<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1997
REGISTRATION NO. 333-37441
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MEDICAL SCIENCE SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
TEXAS 8099 94-3123681
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
4400 MACARTHUR BOULEVARD, SUITE 980
NEWPORT BEACH, CALIFORNIA 92660
(714) 440-9730
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
PAUL J. WHITE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MEDICAL SCIENCE SYSTEMS, INC.
4400 MACARTHUR BOULEVARD, SUITE 980
NEWPORT BEACH, CALIFORNIA 92660
(714) 440-9730
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE OF PROCESS)
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATION TO:
CHRISTOPHER A. WILSON, ESQ. WILLIAM M. PRIFTI, ESQ.
DANIEL J. TANGEMAN, ESQ. LYNNFIELD WOODS OFFICE PARK
JEFFERS, WILSON, SHAFF & FALK, LLP 220 BROADWAY
18881 VON KARMAN AVENUE, SUITE 1400 SUITE 204
IRVINE, CALIFORNIA 92612 LYNNFIELD, MASSACHUSETTS 01940
(714) 660-7700 (781) 593-4525
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: NOVEMBER 19, 1997
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>
<S> <C> <C> <C> <C>
============================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------
Common Stock, no par
value..................... 1,500,000 $ 9.00 $13,500,000 $4,091
Underwriters' Warrants(2)... 150,000 $ .001 $ 150 $ 0(3)
Common Stock, no par
value(4).................. 150,000 $12.15 $ 1,822,500 $ 552
Common Stock, no par
value(5) 225,000 $ 9.00 $ 2,025,000 $ 614
Total.............. $5,257
============================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee, pursuant
to rule 457(a) and (g) under the Securities Act.
(2) To be sold to the Representatives of the Underwriters.
(3) None pursuant to Rule 457(g).
(4) Issuable upon exercise of the Underwriters' Warrants.
(5) Issuable upon exercise of the Underwriters' option to purchase to cover
over-allotments, if any.
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> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE. WE MAY NOT SELL THESE
SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SEC IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED OCTOBER 29, 1997
Initial Public Offering
Prospectus
[MEDICAL SCIENCE SYSTEMS LOGO]
1,500,000 shares of Common Stock
$8 to $9 per share
Medical Science Systems, Inc.
4400 MacArthur Boulevard
Suite 980
Newport Beach, California 92660
(714) 440-9730
The Offering*
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public Price............. $9.00 $13,500,000
Underwriting discounts... $ .72 $ 1,080,000
Proceeds to Company...... $8.28 $12,420,000
</TABLE>
- ---------------
*Assumes a $9 per share offering price.
We develop genetic tests which indicate
whether a person is more likely to
develop or will be more severely
affected by certain common diseases
which are treatable and preventable. We
recently began marketing our initial
test related to periodontitis (gum
disease). We intend to commence
marketing our other genetic tests which
indicate susceptibility to osteoporosis
(bone disease), coronary artery disease
(heart disease) and diabetic retinopathy
(blindness associated with diabetes) in
1998 and 1999.
Proposed Trading Symbols
NASDAQ SMALLCAP MARKET(SM) -- MSSI
BOSTON STOCK EXCHANGE -- MSS
This Investment Involves a High Degree of Risk.
Please Refer to "Risk Factors" Beginning on Page 8.
The Securities and Exchange Commission (SEC) and state securities regulators
have not approved these securities or determined if this prospectus is truthful
or complete. Any representation to the contrary is a criminal offense and should
be reported immediately to the SEC by calling 1-800-SEC-0330.
Nutmeg Securities, Inc.
Millennium Financial Group, Inc.
<PAGE> 3
[Pictorial Depiction of Biological and Behavioral Risk Factors Contributing to
Disease Progression]
Our website is located at http://www.medscience.com.
This prospectus includes names and marks which we believe to be trademarks or
servicemarks of third parties. We have no ownership interest in any of the
intellectual property indicated by the trademark or servicemark symbols of third
parties referenced in this prospectus.
Upon the effective date of the registration statement, of which this prospectus
is a part, our company will become a reporting company. Thereafter, we intend to
distribute to our shareholders annual reports containing audited financial
statements. We will also make available copies of quarterly reports for the
first three quarters of each fiscal year containing unaudited interim financial
information.
CERTAIN PERSONS WHO PARTICIPATE IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES, INCLUDING
PURCHASES OF SHARES TO MAINTAIN THEIR MARKET PRICE OR PURCHASES TO COVER SOME OR
ALL OF THE UNDERWRITERS' SHORT POSITION IN THE SHARES.
<PAGE> 4
MEDICAL SCIENCE SYSTEMS, INC.
INTRODUCTION
Please read this prospectus carefully. It describes our company, finances and
products. Federal and state securities laws require that we include in this
prospectus all the important information that investors will need to make an
investment decision.
You should rely only on the information contained in this prospectus to make
your investment decision. We have not authorized anyone to provide you with
information that is different from what is contained in this prospectus.
PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary......................... 1
Risk Factors.................... 8
The Company..................... 16
Use of Proceeds................. 17
Dividend Policy................. 18
Capitalization.................. 18
Dilution........................ 19
Selected Financial Data......... 20
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations................... 21
Business........................ 23
Management...................... 44
Certain Relationships and
Related Party Transactions... 50
Principal Shareholders.......... 51
Description of Securities....... 52
Shares Eligible for Future
Sale......................... 53
Underwriting.................... 55
Legal Matters................... 56
Experts......................... 56
Additional Information.......... 56
Index to Financial Statements... F-1
</TABLE>
<PAGE> 5
MEDICAL SCIENCE SYSTEMS, INC. Summary
ABOUT OUR COMPANY
Our company has developed genetic tests which indicate whether an
individual is genetically more likely to be affected or more
severely affected by certain common diseases which are treatable
and preventable. We have focused on four diseases initially:
periodontitis (gum disease), osteoporosis (bone disease), coronary
artery disease (heart disease) and diabetic retinopathy (blindness
associated with diabetes). We have identified several genetic
markers which, if present in a patient, increase the probability
that such patient will be affected by the disease or that the
disease will be more severe. Moreover, we are the only company that
we know of that has brought to market a test (our periodontal
susceptibility test) that identifies a genetic marker which
indicates a greater susceptibility to a disease which is treatable
and preventable. Our company's ability to identify genetic markers
related to common diseases is enhanced by a strategic alliance with
Sheffield University. Sheffield University provides us with access
to critical biotechnology research in molecular genetics. This
arrangement helps provide for the development of additional genetic
testing products in the future and reduces our capital costs
relative to biotechnology firms that support large in-house
research programs. See "Competitive Advantages" at page 40.
