales and Ser-
vice, hereinafter "PSS") the Products in the
United States, its possessions and territories,
the United Kingdom, France, Spain, Germany, Italy,
the Benelux and other countries if mutually agreed
upon in the future (the "Territory") and non-ex-
clusively in the rest of the world. Exclusivity
is based on meeting the requirements listed on
Exhibit A.
(b) Except for sales to PSS, PBI relinquishes the
right to sell the Products in the Territory, ei-
ther directly or indirectly, to any party under
either its own or any
1
<PAGE>
third party's trademark or trade name.
PBI agrees the price charged to any 3rd party
will be greater than the price charged to
SIGMA unless such 3rd party buys in the same or
larger aggregate quantities.
3. Term and Renewal. The term of this Agreement shall be
for a period of three (3) years commencing on the date
that it is signed by the last signing party (the "Ini-
tial Term"). This Agreement shall automatically renew
for additional and successive terms of one (1) year
unless either party provides written notice of non-
renewal at least one-hundred twenty (120) days prior to
the close of the Initial Term of or any anniversary
date thereafter.
4. Terms of Sale.
(a) A current price list is attached as part of Exhib-
it A. This price list shall remain in effect with-
out change for twelve (12) months after the com-
mencement date of this Agreement. Thereafter, PBI
may furnish SIGMA with changes to its price list
annually. Such notification shall occur at least
ninety (90) days prior to the succeeding Agreement
year. A price increase shall not exceed the
greater of 2% or the annual percent change in the
Producer Price Index for in vitro diagnostics for
the twelve (12) month period immediately preceding
the date of notification of any price change, as
reported by the U.S. Department of Labor, Bureau
of Labor Statistics (the "Price Index"). If the
Price Index is not available for any reason, the
parties shall select another index of general
inflation for purposes of calculating such annual
price increase. Notwithstanding any provision set
forth herein to the contrary, PBI reserves the
right to amend the pricing for any Product from
time to time upon thirty (30) days prior written
notice to SIGMA in the event of a documented in-
crease in PBI's cost of raw materials or labor for
the Product which would increase PBI's production
cost by five (5) percent or greater. In such
event, PBI will provide documentation to SIGMA to
support such price increase.
(b) Payment terms are net thirty (30) days.
(c) Title and risk of loss shall pass to SIGMA upon
release of Products for shipment by PBI to the
designated carrier (F.O.B. Irvine, California).
All freight and applicable insurance charges shall
be the responsibility of SIGMA. PBI will be re-
sponsible for selecting and contracting freight
services in
2
<PAGE>
accordance with Section 8(a) of this
Agreement, for which SIGMA will be billed on a
shipment by shipment basis. Products are subject
to inspection and acceptance by SIGMA upon
receipt. SIGMA shall be deemed to have accepted
all shipments of Products unless rejected for non-
conformity with the Quality Specifications, as
hereinafter defined, in accordance with Article 9
of this Agreement, within ten (10) working days
after receipt of shipments from PBI.
(d) Unless approved by SIGMA in writing, PBI will not
sell any Product listed on Exhibit A hereto as of
the effective date hereof to SIGMA that has less
than 18 months shelf-life from date of shipment by
PBI. SIGMA agrees that the first 250,000 SPINPRO(R)
units may have dating less than 18 months, but
greater than 12 months.
(e) All products will be shipped to one (1) warehouse
location, as designated in writing by SIGMA. The
warehouse location may be changed by SIGMA every
January 1st and July 1st during the term of the
Agreement provided at least 21 days written notice
of the change is provided to PBI.
(f) SIGMA will place an initial order of no less than
250,000 units within 10 days of final contract
signature.
(g) SIGMA will undertake its best efforts to sell
SPINPRO(R) in all available markets including large
volume users such as national reference laborato-
ries, federal and military institutions, manufac-
turers of chemistry instruments or reagents, man-
aged care institutions, buying groups or other
large purchasers. In the event that SIGMA must
bid less than $0.55 per pricing, SIGMA will ask
PBI for special pricing. SIGMA agrees to provide
proof of sale at the discounted price.
5. Termination. Should any of the following events occur,
the affected party may terminate this Agreement by
giving notice, in writing to be effective on the date
specified in the notice, namely,
(a) failure of either party to observe any of the
terms hereof to a material extent and to remedy
the same (where it is capable of being remedied)
after having received reasonable notice from the
aggrieved party and a reasonable opportunity to
cure;
3
<PAGE>
(b) either party becoming insolvent or having a re-
ceiver appointed of its assets, or execution or
distress levied upon its assets;
(c) an order being made or a resolution being passed
for the winding up or liquidation of either party;
6. Procedures on Termination. Upon termination or non-
renewal of this Agreement:
(a) SIGMA shall return to PBI all literature which PBI
shall have supplied to SIGMA and which is in its
possession.
(b) the rights and duties of each party under this
Agreement in respect of performance prior to ter-
mination or non-renewal shall survive and be en-
forceable in accordance with the terms of this
Agreement.
(c) within thirty (30) days of receipt of PBI's in-
voice therefor, SIGMA will pay PBI for all remain-
ing inventory of Products for which SIGMA has
issued purchase orders to PBI. Upon payment, PBI
will ship such inventory to SIGMA at SIGMA's ex-
pense.
NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR COMPEN-
SATION, REIMBURSEMENT OR DAMAGES ON ACCOUNT OF LOSS OF
PROSPECTIVE PROFITS, GOODWILL, EXPENDITURES OR OTHER-
WISE.
7. SIGMA's Duties. SIGMA shall:
(a) use its best efforts during the term of this
Agreement to purchase for sale, consistent with
Exhibit A, the minimum quantities listed on Exhib-
it A. Best effort is defined as the effort commen-
surate to that given to any of SIGMA's focus prod-
ucts. SIGMA will actively promote the sale of
products into all markets; but SIGMA shall be free
to market and sell other competing products.
(b) submit its purchase orders to PBI in writing or
via facsimile, signed by an authorized representa-
tive of SIGMA.
(c) pay all PBI invoices in United States currency by
company check.
(d) submit to PBI a twelve (12) month forecast of
purchases from PBI for the Products in a format to
be mutually determined by the parties. Said fore-
cast shall be submitted by SIGMA to PBI within 120
days after the
4
<PAGE>
commencement of the term of this Agreement
and on a rolling calendar quarterly basis thereafter.
(e) obtain advance written authorization and a
Returned Material Authorization ("RMA") prior to
returning any of the Products.
(f) maintain a properly trained sales force of ade-
quate size to represent and promote the sales of
the Products and provide instructions to customers
in the use of the Products. SIGMA shall be re-
sponsible for developing its own marketing plan
and system for dispensing the Products.
(g) carry in stock an inventory of Products, consis-
tent with the normal business practices for dis-
tributed products, to promptly fill the orders of
SIGMA's customers in the Territory.
(h) apply for and obtain all necessary licenses, per-
mits and other authorizations required by local
law or regulation in relation to the promotion,
marketing, distribution and supply of the Products
in any jurisdiction in which SIGMA sells the Prod-
ucts.
(i) pay any import duty or like charge on the entry of
the Products into the Territory and any local or
other applicable taxes.
(j) maintain separate and detailed accurate and com-
plete records of all transactions in respect of
the Products, including, but not limited to, such
records as identify all customer purchases by
Product and serial and/or lot number, and possess
the capability to notify all purchasers in the
event of a Product recall or corrective action.
(k) defray all expenses of and incidental to the dis-
tribution and sale of Products hereunder incurred
by SIGMA.
(l) make no contracts or commitments on behalf of PBI
or make any promises or representations or give
any warranties or guarantees with respect to the
Products except as herein expressly permitted or
otherwise incur any liability on behalf of PBI
without PBI's prior written consent, nor represent
itself as agent or partner of PBI.
5
<PAGE>
(m) comply with all laws and regulations and require-
ments applicable to a seller of in-vitro diagnos-
tics products, and with all laws and regulations
and requirements of governmental agencies having
jurisdiction within the Territory.
(n) except as authorized in writing by PBI, refrain
absolutely from using the trademark or trade name
and logo of PBI in connection with the marketing,
distribution and sale of any Product.
(o) provide the necessary camera ready artwork to
allow PBI to label and package the Products speci-
fied in Exhibit A.
8. PBI Duties. PBI shall:
(a) make reasonable best efforts, in good faith, to
ship SIGMA's orders for Products within sixty (60)
days from date of order receipt, f.o.b. Irvine,
California at the prices set forth on Exhibit A.
SIGMA acknowledges that PBI may from time to time
be subject to production, quality assurance or
shipping delays affecting the Products. In such
event, PBI shall have the right, regardless of any
previous acceptance of SIGMA's order, to allocate
the available inventory on a reasonable basis
between SIGMA and PSS. PBI shall not be liable in
any way to SIGMA or SIGMA's customers for its
failure to supply the quantity of Products or meet
the shipment date contained in the purchase order.
SIGMA shall specify the method of shipment and
insurance and PBI shall make reasonable best ef-
forts, in good faith, to comply with such specifi-
cations. If no such specification is made, or if
the specification cannot be reasonably complied
with after notice to SIGMA and an opportunity to
resolve the issues surrounding PBI's alleged in-
ability to comply, PBI may select a reasonable
manner of shipment and insurance.
(b) give SIGMA the prior written notice of each price
increase outlined in Article 4(a) and honor
SIGMA's existing purchase orders at the price(s)
in effect immediately prior to the effective date
of each such price increase.
(c) comply with all laws and regulations and require-
ments applicable to a United States manufacturer
of in-vitro diagnostic products.
6
<PAGE>
(d) except as authorized in writing by SIGMA, refrain
absolutely from using the trademark or trade name
and logo of SIGMA in connection with the market-
ing, distribution and sale of any Product.
(e) provide technical assistance to SIGMA's personnel
necessary for the marketing of the Products.
(f) at PBI's expense, provide SIGMA with written prod-
uct inserts relating to the Product's use, and
with such amendments thereto as subsequently be-
come available.
(g) Provide necessary documentation to assist SIGMA in
meeting requirements to register Products in the
Territory, and where possible, allow SIGMA to
utilize prior registration by PBI.
(h) Regulatory Approval and Compliance. To the extent
required by United States law, and prior to
SIGMA's distribution of Products labeled "For In
Vitro Diagnostic Use", PBI will provide documenta-
tion of 510(k) approval of the FDA for the Prod-
ucts. PBI will comply with the FDA's Good Manu-
facturing Practices ("GMP") in the manufacture of
all Products. SIGMA shall have the right, upon
reasonable notice and during normal business hours
and not more that once each six (6) months, to
inspect PBI's manufacturing facilities and GMP
records pertaining to the manufacture of the Prod-
ucts. Duration of such inspections shall not
exceed one (1) business day. If any action should
be taken by the FDA to restrict or prevent the
distribution of any of the Products for more than
thirty (30) days, then upon notice to PBI, SIGMA
shall have the right to terminate this Agreement
as to such Products. PBI shall replace any af-
fected inventory of Products or refund to SIGMA
the purchase price it paid to PBI for such inven-
tory if PBI is unable to replace the Products with
comparable inventory. PBI shall replace or repur-
chase any affected inventory of Product which
SIGMA replaces or repurchases from SIGMA's custom-
ers, at the price SIGMA paid PBI for such invento-
ry. IN NO CASE SHALL PBI BE LIABLE FOR SPECIAL
CONSEQUENTIAL OR INCIDENTAL DAMAGES.
(i) Compliance with the Food, Drug, and Cosmetic Act.
The Products comprising each shipment or other
delivery hereafter made by PBI to, or on the order
of, SIGMA, as of the date of such shipment or
delivery, shall be, on such date, not adulterated
or misbranded within the meaning of the Federal
Food, Drug and Cosmetic Act.
7
<PAGE>
(j) Fair Labor Standards Certificate; Equal Opportuni-
ty; OSHA. PBI certifies that all Products fur-
nished hereunder shall have been produced in com-
pliance with all applicable requirements of Sec-
tions 6, 7, and 12 of the Fair Labor Standards Act
of 1938, as amended, and of regulations and orders
of the Administrator of Wages and Hours Division
issued under Section 14 thereof, and in accordance
with all applicable state and federal laws and
regulations governing general conditions for labor
employed in the production of such goods. PBI
certifies that it is in compliance with Executive
Order 11246, as amended, and the rules, regula-
tions and orders issued thereunder, including,
without limitation, where applicable, provisions
regarding nonsegregated facilities for its employ-
ees, written affirmative action compliance pro-
grams and filing of Standard Form 100 (EEO-1), and
PBI agrees that the equal opportunity clause
therein is incorporated herein by reference. PBI
certifies that it is in compliance with 29 U.S.C.
S793 (Section 503 of the Rehabilitation Act of
1973), relating to employment of qualified handi-
capped individuals and 38 U.S.C. S2012 (Section
402 of the Vietnam Era Veterans Readjustment Act
of 1974), veterans, and the rules, regulations and
orders issued thereunder, and agrees that where
applicable, the affirmative action clauses therein
are incorporated herein by reference. PBI certi-
fies that it is in compliance with Executive Or-
ders 11625 and 12138, as amended, relating to
minority and women's business enterprises, and the
rules, regulations and orders issued thereunder,
and agrees that any applicable contract clauses
therein are incorporated herein by reference. PBI
certifies it is in compliance with the Occupation-
al Safety and Health Standards Act of 1970 (OSHA)
and the orders, rules and regulations issued pur-
suant thereto.
(k) properly label bottles and boxes as well as place
PBI prepared package inserts into the finished
packages using camera ready artwork supplied by
SIGMA. SPINPRO(R)-HDL will be co-labeled product
using the name and logo owned by SIGMA and the
SPINPRO(R)-HDL trademark.
9. Performance Standards.
(a) Quality Specifications and Characteristics. PBI
shall deliver to SIGMA Products having the quality
specifications agreed upon by the parties as set
forth in Exhibit B (the "Quality Specifications").
8
<PAGE>
(b) Certificate of Analysis. Concurrent with ship-
ment, PBI shall fax to SIGMA a Certificate of
Analysis, in the form set forth in Exhibit B, for
each lot of Product sold to SIGMA, confirming that
the Product meets the Quality Specifications.
(c) Product Acceptance. Within ten (10) working days
of receipt of Product, SIGMA shall take and con-
duct analysis of samples of Products delivered by
PBI. Should the result of an analysis of such
sample deviate from the Quality Specifications,
SIGMA shall notify PBI in accordance with article
4(c)hereof and immediately thereafter provide PBI
with samples of the Product tested. If, following
a review of the test results and after conducting
its own tests of the sample, PBI agrees that such
sample does not conform to the Quality Specifica-
tions, PBI shall provide SIGMA, free of any addi-
tional charge, with new deliveries of the same
quantity of the Products as the one from which the
sample was taken, or, in PBI's discretion and at
its cost, PBI may promptly reprocess the noncon-
forming Products to meet the Quality Specifica-
tions. In either event, SIGMA shall return, at
PBI's expense, the particular lot or shipment of
the Product which does not comply with the Quality
Specifications if requested to do so by PBI.
10. Product Recall.
(a) PBI shall maintain an appropriate record of all
claims made or to be made regarding the Products
performance.
(b) Each party shall keep the other informed of any
formal action relating to any specific lot of
Product sold to SIGMA hereunder by any regulatory
agency of any state, national government, or gov-
ernment agency having jurisdiction.
(c) Should any governmental or corporate action re-
quire the recall or field corrections or withhold-
ing from market of Product sold by PBI to SIGMA,
SIGMA shall bear the reasonable, direct costs and
expenses of recall or field correction if such
recall or field correction is the result of any
fault or omission attributable to SIGMA and PBI
shall bear the cost of products and the actual
costs of replacing the products if such recall or
field correction is the result of any fault or
omission attributable to PBI. Should such recall
or field correction result from the fault of both
parties, the parties shall share the costs of
Products and the actual cost of replacing the
Products in proportion to their respective degree
of fault.
9
<PAGE>
11. Product Complaints.
(a) Should either party experience any quality problem
involving field correction or recall of any spe-
cific lot(s) of Product supplied to SIGMA by PBI,
such party will notify the other in writing by
facsimile within twenty-four (24) hours of the
initiation of the field correction or recall.
Both parties will test retained samples of lots in
question and report its findings to the other
within ten (10) working days. Each party retains
the right to correct field problems arising out of
its fault or omission as it deems appropriate,
with or without the concurrence of the other. All
information about Product complaints shall be
considered "Confidential Information" under the
terms of this Agreement.
(b) Either party shall immediately notify the other
party in writing should it become aware of any
defect or condition that renders any lot(s) of
Product supplied by PBI to SIGMA in violation of
the United States Food, Drug and Cosmetic Act, or
of a similar law of any jurisdiction where the
Product is sold. The parties shall share with
each other all data on confirmed lot specific
Product complaints including, but not limited to,
complaints or information regarding performance
and/or allegations or reports of any negative
effect from the use or misuse of such affected lot
of Products as soon as such data is available.
Each party will provide reasonable assistance to
the other in resolving customer complaints to the
extent the complaint arises out of any fault or
omission of the party whose assistance is request-
ed. However, SIGMA shall have sole responsibility
and authority to interact directly with SIGMA's
customers in the resolution of such complaints and
PBI agrees that it will only interact with SIGMA
in such matters.
(c) PBI shall evaluate and investigate all customer
complaints in connection with the Products which
may be brought to its attention, in writing, by
SIGMA; provided such complaints have been con-
firmed by SIGMA's QA/QC or technical service per-
sonnel using the same standards for confirmation
which SIGMA's uses for products other than the PBI
Products and which are believed in good faith by
SIGMA to arise out of a fault or omission attrib-
utable to PBI. Within twenty (20) calendar days
following receipt from SIGMA of the original noti-
fication of each such complaint, PBI agrees to
provide SIGMA with a written interim or final
complaint investigation report, using the same
standards for evaluation and investigation that
PBI
10
<PAGE>
uses for products other than the Products.
All such Product complaints reported to PBI by
SIGMA shall be reviewed monthly by PBI until clo-
sure, and a summary report thereof will be provid-
ed by PBI to SIGMA.
(d) PBI will report to SIGMA all data and/or informa-
tion pertaining to adverse reports on any lot of
Product supplied by PBI for distribution by SIGMA
which would have a materially adverse impact on
performance of the Products.
(e) Recalls or field notifications with respect to the
Products, or any of them, shall be the responsi-
bility of the party whose fault or omission neces-
sitated such action, as described in Article
10(c).
(f) Should there be a difference of opinion between
PBI and SIGMA regarding a field notification or
recall, SIGMA will exercise the right to notify
its customers without delay.
12. Warranties.
(a) PBI warrants that all Products manufactured and
supplied under this Agreement shall at the time of
shipment meet the Quality Control Specifications
of PBI which are attached to this Agreement as
Exhibit B. No claim under this warranty may be
made with respect to a unit of the Products if
shipped or used after the expiration of the shelf-
life of the Product as determined by PBI. PBI
further warrants that prior to shipment to SIGMA,
all of its standard tests and quality control
procedures have been carried out in relation to
each lot of the Products with satisfactory re-
sults. The limited warranty to SIGMA set forth in
this Agreement shall control over any warranty
provisions which may be set forth in PBI's Product
literature and SIGMA shall hold PBI harmless from
any and all damages and expenses which PBI may
incur as a result of unauthorized SIGMA warranties
or representations. PBI MAKES NO WARRANTY EX-
PRESSED OR IMPLIED WITH RESPECT TO THE PRODUCTS
BEYOND THAT WHICH IS SET FORTH IN THIS AGREEMENT
INCLUDING THE WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR ANY PARTICULAR PURPOSE. Any warranty
made by SIGMA to its customers with respect to the
Products shall not obligate PBI in any way.
(b) Upon its verification of any claim of defect or
nonconformity of any unit of the Product arising
out of a fault or omission attributable to PBI,
during the term of this Agreement, PBI will pro-
vide SIGMA with a
11
<PAGE>
replacement unit to the extent necessary
to honor PBI's warranties contained in
Section 12(a) hereof, or make good any shortages
or non-completed deliveries and shall pay all
associated freight and insurance associated there-
with.
(c) PBI's liability under any legal or equitable theo-
ry to any person with respect to the Products
and/or the relationship described in this Agree-
ment shall be limited to the replacement of the
unit, or if impractical, return of the purchase
price paid by SIGMA for such unit. PBI shall in
no event be liable to SIGMA or any other person
for any incidental or consequential damages, lost
profits, cost of procurement of substitute goods
or any indirect, special, or consequential damages
even if PBI has been informed of the possibility
thereof.
13. Packaging and Intellectual Property. PBI shall be
responsible for packaging and labeling the Products.
SIGMA will distribute the Products only with all appro-
priate labeling, packaging, and Product literature and
only under SIGMA's applicable trademarks and trade
names. SIGMA recognizes PBI's right, title and inter-
est in its patents, trademarks, trade names and copy-
rights, trade secrets and proprietary information in
connection with the Products, and SIGMA shall not claim
any ownership right thereto inconsistent with this
Agreement, or dispute the validity thereof. In the
event any third party shall contest PBI's rights to its
patents, trademarks, trade names or copyrights, trade
secrets or propriety rights, SIGMA shall, at PBI's sole
expense, render reasonable assistance to PBI in defend-
ing such claims.
14. Compliance with Other Agreements. Each party repre-
sents and warrants that the execution and delivery by
it of this Agreement and the performance by it of its
obligations hereunder will not, with or without the
giving of notice or the passage of time, violate any
judgement, writ, injunction or order of any court,
arbitration or governmental agency or conflict with,
result in the breach of any provisions of, or the ter-
mination of, or constitute a default under, any agree-
ment to which PBI or SIGMA is a party or by which it is
or may be bound.
15. Indemnity.
(a) Except as limited by the remainder of this para-
graph, PBI hereby agrees to indemnify SIGMA
against claims of third parties for injuries to
their persons arising from the use of Products
supplied by PBI to SIGMA hereunder. This indemni-
ty shall not apply to, and PBI shall not be liable
for, claims for injuries caused by or arising
from:
12
<PAGE>
1) any act or failure to act on the part of
SIGMA, its employees, representatives,
agents, or subsidiaries in handling, storing
or otherwise distributing such Products; or
2) any representation or warranty concerning
the Products made by or on behalf of SIGMA
and not specifically authorized in writing
by PBI; or
3) claims where the use of the Products by any
customer was not in accordance with the use
prescribed by PBI; or
4) SIGMA's failure to disseminate to purchasers
or end-users any Product Information which
PBI has made available to SIGMA; or
5) claims where PBI has not been notified in
writing within fifteen (15) days of SIGMA's
first notice of the claim; or
6) claims where SIGMA fails to furnish evidence
in its possession or fails to fully
cooperate with PBI in preparing the defense;
or
7) claims where PBI is not given the option to
assume the sole defense of the claim at
PBI's expense; or
8) relabeling or re-packaging of the Products
by SIGMA; or
9) bodily injury or property damage occurring
within SIGMA's premises to its agents or
employees, including commercial loss of any
kind.
(b) PBI shall indemnify SIGMA from any claims of pat-
ent infringement relating to a Product subject to
this Agreement provided SIGMA gives PBI notice
within fifteen (15) days of SIGMA's first notice
of the claim, and permits PBI to assume the sole
defense of the claim at PBI's expense; provided,
however, that the claim is not based on (i) the
sale or use of any Product in combination with any
other product which is not specifically authorized
by PBI in writing; (ii) the application of any
Product in any manner not specifically authorized
by PBI in writing.
16. Fees. SIGMA acknowledges that it has not and will not
pay any fee to PBI in connection with this Agreement or
any prior agreement, undertaking or arrangement between
them.
17. Corrupt Payments. SIGMA shall not make any offer,
payment, promise to pay, or authorization of the pay-
ment of anything of value to any government official,
political party or official thereof, or any candidate
for political office for
13
<PAGE>
purposes of influencing any act or decision, including a
decision to fail to perform his or its official duties in
order to assist PBI or SIGMA in obtaining or retaining
business, or for purposes of directing business to PBI or
SIGMA. SIGMA agrees to verify, from time to time, its
compliance with the foregoing provision, in writing, upon
request by PBI.
18. Force Majeure. Neither party shall be responsible for
any failure to perform due to causes beyond its con-
trol. These causes shall include, but not be limited
to, fire, storm, flood, earthquake, explosion, wars,
riots, civil disorder, sabotage, quarantine restric-
tions, labor disputes, labor shortages, transportation
embargoes, or failure or delays or disruption in manu-
facturing process, curtailment of or failure in obtain-
ing fuel or electrical power, or the acts of any gov-
ernmental authority, or instrumentalities, orders of
any court or tribunal whether foreign or domestic,
exchange restrictions, acts of God, acts of the Federal
Government or any agency thereof, acts of any state or
local government or agency thereof, or shortage of
materials or any similar or dissimilar occurrence be-
yond the reasonable control of the party which is pre-
vented, interrupted or delayed in the performance of
its obligations hereunder. In the event PBI is pre-
vented by any of the foregoing contingencies from sup-
plying full quantities of Products, PBI shall have the
right to prorate among SIGMA and PBI's other customers
the quantity of Products then available to it. In no
event shall PBI be under any obligations to purchase
Products or similar products from any third party in
order to supply same to SIGMA hereunder. Any force
majeure event shall not excuse performance by the party
but shall delay performance, unless such force majeure
continues for a period in excess of ninety (90) days.
In such event, the party seeking performance, as its
sole and exclusive remedy, many cancel its obligations
under this Agreement. The foregoing terms notwith-
standing, nothing herein shall relieve SIGMA of its
obligations to make the payments due PBI hereunder.
19. Insurrance. Each party shall keep in force during the
term of this Agreement product liability insurance in
such amounts as may be customary for like sized
businesses undertaking like responsibilities to those
contemplated by this Agreement. Each party shall
submit a certificate of insurance to the other
evidencing such coverage upon written request therefor.
20. Confidentiality. Both parties agree to maintain in
total the language and intent agreed between the par-
ties toward confidentiality as provided by the signed
agreement attached as Exhibit C. The following items
will be considered additions to the scope of the agree-
ment provided in Exhibit C:
14
<PAGE>
(1) Each party agrees to limit access to Confidential
Information to employees and agents having a need
to know and to protect Confidential Information to
the same extent as it protects its own trade se-
crets.
21. Appointment of Sub-Distributor's; Change in Control.
(a) SIGMA may, except as otherwise provided in Section
21(b) thereof, assign, sublicense, delegate, or
otherwise transfer the performance of the rights
and obligations hereunder to qualified and reputa-
ble subdistributors, provided, however, that: (i)
SIGMA shall be liable to PBI for the errors, neg-
ligent acts and omissions of its sub-distributor's
as if such errors, negligent acts and omissions
were its own, including any breach of any provi-
sion of this Agreement by the sub-distributors;
(ii) SIGMA shall have and retain full control of
any sub-distributors utilized, and shall be re-
sponsible for the performance by any sub-distribu-
tor; and (iii) SIGMA shall not be relieved of the
responsibility for the proper performance and
completion of the sub-distributed portions of its
obligations hereunder.
(b) SIGMA shall inform PBI if it undergoes any change
(whether by merger, takeover, change in the owner-
ship of share capital or other significant shift-
ing of power) which results in a change in control
of SIGMA (whether or not there be a concurrent
change in SIGMA's company name)
22. Arbitration. Any controversy or claim arising under or
in relation to this Agreement, except as otherwise
expressly provided below, shall be settled exclusively
by arbitration in accordance with the Arbitration Rules
of the American Arbitration Association (AAA). There
shall be three arbitrators: one selected by the party
who requests arbitration who shall notify the other
party of the person selected at the time that notice of
arbitration is sent; one selected by the other party
within ten (10) days of receipt of notice of arbitra-
tion and one selected by the parties Jointly within ten
(10) calendar days thereafter or, failing their agree-
ment, selected pursuant to the rules of the AAA. No
arbitrator shall be related to , employed by, or have
at any time a substantial ongoing business relationship
with any party hereto or any of their respective affil-
iates. The substantive law governing the arbitration
shall be the law of Delaware. The arbitration shall
take place in the location of the principal place of
business of the party who does not file the notice of
arbitration. The losing party in the arbitration shall
reimburse the prevailing party for all costs and ex-
penses, including reasonable attorney fees, incurred in
connection with the arbitration. The decision of the
arbitrators shall be final and binding on the parties
and judgement upon the award rendered by the arbitra-
tors may
15
<PAGE>
be entered by any court having jurisdiction
thereof. The provisions of this arbitration clause
shall not be applied to the determination of questions
affecting validity or scope of any trademarks or other
intellectual property rights.
23. Notices. Any notice or other communication required or
that shall be given pursuant to this Agreement shall be
deemed sufficient if delivered personally, sent by
facsimile, telegraph, or sent by certified, registered
or express mail, postage prepaid to the address or
facsimile number set forth below:
To PBI:
PACIFIC BIOMETRICS, INC.
1100 Eastlake Avenue E
3rd Floor
Seattle, WA 98109
Facsimile No. (206) 233-0198
Attn: Director of Business Development
To SIGMA:
SIGMA DIAGNOSTICS
545 South Ewing Avenue
St. Louis, Missouri 63103
Facsimile No: (314) 534-8461
Attn: Vice President, Administration
Either party may change the address to which notice to
it is to be given, as provided herein.
24. Entire Agreement. This Agreement and the exhibits
referred to herein constitute the entire agreement
between the parties and superseded all prior proposals,
communications, representations and agreements whether
written or oral, with respect to the subject matter
hereof. No change to the written terms of this Agree-
ment shall be made except by written instrumentation
executed by the parties hereto.
25. No Waiver. The failure of either party to enforce at
any time any of the provisions of this Agreement shall
not be construed to be a waiver of those provisions or
of the right of that party thereafter to enforce those
provisions.
26. Severability. If any provision of this Agreement is or
becomes or is deemed invalid, illegal or unenforceable
in any jurisdiction in which the Agreement is sought to
be enforced, (a) such provision shall be deemed and
amended to conform to applicable laws of such jurisdic-
tion so as to be valid and enforceable or, if it cannot
be so amended without materially altering the intention
of the parties, it shall
16
<PAGE>
be stricken; (b) the validity, legality and enforceability of
such provision will not in any way be affected or impaired
thereby in any other jurisdiction; and (c) the remainder of
this Agreement shall remain in full force and effect.
27. Headings. The headings of this Agreement are included
only for ease of reference and shall not affect the
interpretation of this Agreement in any manner.
28. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION
ENFORCEABLE BY EITHER PARTY.
IN WITNESS WHEREOF, the parties have caused this Agreement
to be executed by their duty authorized officers or autho-
rized representatives.
PACIFIC BIOMETRICS, INC.
By: /s/ G. Russell Warnick
Title: President
Date: Oct. 26, 1995
SIGMA DIAGNOSTICS,
a division of SIGMA Chemical Company
By: /s/ Michael Douglas
Title: CEO
Date: Oct. 20, 1995
17
<PAGE>
MERCHANT HOUSE SCIENTIFIC
March 1, 1994
Mr. Robert K. Jackson
President
Irvine Scientific
2511 Daimler Street
Santa Ana, California 92705
Re: Merchant House Scientific
Amendment to Manufacturing Agreement
Our File No. 25-008.4
------------------------------------
Dear Mr. Jackson:
This letter is intended to amend that certain Manufacturing Agreement
entered into by and between Merchant House Scientific, a California corporation
(hereinafter referred to as "MHS") and Irvine Scientific, a California
corporation (hereinafter referred to as "Manufacturer").
Section 2.4 of the Manufacturing Agreement provides that, until such time
as Manufacturer's costs for the purchase of the molds and additional equipment
have been fully amortized or reimbursed, MHS shall purchase all of its
SPINPRO(R) requirements exclusively from Manufacturer. However, pursuant to
Section 9 of the Agreement, Manufacturer has up to Ninety (90) days following
receipt of Exhibit "A" to complete its manufacturing and assembly line. In the
interim, MHS needs to be able to have SPINPRO(R) units manufactured for it by
other sources.
By this letter, the parties agree that, until Manufacturer provides
written notification to MHS that it is ready, willing and able to deliver
completed SPINPRO(R) units in quantities of not less than 10,000 units per
week, MHS shall be entitled to utilize other entities in order to manufacturer
SPINPRO(R) units. The use of such other entities prior to the time MHS
receives written notification from Manufacturer shall not be deemed a breach of
this Agreement
1370 Reynolds Avenue, Suite #119, Irvine, CA 92714
(714) 250-0902 FAX (714) 250-8848
<PAGE>
Mr. Robert K. Jackson
March 1, 1994
Page 2
Please indicate your agreement to these additional terms and conditions by
executing this letter in the space provided for below.
Yours very truly,
/s/ Ronald R. Helm
Ronald R. Helm
RRH:cj
Agreed:
IRVINE SCIENTIFIC
By: /s/ Robert K. Jackson
---------------------
Robert K. Jackson
Its: President
<PAGE>
MANUFACTURING AGREEMENT
This Manufacturing Agreement ("Agreement") is entered into
by and between Merchant House Scientific, a California
corporation (hereinafter referred to as "MHS") and Irvine
Scientific, a California corporation (hereinafter referred to as
"Manufacturer"), effective this 1st day of March 1994.
R E C I T A L S:
WHEREAS, MHS is the authorized licensee of certain trade
secrets and proprietary technology commonly referred to as the
SPINPRO(R) Sample Preparation Device (hereinafter referred to as
the "SPINPRO(R)"); and
WHEREAS, MHS desires to out-contract the manufacturing of
the SPINPRO(R) to a competent manufacturer; and
WHEREAS, Manufacturer is in the business of manufacturing
bio-medical devices of a nature comparable to the SPINPRO(R); and
WHEREAS, MHS and Manufacturer desire to enter into a
relationship whereby Manufacturer will manufacture SPINPRO(R) units
for MHS on the terms and conditions set forth herein;
NOW, THEREFORE, the parties hereby agree as follows:
1. Authority to Manufacture. Subject to the terms and
conditions set forth herein, MHS authorizes, appoints and
designates Manufacturer as an authorized manufacturer of the
SPINPRO(R).
1.1 Description of Work. Manufacturer shall perform
all services, either directly or through authorized sub-
manufacturers approved in writing by MHS in accordance with
Section 1.2 hereinbelow, necessary to deliver to MHS fully
completed SPINPRO(R) units which meet the specifications and
tolerances set forth in Exhibit "A" which shall be attached
hereto and incorporated herein by reference, or as such
specifications and tolerances may be modified by mutual agreement
of the parties, and which have been manufactured in accordance
with applicable governmental requirements and GMP standards.
1.2 Use of Sub-Manufacturers. Manufacturer shall
obtain the written consent of MHS prior to utilizing sub-
manufacturers in connection with the performance of
Manufacturer's obligations and duties hereunder. MHS shall not
unreasonably withhold such consent. Manufacturer shall remain
responsible for the quality of any item prepared by a sub-
manufacturer unless the parties otherwise expressly agree in
writing.
1
<PAGE>
2. Molds and Manufacturing Equipment. The following
sections shall apply to any molds and additional manufacturing
equipment purchased by Manufacturer to perform the work described
in Section 1.1 above.
2.1 Production Molds. The parties acknowledge that
MHS has entered into an Agreement with Inland Technologies, Inc.
(a copy of which is attached hereto as Exhibit "B" and
hereinafter referred to as the "Inland Technologies Agreement"),
for the fabrication of three (3) molds (the "Molds"), each of
which shall have eight cavities capable of simultaneously
producing eight interchangeable parts, identified as: (1) Top P/N
H920921; (2) Middle, Insert Tube P/N H9209102; and (3) Bottom,
Container P/N H9212251. Upon the effective date of this
Agreement, Manufacturer shall reimburse MHS for any payments made
pursuant to the Inland Technologies Agreement and shall
thereafter make all further payments due Inland Technologies
pursuant to the Inland Technologies Agreement. Upon completion
of the Molds, MHS shall assign its right, title and interest in
and to the Inland Technologies Agreement and the Molds pursuant
to an assignment in a form substantially identical to that
attached hereto as Exhibit "C." The Molds fabricated by Inland
Technologies pursuant to the Inland Technologies Agreement shall
thereafter become the property of Manufacturer, subject to the
right of MHS to purchase the Molds from Manufacturer pursuant to
the terms and conditions set forth in Section 2.3 below.
2.2 Additional Equipment Purchased by Manufacturer.
The parties understand and agree that Manufacturer will be
required to purchase additional dedicated equipment in order to
manufacture the SPINPRO(R) in accordance with this Agreement. Such
additional equipment includes, but is not limited to, precision
liquid fill equipment, equipment and fixtures associated with
bonding, the SPINPRO(R) components, labelling equipment and
packaging equipment (hereinafter collectively referred to as the
"Additional Equipment"). A schedule of the Additional Equipment,
which includes a description of the equipment and its cost, will
be delivered to MHS within Ninety (90) days after Manufacturer's
receipt of Exhibit "A" from MHS. The Schedule of Additional
Equipment shall thereafter be attached hereto as Exhibit "D."
Manufacturer shall own the Additional Equipment subject to the
rights of MHS as set forth in Section 2.3 below.
2.3 Amortization of Molds and Additional Equipment:
MHS Guarantees; Option to Purchase. Manufacturer's costs for
the purchase of the Molds and the Additional Equipment shall be
amortized and reimbursed at a rate of Two and Eight Tenth cents
(2.8) per completed SPINPRO(R) unit delivered to MHS by
Manufacturer pursuant to this Agreement. The unamortized portion
of the cost of the Molds and Additional Equipment shall be
guaranteed by MHS and proportionately by certain of MHS's
shareholders. MHS and the shareholders shall execute guarantees
in a form substantially identical to Exhibit "E" attached hereto
and incorporated herein by reference. Manufacturer grants MHS
the right to purchase the Molds and the Additional Equipment from
Manufacturer for an amount equal to the unamortized costs
thereof. After the costs of the Molds and Additional Equipment
have been fully amortized, MHS's option may be exercisable by
paying Manufacturer $100.00.
2.4 Exclusive Agreement. Until such time as
Manufacturer's costs for the purchase of the Molds and the
Additional Equipment have been fully amortized or
2
<PAGE>
reimbursed, MHS shall purchase all of its SPINPRO(R) requirements
exclusively from Manufacturer.
3. Limitation of Manufacturer's Rights. Notwithstanding
Section 2.1 hereinabove, Manufacturer acknowledges that the
product and other proprietary rights and trade secrets in and to
the SPINPRO(R) shall at all times remain with MHS. Absent an
express license agreement approved by the Board of Directors of
MHS, Manufacturer shall have no right to manufacture the SPINPRO(R)
for its own use, or for the use of any person or entity other
than MHS. Additionally, Manufacturer agrees that any information
conveyed by MHS to Manufacturer concerning the SPINPRO(R) shall
remain proprietary and confidential. Neither receipt or
possession thereof shall confer any rights to reproduce, or use,
or disclose, in whole or in part, any information without the
express, prior, and written authorization of MHS.
3.1 MHS Duty of Confidentiality. It is the intention
of the parties that the duty of confidentiality be reciprocal.
MHS therefore agrees that any proprietary information, not
generally known or available to the public, conveyed by
Manufacturer to MHS shall remain proprietary and confidential.
Neither receipt or possession thereof shall confer any rights to
reproduce, use or disclose, in whole or in part, any such
information without the express, prior and written consent of
Manufacturer.
4. Right of Inspection. MHS shall have the right to
inspect and test Manufacturer's SPINPRO(R) manufacturing and
assembly process, as well as the finished goods to be delivered
pursuant to this Agreement, at the facilities of Manufacturer.