We have ten (10) patent applications pending, including
applications covering each of our four genetic susceptibility
tests. We have also been issued one patent related to our computer
modeling technology. In June 1997, the United States Patent and
Trademark Office notified us that the patents for our periodontal
and osteoporosis susceptibility tests are expected to issue. While
the issuance of those patents is likely, the Patent and Trademark
Office could disallow the patents at any time prior to the actual
issue date. See "Intellectual Property" at page 38.
MISSION
Our mission is to improve patient care and treatment outcomes by
incorporating genetic information about a patient's susceptibility
to disease into overall risk assessment and treatment planning. We
believe that doctors and dentists will use our genetic
susceptibility tests to assess the risk involved for any particular
patient and to adopt appropriate treatments or therapy, including
preventive measures.
1
<PAGE> 6
Summary (con't)
PRODUCTS AND SERVICES
PERIODONTAL SUSCEPTIBILITY TEST
- Description. Our periodontal susceptibility test is a
genetic test capable of detecting individuals with an
increased susceptibility to developing severe gum
disease (periodontitis). Periodontitis is a
bacterially-induced chronic inflammation that destroys
the collagen fibers and bone that support the
teeth -- ultimately resulting in tooth loss.
- Market. According to industry data, in the United
States alone, an estimated one-third of all adults, or
67 million people, suffer from some form of
periodontitis. Approximately 13 million people seek
professional treatment annually for periodontal
disease, resulting in over 17 million periodontal
procedures and annual expenditures of approximately $6
billion. Because of the great prevalence of
periodontitis, we believe that a substantial portion
of the United States' population receiving dental care
will be our initial target market.
- Launch. On October 3, 1997, we commercially launched
our periodontal susceptibility test at the American
Academy of Periodontology's Annual Meeting in San
Diego, California.
OSTEOPOROSIS SUSCEPTIBILITY TEST
- Description. Our osteoporosis susceptibility test is
a genetic test capable of detecting individuals with
an increased susceptibility to developing
osteoporosis. Osteoporosis is a disease which causes a
decrease in the amount of normal bone, making the
affected individual more susceptible to fractures.
- Market. According to industry data, in the United
States alone, an estimated 28 million people, suffer
from osteoporosis. Post-menopausal osteoporosis,
stemming from the loss of estrogen, affects more than
one-half of all women over 65 years of age and has
been detected in as many as 90% of the women over age
75. Osteoporosis is responsible for a majority of the
1.5 million bone fractures each year and leads to
disabilities costing more than $10 billion in medical,
social and nursing home costs.
2
<PAGE> 7
Summary (con't)
CORONARY ARTERY DISEASE SUSCEPTIBILITY TEST
- Description. Our coronary artery disease
susceptibility test is a genetic test capable of
detecting individuals with an increased susceptibility
to developing coronary artery disease (or "CAD"). CAD
is a condition where the arteries that supply blood to
the heart have become partially obstructed by plaque
accumulation. CAD results in heart attacks due to
damage to the heart muscle when blood supply (and
therefore oxygen) is cut off and heart muscle cells
die. An individual testing positive under our CAD
susceptibility test has between a 2.4 to 5.4 times
greater change of developing coronary artery disease
than the general population.
- Market. More than one in four Americans, or about 60
million, now have some form of cardiovascular disease.
Cardiovascular diseases kill nearly one million
Americans every year. Every year since 1919,
cardiovascular disease has been the number one cause
of death in the U.S. Approximately 13.5 million
Americans suffer from coronary artery disease, and
approximately half a million Americans die each year
from this disease.
DIABETIC RETINOPATHY SUSCEPTIBILITY TEST
- Description. Our diabetic retinopathy susceptibility
test is a genetic test capable of detecting diabetic
individuals who have an increased susceptibility to
developing sight-threatening retinopathy. Diabetic
retinopathy refers to diabetic complications affecting
the retina that predictably lead to severe vision loss
or even blindness.
- Market. In the United States there are approximately
16 million people suffering from diabetes. It is
estimated that only one-half of this number have been
diagnosed. Diabetic retinopathy is one of the most
common complications of diabetes. It is the fourth
leading cause of legal blindness in the U.S. and the
leading cause of blindness in people ages 20 to 74.
Each year 15,000 to 39,000 people lose their sight
from diabetic retinopathy.
COST OF PRODUCTS AND SERVICES
We have recently commercially launched our periodontal
susceptibility test and are marketing the test at $210 per test.
Although we cannot be certain, we anticipate that the remainder of
our genetic susceptibility tests will be marketed at a price
between $200 and $250. Final pricing of these other tests will be
determined at the time of commercial launch. We anticipate our
direct cost (exclusive of sales and marketing) on a per test basis
to be between $45-$80 depending primarily upon volume
considerations.
3
<PAGE> 8
Summary (con't)
STATUS OF CLINICAL TRIALS AND COMMERCIAL LAUNCH DATES
The current trial status and the actual/anticipated commercial
launch date of each of our four genetic susceptibility tests is
depicted below. A more detailed discussion of this chart is found
under "Pre-Marketing Trials/Status of Susceptibility Tests" at
pages 33 and 34.
<TABLE>
<CAPTION>
INITIAL PROOF ACTUAL/ANTICIPATED
(PRIOR TO CONFIRMATORY CLINICAL COMMERCIAL
PATENT FILING) TRIAL UTILITY LAUNCH
-------------- ------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Periodontal Disease......... Completed Completed Completed October 1997
Osteoporosis................ Completed Completed Underway Late 1998
Coronary Artery Disease..... Completed Completed Underway 1999
Diabetic Retinopathy........ Completed Underway Not Yet Started 1999
</TABLE>
RISKS OF INVESTING
An investment in our company is subject to many risks. We
summarize some of the most serious risks below. A more detailed
list of the risk factors is found under "Risk Factors" at page 8.
You should read and understand all risk factors before making your
decision to invest.
- Uncertainty of Market Acceptance for Genetic
Susceptibility Tests. Consumers may not accept our
current genetic susceptibility tests or others in
development or may accept the tests much later than we
anticipate.
- New Business Venture. Our genetic susceptibility
testing business is relatively new and may be affected
significantly by unknown economic and market
conditions over which we have no control.