5. Prices. MHS agrees to pay Manufacturer its "Cost," as
defined in Section 5.1 below, plus Forty percent (40%), plus
amortization of the Molds and Additional Equipment, not to exceed
an aggregate per unit price of Thirty-One cents (31) per
completed SPINPRO(R), F.O.B. Manufacturer's facility located at
2511 Daimler Street, Santa Ana, California. The unit price shall
be all-inclusive and shall include the cost of the molded plastic
parts, the reagent, the rubber stopper, assembly, fill, labelling
and testing, bulk packaging (meaning, any packaging which
contains 100 or more SPINPRO(R) units) and package inserts,
Manufacturer's profit, and the amortization of Manufacturer's
cost for the Molds and Additional Equipment based on a per unit
amortization factor of Two and Eight-Tenth cents (2.8). All
expenses relating to product transportation and delivery,
including duties, costs, taxes and applicable insurance premiums,
shall be paid by MHS. Once the costs of the Molds and Additional
Equipment have been fully amortized or otherwise reimbursed to
Manufacturer, the per unit price for each SPINPRO(R) shall be
reduced accordingly. This means that if Manufacturer's Cost is
Fifteen cents (15) per unit and the amortization factor is Two
and Eight-Tenth cents (2.8) per unit, the price to MHS shall be
Twenty-Seven and Eight-Tenth cents (27.8) per unit (or 15 divided by .60
+ 2.8). However, if Manufacturer's Cost is 18 per unit and the
amortization factor is 2.8 per unit, the price to MHS shall be
31 since the actual amount of 32.8 (i.e. 18 divided by .60 + 2.8)
exceeds the maximum price set forth herein. Further, once the
Molds and Additional Equipment have been fully amortized or MHS
has otherwise reimbursed Manufacturer for the unamortized portion
of these items, the unit price and the maximum unit price shall
be adjusted accordingly.
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5.1 Manufacturer's Cost. For purposes of this
Agreement, Manufacturer's Cost shall be calculated by including
the actual cost of all parts, reagent and packaging, and the
actual cost of all direct labor used to assemble, fill, label,
test and bulk package (meaning any packaging which contains 100
or more SPINPRO(R) units) units in accordance with the SPINPRO(R)
Manufacturing Procedures and Product Specifications to be
attached hereto as Exhibit "A." Manufacturer's Cost shall not
include general and administrative overhead, indirect costs such
as rent or depreciation, or amortization/depreciation of
equipment. Within Twenty (20) days after the end of each month,
Manufacturer shall forward to MHS a report accounting for the
calculation of Manufacturer's Costs for the month being reported.
6. Title, Risk of Loss, and Delivery. All SPINPRO(R) units
to be delivered under this Agreement shall be delivered F.O.B. at
Manufacturer's facility, located in the City of Santa Ana, State
of California. Title and risk of loss for the goods shall pass
to MHS upon delivery by Manufacturer to the carrier.
Manufacturer shall ship SPINPRO(R) units in accordance with
instructions supplied by MHS, but if MHS fails to furnish such
instructions, Manufacturer may select what it, in its opinion,
considers to be the most satisfactory method and routing for
shipment. Any prepayment by Manufacturer of freight charges
shall be for the account of MHS and shall be paid by MHS with and
in addition to the per unit price.
7. Invoicing and Payment. Manufacturer shall provide MHS
with an invoice for each order of SPINPRO(R) units shipped by
Manufacturer. Alternatively, Manufacturer shall have the right
to invoice MHS for completed SPINPRO(R) units held in inventory by
Manufacturer for more than Sixty (60) days. The foregoing
notwithstanding, Manufacturer shall have no obligation to hold
inventory for more than Sixty (60) days. Payment terms for
SPINPRO(R) purchased pursuant to this Agreement shall be net Thirty
(30) days.
8. Product Liability Insurance. MHS shall maintain not
less than Five Million Dollars ($5,000,000.00) of product
liability insurance applicable to the SPINPRO(R) which shall name
Manufacturer as an additional insured. Manufacturer shall be
entitled to receive a certificate of insurance from MHS' insurer
upon reasonable notice to MHS.
8.1 Indemnity. MHS shall indemnify Manufacturer, its
Shareholders, Directors, Officers, agents, employees and
affiliates (together the "Manufacturer Indemnities") against any
and all Liability, damages, loss, cost and expense, including
actual attorneys' fees sustained by any Manufacturer Indemnitee
arising from any claim brought against any of them with respect
to any of the products manufactured by Manufacturer.
8.2 Warranties. Manufacturer warrants to MHS and only
to MHS that each Product will conform to the applicable Product
Specifications. EXCEPT FOR THE FOREGOING WARRANTY, MANUFACTURER
MAKES NO OTHER WARRANTIES RELATED TO THE PRODUCTS, WHETHER
EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
MANUFACTURER SHALL HAVE NO LIABILITY FOR CONSEQUENTIAL DAMAGES
SUFFERED BY MHS BY REASON OF ANY BREACH OF THE FOREGOING WARRANTY
AND MHS' SOLE REMEDY FOR
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ANY BREACH OF WARRANTY SHALL BE LIMITED TO REPLACEMENT OF THE PRODUCT.
MANUFACTURER DOES NOT AUTHORIZE MHS, ITS EMPLOYEES OR AGENTS TO MAKE
ANY OTHER WARRANTY WITH RESPECT TO THE PRODUCTS, INCLUDING WITHOUT
LIMITATION, THE WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OF THE PRODUCTS OR THE PERFORMANCE THEREOF.
8.3 Continuing Applicability. The provisions of
Section 8, 8.1 and 8.2 shall survive the termination of this
Agreement.
9. Completion Date. Manufacturer shall complete its
manufacturing and assembly line no later than Ninety (90) days
following delivery of Exhibit "A" to Manufacturer.
10. Failure to Perform Under Certain Events. Manufacturer
shall not be liable to MHS for any partial performance or failure
to perform hereunder due to any condition beyond its reasonable
control including, but not limited to, fire, flood, earthquake,
storm, governmental intervention or labor disturbance.
11. Termination. Either party may terminate this Agreement
by giving Ninety (90) days written notice to the other party of
its intention to terminate. Upon termination, the parties shall
promptly settle all accounts due, including payment of the
unamortized cost of the Molds and the Additional Equipment. Upon
termination, MHS shall purchase all SPINPRO(R) units in
Manufacturer's possession. Neither party shall make any claim
against the other party based upon any termination.
12. No Agency Relationship. The relationship created by
this Agreement is that of an independent contractor and is not
intended, nor shall it be construed as creating an agency
relationship. Neither party shall have the right to legally bind
the other.
13. Assignment. A party hereto may not assign any of its
rights or responsibilities hereunder without the express written
consent of the other party.
14. Bind Arbitration of Disputes. All disputes, claims and
questions regarding the rights and obligations of the parties
under the terms of this Agreement shall be submitted to binding
arbitration. Either party may make a demand for arbitration by
notifying the other party in writing pursuant to Section 15
below. Thereafter, arbitration shall be conducted in Anaheim,
California by the Judicial Arbitration and Mediation Services
("J.A.M.S.") using the rules of commercial arbitration of the
American Arbitration Association, or such other rules as may be
imposed upon the parties by J.A.M.S.
15. Attorneys' Fees. In all cases of arbitration and/or
civil court litigation, the prevailing party shall be entitled to
recover reasonable attorneys' fees in addition to any other
relief to which it may be entitled.
16. Entire Agreement. This Agreement shall constitute the
entire Agreement between the parties and any prior understanding
or representation of any kind preceding
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the date of this Agreement shall not be binding upon either party
except to the extent incorporated into this Agreement.
17. Modification of Agreement. Any modification of this
Agreement or additional obligation assumed by either party in
connection with this Agreement shall be binding only if evidenced
in writing signed by each party or an authorized representative
of each party.
18. Notices. Any notice provided for concerning this
Agreement shall be in writing and shall be deemed sufficiently
given when sent by telefax, with the original following by U.S.
mail sent to the respective address of each party as set forth
below:
MHS: Merchant House Scientific
1370 Reynolds Avenue, Suite 119
Irvine, California 92718
FAX: (714) 250-8848
With a Copy Alton G. Burkhalter, Esq.
To: Giles & Burkhalter
1912 North Broadway
Santa Ana, California 92706
FAX: (714) 973-8539
Manufacturer: Irvine Scientific
2511 Daimler Avenue
Santa Ana, California 92705-5588
FAX: (714) 261-6522
19. Severability. Should any provision of this Agreement
be declared illegal or unenforceable, it shall be considered
severed from this Agreement without affecting the legality or
enforceability of the remainder.
20. Governing Law. This Agreement shall be governed by,
construed, and enforced in accordance with the laws of the State
of California.
MERCHANT HOUSE SCIENTIFIC
By:/s/ Ronald R. Helm
------------------------
Ronald R. Helm
Its: President
(ADDITIONAL SIGNATURE ON FOLLOWING PAGE)
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IRVINE SCIENTIFIC
By:/s/ Robert K. Jackson 3/1/94
-----------------------------
Robert K. Jackson
Its: President
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, made and entered into as of the 15th day of
May, 1996, by and between BIOQUANT, INC. ("BIOQUANT" or the "Surviving
Corporation"), a Michigan corporation, PACIFIC BIOMETRICS, INC. ("PBI-DE"), a
Delaware corporation and BIOQUANT-ACQUISITION, INC. ("BIOQUANT-ACQUISITION"), a
Delaware corporation and wholly-owned subsidiary of PBI-DE (which corporations
are sometimes hereinafter collectively referred to as the "Constituent
Corporations").
W I T N E S S E T H:
WHEREAS:
1. The Board of Directors of each of the Constituent Corporations deems it
advisable and in the best interests of each of the Constituent Corporations and
its shareholders or stockholders that BIOQUANT-ACQUISITION be merged with and
into BIOQUANT as permitted by the Michigan Business Corporation Act ("MBCA") and
the Delaware General Corporation Law ("DGCL") under and pursuant to the terms
and conditions hereafter set forth; and
2. The Board of Directors of each of the Constituent Corporations have
adopted and approved this Agreement and Plan of Merger and have directed that
this Agreement be submitted to its shareholders and stockholders, respectively,
for approval.
NOW, THEREFORE, in accordance with the applicable provisions of the MBCA
and the DGCL, the parties hereto agree as follows:
FIRST: Constituent Corporations; Surviving Corporation. The names of the
Constituent Corporations are BioQuant, Inc., a Michigan corporation, Pacific
Biometrics, Inc., a Delaware corporation and BioQuant-Acquisition, Inc., a
Delaware corporation and wholly-owned subsidiary of PBI-DE. The name of the
Surviving Corporation is BioQuant, Inc., a Michigan corporation. As soon as
practicable following the satisfaction or waiver of all conditions set forth
herein, BIOQUANT-ACQUISITION shall be merged with and into BIOQUANT (the
"Merger") and BIOQUANT shall survive the Merger, whereby the Certificate of
Incorporation and By-Laws of the Surviving Corporation as in effect immediately
prior to the effective time of the Merger shall constitute the "Articles" of the
Surviving Corporation within the meaning of Section 450.1105 of the MBCA and
Section 104 of the DGCL.
SECOND: A. BIOQUANT Shares. BIOQUANT is authorized to issue 2,900,000
shares of common stock, no par value per share, 500,000 shares of Series A
<PAGE>
Convertible Preferred Stock, no par value per share and 760,000 shares of Series
B Convertible Preferred Stock, no par value per share. There are outstanding
560,243 shares of said common stock, said common stock being entitled to vote.
There are 403,979 shares of said Series A Convertible Preferred Stock and
512,840 shares of said Series B Convertible Preferred Stock, each being entitled
to vote as a separate class. The number of outstanding shares of said common
stock is subject to change prior to the effective date of the Merger (1) upon
the exercise of stock options of BIOQUANT and (2) any stock purchase plans,
warrants or conversion rights of BIOQUANT, now outstanding or hereafter granted.
B. PBI-DE Shares. PBI-DE is authorized to issue 30,000,000 shares of
common stock, par value $.01 per share, and 5,000,000 shares of preferred stock,
par value $.01 per share. There is outstanding 1 share of common stock, said
common stock being entitled to vote, and no shares of said preferred stock. The
number of outstanding shares of said common stock is not subject to change prior
to the effective date of the Merger; no shares of said preferred stock will be
issued prior to the effective date of the Merger.
C. BIOQUANT-ACQUISITION Shares. BIOQUANT-ACQUISITION is authorized to
issue 1,000 shares of common stock, par value $.01 per share, and no shares of
preferred stock. There is outstanding 1 share of common stock, said common stock
being entitled to vote. The number of outstanding shares of said common stock is
not subject to change prior to the effective date of the Merger.
THIRD: Covenants. Each of BIOQUANT, PBI-DE and BIOQUANT-ACQUISITION shall
take, or cause to be taken, all action and shall do, or cause to be done, all
things necessary, proper or advisable under the laws of the States of Michigan
and Delaware and upon the advice of counsel to consummate and make effective the
Merger in accordance with this Agreement and Plan of Merger as promptly as shall
be practicable.
FOURTH: Merger. A. The Merger shall become effective upon approval thereof
by the respective shareholders of BIOQUANT, PBI-DE and BIOQUANT-ACQUISITION and
upon the last to occur of (i) the filing with the Secretary of State of the
State of Delaware of a copy of this Agreement and Plan of Merger or a
certificate of merger pursuant to Section 252 of the DGCL, (ii) the filing with
the Secretary of State of the State of Michigan of articles of merger pursuant
to Section 450.1712 of the MBCA, or (iii) June 30, 1996. (The time of such later
filing or June 30, 1996, as the case may be, is hereinafter called the
"Effective Time".)
B. At the Effective Time:
I. BIOQUANT-ACQUISITION shall be merged with and into BIOQUANT,
which shall be the surviving corporation, and the separate corporate existence
of BIOQUANT-ACQUISITION shall cease.
II. The Surviving Corporation shall thereafter possess all the
rights, privileges, powers and franchises and assume and agree to perform and
discharge all the
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debts, obligations, contracts and liabilities of each of BIOQUANT-ACQUISITION
and BIOQUANT, and all property, real, personal and mixed, of each of
BIOQUANT-ACQUISITION and BIOQUANT shall vest in the Surviving Corporation
without further act or deed.
III. The name of the Surviving Corporation shall remain BioQuant,
Inc.
IV. The Certificate of Incorporation and the By-Laws of BIOQUANT
shall be the Certificate of Incorporation and the By-Laws of the Surviving
Corporation.
V. The officers and the directors of the Surviving Corporation and
PBI-DE shall be as follows:
Ellen A. Rudnick Chairman of the Board
Paul G. Kanan President, CEO and Director
G. Russell Warnick Executive Vice President
Elizabeth Teng Leary, Ph.D. Vice President
Mary L. Campbell Director
Terry M. Giles Director
Craig M. Goldstone Director
Douglas S. Harrington, M.D. Director
VI. The 1 share of common stock of BIOQUANT-ACQUISITION shall be
cancelled and retired, all rights in respect thereof shall cease and the capital
of the Surviving Corporation shall be reduced by the $4.00 of capital applicable
to such share.
VII. Each outstanding share of the common stock, Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock of
BIOQUANT, including shares held by BIOQUANT in its treasury, shall thereupon,
and without the surrender of stock certificates or any other action, be
converted into approximately .112 shares of Class A common stock, .169 shares of
Class E-1 common stock and .193 shares of Class E-2 common stock, of PBI-DE (the
terms of which are more fully described on Exhibit A attached hereto), such
shares to be fully paid and non-assessable shares of PBI-DE. Certificates
representing outstanding shares of the common stock and the Series A and B
preferred stock of BIOQUANT shall thenceforth be deemed to represent the number
of shares of the common stock of PBI-DE after giving effect to the exchange
ratio set forth above and the holders thereof shall have all of the same rights
which they would have had if such certificates had been issued by PBI-DE.
VIII. All outstanding options, warrants and other agreements to
purchase shares of the common stock or preferred stock of BIOQUANT shall become,
respectively, options, warrants and agreements to purchase, that number of
shares of the common stock only of PBI-DE, giving effect to the exchange ratio
set forth above, had such options, warrants and agreements to purchase been
exercised in full prior to the Merger and
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otherwise on the same terms and conditions, except that no anti-dilution,
preemptive or similar rights shall survive or be granted in connection with the
Merger.
FIFTH: Representations and Warranties of BIOQUANT.
BIOQUANT represents and warrants to PBI-DE and BIOQUANT-ACQUISITION as
follows:
A. Organization and Good Standing. Each of BIOQUANT and its subsidiaries
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has all requisite corporate
power and authority to own, lease and operate its properties and to carry on its
business as now being conducted. Each of BIOQUANT and its subsidiaries is duly
qualified or licensed and in good standing to do business in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
in such jurisdictions where the failure to be so duly qualified or licensed and
in good standing would not, in the aggregate, have a Material Adverse Effect.
"Material Adverse Effect" means, with respect to BIOQUANT, any event that could
have a material adverse effect on the business, assets, results of operations or
financial condition of and its subsidiaries taken as a whole.
B. Capitalization. As of the date hereof the capitalization of BIOQUANT is
as set forth in Article SECOND hereof. All of the issued and outstanding shares
of BIOQUANT Common Stock have been duly authorized and validly issued and are
fully paid, nonassessable and free of preemptive rights, with no personal
liability attaching to the ownership thereof. All prior sales of BIOQUANT's
securities have been made in compliance with or under an exemption from the
registration requirements of the Securities Act of 1933 and applicable state
securities laws, and no shareholders of BIOQUANT have any rescission rights with
respect to any BIOQUANT securities. BIOQUANT does not have and is not bound by
any outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character to or by which BIOQUANT is a party or is bound
which, directly or indirectly, obligate BIOQUANT to issue, deliver or sell any
shares of BIOQUANT Common Stock or any other equity security of BIOQUANT or any
securities representing the right to purchase or otherwise receive any shares of
BIOQUANT Common Stock or any other equity security of BIOQUANT.
C. Subsidiaries. BIOQUANT owns, directly or indirectly, all of the issued
and outstanding shares of capital stock of each of BIOQUANT's subsidiaries, free
and clear of all liens and encumbrances whatsoever, and all of such shares are
duly authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights, with no personal liability attaching to the ownership
thereof. None of BIOQUANT's subsidiaries has or is bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the sale or issuance by such subsidiary of any shares of
capital stock or any other equity security of such subsidiary or any securities
representing
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the right to purchase or otherwise receive any shares of capital stock or any
other equity security of such subsidiary.
D. Authority Relating to this Agreement. BIOQUANT has full corporate power
and authority to execute and deliver this Agreement and all other documents
hereby contemplated and, subject to obtaining requisite shareholder approval, to
consummate the transactions contemplated hereby and to take all other actions
required to be taken by it pursuant to the provisions hereof. The execution and
delivery of this Agreement by BIOQUANT and the consummation by BIOQUANT of the
transactions contemplated hereby have been duly and validly authorized and
approved by the Board of Directors of BIOQUANT and no other corporate
proceedings on the part of BIOQUANT are necessary to authorize this Agreement or
to consummate the transactions so contemplated (other than, with respect to the
Merger, the approval and adoption of this Agreement by the holders of a majority
of the outstanding shares of BIOQUANT Common Stock in accordance with the MBCA
and BIOQUANT's Articles of Incorporation and Bylaws). This Agreement has been
duly and validly executed and delivered by BIOQUANT and constitutes a valid and
binding agreement of BIOQUANT, enforceable against BIOQUANT, in accordance with
its terms, except as such enforcement may be limited by bankruptcy and other
laws affecting the enforceability of creditors' rights generally or laws
governing the availability of specific performance or other equitable remedies,
or restrictions on the enforcement of securities indemnification and
contribution provisions imposed by public policy.
E. Consents and Approvals; No Violations. Except for applicable
requirements of state Blue Sky laws, and the filing and recordation of the
applicable certificates of merger, no filing with, and no permit, authorization,
consent or approval of, any public body or authority, including courts of
competent jurisdiction, domestic or foreign ("Governmental Entity"), or of any
third party, is necessary for the entering into and/or consummation by BIOQUANT
of the transactions contemplated by this Agreement. Subject to obtaining
requisite shareholder approval, neither the execution and delivery of this
Agreement by BIOQUANT nor the consummation by BIOQUANT of the transactions
contemplated hereby nor compliance by BIOQUANT with any of the provisions hereof
will (i) constitute any violation or breach of any provision of the Articles of
Incorporation or By-laws of BIOQUANT or its subsidiaries, (ii) result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation
or acceleration or result in the creation of any lien) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
contract, agreement or other instrument or obligation to which BIOQUANT or its
subsidiaries is a party or by which either they or their properties or assets
may be bound or (iii) violate any order, writ, injunction, decree, statute, rule
or regulation applicable to BIOQUANT, its subsidiaries or any of their
properties or assets, except in the case of subclause (ii) or (iii) of this
sentence for violations, breaches, defaults, rights which arose or liens which
would not, in the aggregate, have a Material Adverse Effect and which would not
prevent or materially delay the consummation of the transactions contemplated
hereby.
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F. Absence of Certain Changes. Subsequent to December 31, 1995 and as of
the Effective Time, the Company and its subsidiaries each has not or will not
have incurred any liabilities or obligations, direct or contingent, not in the
ordinary course of business, or entered into any transaction not in the ordinary
course of business, which is material to the business of the company and its
subsidiaries, and there has not been nor will there be at the Effective Time any
change in the capital stock of, or any incurrence of short-term or long-term
debt by, the Company or its subsidiaries or any issuance of options, warrants or
other rights to purchase the capital stock of the Company or its subsidiaries or
any adverse change or any development involving, so far as the Company can now
reasonably foresee a prospective adverse change in the financial condition, net
worth, results of operations, business, key personnel or properties of the
Company or the subsidiaries which would be material to the business or financial
condition of the Company and its subsidiaries, and the Company and its
subsidiaries each has not become a party to, and neither the business nor the
property of the Company and its subsidiaries each has become the subject of, any
material litigation whether or not in the ordinary course of business, except as
may have been previously disclosed.
G. No Undisclosed Liabilities. Since December 31, 1995 neither BIOQUANT
nor its subsidiaries has incurred any liabilities (absolute, accrued, contingent
or otherwise) which are, in the aggregate, material to the business, operations
or financial condition of BIOQUANT and its subsidiaries taken as a whole, except
liabilities (i) adequately provided for in the BIOQUANT balance sheet, (ii)
incurred since December 31, 1995 in the ordinary course of business, (iii)
consistent with past practice or (iv) incurred in connection with this
Agreement.
H. No Default. Neither BIOQUANT nor any of its subsidiaries is in default
or violation (and no event has occurred which with notice or the lapse of time
or both would constitute a default or violation) of any term, condition or
provision of (i) its Articles of Incorporation or its By-laws, (ii) any note,
bond, mortgage, indenture, license, contract, agreement or other instrument or
obligation to which BIOQUANT or any of its subsidiaries is a party or by which
they or any of their properties or assets may be bound or (iii) any order, writ,
injunction, decree, statute, rule or regulation applicable to BIOQUANT or any of
its subsidiaries, except in the case of subclause (ii) or (iii) of this sentence
for defaults or violations which would not, in the aggregate, have a Material
Adverse Effect and which would not prevent or materially delay the consummation
of the transactions contemplated hereby.
I. Litigation. There is no suit, action or proceeding pending or, to the
knowledge of BIOQUANT, any investigation pending or any suit, action, proceeding
or investigation threatened against, involving or affecting BIOQUANT or its
officers and directors in such capacities, any of its subsidiaries, or any of
its or their respective properties or rights seeking equitable relief or
claiming damages in excess of $5,000, nor is there any judgment, decree,
injunction, rule or order of any court, governmental department, commission,
agency, instrumentality or arbitrator outstanding against BIOQUANT or its
officers and directors in such capacities, or any of its subsidiaries, which
does or might reasonably be expected to
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(i) result in the modification, termination, suspension, impairment or
reformation of any contract to which BIOQUANT or any of its subsidiaries is a
party, which modification, termination, suspension, impairment or reformation
would have a Material Adverse Effect; (ii) materially adversely affect the
manner in which BIOQUANT conducts its business; (iii) affect the ability of
BIOQUANT, PBI-DE or BIOQUANT-ACQUISITION to consummate any of the transactions
contemplated hereby; or (iv) have a Material Adverse Effect. There is no suit,
action or proceeding pending by BIOQUANT against any third party.
J. Compliance with Applicable Law. The businesses of BIOQUANT and its
subsidiaries are not being conducted in violation of any applicable law,
ordinance, rule, regulation, decree or order of any Governmental Entity, except
for violations which, in the aggregate, do not and would not reasonably be
expected to have a Material Adverse Effect. BIOQUANT and its subsidiaries hold
all permits, licenses, variances, exemptions, orders and approvals of all
Governmental Entities necessary for the lawful conduct of their respective
businesses (the "BIOQUANT Permits"), except for failures to hold such BIOQUANT
Permits which would not, in the aggregate, reasonably be expected to have a
Material Adverse Effect. BIOQUANT and its subsidiaries are in compliance with
the terms of the BIOQUANT Permits, except where the failure so to comply would
not, in the aggregate, reasonably be expected to have a Material Adverse Effect.
K. Taxes. BIOQUANT and each of its subsidiaries have duly and timely filed
all material federal, state, local and foreign tax returns required to be filed
by it, and except for taxes not in excess of $5,000, BIOQUANT has duly and
timely paid, caused to be paid or made adequate provision for the payment of all
Taxes required to be paid in respect of the periods covered by such returns,
except such as are being contested in good faith by appropriate proceedings or
otherwise, and has made adequate provision for payment of all taxes anticipated
to be payable in respect of all periods since the periods covered by such
returns. Except for taxes not in excess of $5,000, BIOQUANT and each of its
subsidiaries have fully collected, withheld and/or paid over all Taxes required
to be collected, withheld and/or paid over to a taxing authority. No issue or
claim has been asserted for taxes by any taxing authority for any prior period,
the adverse determination of which would result in a deficiency which would have
a Material Adverse Effect, other than those heretofore paid or provided for.
L. Employee Benefit Plans; ERISA. BIOQUANT and each of its ERISA
Affiliates (as such term is defined in the Employee Retirement Income Security
Act of 1974) have complied with all of the provisions of each employee benefit
plan and all applicable provisions of ERISA and the Internal Revenue Code (the
"Code"), have administered each such plan (including the payment of benefits
thereunder) in accordance with the provisions of each such plan and all
applicable provisions of ERISA and the Code and have timely made all required
contributions thereto.
M. Intellectual Property. BIOQUANT and its subsidiaries each has all
material licenses, permits and other governmental authorizations currently
required for the conduct
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of their respective business or the ownership of their respective properties and
are in all material respects complying therewith and owns or possesses adequate
rights to use all material patents, patent applications, trademarks, service
marks, trade-names, trademark registrations, service mark registrations,
copyrights and licenses necessary for the conduct of such business, and has not
received any notice of conflict with or infringement of the asserted rights of
others in respect thereof. To the best knowledge of BIOQUANT, none of the
activities or business of BIOQUANT or its subsidiaries are in violation of, or
cause BIOQUANT or its subsidiaries to violate, any law, rule, regulation or
order of the United States, any state, county or locality, or of any agency or
body of the United States or of any state, county or locality, the violation of
which would have a material adverse impact upon the financial condition,
business, property, prospective results of operations, or net worth of BIOQUANT
and its subsidiaries.
N. Labor Disputes. BIOQUANT is not a party to any collective bargaining
agreements, whether or not expired. There are no labor unions or other
organizations representing or, to BIOQUANT's knowledge, purporting to represent
or attempting to represent any employee of BIOQUANT. BIOQUANT has not violated
any provision of federal or state law or any governmental rule or regulation, or
any order, ruling, decree, judgment or arbitration award of any court,
arbitrator or any government agency regarding the terms and conditions of
employment of employees, former employees or, without limitation, laws, rules,
regulations, orders, rulings, decrees, judgments and awards relating to
discrimination (including, without limitation, discrimination on the basis of
age, sex, race or religion), fair labor standards and occupational health and
safety, wrongful discharge or violation of the person rights of employees,
former employees or prospective employees or state temporary disability laws,
rules or regulations, except where such failure would not have a Material
Adverse Effect.
O. Financial Statements and Condition. The financial statements present
fairly, in all material respects, the financial position of BIOQUANT as of their
respective dates and the results of BIOQUANT's operations, cash flows and
shareholders' equity for such periods, all in conformity with GAAP applied on a
consistent basis, except that the unaudited financial statements may not include
all notes required under GAAP.
P. Environmental Matters. BIOQUANT has obtained or caused to be obtained
and continues to maintain or cause the maintenance of permits, licenses,
consents and approvals (the "Environmental Approvals") necessary for conducting
the business of BIOQUANT which are required under environmental laws, and
BIOQUANT has not operated in violation of any environmental law or the terms of
any Environmental Approval.
Q. Insurance. BIOQUANT has adequate insurance coverage for the assets and
operations of its business which is of the type and in the amounts customarily
carried by persons conducting businesses similar to that of BIOQUANT.
R. FCPA. BIOQUANT and its subsidiaries each has not, directly or
indirectly, at any time (i) made any contributions to any candidate for
political office, or failed to disclose
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fully any such contribution in violation of law or (ii) made any payment to any
state, federal or foreign governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments or
contributions required or allowed by applicable law. To the best of BIOQUANT's
knowledge, BIOQUANT's and its subsidiaries' internal accounting controls and
procedures are sufficient to cause BIOQUANT and its subsidiaries to comply in
all material respects with the Foreign Corrupt Practices Act of 1977, as
amended.
SIXTH: Representations and Warranties of PBI-DE and BIOQUANT-ACQUISITION.
PBI-DE and BIOQUANT-ACQUISITION, jointly and severally, represent and
warrant to BIOQUANT that:
A. Organization and Good Standing. Each of PBI-DE and BIOQUANT-ACQUISITION
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to own, operate or lease all of its properties and assets and carry on
its business as it is now being conducted.
B. Capitalization of PBI-DE and BIOQUANT-ACQUISITION. At the date hereof,
the capitalization of each of PBI-DE and BIOQUANT-ACQUISITION is as set forth in
Article SECOND hereof. All of the issued and outstanding shares of
BIOQUANT-ACQUISITION are owned by PBI-DE and there are not any outstanding or
authorized subscriptions, options, warrants, calls, rights, commitments or any
other agreements of any character to or by which BIOQUANT-ACQUISITION is a party
or is bound. All of the issued and outstanding shares of capital stock of PBI-DE
and BIOQUANT-ACQUISITION have been duly authorized and are validly issued, fully
paid and nonassessable and free of preemptive rights with no personal liability
attaching to the ownership thereof.
C. Authority Relative to Agreement. Each of PBI-DE and
BIOQUANT-ACQUISITION has the corporate power and authority to execute and
deliver this Agreement and all other documents hereby contemplated, and to
consummate the transactions hereby and thereby contemplated and to take all
other actions required to be taken by it pursuant to the provisions hereof and
thereof. The execution, delivery and performance of this Agreement and all other
documents hereby contemplated to be executed by PBI-DE and BIOQUANT-ACQUISITION
and the consummation by PBI-DE and BIOQUANT-ACQUISITION of the transactions
hereby contemplated have been, duly and validly authorized by any and all
necessary corporate action of PBI-DE and BIOQUANT-ACQUISITION. This Agreement
and all other documents hereby contemplated to be executed by PBI-DE and
BIOQUANT-ACQUISITION constitute legal, valid and binding obligations of PBI-DE
and BIOQUANT-ACQUISITION, respectively, enforceable in accordance with their
respective terms, except as such enforcement may be limited by bankruptcy and
other laws affecting the enforceability of creditors' rights generally or laws
governing the availability of specific performance or other equitable
9
<PAGE>
remedies, or restrictions on the enforcement of securities indemnification and
contribution provisions imposed by public policy. The issuance by PBI-DE of
shares of PBI-DE Common Stock in connection with the Merger does not require any
further corporate action and will not be subject to preemptive rights or other
preferential rights of any present or future stockholders of PBI-DE and, at the
Effective Time, the shares of PBI-DE Common Stock, if any, to be issued to
BIOQUANT in connection with the Merger will be duly authorized, validly issued,
fully paid and non-assessable with no personal liability attaching to the
ownership thereof. The options and warrants, if any, to be substituted by PBI-DE
for the stock options and warrants of BIOQUANT have been duly authorized and
when issued and delivered in connection with the Merger will have been duly
issued and delivered and will constitute valid and legally binding obligations
of PBI-DE enforceable in accordance with their terms.
D. No Violation of Other Instruments or Obligations. Neither the execution
and delivery by PBI-DE and BIOQUANT-ACQUISITION of this Agreement and all other
documents hereby or thereby contemplated nor the consummation by PBI-DE and
BIOQUANT-ACQUISITION of the transactions hereby and thereby contemplated nor
compliance by PBI-DE and BIOQUANT-ACQUISITION with any of the provisions hereof
shall (i) constitute any violation or breach of the respective Certificates of
Incorporation or By-laws of PBI-DE or BIOQUANT-ACQUISITION; (ii) constitute
(with or without due notice or lapse of time or both) a default under or a
violation or breach of, or result in acceleration of any obligation or give rise
to any right of termination, cancellation or result in the creation of any lien
under, any provision of any contract, lease, mortgage or other instrument or
obligation to which either PBI-DE or BIOQUANT-ACQUISITION is a party or by which
either of its properties or assets may be bound, which default, breach or
acceleration has not been waived; (iii) violate any judgment, order, writ,
injunction, decree, statute, rule or regulation affecting PBI-DE or any of its
assets or BIOQUANT-ACQUISITION or any of its assets; (iv) result in the creation
of any lien on any of the assets or properties of PBI-DE or
BIOQUANT-ACQUISITION; or (v) result in the termination of any license,
franchise, lease or permit to which PBI-DE or BIOQUANT-ACQUISITION is a party or
by which each is bound, except in the case of those items specified in clause
(ii), (iii), (iv) or (v) above, which would not, individually or in the
aggregate, limit or delay either PBI-DE's or BIOQUANT-ACQUISITION's ability to
consummate the transactions hereby contemplated or have a Material Adverse
Effect on either PBI-DE or BIOQUANT-ACQUISITION.
E. Consents and Approvals. Except for applicable requirements of state
Blue Sky laws and the filing and recordation of the applicable certificates of
merger, as required by the DGCL and the MBCA, no filing with, and no permit,
authorization, consent or approval of, any Government Entity, or of any third
party, is necessary for the entering into and/or consummation by PBI-DE or
BIOQUANT-ACQUISITION of the transactions contemplated by this Agreement.
F. BIOQUANT-ACQUISITION. BIOQUANT-ACQUISITION will not conduct any
business or have any liabilities other than those hereunder nor will it have any
operating
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assets except as contemplated hereby and PBI-DE will have good and valid title
to all of the issued and outstanding shares of BIOQUANT-ACQUISITION.
G. No Default. Neither PBI-DE nor any of its subsidiaries is in default or
violation (and no event has occurred which with notice or the lapse of time or
both would constitute a default or violation) of any term, condition or
provision of (i) its Certificate of Incorporation or its By-laws, (ii) any note,
bond, mortgage, indenture, license, contract, agreement or other instrument or
obligation to which PBI-DE or any of its subsidiaries is a party or by which
they or any of their properties or assets may be bound or (iii) any order, writ,
injunction, decree, statute, rule or regulation applicable to PBI-DE or any of
its subsidiaries, except in the case of subclause (ii) or (iii) for defaults or
violations which would not, in the aggregate, have a Material Adverse Effect and
which would not prevent or materially delay the consummation of the transactions
contemplated hereby.
H. Litigation. There is no suit, action or proceeding pending or, to the
knowledge of PBI-DE, any investigation pending or any suit, action, proceeding
or investigation threatened against, involving or affecting PBI-DE or its
officers and directors in such capacities, any of its subsidiaries, or any of
its or their respective properties or rights seeking equitable relief, nor is
there any judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or arbitrator outstanding
against PBI-DE or its officers and directors in such capacities, or any of its
subsidiaries, which does or might reasonably be expected to (i) result in the
modification, termination, suspension, impairment or reformation of any contract
to which PBI-DE or any of its subsidiaries is a party, which modification,
termination, suspension, impairment or reformation would have a Material Adverse
Effect; (ii) materially adversely affect the manner in which PBI-DE conducts its
business; (iii) adversely affect the ability of BIOQUANT or PBI-DE to consummate
any of the transactions contemplated hereby; or (iv) have a Material Adverse
Effect.
I. Compliance with Applicable Law. To PBI-DE's knowledge, the business of
PBI-DE and its subsidiaries are not being conducted in violation of any
applicable law, ordinance, rule, regulation, decree or order of any Governmental
Entity, except for violations which, in the aggregate, do not and would not
reasonably be expected to have a Material Adverse Effect. PBI-DE and its
subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary for the lawful conduct of their
respective businesses (the "PBI-DE Permits"), except for failures to hold such
PBI-DE Permits which would not, in the aggregate, have a Material Adverse
Effect. PBI-DE and its subsidiaries are in compliance with the terms of the
PBI-DE Permits, except where the failure so to comply would not, in the
aggregate, reasonably be expected to have a Material Adverse Effect.
SEVENTH: Termination. This Agreement and Plan of Merger may be terminated
and the Merger abandoned for any reason whatsoever by action of the Board of
Directors of BIOQUANT, PBI-DE or BIOQUANT-ACQUISITION at any time prior to the
Effective
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Time, notwithstanding adoption and approval of this Agreement and Plan of Merger
by the shareholders of BIOQUANT or stockholders of PBI-DE or
BIOQUANT-ACQUISITION.
EIGHTH: Amendment. This Agreement and Plan of Merger may be amended at any
time prior to the Effective Time by action of the respective Boards of Directors
of BIOQUANT, PBI-DE and BIOQUANT-ACQUISITION; provided, however, that no such
amendment shall change the rate of conversion provided for in divisions VII and
VIII of part B of Article FOURTH hereof or adversely affect the rights of the
shareholders of BIOQUANT subsequent to the adoption and approval of this
Agreement and Plan of Merger by the shareholders of BIOQUANT.
NINTH: Miscellaneous. A. BIOQUANT-ACQUISITION agrees that from time to
time as and when requested by the Surviving Corporation, its successors or
assigns, it will execute, acknowledge, deliver and file all proper deeds,
assurances, assignments, bills of sale and other documents, and do all other
acts and things, or cause the same to be done, necessary or proper in order to
vest, perfect or confirm in the Surviving Corporation title to and possession of
all the property, rights, privileges, powers and franchises of
BIOQUANT-ACQUISITION, or otherwise necessary or proper to carry out the intent
and purposes of this Agreement and Plan of Merger.
B. This Agreement and Plan of Merger shall be binding and inure to the
benefit of the parties hereto and their respective successors and assigns.
C. This Agreement and Plan of Merger shall be governed by the laws of the
State of Delaware.
D. This Agreement and Plan of Merger may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
* * *
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement
and Plan of Merger the day and year first above written.
BIOQUANT, INC.
(a Michigan corporation)
By: /s/ Paul G. Kanan
-------------------------------------
Name: Paul G. Kanan
Title: President
Attest:
s/Mary L. Campbell
- -------------------------------------
Mary L. Campbell, Secretary
PACIFIC BIOMETRICS, INC.
(a Delaware corporation)
By: s/Paul G. Kanan
-------------------------------------
Name: Paul G. Kanan
Title: President
Attest:
s/Mary L. Campbell
- -------------------------------------
Mary L. Campbell, Secretary
BIOQUANT-ACQUISITION, INC.
(a Delaware corporation)
By: s/Paul G. Kanan
-------------------------------------
Name: Paul G. Kanan
Title: President
Attest:
s/Mary L. Campbell
- -------------------------------------
Mary L. Campbell, Secretary
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<PAGE>
EXHIBIT A
The Class A Common Stock, Class E-1 Common Stock and Class E-2 Common
Stock to be received in connection with the Merger are identical in all
respects, except that the Class E-1 Common Stock and Class E-2 Common Stock
shall not be assignable or transferable and will automatically convert into
shares of Class A Common Stock, on a one-for-one basis, upon the achievement of
the objectives described below, or, if not so converted prior to June 30, 2001,
will be cancelled by PBI-DE :
(a) Each share of Class E-1 Common Stock shall be automatically converted,
without any action on the part of the holder thereof, into one share of Class A
Common Stock in the event that:
(i) PBI-DE's net income before provision for income taxes and exclusive of
any extraordinary earnings (all as audited and determined by PBI-DE's
independent public accountants) (the "Minimum Pretax Income") amounts to
at least $6.0 million during the fiscal year ending on June 30, 1997, 1998
or 1999; $7.5 million during the fiscal year ending on June 30, 2000; or
$10.5 million during the fiscal year ending on June 30, 2001; or
(ii) commencing at the effective date of PBI-DE's initial public offering
(the "Effective Date") and ending 18 months after such date, the bid price
of the Class A Common Stock shall average in excess of $12.50 per share
(subject to certain adjustments) for 30 consecutive business days; or
(iii) commencing 18 months from the Effective Date and ending 36 months
after the Effective Date, the bid price of the Class A Common Stock shall
average in excess of $16.75 per share (subject to certain adjustments) for
30 consecutive business days; or
(iv) the abandonment of or failure to consummate PBI-DE's initial public
offering of its equity securities on or before June 30, 1997.
(b) Each share of Class E-2 Common Stock shall be automatically converted,
without any action on the part of the holder thereof, into one share of Class A
Common Stock in the event that:
(i) the Minimum Pretax Income amounts to at least $9.5 million during the
fiscal year ending on June 30, 1997, 1998 or 1999; $11.0 million during
the fiscal year ending on June 30, 2000; or $14.25 million during the
fiscal year ending on June 30, 2001; or
(ii) commencing at the Effective Date and ending 18 months after the
Effective Date, the bid price of the Class A Common Stock shall average in
excess of $18.50 per share (subject to certain adjustments) for 30
consecutive business days; or
<PAGE>
(iii) commencing 18 months from the Effective Date and ending 36 months
after the Effective Date, the bid price of the Class A Common Stock shall
average in excess of $23.50 per share (subject to certain adjustments) for
30 consecutive business days; or
(iv) the abandonment of or failure to consummate PBI-DE's initial public
offering of its equity securities on or before June 30, 1997.
The Minimum Pretax Income amounts set forth above assume the conversion
into Class A Common Stock of all of the Class E-1 Common Stock, Class E-2 Common
Stock, and any other outstanding securities which are convertible into Class A
Common Stock solely upon surrender of such convertible securities without the
payment of any additional consideration, but shall be increased proportionally
to reflect the issuance of any other additional shares, including any shares
that may be issued upon the exercise of the Class A Warrants or the Class B
Warrants contemplated to be issued in the Company's initial public offering or
any other options or warrants presently outstanding or hereafter granted by
PBI-DE. The Minimum Pretax Income shall be calculated exclusive of any
extraordinary earnings including, but not limited to, any charge to income
resulting from the conversion of the Class E-1 Common Stock or Class E-2 Common
Stock into Class A Common Stock.
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, made and entered into as of the 15th day of
May, 1996, by and between PACIFIC BIOMETRICS, INC. ("PBI-WA" or the "Surviving
Corporation"), a Washington corporation, PACIFIC BIOMETRICS, INC. ("PBI-DE"), a
Delaware corporation and PBI-ACQUISITION, INC. ("PBI-ACQUISITION"), a Delaware
corporation and wholly-owned subsidiary of PBI-DE (which corporations are
sometimes hereinafter collectively referred to as the "Constituent
Corporations").
W I T N E S S E T H:
WHEREAS:
1. The Board of Directors of each of the Constituent Corporations deems it
advisable and in the best interests of each of the Constituent Corporations and
its shareholders or stockholders that PBI-ACQUISITION be merged with and into
PBI-WA as permitted by the Washington Business Corporation Act ("WBCA") and the
Delaware General Corporation Law ("DGCL") under and pursuant to the terms and
conditions hereafter set forth; and
2. The Board of Directors of each of the Constituent Corporations have
adopted and approved this Agreement and Plan of Merger and have directed that
this Agreement be submitted to its shareholders and stockholders, respectively,
for approval.
NOW, THEREFORE, in accordance with the applicable provisions of the WBCA
and the DGCL, the parties hereto agree as follows:
FIRST: Constituent Corporations; Surviving Corporation. The names of the
Constituent Corporations are Pacific Biometrics, Inc., a Washington corporation,
Pacific Biometrics, Inc., a Delaware corporation and PBI-Acquisition, Inc., a
Delaware corporation. The name of the Surviving Corporation is Pacific
Biometrics, Inc., a Washington corporation. As soon as practicable following the
satisfaction or waiver of all conditions set forth herein, PBI-ACQUISITION shall
be merged with and into PBI-WA (the "Merger") and PBI-WA shall survive the
Merger, whereby the Certificate of Incorporation and By-Laws of the Surviving
Corporation as in effect immediately prior to the effective time of the Merger
shall constitute the "Articles" of the Surviving Corporation within the meaning
of Section 23B.01.400(1) of the WBCA and Section 104 of the DGCL.
SECOND: A. PBI-WA Shares. PBI-WA is authorized to issue 10,000,000 shares
of common stock, no par value per share and no shares of preferred stock. There
are outstanding 5,500,000 shares of common stock, said common stock being
entitled to vote. The number of outstanding shares of said common stock is
subject to change prior to the
<PAGE>
effective date of the Merger (1) upon the exercise of stock options of PBI-WA
and (2) any stock purchase plans, warrants or conversion rights of PBI-WA, now
outstanding or hereafter granted.
B. PBI-DE Shares. PBI-DE is authorized to issue 30,000,000 shares of
common stock, par value $.01 per share, and 5,000,000 shares of preferred stock,
par value $.01 per share. There is outstanding 1 share of common stock, said
common stock being entitled to vote, and no shares of said preferred stock. The
number of outstanding shares of said common stock is not subject to change prior
to the effective date of the Merger; no shares of said preferred stock will be
issued prior to the effective date of the Merger.
C. PBI-ACQUISITION Shares. PBI-ACQUISITION is authorized to issue 1,000
shares of common stock, par value $.01 per share, and no shares of preferred
stock. There is outstanding 1 share of common stock, said common stock being
entitled to vote. The number of outstanding shares of said common stock is not
subject to change prior to the effective date of the Merger.
THIRD: Covenants. Each of PBI-WA, PBI-DE and PBI-ACQUISITION shall take,
or cause to be taken, all action and shall do, or cause to be done, all things
necessary, proper or advisable under the laws of the States of Washington and
Delaware and upon the advice of counsel to consummate and make effective the
Merger in accordance with this Agreement and Plan of Merger as promptly as shall
be practicable.
FOURTH: Merger. A. The Merger shall become effective upon approval thereof
by the respective shareholders of PBI-WA, PBI-DE and PBI-ACQUISITION and upon
the last to occur of (i) the filing with the Secretary of State of the State of
Delaware of a copy of this Agreement and Plan of Merger or a certificate of
merger pursuant to Section 252 of the DGCL, (ii) the filing with the Secretary
of State of the State of Washington of articles of merger pursuant to Section
23B.11.050 of the WBCA, or (iii) June 30, 1996. (The time of such later filing
or June 30, 1996, as the case may be, is hereinafter called the "Effective
Time".)
B. At the Effective Time:
I. PBI-ACQUISITION shall be merged with and into PBI-WA, which shall
be the surviving corporation, and the separate corporate existence of
PBI-ACQUISITION shall cease.
II. The Surviving Corporation shall thereafter possess all the
rights, privileges, powers and franchises and assume and agree to perform and
discharge all the debts, obligations, contracts and liabilities of each of
PBI-ACQUISITION and PBI-WA, and all property, real, personal and mixed, of each
of PBI-ACQUISITION and PBI-WA shall vest in the Surviving Corporation without
further act or deed.
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<PAGE>
III. The name of the Surviving Corporation shall remain Pacific
Biometrics, Inc.
IV. The Certificate of Incorporation and the By-Laws of PBI-WA shall
be the Certificate of Incorporation and the By-Laws of the Surviving
Corporation.
V. The officers and the directors of the Surviving Corporation and
PBI-DE shall be as follows:
Ellen A. Rudnick Chairman of the Board
Paul G. Kanan President, CEO and Director
G. Russell Warnick Executive Vice President
Elizabeth Teng Leary, Ph.D. Vice President
Mary L. Campbell Director
Terry M. Giles Director
Craig M. Goldstone Director
Douglas S. Harrington, M.D. Director
VI. The 1 share of common stock of PBI-ACQUISITION shall be
cancelled and retired, all rights in respect thereof shall cease and the capital
of the Surviving Corporation shall be reduced by the $4.00 of capital applicable
to such share.
VII. Each outstanding share of the common stock of PBI-WA, including
shares held by PBI-WA in its treasury, shall thereupon, and without the
surrender of stock certificates or any other action, be converted into
approximately .018 shares of Class A common stock, .080 shares of Class E-1
common stock and .091 shares of Class E-2 common stock, of PBI-DE (the terms of
which are more fully described on Exhibit A attached hereto), such shares to be
fully paid and non-assessable shares of PBI-DE. Certificates representing
outstanding shares of the common stock of PBI-WA shall thenceforth be deemed to
represent the number of shares of the common stock of PBI-DE after giving effect
to the exchange ratio set forth above and the holders thereof shall have all of
the same rights which they would have had if such certificates had been issued
by PBI-DE.
VIII. All outstanding options, warrants and other agreements to
purchase shares of the common stock of PBI-WA shall become, respectively,
options, warrants and agreements to purchase, that number of shares of the
common stock of PBI-DE, giving effect to the exchange ratio set forth above, had
such options, warrants and agreements to purchase been exercised in full prior
to the Merger and otherwise on the same terms and conditions, except that no
anti-dilution, preemptive or similar rights shall survive or be granted in
connection with the Merger.
3
<PAGE>
FIFTH: Representations and Warranties of PBI-WA.
PBI-WA represents and warrants to PBI-DE and PBI-ACQUISITION as follows:
A. Organization and Good Standing. Each of PBI-WA and its subsidiaries is
a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has all requisite corporate
power and authority to own, lease and operate its properties and to carry on its
business as now being conducted. Each of PBI-WA and its subsidiaries is duly
qualified or licensed and in good standing to do business in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
in such jurisdictions where the failure to be so duly qualified or licensed and
in good standing would not, in the aggregate, have a Material Adverse Effect.
"Material Adverse Effect" means, with respect to PBI-WA, any event that could
have a material adverse effect on the business, assets, results of operations or
financial condition of and its subsidiaries taken as a whole.
B. Capitalization. As of the date hereof the capitalization of PBI-WA is
as set forth in Article SECOND hereof. All of the issued and outstanding shares
of PBI-WA Common Stock have been duly authorized and validly issued and are
fully paid, nonassessable and free of preemptive rights, with no personal
liability attaching to the ownership thereof. All prior sales of PBI-WA's
securities have been made in compliance with or under an exemption from the
registration requirements of the Securities Act of 1933 and applicable state
securities laws, and no shareholders of PBI-WA have any rescission rights with
respect to any PBI-WA securities. PBI-WA does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character to or by which PBI-WA is a party or is bound which, directly or
indirectly, obligate PBI-WA to issue, deliver or sell any shares of PBI-WA
Common Stock or any other equity security of PBI-WA or any securities
representing the right to purchase or otherwise receive any shares of PBI-WA
Common Stock or any other equity security of PBI-WA.
C. Subsidiaries. PBI-WA owns, directly or indirectly, all of the issued
and outstanding shares of capital stock of each of PBI-WA's subsidiaries, free
and clear of all liens and encumbrances whatsoever, and all of such shares are
duly authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights, with no personal liability attaching to the ownership
thereof. None of PBI-WA's subsidiaries has or is bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the sale or issuance by such subsidiary of any shares of
capital stock or any other equity security of such subsidiary or any securities
representing the right to purchase or otherwise receive any shares of capital
stock or any other equity security of such subsidiary.
D. Authority Relating to this Agreement. PBI-WA has full corporate power
and authority to execute and deliver this Agreement and all other documents
hereby contemplated and, subject to obtaining requisite shareholder approval, to
consummate the
4
<PAGE>
transactions contemplated hereby and to take all other actions required to be
taken by it pursuant to the provisions hereof. The execution and delivery of
this Agreement by PBIWA and the consummation by PBI-WA of the transactions
contemplated hereby have been duly and validly authorized and approved by the
Board of Directors of PBI-WA and no other corporate proceedings on the part of
PBI-WA are necessary to authorize this Agreement or to consummate the
transactions so contemplated (other than, with respect to the Merger, the
approval and adoption of this Agreement by the holders of a majority of the
outstanding shares of PBI-WA Common Stock in accordance with the WBCA and
PBI-WA's Articles of Incorporation and Bylaws). This Agreement has been duly and
validly executed and delivered by PBI-WA and constitutes a valid and binding
agreement of PBI-WA, enforceable against PBI-WA, in accordance with its terms,
except as such enforcement may be limited by bankruptcy and other laws affecting
the enforceability of creditors' rights generally or laws governing the
availability of specific performance or other equitable remedies, or
restrictions on the enforcement of securities indemnification and contribution
provisions imposed by public policy.
E. Consents and Approvals; No Violations. Except for applicable
requirements of state Blue Sky laws, and the filing and recordation of the
applicable certificates of merger, no filing with, and no permit, authorization,
consent or approval of, any public body or authority, including courts of
competent jurisdiction, domestic or foreign ("Governmental Entity"), or of any
third party, is necessary for the entering into and/or consummation by PBI-WA of
the transactions contemplated by this Agreement. Subject to obtaining requisite
shareholder approval, neither the execution and delivery of this Agreement by
PBI-WA nor the consummation by PBI-WA of the transactions contemplated hereby
nor compliance by PBI-WA with any of the provisions hereof will (i) constitute
any violation or breach of any provision of the Articles of Incorporation or
By-laws of PBI-WA or its subsidiaries, (ii) result in a violation or breach of,
or constitute (with or without due notice or lapse of time or both) a default
(or give rise to any right of termination, cancellation or acceleration or
result in the creation of any lien) under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license, contract, agreement
or other instrument or obligation to which PBI-WA or its subsidiaries is a party
or by which either they or their properties or assets may be bound or (iii)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to PBI-WA, its subsidiaries or any of their properties or assets,
except in the case of subclause (ii) or (iii) of this sentence for violations,
breaches, defaults, rights which arose or liens which would not, in the
aggregate, have a Material Adverse Effect and which would not prevent or
materially delay the consummation of the transactions contemplated hereby.
F. Absence of Certain Changes. Subsequent to December 31, 1995 and as of
the Effective Time, the Company and its subsidiaries each has not or will not
have incurred any liabilities or obligations, direct or contingent, not in the
ordinary course of business, or entered into any transaction not in the ordinary
course of business, which is material to the business of the company and its
subsidiaries, and there has not been nor will there be at the Effective Time any
change in the capital stock of, or any incurrence of short-term or long-term
debt by, the Company or its subsidiaries or any issuance of options, warrants or
other
5
<PAGE>
rights to purchase the capital stock of the Company or its subsidiaries or any
adverse change or any development involving, so far as the Company can now
reasonably foresee a prospective adverse change in the financial condition, net
worth, results of operations, business, key personnel or properties of the
Company or the subsidiaries which would be material to the business or financial
condition of the Company and its subsidiaries, and the Company and its
subsidiaries each has not become a party to, and neither the business nor the
property of the Company and its subsidiaries each has become the subject of, any
material litigation whether or not in the ordinary course of business, except as
may have been previously disclosed.
G. No Undisclosed Liabilities. Since December 31, 1995 neither PBI-WA nor
its subsidiaries has incurred any liabilities (absolute, accrued, contingent or
otherwise) which are, in the aggregate, material to the business, operations or
financial condition of PBI-WA and its subsidiaries taken as a whole, except
liabilities (i) adequately provided for in the PBI-WA balance sheet, (ii)
incurred since December 31, 1995 in the ordinary course of business, (iii)
consistent with past practice or (iv) incurred in connection with this
Agreement.
H. No Default. Neither PBI-WA nor any of its subsidiaries is in default or
violation (and no event has occurred which with notice or the lapse of time or
both would constitute a default or violation) of any term, condition or
provision of (i) its Articles of Incorporation or its By-laws, (ii) any note,
bond, mortgage, indenture, license, contract, agreement or other instrument or
obligation to which PBI-WA or any of its subsidiaries is a party or by which
they or any of their properties or assets may be bound or (iii) any order, writ,
injunction, decree, statute, rule or regulation applicable to PBI-WA or any of
its subsidiaries, except in the case of subclause (ii) or (iii) of this sentence
for defaults or violations which would not, in the aggregate, have a Material
Adverse Effect and which would not prevent or materially delay the consummation
of the transactions contemplated hereby.
I. Litigation. There is no suit, action or proceeding pending or, to the
knowledge of PBI-WA, any investigation pending or any suit, action, proceeding
or investigation threatened against, involving or affecting PBI-WA or its
officers and directors in such capacities, any of its subsidiaries, or any of
its or their respective properties or rights seeking equitable relief or
claiming damages in excess of $5,000, nor is there any judgment, decree,
injunction, rule or order of any court, governmental department, commission,
agency, instrumentality or arbitrator outstanding against PBI-WA or its officers
and directors in such capacities, or any of its subsidiaries, which does or
might reasonably be expected to (i) result in the modification, termination,
suspension, impairment or reformation of any contract to which PBI-WA or any of
its subsidiaries is a party, which modification, termination, suspension,
impairment or reformation would have a Material Adverse Effect; (ii) materially
adversely affect the manner in which PBI-WA conducts its business; (iii) affect
the ability of PBI-WA, PBI-DE or PBI-ACQUISITION to consummate any of the
transactions contemplated hereby; or (iv) have a Material Adverse Effect. There
is no suit, action or proceeding pending by PBI-WA against any third party.
6
<PAGE>
J. Compliance with Applicable Law. The businesses of PBI-WA and its
subsidiaries are not being conducted in violation of any applicable law,
ordinance, rule, regulation, decree or order of any Governmental Entity, except
for violations which, in the aggregate, do not and would not reasonably be
expected to have a Material Adverse Effect. PBI-WA and its subsidiaries hold all
permits, licenses, variances, exemptions, orders and approvals of all
Governmental Entities necessary for the lawful conduct of their respective
businesses (the "PBI-WA Permits"), except for failures to hold such PBI-WA
Permits which would not, in the aggregate, reasonably be expected to have a
Material Adverse Effect. PBI-WA and its subsidiaries are in compliance with the
terms of the PBI-WA Permits, except where the failure so to comply would not, in
the aggregate, reasonably be expected to have a Material Adverse Effect.
K. Taxes. PBI-WA and each of its subsidiaries have duly and timely filed
all material federal, state, local and foreign tax returns required to be filed
by it, and except for taxes not in excess of $5,000, PBI-WA has duly and timely
paid, caused to be paid or made adequate provision for the payment of all Taxes
required to be paid in respect of the periods covered by such returns, except
such as are being contested in good faith by appropriate proceedings or
otherwise, and has made adequate provision for payment of all taxes anticipated
to be payable in respect of all periods since the periods covered by such
returns. Except for taxes not in excess of $5,000, PBI-WA and each of its
subsidiaries have fully collected, withheld and/or paid over all Taxes required
to be collected, withheld and/or paid over to a taxing authority. No issue or
claim has been asserted for taxes by any taxing authority for any prior period,
the adverse determination of which would result in a deficiency which would have
a Material Adverse Effect, other than those heretofore paid or provided for.
L. Employee Benefit Plans; ERISA. PBI-WA and each of its ERISA Affiliates
(as such term is defined in the Employee Retirement Income Security Act of 1974)
have complied with all of the provisions of each employee benefit plan and all
applicable provisions of ERISA and the Internal Revenue Code (the "Code"), have
administered each such plan (including the payment of benefits thereunder) in
accordance with the provisions of each such plan and all applicable provisions
of ERISA and the Code and have timely made all required contributions thereto.
M. Intellectual Property. PBI-WA and its subsidiaries each has all
material licenses, permits and other governmental authorizations currently
required for the conduct of their respective business or the ownership of their
respective properties and are in all material respects complying therewith and
owns or possesses adequate rights to use all material patents, patent
applications, trademarks, service marks, trade-names, trademark registrations,
service mark registrations, copyrights and licenses necessary for the conduct of
such business, and has not received any notice of conflict with or infringement
of the asserted rights of others in respect thereof. To the best knowledge of
PBI-WA, none of the activities or business of PBI-WA or its subsidiaries are in
violation of, or cause PBI-WA or its subsidiaries to violate, any law, rule,
regulation or order of the United States, any state, county or locality, or of
any agency or body of the United States or of any state, county or
7
<PAGE>
locality, the violation of which would have a material adverse impact upon the
financial condition, business, property, prospective results of operations, or
net worth of PBI-WA and its subsidiaries.
N. Labor Disputes. PBI-WA is not a party to any collective bargaining
agreements, whether or not expired. There are no labor unions or other
organizations representing or, to PBI-WA's knowledge, purporting to represent or
attempting to represent any employee of PBI-WA. PBI-WA has not violated any
provision of federal or state law or any governmental rule or regulation, or any
order, ruling, decree, judgment or arbitration award of any court, arbitrator or
any government agency regarding the terms and conditions of employment of
employees, former employees or, without limitation, laws, rules, regulations,
orders, rulings, decrees, judgments and awards relating to discrimination
(including, without limitation, discrimination on the basis of age, sex, race or
religion), fair labor standards and occupational health and safety, wrongful
discharge or violation of the person rights of employees, former employees or
prospective employees or state temporary disability laws, rules or regulations,
except where such failure would not have a Material Adverse Effect.
O. Financial Statements and Condition. The financial statements present
fairly, in all material respects, the financial position of PBI-WA as of their
respective dates and the results of PBI-WA's operations, cash flows and
shareholders' equity for such periods, all in conformity with GAAP applied on a
consistent basis, except that the unaudited financial statements may not include
all notes required under GAAP.
P. Environmental Matters. PBI-WA has obtained or caused to be obtained and
continues to maintain or cause the maintenance of permits, licenses, consents
and approvals (the "Environmental Approvals") necessary for conducting the
business of PBI-WA which are required under environmental laws, and PBI-WA has
not operated in violation of any environmental law or the terms of any
Environmental Approval.
Q. Insurance. PBI-WA has adequate insurance coverage for the assets and
operations of its business which is of the type and in the amounts customarily
carried by persons conducting businesses similar to that of PBI-WA.
R. FCPA. PBI-WA and its subsidiaries each has not, directly or indirectly,
at any time (i) made any contributions to any candidate for political office, or
failed to disclose fully any such contribution in violation of law or (ii) made
any payment to any state, federal or foreign governmental officer or official,
or other person charged with similar public or quasi-public duties, other than
payments or contributions required or allowed by applicable law. To the best of
PBI-WA's knowledge, PBI-WA's and its subsidiaries' internal accounting controls
and procedures are sufficient to cause PBI-WA and its subsidiaries to comply in
all material respects with the Foreign Corrupt Practices Act of 1977, as
amended.
8
<PAGE>
SIXTH: Representations and Warranties of PBI-DE and PBI-ACQUISITION.
PBI-DE and PBI-ACQUISITION, jointly and severally, represent and warrant
to PBI-WA that:
A. Organization and Good Standing. Each of PBI-DE and PBI-ACQUISITION is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
own, operate or lease all of its properties and assets and carry on its business
as it is now being conducted.
B. Capitalization of PBI-DE and PBI-ACQUISITION. At the date hereof, the
capitalization of each of PBI-DE and PBI-ACQUISITION is as set forth in Article
SECOND hereof. All of the issued and outstanding shares of PBI-ACQUISITION are
owned by PBI-DE and there are not any outstanding or authorized subscriptions,
options, warrants, calls, rights, commitments or any other agreements of any
character to or by which PBI-ACQUISITION is a party or is bound. All of the
issued and outstanding shares of capital stock of PBI-DE and PBI-ACQUISITION
have been duly authorized and are validly issued, fully paid and nonassessable
and free of preemptive rights with no personal liability attaching to the
ownership thereof.
C. Authority Relative to Agreement. Each of PBI-DE and PBI-ACQUISITION has
the corporate power and authority to execute and deliver this Agreement and all
other documents hereby contemplated, and to consummate the transactions hereby
and thereby contemplated and to take all other actions required to be taken by
it pursuant to the provisions hereof and thereof. The execution, delivery and
performance of this Agreement and all other documents hereby contemplated to be
executed by PBI-DE and PBI-ACQUISITION and the consummation by PBI-DE and
PBI-ACQUISITION of the transactions hereby contemplated have been, duly and
validly authorized by any and all necessary corporate action of PBI-DE and
PBI-ACQUISITION. This Agreement and all other documents hereby contemplated to
be executed by PBI-DE and PBI-ACQUISITION constitute legal, valid and binding
obligations of PBI-DE and PBI-ACQUISITION, respectively, enforceable in
accordance with their respective terms, except as such enforcement may be
limited by bankruptcy and other laws affecting the enforceability of creditors'
rights generally or laws governing the availability of specific performance or
other equitable remedies, or restrictions on the enforcement of securities
indemnification and contribution provisions imposed by public policy. The
issuance by PBI-DE of shares of PBI-DE Common Stock in connection with the
Merger does not require any further corporate action and will not be subject to
preemptive rights or other preferential rights of any present or future
stockholders of PBI-DE and, at the Effective Time, the shares of PBI-DE Common
Stock, if any, to be issued to PBI-WA in connection with the Merger will be duly
authorized, validly issued, fully paid and non-assessable with no personal
liability attaching to the ownership thereof. The options and warrants, if any,
to be substituted by PBI-DE for the stock options and warrants of PBI-WA have
been duly authorized and when issued and delivered in connection with the Merger
will have been duly issued and delivered and will
9
<PAGE>
constitute valid and legally binding obligations of PBI-DE enforceable in
accordance with their terms.
D. No Violation of Other Instruments or Obligations. Neither the execution
and delivery by PBI-DE and PBI-ACQUISITION of this Agreement and all other
documents hereby or thereby contemplated nor the consummation by PBI-DE and
PBI-ACQUISITION of the transactions hereby and thereby contemplated nor
compliance by PBI-DE and PBI-ACQUISITION with any of the provisions hereof shall
(i) constitute any violation or breach of the respective Certificates of
Incorporation or By-laws of PBI-DE or PBI-ACQUISITION; (ii) constitute (with or
without due notice or lapse of time or both) a default under or a violation or
breach of, or result in acceleration of any obligation or give rise to any right
of termination, cancellation or result in the creation of any lien under, any
provision of any contract, lease, mortgage or other instrument or obligation to
which either PBI-DE or PBI-ACQUISITION is a party or by which either of its
properties or assets may be bound, which default, breach or acceleration has not
been waived; (iii) violate any judgment, order, writ, injunction, decree,
statute, rule or regulation affecting PBI-DE or any of its assets or
PBI-ACQUISITION or any of its assets; (iv) result in the creation of any lien on
any of the assets or properties of PBI-DE or PBI-ACQUISITION; or (v) result in
the termination of any license, franchise, lease or permit to which PBI-DE or
PBI-ACQUISITION is a party or by which each is bound, except in the case of
those items specified in clause (ii), (iii), (iv) or (v) above, which would not,
individually or in the aggregate, limit or delay either PBI-DE's or
PBI-ACQUISITION's ability to consummate the transactions hereby contemplated or
have a Material Adverse Effect on either PBI-DE or PBI-ACQUISITION.
E. Consents and Approvals. Except for applicable requirements of state
Blue Sky laws and the filing and recordation of the applicable certificates of
merger, as required by the DGCL and the MBCA, no filing with, and no permit,
authorization, consent or approval of, any Government Entity, or of any third
party, is necessary for the entering into and/or consummation by PBI-DE or
PBI-ACQUISITION of the transactions contemplated by this Agreement.
F. PBI-ACQUISITION. PBI-ACQUISITION will not conduct any business or have
any liabilities other than those hereunder nor will it have any operating assets
except as contemplated hereby and PBI-DE will have good and valid title to all
of the issued and outstanding shares of PBI-ACQUISITION.
G. No Default. Neither PBI-DE nor any of its subsidiaries is in default or
violation (and no event has occurred which with notice or the lapse of time or
both would constitute a default or violation) of any term, condition or
provision of (i) its Certificate of Incorporation or its By-laws, (ii) any note,
bond, mortgage, indenture, license, contract, agreement or other instrument or
obligation to which PBI-DE or any of its subsidiaries is a party or by which
they or any of their properties or assets may be bound or (iii) any order, writ,
injunction, decree, statute, rule or regulation applicable to PBI-DE or any of
its subsidiaries, except in the case of subclause (ii) or (iii) for defaults or
violations which would
10
<PAGE>
not, in the aggregate, have a Material Adverse Effect and which would not
prevent or materially delay the consummation of the transactions contemplated
hereby.
H. Litigation. There is no suit, action or proceeding pending or, to the
knowledge of PBI-DE, any investigation pending or any suit, action, proceeding
or investigation threatened against, involving or affecting PBI-DE or its
officers and directors in such capacities, any of its subsidiaries, or any of
its or their respective properties or rights seeking equitable relief, nor is
there any judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or arbitrator outstanding
against PBI-DE or its officers and directors in such capacities, or any of its
subsidiaries, which does or might reasonably be expected to (i) result in the
modification, termination, suspension, impairment or reformation of any contract
to which PBI-DE or any of its subsidiaries is a party, which modification,
termination, suspension, impairment or reformation would have a Material Adverse
Effect; (ii) materially adversely affect the manner in which PBI-DE conducts its
business; (iii) adversely affect the ability of PBI-WA or PBI-DE to consummate
any of the transactions contemplated hereby; or (iv) have a Material Adverse
Effect.
I. Compliance with Applicable Law. To PBI-DE's knowledge, the business of
PBI-DE and its subsidiaries are not being conducted in violation of any
applicable law, ordinance, rule, regulation, decree or order of any Governmental
Entity, except for violations which, in the aggregate, do not and would not
reasonably be expected to have a Material Adverse Effect. PBI-DE and its
subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary for the lawful conduct of their
respective businesses (the "PBI-DE Permits"), except for failures to hold such
PBI-DE Permits which would not, in the aggregate, have a Material Adverse
Effect. PBI-DE and its subsidiaries are in compliance with the terms of the
PBI-DE Permits, except where the failure so to comply would not, in the
aggregate, reasonably be expected to have a Material Adverse Effect.
SEVENTH: Termination. This Agreement and Plan of Merger may be terminated
and the Merger abandoned for any reason whatsoever by action of the Board of
Directors of PBI-WA, PBI-DE or PBI-ACQUISITION at any time prior to the
Effective Time, notwithstanding adoption and approval of this Agreement and Plan
of Merger by the shareholders of PBI-WA or stockholders of PBI-DE or
PBI-ACQUISITION.
EIGHTH: Amendment. This Agreement and Plan of Merger may be amended at any
time prior to the Effective Time by action of the respective Boards of Directors
of PBI-WA, PBI-DE and PBI-ACQUISITION; provided, however, that no such amendment
shall change the rate of conversion provided for in divisions VII and VIII of
part B of Article FOURTH hereof or adversely affect the rights of the
shareholders of PBI-WA subsequent to the adoption and approval of this Agreement
and Plan of Merger by the shareholders of PBI-WA.
11
<PAGE>
NINTH: Miscellaneous. A. PBI-ACQUISITION agrees that from time to time as
and when requested by the Surviving Corporation, its successors or assigns, it
will execute, acknowledge, deliver and file all proper deeds, assurances,
assignments, bills of sale and other documents, and do all other acts and
things, or cause the same to be done, necessary or proper in order to vest,
perfect or confirm in the Surviving Corporation title to and possession of all
the property, rights, privileges, powers and franchises of PBI-ACQUISITION, or
otherwise necessary or proper to carry out the intent and purposes of this
Agreement and Plan of Merger.
B. This Agreement and Plan of Merger shall be binding and inure to the
benefit of the parties hereto and their respective successors and assigns.
C. This Agreement and Plan of Merger shall be governed by the laws of the
State of Delaware.
D. This Agreement and Plan of Merger may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
* * *
12
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement
and Plan of Merger the day and year first above written.
PACIFIC BIOMETRICS, INC.
(a Washington corporation)
By: /s/ Craig M. Goldstone
--------------------------------------
Name: Craig M. Goldstone
Title: Chairman of the Board
Attest:
/s/ G. Russell Warnick
- --------------------------------------
G. Russell Warnick, President
PACIFIC BIOMETRICS, INC.
(a Delaware corporation)
By: /s/ Paul G. Kanan
--------------------------------------
Name: Paul G. Kanan
Title: President
Attest:
/s/ Mary L. Campbell
- --------------------------------------
Mary L. Campbell, Secretary
PBI-ACQUISITION, INC.
(a Delaware corporation)
By: /s/ Paul G. Kana
--------------------------------------
Name: Paul G. Kanan
Title: President
Attest:
/s/ Mary L. Campbell
- --------------------------------------
Mary L. Campbell, Secretary
13
<PAGE>
EXHIBIT A
The Class A Common Stock, Class E-1 Common Stock and Class E-2 Common
Stock to be received in connection with the Merger are identical in all
respects, except that the Class E-1 Common Stock and Class E-2 Common Stock
shall not be assignable or transferable and will automatically convert into
shares of Class A Common Stock, on a one-for-one basis, upon the achievement of
the objectives described below, or, if not so converted prior to June 30, 2001,
will be cancelled by PBI-DE:
(a) Each share of Class E-1 Common Stock shall be automatically converted,
without any action on the part of the holder thereof, into one share of Class A
Common Stock in the event that:
(i) PBI-DE's net income before provision for income taxes and exclusive of
any extraordinary earnings (all as audited and determined by PBI-DE's
independent public accountants) (the "Minimum Pretax Income") amounts to
at least $6.0 million during the fiscal year ending on June 30, 1997, 1998
or 1999; $7.5 million during the fiscal year ending on June 30, 2000; or
$10.5 million during the fiscal year ending on June 30, 2001; or
(ii) commencing at the effective date of PBI-DE's initial public offering
(the "Effective Date") and ending 18 months after such date, the bid price
of the Class A Common Stock shall average in excess of $12.50 per share
(subject to certain adjustments) for 30 consecutive business days; or
(iii) commencing 18 months from the Effective Date and ending 36 months
after the Effective Date, the bid price of the Class A Common Stock shall
average in excess of $16.75 per share (subject to certain adjustments) for
30 consecutive business days; or
(iv) the abandonment of or failure to consummate PBI-DE's initial public
offering of its equity securities on or before June 30, 1997.
(b) Each share of Class E-2 Common Stock shall be automatically converted,
without any action on the part of the holder thereof, into one share of Class A
Common Stock in the event that:
(i) the Minimum Pretax Income amounts to at least $9.5 million during the
fiscal year ending on June 30, 1997, 1998 or 1999; $11.0 million during
the fiscal year ending on June 30, 2000; or $14.25 million during the
fiscal year ending on June 30, 2001; or
14
<PAGE>
(ii) commencing at the Effective Date and ending 18 months after the
Effective Date, the bid price of the Class A Common Stock shall average in
excess of $18.50 per share (subject to certain adjustments) for 30
consecutive business days; or
(iii) commencing 18 months from the Effective Date and ending 36 months
after the Effective Date, the bid price of the Class A Common Stock shall
average in excess of $23.50 per share (subject to certain adjustments) for
30 consecutive business days; or
(iv) the abandonment of or failure to consummate PBI-DE's initial public
offering of its equity securities on or before June 30, 1997.
The Minimum Pretax Income amounts set forth above assume the conversion
into Class A Common Stock of all of the Class E-1 Common Stock, Class E-2 Common
Stock, and any other outstanding securities which are convertible into Class A
Common Stock solely upon surrender of such convertible securities without the
payment of any additional consideration, but shall be increased proportionally
to reflect the issuance of any other additional shares, including any shares
that may be issued upon the exercise of the Class A Warrants or the Class B
Warrants contemplated to be issued in the Company's initial public offering or
any other options or warrants presently outstanding or hereafter granted by
PBI-DE. The Minimum Pretax Income shall be calculated exclusive of any
extraordinary earnings including, but not limited to, any charge to income
resulting from the conversion of the Class E-1 Common Stock or Class E-2 Common
Stock into Class A Common Stock.
15
<PAGE>
1100 Eastlake Avenue East
OFFICE LEASE
between
Bruce M. and Ann Stever Blume,
as Landlord,
and
Pacific Biometrics, Inc.,
as Tenant
Dated: January 15, 1990
<PAGE>
OFFICE LEASE
TABLE OF CONTENTS
Page
----
1. Premises............................................................... 1
1.1 Description..................................................... 1
1.2 Tenant Improvements............................................. 1
1.3 Parking......................................................... 1
1.4 First Right to Expansion Space.................................. 2
2. Term................................................................... 2
2.1 Term............................................................ 2
2.2 Delay in Commencement........................................... 3
2.3 Tenant's Termination Option..................................... 3
2.4 Landlord's Termination Option................................... 3
3. Rent................................................................... 3
4. Security Deposit....................................................... 4
5. Taxation............................................................... 4
5.1 Payment of Increases in Real Property Taxes..................... 4
5.2 Proration; Joint Assessment..................................... 5
5.3 Personal Property Taxes........................................ 5
6. Use.................................................................... 5
6.1 Use............................................................. 5
6.2 Suitability..................................................... 5
6.3 Uses Prohibited................................................. 6
7. Services, Utilities and Operating Costs................................ 7
7.1 Services and Utilities.......................................... 7
7.2 Operating Costs................................................. 7
7.3 Adjustment of Estimated Operating Costs......................... 8
8. Maintenance and Repairs, Alterations and Additions..................... 8
8.1 Landlord's Obligations.......................................... 8
8.2 Tenant's Obligations............................................ 9
8.3 Landlord's Rights............................................... 9
8.4 Alterations and Additions...................................... 10
9. Rights of Entry........................................................ 10
10. Liens................................................................. 10
11. Indemnity............................................................. 11
11.1 Indemnity...................................................... 11
11.2 Exemption of Landlord from Liability........................... 11
12. Insurance............................................................. 12
12.1 Liability Insurance............................................ 12
i
<PAGE>
12.2 Property Insurance............................................. 12
12.3 Other Insurance Matters........................................ 12
12.4 Waiver of Subrogation.......................................... 12
13. Damage or Destruction................................................. 13
13.1 Damage......................................................... 13
13.2 Abatement of Rent; Tenant's Remedies........................... 13
14. Condemnation.......................................................... 14
15. Assignment and Subletting............................................. 15
15.1 Landlord's Consent Required.................................... 15
15.2 No Release of Tenant........................................... 15
16. Subordination......................................................... 15
16.1 Subordination.................................................. 15
16.2 Subordination Agreements....................................... 15
16.3 Quiet Enjoyment................................................ 16
16.4 Attornment..................................................... 16
17. Default; Remedies..................................................... 16
17.1 Default........................................................ 16
17.2 Remedies....................................................... 17
17.3 Late Charges and Default Interest.............................. 18
18. Broker................................................................ 18
19. Miscellaneous......................................................... 18
19.1 Estoppel Certificate........................................... 18
19.2 Transfer of Landlord's Interest................................ 19
19.3 Captions; Attachments; Construction; Defined
Terms.......................................................... 19
19.4 Entire Agreement............................................... 20
19.5 Severability................................................... 20
19.6 Costs of Suit.................................................. 20
19.7 Time; Joint and Several Liability.............................. 20
19.8 Binding Effect; Choice of Law.................................. 21
19.9 Waiver......................................................... 21
19.10 Holding Over.................................................. 21
19.11 Signs......................................................... 21
19.12 Tenant Equipment.............................................. 22
19.13 Recording..................................................... 22
19.14 Notices....................................................... 22
19.15 Corporate Authority........................................... 22
19.16 Exhibits...................................................... 22
EXHIBIT A ................................................................. 25
EXHIBIT B ................................................................. 26
EXHIBIT C ................................................................. 27
ii
<PAGE>
1100 EASTLAKE AVENUE EAST
OFFICE LEASE
THIS OFFICE LEASE is made and entered into this 15th day of January, 1990,
by and between BRUCE M. AND ANN STEVER BLUME, husband and wife, doing business
as BRUCE BLUME & COMPANY (the "Landlord"), and PACIFIC BIOMETRICS, INC., a
Washington corporation (the "Tenant").