- History of Operating Losses; Accumulated Deficit;
Uncertainty of Future Profitability. Our company
incurred a net loss of $788,546 in 1996 and
anticipates a net loss of approximately $4.0 million
in 1997. As of September 30, 1997, our accumulated
deficit was approximately $3.91 million. It is
uncertain when we will become profitable.
- Intense Competition. Our company faces intense
competition related to the discovery and use of
disease predisposing genes and genetic markers. Even
after our discovery of the genetic markers, our
competition may find and patent the same markers
before we do or may find other markers for the same
diseases. Additionally, our competitors may have
greater resources enabling them to more effectively
market their discoveries.
- Difficulty of Developing Genetic Susceptibility
Tests. It is uncertain whether we will be successful
in bringing our complete
4
<PAGE> 9
Summary (con't)
portfolio of tests to market. Even after identifying a
genetic marker, many additional trials must be run in
order to verify and confirm the test's accuracy and
utility. Any delay in clinical trials or negative
clinical results could slow or prevent our ability to
successfully market our tests.
- Uncertainty of Insurance Reimbursement. It is
uncertain whether insurers and third-party payors will
elect to reimburse patients for the cost of the
genetic susceptibility tests. If insurers or
third-party payors elect not to reimburse patients, it
is uncertain whether individuals will elect to pay
directly for our tests.
- Reliance on Collaborative Partners. We have a
collaborative research relationship, evidenced by an
exclusive worldwide agreement, with the Section of
Molecular Medicine at Sheffield University.
Additionally, we have entered into agreements with
Sheffield University governing each of our individual
tests. If these agreements were terminated, we would
need to enter into additional collaborative
arrangements in order to continue to build a future
pipeline of new products.
- Uncertain Ability to Protect Proprietary
Technology. The patent position of biotechnology
companies generally is highly uncertain and involves
complex legal and factual questions. Although initial
approvals have been granted by the Patent and
Trademark Office with respect to some of our tests,
certain of our patent applications may be rejected.
Even when patents are issued, the claims of any issued
patents may not provide meaningful protection for our
technology or products. Others may develop similar
products which test for susceptibility related to the
same diseases yet avoid infringing upon, or
conflicting with, our anticipated patents. In
addition, there can be no assurance that any patents
issued to us will not be challenged, and subsequently
narrowed, invalidated or circumvented.
- Technological Changes Resulting in Product
Obsolescence. It is possible that our competitors
will develop technologies more effective than those
contained or used in our products. Our competitors
could develop new products which make our products
less competitive or obsolete.
- Limited Marketing or Sales Experience. We have
limited experience in developing and commercially
marketing our genetic susceptibility testing services.
5
<PAGE> 10
Summary (con't)
PAST FINANCIAL HISTORY
The following graph depicts our revenues and net income or
loss for each of the last three fiscal years. Our financial results
are described in more detail under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" at page
21. Audited financial statements are included beginning at page
F-1.
[NET INCOME AND REVENUES GRAPH]
6
<PAGE> 11
Medical Science Systems, Inc. Summary (con't)
KEY FACTS
SHARES OFFERED TO THE PUBLIC:
1,500,000 Shares
OVER-ALLOTMENT OPTION:
Up to 225,000 Shares (not included in 1,500,000)
TOTAL SHARES OUTSTANDING PRIOR TO OFFERING:
3,738,007 Shares
TOTAL SHARES OUTSTANDING AFTER OFFERING:
5,238,007 Shares (assuming no exercise of the over-allotment option)
TOTAL SHARES OUTSTANDING AFTER OFFERING AND EXERCISE OF ALL OPTIONS/WARRANTS:
6,545,131 Shares
PRICE PER SHARE TO PUBLIC:
$9.00 per share
TOTAL PROCEEDS RAISED BY OFFERING:
$13,500,000
UNDERWRITERS' FEES:
$1,080,000/8% of the total proceeds plus a 3% non-accountable expense allowance
EXPENSES OF THE OFFERING:
$355,000
NET PROCEEDS:
$11,660,000
USE OF PROCEEDS:
Marketing, sales, customer service and
commercialization expenses; research and
development activities; capital investment; repayment
of bridge loans; and working capital and general
corporate purposes.
UNDERWRITERS' WARRANTS:
Underwriters will receive warrants to purchase 150,000 Shares at an exercise
price of $12.15 exercisable for five (5) years.
AVERAGE PRICE PER SHARE PAID BY CURRENT
SHAREHOLDERS:
$0.59
NET TANGIBLE BOOK VALUE:
$(1,725,016)
NET TANGIBLE BOOK VALUE PER SHARE BEFORE
DILUTION:
$(0.46)
NET TANGIBLE BOOK VALUE PER SHARE AFTER DILUTION:
$1.90
MARKET:
Nasdaq SmallCap MarketSM -- MSSI
Boston Stock Exchange -- MSS
DIVIDEND POLICY:
No Dividends Expected
UNDERWRITING:
Firm Commitment
7
<PAGE> 12
RISK FACTORS
The shares of Common Stock offered by this Prospectus are speculative and
involve a high degree of risk of loss. Prior to making an investment, you should
carefully read this entire Prospectus and consider the following risk and
speculative factors:
UNCERTAINTY OF MARKET ACCEPTANCE FOR GENETIC SUSCEPTIBILITY TESTS
The commercial success of our genetic susceptibility tests and those that
we may develop will depend upon their acceptance as medically useful and
cost-effective by patients, physicians, dentists, other members of the medical
and dental community and insurers. Broad market acceptance can be achieved only
with substantial education about the benefits and limitations of such tests. We
expect to expend substantial financial resources to effectively promote the
benefits of our genetic susceptibility tests and those that we may develop. We
intend to expend significant resources on educating medical and dental
caregivers, policymakers, patients, insurers and others. It is uncertain whether
current genetic susceptibility tests or others that we may develop will gain
market acceptance on a timely basis. If patients, dentists and physicians do not
accept our tests, or take a longer time to accept than we anticipate, then our
revenues and profit margins may be reduced and may result in losses. See
"Uncertainty of Insurance Reimbursement" at page 9.