1. Premises.
1.1 Description. Landlord hereby leases to Tenant and Tenant hereby leases
from Landlord the second floor space outlined on Exhibit A attached hereto (the
"Premises") and the first floor space outlined on Exhibit B attached hereto (the
"Storage Space"), in the building commonly known as 1100 Eastlake Avenue East
(the "Building") in the City of Seattle, County of King, State of Washington,
and situated on the land described in Exhibit C (the "Land") The Premises,
Storage Space, Building and Land are sometimes collectively referred to as the
"Property". Landlord and Tenant agree that the Premises contain approximately
2800 rentable square feet of space and 2370 usable square feet of space, as such
terms are defined by the Building Owners and Managers Association; the Storage
Space contains approximately 75 rentable square feet of space; the Building
contains approximately 11,580 rentable square feet of space; and that Tenant's
percentage of the Building for all purposes under this Lease is 24.17%
("Tenant's Share").
1.2 Tenant Improvements. Landlord shall construct and install in the
Premises tenant improvements pursuant to the plans and specifications prepared
by Business Space Design and dated December 19, 1989 (the "Tenant
Improvements"). Landlord shall bear the expense of constructing and installing
the Tenant Improvements to the extent such expense does not exceed $23,700 (such
amount being the product of (a) 2370, the usable square footage of the Premises,
and (b) $10.00). Any expense of constructing and installing the Tenant
Improvements in excess of $23,700, but not more than $10,000 (the "Amortized
Expense"), shall be paid initially by Landlord, and an amount equal to a monthly
payment which would amortize the Amortized Expense over a sixty (60) month
period with interest at the rate of twelve percent (12%) per annum on the unpaid
balance shall be paid by Tenant to Landlord as Additional Rent monthly, in
advance, on the first day of each calendar month of the term of this Lease.
Tenant shall be responsible for and shall pay when due all expenses incurred in
constructing and installing the Tenant Improvements in excess of $33,700.
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1.3 Parking. Tenant shall be provided with twelve (12) parking spaces on
the Property, on a nonexclusive basis at no charge.
1.4 First Right to Expansion Space. So long as Tenant is not in default
under this Lease, during the term of this Lease Tenant shall have a right of
first refusal option ("First Right Option") to lease all or a portion of the
space in the Building presently leased to Peratrovich, Nottingham & Drage, Inc.
("Expansion Space") when it becomes available for leasing in accordance with the
following terms and conditions:
(a) If a person or entity ("Prospective Lessee") is interested in
leasing all or any part of the Expansion Space, Landlord shall give Tenant
written notice of (i) the name of the Prospective Lessee, (ii) the portion, if
not all, of the Expansion Space to be leased by the Prospective Lessee, and
(iii) the term of the proposed lease. Landlord and the Prospective Lessee need
not have agreed on any other of the terms on which the Prospective Lessee would
take the space. Tenant shall have fourteen (14) days after the written notice
has been given in which to exercise its First Right Option with respect to all
of the space in the Expansion Space identified in Lessor's notice.
(b) If the First Right Option is exercised by Tenant, Landlord and
Tenant shall promptly amend this Lease to include all of the space identified in
Lessor's notice, and the leasing of such Expansion Space (the "First Right
Option Space") by Tenant shall be on the same terms and conditions as set forth
in this Lease, except that the Base Monthly Rent for such First Right Option
Space shall be mutually negotiated by the parties in good faith to reflect the
prevailing market rate for comparable space in the Building at the time of such
exercise by Tenant. Likewise, the tenant improvement allowance shall be mutually
negotiated by the parties in good faith to reflect Landlord's then-prevailing
policy for the Building.
(c) Tenant's right to occupy the First Right Option space shall
continue to and end at the same time as its right to occupy the Premises.
(d) If Tenant does not exercise the First Right Option within the
ten-day time period, the First Right Option shall be deemed waived as it relates
to that particular notice, and Landlord thereafter shall be free to lease the
subject space without restriction, but this First Right Option shall remain in
full force and effect as to any subsequent Prospective Lessee of space in the
Expansion Space.
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2. Term.
2.1 Term. The term of this Lease shall commence on January 22, 1990 (the
"Commencement Date") and end on January 31, 1995 (the "Expiration Date") unless
sooner terminated pursuant to this Lease.
2.2 Delay in Commencement. Tenant agrees that in the event Landlord for
any reason fails to deliver possession of the Premises and/or the Storage Space
to Tenant on the Commencement Date, Landlord shall not be liable for any damage
thereby nor shall such failure affect the validity of this Lease or the
obligations of Tenant hereunder, but in such case Tenant shall not be obligated
to pay rent until possession of the Premises is tendered to Tenant. In the event
Landlord shall not have delivered possession of the Premises on or before
February 15, 1990, then Tenant by written notice to Landlord may terminate this
Lease, and upon Landlord's return of any monies previously deposited by Tenant
the parties shall have no further rights or liabilities to each other. If Tenant
occupies the Premises or Storage Space prior to the Commencement Date, such
occupancy shall be subject to all provisions hereof, such occupancy shall not
advance the Expiration Date, and Tenant shall pay rent for such period at the
Base Monthly Rent as set forth below.
2.3 Tenant's Termination Option. Tenant shall have the right to terminate
this Lease effective at any time on or after the third anniversary of the
Commencement Date; provided that (a) Tenant notifies Landlord in writing of the
date on which it elects to have this Lease terminated at least 120 days in
advance of such date, and (b) Tenant pays to Landlord, on or before the date
this Lease is to terminate pursuant to such notice, in a lump sum, an amount
equal to the remaining portion of the Amortized Expense not yet paid to
Landlord.
2.4 Landlord's Termination Option. Landlord shall have the right to
terminate this Lease effective at any time on or after the third anniversary of
the Commencement Date; provided that (a) Landlord notifies Tenant in writing of
the date on which it elects to have this Lease terminated at least 120 days in
advance of such date, and (b) Landlord reimburses Tenant for up to $2,800 of the
actual and reasonable moving expenses incurred by Tenant in relocating. In the
event Landlord so elects to terminate this Lease, Landlord shall offer to Tenant
available space in other buildings owned by Landlord at ninety-five percent
(95%) of the then prevailing rental rate for comparable space in the building in
which the available space is offered, with a tenant improvement allowance in
keeping with the then prevailing policy in the building in which the available
space is offered.
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3. Rent.
Tenant shall pay to Landlord as rent for the Premises and the Storage
Space, in advance on the first day of each calendar month during the term of
this Lease, without deduction, offset, prior notice or demand, the sum of Three
Thousand Five Hundred Forty-Three and 75/100 Dollars ($3,543.75) (the "Base
Monthly Rent"), together with all Additional Rent required under this Lease. The
Base Monthly Rent is equal to one-twelfth of the sum of the following two
products: (a) 2800 square feet times $15.00, and (b) 75 square feet times $7.00.
If the Commencement Date is not the first day of a month, or if the Expiration
Date is not the last day of a month, a prorated monthly installment shall be due
in advance for the fractional month during which the Lease commences and/or
expires. Notwithstanding the foregoing, Tenant shall not be obligated to pay the
Base Monthly Rent (but shall be obligated to pay any Additional Rent due) for
the months of February and March 1990. Concurrently with Tenant's execution of
this Lease, Tenant shall pay to Landlord the sum of Three Thousand Five Hundred
Forty-Three and 75/100 Dollars ($3,543.75) as rent for April 1990.
4. Security Deposit.
On execution of this Lease, Tenant shall also deposit with Landlord the
sum of Three Thousand Five Hundred Forty-Three and 75/100 Dollars ($3,543.75) as
a security deposit (the "Security Deposit") for the performance by Tenant of all
of the terms of this Lease to be kept and performed by Tenant. If Tenant
defaults with respect to any provisions of this Lease, Landlord may (but shall
not be required to) use, apply or retain all or any part of the Security Deposit
to compensate Landlord for any loss or damage which Landlord may suffer by
reason of Tenant's default. If any portion of the Security Deposit is so used or
applied, Tenant shall, within ten (10) days after written demand therefor,
deposit cash with Landlord in an amount sufficient to restore the Security
Deposit to its original amount. 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. 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 upon the
expiration or sooner termination of the term of this Lease.
5. Taxation.
5.1 Payment of Increases in Real Property Taxes. Tenant shall pay as
Additional Rent Tenant's Share of all increases in real property taxes levied or
assessed against the Property during the term of this Lease ("Taxes"), whether
the increases result from increased rate and/or valuation, over and above the
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Taxes levied or assessed against the Property for the base year, which shall be
calendar year 1990 (the "Tax Base Year"). Each year during the term of this
Lease, Landlord shall notify Tenant of Landlord's calculation of Tenant's Share
of the increases in Taxes. Tenant shall reimburse Landlord for Tenant's Share of
the increases in Taxes within thirty (30) days of the date of receipt by Tenant
of such notice.
5.2 Proration; Joint Assessment. In the event the Taxes paid or reimbursed
by Tenant cover any period of time prior to commencement or after the expiration
of the term of this Lease, Tenant's Share of the Taxes shall be equitably
prorated to cover only the period of time within the tax year during which this
Lease is in effect, and Landlord shall reimburse Tenant to the extent required.
With respect to any general or special assessments which may be levied against
or upon the Property, or which under the laws then in force may be evidenced by
improvement or other bonds or may be paid in annual installments, only the
amount of such annual installment (with appropriate proration for any partial
year) and interest due thereon shall be included within the computation of the
Taxes.
5.3 Personal Property Taxes. Tenant shall pay prior to delinquency all
taxes upon trade fixtures, furnishings, equipment and all other personal
property of Tenant contained in the Premises and Storage Space. When possible,
Tenant shall cause such trade fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property of
Landlord.
6. Use.
6.1 Use. The Premises shall be used and occupied by Tenant for office,
medical research, and blood testing purposes and the Storage Space shall be used
by Tenant only for storage purposes, and Tenant shall not use the Premises or
Storage Space for any other purposes whatsoever without obtaining the prior
written consent of Landlord.
6.2 Suitability. Tenant, upon occupying the Premises, shall be deemed to
have accepted the Premises and Storage Space in the condition existing as of the
date of occupancy, and in any event this Lease shall be subject to all
applicable zoning ordinances and to any municipal, county and state laws and
regulations governing and regulating the use of the Property. Tenant
acknowledges that neither Landlord nor Landlord's agent has made any
representation or warranty as to the suitability of the Premises or Storage
Space for the conduct of Tenant's business.
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6.3 Uses Prohibited.
(a) Tenant shall not do or permit anything to be done in or about
the Premises or the Property which will increase the existing rate of insurance
upon the Premises or the Building (unless Tenant shall pay any increased premium
as a result of such use or acts) or cause the cancellation of any insurance
policy covering the Building or the Property, nor shall Tenant sell or permit to
be kept, used or sold in or about the Premises any articles which may be
prohibited by a standard form policy of fire insurance.
(b) Tenant shall not do or permit anything to be done in or about
the Premises or the Property which will in any way obstruct or interfere with
the rights of other tenants or occupants of the Property, or injure or annoy
them or use or allow the Premises or the Storage Space to be used for any
unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit
any nuisance in, on or about the Property. Tenant shall not commit or suffer to
be committed any waste in or upon the Property.
(c) Tenant shall not use or permit anything to be done in or about
the Property which will in any way conflict with any law, statute, zoning
restriction, ordinance or governmental rule or regulation or requirements of
public authorities now in force or which may hereafter be enacted or
promulgated. Tenant shall, at its sole cost and expense, promptly comply with
all laws, statutes, ordinances and governmental rules, regulations or
requirements now in force or which may hereafter be in force and with the
requirements of any board of fire underwriters or other similar body relating to
or affecting the condition, use or occupancy of the Premises and Storage Space.
(d) Tenant shall comply with all environmental laws, as now existing
or hereafter enacted or amended. Tenant shall not use the Property for, or
permit anything to be done in or about the Property, which may subject Landlord
or any mortgagee under any mortgage covering the Property to any liability under
any environmental laws resulting from Tenant's use of or conduct on the
Property. Landlord shall have the right at all reasonable times upon notice to
Tenant to conduct environmental investigations, including the taking of samples,
for the purpose of detecting or measuring the presence of hazardous wastes or
hazardous substances on the Property.
7. Services, Utilities and Operating Costs.
7.1 Services and Utilities.
(a) Landlord shall furnish to the Premises (but not the Storage
Space) during the ordinary business hours of the
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Building reasonable quantities of gas, electricity, air-conditioning required in
Landlord's judgment for the comfortable use and occupancy of the Premises,
water, sewer, janitorial, and window-washing service.
(b) Tenant shall furnish to the Premises telephone and all other
services and utilities not expressly required to be furnished by Landlord, and
shall locate all wires and connections related thereto only as directed by
Landlord, and without such direction no boring or cutting for the installation
of such wiring and connection shall be permitted.
(c) If Tenant shall require services or utilities in excess of that
normally furnished for the use of the Premises as general office space, then
Tenant, on a monthly basis, in advance, shall pay to Landlord as Additional Rent
the cost of all such excess services and utilities supplied to the Premises as
reasonably determined by Landlord.
(d) Whenever heat generating machines or equipment are used in the
Premises which affect the temperature otherwise maintained by the
air-conditioning system, Landlord shall have the right to install and maintain
supplementary air-conditioning units in the Premises, and the cost thereof shall
be paid as Additional Rent by Tenant to Landlord monthly, in advance, on the
first day of each calendar month during the term of this Lease.
7.2 Operating Costs.
(a) Tenant shall pay to Landlord as Additional Rent Tenant's Share
of the increases in operating costs of the Property ("Operating Costs") as
reasonably estimated by Landlord over the Operating Costs for the Property
during calendar year 1990 (the "Operating Cost Base Year"). Tenant's Share of
such increases shall be paid to Landlord monthly, in advance, on the first day
of each calendar month.
(b) Operating Costs include, without limitation, all costs incurred
by Landlord in operating, cleaning, equipping, protecting, lighting, repairing,
replacing, heating, air-conditioning, maintaining and insuring the Property.
Such costs shall include, without limitation, gardening and landscaping; gas,
electricity and other utilities, water and sewer charges; maintenance of signs
(other than tenants' signs); premiums for liability, property damage, fire and
other types of casualty insurance on the Building; maintenance of the Property,
HVAC maintenance, fees for required licenses and permits; repairing,
resurfacing, repaving, painting, lighting, cleaning, refuse removal, parking lot
sweeping, snow removal, pest control, security and other similar items.
Operating Costs shall also include, without limitation, the cost, as reasonably
amortized by Landlord, with interest at the rate of fifteen percent (15%) per
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year on the unamortized balance, of any improvements which Landlord elects to
capitalize made during the term of this Lease which reduce operating costs, but
in an amount not to exceed such reduction in operating costs for the relevant
year. Operating Costs shall also include, without limitation, the cost, as
reasonably amortized by Landlord, with interest at the rate of fifteen percent
(15%) per year on the unamortized balance, of any improvements which Landlord
elects to capitalize made during the term of this Lease in compliance with the
requirements of any federal, state or local law or governmental regulation, and
a reasonable reserve for repair or replacement of equipment used in the
maintenance or operation of the Property and all other costs which, in
accordance with generally accepted accounting principles used by Landlord, as
applied to the maintenance and operation of industrial or office buildings, are
properly chargeable to the operation and maintenance of the Property. Operating
Costs shall not include depreciation of the Building. Landlord may cause any or
all of such services to be provided by third parties.
7.3 Adjustment of Estimated operating Costs. Landlord may adjust its
estimates of Operating costs at any time and from time to time based upon
Landlord's experience and reasonable anticipation of costs. Such adjustments
shall be effective as of the next rent payment after notice to Tenant. Within
ninety (90) days after the end of each calendar year of the Lease term, Landlord
shall deliver to Tenant a statement prepared in accordance with generally
accepted accounting principles setting forth in reasonable detail the Operating
Cots paid or incurred by the Landlord during the preceding calendar year and
Tenant's Share of the Operating Costs. Upon receipt of such statement, there
shall be an adjustment between Landlord and Tenant with payment to Landlord
within ten (10) days after Tenant's receipt of such statement, or credit then
given by Landlord, as the case may be, so that Landlord may receive the entire
amount of the Tenant's Share of the increases in Operating Costs for such
period.
8. Maintenance and Repairs, Alterations and Additions.
8.1 Landlord's Obligations. Subject to the provisions of Section 13 and
except for damage caused by any negligent or intentional act or omission of
Tenant or Tenant's agents, employees or invitees, Landlord, at Landlord's
expense, shall keep in good order, condition and repair the Premises and the
public and common areas of the Building, such as lobbies, stairs, corridors and
rest rooms. Landlord shall provide lighting replacement for Landlord-furnished
lights, toilet room supplies, window-washing with reasonable frequency, and
customary janitorial service to the Premises (but not the Storage Space).
Landlord shall have no obligation to make repairs under this Section 8.1 until a
reasonable time after receipt of written
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notice of the need for such repairs. Tenant expressly waives the benefits of any
statute now or hereafter in effect which would otherwise afford Tenant the right
to make repairs at Landlord's expense or to terminate this Lease because of
Landlord's failure to keep the Premises in good order, condition and repair.
8.2 Tenant's Obligations.
(a) Subject to the provisions of Sections 7.2, 8.1 and 13, Tenant,
at Tenant's expense, shall promptly repair all damage to the Premises, Storage
Space, or Building caused by any negligent or intentional act or omission of
Tenant or Tenant's agents, employees or invitees.
(b) Upon the expiration or sooner termination of this Lease, Tenant
shall surrender the Premises and Storage Space in the same condition as
received, broom clean, ordinary wear and tear and damage by fire, earthquake,
act of God or the elements alone excepted. Tenant, at its sole cost and expense,
agrees to repair any damage to the Premises or Storage Space caused by or in
connection with the removal of any articles of personal property or fixtures,
including repairing the floor and patching and painting the walls to Landlord's
reasonable satisfaction.
8.3 Landlord's Rights. In the event Tenant fails to perform Tenant's
obligations under this Section 8, Landlord shall give Tenant notice to do such
acts as are reasonably required to so maintain the Premises; if Tenant shall
fail to commence such work and diligently prosecute it to completion, then
Landlord shall have the right, but not the obligation, to do such acts and
expend such funds at the expense of Tenant as are reasonably required to perform
such work. Any amount so expended by Landlord shall be paid by Tenant promptly
after demand with interest at fifteen percent (15%) per year from the date of
such work. Landlord shall have no liability to Tenant for any damage,
inconvenience or interference with the use of the Premises or Storage Space by
Tenant as a result of performing any such work.
8.4 Alterations and Additions.
(a) Tenant shall not, without Landlord's prior written consent, make
any alterations, additions, improvements or utility installations in, on or
about the Premises or Storage Space. The term "utility installations" shall
include ducting, power panels, fluorescent fixtures, space heaters, conduit and
wiring.
(b) All alterations, additions, improvements and utility
installations (whether or not such utility installations constitute trade
fixtures of Tenant), which may be made on the Premises or Storage Space, shall,
at the expiration or sooner
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termination of the term of this Lease, become the property of Landlord and
remain upon and be surrendered with the Premises and Storage Space.
Notwithstanding the foregoing sentence, Tenant may remove, upon the expiration
or sooner termination of this Lease, the fume hood and ducting connecting the
fume hood, subject to the repair obligation of Section 8.2(b) above.
9. Rights of Entry.
Landlord and Landlord's agents shall have the right at reasonable times to
enter the Premises and Storage Space to inspect, maintain, repair, alter or make
additions to the Premises or Storage Space, or to show the Premises and Storage
Space to prospective purchasers, tenants or lenders. For each of the aforesaid
purposes, Landlord shall at all times have and retain a key to all of the doors
in, upon and about the Premises and Storage Space, excluding Tenant's vaults and
safes, and Landlord shall have the right to use any.and all means which Landlord
may deem proper to open such doors in an emergency, and any such entry shall not
be construed to be a forcible or unlawful entry into, or an eviction of, Tenant.
Tenant further acknowledges the right of Windermere Real Estate to enter at any
time the Storage Space to access its storage space adjacent thereto, and the
right of Landlord to enter at any time the Storage Space to access the Building
electrical and mechanical equipment located therein.
10. Liens.
Tenant shall keep the Premises, the Building and the Property free from
any liens and encumbrances arising out of any work performed or materials
furnished by or at the direction of Tenant. In the event that Tenant shall not,
within twenty (20) days following the imposition of any such lien, cause such
lien to be released of record by payment or posting of a proper bond, Landlord
shall have, in addition to all other remedies provided herein and by law, the
right, but not the obligation, to cause the same to be released by such means as
it shall deem proper, including payment of the claim giving rise to such lien.
All such sums paid by Landlord and all expenses incurred by it in connection
therewith, including attorneys' fees and costs, shall be payable to Landlord by
Tenant on demand with interest at the rate of fifteen percent (15%) per year.
Landlord shall have the right at all times to post and keep posted on the
Premises any notices permitted or required by law, or which Landlord shall deem
proper, for the protection of Landlord and the Property, and any other party
having an interest therein, from mechanics' and materialmen's liens, and Tenant
shall give to Landlord at least ten (10) business days' prior written notice of
the expected date of commencement of any work relating to alterations or
additions to the Premises to allow Landlord to post such notices.
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11. Indemnity.
11.1 Indemnity. Tenant shall indemnify and hold Landlord harmless f rom
and against any and all claims of liability for any injury or damage to any
person or property arising from Tenant's use of the Property, or from the
conduct of Tenant's business, or from any activity, work or thing done,
permitted or suffered by Tenant in or about the Property. Tenant shall further
indemnify and hold Landlord harmless from and against any and all claims arising
from any breach or default in the performance of any obligation on Tenant's part
to be performed under this Lease, or arising from any negligence of Tenant or
Tenant's agents, contractors or employees, and from and against all.costs,
attorneys' fees, expenses and liabilities incurred in the defense of any such
claim or any action or proceeding brought thereon. In the event any action or
proceeding is brought against Landlord by reason of any such claim, Tenant upon
notice from Landlord shall defend same at Tenant's expense by counsel
satisfactory to Landlord.
11.2 Exemption of Landlord from Liability. Landlord shall not be liable
for injury to Tenant's business or loss of income therefrom or for damage which
may be sustained by the person, goods, wares, merchandise or property of Tenant,
its employees, invitees, customers, agents or contractors or any other person in
or about the Premises and Storage Space, caused by or resulting from fire,
steam, electricity, gas, water or rain, which may leak or flow from or into any
part of the Premises or Storage Space, or from the breakage, leakage,
obstruction or other defects of the pipes, sprinklers, wires, appliances,
plumbing, air-conditioning or lighting fixtures of the same, whether such damage
or injury results from conditions arising upon the Premises or Storage Space or
upon other portions of the Building or the Property. Landlord shall not be
liable to Tenant for any damage to Tenant's property from any cause whatsoever.
Tenant, as a material part of the consideration to Landlord, waives all claims
against Landlord for damage to Tenant's property arising for any reason.
12. Insurance.
12.1 Liability Insurance. Tenant, at Tenant's expense, shall maintain at
all times during the term of this Lease a policy of comprehensive public
liability and property damage insurance with a combined single liability limit
of $1,000,000 and a property damage limit of $500,000, insuring Landlord and
Tenant against any and all liability arising out of Tenant's use or occupancy of
the Premises, Storage Space, and Property. The limits of such insurance shall
not limit the liability of Tenant. Such insurance shall have a Landlord's
Protective Liability endorsement attached thereto. Both Landlord and Tenant
shall be
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named as insureds or additional insureds and the policy shall contain
cross-liability endorsements.
12.2 Property Insurance. Landlord shall procure and maintain at all times
during the term of this Lease insurance covering loss or damage to the Building,
providing protection against all perils included within the classification of
fire, extended coverage, vandalism, malicious mischief, sprinkler leakage and
special extended peril (all-risk). Such insurance shall provide for payment of
loss thereunder to Landlord or the holder of the mortgage, if any, on the
Property.
12.3 Other Insurance Matters. All insurance required under this Lease
shall: (i) be issued by insurance companies authorized to do business in the
State of Washington and rated A/XI or better in the most recent edition of
Best's Insurance Reports; (ii) shall be issued as a primary policy, not
contributing with and not in excess of coverage which the Landlord may carry;
(iii) shall contain an endorsement requiring thirty (30) days' prior written
notice from the insurance company to both Landlord and Tenant and to Landlord's
lender before cancellation or change in the coverage, scope, or amount of any
policy; and (iv) shall contain loss payable clauses satisfactory to Landlord.
Tenant shall deliver to Landlord each policy or a certificate of the policy,
together with evidence of payment of premiums on or before the Commencement
Date, and on renewal of the policy not less than thirty (30) days before
expiration of the term of the policy. If Tenant fails to procure and maintain
such insurance, Landlord may, upon ten (10) days' prior written notice, but
shall not be obligated to, procure and maintain the same at Tenant's expense,
which amount shall be payable by Tenant upon demand.
12.4 Waiver of Subrogation. Landlord and Tenant each hereby waive any and
all rights of recovery against the other or against the officers, employees,
agents and representatives of the other, on account of loss or damage occasioned
to such waiving party of its property or the property of others under its
control caused by fire or any of the extended coverage risks described above, to
the extent that such loss or damage is insured against under any insurance
policies carried by the parties pursuant to this Lease and in force at the time
of such loss or damage. Landlord and Tenant shall give notice to the insurance
carrier or carriers that the foregoing mutual waiver of subrogation is contained
in this Lease.
13. Damage or Destruction.
13.1 Damage. In the event the Premises are damaged to such an extent as to
render the same untenantable in whole or in a substantial part thereof, or are
destroyed, it shall be optional with Landlord to repair or rebuild the same; and
after the
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happening of any such event, Tenant shall give Landlord immediate written notice
thereof. Landlord shall have not more than thirty (30) days after date of such
notification to notify the Tenant, in writing, of Landlord's intentions to
repair or rebuild said Premises, or the part so damaged as aforesaid, and if
Landlord elects to repair or rebuild said Premises, or the part so damaged as
aforesaid, Landlord shall diligently prosecute the work of such repairing or
rebuilding without unnecessary delay. If the Landlord shall fail to give the
notice aforesaid, or shall fail to diligently prosecute the work of repair or
rebuilding, Tenant shall have the right to declare this Lease terminated by
written notice served upon the Landlord. Tenant shall also have the right to
terminate this Lease by written notice if, at the time Landlord advises Tenant
of his election to repair or rebuild, said repairs will reasonably be
anticipated to require in excess of sixty (60) days to complete.
13.2 Abatement of Rent; Tenant's Remedies.
(a) If the Premises and/or Storage Space are damaged, there shall be
an abatement or reduction of rent between the date of such damage and the date
of completion of the restoration or, if earlier, the date of termination of this
Lease, in proportion to the extent the damage impairs Tenant's use of the
Premises and/or Storage Space, except that if such damage results from Tenant's
fault or negligence, Tenant shall not be entitled to such abatement or reduction
of rent. Except for such abatement or reduction of rent, if any, Tenant shall
have no claim against Landlord for any damage suffered by reason of any such
damage, destruction, repair or restoration.
(b) If Landlord elects to repair or restore the Premises under this
Section 13 and shall not substantially complete such repair or restoration
within ninety (90) days after the damage occurred, Tenant, at Tenant's option,
may cancel and terminate this Lease by written notice to Landlord at any time
after the expiration of such ninety-day period, but prior to the substantial
completion of such repair or restoration.
14. Condemnation.
If, during the term of this Lease, there is a condemnation or taking by
public authority of all or any part of the Premises or the Building, the rights
and obligations of the parties shall be as follows:
(a) If there is a taking of less than twenty-five percent (25%) of
the Premises, this Lease shall remain in full force and effect.
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(b) If there is a taking of twenty-five percent (25*) or more of the
Premises, the term of this Lease shall terminate as of the date of vesting of
title in the condemnor.
(c) If there is a taking of a part of the Building other than the
Premises and, if in the opinion of Landlord the Building should be restored in
such a way as to alter the Premises materially, then Landlord may terminate the
term of this Lease by giving notice to such effect to Tenant within sixty (60)
days after the date of vesting of title in the condemnor and the term of this
Lease shall expire on the date specified in the notice of termination, which
date shall not be less than sixty (60) days after the giving of such notice, as
fully and completely as if such date were the date hereinabove set forth for the
expiration of the term of this Lease.
(d) Landlord shall be entitled.to receive the entire award for the
Premises, the Building and the Property, Tenant hereby assigning to Landlord
Tenant's interest therein, if any, provided, however, that nothing contained
herein shall be deemed to give Landlord any interest in or to require Tenant to
assign to Landlord any award made to Tenant for the taking of personal property
and fixtures belonging to Tenant, and/or for the interruption of or damage to
Tenant's business and/or for Tenant's unamortized cost of leasehold
improvements. The claim for interruption of or damage to Tenant's business shall
be subject and subordinate to the claim of the first mortgagee of the Property.
(e) If any portion of the Premises is taken by condemnation and this
Lease remains in full force and effect, on the date of taking the rent shall be
reduced by an amount that is in the same ratio to the monthly rent as the total
number of square feet in the Premises taken bears to the total number of square
feet in the Premises immediately before the date of taking. No temporary taking
of the Premises and/or of Tenant's rights therein or under this Lease shall
terminate this Lease or give Tenant any right to any abatement or reduction of
rent under this Lease. Any award made to Tenant by reason of any such temporary
taking shall belong entirely to Tenant, and Landlord shall not be entitled to a
share therein.
15. Assignment and Subletting.
15.1 Landlord's Consent Required. Tenant shall not assign, transfer,
mortgage, pledge, hypothecate or encumber this Lease or any interest therein.
Tenant shall not sublet the Premises or Storage Space, or any part thereof,
without the prior written consent of Landlord, which consent shall not be
unreasonably withheld.
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15.2 No Release of Tenant. No consent by Landlord to any subletting by
Tenant shall relieve Tenant of any obligation to be performed by the Tenant
under this Lease, whether occurring before or after such consent or subletting.
The acceptance of rent by Landlord from any other person shall not be deemed to
be a waiver by Landlord of any provision of this Lease or to be a consent to any
assignment, subletting or other transfer. Consent to one assignment, subletting
or other transfer shall not be deemed to constitute consent to any subsequent
assignment, subletting or other transfer.
16. Subordination.
16.1 Subordination. This Lease, at Landlord's option, shall be subject and
subordinate to any first mortgage or deed of trust which now exists or may
hereafter be executed affecting any part of the Property, or on or against
Landlord's interest or estate therein, without the necessity of the execution
and delivery of any further instruments on the part of Tenant to effectuate such
subordination. If any mortgagee shall elect to have this Lease prior to the lien
of its mortgage, and shall give written notice thereof to Tenant, this Lease
shall be deemed prior to such mortgage.
16.2 Subordination Agreements. Tenant covenants and agrees to execute and
deliver upon demand, without charge therefor, such further instruments
evidencing such subordination of this Lease to the lien of any such mortgage or
deed of trust as may be required by Landlord. Tenant hereby appoints Landlord as
Tenant's attorney-in-fact, irrevocably, to execute and deliver any such
agreements, instruments, releases or other documents.
16.3 Quiet Enjoyment. Landlord covenants and agrees with Tenant that upon
Tenant paying rent and other monetary sums due under the Lease and performing
its covenants and conditions, Tenant shall and may peaceably and quietly have,
hold and enjoy the Premises and Storage Space for the term, subject, however, to
the terms of the Lease and of any mortgage or deed of trust described above.
16.4 Attornment. In the event of foreclosure or the exercise of the power
of sale under any mortgage made by the Landlord covering the Property, the
Tenant shall attorn to the purchaser upon any such foreclosure or sale and
recognize such purchaser as the Landlord under this Lease, provided such
purchaser expressly agrees in writing to be bound by the terms of the Lease.
15
<PAGE>
17. Default; Remedies.
17.1 Default. The occurrence of any of the following shall constitute a
material default and breach of this Lease by Tenant:
(a) any failure by Tenant to pay when due the rent or any other
monetary sums required to.be paid hereunder;
(b) the abandonment or vacation of the Premises by Tenant;
(c) a failure by Tenant to observe and perform any other provision
of this Lease to be observed or performed by Tenant, where such failure
continues for twenty (20) days after written notice thereof by Landlord to
Tenant; provided, however, that if the nature of such default is such that the
same cannot reasonably be cured within such twenty (20) day period, Tenant shall
not be deemed to be in default if Tenant shall within such period commence such
cure and thereafter diligently prosecute the same to completion; or
(d) the making by Tenant of any general assignment or general
arrangement for the benefit of creditors; the filing by or against Tenant of a
petition to have Tenant adjudged a bankrupt or of 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 sixty (60) days);
the appointment of a trustee or receiver to take possession of substantially all
of the 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
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.
17.2 Remedies. In the event of any such material default or breach by
Tenant, Landlord may at any time thereafter, with or without notice and demand
and without limiting Landlord in the exercise of any right or remedy at law or
in equity which Landlord may have by reason of such default or breach:
(a) maintain this Lease in full force and effect and recover the
rent and other monetary charges as they become due, without terminating Tenant's
right to possession, irrespective of whether Tenant shall have abandoned the
Premises. In the event Landlord elects to not terminate the Lease, Landlord
shall have the right to attempt to re-let the Premises and storage Space at such
rent and upon such conditions and for such a term, and to do all acts necessary
to maintain or preserve the Premises as Landlord deems reasonable and necessary,
without being deemed to have elected to terminate the Lease, including removal
of all
16
<PAGE>
persons and property from the Premises and Storage Space; such property may be
removed and stored in a public warehouse or elsewhere at the cost of and for the
account of Tenant. In the event any such re-letting occurs, this Lease shall
terminate automatically upon the new Tenant taking possession of the Premises.
Notwithstanding that Landlord fails to elect to terminate the Lease initially,
Landlord at any time during the term of this Lease may elect to terminate this
Lease by virtue of such previous default of Tenant, or
(b) terminate Tenant's right to possession by any lawful means, in
which case this Lease shall terminate and Tenant shall immediately surrender
possession of the Premises and Storage Space to Landlord. In such event Landlord
shall be entitled to recover from Tenant all damages incurred by Landlord by
reason of Tenant's default, including, without limitation thereto, 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 (ii) the worth at the time of award
of the amount 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 is proved
could be reasonably avoided; plus (iv) any other amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure to perform
its obligations under this Lease or which in the ordinary course of things would
be likely to result therefrom; plus (v) it Landlord's election, such other
amounts in addition to or in lieu of the foregoing as may be permitted from time
to time by applicable state law. Upon any such re-entry, Landlord shall have the
right to make any reasonable repairs, alterations or modifications to the
Premises and/or Storage Space, which Landlord in its sole discretion deems
reasonable and necessary. As used in Subsection (i) above, the "worth at the
time of award" is computed by allowing interest at the rate of fifteen percent
(15%) per @ear from the date of default. As used in Subsections (ii) and (iii),
the "worth at the time of award" is computed by discounting such amount at the
discount rate of the U.S. Federal Reserve Bank at the time of award plus one
percent (1%). The term "rent," as used in this Section 17, shall be deemed to be
and to mean the rent to be paid pursuant to Section 3 and all other monetary
sums required to be paid by Tenant pursuant to the terms of this Lease.
17.3 Late Charges and Default Interest. If any installment of Base Monthly
Rent or Additional Rent shall not be received by Landlord within ten (10) days
after such amount shall be due, Tenant shall pay to Landlord a late charge equal
to ten percent (10%) of such overdue amount. The parties hereby agree that such
late charge represents a fair and reasonable estimate of the
17
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costs Landlord will incur by reason of late payment by Tenant. Any other amount
due to Landlord not paid when due shall bear interest at fifteen percent (15%)
per year from the due date. Payment of such interest shall not excuse or cure
any default by Tenant under this Lease.
18. Broker.
Landlord and Tenant each represent to the other that neither is
represented by any broker, agent or finder with respect to this Lease in any
manner, except Richard Dollarhide (the "Broker"). The commission of the Broker
shall be paid by Landlord pursuant to a separate agreement. Each party agrees to
indemnify and hold the other party harmless from and against any and all
liability, costs, damages, causes of action or other proceedings instituted by
any broker, agent or finder, licensed or otherwise, claiming through, under or
by reason of the conduct of the indemnifying party in any manner whatsoever in
connection with this Lease.
19. Miscellaneous.
19.1 Estoppel Certificate.
(a) Tenant shall at any time upon not less than ten (10) days' prior
written notice from Landlord execute, acknowledge and deliver to Landlord a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to Tenant's knowledge, any uncured defaults on
the part of Landlord hereunder, or specifying such defaults if any are claimed.
(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 month's rent has been paid in advance.
(c) If Landlord desires to finance or refinance the Property, or any
part thereof, then Tenant hereby agrees to deliver to any lender designated by
Landlord such financial statements of Tenant as may be reasonably required by
such lender.
19.2 Transfer of Landlord's Interest. If Landlord sells or transfers the
Building or the Property, then upon consummation of the sale or transfer,
Landlord shall be relieved and released
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<PAGE>
from any and all obligations and liabilities thereafter accruing under this
Lease. If any security deposit or prepaid rent has been paid by Tenant, then
Landlord may transfer such security deposit or prepaid rent to Landlord's
successor, and upon such transfer Landlord shall be discharged from any further
liability with respect to such security deposit or prepaid rent. This Lease
shall not be affected by any such sale or transfer and Tenant agrees to attorn
to the purchaser or assignee, provided all of Landlord's obligations hereunder
are assumed in writing by the transferee.
19.3 Captions; Attachments; Construction; Defined Terms.
(a) The captions of the Sections of this Lease are for convenience
only and shall not be deemed to be relevant in resolving any question of
interpretation or construction of any Section of this Lease.
(b) Exhibits attached hereto, and addendums and schedules initialed
by the parties, are deemed by attachment to constitute part of this Lease and
are incorporated herein.
(c) The words "Landlord" and "Tenant," as used herein, shall include
the plural as well as the singular. Words used in neuter gender include the
masculine and feminine and words in the masculine or feminine gender include the
neuter. The term "Landlord" shall mean only the owner or owners at the time in
question of the fee title or a tenant's interest in a ground lease of the
Premises. The obligations contained in this Lease to be performed by Landlord
shall be binding on Landlord's successors and assigns only during their
respective periods of ownership.
19.4 Entire Agreement. This instrument, along with any exhibits and
attachments hereto, constitutes the entire agreement between Landlord and Tenant
relative to the Premises, and this Agreement and the exhibits and attachments
may be altered, amended or revoked only by an instrument in writing signed by
both Landlord and Tenant. Landlord and Tenant agree hereby that all prior or
contemporaneous oral agreements between and among themselves and their agents or
representatives relative to the leasing of the Premises are merged in or revoked
by this Agreement.
19.5 Severability. If any term or provision of this Lease shall, to any
extent, be determined by a court of competent jurisdiction to be invalid or
unenforceable, the remainder of this Lease shall not be affected thereby, and
each term and provision of this Lease shall be valid and be enforceable to the
fullest extent permitted by law.
19
<PAGE>
19.6 Costs of Suit.
(a) If Tenant or Landlord shall bring any action for relief against
the other, declaratory or otherwise, arising out of this Lease, including any
suit by Landlord for the recovery of rent or possession of the Premises, the
losing party shall pay the successful party a reasonable sum for attorneys'
fees, which shall be deemed to have accrued on the commencement of such action
and shall be paid whether or not such action is prosecuted to judgment.
(b) Should Landlord, without fault on Landlord's part, be made a
party to any litigation instituted by Tenant or by any third party against
Tenant, or by or against any person holding under or using the Premises by
license of Tenant, or for the foreclosure of any lien for labor or material
furnished to or for Tenant or any such other person, or otherwise arising out of
or resulting from any act or transaction of Tenant or of any such other person,
Tenant covenants to save and hold Landlord harmless from any judgment rendered
against Landlord or the Premises or any part thereof, and all costs and
expenses, including reasonable attorneys' fees, incurred by Landlord in or in
connection with such litigation.