NEW BUSINESS VENTURE
The securities being offered by us are subject to the risks inherent in any
new business venture. Although we have operated as a contract research firm
since 1986, we have limited experience and a short history of operations with
respect to marketing and selling susceptibility tests or therapeutics. We have
had only minimal revenues related to the sale of our genetic susceptibility
testing services. With the exception of our periodontal susceptibility test, the
genetic susceptibility tests anticipated to be sold by us have not yet been
finally designed, developed, tested or marketed. Therefore, there can be no
assurance that we will be able to complete these genetic susceptibility tests,
that those tests will be accepted in the marketplace, or that the tests can be
sold at a profit. Our business may also be affected significantly by economic
and market conditions over which we have no control. Consequently, an investment
in our Common Stock is highly speculative. We do not guarantee any return on an
investment in our Common Stock.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE
PROFITABILITY
We incurred a net operating loss of $788,546 in fiscal year 1996. We
anticipate a net loss of approximately $4.0 million in 1997. As of September 30,
1997, our accumulated deficit was $3,913,577. Our losses have resulted
principally from expenses incurred in research and development and from selling,
general and administrative expenses. These expenses have exceeded our revenues.
We have yet to generate any significant revenues from the sale of our genetic
susceptibility testing services and there can be no assurance that we will be
able to generate significant revenues in the future. We expect our operating
losses to continue for the near future as our research and development, sales
and marketing activities and operations continue. Our ability to achieve
profitability depends on our ability to develop our sales and marketing capacity
and our ability to successfully market and sell our products and services. It is
uncertain when we will become profitable. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" at page 21.
INTENSE COMPETITION
Research in the field of disease predisposing genes and genetic markers is
intense and highly competitive. Genetic research is characterized by rapid
technological change. Our competitors in the United States and abroad are
numerous and include, among others, major pharmaceutical and diagnostic
companies, specialized biotechnology firms, universities and other research
institutions (including those receiving funding from the Human Genome Project).
Many of our potential competitors have considerably greater financial,
technical, marketing and other resources than us. These greater resources may
allow our competitors to discover important genes or genetic markers before us.
If we, in conjunction with the Department of Molecular and Genetic Medicine at
the University of Sheffield, U.K., do not discover disease predisposing
8
<PAGE> 13
genes or genetic markers associated with increased disease severity,
characterize their function, develop susceptibility tests and related
information services based on such discoveries, obtain regulatory and other
approvals, if needed, and launch such services or products before competitors,
then our revenues and earnings will be reduced or eliminated. In addition, any
of the susceptibility tests that we may develop, including our periodontal
susceptibility test, could be made obsolete by less expensive or more effective
tests or methods which may be developed in the future. We expect competition to
intensify in our industry as technical advances are made and become more widely
known. See "Uncertain Ability to Protect Proprietary Technology" at page 10,
"Competition" at page 39 and "Intellectual Property" at page 38.
DIFFICULTY OF DEVELOPING GENETIC SUSCEPTIBILITY TESTS
It is uncertain whether we will be successful in developing and bringing to
market our current portfolio or future tests based on the genetic discoveries
made by us and our collaborators. Even when we discover a genetic marker (i.e.,
a genetic variation or polymorphism associated with increased disease incidence
or severity), additional clinical trials need to be conducted to confirm the
initial scientific discovery and to support the scientific discovery's clinical
utility in the marketplace. The results of a clinical trial could delay, reduce
the test's acceptance or cause our company to cancel a program. Such delays,
reduced acceptance or cancellations would reduce revenues and may result in
losses.
UNCERTAINTY OF INSURANCE REIMBURSEMENT
Our ability to successfully commercialize existing genetic susceptibility
tests and others that we may develop depends in part on obtaining adequate
reimbursement for such testing services and related treatments from government
and private health care insurers (including health maintenance organizations)
and other third-party payors. Physicians' and dentists' decisions to recommend
genetic susceptibility tests, as well as patients' elections to pursue testing,
are likely to be heavily influenced by the scope and extent of reimbursement for
such tests by third-party payors. Government and private third-party payors are
increasingly attempting to contain health care costs by limiting both the extent
of coverage and the reimbursement rate for new testing and treatment products
and services. In particular, services which are determined to be investigational
in nature or which are not considered "reasonable and necessary" for diagnosis
or treatment may be denied reimbursement coverage. To date, few insurers or
third-party payors have agreed to reimburse patients for genetic susceptibility
tests. As a result, we initially expect to bill patients directly for the
genetic susceptibility tests.
It remains uncertain whether insurers or third-party payors will elect to
provide full reimbursement coverage for the genetic susceptibility tests in the
near future. If adequate reimbursement coverage is not available from insurers
or third-party payors, it is uncertain whether individuals will elect to
directly pay for the test. If both insurers or third-party payors and
individuals are unwilling to pay for the test, then the number of tests
performed will be significantly decreased. Such a scenario would result in
reduced revenues and possible losses.
RELIANCE ON COLLABORATIVE PARTNERS
In 1994 we entered into a strategic alliance with the Section of Molecular
Medicine at Sheffield University, a world leader in the genetic aspects of
common diseases with an inflammatory component. In 1996 we formalized our
relationship by entering into an exclusive worldwide agreement (the "Master
Agreement"). Under the terms of the Master Agreement, we will undertake the
development and commercialization of any discoveries resulting from the research
of Section of Molecular Medicine at Sheffield University. In exchange, Sheffield
University will receive a share of the resultant net profits, with the
percentage of net profits for us and Sheffield University agreed upon separately
under project agreements related to each test (each a "Project Agreement"). Our
share of the net profits under such Project Agreements ranges from 50% to 67%.
The Master Agreement may be terminated with or without cause by either party
upon six-months notice. Although termination does not affect any existing
Project Agreements, any termination would limit or eliminate our access to
future Sheffield University genetic discoveries that fall outside of the scope
of our existing Project Agreements.
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The Project Agreements (excluding the agreement covering the periodontal
test which has no fixed termination date) each have a ten-year term, commencing
in September 1996, which is automatically renewed for one-year periods unless
terminated by either party upon a six month's prior notice. The Project
Agreements may be terminated: (i) by mutual agreement, (ii) by either party 30
days after an uncured breach or default by the other party; (iii) by either
party upon certain events of bankruptcy; and (iv) by our company if Professor
Gordon Duff ceases to be an employee of, or head of the Section of Molecular
Medicine at Sheffield University. In the case of mutual agreement to terminate,
or in the case of our terminating a Project Agreement prior to the end of the
ten-year term, net profits would be reallocated by mutual agreement in light of
the continued responsibilities between the parties. However, Sheffield
University's share of the net profits would not be allowed to fall below ten
percent (10%) in such an instance. If the Master Agreement or any of the Project
Agreements were terminated, we would need to enter into additional collaborative
arrangements in order to continue to build a future pipeline of products.
In the future we may, in order to facilitate the sale of our testing
services and/or products, enter into collaborative selling arrangements with one
or more other persons. It is uncertain whether we will be able to negotiate
acceptable collaborative arrangements in the future or that such collaborative
arrangements will be successful. If we are unable to identify collaborative
partners to sell certain of our services and/or products, we may be forced to
develop an internal sales force to market and sell our services and/or products
in markets where we are not intending on developing a direct selling presence.
Such a process would take more time and potentially cost more. As a result, our
revenues and earnings would be reduced. If we do enter into collaborative
selling arrangements, our success will depend upon the efforts of others and may
be beyond our control. Failure of any collaborative selling arrangement could
result in reduced revenues and possible losses.
UNCERTAIN ABILITY TO PROTECT PROPRIETARY TECHNOLOGY
Our success will partly depend on our ability to obtain patent protection,
both in the United States and in other countries, for our products and services.
In addition, our success will also depend upon our ability to preserve our trade
secrets and to operate without infringing the proprietary rights of third
parties.
We have ten (10) patent applications pending, including applications
covering each of our four genetic susceptibility tests. In June 1997, a Notice
of Allowance was issued by the United States Patent and Trademark Office with
respect to the patent applications for both our periodontal and osteoporosis
susceptibility tests. A Notice of Allowance is granted by the Patent and
Trademark Office, if, on examination of the application, the patent application
is found to be allowable. Thereafter a fee for issuing the patent is due within
three months from the date of the Notice of Allowance. When the issue fee is
paid, the patent issues as soon as possible after the date of payment, dependent
upon the backlog of patents at the Patent and Trademark Office. The patent is
then delivered or mailed on the day of its grant, or as soon thereafter as
possible. We paid the issue fee related to the application for the periodontal
susceptibility test on July 18, 1997 and for the osteoporosis susceptibility
test on September 8, 1997. While the issuance of these patents is likely, the
exact date of issuance is not known. It is rather unlikely, but possible, that
the United States Patent Trademark Commissioner could disallow the granting of
our patents at any time prior to the date of issuance. There can be no assurance
that our patent applications will ever be issued as patents or that the claims
of any issued patents will afford meaningful protection for our technology or
products. Further, others may develop similar products which test for
susceptibility related to some diseases yet avoid infringing upon, or
conflicting with, our anticipated patents. In addition, there can be no
assurance that any patents issued to us will not be challenged, and subsequently
narrowed, invalidated or circumvented.
Our testing services and/or products may also conflict with patents which
have been or may be granted to others. As the biotechnology industry expands and
more patents are filed and issued, the risk increases that our products may give
rise to a declaration of interference by the Patent and Trademark Office, or to
claims of patent infringement by other companies, institutions or individuals.
Such entities or persons could bring legal proceedings against us seeking
damages or seeking to enjoin us from testing, manufacturing or marketing our
products. Patent litigation is costly, and even if we prevail, the cost of such
litigation could have an adverse effect on us. If the other parties in any such
actions are successful, in addition to any liability for damages, we could be
required to cease the infringing activity or obtain a license. It is uncertain
whether
10
<PAGE> 15
any license required would be available to us on acceptable terms, if at all.
Failure by us to obtain a license to any technology that we may require to
commercialize our products could have a material adverse effect on our business,
financial condition, results of operations and cash flows. In addition, there is
considerable pressure on academic institutions and other entities to publish
discoveries in the genetic field. Such a publication by an academic institution
or other entity, prior to our filing of a patent application on such discovery,
may compromise our ability to obtain U.S. and foreign patent protection for the
discovery.
We also rely upon unpatented proprietary technologies. We rely on
confidentiality agreements with our employees, consultants and collaborative
partners to protect such proprietary technology. There can be no assurance that
we can adequately protect our rights in such unpatented proprietary
technologies, that others will not independently develop substantially
equivalent proprietary information or techniques, or otherwise gain access to
our proprietary technologies or disclose such technologies. See "Intellectual
Property" at page 38.
The United States Patent and Trademark Office issued new Utility Guidelines
in July 1995 that address the requirements for demonstrating utility,
particularly in inventions relating to human therapeutics. While the guidelines
do not require clinical efficacy data for issuance of patents for human
therapeutics, there can be no assurance that the Patent and Trademark Office's
interpretations of such guidelines, and any chances to such interpretations will
not delay or adversely affect our or our collaborators' ability to obtain patent
protection. The biotechnology patent situation outside the United States is even
more uncertain and is currently undergoing review and revision in many
countries.
TECHNOLOGICAL CHANGES RESULTING IN PRODUCT OBSOLESCENCE
Market acceptance and sales of our testing services could also be adversely
affected by technological change. It is uncertain whether our competitors will
succeed in developing genetic susceptibility tests that circumvent or are more
effective than our technologies or services. Further, it is uncertain whether
such developments would render our or our collaborators' technology or services
less competitive or obsolete. Further, our testing services could be rendered
obsolete as a result of future innovations in the treatment of gum disease,
osteoporosis, coronary artery disease or diabetes retinopathy, which could have
a significant negative impact on our company's ability to market our services
effectively. See "Uncertain Ability to Protect Proprietary Technology" at page
10, "Competition" at page 39 and "Intellectual Property" at page 38.
LIMITED MARKETING OR SALES EXPERIENCE
Our business strategy is to provide genetic susceptibility testing services
aimed at common diseases that are treatable and preventable. The commercial
introduction of the periodontal susceptibility test at the beginning of October
1997 represents our first such effort. In preparation for the launch of the
periodontal susceptibility test, we have devoted substantial human and financial
resources to the establishment and staffing of a customer service support
facility and the building of a sales and marketing infrastructure. However, we
have limited experience in developing and commercially marketing susceptibility
testing services. It is uncertain whether our customer service support
facilities and sales and marketing program will achieve efficient, effective or
successful operations. Failure to successfully market such tests could reduce
our revenues and may result in losses. See "Competition" at page 39 and
"Government Regulation" at pages 11 and 42.
GOVERNMENT REGULATION
The sampling of blood, saliva or cheek scrapings from patients and
subsequent analysis in a clinical laboratory does not, at the present time,
require FDA or regulatory authority approval outside the U.S. for either the
sampling procedure or the analysis itself. The samples are taken in the
healthcare provider's office, using standard materials previously approved as
medical devices, such as sterile lancets and swabs. The testing procedure itself
is performed in one or more registered, certified clinical laboratories under
the auspices of the Clinical Laboratory Improvement Amendments of 1988,
administered by the Health Care Financing Administration. In general, the
federal regulations governing approval of the laboratory
11
<PAGE> 16
facilities and applicable state and local regulations governing the operation of
clinical laboratories apply to the laboratory but not to our company. However,
changes in the scope of the services offered by our company (e.g., establishing
an in-house clinical laboratory) would subject our company to applicable
regulations. Additionally, changes in existing regulations could require advance
regulatory approval of genetic susceptibility tests which may result in a
substantial curtailment or even prohibition of our activities without regulatory
approval. If our tests ever require regulatory approval, the costs of
introduction will increase and marketing and sales may be significantly delayed.