19.7 Time; Joint and Several Liability. Time is of the essence of this
Lease and each and every provision hereof, except as to the condition relating
to the delivery of possession of the Premises to Tenant. All the terms,
covenants and conditions contained in this Lease to be performed by either
party, if such party shall consist of more than one person or organization,
shall be deemed to be joint and several, and all rights and remedies of the
parties shall be cumulative and nonexclusive of any other remedy at law or in
equity.
19.8 Binding Effect; Choice of Law. The parties hereto agree that all
provisions hereof are to be construed as both covenants and conditions, as
though the words importing such covenants and conditions were used in each
separate Section hereof. Subject to any provisions hereof restricting assignment
or subletting by Tenant and subject to Section 19.2, all of the provisions
hereof shall bind and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and assigns. This Lease
shall be governed by the laws of the State of Washington.
19.9 Waiver. No covenants, terms or conditions or the breach thereof shall
be deemed waived, except by written consent of the party against whom the waiver
is claimed, and any waiver or the breach of any covenant, term or condition
shall not be deemed to be a waiver of any preceding or succeeding breach of the
same or any other covenant, term or condition. Acceptance by Landlord of any
performance by Tenant after the time the same
20
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shall have become due shall not constitute a waiver by Landlord of the breach or
default of any covenant, term or condition unless otherwise expressly agreed to
by Landlord in writing.
19.10 Holding Over.
(a) On expiration of the term of this Lease, Tenant shall surrender
the Premises to Landlord in good condition. Tenant shall remove all of its
personal property on or before the expiration date of the term of this Lease.
Tenant shall perform all restoration made necessary by the removal of such
personal property within the time period stated in this Section.
(b) If Tenant fails to surrender the Premises to Landlord on
expiration of the term of this Lease as required by this Section, Tenant shall
pay Landlord rent at double the monthly rate specified in Section 3 of this
Lease. If Tenant remains in possession of the Premises after expiration of the
term of this Lease, or after the date in any notice given by Landlord to Tenant
terminating this Lease, such possession shall be deemed to be a month-to-month
tenancy.
19.11 Signs. Tenant shall not place any sign upon the Property without
Landlord's prior written consent. If such consent is so obtained, it shall be
Tenant's responsibility to confirm that the proposed signage is in compliance
with the prevailing governmental codes or ordinances. Within sixty (60) days
after the Commencement Date, Landlord, at Landlord's expense, shall install in
the Building a directory of the tenants in the Building.
19.12 Tenant Equipment. Landlord agrees, at Landlord's expense, to remove
and then replace certain windows of the Premises to assist Tenant in moving
equipment into the Premises that could not be moved into the Premises otherwise;
provided, however, that Landlord shall not be required to so remove windows on
more than two occasions before the first anniversary of the Commencement Date,
and more often than once in every succeeding twelve-month period thereafter. No
equipment in excess of 2000 pounds shall be moved into the Premises or the
Storage Space without the prior consent of Landlord, and Landlord shall have the
right to locate the position of such equipment in the Premises or Storage Space
if Landlord so desires.
19.13 Recording. Tenant shall not record this Lease without Landlord's
prior written consent.
19.14 Notices. All Notices or demands of any kind required or desired to
be given by Landlord or Tenant hereunder shall be in writing and shall be deemed
delivered seventy-two (72) hours after depositing the notice or demand in the
United States mail, certified or registered, postage prepaid, addressed to the
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Landlord or Tenant respectively at the addresses set forth after their
signatures at the end of this Lease. A copy of any notice required to be given
in accordance with the terms of this Lease shall be sent simultaneously, in the
manner provided, to such address as the mortgagee of any mortgage from time to
time shall designate.
19.15 Corporate Authority. If Tenant is a corporation, each individual
executing this Lease on behalf of such corporation represents and warrants that
he or she is duly authorized to execute and deliver this Lease on behalf of such
corporation in accordance with a duly adopted resolution of the Board of
Directors of such corporation or in accordance with the bylaws of such
corporation, and that this Lease is binding upon such corporation in accordance
with its terms. If Tenant is a corporation Tenant shall, within thirty (30) days
after execution of this Lease, deliver to Landlord a certified copy of a
resolution of the Board of Directors of such corporation authorizing or
ratifying the execution of this Lease.
19.16 Exhibits. The following exhibits are attached hereto
and by this reference made a part hereof.
a) Exhibit A - Indication of Premises
b) Exhibit B - Indication of Storage Space
c) Exhibit C - Legal Description
Landlord and Tenant have executed this Lease the date and year first above
written.
Landlord: Tenant:
BRUCE BLUME & company PACIFIC BIOMETRICS, INC.,
a Washington corporation
By: /s/ Bruce M. Blume By: /s/ G. Russell Warnick
- ---------------------- --------------------------
Bruce M. Blume G. Russell Warnick,
President
By: /s/ Bruce M. Blume
- ----------------------
Ann Stever Blume
as attorney-in-fact Address:
Address: c/o Northwest Lipid Research
Center
146 North Canal Street, No. 310 326 Ninth Avenue, ZA-36
Seattle, WA 98103 Seattle, WA 98104
ED: January 15, 1990
22
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STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 16th day of January, 1990, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn as such,
personally appeared G. Russell Warnick, to me known to be the President of
PACIFIC BIOMETRICS, INC., the corporation that executed the within and foregoing
instrument, and acknowledged the instrument to be the free and voluntary act and
deed of such corporation, for the uses and purposes therein mentioned, and on
oath stated that he or she is authorized to execute the instrument pursuant to
the bylaws of such corporation or a resolution of the Board of Directors of such
corporation.
Witness my hand and official seal hereto affixed the day and year first
above written.
/s/ Marit K. Bucy
------------------------------------------
NOTARY PUBLIC in and for the State
of Washington
Residing at: Issaquah
My appointment expires: 9/1/91
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 17th day of January, 1990, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn as such,
personally appeared BRUCE M. BLUME and ANN STEVER BLUME, to me known to be the
persons who executed the within and foregoing instrument, and acknowledged the
instrument to be their free and voluntary act and deed.
Witness my hand and official seal hereto affixed the day and year first
above written.
/s/ Marit K. Bucy
------------------------------------------
NOTARY PUBLIC in and for the State
of Washington
Residing at: Issaquah
My appointment expires: 9/1/91
23
<PAGE>
EXHIBIT A
To Office Lease between Bruce M. Blume and Ann Stever Blume, as
Landlord, and Pacific Biometrics, Inc., as Tenant.
Location of Premises
[DIAGRAM]
SECOND FLOOR PLAN
24
<PAGE>
EXHIBIT B
To Office Lease between Bruce M. Blume and Ann Stever Blume, as
Landlord, and Pacific Biometrics, Inc., as Tenant.
Location of Storage Space
[DIAGRAM]
FIRST FLOOR PLAN
25
<PAGE>
EXHIBIT C
To Office Lease between Bruce M. Blume and Ann Stever Blume, as
Landlord, and Pacific Biometrics, Inc., as Tenant.
Legal Description of Land
Portion of Lot 1 lying North of Interstate Freeway #5 and all of Lots 20,
21 and 22, Block 12, East Park Addition to the City of Seattle, as
recorded in Volume 8 of Plats, page 83, Records of King County,
Washington.
26
<PAGE>
AMENDMENT NO. 1 TO LEASE AGREEMENT
THIS AMENDMENT NO. 1 TO LEASE AGREEMENT ("Amendment No. 1")
is made and entered into this 15th day of June, 1992, by and
between BLUME 1100 LIMITED PARTNERSHIP, a Washington partnership
("Landlord"), and PACIFIC BIOMETRICS, INC., a Washington
corporation ("Tenant").
RECITALS
A. Landlord and Tenant entered into a certain 1100
Eastlake Avenue Office Lease dated January 15, 1990 (the
"Lease").
B. Landlord and Tenant desire to amend the Lease as set
forth herein.
NOW, THEREFORE, in consideration of the foregoing,
together with other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties
agree as follows:
1. Definitions. Capitalized term(s) used herein
without definition shall have the same definitions ascribed to
such term(s) in the Lease.
2. Premises. Section 1.1 of the Lease is deleted in
its entirety a nd the following substituted in lieu thereof:
"1.1 Description. Landlord hereby leases to Tenant
and Tenant hereby leases from Landlord the second floor
space outlined on Exhibit A-1 annexed hereto (the
"Premises") in the building commonly known as 1100
Eastlake Avenue East (the "Building") in the City of
Seattle, County of King, State of Washington, and
situated on the land described in Exhibit C annexed to
the Lease (the "Land"). The Premises, Building and
Land are sometimes collectively referred to as the
"Property". Landlord and Tenant agree that the
Premises contains approximately 5,839 rentable square
feet of space, as such term is defined by the Building
Owners and Managers Association; the Building contains
approximately 12,767 rentable square feet of space; and
that Tenant's percentage of 'the Building for all
purposes under this Lease is 45.74% ("Tenant's
Share")."
3. Parking. Paragraph 1.3 of the Lease is deleted in
its entirety and the following substituted in lieu thereof:
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<PAGE>
"1.3 Parking. Tenant shall be provided with twenty-
two (22) assigned parking spaces on the Property.
Until January 31, 1995, twelve (12) of such spaces
shall be at no charge and ten (10) of such spaces shall
be at market rates which is currently $35 per stall.
From February 1, 1995 through the end of the term, all
twenty-two (22) spaces provided to Tenant shall be
charged to Tenant at market rates, as the same may from
time to time change."
4. Term. Paragraph 2.1 of the Lease is deleted in
its entirety and the following substituted in lieu thereof:
"2.1 Term. The term of this Lease shall commence on
January 22, 1990 (the "Commencement Date") and end on
May 31, 1997 (the "Expiration Date") unless sooner
terminated pursuant to this Lease."
5. Rent. Paragraph 3 of the Lease is deleted in its
entirety and the following substituted in lieu thereof:
"3. Rent. Tenant shall pay to Landlord, as rent for
the Premises and the Storage Space, in advance on the
first day of each calendar month during the term of
this Lease, without deduction, offset, prior notice or
demand, the amounts set forth in Paragraphs 3.1 through
3.3 below ("Base Monthly Rent"), together with all
Additional Rent required under this Lease:
3.1 Commencement Date Through June 30, 1992.
Base Monthly Rent shall be $3,543.75.
3.2 July 1, 1992 Through December 31, 1992. Base
Monthly Rent shall be $5,589.32.
3.3 January 1, 1993 Through June 30, 1993. Base
Monthly Rent shall be $6,633.97.
3.4 July 1, 1993 Through December 31, 1994. Base
Monthly Rent shall be $7,678.63.
3.5 January 1, 1995 Through June 30, 1997. Base
Monthly Rent shall be $8,028.63.
3.6 General. If the Commencement Date is not the
first day of a month, or if the Expiration Date is not
the last day of a month, a prorated monthly installment
shall be due in advance for the fractional month during
which the Lease commences and/or expires. Notwithstanding
the foregoing, Tenant shall not be obligated
to pay the Base
2
<PAGE>
Monthly Rent (but shall be obligated to pay any
Additional Rent due) for the months of February
and March 1990. Concurrently with Tenant's execution
of this Lease, Tenant shall pay to Landlord the sum of
Three Thousand Five Hundred Forty-Three and 75/100
Dollars ($3,543.75) as rent for April 1990."
6. Tenant Improvements. Landlord and Tenant agree
(i) that the improvements contemplated by Paragraph 1.2 of the
Lease have been installed to the satisfaction of each and (ii)
that their understanding regarding the improvements to be made to
the additional approximate 3,039 rentable square feet added to
the Lease by this Amendment No. 1 is set forth in Exhibit B-1
annexed hereto. The approximate cost of the improvements will be
$22,785 of which Landlord agrees to pay $8,500 and Tenant agrees
to pay $14,285 on completion of the improvements.
7. Effective Date. The effective date of this
Amendment No. 1 shall be July 1, 1992. As of such date, all
references in the Lease to "Storage Space" shall be disregarded
and Tenant shall be deemed to have relinquished any possessory
claim to all or any part of the Storage Space.
8. Ratification. Except as specifically amended as
set forth herein, the Lease remains in full force as originally
executed and as previously modified by Amendment No. 1.
IN WITNESS WHEREOF, the parties have executed this
Amendment No. 1 as of the day and year first above written.
Landlord:
BLUME 1100 LIMITED PARTNERSHIP
By: /s/ Bruce M. Blume
---------------------------------------
Bruce M. Blume, General Partner
Tenant:
PACIFIC BIOMETRICS, INC.,
a Washington corporation
By: /s/ G. Russell Warnick
---------------------------------------
G. Russell Warnick, President
3
<PAGE>
STATE OF WASHINGTON)
)SS
COUNTY OF KING )
I certify that I know or have satisfactory evidence that the
person appearing before me and making this acknowledgment is the
person whose signature appears on this document.
On this 1st day of June, 1992, before me personally appeared
Bruce M. Blume, to me known to be the General Partner of Blume
1100 Limited Partnership and the individual that executed the
within and foregoing instrument, and acknowledged the said
instrument to be his free and voluntary act of said partnership
for the uses and purposes therein mentioned, and on oath stated
that he was authorized to execute said instrument.
Witness my hand and official seal hereto affixed the day and year
first above written.
/s/ Marit K. Bucy
----------------------------------------------
[SEAL] Notary Public in and for the State of
Washington, residing at Issoquah
STATE OF WASHINGTON)
)SS
COUNTY OF KING )
I certify that I know or have satisfactory evidence that the
person appearing before me and making this acknowledgment is the
person whose signature appears on this document.
On this 15th day of June, 1992, before me personally appeared
G. RUSSELL WARNICK, to me known to be the President of PACIFIC
BIOMETRICS, INC., the corporation that executed the within and
foregoing instrument, and acknowledged the said instrument to be
the free and voluntary act and deed of said corporation for the
uses and purposes therein mentioned, and on oath stated that he
was authorized to execute the said instrument, and the seal
affixed, if any, is the corporate seal of said corporation.
Witness my hand and official seal hereto affixed the day and year
first above written.
/s/ Marit K. Bucy
----------------------------------------------
[SEAL] Notary Public in and for the State of
Washington, residing at Issoquah
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Exhibit B-1
Tenant improvements - Estimated Cost $22,785
1) The removal of existing walls and installation
of back door entry way to the laboratory area. $3,600
2) Install shower head and hot/cold water
assembly to existing shower area. The
emergency chemical water rinse will remain. $ 500
3) Install one 3x8 horizontal relight in the
reception area to look into the new
laboratory area. $ 600
4) Install a new exterior walkway on the southeast
portion of the building from the south parking
lot (handicap access under State Law would
cause this to increase $7,000). $4,300
5) Install a relight window on Russ Warnick's
office entry door. $ 300
6) Move entry way door and install four feet of
walkway. $ 485
7) Install two new offices on the S.W. portion
of the office. $2,900
8) Move door & wall and increase ceiling height
and size of exam room. $1,500
9) Paint new space. $2,500
10) Paint ceiling of new space. $1,900
11) Install wall mounted sink in exam room. $ 400
12) Construction overhead, insurance and tax. $3,800
Total Tenant Improvements $22,785
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1100 EASTLAKE
OFFICE LEASE
THIS OFFICE LEASE, is made and entered into this 13th day of August, 1992,
by and between Blume 1100 Limited Partnership, a Washington limited partnership,
(the "Lessor") and Drake Mortgage, a Washington corporation, (the "Lessee").
Lessor hereby leases to Lessee and Lessee hereby leases from Lessor the Premises
pursuant to the following terms.
1. Premises.
1.1 Description. Lessor hereby leases to Lessee and Lessee hereby leases
from Lessor the office space located in the City of Seattle, County of King,
State of Washington, outlined on Exhibit "A" attached hereto (the "Premises") in
the building commonly known as 1100 Eastlake Building (the "Building"), located
at 1100 Eastlake Ave. East, Seattle, Wa. 98109, and situated on the land
described in Exhibit "B" (the "Land"). The Premises, Building, and Land are
sometimes collectively referred to as the "Property".
Lessor and Lessee agree that the Premises contains approximately 1,500 rentable
square feet of space, the Building contains approximately 11,522 rentable square
feet of space as defined by the Building Owners and Managers Association
International, and that Lessee's percentage of the Building for all purposes
under this Lease is 13.02% ("Lessee's Share").
1.2 Tenant Improvements. The cost of following improvements shall be borne
by Lessor:
1. Paint entire space, including ceiling tiles. Clean and paint ceiling
heating grids.
2. Refinish entry and interior suite doors as needed to repair
scratches.
3. Re-carpet entire suite (color and texture to be mutually agreed).
4. Demolition and construction of wall(s) to be determined. Possible
removal of reception wall(s) and replacement area to create larger
bullpen.
5. Construction of lobby counter similar to that constructed in the
reception area of Windermere/Eastlake.
6. Replace existing dark brown levelors with light colored (mutually
agreed) blinds.
7. Remove free standing Singer air conditioning unit in back office.
8. Electrical and telephone outlets as needed by Lessee.
9. Replace existing hollow core entry door at rear of suite (into
common area) with solid core door.
10. Install dead bolt locks on all suite entry doors.
11. Construct coat closet.
2. Term.
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2.1 Term. The term of this lease shall be for a period of sixty (60)
months, commencing, subject to Lessor completing improvements, on October 1,
1992, (the "Commencement Date") and ending on September 30, 1997 (the
"Expiration Date") unless sooner terminated pursuant to this Lease.
2.2 Renewal Option. Lessor hereby grants Lessee the option to renew this
lease for one (1) further additional period of five (5) years from the end of
the initial lease term. The Option shall be exercisable by Lessee notifying
Lessor of Lessee's intention to renew this Lease in writing at least ninety (90)
days prior to the expiration of the Initial Term, and if at the time of giving
such notice, Lessee is in full and satisfactory compliance with all provisions
of this Lease, Lessor shall lease to Lessee the Premises for the Renewal Term.
During the Renewal Term, all of the terms and conditions of the Lease shall
remain unchanged and in full force and effect except that Rent for the Renewal
Term shall be renegotiated.
3. Rent.
3.1 Monthly Rent. Lessee shall pay to Lessor as rent for the Premises, in
advance on the first day of each calendar month during the term of this Lease,
without deduction, offset, prior notice or demand, in lawful money of the United
States, two thousand sixty two dollars and 50/100 ($2,062.50) (the "Base Monthly
Rent") together with all Additional Rent required under this Lease. If the
Commencement Date is not the first day of a month, or if the Expiration Date is
not the last day of a month, a prorated monthly installment shall be due in
advance of the first day of the fractional month during the month which the
lease commences or expires. Concurrently with the execution of this lease Lessee
will pay to the Lessor the sum of Six Thousand One Hundred Eighty Seven Dollars
and 50/100 ($6,187.50) as rent for the months of October 1992, November 1992,
and September 1997.
3.2 Free Rent. Lessee will be given Three months of free rent to be
applied on the following months:
Free Rent #1 December, 1992
Free Rent #2 January, 1993
Free Rent #3 December, 1993
3.3 Parking. Eight spaces will be designated to the lessee in the south
lot. Parking will be free during the first year of this lease. Years 2 & 3,
Lessee will pay $35/stall per month. Years 4 & 5, rate of parking per stall
shall be renegotiated.
5. Taxation.
5.1 Payment of Increases in Real Property Taxes. Lessee shall pay as
Additional Rent Lessee's Share of all increases in real property taxes levied or
assessed against the Property during the term of this Lease ("Taxes"), whether
the increases result from increased levy rate and/or assessed valuation, over
and above the Taxes levied or assessed against the Property for the base year,
which shall be calendar year 1992 (the "Tax Base Year"). Each calendar year
during the term of this Lease, Lessor shall
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notify Lessee of Lessor's calculation of Lessee's share of the increases in
Taxes. Lessor shall use due diligence in appealing any increased tax assessment
which in Lessor's judgement is unjustified. Lessee shall reimburse Lessor for
Lessee's Share of the increases in Taxes within one hundred and eighty (180)
days of the date of receipt by Lessee of such notice. If Lessee fails to so
reimburse Lessor for Lessee's Share of the Taxes, the amount of reimbursement
shall bear interest at the rate of Seafirst Prime rate plus five percent (Prime
+ 5%) per year from the date such reimbursement was due until the date such
reimbursement is paid.
5.2 Proration; Joint Assessment. In the event the Taxes paid or reimbursed
by Lessee cover any period of time prior to commencement or after the expiration
of the term of this Lease, Lessee's Share of the Taxes shall be equitably
prorated to cover only the period of time within the tax year during which this
Lease is in effect, and Lessor shall reimburse Lessee to the extent required.
With respect to any general or special assessments which may be levied against
or upon the Property, or which under the laws then in force may be evidenced by
improvement or other bonds or may be paid in annual installments, only the
amount of such annual installment (with appropriate proration for any partial
year) and interest due thereon shall be included within the computation of the
Taxes.
5.3 Personal Property Taxes. Lessee shall pay prior to delinquency all
taxes upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises. When possible, Lessee shall cause
such trade fixtures, furnishings, equipment and all other personal property to
be assessed and billed separately from the real property of Lessor.
6. Use.
6.1 Use. The premises shall be used and occupied by Lessee only for the
following purposes, and Lessee shall not use the Premises for any other purpose
whatsoever without obtaining the prior written consent of Lessor: General
Office.
6.2 Suitability. Unless Lessor notifies Lessee in writing within five
days, Lessee, upon occupying the Premises, shall be deemed to have accepted the
Premises in the condition existing as of the date of occupancy excluding hidden
defects, and in any event this Lease shall be subject to all applicable zoning
ordinances and to any municipal, county and state laws and regulations governing
and regulating the use of the Property. Lessee acknowledges that neither Lessor
nor Lessor's agent has made any representation or warranty as to the suitability
of the Premises for the conduct of Lessee's business.
6.3 Uses Prohibited.
(a) Lessee shall not do or permit anything to be done in or about
the Premises or the Property which will increase the existing rate of insurance
upon the Premises or the Building (unless Lessee shall pay any increased premium
as a result of such use or acts) or cause the cancellation of any insurance
policy covering the Building or the Property, nor shall Lessee or Lessor
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sell or permit to be kept, used or sold in or about the Premises any articles
which may be prohibited by a standard form policy of fire insurance.
(b) Lessee shall not do or permit anything to be done in or about
the Premises or the Property which will in any way obstruct or interfere with
the rights of other tenants or occupants of the Property, or injure or annoy
them or use or allow the Premises to be used for any unlawful or objectionable
purpose, nor shall Lessee cause, maintain or permit any nuisance in, on or about
the Property. Lessee shall not commit or suffer to be committed any waste in or
upon the Property.
(c) Lessee shall not use or permit anything to be done in or about
the Property which will in any way conflict with any law, statute, zoning
restriction, ordinance or governmental rule or regulation or requirement of
public authorities now in force or which may hereafter be enacted or
promulgated. Lessee shall, at its sole cost and expense, promptly comply with
all laws, statutes, ordinances and governmental rules, regulations or
requirements now in force or which may hereafter be in force and with the
requirements of any board of fire underwriters or other similar body relating to
or affecting the conditions, use or occupancy of the Premises, provided however
that nothing herein shall cause Lessee to be liable for any modifications or
repairs to the building, grounds, signs or other components or a part of
Lessee's space.
(d) Lessee in its business operations shall comply with all
environment laws, as now existing or hereafter enacted or amended. Lessee shall
not use the Property for, or permit anything to be done in or about the
Property, which may subject Lessor or any mortgagee under any mortgage covering
the Property to any liability under any environmental laws resulting from
Lessee's use of or conduct on the Property. Lessor shall have the right at all
reasonable times upon notice to Lessee to conduct environmental investigations,
including the taking of samples, for the purpose of detecting or measuring the
presence of hazardous wastes or hazardous substances on the property.
7. Services, Utilities and Operating Costs.
7.1 Services and Utilities.
(a) Lessor shall furnish to the Premises reasonable quantities of
gas, electricity, water, sewer, window washing service, janitorial service and
air-conditioning required in Lessor's judgment for the comfortable use and
occupancy of the Premises.
(b) Lessee shall furnish to the Premises telephone and all other
services and utilities not expressly required to be furnished by Lessor, and
shall locate all wires and connections related thereto only as directed by
Lessor, and without such direction no boring or cutting for the installation of
such wiring and connection shall be permitted.
(c) If Lessee shall require services or utilities in
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excess of that normally furnished for the use of the Premises as general office
space, then Lessee, on a monthly basis, in advance, shall pay to Lessor as
Additional Rent the cost of all such excess services and utilities supplied to
the Premises as reasonably determined by Lessor.
(d) Whenever heat generating machines or equipment are used in the
Premises which affect the temperature otherwise maintained by the
air-conditioning system, Lessor shall have the right to install and maintain
supplementary air-conditioning units in the Premises and the cost of operating
thereof shall be paid as Additional Rent by Lessee to Lessor monthly, in
advance, on the first day of each calendar month during the term of this Lease.
7.2 Operating Costs.
(a) Lessee shall pay to Lessor as Additional Rent Lessee's Share of
the increases in operating costs of the Property ("Operating Costs") as
reasonably estimated by Lessor over the Operating Costs for the Property during
the calendar year 1992 (the "Operating Cost Base Year"). Lessee's share of such
increases shall be paid to Lessor monthly, in advance, on the first day of each
calendar month.
(b) Operating Costs include, without limitation, all costs incurred
by Lessor in operating, cleaning, equipping, protecting, lighting, repairing,
replacing, heating, air conditioning, maintaining and insuring the Property.
Such costs shall include, without limitation, gardening and landscaping; gas,
electricity and other utilities, water and sewer charges; maintenance of signs
(other than tenants' signs); premiums for liability, property damage, fire and
other types of casualty insurance on the Building; maintenance of the Property,
HVAC maintenance, fees for required licenses and permits; repairing,
resurfacing, repaving, painting, lighting, cleaning, refuse removal, parking lot
sweeping, snow removal, pest control, security and other similar items. Lessor
agrees that the percentage charged to manage the building to Lessee will not
increase during the term of this lease. Operating Costs shall also include,
without limitation, the cost, as reasonably amortized by Lessor, with interest
at the rate of Seafirst Prime plus five percent (Prime + 5%) per year on the
unamortized balance, of any improvements which Lessor elects to capitalize made
during the term of this Lease which reduces operating costs, but in an amount
not to exceed such reduction in operating costs for the relevant year. Operating
Costs shall also include, without limitation, the cost, as reasonably amortized
by Lessor, with interest at the Seafirst Prime rate plus five percent (Prime +
5%) per year on the unamortized balance, of any improvements which Lessor elects
to capitalize made during the term of this Lease in compliance with the
requirements of any federal, state or local law or governmental regulation, and
a reasonable reserve for repair or replacement of equipment used in the
maintenance or operation of the Property and all other costs as applied to the
maintenance and operations of industrial or office buildings, are properly
chargeable to the operation and maintenance of the Property. Operating Costs
shall not include depreciation of the Building. Lessor may cause any or all of
such services to be
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provided by third parties. Lessee shall pay Lessee's Share of the Operating
Costs in monthly installments, in advance, on the first day of each month during
the term of this Lease.
7.3 Adjustment of Estimated Operating Costs. Lessor may adjust its
estimates of Operating Costs at any time and from time to time based upon
Lessor's experience and reasonable anticipation of costs. Such adjustments shall
be effective as of the next rent payment after notice to Lessee. Within one
hundred and eighty (180) days after the end of each calendar year of the Lease
term, Lessor shall deliver to Lessee a statement setting forth in reasonable
detail the operating Costs paid or incurred by the Lessor during the preceding
calendar year and Lessee's Share of the Operating Costs. Upon receipt of such
statement, there shall be an adjustment between Lessor and Lessee with payment
to Lessor within ten (10) days after Lessee's receipt of such statement, or
credit then given by Lessor, as the case may be, so that Lessor may receive the
entire amount of the Lessee's Share of the increases in Operating Costs for such
period.
8. Maintenance and Repairs, Alteration and Additions.
8.1 Lessor's Obligations. Subject to the provisions of Section 13 and
except for damage caused by any negligent or intentional act or omission of
Lessee or Lessee's agent, employees or invites, Lessor, at Lessor's expense,
shall keep in good order, condition and repair the Premises and the public and
common areas of the Building, such as lobbies, stairs, corridors and rest rooms.
Lessor shall provide lighting replacement for Lessor-furnished lights, toilet
room supplies, window-washing with reasonable frequency, and customary
janitorial service to the Premises. Lessor shall have no obligation to make
repairs under this Section 8.1 until a reasonable time after receipt of written
notice of the need for such repairs.
8.2 Lessee's Obligations.
(a) At it's own expense, Lessee shall promptly repair all damage to
the Premises or Building caused by any act or omission of Lessee or Lessee's
agents, employees or invites.
(b) Upon the expiration or sooner termination of this Lease, Lessee
shall surrender the Premises in the same condition as received, broom clean,
ordinary wear and damage by fire, earthquake, act of God or the elements alone
excepted. Lessee, at its sole cost and expense, agrees to repair any damage to
the Premises caused by or in connection with the removal of any articles of
personal property or fixtures, including repairing the floor and patching and
painting the wall to Lessor's reasonable satisfaction.
8.3 Lessor's Rights. In the event Lessee fails to perform Lessee's
obligation under this Section 8, Lessor shall give Lessee notice to do such acts
as are reasonably required to so maintain the Premises; if Lessee shall fail to
commence such work diligently prosecute it to completion, then Lessor shall have
the right, but not the obligation, to do such acts and expend such funds at the
expense of Lessee as are reasonably required to
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perform such work. Any amount so expended by Lessor shall be paid by Lessee
promptly after demand with interest at the Seafirst Prime rate plus five percent
(Prime + 5%) per year form the date of such work. Lessor shall have no liability
to Lessee for any damage, inconvenience or interference with the use of the
Premise by Lessee as a result of performing any such work.
8.4 Alterations and Additions.
(a) Lessee shall not, without Lessor's prior written consent, make
any alteration, additions, improvements or utility installations in, on or about
the Premises. The term "utility installations" shall include ducting, power
panels, fluorescent fixtures, space heaters, conduit and wiring.
(b) All alterations, additions, improvements and utility
installations (except trade fixtures of Lessee) which may be made on the
Premises shall, at the expiration or sooner termination of the term of this
Lease, become the property of Lessor and remain upon and be surrendered with the
Premises.
9. Rights of Entry.
Lessor and Lessor's agents shall have the right at reasonable times to
enter the Premises to inspect and maintain the Premises, or to show the Premises
to prospective purchasers, tenants or lenders. Repairs, alterations, and
additions shall be done at a time so as not to interfere with normal business
operation of Lessee. For each of the aforesaid purposes, Lessor shall at all
times have and retain a key to all of the doors in, upon and about the Premises,
excluding Lessee's vaults and safes, and Lessor shall have the right to use any
and all means which Lessor may deem proper to open such doors in an emergency,
in order to obtain entry to the Premises, and any entry to the Premises obtained
by Lessor by any of such means, or otherwise, shall not under any circumstances
be construed or deemed to be a forcible or unlawful entry into, or an eviction
of Lessee from the Premises or any portion thereof.
10. Liens.
Lessee shall keep the Premises, the Building and the Property free from
any liens and encumbrances arising out of any work performed or materials
furnished by or at the direction of Lessee. In the event that Lessee shall not,
within twenty (20) days following the imposition of any such lien, either cause
such lien to be released of record by payment, posting or recording of a proper
bond, or proceed to defend against such claim of lien in an appropriate form of
legal action, Lessor shall with ten (10 days notice first given to Lessee, have,
in addition to all other remedies provided herein and by law, the right, but not
the obligation, to cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All such sums
paid by Lessor and all expenses incurred by it in connection therewith including
reasonable attorneys' fees and costs shall be payable to Lessor by Lessee on
demand with interest at the Seafirst Prime rate plus five percent (Prime + 5%)
per year. Lessor shall have the right at all times to post and
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keep posted on the Premises any notices permitted or required by law, or which
Lessor shall deem proper, for the protection of Lessor and the Property, and any
other party having an interest therein, from mechanics' and materialmen's liens,
and Lessee shall give to Lessor at Least ten (10) business days prior written
notice of the expected date of commencement of any work relating to alterations
or additions to the Premises to allow Lessor to post such notices.
11. Indemnity.
11.1 Indemnity. Lessee shall indemnify and hold Lessor harmless from and
against any and all claims of liability for any injury or damage to any person
or person or property arising from Lessee's use of the Property, or from the
conduct of Lessee's business, or from any activity, work or thing done,
permitted or suffered by Lessee in or about the Property. Lessee shall further
indemnify and hold Lessor harmless from and against any and all claims arising
from any breach or default in the performance of any obligation on Lessee's part
to be performed under this Lease, or arising from any negligence of Lessee or
Lessee's agents, contractors or employees, and from and against all costs,
attorneys' fees, expenses and liabilities incurred in the defense of any such
claim or any action or proceeding brought thereon. In the event any action or
proceeding is brought against Lessor by reason of any such claim, Lessee upon
notice from Lessor shall defend same at Lessee's expense by counsel reasonably
satisfactory to Lessor.
11.2 Exemption of Lessor from Liability. Lessor shall not be liable for
injury to Lessee's business or loss of income therefrom or for damage which may
be sustained by the person, goods, wares, merchandise or property of Lessee, its
employees, invites, customers, agents or contractors or any other person in or
about the Premises, caused by or resulting from fire, steam, electricity, gas,
water or rain, which may leak or flow from or into any part of the Premises, or
from the breakage, leakage, obstruction or other defects of the pipes,
sprinklers, wires, appliances, plumbing, air-conditioning or lighting fixtures
of the same, whether such damage or injury results from conditions arising upon
the Premises or upon other portions of the Building or the Property. Lessee, as
a material part of the consideration to Lessor, waives all claims against Lessor
for damage to Lessee's property arising for any reason, except negligence or
intentional acts.
12. Insurance.
12.1 Liability Insurance. Lessee, at Lessee's expense, shall maintain at
all times during the term of this Lease a policy with a bodily injury and
property damage combined single liability limit of $1,000,000, insuring Lessor
and Lessee against any and all liability arising out of Lessee's use or
occupancy of the Premises and Property. The limits of such insurance shall not
limit the liability of Lessee. Such insurance shall have a Lessor's Protective
Liability endorsement attached thereto. Both Lessor and Lessee shall be named as
insureds or additional insureds.
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12.2 Property Insurance. Lessor shall procure and maintain at all times
during the term of this Lease insurance covering loss or damage to the Building,
providing protection against all perils included within the classification of
fire, extended coverage, vandalism, malicious mischief, sprinkler leakage and
special extended peril (allrisk). Such insurance shall provide for payment of
loss thereunder to Lessor or the holder of the mortgage, if any, on the
Property.
12.3 Other Insurance Matters. All insurance required under this Lease
shall: (i) be issued by insurance companies authorized to do business in the
State of Washington and rated A/XI or better in the most recent edition of
Best's Insurance Reports; (ii) shall be issued as a primary policy, not
contributing with and not in excess of coverage which the Lessor may carry;
(iii) shall contain an endorsement requiring thirty (30) days' prior written
notice from the insurance company to both Lessor and Lessee and to Lessor's
lender before cancellation or change in the coverage, scope, or amount of any
policy; and (iv) shall contain loss payable clauses satisfactory to Lessor.
Lessee shall deliver to Lessor each policy or a certificate of the policy,
together with evidence of payment of premiums on or before the Commencement
Date, and on renewal of the policy not less than thirty (30) days before
expiration of the term of the policy. If Lessee fails to procure and maintain
such insurance, Lessor may, upon ten (10) days' prior written notice, but shall
not be obligated to, procure and maintain the same at Lessee's expense, which
amount shall be payable by Lessee upon demand.
12.4 Waiver of Subrogation. Lessor and Lessee each hereby waive any and
all rights of recovery against the other or against the officers, employees,
agents and representatives of the other, on account of loss or damage occasioned
to such waiving party of its property or the property of others under its
control caused by fire or any of the extended coverage risks described above, to
the extent that such loss or damage is insured against under any insurance
policies carried by the parties pursuant to this Lease and in force at the time
of such loss or damage. Lessor and Lessee shall give notice to the insurance
carrier or carriers that the foregoing mutual waiver of subrogation is contained
in this Lease.
13. Damage or Destruction.
13.1 Damage. In the event the Premises are damaged to such an extent as to
render the same untenantable in whole or in a substantial part thereof, or are
destroyed, it shall be optional with Lessor to repair or rebuild the same; and
after the happening of any such event, Lessee shall give Lessor immediate
written notice thereof. Lessor shall have not more than thirty (30) days after
date of such notification to notify the Lessee, in writing, of Lessor's
intentions to repair or rebuild said Premises, or the part so damaged as
aforesaid, and if Lessor elects to repair or rebuild said Premises, or the part
so damaged as aforesaid, Lessor shall diligently prosecute
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the work of such repairing or rebuilding without unnecessary delay. If the
Lessor shall fail to give the notice aforesaid, or shall fail to diligently
prosecute the work of repair or rebuilding, Lessee shall have the right to
declare this Lease terminated by written notice served upon the Lessor.
Lessee shall also have the right to terminate this Lease by written notice if,
at the time Lessor advises Lessee of his election to repair or rebuild, said
repairs will reasonably be anticipated to require in excess of sixty (60) days
to complete.
13.2 Abatement of Rent; Lessee's Remedies.
(a) If the Premises are damaged, there shall be an abatement or
reduction of rent between the date of such damage and the date of completion of
the restoration or, if earlier, the date of termination of this Lease, in
proportion to the extent the damage impairs Lessee's use of the Premises, except
that if such damage results from Lessee's fault or negligence, Lessee shall not
be entitled to such abatement or reduction of rent. Except for such abatement or
reduction of rent, if any, Lessee shall have no claim against Lessor for any
damage suffered by reason of any such damage, destruction, repair or
restoration.
(b) If Lessor elects to repair or restore the Premises under this
Section 13 and shall not substantially complete such repair or restoration
within sixty (60) days after the damage occurred, Lessee, at Lessee's option,
may cancel and terminate this Lease by written notice to Lessor at any time
after the expiration of such sixty-day period, but prior to the substantial
completion of such repair or restoration.
14. Condemnation.
If, during the term of this Lease, there is a condemnation or taking by
public authority of all or any part of the Premises or the Building, the rights
and obligations of the parties shall be as follows:
(a) If there is a taking of less than twenty-five percent (25%) of
the Premises, this Lease shall remain in full force and effect.
(b) If there is a taking of twenty-five (25%) or more of the
Premises, the term of this Lease shall terminate as of the date of vesting of
title in the condemnor.
(c) If there is a taking of a part of the Building other than the
Premises and, if in the opinion of Lessor the Building should be restored in
such a way as to alter the Premises materially, then Lessor may terminate the
term of this Lease by giving notice to such effect to Lessee within six months
after the date of vesting of title in the condemnor and the term of this Lease
shall expire on the date specified in the notice of termination, which date
shall not be less than six months after the giving of such notice, as fully and
completely as if such date were the date hereinabove set forth for the
expiration of the term of this Lease.
(d) Lessor shall be entitled to receive the entire award for the
Premises, the Building and the Property, Lessee
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hereby assigning to Lessor Lessee's interest therein, if any, provided, however,
that nothing contained herein shall be deemed to give Lessor any interest in or
to require Lessee to assign to Lessor any award made to Lessee for the taking of
personal property and fixtures belonging to Lessee, and/or for the interruption
of or damage to Lessee's business and/or for Lessee's unamortized cost of
leasehold improvements paid for by Lessee and/or an award of $5,000.00 to Lessee
for relocation costs. The claim for interruption of or damage to Lessee's
business shall be subject and subordinate to the claim of the first mortgagee of
the Property.
(e) If any portion of the Premises is taken by condemnation and this
Lease remains in full force and effect, on the date of taking the rent shall be
reduced by an amount that is in the same ratio to the monthly rent as the total
number square feet in the Premises taken bears to the total number of square
feet in the Premises immediately before the date of taking. No temporary taking
of the Premises and/or of Lessee's rights therein or under this Lease shall
terminate this Lease or give Lessee any right to any abatement or reduction of
rent under this Lease. Any award made to Lessee by reason of any such temporary
taking shall belong entirely to Lessee, and Lessor shall not be entitled to a
share therein.