Further, eighteen months ago the FDA proposed to regulate as medical
devices the "active ingredients" (known as "analyte specific reagents" or
"ASRs") of certain tests developed by, or in conjunction with, clinical
laboratories. Currently, a final rule has not been issued. The FDA has
specifically stated that it is not proposing a comprehensive regulatory scheme
over the final tests, but rather the active ingredients (ASRs) provided to the
laboratories that perform them. According to the FDA, any contemplated
additional controls (e.g. submission for Pre-Market Approval applications) over
the tests themselves would likely involve those tests which identify genes
associated with cancer or diseases associated with dementia. If the FDA requires
Pre-Market Approval of our genetic susceptibility test, our company may be
required to conduct pre-clinical studies, obtain an investigational device
exemption to conduct clinical tests, file a Pre-Market Approval application, and
obtain FDA approval. There can be no assurance such approval would be received
on a timely basis, if at all. The failure to receive such approval could require
us to develop alternative testing methods or utilize approved ASRs, which could
result in the delay or stop the use of such tests. Such a delay or termination
could result in reduced revenues or losses.
Although our primary business is to develop genetic susceptibility testing
services, we may also develop or assist others to develop, drugs or other
treatments for the diseases related to our tests. The FDA and comparable
agencies in state and local jurisdictions and in foreign countries impose
substantial requirements upon the manufacturing and marketing of drug products
such as those potentially to be developed by our company or any partner. The
process of obtaining FDA and other required regulatory approvals is lengthy and
expensive. The time required for FDA approvals is uncertain and typically takes
a number of years, depending on the type, complexity and novelty of the product.
We may encounter significant delays or excessive costs in our efforts to secure
necessary approvals or licenses. Because certain of the products likely to
result from our research and development programs involve the application of new
technologies and will be based on new approaches, such products may be subject
to substantial additional review by various governmental regulatory authorities
and as a result, regulatory approvals may be obtained more slowly than for
products using more conventional technologies. There can be no assurance that
FDA approvals will be obtained in a timely manner, if at all. Any delay in
obtaining, or the failure to obtain, such approvals would adversely affect our
ability to generate product or product sales. Even if FDA approvals are
obtained, the marketing and manufacturing of drug products are subject to
continuing FDA and other regulatory review, and later discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions on the product or manufacturer, including withdrawal of the product
from the market. Additional governmental regulations may be promulgated which
could delay regulatory approval of our potential products. We cannot predict the
impact of adverse governmental regulation which might arise from future
legislative or administrative action.
We intend to generate product revenues from sales outside of the United
States. Distribution of our testing services or products outside the United
States may be subject to extensive government regulation. These regulations,
including the requirements for approvals or clearance to market, the time
required for regulatory review and the sanctions imposed for violations, vary by
country. It is uncertain whether we will obtain regulatory approvals in such
countries or that we will be required to incur significant costs in obtaining or
maintaining our foreign regulatory approvals. Failure to obtain necessary
regulatory approvals or any other failure to comply with regulatory requirements
could result in reduced revenues and earnings. See "Products and Services" at
page 25 and "Government Regulation" at page 42.
12
<PAGE> 17
PRODUCT LIABILITY EXPOSURE
Our business exposes us to potential liability risks inherent in the
testing and marketing of medical and dental related services or products. It is
uncertain whether liability claims will be asserted against us. We have product
and professional liability insurance which we believe provides coverage for the
testing and commercial introduction of our genetic susceptibility tests. It is
uncertain whether we will be able to maintain such insurance on acceptable
terms. Any insurance obtained may not provide adequate coverage against
potential liabilities. A liability claim, even one without merit, could result
in significant legal defense costs thereby increasing our expenses, lowering our
earnings and even resulting in losses.
DEPENDENCE ON CLINICAL LABORATORY
The clinical laboratory operated by Baylor University currently performs
all of our genetics tests. Our company is not licensed as a clinical laboratory
and cannot perform genetic tests. Although we believe other clinical
laboratories are readily available if we cannot use Baylor University, the loss
of Baylor University may result in delays in the performance of genetic tests or
may increase the costs of performing genetic tests.
ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF GENETIC SUSCEPTIBILITY TESTING
The prospect of broadly available genetic susceptibility testing has raised
issues which are currently being widely discussed by the medical and scientific
communities, as well as other interested groups and organizations, regarding the
appropriate utilization and the confidentiality of information provided by such
testing. The recent movement towards discovery and commercialization of
susceptibility tests for assessing a person's likelihood of developing a chronic
disease has also focused public and legislative attention on the need to protect
the privacy of genetic assessment medical information. With the progression
towards more comprehensive record keeping by health insurers and managed care
firms, this need has led to a number of legal initiatives. The recently enacted
federal health insurance reform law (Kassebaum-Kennedy of 1996) recognizes the
comparability of information obtained by genetic means to other types of
personal medical information. The law prohibits insurance companies from
refusing health insurance coverage to individuals on the basis of their medical
history, including "genetic information." This legislation also prohibits
employees from discrimination in hiring practices on the same basis. This
legislation indicates a trend to protect the privacy of patients while allowing
them to be screened for conditions which, can be prevented, reduced in severity
or cured. In the most extreme scenario, governmental authorities could, for
social or other purposes, limit the use of genetic testing or prohibit testing
for genetic susceptibility to certain conditions. For these reasons, we could
experience a delay or reduction in test acceptance. Such a delay or reduction
could reduce our revenues or result in losses.
We are taking a proactive stance in the ethical arena. We have engaged Dr.
Philip Reilly, who is both an M.D. (certified specialist in clinical genetics)
and an attorney, to advise us in the area of genetic testing and its ethical,
legal and clinical utility ramifications. Additionally, we are currently
advising doctors who administer our genetic susceptibility tests to take special
efforts to maintain the confidentiality of the test results. Our intent is to
avoid information about test results being disclosed to insurers until issues
regarding insurability have been fully analyzed and acted upon by the
appropriate legislative bodies.
On August 1, 1997, we formed a joint venture named Digisphere, LLC whose
purpose, in part, will be to provide marketing information to those patients who
test positive on one of our tests and who subsequently send in a business reply
card seeking more information. See "Product Development" at page 34. The
confidentiality of patient information is subject to regulation by state law. A
variety of statutes and regulations exist safeguarding privacy and regulating
the disclosure and use of medical information. State constitutions may provide
privacy rights and states may provide private causes of action for violations of
an individual's "expectation of privacy." Tort liability may result from
unauthorized access and breaches of patient confidence. We intend to comply with
state law and regulations governing medical information privacy.
13
<PAGE> 18
DEPENDENCE ON KEY PERSONNEL AND CONSULTANTS
Because of the specialized scientific nature of our business, we are highly
dependent upon our ability to attract and retain qualified management,
scientific and technical personnel. Our company will also be dependent upon the
ability to hire qualified marketing and sales personnel. Competition for
scientific, marketing and sales personnel is intense. Loss of the services of
Mr. White, Dr. Kornman or Dr. Newman could adversely affect our research and
development programs and susceptibility testing service business and could
impede the achievement of our business objectives. We do not maintain key man
life insurance on any of our personnel.
CONTROL BY EXISTING SHAREHOLDERS
Following completion of this offering, our directors, executive officers
and certain of their affiliates, will beneficially own approximately 66.86% of
our outstanding Common Stock. Accordingly, these shareholders, individually and
as a group, may be able to influence the outcome of shareholder votes, including
votes concerning the election of directors, the adoption or amendment of
provisions in our Amended and Restated Articles of Incorporation or Amended and
Restated By-Laws and the approval of certain mergers and other significant
corporate transactions, including a sale of substantially all of our assets.
Such control by existing shareholders could have the effect of delaying,
deferring or preventing a change in control. See "Principal Shareholders" at
page 51.
DILUTION; ABSENCE OF DIVIDENDS
Purchasers in the offering will experience immediate and substantial
dilution in the net tangible book value of the Common Stock from the public
offering price. Additional dilution is likely to occur upon the exercise of any
options or warrants that we have granted. See "Dilution" at page 19. We have
never paid dividends and do not intend to pay any dividends in the foreseeable
future. See "Description of Securities" at page 52.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
this offering could lower the market price of the Common Stock. Of the 5,238,007
shares of Common Stock to be outstanding after this offering (assuming no
exercise of outstanding options, warrants or the overallotment option),
1,500,000 shares will be freely tradeable without restriction. Upon expiration
of the lock-up agreements entered into by the officers and directors of our
company, an additional 3,258,053 shares will become eligible for sale one year
from the closing of this offering, subject to the provisions of Rule 144. See
"Shares Eligible for Future Sale" at page 53. Of the remaining 479,954 shares of
Common Stock, 5,000 shares will be eligible for resale under Rule 144 following
this offering. The remaining 474,954 shares will have been held for less than
one year and will become eligible for sale at various dates as the one-year
holding period under Rule 144 is satisfied.
In addition, we intend to file a registration statement on Form S-8 with
respect to the shares of Common Stock issuable upon exercise of options under
the 1996 Equity Incentive Plan (the "Plan"). The Plan authorizes the issuance of
options relating to up to 1,000,000 shares of Common Stock. Currently, there are
800,579 options that have been issued under the Plan which generally vest over
three years. See "1996 Equity Incentive Plan" at page 48. Upon filing of such
registration statement, the holders of such options may, subject to vesting
requirements, exercise and sell their shares immediately without restriction,
except affiliates who are subject to certain volume limitations and manner of
sale requirements of Rule 144. See "Shares Eligible for Future Sale" at page 53.
Holders of 356,545 warrants to purchase shares are entitled to certain
registration rights with respect to such shares. Upon registration, such shares
may be sold in the market without limitation. See "Registration Rights" at page
53. Sales of such shares may decrease the market price for our Common Stock. See
"Underwriting" at page 55.
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<PAGE> 19
IMPACT UPON FUTURE NET INCOME OR LOSS OF THE COMPANY BY CURRENT ACCOUNTING FOR
DEBT ISSUANCE COSTS
From August 1, 1997 through October 6, 1997, the Company issued Bridge
Loans to investors in the aggregate amount of $1,780,000. In connection with the
issuance of these Bridge Loans, the Company also issued 356,545 warrants to
purchase the Company's Common Stock for $5.50 per share. The Company has
determined that additional financing expense of $356,545 needs to be recognized
in connection with the issuance of these warrants. The $356,545 of additional
financing cost is currently being amortized over fourteen months, the terms of
the Bridge Loans. However, upon completion of the initial public offering, the
$1,780,000 Bridge Loans will be repaid and the unamortized amount of the
additional financing costs will be charged to earnings as an extraordinary loss
on debt extinguishment and will significantly impact the net income or loss of
the Company in the quarter in which the initial public offering is completed.
ARBITRARY OFFERING PRICE OF THE COMMON STOCK; POSSIBLE VOLATILITY OF COMMON
STOCK PRICE
The initial public offering price of the Common Stock has been determined
by negotiations between our company and the Underwriter. The initial public
offering price bears no relationship to earnings, asset values, book value or
any other recognized criteria of value. See "Underwriting" at page 55.
The market prices for securities of emerging health care companies have
been highly volatile. Announcements may have a significant impact on the market
price of the Common Stock. Such announcements may include biological or medical
discoveries, technological innovations or new commercial services by us or our
competitors, developments concerning proprietary rights, including patents and
litigation matters, regulatory developments in both the United States and
foreign countries, public concern as to the safety of new technologies, general
market conditions as well as quarterly fluctuations in our revenues and
financial results and other factors. The stock market has from time to time
experienced extreme price and volume fluctuations which have particularly
affected the market prices for emerging and biotechnology companies and which
have often been unrelated to the operating performance of such companies. These
broad market fluctuations may adversely affect the market price of our Common
Stock. In the past, following periods of volatility in the market price of a
company's stock, securities class action litigation has occurred against the
issuing company. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which could have a material
adverse effect on our revenues and earnings. Any adverse determination in such
litigation could also subject us to significant liabilities.
EFFECT OF PREFERRED STOCK AND DIRECTOR REMOVAL PROVISIONS
Our Board of Directors is authorized to issue up to 5,000,000 shares of
Preferred Stock and to determine the price, rights, preferences and privileges
of those shares without any further vote or action by our shareholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any shares of Preferred Stock that may
be issued in the future. While we have no present intention to issue shares of
Preferred Stock, such issuance, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of our outstanding voting stock. In addition, such Preferred Stock may have
other rights, including economic rights, senior to the Common Stock. As a
result, the issuance of Preferred Stock could decrease the market value of the
Common Stock.