15. Assignment and Subletting.
15.1 Lessor's Consent Required. Lessee shall not assign, transfer,
mortgage, pledge, hypothecate or encumber this Lease or any interest therein
without the prior written consent of Lessor, which consent shall not be
unreasonably withheld. Lessee shall not sublet the Premises or any part thereof
without the prior written consent of Lessor, which consent shall not be
unreasonably withheld.
15.2 No Release of Lessee. No consent by Lessor to any subletting by
Lessee shall relieve Lessee of any obligation to be performed by the Lessee
under this Lease, whether occurring before or after such consent or subletting.
The acceptance of rent by Lessor from any other person shall not be deemed to be
a waiver by Lessor of any provision of this Lease or to be a consent to any
assignment, subletting or other transfer. Consent to one assignment, subletting
or other transfer shall not be deemed to constitute consent to any subsequent
assignment, subletting or other transfer.
16. Subordination.
16.1 Subordination. This Lease, at Lessor's option, shall be subject and
subordinate to any mortgage or deed of trust which now exists or may hereafter
be executed affecting any part of the Property, or on or against Lessor's
interest or estate therein, without the necessity of the execution and delivery
of any further instruments on the part of the Lessee to effectuate such
subordination. If any mortgagee shall elect to have this Lease prior to the lien
of its mortgage, and shall give written notice thereof to Lessee, this Lease
shall be deemed prior to such mortgage.
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16.2 Subordination Agreements. Lessee covenants and agrees to execute and
deliver upon demand, without charge therefore, such further instruments
evidencing such subordination of this Lease to the lien of any such mortgage or
deed of trust as may be required by Lessor. Lessee hereby appoints Lessor as
Lessee's attorney-in-fact, irrevocably, to execute and deliver any such
agreements, instruments, releases or other documents.
16.3 Quiet Enjoyment. As a condition of any such subordination, Lender and
Lessor shall restate this right of Lessee to quiet enjoyment of the Premises
notwithstanding Lender subsequently attaining ownership of the subject real
property. Lessor covenants and agrees with Lessee that upon Lessee paying rent
and other monetary sums due under the Lease and performing its covenants and
conditions, Lessee shall and may peaceably and quietly have, hold and enjoy the
Premises for the term, subject, however, to the terms of the Lease and of any
mortgage or deed of trust described above.
16.4 Attornment. in the event of foreclosure or the exercise of the power
of sale under any mortgage made by the Lessor covering the Property, the Lessee
shall attorn to the purchaser upon any such foreclosure or sale and recognize
such purchaser as the Lessor under this Lease, provided such purchaser expressly
agrees in writing to be bound by the terms of the Lease.
17. Default; Remedies.
17.1 Default. The occurrence of any of the following shall constitute a
material default and breach of this Lease by Lessee:
(a) any failure by Lessee to pay when due the rent or any other
monetary sums required to be paid hereunder within 10 days of its due date;
(b) the abandonment or vacation of the Premises by Lessee;
(c) a failure by Lessee to observe and perform any other provision
of this Lease to be observed or performed by Lessee, where such failure
continues for twenty (20) days after written notice thereof by Lessor to Lessee;
provided, however, that if the nature of such default is such that the same
cannot reasonably be cured within such twenty (20) day period, Lessee shall not
be deemed to be in default if Lessee shall within such period commence such cure
and thereafter diligently prosecute the same to completion; or
(d) the making by Lessee of any general assignment or general
arrangement for the benefit of creditors; the filing by or against Lessee of a
petition to have Lessee adjudged a bankrupt or of a petition for reorganization
or arrangement under any law relating to bankruptcy (unless, in the case of a
petition filed against Lessee, the same is dismissed within sixty (60) days);
the appointment of a trustee or receiver to take possession of substantially all
of the Lessee's assets located at the Premises or of Lessee's interest in this
Lease; where possession is not restored to Lessee within thirty (30) days; or
the attachment, execution or other judicial seizure of substantially all of
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Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where such seizure is not discharged within thirty (30) days.
17.2 Remedies. In the event of any such material default or breach by
Lessee, Lessor may at any time thereafter, with or without notice and demand and
without limiting Lessor in the exercise of any right or remedy at law or in
equity which Lessor may have by reason of such default or breach:
(a) maintain this Lease in full force and effect and recover the
rent and other monetary charges as they become due, without terminating Lessee's
right to possession irrespective of whether Lessee shall have abandoned the
Premises. In the event Lessor elects to not terminate the Lease, Lessor shall
have the obligation to attempt to relet the Premises at such rent and upon such
conditions and for such a term, and to do all acts necessary to maintain or
preserve the Premises as Lessor deems reasonable and necessary, without being
deemed to have elected to terminate the Lease, including removal of 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 Lessee.
Lessor shall not be deemed to have terminated this Lease, or the liability of
Lessee to pay any rent or other charges thereafter accruing, or to have
terminated Lessee's liability for damages under any of the provisions hereof, by
any such reentry or by any action, in unlawful detainer or otherwise, to obtain
possession of the Premises, unless Lessor shall have notified Lessee in writing
that it has so elected to terminate this Lease, and Lessee further covenants
that the service by Lessor of any notice pursuant to the unlawful detainer
statutes of the State of Washington and the surrender of possession pursuant to
such notice shall not (unless Lessor elects to the contrary at the time of or at
any time subsequent to the serving of such notices and such election is
evidenced by written notice to Lessee) be deemed to be a termination of this
Lease. Notwithstanding that Lessor fails to elect to terminate the Lease
initially, Lessor at any time during the term of this Lease may elect to
terminate this Lease by virtue of such previous default of Lessee, or
(b) terminate Lessee's right to possession by any lawful means, in
which case this Lease shall terminate and Lessee shall immediately surrender
possession of the Premises to Lessor. In such event Lessor shall be entitled to
recover from Lessee all damages incurred by Lessor by reason of Lessee's
default, including, without limitation thereto, 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 (ii) the worth at the time of award of the amount 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 Lessee 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 is proved could be reasonably
avoided; plus (iv) any other amount necessary to compensate Lessor for all the
detriment proximately caused by Lessee's failure to perform its obligations
under this Lease or which in the ordinary course of things would
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be likely to result therefrom; plus (v) at Lessor's election, such other amounts
in addition to or in lieu of the foregoing as may be permitted from time to time
by applicable state law. Upon any such re-entry, Lessor shall have the right to
make any reasonable repairs, alterations or modifications to the Premises that
Lessor in its sole discretion deems reasonable and necessary. As used in
Subsection (i) above, the "worth at the time of award" is computed by allowing
interest at the Seafirst Prime rate plus five percent (Prime + 5%) per year from
the date of default. As used in Subsections (ii) and (iii), the "worth at the
time of award" is computed by discounting such amount at the discount rate of
the U.S. Federal Reserve Bank at the time of award plus one percent (1%) . The
term "rent," as used in this Section 17, shall be deemed to be and to mean the
rent to be paid pursuant to Section 3 and all other monetary sums required to be
paid by Lessee pursuant to the terms of this Lease.
17.3 Late Charges and Default Interest. If any installment of Base Monthly
Rent or Additional Rent shall not be received by Lessor within ten (10) days
after such amount shall be due, Lessee shall pay to Lessor a late charge equal
to five percent (5%) of such overdue amount. The parties hereby agree that such
late charge represents a fair and reasonable estimate of the costs Lessor will
incur by reason of late payment by Lessee. In addition to such late charge, any
installment of Base Monthly Rent or Additional Rent not received by Lessor
within thirty (30) days after such amount shall be due, shall bear interest at
the Seafirst Prime rate plus five percent (Prime + 5%) per year from the due
date. Payment of such late charge or interest shall not excuse or cure any
default by Lessee under this Lease.
18. Broker.
Lessor and Lessee each represent to the other that both are represented by
Windermere Real Estate/Eastlake, agent or finder with respect to this Lease in
any manner. Each party agrees to indemnify and hold the other party harmless
from and against any and all liability, costs, damages, causes of action or
other proceedings instituted by any broker, agent or finder, licensed or
otherwise, claiming through, under or by reason of the conduct of the
indemnifying party in any manner whatsoever in connection with this Lease.
19. Miscellaneous.
19.1 Estoppel Certificate.
(a) Lessee shall at any time upon not less than ten (10) days' prior
written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to Lessee's knowledge, any uncured defaults on
the part of Lessor hereunder, or specifying such defaults if any are claimed.
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(b) Lessee's failure to deliver such statement within such time
shall be conclusive upon Lessee (i) that this Lease is in full force and effect,
without modification except as may be represented by Lessor, (ii) that there are
no uncured defaults in Lessor's performance, and (iii) that not more than one
month's rent has been paid in advance.
(c) If Lessor desires to finance or refinance the Property, or any
part thereof, then Lessee hereby agrees to deliver to any lender designated by
Lessor such financial statements of Lessee as may be reasonably required by such
lender.
19.2 Transfer of Lessor's Interest. If Lessor sells or transfers the
Building or the Property, in an arm's length BonaFide transaction involving a
non-related party, then upon consummation of the sale or transfer, Lessor shall
be relieved and released from any and all obligations and liabilities thereafter
accruing under this Lease. If any security deposit or prepaid rent has been paid
by Lessee, then Lessor may transfer such security deposit or prepaid rent to
Lessor's successor, and upon such transfer Lessor shall be discharged from any
further liability with respect to such security deposit or prepaid rent. This
Lease shall not be affected by any such sale or transfer and Lessee agrees to
attorn to the purchaser or assignee, provided all of Lessor's obligations
hereunder are assumed in writing by the transferee.
19.3 Captions Attachments Construction; Defined Terms.
(a) The captions of the Sections of this Lease are for convenience
only and shall not be deemed to be relevant in resolving any question of
interpretation or construction of any Section of this Lease.
(b) Exhibits attached hereto, and addendum and schedules initialed
by the parties, are deemed by attachment to constitute part of this Lease and
are incorporated herein.
(c) The words "Lessor" and "Lessee," as used herein, shall include
the plural as well as the singular. Words used in neuter gender include the
masculine and feminine and words in the masculine and feminine gender include
the neuter. The term "Lessor" shall mean only the owner or owners at the time in
question of the fee title or a Lessee's interest in a ground lease of the
Premises. The obligations contained in this Lease to be performed by Lessor
shall be binding on Lessor's successors and assigns only during their respective
periods of ownership.
19.4 Entire Agreement. This instrument, along with any exhibits and
attachments hereto, constitutes the entire agreement between Lessor and Lessee
relative to the Premises, and this Agreement and the exhibits and attachments
may be altered, amended or revoked only by an instrument in writing signed by
both Lessor and Lessee. Lessor and Lessee agree hereby that all prior or
contemporaneous oral agreements between and among themselves and their agents or
representatives relative to the leasing of the Premises are merged in or revoked
by this Agreement.
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19.5 Severability. if any term or provision of this Lease shall, to any
extent, be determined by a court of competent jurisdiction to be invalid or
unenforceable, the remainder of this Lease shall not be affected thereby, and
each term and provision of this Lease shall be valid and be enforceable to the
fullest extent permitted by law.
19.6 Costs of Suit.
(a) If Lessee or Lessor shall bring any action for relief against
the other, declaratory or otherwise, arising out of this Lease, including any
suit by Lessor for the recovery of rent or possession of the Premises, the
losing party shall pay the successful party a reasonable sum for attorneys'
fees, which shall be deemed to have accrued on the commencement of such action
and shall be paid whether or not such action is prosecuted to judgment.
(b) Should Lessor, without fault on Lessor's part, be made a party
to any litigation instituted by Lessee or by any third party against Lessee, or
by or against any person holding under or using the Premises by license of
Lessee, or for the foreclosure of any lien for labor or material furnished to or
for Lessee or any such other person, or otherwise arising out of or resulting
from any act or transaction of Lessee or of any such other person, Lessee
covenants to save and hold Lessor harmless from any judgment rendered against
Lessor or the Premises of any part thereof, and all costs and expenses,
including reasonable attorneys' fees, incurred by Lessor in or in connection
with such litigation.
19.7 Time; Joint and Several Liability. Time is of the essence of this
Lease and each and every provision hereof, except as to the condition relating
to the delivery of possession of the Premises to Lessee. All the terms,
covenants and conditions contained in this Lease to be performed by either
party, if such party shall consist of more than one person or organization,
shall be deemed to be joint and several, and all rights and remedies of the
parties shall be cumulative and nonexclusive of any other remedy at law or in
equity.
19.8 Binding Effect; Choice of Law. The parties hereto agree that all
provisions hereof are to be construed as both covenants and conditions, as
though the words importing such covenants and conditions were used in each
separate Section hereof. Subject to any provisions hereof restricting assignment
or subletting by Lessee and subject to Section 19.2, all of the parties hereto
and their respective heirs, legal representatives, successors and assigns. This
Lease shall be governed by the laws of the State of Washington.
19.9 Waiver. No covenants, terms or conditions or the breach thereof shall
be deemed waived, except by written consent of the party against whom the waiver
is claimed, and any waiver or the breach of any covenant, term or condition
shall not be deemed to be a waiver of any preceding or succeeding breach of the
same or any other covenant, term or condition. Acceptance by Lessor of any
performance by Lessee after the time the same shall have
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become due shall not constitute a waiver by Lessor of the breach or default of
any covenant, term or condition unless otherwise expressly agreed to by Lessor
in writing. Wherever the approval or consent of Lessor is required herein, such
approval or consent shall not be unreasonably withheld.
19.10 Holding Over.
(a) On expiration of the term of this Lease, Lessee shall surrender
the Premises to Lessor broom clean and in good condition. Lessee shall remove
all of its personal property on or before the expiration date of the term of
this Lease. Lessee shall perform all restoration made necessary by the removal
of such personal property within the time period stated in this Section.
(b) If Lessee fails to surrender the Premises to Lessor on
expiration of the term of this Lease as required by this Section, after twenty
(20) days written notice to vacate from Lessor, then Lessee shall pay Lessor
Base Monthly Rent at double the rate specified in Section 3 of this Lease for
the last month of the term. If Lessee remains in possession of the Premises
after expiration of the term of this Lease, or after the date in any notice
given by Lessor to Lessee terminating this Lease, such possession shall be
deemed to be a month-to-month tenancy.
19.11 Signs. Lessor hereby acknowledges that Lessee intends to have
signage designed for premise. Size, style, and position will be mutually agreed
upon. It shall be Lessee's responsibility to confirm that the proposed signage
is in compliance with the prevailing governmental codes or ordinances.
19.12 Interest on Past Due Obligations. Except as expressly herein
provided, any amount due to Lessor not paid when due shall bear interest at the
Seafirst Prime rate plus five percent (Prime + 5%) per year from the due date.
Payment of such interest shall not excuse or cure any default by Lessee under
this Lease.
19.13 Recording. Lessee shall not record this Lease without Lessor's prior
written consent, which consent shall not be unreasonably withheld.
19.14 Notices. All Notices or demands of any kind required or desired to
be given by Lessor or Lessee hereunder shall be in writing and shall be deemed
delivered upon personal service, or, if mailed, seventy-two (72) hours after
depositing the notice or demand in the United States mail, certified or
registered, postage prepaid, addressed to the Lessor or Lessee respectively at
the addresses set forth after their signatures at the end of this Lease. A copy
of any notice required to be given in accordance with the terms of this Lease
shall be sent simultaneously, in the manner provided, to such address as the
mortgagee of any mortgage from time to time shall designate.
19.15 Corporate Authority. If Lessee is a corporation, each individual
executing this Lease on behalf of such corporation represents and warrants that
he or she is duly authorized to execute and deliver this Lease on behalf of such
corporation in
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accordance with a duly adopted resolution of the Board of Directors of such
corporation or in accordance with the By-Laws of such corporation, and that this
Lease is binding upon such corporation in accordance with its terms. If Lessee
is a corporation, Lessee shall, within thirty (30) days after execution of this
Lease, deliver to Lessor a certified copy of a resolution of the Board of
Directors of such corporation authorizing or ratifying the execution of this
Lease.
19.16 Exhibits. The following exhibits are attached hereto
and by this reference made a part hereof.
(a) Exhibit A - the "Premises"
(b) Exhibit B - the "Legal Description"
20. Cancellation Option. In conjunction with redevelopment of the site,
Lessor will have the option to cancel the lease after the first 18 (eighteen)
months of the Initial Term provided that Lessor give Lessee 12 (twelve) months
written notice prior to the date of cancellation. Lessee has the option to lease
the same amount of office space in a new building if the site is developed to
include office space. If Lessee exercises this option, Lessor will use its best
efforts to relocate Lessee to nearby office space the Lessor owns during the
construction period. If Lessee is not in default of this lease, Lessor shall pay
Lessee $5,000 as a moving allowance within 30 days of Lessee vacating the
premise.
Lessor and Lessee have executed this Lease the date and year first above
written.
Lessor: Lessee:
BLUME 1100 LIMITED PARTNERSHIP DRAKE MORTGAGE CORPORATION
By /s/ Bruce M. Blume By /s/ Stanley Drake
- -------------------------------- -------------------------------
Bruce M. Blume Stanley Drake,
General Partner President
Address: Address:
2825 Eastlake Ave. E, #310 _____________________________
Seattle, WA 908102 _____________________________
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STATE OF WASHINGTON )
)SS
COUNTY OF KING )
I certify that I know or have satisfactory evidence that the person
appearing before me and making this acknowledgment is the person whose true
signature appears on this document.
On the 17 day of August, 1992, before me personally appeared Bruce M.
Blume, to me known to be the General Partner of Blume 1100 Limited Partnership,
the partnership that executed the within and foregoing instrument, and
acknowledged the said instrument to be the free and voluntary act and deed of
said partnership, for the uses and purposes therein mentioned, and on oath
stated that he/she was authorized to execute said instrument.
Witness my hand and official seal hereto affixed the day and year first
above written.
/s/ Gary C. Lange
-----------------------------------
Notary Public in and for the State of
Washington, residing at Bellevue.
(SEAL) My commission expires: March 29, 1995.
STATE OF WASHINGTON )
)SS
COUNTY OF KING )
I certify that I know or have satisfactory evidence that the person
appearing before me and making this acknowledgment is the person whose true
signature appears on this document.
On the 18th day of August, 1992, before me personally appeared Stanley
Drake, to me known to be the President of Drake Mortgage Corporation, the
corporation that executed the within and foregoing instrument, and acknowledged
the said instrument to be the free and voluntary act and deed of said
corporation, for the uses and purposes therein mentioned, and on oath stated
that he/she was authorized to execute said instrument and that the seal affixed,
if any, is the corporate seal of said corporation.
Witness my hand and official seal hereto affixed the day and year first
above written.
/s/ Marion S. Rector
-----------------------------------
Notary Public in and for the State of
Washington, residing at Bellevue.
My commission expires: 6/3/96.
19
(SEAL)
<PAGE>
AGREEMENT; ASSIGNMENT OF LEASE
THIS AGREEMENT is made and entered into by and between the parties set
forth below this 30th day of November, 1993.
1. PARTIES
Pacific Biometrics, Inc., a Washington corporation ("Assignee") and
Columbia First Service, Inc., a Washington corporation ("Tenant").
2. SUBJECT PROPERTY
The office space located in the City of Seattle, County of King, State of
Washington outlined on Exhibit A attached hereto (the "Premises") in the
building commonly known as 1100 Eastlake Building (the "Building") located at
1100 Eastlake Avenue East, Seattle, Washington 98109 and situated on the land
described in Exhibit B.
3. ASSIGNMENT
Tenant does hereby assign all of its right, title and interest in that
lease between Landlord and Tenants assignor, Drake Mortgage Corporation, dated
August 13, 1992 commencing October 1, 1992 and terminating September 30, 1997,
with respect to the Premises (the "Lease") to Assignee for and in consideration
of Assignee assuming and agreeing to the terms and conditions of said Lease and
in further consideration of the covenants and agreements set forth in this
Agreement. A copy of the Lease and the prior assignment thereof to Tenant are
attached hereto and marked Attachment 1.
4. ASSUMPTION OF LEASE AND COVENANTS
Assignee does hereby assume the Lease subject to its terms and conditions,
conditioned upon the consent of Landlord, and does further covenant and agree
with Tenant as follows:
a. Assignee will receive one month of free rent in December, 1993 and
Tenant will pay, for and on behalf of Assignee, one-half month rent
in November, 1995 and one-half month rent in January, 1996, if
Assignee continues to occupy the Premises as of the date the rent
for those months becomes payable.
b. This Assignment will commence November 15, 1993 and be effective for
the remaining term of the Lease unless Assignee elects early
termination as provided in subparagraph c below.
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c. Assignee shall have the one-time right to terminate this Assignment
and Sublease effective as of July 31, 1995 in the event that it also
terminates its lease with Blume 1100 Limited Partnership in all
other space currently occupied by Assignee in the Building. In order
to exercise this option, Assignee must provide written notice of
exercise of the option to Tenant not more than 180 days and not less
than 90 days prior to July 31, 1995. Such notice shall be given by
Assignee in writing and will be deemed delivered upon personal
service, or if mailed, seventy-two (72) hours after depositing the
notice in the United States mail, certified or registered, postage
pre-paid, addressed to Tenant at the address set forth after its
signature at the end of this Agreement.
d. Assignee accepts the Premises "as is" with no duty by Tenant to
repair or maintain the Premises in any manner.
e. Assignee agrees to promptly notify Tenant in writing, in the manner
specified in subparagraph (c) above in the event that any of the
following events shall occur:
(i) Assignee shall receive any claim for indemnity pursuant to
the terms of the Lease;
(ii) Assignee shall receive any notice of threatened or actual
condemnation or taking by public authority of all or any
part of the Premises and of any abatement of rent arising
out of any such proceeding;
(iii) Assignee shall suffer a default pursuant to the provisions
of the Lease.
f. In the event of any default on the part of Assignee or in the event
of any claim of indemnity against Assignee, Tenant shall have and
may utilize all rights against Assignee to the full extent that
Lessor shall have and may exercise such rights against Tenant.
g. Any proposed assignment or subletting by Assignee shall require the
prior approval of Lessor and of Tenant in the manner provided in
Paragraph 15 of the Lease.
h. Each individual executing this Agreement on behalf of Assignee
represents and warrants that he or she is duly authorized to execute
and deliver this Agreement on behalf of such corporation in
accordance with the duly
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adopted resolution by the Board of Directors of such corporation or
in accordance with the Bylaws of such corporation, and that this
Agreement is binding upon such corporation in accordance with its
terms. Assignee will, within thirty (30) days after execution of
this Lease, deliver to Tenant a certified copy of a resolution of
the Board of Directors of such corporation authorizing or ratifying
the execution of this Agreement.
5. COUNTERPART SIGNATURES
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
DATED AND EFFECTIVE this 30th day of November, 1993.
"ASSIGNEE" "TENANT"
/s/ G. Russell Warnick, Pres. /s/ James L. Maxwell
- ----------------------------- ------------------
Address: 1100 Eastlake Ave. E Address: 1102 Broadway Plaza
Seattle WA 98109 Tacoma, WA 98402
Attn: President
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STANDARD FORM LEASE
(MULT-TENANT)
LANDLORD: HARRIS TRUST and SAVINGS BANK, an Illinois
corporation, as directed Trustee for Unisys Master
Trust
TENANT: MERCHANT HOUSE SCIENTIFIC, a California corporation
Lease Summary:
(a) Lease Date: May 23, 1993
(b) Landlord: HARRIS TRUST and SAVINGS BANK, an Illinois
corporation, as directed Trustee for Unisys Master Trust.
(c) Address of Landlord:_____________________________________________________
_____________________________________________________
_____________________________________________________
(d) Tenant: MERCHANT HOUSE SCIENTIFIC, a California corporation
(e) Address of Tenant: Building "A" 1370 Reynolds Avenue, Suite
118 & 119, Irvine, California 92714
(f) Contact: Ronald R. Helm Telephone: (714) 973-8539
(g) Premises Square Footage: Approximately 3,570 rsf
(h) Building Address: Building "A" 1370 Reynolds Avenue, Suite 118 & 119,
Irvine, California 92714
(i) Building Square Footage: Approximately 41,720
Square Feet
(j) Anticipated Commencement Date: Sixty (60) days from
submission of plans to the City of Irvine
(k) Term: Three (3) years and n/a ( ) months
(l) Monthly Rent: $2,210.00/month $26,520.00/year
(subject to adjustment per Exhibit "E").
(m) Security Deposit: $4,420.00 ($1,196.00 shall be applied to
month thirteen (13) of the lease as rent)
(n) Permitted Uses: General Office/Warehouse Use
(o) Brokers: Lee & Associates
(p) Insuring Party: HARRIS TRUST and SAVINGS BANK, an Illinois
corporation, as directed Trustee for Unisys Master Trust
(q) Tenant's Percentage: 8.56%
Exhibits(s):
"A" Description of Premises & "F" Rules & Regulations
"B" Description of Project
"C" Tenant Improvements Preliminary Plans
"D" Commencement Date Memorandum
"E" Rent Adjustments
Riders:
Addendum #1 to Lease
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
LEASE
1. Parties. THIS LEASE ("Lease"), is dated for reference purposes only as of the
date set forth in Paragraph (a) of the Lease Summary and is entered into by and
between the Landlord identified in Paragraph (b) of the Lease Summary
("Landlord"), whose address is set forth in Paragraph (c) of the Lease Summary
and the Tenant identified in Paragraph (d) of the Lease Summary ("Tenant"),
whose address is set forth in Paragraph (e) of the Lease Summary.
2. Premises. Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord those certain premises ("Premises") within that certain building
located at the address set forth in Paragraph (h) of the Lease Summary, which
Premises are shown on Exhibit "A" attached hereto, together with the property
appurtenant thereto, if any, for the exclusive use of Tenant as shown on said
Exhibit "A".
3. Definitions. The following terms shall have the following meanings in this
Lease:
(a) "Alterations" shall mean any alterations, decorations, additions or
improvements made in, on or about, under or continuous to the Premises after the
Commencement Date, including, but not limited to, lighting, HVAC and electrical
fixtures, pipes and conduits, aboveground and below ground tanks, hazardous
transfer, storage and disposal facilities, partitioning, drapery, wall
coverings, cabinetry, carpeting and/or other floor covering, ceiling tile,
fixtures and carpentry installations.
(b) "Building" shall mean that certain building, identified in Paragraph
(h) of the Lease Summary, within which the Premises are located.
(c) "CC&R's" shall mean that Declaration of Covenants, Conditions and
Restrictions recorded May 1965 as instrument No. 16662 in the Official Records
of Orange County, California, as the same may be amended from time to time,
true, correct and complete copies of which have been supplied by Landlord to
Tenant.
(d) "City" shall mean the city in which the Premises are located.
(e) "Commencement Date" shall mean the first day of the Term of this Lease
as described in Paragraph 4(a).
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(f) "Common Area" shall mean all areas and facilities within the Project
exclusive of the premises and other portions of the Project leased (or to be
leased) exclusively to other tenants. The Common Area includes, but is not
limited to, striped parking areas, access and perimeter roads, sidewalks,
landscaped areas and similar areas and facilities. Tenant's use of the Common
Area, and its rights and obligations with respect thereto, are not particularly
described in Paragraph 40 hereof.
(g) "County" shall mean the county in which the Premises are located.
(h) "HVAC" shall mean the heating, ventilating and air conditioning system
serving the Building.
(i) "Interest Rate" shall mean the greater of ten percent (10%) per annum
or five percent (5%) in excess of the discount rates of the Federal Reserve Bank
of San Francisco in effect on the twenty-fifth (25th) day of the calendar month
immediately prior to the event giving rise to the Interest Rate imposition.
(j) "Landlord's Agents" shall mean Landlord's authorized agents,
contractors, partners, subsidiaries, directors, officers and employees.
(k) "Lease Summary" shall mean the above summary of Lease information
which is hereby made a part of this Lease.
(l) "Monthly Rent" shall mean the rent payable pursuant to Paragraph 5(a),
as adjusted from time to time pursuant to the terms of this Lease.
(m) "Operating Expenses" shall mean all costs and expenses for maintenance
and operation of the Project as more particularly described in Paragraph 16(b)
below.
(n) "Premises" shall mean the property leased hereby within the Building,
and all areas appurtenant thereto for the exclusive use of Tenant as shown on
Exhibit "A" hereto.
(o) "Project" shall mean that certain real property, and all improvements
thereon, including the Building and other buildings, if any, located within the
boundaries of the property shown on the Project Site Plan attached to the Lease
as Exhibit "B".
(p) "Real Property Taxes" shall mean any form of tax, assessment, license,
fee, rent tax, levy, penalty (if a result of tenant's delinquency), real
property or other tax (other than Landlord's net income, estate, succession
inheritance, or franchise taxes), now or hereafter imposed with respect to the
Premises, this Lease or any rent payable hereunder by any authority having the
direct or indirect power to tax, or by any city, county, state or federal
government or any improvement district or other district or division thereof,
whether such tax or any portion thereof (i) is determined by the area of the
Premises or any part thereof or the rent and other sums payable hereunder by
Tenant including, but not limited to, any gross income or excise tax levied by
any of the foregoing authorities with respect to receipt of such rent or other
sums due under this Lease; (ii) is levied or assessed in lieu of, in
substitution for, or in addition to, existing or additional taxes with respect
to the Premises whether or not now customary or within the contemplation of the
parties; or (iii) is based upon any legal or equitable interest of Landlord in
the Premises or any part thereof.
(q) "Rent" shall mean Monthly Rent plus the Additional Rent defined in
Paragraph 5(c).
(r) "Security Deposit" shall mean that amount paid by Tenant pursuant to
Paragraph 7.
(s) "Tenant Improvements" shall mean those certain improvements to the
Premises, if any, to be constructed pursuant to Paragraph 25 hereof.
(t) "Tenant's Personal Property" shall mean Tenant's removable trade
fixtures, furniture, equipment and other personal property in the Premises.
(u) "Term" shall mean that period of years and/or months as set forth in
Paragraph (k) of the Lease Summary, as said Term may be extended pursuant to the
proper exercise of any option or options to extend the Term as may be granted
herein or as may be sooner terminated pursuant to any provision hereof.
4. Lease Term
(a) Term. The Term of this Lease shall be for that period of years and
months set forth in Paragraph (k) of the Lease Summary commencing on the
Commencement Date, unless extended in accordance with any option or options to
extend the Term granted herein, or unless sooner terminated pursuant to any
provision hereof. Landlord and Tenant anticipate that the Term will commence on
the "Anticipated Commencement Date" set forth in Paragraph (j) of the Lease
Summary, however, notwithstanding the foregoing, the actual Commencement Date of
this Lease ("Commencement Date") shall be the earlier of: (i) the date upon
which the City has approved the Tenant Improvements (as defined in Paragraph 25
hereof) and a Certificate of Occupancy is issued for the premises; or (ii)
Tenant commences occupancy of the Premises. The Tenant Improvements shall be
deemed "substantially complete" when they have been completed except for minor
details of construction, mechanical adjustments or decorations which do not
materially interfere with Tenant's use and enjoyment of the Premises (items
normally referred to as "punch list") items). If the Commencement Date is based
on the date established by the provisions of Paragraph 4(a)(ii) above, Landlord
shall deliver to Tenant a certificate of occupancy from the City for the
Premises within five (5) business days of such date. When the actual
Commencement Date has occurred, Landlord and Tenant shall execute a Commencement
Date Memorandum in the form shown in Exhibit "D" attached to the Lease.
(b) Early Entry. Landlord hereby agrees that upon prior written notice to
Landlord, Tenant and its authorized agents, contractors, subcontractors and
employees may, during ordinary business hours prior to the Commencement Date, at
Tenant's sole risk, enter upon the Premises for the sole purpose of installing
Tenant's trade fixtures and equipment in the Premises; provided, however, that
(i) the provisions of this Lease, other than with respect to the payment of
Monthly Rent and items payable by Tenant as Additional Rent (other than Tenant's
insurance obligations as set forth in Paragraph 20 of the Lease), shall apply
during such early entry, specifically including, but not limited to, the
provisions of Paragraph 20(a) relating to the indemnification of Landlord; (ii)
Tenant shall pay for and provide evidence of the insurance to be provided by
Tenant pursuant to the provisions of Paragraph 20 of the Lease; (iii) Tenant
shall pay all utility charges for the Premises attributable to Tenant's early
entry and use of the premises as reasonably determined by Landlord; and (iv)
Tenant will not unreasonably interfere, delay or hinder Landlord, its agents,
contractors or subcontractors in the construction of the Tenant Improvements in
accordance with the provisions of this Lease. Tenant shall not use the Premises
for the storage of inventory or otherwise commence the operation of business
during the period of such early entry. Early entry under this Paragraph 4(b)
shall not constitute occupancy of the Premises for purposes of establishing the
Commencement Date.
(c) Delay in Possession. Notwithstanding the Anticipated Commencement
Date, if for any reason Landlord cannot deliver possession of the Premises to
Tenant with the Tenant Improvements "substantially completed" (as such term is
defined in Paragraph 4(a)(iii) above) and ready for Tenant to commence the
installation of its trade fixtures and Tenant's Personally Property, on or
before said date, Landlord shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease or the obligations of
Tenant hereunder, but in such case, Tenant shall not be obligated to pay Monthly
Rent or any items of Additional Rent other than as provided in Paragraph 4(b)
above, until possession of the Premises is tendered to Tenant as provided
hereinabove; provided, however, if Landlord shall not have delivered possession
of the Premises as provided hereinabove within one hundred twenty (120) days
following the Anticipated Commencement Date plus periods occurring as a result
of delays caused in whole or in part by Tenant or any delays which are beyond
Landlord's reasonable control, including but not limited to, inclement weather,
delays due to strikes, acts of God, inability to obtain labor or materials,
inability to secure governmental approvals or permits, governmental
restrictions, civil commotion, fire or similar causes, Tenant may, at its
option, by notice in writing given to Landlord within ten (10) days thereafter,
cancel this Lease, in which event the parties shall be discharged from all
obligations hereunder; provided further, however, that if such written notice of
Tenant is not given to Landlord within said fifteen (15) day period. Tenant's
right to cancel the Lease under this Paragraph 4(c) shall terminate and be of no
further force or effect.
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(d) Tenant Delays. The Commencement Date shall not be delayed or postponed
due to the fault of Tenant and the Term hereof and Tenant's obligation to pay
Monthly Rent and Additional Rent under the Lease shall commence upon the date
which would have been the Commencement Date but for the delay due to the fault
of Tenant, as said date is determined by Landlord. Delays "due to the fault" of
Tenant shall include, without limitation, delays caused by: (i) Tenant's failure
to timely approve the preliminary and working plans and specifications for the
Tenant Improvements; (ii) Tenant's request for or use of special materials,
finishes or installations which are not readily available or which otherwise
require additional time to obtain; (iii) Tenant's request for changes in the
plans and/or working drawings after Landlord has prepared the working plans and
specifications; or (iv) unreasonable interference with Landlord's work, if any,
caused by Tenant or by Tenant's agents, employees, contractors or
subcontractors.
5. Rent.
(a) Monthly Rent. Tenant shall pay to Landlord, in lawful money of the
United States, for each calendar month of the Term, the Monthly Rent set forth
in Paragraph (1) of the Lease Summary, subject to the adjustment as provided in
Paragraph 5(b) below, in advance, on the first (1st) day of each calendar month,
without abatement, deduction, claim, offset, prior notice or demand. Landlord
hereby acknowledges receipt of Tenant's payment of Monthly Rent for the first
(1st) month of the Term.
(b) Adjustments. The Monthly Rent as set forth hereinabove shall be
adjusted as provided in Exhibit "E" attached to this Lease.
(c) Additional Rent. All monies required to be paid by Tenant under this
Lease, including, without limitation, Real Property Taxes payable pursuant to
paragraph 14 hereof, repair and maintenance charges payable pursuant to
Paragraph 16 hereof and insurance premiums payable pursuant to Paragraph 20
hereof shall constitute Additional Rent. Landlord shall have the right to
estimate and collect from Tenant in advance on a quarterly or monthly basis any
and all such Additional Rent.
(d) prorations. If the Commencement Date is not the first (1st) day of a
month, or if the expiration of the Term of this Lease is not the last day of a
month, a prorated installment of Monthly Rent based on a thirty (30) day month
shall be paid for the fractional month during which the Term commences or
terminates.
6. Late Payment Charges. Tenant acknowledges that late payment by Tenant to
Landlord of Rent and other charges provided for under this Lease will cause
Landlord to incur costs not contemplated by this Lease, the exact amount of such
costs being extremely difficult or impracticable to fix. Such costs include, but
are not limited to, processing and accounting charges, and late charges that may
be imposed on Landlord by the terms of any encumbrance and notes secured by an
encumbrance covering the Premises, or late charges and penalties due to late
payment of Real Property Taxes due on the Premises. Therefore, if any
installment of Rent or any other charge due from Tenant is not received by
Landlord within ten (10) days following the applicable due date, Tenant shall
pay to Landlord an additional sum equal to the greater of One Hundred Dollars
($100.00) or five percent (5%) of the amount overdue as a late charge for every
month or portion thereof that Landlord will incur by reason of the late payment
by Tenant. Acceptance of any late charge shall not constitute a waiver by
Landlord of Tenant's default with respect to the overdue amount, and shall not
prevent Landlord from exercising any of the other rights and remedies available
to this Lease of Tenant's failure to pay Monthly Rent or Additional Rent when
due, Landlord may condition its acceptance of future Rent upon a requirement
that Tenant concurrently execute an amendment to this Lease which provides that
Monthly Rent for the balance of the Term of this Lease shall be made in
quarterly installments, in advance, in an amount equal to the sum of the Monthly
Rent amounts payable during such three (3) month period.
7. Security Deposit. Tenant has deposited with Landlord the sum set forth in
Paragraph (m) of the Lease Summary as a Security Deposit for the full and
faithful performance of every provision of this Lease to be performed by Tenant.
If Tenant defaults with respect to any provision of this Lease, Landlord may
apply all or any part of the Security Deposit for the payment of any Rent or
other sum in default, the repair of such damage to the Premises or 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 other loss or
damage which Landlord may suffer by reason of Tenant's default to the full
extent permitted by law. If any portion of the Security Deposit is so applied,
Tenant shall, within ten (10) days after written demand therefor, deposit cash
with Landlord in an amount sufficient to restore the Security Deposit to its
original amount, and Tenant's failure to do so shall be a default under this
Lease. Upon any increase in the Monthly Rent during the Term, Tenant shall
deposit with Landlord additional funds such that the amount of the Security
Deposit held by Landlord shall at all times bear the same proportion to the then
current Monthly Rent as the original Security Deposit bears to the initial
Monthly Rent. 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. If Tenant is not otherwise in default, the Security
Deposit or any balance thereof shall be returned to Tenant within thirty (30)
days of the Termination Date.
8. Holding Over. If Tenant remains in possession of all or any part of the
Premises after the expiration of the Term hereof with the prior written consent
of Landlord, such possession shall constitute a month-to-month tenancy only and
shall not constitute a renewal or extension for any further term. In such event,
Monthly Rent shall be increased to an amount equal to one hundred fifty percent
(150%) of the Monthly Rent payable during the last month of the Term, and any
other sums due hereunder shall be payable in the amount and at the times
specified in this Lease. Such month-to-month tenancy shall be subject to every
other term, condition, and covenant contained herein.
9. Condition of Premises.
(a) Landlord's sole construction obligations regarding Tenant Improvements
for the Premises will be as set forth in Paragraph 25 hereof. Subject to the
following provisions, Tenant, by taking possession of the Premises, acknowledges
having inspected the Premises and accepts them as being in good and sanitary
order, condition and repair and as having been constructed in accordance with
the Plans. Tenant will have a period of thirty (30) days after taking possession
of the Premises in which to advise Landlord of construction deficiencies or
defects, in addition to the punch list items referred to in paragraph 4(a)
above, by written notice to Landlord. Except as hereafter provided, Landlord
will repair, replace or complete at its expense all items both on Tenant's punch
list and referenced on the 30-day notice referred to above, within thirty (30)
days after receipt of notice or as soon as Landlord, acting in good faith, can
complete thereafter. If Landlord reasonably contents that a particular punch
list or notice item is not justified, the parties will refer the issue to
Landlord's architect for resolution. If Tenant does not accept the opinion of
Landlord's architect, the parties will select an independent architect of
recognized standing to make a final determination.
(b) Tenant acknowledges that neither Landlord nor Landlord's Agents has
made any representations or warranties as to the suitability or fitness of the
Premises for the conduct of Tenant's business or for any other purpose, and that
neither Landlord nor Landlord's Agents has agreed to undertake any alterations
or construct any Tenant Improvements to the Premises except as expressly
provided in this Lease.
10. Use of the Premises.
(a) Tenant's Use. Tenant shall use the Premises solely for the purposes
set forth in Paragraph (n) of the Lease Summary and shall not use the Premises
for any other purpose without obtaining the prior written consent of Landlord.
Tenant's use of the Premises shall be subject to all of the terms and conditions
of this Lease, including, without limitation, the provisions of Paragraph 10(b)
hereof.
(b) Compliance.
(i) Tenant shall not use the Premises or suffer or permit anything
to be done in or about the Premises which will in any way conflict with any law,
statute, zoning restriction, ordinance or governmental law, rule, regulation or
requirement of any duly constituted public authority having jurisdiction over
the Premises now in force or which may hereafter be in force, or the
requirements of the Board of Fire Underwriters or other similar body now or
hereafter constituted relating to or affecting the condition, use or occupancy
of the Premises or any covenants, conditions, easements or restrictions now or
hereafter encumbering the Premises. Tenant shall not commit any public or
private nuisance or any other act or thing which might or would disturb the
quiet enjoyment of any other tenant of Landlord or any occupant of nearby
property. Tenant shall place no loads upon the floors, walls or ceilings in
excess of the maximum designed load specified by Landlord or which may damage
the Building or outside areas; nor place any harmful liquids in the drainage
systems; nor dump or store waste materials, refuse or other materials or allow
such to remain outside the Building proper, except in the enclosed trash areas
provided.
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(ii) In no event shall Tenant cause or permit any "Toxic Materials"
(as herein defined) to be brought upon, stored, used, released into the
environment or disposed of on or about the Premises. As used herein, "Toxic
Materials" shall mean any hazardous, toxic or radioactive matter, including
those materials identified in Section 66680 through 66685 of Title 22 of the
California Administrative Code, Division 4, Chapter 30 ("Title 22") as amended
from time to time. If Tenant breaches the obligation in the preceding sentence,
or if the presence of Toxic Materials on the Premises caused or permitted by
Tenant results in the contamination of the Premises, Tenant shall be solely
responsible for and shall defend, indemnify and hold Landlord and Landlord's
Agents harmless from and against all claims, costs and liabilities, including
attorneys' fees and costs, arising out of or in connection with such breach or
contamination. Tenant shall further be solely responsible for and shall defend,
indemnify and hold Landlord, Landlord's Agents and the Premises harmless from
and against all claims, costs, and liabilities, including attorneys' fees and
costs, arising out of or in connection with the removal, clean-up and
restoration work and materials necessary to return the Premises and any other
property of whatever nature to their condition existing prior to the appearance
of the Toxic Materials on the Premises. Tenant's obligations hereunder shall
survive the termination of this Lease. Tenant shall notify Landlord of an
provide to Landlord copies of any of the following environmental entitlements or
inquiries relating to the Premises which may be filed by or served on Tenant:
notices of violation, notices to comply, citations, inquiries, reports filed
pursuant to selfreporting requirements, reports filed pursuant to any
governmental law or regulation relating to underground or aboveground tanks,
permit applications, permits and other reports or documents including those
which may be characterized as confidential. Landlord may, at any time, require
that Tenant conduct monitoring activities on the Premises satisfactory to
landlord with respect to the release or potential release of Toxic Materials on
or from the Premises. In the event of a release of any Toxic Materials to the
environment, Tenant will furnish to Landlord copies of any and all reports
and/or correspondence with any governmental agencies relating to such release.
(iii) Tenant acknowledges that it has read the CC&R's, the REA and
the SLURS (as those terms are defined in Paragraph 3 hereof), and knows the
contents thereof. Tenant agrees that this Lease is subject and subordinate to
the CC&R's, the SLURS and the REA, as the same may now or hereafter exist, and
that it will execute and deliver to Landlord within fifteen (15) days of
Landlord's request therefore, any further documentation or instruments which
Landlord deems necessary or desirable to evidence or effect such subordination;
provided, that any future amendment to the CC&R's the SLURS or the REA shall not
substantially interfere with Tenant's use and enjoyment of the premises.
Throughout the Term Tenant shall timely comply with all of the terms, provisions
and restrictions of the REA, the SLURS and the CC&R's and any modifications or
amendments thereof which pertain, restrict or affect the Premises, or Tenant's
use of any other area of the Project as permitted hereunder, including the
payment by Tenant of Tenant's Percentage of any periodic or special dues or
assessments charged against the Project, the Building (or against the Landlord
as the owner thereof), in accordance with the provisions of the REA, the SLURS
or the CC&R's. Tenant shall hold Landlord, Landlord's Agents and the Premises
harmless and indemnify Landlord and Landlord's Agents against any loss, expense,
damage, attorneys' fees and costs or liability arising out of or in connection
with the failure of Tenant to so perform or comply with the CC&R's, the SLURS
and the REA. The failure of Tenant to so comply with the requirements of the
CC&R's, the SLURS or the REA shall constitute a material default hereunder.
Tenant agrees that it will subordinate the Lease to any other covenants,
conditions and restrictions and any reciprocal easement agreements or any
similar agreements which Landlord may hereafter record against the Premises or
any portion thereof, provided that such subordination does not unreasonably
interfere with Tenant's use and enjoyment of the Premises.
11. Quiet Enjoyment. Subject to the right of any lender of record, Landlord
covenants that Tenant, upon performing the terms, conditions and covenants of
the Lease, shall have quiet and peaceful possession of the Premises as against
any person claiming the same by, through or under Landlord.
12. Alterations.
(a) Permitted Alterations. After the Commencement Date, Tenant shall not
make or permit any Alterations in, on or about the Premises, except for
non-structural Alterations not exceeding Five Thousand Dollars ($5,000.00) in
aggregate cost over the Term of the Lease, without the prior written consent of
Landlord, which consent may be withheld in Landlord's discretion. All
Alterations shall be constructed pursuant to plans and specifications approved
in writing by Landlord. Notwithstanding the foregoing, Tenant shall not, without
the prior written consent of Landlord, make any: (i) Alterations to the exterior
of the Building or the outside areas; (ii) Alterations to or penetrations of the
structural portions of the Building including, without limitation, the roof, or
which will interfere with the proper functioning of any HVAC, electrical or
mechanical facilities or equipment located in the building, or (iii) Alterations
visible from outside the Building to which Landlord may withhold its consent
based on wholly aesthetic grounds.
All Alterations shall be installed by a licensed contractor at Tenant's
sole expense in compliance with all applicable laws and covenants, conditions
and restrictions of record. The work shall be done in a good and workmanlike
manner conforming in quality and design with he Premises existing as of the
Commencement Date, and shall not diminish the value of the Premises. Tenant
shall, if required by Landlord, obtain and pay for, at its own expense, a
completion and indemnity bond, the form and amount of which shall be subject to
the approval of Landlord. All Alterations made by Tenant shall be and become the
property of Landlord upon the installation thereof and shall not be deemed
Tenant's Personal Property; provided, however, that Landlord may, at its option,
require that Tenant, upon the termination of this Lease, at Tenant's expense,
remove any or all non-structural Alterations installed by Tenant and return the
Premises to its condition as of the commencement Date of this lease, normal wear
and tear excepted. Notwithstanding any other provisions of this Lease, Tenant
shall be solely responsible for the maintenance, repair and replacement of any
and all Alterations made by it to the Premises. Further, in the event the
Alterations include any aboveground or underground tanks, concrete sumps,
non-vaulted buried tanks, earthen-walled pits, ponds or lagoons or other
underground containers, Tenant shall prepare a risk assessment which addresses
any and all concerns of Landlord. The adequacy of the risk assessment shall be
determined in Landlord's sole discretion.
(b) Notice. Tenant shall give Landlord written notice of Tenant's
intention to perform work on the Premises which might result in any claim of
lien at least twenty (20) days prior to the commencement of such work to enable
Landlord to post and record a notice of nonresponsibility or other notice
Landlord deems proper prior to the commencement of any such work. Tenant shall
not permit any mechanic's, materialmen's or other liens to be filed against the
property of which the Premises are a part, nor against Tenant's leasehold
interest in the Premises. If Tenant fails to remove or bond any lien(s) filed
against the Premises or its leasehold estate therein in connection with any work
performed or any work claimed to have been performed by or at the direction of
Tenant within ten (10) days from the date of the lien filings(s), then Landlord
may remove such lien(s) at Tenant's expense and Tenant shall reimburse landlord
for all costs incurred by Landlord in connection with the removal of the
lien(s), which amount shall be deemed Additional Rent, and shall include,
without limitation, all sums disbursed, incurred or deposited by Landlord
including Landlord's costs, expenses and actual attorneys' fees with interest
thereon at the Interest Rate from the date of expenditure.
13. Surrender of the Premises. Upon the expiration or earlier termination of
this Lease, Tenant shall surrender the Premises to Landlord in its condition
existing as of the Commencement Date, normal wear and tear and acts of God
excepted, with an interior walls in good repair and repainted if marked, all
carpets shampooed and cleaned, the HVAC equipment, plumbing, electrical and
other mechanical installations in good operating order, and all floors cleaned
and waxed, all to the reasonable satisfaction of Landlord. Tenant shall remove
from the Premises all of Tenant's Alterations which Landlord requires Tenant to
remove pursuant to Paragraph 12 and all Tenant's Personal Property, and shall
repair any damage and perform any restoration work caused by such removal,
provided, however, if Tenant is then in default, Tenant shall not be entitled to
remove Tenant's Personal Property except as specified by written notice
delivered by Landlord to Tenant. If Tenant fails to remove such Alterations and
Tenant's Personal Property which Tenant is authorized and obligated to remove
pursuant to the above, and such failure continues after the termination of this
Lease, Landlord may retain such property and all rights of Tenant with respect
to it shall cease, or Landlord may place all or any portion of such property in
public storage for Tenant's account. Tenant shall pay to Landlord, upon demand,
the cost of removal of any such Alterations and Tenant's Personal Property and
storage and transportation costs of same, and the repairing and restoring the
Premises, together with attorneys' fees and interest on said amounts at the
Interest Rate from the date of expenditure by Landlord. If the Premises are not
so surrendered at the termination of this Lease, Tenant hereby agrees to
indemnify Landlord and its Agenda against all loss or liability resulting from
delay by Tenant in so surrendering the Premises, including, without limitation,
any claims made by any succeeding tenant, losses to Landlord due to lost
opportunities to lease to succeeding tenants, and actual attorneys' fees and
costs.
14. Real and Personal Property Taxes.
(a) Payment by Tenant. Tenant shall pay, as Additional Rent, all personal
property taxes now or hereafter levied against Tenant's Personal Property, and
Tenant's Percentage of all Real Property Taxes levied against the Project,
during the Term as the same become due and payable. Landlord agrees to forward
to Tenant copies of all notices and tax bills pertaining to the Premises upon
receipt. At least fifteen (15) days before
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the last date payable without penalty, Tenant shall pay to Landlord the full
amount of such Real Property Taxes as shown on said notices and bills. If Tenant
shall fail to timely pay any Real Property Taxes or personal property taxes,
Landlord shall have the right but not the obligation to: (i) pay the same, in
which case Tenant shall immediately repay such amount to Landlord including
interest at the Interest Rate from the date paid by Landlord until the date of
payment by Tenant; and (ii) exercise any and all remedies available to Landlord
pursuant to Paragraph 26. Tenant may contest the amount or validity of any Real
Property Taxes by appropriate proceedings; provided that Tenant shall promptly
pay such taxes unless such proceedings shall operate to prevent or stay the
collection of the tax so contested. Landlord shall join in any such proceedings
if any law shall so require, providing that Tenant shall indemnify Landlord
against any liability, cost or expense in connection therewith, including,
without limitation actual attorneys' fees and costs.
(b) Apportionment. If the Premises or the Project are not assessed as a
separate parcel, then Landlord shall equitably apportion the Real Property Taxes
assessed against the real property which includes the Premises based upon the
ratio of the square footage of the Premises to the total square footage of all
leasable space within the buildings on the assessed parcel, and Tenant shall pay
the amount of Real Property Taxes so apportioned to the Premises.
(c) Tax on Improvements. Tenant shall pay any increase in Real Property
Taxes attributable to any and all Alterations and Tenant Improvements of any
kind whatsoever placed in, on or about the Premises for or by Tenant.
(d) Proration. Tenant's liability to pay Real Property Taxes shall be
prorated on the basis of a three hundred sixty-five (365) day year to account
for any fractional portion of a fiscal tax year included at the commencement or
expiration of the Term. With respect to any assessments which may be levied
against or upon the Premises, or which under the laws then in force may be
evidenced by improvements or other bonds or may be paid in annual installments,
only the amount of such annual installment (with appropriate proration for any
partial year) and interest due thereon shall be included within the computation
of the annual Real Property Taxes levied against the Premises.
(e) Payment on Expiration of Term. If this Lease terminates on a date
earlier than the end of a fiscal tax year, Landlord shall deliver to Tenant a
statement setting forth the amount of Real Property Taxes to be paid by Tenant
prorated to the date of termination. Tenant shall pay to Landlord such prorated
amount within five (5) days of Tenant's receipt of the statement.
(f) Personal Property Taxes. Tenant shall pay prior to delinquency all
taxes assessed or levied against Tenant's Personal Property in, on or about the
Premises. When possible, Tenant shall cause its Personal Property to be assessed
and billed separately from the real or personal property of Landlord.
(g) Failure to Pay. Tenant's failure to timely pay any of the charges
required to be paid under this Paragraph shall constitute a material default
under this lease.
15. Utilities and Services. Tenant shall be responsible for and shall pay
promptly all charges for water, gas, electricity, sewer, heat, light, power,
telephone, refuse pickup, janitorial service and all other utilities, materials
and services furnished directly to or used by Tenant in, on or about the
Premises during the Term, together with any taxes thereon. Landlord shall not be
liable in damages or otherwise for any failure or interruption of any utility or
other service furnished to the Premises. No such failure or interruption shall
entitle Tenant to terminate this Lease or withhold or abate Rent or other sums
due hereunder.
16. Operating Expenses, Repairs and Maintenance.
(a) Tenant to Bear Share of Operating Expenses.
(i) Tenant shall pay to Landlord as hereinafter provided, Tenant's
Percentage of "Operating Expenses", as defined in Paragraph 16(b) below.
"Tenant's Percentage", as set forth in Paragraph (q) of the Lease Summary, is
that percentage that the gross square feet of the floor area of the Premises
bears to that total gross square footage of the floor area of leasable space
within the Building.
(ii) Prior to the commencement of each calendar year, Landlord shall
give Tenant a written estimate of Tenant's Percentage of Operating Expenses for
the ensuing calendar year. Tenant shall pay its estimated share of Operating
Expenses in equal monthly installments in advance, or before the first (1st) day
of each month. Within ninety (90) days after the end of each calendar year (or
such shorter interval as Landlord shall select), Landlord shall furnish Tenant a
statement showing in reasonable detail, the actual Operating Expense for the
Building incurred for the period in question and the parties shall within thirty
(30) days thereafter, make payment or allowance necessary to adjust Tenant's
estimated payments to the actual Tenant's Percentage of Operating Expenses as
shown by the applicable periodic statements submitted to Tenant by Landlord.
(iii) If Landlord shall determine at any time from time to time that
the estimate of Tenant's Percentage of Operating Expenses for the current
calendar year is, or will become inadequate to meet Tenant's share of such
Operating Expenses for any reason, Landlord shall immediately determine the
approximate amount of such inadequacy and issue a supplemental estimate as to
Tenant's Percentage of Operating Expenses, and Tenant shall pay said increase in
the estimated Tenant's Percentage of Operating Expenses as reflected by such
supplemental estimate.
(iv) Landlord shall keep or cause to be kept separate and complete
books of accounting covering costs and expenses of operating and maintaining the
Common Area and other portions of the Project which Landlord is required to
maintain and repair showing the method of calculating Tenant's Percentage of
Operating Expenses, and shall preserve for at least twenty-four (24) months
after the close of each fiscal year all vouchers, invoices, statements or
payroll records, and other papers evidencing said costs and expenses for that
calendar year. Tenant, at its sole cost and expense through any certified public
accountant designated by it, shall have the right to examine and/or audit the
books and other documents mentioned above evidencing such costs and expenses for
the previous two (2) calendar years, during reasonable business hours and not
more frequently than once during any calendar year.
(b) Definition of the Operating Expenses. The term "Operating Expenses" as
used herein shall mean all costs and expenses incurred in connection with the
maintenance and operation of the Project, which costs shall include, without
limitation, repair and maintenance to the roof and the exterior walls of the
buildings in the Project, periodic painting of the buildings in the Project,
landscaping services, HVAC maintenance contracts and normal maintenance of the
HVAC, sweeping, maintenance services, repairs to and replacement of asphalt
paving, bumpers, striping, light bulbs, light standards, guard and directional
signs and lighting systems, perimeter walls, retaining walls, sidewalks,
planters, landscaping and sprinkler system in planting area, any and all
assessments levied against the Project pursuant to the CC&R's, water, electrical
and other utility services thereto, removal of trash, rubbish and other refuse
from the Project, cleaning of and replacement of signs of the Project, including
relamping and repairs made as required; maintenance of all of the Common Area
from any obstructions not reasonably required for the Common Area uses,
including the prohibition of the sale or display of merchandise or the storing
of materials and/or equipment in the Common Area, payment of all electrical,
water and other utility charges or fees for services furnished to Common Area;
obtaining and maintaining public liability, property damage and other forms of
insurance which Landlord may or is required to maintain in connection with the
Project (including the payment of any deductibles thereunder); establishment of
reasonable reserves for replacements and/or repair of Common Area improvements,
equipment and supplies; employment of such personnel as Landlord may deem
reasonably necessary, if any, to direct parking and police the Common Area and
facilities; depreciation of machinery and equipment used in connection with the
maintenance and operation of the Common Area; depreciation of Common Area
improvements to cover the costs of replacement and reconstruction thereof from
time to time as needed; employment of personnel used in connection with the
operation, maintenance and repair of the Common Area including payment or
provision for unemployment insurance, workers' compensation insurance and other
employee costs; the costs of bookkeeping and accounting and legal services
provided in connection with the operation and maintenance of the Common Area by
Landlord; any other items reasonably necessary from time to time to properly
repair, replace, maintain and operate the Common Area within the Project and any
interest paid in connection therewith, and a management fee to cover Landlord's
management, overhead and administrative expenses. Notwithstanding the foregoing,
if Landlord elects to delegate its duties hereunder to a professional property
manager, then Landlord shall not be entitled to receive any management fee
(except for any costs and/or administrative and overhead expenses reasonably
incurred by Landlord in "monitoring" and "auditing" the performance delegated to
the professional property manager as contemplated herein which costs and/or
expenses shall be reimbursed to Landlord as incurred and billed) but under such
circumstances any reasonable amounts paid to the professional property manager
shall be added to and deemed a part of the Operating Expenses.
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(c) Repairs and Maintenance.
(i) Tenant shall, subject to Landlord's obligations as hereunder
provided, at all times during the Term of this Lease or any extension thereof,
and at Tenant's sole cost and expense, keep, maintain and repair the Premises
and every portion thereof and every Improvement therein, in good and sanitary
order and condition (usual wear and tear excepted), including without limitation
all necessary maintenance and repairs to all portions of the Premises, and all
exterior entrances, all glass, window easements, show window mouldings, all
partitions, doors, doorjambs, door closers, or hardware, fixtures, equipment,
electrical lighting and systems, plumbing and a plumbing fixtures, ducts, pipes,
wiring, conduits and all required air conditioning and heating system repairs,
exclusive of normal maintenance services. Tenant agrees that it will not, nor
will it authorize any person to go onto the roof of the Building without the
prior written consent of Landlord.
(ii) Landlord shall, subject to receiving Tenant's Percentage of
Operating Expenses, maintain in good and sanitary condition and repair the roof
of the Building in which the Premises are located and the normal maintenance
services for the HVAC for the Premises, if any, and paint the exterior of the
Building within which the Premises are located as and when such painting becomes
reasonably necessary in Landlord's sole discretion. Landlord shall not be
required to make any repairs to the roof unless and until Tenant has notified
Landlord in writing of the need for such repair and Landlord shall have a
reasonable period of time hereafter to commence and complete said repair.
(iii) The cost of any maintenance and repairs on the part of
Landlord provided for in this Paragraph 16 shall be considered Operating
Expenses as herein defined.
(d) Waiver. Tenant hereby waives all rights provided for by the provisions
of Sections 1941 and 1942 of the California Civil Code and any similar or
successor law regarding Tenant's right to make repairs at the expense of
Landlord.
(e) Compliance with Governmental Regulations. Tenant shall, at its own
costs and expense, promptly and properly observe and comply with, including the
making by Tenant of any Alteration to the Premises, all present and future
orders, regulations, directions, rules, laws, ordinances, and requirements of
all governmental authorities (including, without limitation, state, municipal,
county and federal governments and their departments, bureaus, boards and
officials) arising from the use or occupancy of, or applicable to, the Premises
or privileges appurtenant to or in connection with the enjoyment of the
Premises.
(f) Tenant's Failure to Pay. Tenant's failure to timely pay any of the
charges in connection with the performance of its maintenance and repair
obligations to be paid under this Paragraph shall constitute a material default
under this Lease.
17. Fixtures. Tenant shall, at its own expense, provide, install and maintain in
good condition all Tenant's Personal Property required in the conduct of its
business in the Premises.
18. Landlord's Right to Enter the Premises. Tenant shall permit Landlord and
Landlord's Agents to enter the Premises at all reasonable times upon reasonable
notice, except for emergencies in which case no notice shall be required, to
inspect the same, to post notices of nonresponsibility and similar notices and
signs indicating the availability of Premises for sale, to show the Premises to
interested parties such as prospective lenders and purchasers, to make necessary
Alternations or repairs, to discharge Tenant's obligations hereunder when Tenant
has failed to do so within a reasonable time after written notice from Landlord,
and at any reasonable time after one hundred eighty (180) days prior to the
expiration of the Term, to place upon the Premises such reasonable signs
indicating availability of Premises for lease and to show the Premises to
prospective tenants. The above rights are subject to reasonable security
regulations of Tenant, and to the requirement that Landlord shall at all times
act in a manner to cause the least possible interference with Tenant's business.
Notwithstanding anything contained herein to the contrary, in the event a
release of Toxic Materials occurs on or affects the Premises, Tenant shall
permit Landlord or Landlord's Agents to enter the Premises at any time, without
prior notice, to inspect, monitor, take emergency or longterm remedial action,
discharge Tenant's obligations hereunder if Tenant has failed to do so, or take
any other action to restore the Premises to its original condition.
19. Signs. Landlord shall designate the location on the Premises, if any, for
one (1) or more exterior Tenant identification sign(s). Tenant shall have no
right to maintain Tenant identification signs in any other location in, on or
about the Premises and shall not display or erect any other signs, displays or
other advertising materials that are visible from the exterior of the Building.
The size, design, color and other physical aspects of permitted sign(s) shall be
subject to the Landlord's written approval prior to installation, which approval
may be withheld in Landlord's discretion, any covenants, conditions or
restrictions encumbering the Premises and any applicable municipal or other
governmental permits and approvals. The cost of the sign(s), including the
installation, maintenance and removal thereof shall be at Tenant's sole cost and
expenses. If Tenant fails to maintain its sign(s), or if Tenant fails to remove
same upon termination to this Lease and repair any damage caused by such removal
(including, without limitation, repainting the Building, if required by
Landlord), Landlord may do so at Tenant's expense. Tenant shall reimburse
Landlord for all costs incurred by Landlord to effect such removal, which
amounts shall be deemed Additional Rent, and shall include, without limitation,
all sums disbursed, incurred or deposited by Landlord including Landlord's
costs, expenses and actual attorneys' fees with interest thereon at the Interest
Rate.
20. Indemnity; Insurance.
(a) Indemnification. Tenant hereby agrees to defend (with attorneys
acceptable to Landlord), indemnify and hold harmless Landlord and Landlord's
Agents from and against any and all damage, loss, liability and expenses
including, without limitation, actual attorneys' fees and legal costs, incurred
directly or indirectly by reason of any claim, suit or judgment brought by or on
behalf of any person or persons for damage, loss or expenses due to, but not
limited to, bodily injury or property damage sustained by such person or persons
which arise out of, are occasioned by, or are in any way attributable to the use
or occupancy of the Premises, the acts or omissions of the Tenant, its agents,
employees or contractors, except to the extent caused by the sole negligence or
willful misconduct of Landlord Tenant agrees that the obligations of Tenant
herein shall survive the expiration or earlier termination of this Lease.
(b) Insuring Party. As used in this Paragraph the term "Insuring Party"
shall mean the party designated in Paragraph (p) of the Lease Summary who has
the obligation to obtain the property insurance required hereunder. If Landlord
is the Insuring Party,
Landlord shall not be required to name Tenant as an additional insured under any
such policy.
(c) Tenant's Insurance. Tenant agrees to maintain in full force and effect
at all times during the Term, at its own expense, for the protection of Tenant
and Landlord, as their interests may appear, policies of insurance issued by a
carrier or carriers acceptable to Landlord and its lender(s) of record which
afford the following coverages: (i) statutory workers' compensation; (ii)
employer's liability with minimum limits of not less than Five Hundred Thousand
Dollars ($500,000); (iii) comprehensive general liability insurance including,
but not limited to, blanket contractual liability, broad form property damage,
personal injury, completed operations, products liability, independent
contractors, and owned, non-owned and hired vehicles, of not less than One
Million Dollars ($1,000,000) combined single limit bodily injury and property
damage (or current carried, whichever is greater), naming Landlord and
Landlord's mortgagees as additional insureds; (iv) boiler and machinery
insurance including, but not limited to, steam pipes, pressure pipes,
condensation return pipes and other pressure vessels and HVAC equipment, with
limits per accident of not less than the replacement cost of all leasehold
improvements and of all boilers, pressure valves, HVAC equipment and
miscellaneous electrical and mechanical equipment on the Premises; (v)
plateglass insurance, if applicable and such other insurance, in such form and
amounts as may be required by Landlord or its lender(s) from time to time.
(d) Property Insurance. The Insuring Party shall obtain and keep enforce
during the Term of this Lease a policy or policies of insurance (with
replacement cost endorsement) covering loss or damage to the Premises in the
amount of the full replacement cost thereof, but in no event less than the total
amount required by lender(s) having lien(s) on the Premises, against all perils
included within the classification of fire, extended coverage, vandalism,
malicious mischief, and special extended perils ("all risk" as such term is used
in the insurance industry). Said insurance shall provide for payment of loss
thereunder to Landlord or to the holders of mortgages or deeds of trust on
Premises. Tenant shall, in addition, obtain and keep in force during the Term of
this Lease a policy of business interruption and/or loss of income insurance
covering a period of one (1) year, with loss payable to Landlord, which
insurance shall also cover all real estate taxes and insurance costs for said
period. A stipulated value or agreed amount endorsement deleting the coinsurance
provision of the policy shall be procured with said insurance. If the Premises
are part of a larger building, or if the Premises are part of a group of
buildings owned by Landlord which are adjacent to the Premises, then Tenant
shall pay for any increase in the property insurance of the Building or such
other building or buildings if said increase is caused by Tenant's acts,
omission, use or occupancy of the Premises. If the Landlord is the Insuring
Party, Landlord will not insure Tenant's fixtures, contents, equipment and
tenant improvements. Tenant shall obtain and keep in force, at its expense, an
"all risk" property damage policy in the amount of the full replacement cost
covering Tenant's fixtures, contents, equipment and tenant improvements.
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(e) Deductibles. Any policy of insurance required of Tenant pursuant to
this Lease containing a deductible exceeding TwentyFive Thousand Dollars
($25,000) must be approved in writing by Landlord prior to the issuance of such
policies; it being understood and agreed that Tenant shall be solely responsible
for the payment of any such deductible.
(f) Certificates. Tenant shall deliver to Landlord at least thirty (30)
days prior to the time such insurance is first required to be carried by Tenant,
and thereafter prior to expiration of each such policy, certificates of
insurance evidencing the above coverage with limits not less than those
specified above. The certificates shall expressly provide that the Interest of
Landlord therein shall not be affected by any breach of Tenant of any policy
provision for which such certificates evidence coverage.
(g) Increased Coverage. Upon demand, Tenant shall provide Landlord, at
Tenant's expense, with such increased amount of existing insurance, and such
other insurance as Landlord or Landlord's lender(s) may reasonably require.
(h) Co-Insurer. If, on account of the failure of Tenant to comply with the
foregoing provisions, Landlord is adjudged a coinsurer by its insurance carrier,
then, any loss or damage Landlord shall sustain by reason thereof, including
attorneys' and costs, shall be borne by Tenant and shall be immediately paid by
Tenant upon receipt of a bill therefor and evidence of such loss.
(i) Sufficiency of Coverage. Neither Landlord nor Landlord's Agents makes
any representation that the limits of liability specified to be carried by
Tenant under this Lease are adequate to protect Tenant. If Tenant believes that
any such insurance coverage is insufficient, Tenant shall provide, at its own
expense, such additional Insurance as Tenant deems adequate.
(j) Insurance Requirements. All such insurance: (i) shall be in a form
satisfactory to Landlord and its lender(s) and shall be carried with companies
that have a general policyholder's rating of not less than "A, and a financial
rating of not less than Class "X" in the most current edition of Best's
insurance Reports; (ii) shall provide that such policies shall not be subject to
material alteration or cancellation except after at least thirty (30) days'
prior written notice to Landlord; and (iii) shall be primary, and any insurance
carried by Landlord shall be noncontributing. The policy or policies, or duly
executed certificates for them, shall be deposited with landlord prior to the
Commencement Date, and upon renewal of such policies. If Tenant fails to procure
and maintain the insurance required to be procured by Tenant hereunder, Landlord
may, but shall not be required to, order such Insurance at Tenant's expense and
Tenant shall reimburse Landlord for all costs reasonably incurred by Landlord
with respect thereto. Tenant's reimbursement to Landlord for such amounts shall
be deemed Additional Rent, and shall include all reasonable sums disbursed,
incurred or deposited by Landlord including Landlord's costs, expenses and
actual attorneys' fees, with interest thereon at the Interest Rate.
(k) Landlord's Disclaimer. Landlord and Landlord's Agents shall not be
liable for any loss or damage to persons or property resulting from fire,
explosion, falling materials, glass, tile or sheetrock, steam, gas, electricity,
water or rain which may leak from any part of the Premises, or from the pipes,
appliances or plumbing works therein or from the roof, street or subsurface or
whatsoever, unless caused by or due to the gross negligence or willful acts of
Landlord. Landlord and Landlord's Agents shall not be liable for Inference with
light or air, or for any latent defect in the Premises. Tenant shall give prompt
written notice to Landlord in case of a casualty, accident or repair needed to
the Premises.
(l) Failure to Pay. The failure of Tenant to obtain and pay for any
Insurance required to be obtained and paid for by it hereunder shall constitute
a material default under this Lease.
21. Waiver of Subrogation. Landlord and Tenant each hereby waive all rights of
recovery against the other on account of loss and damage occasioned to such
waiving party for its property or the property of others under its control to
the extent that such loss or damage is insured against under any property
insurance policies in force at the time of such loss or damage. Tenant and
Landlord shall, upon obtaining policies of insurance required hereunder, give
notice to the insurance carrier that the foregoing mutual waiver of subrogation
is contained in this Lease and Tenant and Landlord shall cause each Insurance
policy obtained by such party to provide that the Insurance company waives all
right of recovery by way of subrogation against either Landlord or Tenant in
connection with any damage covered by such policy.
22. Damage or Destruction.
(a) Landlord's Obligations to Rebuild. If the Premises are damaged or
destroyed, Landlord shall promptly and diligently repair the Premises unless it
has the right to terminate this Lease as provided in Paragraph 22(b) below and
it elects to so terminate.
(b) Landlord's Right to Terminate. Landlord shall have the right to
terminate this Lease following damage to or destruction of the Premises if any
of the following occurs: (i) insurance proceeds together with additional amounts
Tenant agrees to contribute are not available to landlord to pay one hundred
percent (100%) of the cost to fully repair the damaged Premises, excluding the
deductible for which Tenant shall also be responsible; (ii) the Premises cannot,
with reasonable diligence, be fully repaired by Landlord within one hundred
eighty (180) days after the date of the damage or destruction; (iii) the
Premises cannot be safely repaired because of the presence of hazardous factors,
including, but not limited to, earthquake faults, radiation, chemical waste and
other similar dangers; (iv) the Premises are destroyed or damaged during the
last twelve (12) months of the Term; or (v) Tenant is in default under the terms
of this Lease at the time of such damage or destruction.
If Landlord elects to terminate this Lease, Landlord may give Tenant
written notice of its election to terminate within thirty (30) days after it has
knowledge of such damage or destruction, and this Lease shall terminate fifteen
(15) days after the date Tenant receives such notice. If this Lease is
terminated, Landlord shall, subject to the rights of its lender(s), be entitled
to receive and retain all the insurance proceeds resulting from such damage,
except for those proceeds payable under policies obtained by Tenant which
specifically insure Tenant's Personal Property. If Landlord elects not to
terminate the Lease, Landlord shall, promptly following the date of such damage
or destruction and receipt of amounts required of Tenant pursuant to Paragraph
22(b)(i) above, commence the process of obtaining necessary permits and
approvals, and shall commence repair of the Premises as soon as practicable and
thereafter prosecute the same diligently to completion, in which event this
Lease will continue in full force and effect.
(c) Limited Obligation to Repair. Landlord's obligation, should it elect
or be obligated to repair or rebuild, shall be limited to the basic Building and
Tenant improvements and Tenant shall, at its expense, replace or fully repair
all Tenant's Personal Property and any Alterations installed by Tenant existing
at the time of such damage or destruction. If the Premises are to be repaired in
accordance with the foregoing, Landlord shall make available to Tenant any
portion of insurance proceeds it receives which are allocable to the Alterations
constructed by Tenant pursuant to this Lease provided Tenant is not then in
default.
(d) Abatement of Rent. Rent shall be temporarily abated proportionately,
but only to the extent of any proceeds received by Landlord from the rental
abatement insurance described in paragraph 20(d) hereof, during any period when,
by reason of such damage or destruction, Landlord reasonably determines that
there is substantial interference with Tenant's use of the Building. Such
abatement shall commence upon such damage or destruction and end upon
substantial completion by Landlord of the repair or reconstruction which
landlord is obligated or undertakes to do. Tenant shall not be entitled to any
compensation or damages from landlord for loss of the use of the Premises,
damage to Tenant's Personal Property or any inconvenience occasioned by such
damage, repair or ore restoration. Tenant hereby waives the provisions of
Section 1932(2) and Section 1933(4) of the California Civil code, and the
provisions of any similar law hereinafter enacted.
(e) Replacement Cost. The determination in good faith by Landlord of the
estimated cost of repair of any damage, or the replacement cost, or the time
period required for repair shall be conclusive for purposes of this Paragraph.
23. Condemnation.
(a) Total Taking - Termination. If title to all of the Premises or so much
thereof is taken for any public or quasi-public use under any statute or by
right of eminent domain so that reconstruction of the Premises will not result
in the Premises being reasonably suitable for Tenant's continued occupancy for
the uses and purposes permitted by this Lease, this Lease shall terminate as of
the date possession of the Premises or part thereof be taken.
(b) Partial Taking. If any part of the Premises is taken and the remaining
part is reasonably suitable for Tenant's continued occupancy for the purposes
and uses permitted by this Lease, this Lease shall, as to the part so taken,
terminate as of the date that possession of such part of the Premises is taken
and the Monthly Rent shall be reduced in the same proportion that the floor area
of the portion of the Building so taken (less any addition thereto by reason of
any reconstruction) bears to the original floor area of the Building. Landlord
shall, at its own cost and expense, make all necessary repairs or alterations to
the Building so as to make the portion of the Building not taken a complete
architectural unit. Such work shall not, however, exceed the scope of the work
done by Landlord in originally constructing the Building. Monthly Rent due and
payable hereunder shall be temporarily abated during such restoration period in
proportion to the degree to which Tenant's use of Premises is impaired. Each
party hereby waives the provisions of Section 1265.130 of the California Code of
Civil Procedure allowing either party to petition the Superior Court to
terminate in the event of a partial taking of the Building or Premises.
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(c) No Apportionment of Award. No award for any partial or entire taking
shall be apportioned, it being agreed and understood that Landlord shall be
entitled to the entire award for any partial or entire taking. Tenant assigns to
Landlord its interest in any award which may be made in such taking or
condemnation, together with any and all rights of Tenant arising in or to the
same or any part thereof. Nothing contained herein shall be deemed to give
Landlord any interest or in require Tenant to assign to Landlord any separate
award made to Tenant for the taking of Tenant's Personal Property for the
interruption of Tenant's business, or its moving costs, or for the loss of its
goodwill.
(d) Temporary Taking. No temporary taking of the Premises shall terminate
this Lease or give Tenant any right to any abatement of Rent. Any award made to
Tenant by reason of such temporary taking shall belong entirely to Tenant and
Landlord shall not be entitled to share therein. Each party agrees to execute
and deliver to the other all instructions that may be required to effectuate the
provisions of this Paragraph.
(e) Sale Under Threat of Condemnation. A sale made in good faith by
Landlord to any authority having the power of eminent domain, either under
threat of condemnation or while condemnation proceedings are pending, shall be
deemed a taking under the power of eminent domain for all purposes of this
Paragraph.
24. Assignment and Subletting.
(a) Prohibition. Tenant shall not assign, mortgage, hypothecate, encumber,
grant any license or concession, pledge or otherwise transfer (collectively,
"assignment") this Lease, in whole or in part, nor sublet or permit occupancy by
any person other than Tenant of all or any part of the Premises, without the
prior written consent of Landlord in each instance, which consent shall not be
unreasonably withheld. Any purported assignment or subletting contrary to the
provisions hereof without consent shall be void. The consent by Landlord to any
assignment or subletting shall not constitute a waiver of the necessity for such
consent to any subsequent assignment or subletting. As Additional Rent
hereunder, Tenant shall reimburse Landlord for actual legal and other expenses
reasonably incurred by Landlord in connection with any request by Tenant for
consent to assignment or subletting. In connection with any proposed assignment
or sublease, Tenant shall submit to Landlord in writing (i) the name of the
proposed assignee or sublessee, (ii) such information as to such assignee's or
sublessee's financial responsibility and standing as Landlord may reasonably
require; (iii) the proposed use of Premises by such assignee or sublessee (iv)
all of the terms and conditions upon which the proposed assignment or subletting
is to be made and (v) an instrument of assignment or sublease wherein such
assignee or sublessee assumes all of Tenant's obligations hereunder and agrees
to be bound by the terms hereof.
(b) Excess Sublease Rental or Assignment Consideration. If for any
sublease or assignment, Tenant receives rent or other consideration either
initially or over the term of the sublease or assignment, in excess of (i) the
Monthly Rent called for hereunder, plus (ii) Tenant's direct out-of-pocket costs
which Tenant certifies to Landlord to have been incurred in providing
occupancyrelated services to any such subtenant of a nature commonly provided by
landlords of similar space (or in case of the sublease of a portion of the
Premises, in excess of such Monthly Rent fairly allocable to such portion), then
promptly following its receipt thereof, Tenant shall pay to Landlord as
Additional Rent hereunder, one hundred percent (100%) of such excess as and when
received. By initialling these provisions, Landlord and Tenant acknowledge and
agree that the provisions of this Paragraph 24 are agreed to after negotiation:
___________________________________ ______________________________________
LANDLORD TENANT
(c) Scope. The prohibition against assigning or subletting contained in
this Paragraph shall be construed to include a prohibition against any
assignment or subletting by operation of law, whether voluntary or involuntary.
If this Lease be assigned, or if the underlying beneficial interest of Tenant be
transferred, or if the Premises or any part thereof be sublet or occupied by
anybody other than Tenant, Landlord may collect rent from the assignee,
subtenant or occupant and apply the net amount collected to the Monthly Rent
herein reserved and apportion any excess rent so collected in accordance with
the terms of Paragraph 24(b) above, but no such assignment, subletting occupancy
or collection shall be deemed a waiver of this covenant or the acceptance of the
assignee, subtenant or occupant as tenant, or a release of Tenant from primary
liability of Tenant (which, following assignment, shall be joint and several
with the assignment and Tenant shall not be released from performing any of the
terms, covenants and conditions of this Lease.
(d) Waiver. Notwithstanding any assignment or sublease, or any
indulgences, waivers or extensions of time granted by Landlord to any assignee
or sublessee, or failure by Landlord to take action against any assignee or
sublessee. Tenant waives notice of any default of any assignee or sublessee and
agrees that Landlord may at its option, proceed against Tenant without having
taken action against or joined such assignee or sublessee, except that Tenant
shall have the benefit of any indulgences, waivers and extensions of time
granted to any such assignee or sublessee.
25. Construction of Tenant Improvements.
(a) Preliminary Plans/Working Plans. Tenant has retained n/a to prepare
preliminary space plans ("Preliminary Plans") to be utilized in the preparation
of final working drawings and specifications for tenant improvements to the
Premises ("Tenant Improvements"). The Preliminary Plans have been completed and
delivered to landlord and are attached hereto as Exhibit "C". Within five (5)
days after execution of the Lease, Landlord shall return same to Tenant marked
and accompanied by comments and such required revisions as are reasonable under
the circumstances. Within five (5) days thereafter, Tenant shall submit two
comments and such required revisions as are reasonable under the circumstances.
Within five (5) days thereafter, Tenant shall submit two (2) sets of revised
Preliminary Plans, revised to reflect review and approval. Promptly following
Landlord's approval of the Preliminary Plans, Landlord shall cause its architect
to prepare and submit two (2) copies of working drawings and specifications
("Working Plans") to Tenant for its review and approval. Tenant shall advise
Landlord within five (5) days of Tenant's receipt of the Working Plans of any
requested revisions. Immediately upon receipt of said comments, Landlord shall
make all approved revisions to the Working Plans and submit two (2) copies
thereof to Tenant for its final review and approval. Concurrently with the above
review and approval process, Landlord shall submit all plans and specifications
to the City and other applicable governmental agencies in an attempt to expedite
City approval and issuance of all necessary permits and licenses to construct
the Tenant Improvements as shown on the Working Plans.
(b) Construction of Tenant Improvements. Landlord at its own cost (except
as otherwise provided in Paragraphs 25(c) and (d) below) shall, through a
guaranteed maximum cost construction contract ("Construction Contract") with a
reputable, licensed contractor ("Contractor"), cause the construction of the
Tenant Improvements to be carried out in substantial conformance with the
Working Plans in a good and workmanlike manner and will use only first-class
materials. Tenant shall have the right to review and approve the construction
cost breakdown, including any and all fees, contained in the Construction
Contract. Landlord shall see that the construction complies with all applicable
building, fire, health and sanitary codes and regulations, the satisfaction of
which shall be evidenced by a certificate of occupancy for the Premises.
Landlord shall use best efforts to obtain all necessary construction and
building permits and licenses necessary for the construction of Tenant
Improvements.
(c) Change Orders. Tenant may from time to time request and obtain change
orders during the course of construction provided that: (i) each such request
shall be reasonable; (ii) each such request shall be in writing and signed by or
on behalf of Tenant; (iii) each such request shall not result in any structural
change in the Building as reasonably determined by Landlord; (iv) all additional
charges and costs, including without limitation architectural and engineering
costs, construction and materials costs, and City processing costs, shall be the
sole and exclusive obligation of Tenant; and (v) any resulting delay in the
completion of the Tenant Improvements shall in no event extend the Commencement
Date of the Lease. Upon Tenant's request for a change order, Landlord shall as
soon as reasonably possible submit to Tenant a written estimate of the increased
(or decreased) cost and anticipated delay, if any, attributable to the requested
change. Within three (3) days of the date such
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estimated cost adjustment and delay are delivered to Tenant, Tenant shall advise
Landlord whether or not it wishes to proceed with the change order. Unless
Tenant includes in its initial change order request that work in process at the
time such request is made be halted pending approval and execution of a change
order, Landlord shall not be obligated to stop construction of the Tenant
Improvements, whether or not the change order relates to work then in process or
about to be started.
(d) Tenant Delays. In no event shall the Commencement Date be extended due
to delay due to the fault of Tenant. Delays "due to the Fault" of Tenant shall
include, without limitation, delays caused by: (i) Tenant's failure to timely
prepare, submit and revise the Preliminary Plans and to review and approve the
Working Plans or to furnish information to Landlord for the preparation by
Landlord of the Working Plans; (ii) Tenant's request for or use of special
materials, finishes or installments which are not readily available, promptly
upon Landlord's discovery of same; (iii) Tenant's failure to reasonably approve
the Working Plans in accordance with this Addendum; (iv) change orders requested
by Tenant; or (v) interference with Landlord's construction activities, caused
by Tenant or by Tenant's agents, employees, contractors or subcontractors.
Landlord shall give Tenant written notice within a reasonable time of any
circumstances that Landlord believes constitute delay caused by Tenant.
26. Default.
(a) Tenant's Default. At the option of Landlord, a default under this
Lease by Tenant shall exist if any of the following events shall occur; (i) if
Tenant shall have filed to pay Rent or any other sum required to be paid
hereunder within ten (10) days when due; (ii) if Tenant shall have failed to
perform any term, covenant or condition of this Lease other than those requiring
the payment of money, and Tenant shall have failed to cure such failure within
fifteen (15) days after written notice from Landlord where such failure could
reasonably be cured within such fifteen (15) day period; provided, however, that
where such failure could not reasonably be cured within the fifteen (15) day
period, that Tenant shall not be in default if it has commenced such cure within
the fifteen (15) day period and diligently thereafter prosecutes the same to
completion which in all events must occur within sixty (60) days thereafter;
(iii) if Tenant shall have assigned its assets for the benefit of its creditors;
(iv) if the sequestrian or attachment of or execution on any material part of
Tenant's Personal Property essential to the conduct of Tenant's business shall
have occurred, and tenant shall have failed to obtain a return or release of
Tenant's Personal Property within thirty (30) days thereafter, or prior to sale
pursuant to such sequestration, attachment or levy, whichever is earlier; (v) if
Tenant shall have failed to continuously or uninterruptedly conduct its business
in the Premises, or shall have abandoned or vacated the Premises; (vi) if a
court shall have made or entered any decree or order other than under the
bankruptcy laws of the United States or any state adjudging Tenant to be
insolvent; or approving as properly filed a petition seeking reorganization of
Tenant; or directing the winding up or liquidation of Tenant and such decree or
order shall have continued for a period of thirty(30) days; (vii) the filing of
a voluntary petition in bankruptcy by Tenant, a voluntary petition of
arrangement, a voluntary or involuntary petition for reorganization, or the
filing of an involuntary petition by Tenant's creditors, immediately (unless
involuntary, in which case when the petition remains undischarged for a period
of thirty (30) days); (viii) if Tenant shall have failed to timely comply with
the provisions of Paragraphs 27 or 30 of this Lease.
(b) Remedies. Upon a default, Landlord shall have the following remedies,
in addition to all other rights and remedies provided by law in equity or
otherwise provided in this Lease, to which Landlord may resort cumulatively or
in the alternative; (i) Landlord may continue this Lease in full force and
effect and this Lease shall continue in full force and effect as long as
Landlord does not terminate this Lease, and Landlord shall have the right to
collect Rent when due; (ii) Landlord may, with or without terminating this
Lease, 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. No re-entry or taking
possession of the Premises by Landlord pursuant to this Paragraph shall be
construed as an election to terminate this Lease unless a written notice of such
intention is given to tenant; (iii) Landlord may terminate Tenant's right to
possession of the Premises at any time by giving written notice to that effect,
and relet the Premises or any part thereof. Tenant shall liable immediately to
Landlord for all costs Landlord incurs in reletting the Premises or any part
thereof, including, without limitation, brokers' commissions, expenses of
cleaning, redecorating, and further improving the Premises and like costs.
Reletting may be for a period shorter or longer than the remaining Term of this
Lease. No act by Landlord other than giving written notice to Tenant shall
terminate this Lease. Acts of maintenance efforts to relet the Premises or the
appointment of a receiver on Landlord's initiative to protect Landlord's
interest under this Personal Property and store same at Tenant's cost and to
recover from Tenant as damages (A) the worth at the time of award of any unpaid
Rent and other sums due and payable which had been earned at the time of
termination, plus (B) the worth at the time of award of the amount by which the
unpaid Rent and other sums which would have been payable after termination until
the time of award exceeds the amount of such Rent loss that Tenant proves could
have been reasonably avoided, plus (C) the worth at the time of award of the
amount by which the unpaid Rent and other sums due for the balance of the Term
after the time of award exceeds the amount of such Rent loss that Tenant proves
could be reasonably avoided, plus (D) any other amounts to compensate Landlord
for all the detriment proximately caused by Tenants failure to perform Tenant's
obligations under this Lease, or which is the ordinary cause of things, would be
likely to result therefrom, including, without limitation, any costs or expenses
incurred by Landlord, (i) in retaking possession of the Premises; (ii) in
maintaining, repairing, preserving, restoring, replacing, cleaning, altering or
rehabilitating the Premises or any portion thereof, including such acts for
reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv) for
any other costs necessary or appropriate to relet the Premises; plus (E) at
Landlord's election, such other amounts and remedies in addition to or in lieu
of the foregoing as may be permitted from time to time by the laws of the State
of California including, without limitation, the remedies provided by California
Civil Code Section 1951.4, as amended from time to time.
The "worth at the time of award" of the amounts referred to in Paragraphs
26(b)(iii)(C) 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 percent
(1%). Tenant waives redemption or relief from forfeiture under California Code
of Civil Procedure Sections 1174 and 1179, or under any other present or future
law, in the event Tenant is evicted or Landlord takes possession of the Premises
by reason of any default of Tenant hereunder.
(c) Landlord's Default. Landlord shall not be deemed to be in default in
the performance of any obligation required to be performed by if hereunder
unless and until it has failed to perform such obligation within thirty (30)
days after receipt of written notice by Tenant to Landlord (and its lender(s) of
record who have provided Tenant with notice) specifying the nature of such
default; provided, however, that if the nature of Landlord's obligation is such
that more than thirty (30) days are required for its performance, then Landlord
shall not be deemed to be in default if it shall commence such performance
within such thirty (30) day period and thereafter diligently prosecute the same
to completion.
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 bona fide mortgagee or deed of trust beneficiary
with a lien on all or any portion of the Premises or any ground lessor with
respect to the land of which the Premises are a part, this Lease shall be
subject and subordinate at all times to; (i) any 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 (ii) 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 or any such ground lessor, mortgagee,
any beneficiary 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. If
any ground lease or underlying lease terminates for any reason or any mortgage
or deed of trust is foreclosed or conveyance in lieu of foreclosure is made for
any reason, Tenant shall, notwithstanding any subordination and upon the request
of such successor in interest to Landlord, attorn to and become the Tenant of
the successor in interest to Landlord. Tenant covenants and agrees to execute
and deliver, upon demand by Landlord and in the form requested by Landlord,
ground lessor, mortgagee or beneficiary, any additional documents evidencing the
priority or subordination of this Lease with respect to any such ground leases
or underlying leases or the lien of any such mortgage or deed of trust. Tenant's
failure to timely execute and deliver such additional documents shall, at
Landlord's option, constitute an additional default hereunder. Tenant hereby
irrevocably appoints Landlord as attorney-in-fact of Tenant, which appointment
is coupled with an interest, to execute, deliver and record any such documents
in the name and on behalf of Tenant.
28. Notices. Any notice or demand required or desired to be given under this
Lease shall be in writing and shall be personally served or in lieu of personal
service may be given by mail, if given by mail, such notice shall be deemed to
have been given when seventytwo (72) hours have elapsed from the time when such
notice was deposited in the United States mail, registered or certified, postage
prepaid, return receipt request, addressed to the party to be served. At the
date of execution of this Lease, the addresses of Landlord and Tenant are as set
forth in paragraph 1. After the Commencement Date, the address of tenant shall
be the address of the Premises. Either party may change its address by giving
notice of same in accordance with this Paragraph.
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29. Attorneys' Fees. If either party brings any action or legal proceeding for
damages for an alleged breach of any provision of this Lease, to recover Rent or
other sums due, to terminate this Lease or to enforce, protect or establish any
term, condition or covenant of this Lease or the right of either party hereunder
or at law, the prevailing party shall be entitled to recover as a part of such
action or proceedings, or in a separate action brought for that purpose, actual
attorneys' fees and costs.
30. Estoppel Certificate. Tenant shall within ten (10) days following written
request by Landlord:
(a) Tenant Options. Execute and deliver to Landlord any documents,
including estoppel certificates, in a form prepared by Landlord (i) certifying
that this Lease is unmodified and in full force and effect or, if modified,
stating the nature of such modification and certifying that this Lease, as so
modified, is in full force and effect and the date to which the Rent and other
charges are paid in advance, if any; (ii) acknowledging that there are not, to
Tenant's knowledge, any uncured defaults on the part of the Landlord or stating
the nature of any uncured defaults; (iii) evidencing the status of the Lease as
may be required by a lender making a loan to Landlord to be secured by deed of
trust or mortgage covering the Premises or a purchase of the Premises from
Landlord; (iv) certifying the current Monthly Rent amount and the amount and
form of Security Deposit on deposit with Landlord; and (v) certifying to such
other information as Landlord, Landlord's Agents, mortgagees, prospective
mortgagees and purchasers may reasonably request.
Tenant's failure to deliver an estoppel certificate within ten (10) days
after deliver of Landlord's written request therefor 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 now no uncured
defaults in Landlord's performance; (iii) that not more than one (1) month's
Monthly Rent has been paid in advance; and (iv) that the other information
requested by Landlord is correct as stated in the form presented by Landlord.
Tenant hereby irrevocably appoints Landlord as Tenant's attorney-in-fact,
which appointment is coupled with an interest, to act in Tenant's name, place
and stead to execute such estoppel certificate on Tenant's behalf.
(b) Financial Information. Deliver to Landlord the current financial
statements of Tenant, and financial statements of the two (2) years prior to the
current financial statement s year, certified to be true, accurate and completed
by the chief financial officer of Tenant, including a balance sheet and profit
and loss statement for the most recent prior year, which statements shall be
prepared on an accrual basis and accurately and completely reflect the financial
condition of Tenant. Landlord agrees that it will keep such financial statements
confidential, except that Landlord shall have the right to deliver the same to
any proposed purchaser of the Premises, the Project or any portion thereof and
to the mortgagees or beneficiaries of Landlord or such purchaser.
31. Transfer of the Premises by Landlord. Upon any conveyance of the Premises
and assignment by Landlord of this Lease, Landlord shall be and is hereby
entirely released from all liability under any and all of its covenants and
obligations contained in or derived from this Lease occurring after the date of
such conveyance and assignment, and Tenant agrees to attorn to any entity
purchasing or otherwise acquiring the Premises.
32. Landlord's Right to Perform Tenant's covenants. If Tenant shall at any time
fail to make any payment or perform any other act on its part to be made or
performed under this Lease, Landlord may, but shall not be obligated to and
without waiving or releasing Tenant from any obligation of Tenant under this
Lease, make such payment or perform such other act to the extent Landlord may
deem desirable, and in connection therewith, pay expenses and employ counsel.
All sums so paid by Landlord and all penalties, interest and costs in connection
therewith shall be due and payable by Tenant to Landlord on the ext day after
such payment by Landlord, together with interest thereon at the Interest Rate
from such date to the date of payment thereof by Tenant to Landlord, plus
collection costs and attorneys' fees. Landlord shall have the same rights and
remedies for the nonpayment thereof as in the case of default in the payment of
Rent.
33. Tenant's Remedy. The obligations of Landlord do not constitute the personal
obligation of the individual partners, trustees, directors, officers or
shareholders of Landlord or its constituent partners. If Landlord shall fail to
perform any covenant, term, or condition of this Lease upon Landlord's part to
be performed, Tenant shall be required to deliver to Landlord written notice of
the same. If, as a consequence of such default, Tenant shall recover a money
judgment against Landlord, such judgment shall be satisfied only out of the
proceeds of sale received upon execution of such judgment and levied thereon
against the right, title and interest of Landlord in the Premises and out of
Rent or other income from such property receivable by Landlord or out of
consideration received by Landlord from the sale or other disposition of all or
any part of Landlord's right, title or interest in the Premises, and no action
for any deficiency may be sought or obtained by Tenant.
34. Mortgagee Protection. Upon any default on the part of Landlord, Tenant will
give notice by registered or certified mail to any beneficiary of deed of trust
or mortgagee of a mortgage covering the Premises who has provided Tenant with
notice of their interest together with an address for receiving notice, and
shall offer such beneficiary or mortgagee a reasonable opportunity to cure the
default (which, in no event shall be less than ninety (90) days), including time
to obtain possession of the Premises by power of sale or a judicial foreclosure,
if such should prove necessary, to effect a cure. Tenant agrees that each lender
to whom this Lease has been assigned by Landlord is an express third party
beneficiary hereof. Tenant shall not make any prepayment of Monthly Rent more
than (1) month in advance without the prior written consent of each such lender.
Tenant waives the collection of any deposit from such lender(s) or any purchaser
at a foreclosure sale of such lender(s) deed of trust unless the lender(s) or
such purchaser shall have actually received and not refunded the deposit. Tenant
agrees to make all payments under the Lease to the lender with the most senior
encumbrance upon receiving a direction, in writing, to pay said amounts to such
lender. Tenant shall comply with such written direction to pay without
determining whether an event of default exists under such lender's loan to
Landlord.
35. Brokers. Landlord and Tenant each warrant and represent to the other that
neither has had any dealings with any real estate broker, agent or finder in
connection with the negotiation of this Lease or the introduction of the parties
to this transaction, except for the brokers identified in Paragraph (o) of the
Lease Summary, and that it knows of no other real estate broker, agent or finder
who is or might be entitled to a commission or fee in connection with this
Lease. In the event of any such additional claims for brokers' or finders' fees
with respect to this Lease, then Tenant shall indemnify, save harmless and
defend Landlord from and against such claims if they shall be based upon any
statement or representation or agreement by Tenant, and Landlord shall
indemnify, shave harmless and defend Tenant if such claims shall be based upon
any statement, representation or agreement made by Landlord.
36. Examination of Lease. Submission of this Lease for examination of signature
by Tenant does not create a reservation of or option to Lease. This Lease shall
only become effective and binding upon full execution hereof by both Landlord
and Tenant.
37. Recording. Tenant shall not record this Lease nor a short form memorandum
thereof without Landlord's prior written consent.
38. Quitclaim. Upon any termination of this Lease, Tenant shall, at Landlord's
request, execute, have acknowledged and deliver to Landlord a quitclaim deed of
the Premises.
39. Modifications for Lender. If in connection with obtaining financing for the
Premises or any portion thereof, Landlord's lender shall request reasonable
modification to this Lease as a condition to such financing. Tenant shall no
unreasonably withhold, delay or defer its consent thereto, provided such
modifications do not materially adversely affect Tenant's rights hereunder.
40. Parking and Use of Common Areas and Facilities.
(a) Grant of Nonexclusive Common Area License and Right. Landlord hereby
grants to Tenant and its successors and assigns, a nonexclusive license and
right for Tenant and its permitted subtenants, in common with Landlord and all
persons, firms and corporations conducting business in the Project and their
respective customers, guests, licensees, invitees, subtenants, employees and
agents, to use the Common Area within the Project for vehicular parking, for
pedestrian and vehicular ingress, egress and travel, and for such other purposes
and for doing such other things as may be provided for, authorized and/or
permitted by the CC&R's and the REA, such nonexclusive license and right to be
appurtenant to Tenant's leasehold estate in and to the leased Premises created
by this Lease. The nonexclusive license and right granted pursuant to the
provisions of their Paragraph shall be subject to the CC&R's and the REA, which
pertain in any way to the Common Area covered by such encumbrances, and the
provisions of this Lease.
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THIS LEASE is effective as of the last signatory necessary to execute the
Lease shall have executed this Lease.
"LANDLORD"
____________________________________________
____________________________________________
____________________________________________
By__________________________________________
Its_________________________________________
By__________________________________________
Its_________________________________________
"TENANT" Merchant House Scientific,
a California corporation
By /s/Ronald R. Helm
--------------------------------------------
Ronald R. Helm, President
Its
By__________________________________________
Its_________________________________________
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<PAGE>
ADDENDUM TO LEASE
BY AND BETWEEN HARRIS TRUST and SAVINGS BANK,
an Illinois corporation, as directed Trustee for
Unisys Master Trust
and
Merchant House Scientific, a California corporation
DATED: May 23, 1993
Following is a list of Addendum supplements to be referred to by number
when adding to Leases.
Paragraph 5 of Lease is supplemented by adding the following:
If this Lease provides for a postponement of any monthly rent, concession
below the Original Monthly Rent (hereinafter referred as "Abated Rent"), it is
hereby understood, acknowledged, and agreed by Lessee that the Abated Rent has
been granted and credited by Lessor to Lessee upon the express condition that
Lessee at all times fully and punctually comply with all of the terms,
provisions, conditions, and requirements of Lessee under this Lease. Should
Lessee, at any time during the term of this Lease, default under any term,
provision, condition, or requirement hereof and not cure such default within any
applicable grace period, the Abated Rent shall immediately be and become due and
payable in full, Lessee's right to a credit for the Abated Rent shall
immediately and automatically cease and terminate, and this Lease shall be
enforced as if there were no such credit to Lessee for the Abated Rent.
Paragraph 19 of Lease is supplemented by adding the following:
No signs, placards, stickers, lights or decor of any sort, other than
building standard signage, shall be placed on, against or hanging from any
portion of the exterior glass or walls of the premises, without prior written
approval from Lessor. Lessee hereby agrees to meet the signage criteria set
forth by Lessor. Lessee is required to identify and suite with a wall mounted
sign. Lessee agrees to purchase sign through Lessor's representative. Prior to
installation, Lessee is required to have written approval from Lessor.
Paragraph 10(a) of Lease is supplemented by adding the following to the
end thereof:
"(V) Cap on Tenant's Percentage. Notwithstanding anything to the contrary
contained in this Lease, (a) for the calendar year in which the Commencement
Date occurs, Tenant's Percentage of Operating Expenses and Real Property Taxes
shall not exceed an aggregate sum of $0.18 per square foot on the Premises per
month, and (b) from and after such calendar year, increases in tenant's
Percentage of Operating Expenses (exclusive of insurance) only shall not exceed
five percent (5%) per annum, compounded, for each succeeding calendar year of
the initial Term of this Lease only."
<PAGE>
Paragraph 10(b)(ii) of the Lease is supplemented by adding the following
to the end thereof:
Any Toxic materials necessary to Tenant's business and permitted use of
the Premises shall not be brought upon, stored, used, generated, released into
the environment or disposed of, on, under, from or about the Premises without
the prior written consent of Landlord. Such consent shall be granted or denied
in Landlord's reasonable discretion, and in any event shall require that Tenant
at all times generate, store, use and dispose of all such Toxic Materials in a
manner that complies with all applicable laws regulating such Toxic Materials,
with good business practices, and under such conditions, protections and
safeguards as are determined by Landlord in its sole and absolute discretion.
Tenant understands that Landlord may utilize an environmental consultant to
assist in determining conditions of approval in connection with the presence,
storage, generation or use of Toxic Materials on or about the Premises, and
Tenant agrees that any cost incurred by Landlord in connection with any such
environmental consultant's services shall be reimbursed by Tenant to Landlord as
Additional Rent upon demand. Prior to the Execution of this lease, Tenant shall
complete, execute and deliver to Landlord an Environmental Questionnaire Form
required by Landlord, and Tenant shall certify to Landlord all information
contained in the Environmental Questionnaire as true and correct.
At any time that Tenant desires to generate, store, use or dispose of any Toxic
Material on, about or from the Premises different from those disclosed in the
Environmental Questionnaire, Tenant shall first deliver to Landlord a new
Environmental Questionnaire and obtain Landlord's written consent thereto.
Landlord, at Tenant's sole cost and expense, shall have the right, but not
the obligation, to join and participate in any legal proceedings or actions
initiated in connection with any claims or causes of action arising out of the
storage, generation, use or disposal by Tenant, its agents, employees,
contractors or Invitees, of Toxic Materials on, under from or about the
Premises. Tenant shall not, without Landlord's prior written consent, take any
remedial action in response to the presence of any Toxic Materials on, under or
about the Premises, or enter into any settlement agreement, consent decree or
other compromise with any governmental agency with respect to any Toxic
Materials claims; provided, however, that Landlord's prior written consent shall
not be necessary in the event that the presence of Toxic Materials on, under or
about the Premises (i) poses an immediate threat to the health, safety or
welfare of any individual, or (ii) is of a nature that an immediate remedial
response is necessary and it is not possible to obtain Landlord's consent before
taking such action, providing that in such event Tenant shall notify Landlord as
soon as practicable of any actions so taken. In addition, should Tenant fail to
comply with any of the provisions of this Paragraph 10(b), Landlord shall have
the right, but not the duty, and without limitation upon any of Landlord's other
rights and remedies under this Lease, to perform the same, and Tenant shall pay
to Landlord, on demand as Additional Rent, all costs and expenses incurred by
Landlord by reason of such failure to comply with this Paragraph 10(b),
including without limitation attorneys' fees and interest thereon at the
Interest Rate until paid.
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<PAGE>
SITE PLAN
42. LANDLORD'S DISCLOSURE. Landlord hereby discloses to Tenant that a former
user of the real property on which the Project is located stored
perchloroethyline ("PCE") and trichloroethylene ("TCE"), which are commonly used
solvents, in storage tanks which leaked in a localized area at such real
property, contaminating the soil in such localized area an the groundwater
thereunder. to the Landlord's current, actual knowledge, the PCE and TCE
contamination in the soil were cleaned up by the former user of the real
property prior to construction of the Project. In addition, partial remediation
of the groundwater contamination has occurred, and there is still located upon
certain of the Common Area portions of the Project monitoring and extraction
wells for the further conduct of groundwater remediation. Such groundwater
remediation is currently on hold due to a concern that the remediation operation
could cause suspected PCE, TCE and 1,2-dichloroethane and Freon 113
contamination at an undetermined off-site location to be drawn into the
groundwater beneath the Project. To Landlord's current actual knowledge, the
contaminated aquifer beneath the Project is located at a depth of approximately
18 feet, is not a source of potable water to the Project, and no practical
impediment to the use or occupancy of the Premises is anticipated to result from
the existing groundwater contamination or any eventual remediation thereof.
Tenant shall not be responsible or liable in any manner for the aforesaid
conditions described in the Paragraph, provided, however, that Tenant shall be
and remain liable and responsible, with respect to any violations of the
prohibitions or requirements contained in Paragraph 10(b) of the Lease,
including without limitation as the same may relate to the use, storage, release
or disposal on or about the Premises by Tenant, its agents, contractors
employees or invitees; of PCE, TCE, 1,2-dichloroethane and/or Freon 113.
44. SUBMISSION OF LEASE: The submission of this Lease for examination does not
constitute a reservation of, or option for the lease of the Property. This lease
shall become effective only upon execution and delivery thereof by Lessor and
Lessee.
"LESSOR" "LESSEE"
HARRIS TRUST and SAVINGS BANK, Merchant House Scientific
INC. a California Corporation
an Illinois corporation, as
directed Trustee for Unisys
Master Trust
BY:
BY:___________________________ BY: /s/Ronald R. Helm
-------------------------
Ronald R. Helm, President
ITS:__________________________
BY:___________________________
<PAGE>
[Floor Plan]
EXHIBIT "C"
1370 Reynolds Avenue, Suite 118 & 119
Irvine, California
Approximately 3,570 rsf
*This information contained herein is derived from sources we believe to be
reliable, but we do not make any representation or guarantee as to it's
completeness or accuracy.
<PAGE>
EXHIBIT D
COMMENCEMENT DATE MEMORANDUM
TO: MERCHANT HOUSE SCIENTIFIC, a California corporation
DATE: September 1, 1993
RE: Standard Form Office Lease dated May 23, 1993 between Harris Trust
and Savings, an Illinois corporation, as directed Trustee for Unisys
Master Trust, as "Landlord", and Merchant House Scientific, a
California corporation as "Tenant", concerning certain Premises (the
"Premises") located at 1370 Reynolds Avenue, Suites 118 & 119,
Irvine, California.
Agreement
The undersigned hereby agrees as follows:
1. The Tenant Improvements (as defined in the Lease) to the Premises
have been substantially completed in accordance with the terms and conditions of
the Lease, subject only to "punch list" items agreed to by Landlord and Tenant
pursuant to the terms of the Lease.
2. The Commencement Date, as defined in and determined in accordance
with the Lease, is hereby stipulated for all purposes to be October 1, 1993.
3. In accordance with the Lease, Monthly Rent (as defined in the
Lease in the amount of $2,210.00, subject to adjustment in accordance with the
term os of the Lease, commences to accrue on October 1, 1993 and is due and
payable in advance on the first day of each and every month during the Term (as
defined in the Lease). Unless and until notified by Landlord to the contrary,
Tenant shall make its Rent checks payable to Reynolds Business Park, 13670
Reynolds Avenue, Suite 107, Irvine, California.
"Landlord"
Units Trust and Savings, an Illinois
corporation, as directed Trustee for
Unisys Master Trust
EXECUTED AT A LATER DATE
By: /s/ LaSalle Advisors Limited
-------------------------------
Its: Agent
By: [Illegible]
-------------------------------
Its: Senior Vice President
"Tenant"
MERCHANT HOUSE SCIENTIFIC, a
California corporation
By: /s/ Ronald R. Helm
-------------------------------
Its: President
By:____________________________
Its:_________________________
<PAGE>
EXHIBIT E
RENT ADJUSTMENT
Said adjustments shall be applied upon the anniversary of the lease
commencement.
YEAR MONTHLY RENT
---- ------------
1 (mo.1) *$2,210.00
(mo. 2-3) Rent & NNN charges waived
(mo. 4-12) **2,210.00
2 (mo. 13) ***3,224.00
2 (mo. 14) ****Rent & NNN charges waived
2 (mo. 15-24) 3,224.00
3 3,385.00
* Year one (1) Rental Rate based on approximately 2,600 rsf of office/warehouse
space.
** Year two (2) and three (3) Rental based on approximately, 3,570 rsf of
office/warehouse space.
*** 1,196.00 portion of Security Deposit applied to rent, breakdown
as follows:
$3,224.00 "Rent"
1,196.00 "Applied Security Deposit"
=========
$2,028.00
*** Lessor shall provide free "Rent & NNN" charges for month fourteen (14) of
the lease, providing Lessee is not in default of the Lease.
"LESSOR" "LESSEE"
HARRIS TRUST AND SAVINGS BANK,
an Illinois corporation, as directed
Trustee for Unisys Master Trust
By:_______________________________ By: /s/ Ronald R. Helm
-------------------------------
Its:______________________________ Its: President
<PAGE>
Exhibit "F"
RULES AND REGULATIONS
1. Lessee shall not suffer or permit the obstruction of any Common Areas,
Including driveways, walkways and stairways.
2. Lessor reserves the right to refuse access to any persons Lessor to good
faith judges to be a threat to the safety, reputation, or property of the
Project and Its occupants.
3. Lessee shall not make or permit any noise or odors that annoy or Interfere
with other Lessees or persons having business within the Project
4. Lessee shall not keep animals or birds within the project, and shall not
bring bicycles, motorcycles or other vehicles into areas not designated as
authorized for same.
5. Lessee shall not make, suffer or permit litter except in appropriate
receptacles for that purpose.
6. Lessee shall not alter any lock or install new or additional locks or
bolts, without Landlord's written prior consent.
7. Lessee shall be responsible for the inappropriate use of any toilet rooms,
plumbing or other utilities. No foreign substances of any kind are to be
inserted therein.
8. Lessee shall deface the walls, partitions or other surfaces of the
premises of the Project.
9. Lessee shall not suffer or permit any thing in or around the Premises or
Building that causes excessive vibration or floor loading in any part of
the Project.
10. Lessee shall refund all keys at the termination of its tenancy and shall
be responsible for the cost of replacing any keys that are lost.
11. No window coverings, shades or awnings shall be installed or used by
Lessee, without Landlord's written prior consent.
12. No Lessee, employee or invitee shall go upon the roof of the Building
without Landlord's written prior consent.
13. Lessee shall not suffer or permit smoking or carrying of lighted cigars or
cigarettes in areas reasonably designated by Lessor or by applicable
governmental agencies as nonsmoking areas.
14. Lessee shall not use any method of heating or air conditioning other than
as provided by Lessor.
15. Lessee shall not install, maintain or operate any vending machines upon
the Premises with Lessor's written consent.
16. The premises shall not be used for lodging, cooking or food preparation.
17. Lessee shall comply with all safety, fire protection and evacuation
regulation established by Lessor or any applicable governmental agency.
18. Lessor reserves the right to waive any one of these rules or regulations
and'/or as to any particular Lessee, and any such waiver shall not
constitute a waiver of any other rule or regulation or any subsequent
application thereof to such Lessee.
19. Lessee assumes all risks from theft or vandalism and agrees to keep its
Premises locked as may be required.
20. Lessor reserves the right to make such other reasonable rules and
regulations as it may from time to time deem necessary for the appropriate
operation and safety of the Project and its occupants. Lessee agrees to
abide by these and such rules and regulations.
PARKING RULES
1. Lessee shall permit or allow any vehicles that belong to or are controlled
by Lessee or Lessee's employees, suppliers, shippers, customers, or
invitees to be leaded, unloaded, or parked in areas other than those
designated by Lessor for such activities.
2. Users of the parking area will obey all posted signs and park only in the
areas designated for vehicles parking.
3. Unless otherwise instructed, very person using the parking area is
required to park and lock his own vehicle. Lessor will not be responsible
for any damage to vehicles, injury or persons or loss of property, all of
which risks are assumed by the party using the parking areas.
4. The maintenance, washing, waxing or cleaning of vehicles in the Common
Area is prohibited.
5. Lessee shall be responsible for seeing that all of its employees, agents
and invitees comply with applicable parking rules, regulations, laws and
agreements.
6. Lessor reserves the right to modify these rules and/or adopt such other
reasonable and non-discrimination rules and regulations as it may deem
necessary for the proper operation of the parking area.
<PAGE>
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE ("First Amendment") is made and entered into
as of the 11th day of July, 1996, by and between BANK OF NEW YORK, a New York
corporation, as directed Trustee for Unisys Master Trust ("Landlord"), and
Pacific Biometrics, a Delaware corporation ("Tenant").
RECITALS:
A. Pursuant to a Standard Form Lease ("Lease"), dated May 23, 1993, between
Landlord and Tenant, Landlord leased to Tenant certain space ("Premises")
commonly described as Suites 118 & 119, 1370 Reynolds Avenue, Irvine,
California, 92614. The Premises are located within the Reynolds Business Park,
1340-1370 Reynolds Avenue, Irvine, California, 92614.
B. Landlord and Tenant now wish to amend the Lease to extend the Term and
to make certain other changes, all as provided in this First Amendment.
NOW, THEREFORE, the parties hereto agree as follows:
1. Premises Square Footage. Approximately 3,570 rentable square feet.
2. Building Address. Building "A", 1370 Reynolds Avenue, Suites 118 & 119,
Irvine, California 92614.
3. Term. The Term of the Lease is hereby extended for Twelve (12) Months,
commencing October 1, 1996, and terminating September 30, 1997 ("Additional
Term").
4. Monthly Rent. The Monthly Rent for the Premises during the Additional
Term shall be $2,677.50 per month, payable upon the first day of each calendar
month within the Additional Term without abatement, deduction, claim, offset,
prior notice or demand. Tenant shall in addition pay to Landlord its share of
Operating Expenses and all other costs, charges and expenses of any type
provided for in the Lease.
5. Tenants Percentage. 8.56%
6. Additional Provisions. The following additional provisions are added to
the Lease and shall apply during the Additional Term [if there are none, insert
"NONE"]: None.
<PAGE>
7. Miscellaneous.
(a) Except as amended by this First Amendment, the Lease shall remain in
full force and effect as originally written. All capitalized, defined terms used
in this First Amendment that are not otherwise defined herein shall have the
meanings most recently given to them in the Lease.
(b) Each person signing this First Amendment on behalf of Tenant warrants
and represents that Tenant has full right and authority to enter into this First
Amendment, that each person executing this First Amendment on behalf of Tenant
is authorized to do so and that such execution is binding on Tenant.
(e) Tenant warrants, represents and certifies to Landlord that as of the
date of this First Amendment: (1) Landlord is not in default under the Lease,
and (2) Tenant does not have any defenses or offsets to payment of rent and
performance of its obligations under the Lease as and when the same become due.
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
as of the day and year first above written.
BANK OF NEW YORK,
a New York corporation,
as directed Trustee for
Unisys Master Trust
By: LaSalle Advisors Limited
--------------------------
Its: Agent
By: /s/James P. Creighton
--------------------------
Its: Principal
--------------------------
"Landlord"
Pacific Biometrics,
a Delaware corporation
By: /s/Paul G. Kanan
--------------------------
Its: President & CEO
--------------------------
"Tenant"
<PAGE>
Subsidiaries
Wholly-Owned Subsidiaries State of Incorporation
BioQuint, Inc. Michigan
Pacific Biometerics, Inc. Washington
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2 (File
No. ); (1) of our report, which includes an explanatory paragraph with
respect to matters raising substantial doubt as to the entity's ability to
continue as a going concern, as described in Note 18 of the notes to the
Consolidated Financial Statements, dated September 5, 1996 on our audits of the
consolidated balance sheet as of June 30, 1996 and the consolidated statements
of operations and cash flows for each of the two years in the period ended June
30, 1996 and for the period from inception (December 1992) to June 30, 1996 and
the consolidated statement of stockholders' deficit for the period from
inception (December 1992) to June 30, 1996 of Pacific Biometrics, Inc.; (2) of
our report, which includes an explanatory paragraph with respect to matters
raising substantial doubt as to the entity's ability to continue as a going
concern, as described in Note 11 of the notes to the Financial Statements,
dated September 5, 1996 on our audits of the balance sheet as of June 30, 1996
and the statements of operations and cash flows for each of the two years in the
period ended June 30, 1996 and for the period from inception (October 1985) to
June 30, 1996 and the statement of stockholders' deficit for the period from
inception (October 1985) to June 30, 1996 of Bioquant, Inc.; and (3) of our
report, dated September 5, 1996 on our audit of the statement of operations for
the seven month period from July 1, 1994 to January 31, 1995 of Pacific
Biometrics, Inc. We also consent to the references to our firm under the caption
"Experts."
Coopers & Lybrand L.L.P.
Seattle, Washington
September 5, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PACIFIC BIOMETRICS, INC. FOR THE YEAR
ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 192,898
<SECURITIES> 0
<RECEIVABLES> 264,042
<ALLOWANCES> 11,630
<INVENTORY> 19,837
<CURRENT-ASSETS> 500,608
<PP&E> 196,465
<DEPRECIATION> 64,642
<TOTAL-ASSETS> 840,113
<CURRENT-LIABILITIES> 2,224,550
<BONDS> 0
0
0
<COMMON> 17,392
<OTHER-SE> (1,401,829)
<TOTAL-LIABILITY-AND-EQUITY> 840,113
<SALES> 1,657,280
<TOTAL-REVENUES> 1,657,280
<CGS> 0
<TOTAL-COSTS> 9,245,605
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,853
<INCOME-PRETAX> (7,560,863)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,560,863)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,560,863)
<EPS-PRIMARY> (7.01)
<EPS-DILUTED> (7.01)
</TABLE>