Our Amended and Restated Articles of Incorporation provide that members of
the Board of Directors may be removed only for cause upon the affirmative vote
of holders of at least a majority of the shares of our outstanding capital stock
entitled to vote. Certain other provisions of our Amended and Restated Articles
of Incorporation could also have the effect of delaying or preventing changes of
control or in management. Such a delay or preventive effect could adversely
affect the price of our Common Stock.
15
<PAGE> 20
THE COMPANY
Drs. Kenneth S. Kornman and Michael G. Newman founded the Company in 1986
to develop and introduce new methods, tools and technology for dental
practitioners that would better predict treatment outcomes in patients. We
derived our initial revenue primarily from contract research to pharmaceutical
companies and others. In early 1992, we expanded our contract research program
to include both medical and dental research. In 1994, we implemented an internal
product discovery program. We then used profits generated from our contract
research programs to fund our own product research and development.
We originally operated under two separate Texas corporations, known as Oral
Science Systems and Oral Science Technologies. In August 1995, Oral Science
Systems was merged into Oral Science Technologies which changed its corporate
name to Medical Science Systems, Inc. ("MSS"). MSS continued to function as a
Subchapter "S" corporation until September 30, 1996, when it became a "C"
corporation. MSS' principal executive office is located at 4400 MacArthur
Boulevard, Suite 980, Newport Beach, California 92660, and may be reached by
telephone at (714) 550-9730. MSS maintains a website located at
http://www.medscience.com.
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<PAGE> 21
USE OF PROCEEDS
If all 1,500,000 shares of Common Stock offered by this Prospectus are
sold, we will receive net proceeds of approximately $11,660,000 (assuming the
public offering price is $9.00, and assuming the over-allotment option is not
exercised). If the Underwriters exercise the over-allotment option, our company
would receive an additional $1,802,250. Net proceeds are determined after
deduction of all commissions, discounts and expenses paid to the Underwriters
(estimated to be $1,485,000) and after all expenses of the offering (estimated
to be $355,000).
We intend, in the following order of priority, to use the net proceeds from
this offering to:
<TABLE>
<CAPTION>
PERCENTAGE
AMOUNT NET PROCEEDS
------------ -------------
<S> <C> <C>
Marketing, sales, customer service and commercialization
expenses.................................................. $ 5,200,000 44.60%
-- Expenses for sales and marketing in conjunction with
the market introduction of each susceptibility test.
Such expenses include market research studies,
marketing collateral materials, trade show
participation, public relations, advertising
expenses and sales and marketing personnel.
Research and development activities......................... 1,450,000 12.43%
-- Continuation of clinical trials for genetic
susceptibility tests under development, to provide
clinical utility data, amortization of capitalized
patent expense beginning when each patent issued and
salaries of research and development personnel.
Capital Investments......................................... 300,000 2.57%
-- Expenditures for computer equipment, furniture and
fixtures primarily related to increases in
personnel.
Repayment of Bridge Loans(1)................................ 1,780,000 15.27%
Working capital and general corporate purposes.............. 2,930,000 25.13%
----------- ------
TOTAL............................................. $11,660,000 100.00%
=========== ======
</TABLE>
- ---------------
(1) The proceeds of the Bridge Loans were applied and utilized in the following
manner: $7,000 (cost of bridge financing, including legal expenses);
$125,000 (initial public offering expenses); $600,000 (operating expenses,
August and September 1997); $300,000 (operating expenses, October 1997); and
$748,000 (remaining on balance as of October 29, 1997).
The amount and timing of working capital expenditures may vary
significantly depending upon numerous factors, including the progress of our
research, discovery and development programs, the timing and costs involved in
obtaining regulatory approvals, the costs involved in filing, prosecuting and
enforcing patent claims, competing technological and market developments,
payments received under collaborative agreements, changes in collaborative
research relationships, the costs associated with potential commercialization of
our products, including the development of marketing and sales capabilities, the
cost and availability of third-party financing for capital expenditures and
administrative and legal expenses.
We believe that our available cash and existing sources of funding,
together with the proceeds of this offering and interest earned thereon, will be
adequate to maintain our current and planned operations for at least the next 18
months.
Until used, we intend to invest the net proceeds of this offering in
interest-bearing, investment-grade securities. While the net proceeds are so
invested, the interest earned by us on such proceeds will be limited by
available market rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" at page 21. We intend to invest and use
such proceeds so as not to be considered an "investment company" under the
Investment Company Act of 1940, as amended.
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<PAGE> 22
DIVIDEND POLICY
Holders of shares of Common Stock are entitled to dividends when, as and if
declared by the Board of Directors, out of funds legally available therefor. We
have not yet paid any dividends and do not expect to do so in the foreseeable
future. We intend to use all retained earnings for working capital and to
finance the anticipated growth and expansion of our business.
CAPITALIZATION
The following table sets forth our capitalization (i) as of September 30,
1997; (ii) on a pro forma basis after giving effect to the issuance of $230,000
in Bridge Loans subsequent to September 30, 1997 as if the issuance of Bridge
Loans occurred on September 30, 1997; and (iii) on a pro forma basis as adjusted
to give effect to the receipt of net proceeds from the sale of 1,500,000 shares
of Common Stock offered hereby after deducting underwriting discounts and
commissions and estimated offering expenses:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long term debt and obligations under capital leases, less
current portion(1), and Bridge Loans....................... $ 2,169 $ 2,399 $ 619
------- --------- -----------
Shareholders' equity:
Preferred Stock, 5,000,000 shares authorized; none issued
and outstanding actual, pro forma or pro forma as
adjusted................................................ -0- -0- -0-
Common Stock, no par value, 10,000,000 shares authorized;
3,738,007 shares issued and outstanding; 3,738,007
shares issued and outstanding pro forma; 5,238,007
shares issued and outstanding pro forma as
adjusted(2)............................................. 2,450 2,450 14,441
Accumulated deficit........................................ (3,914) (3,914) (4,245)
------- --------- -----------
Total shareholders' equity.............................. (1,464) (1,464) 10,196
------- --------- -----------
Total capitalization.................................. $ 705 $ 935 $10,815
======= ======== =========
</TABLE>
- ---------------
(1) As of September 30, 1997, the current portion of obligations under long term
debt and capital leases was approximately $187,959.
(2) Excludes (i) 356,545 shares of Common Stock subject to Bridge Warrants,
exercisable at $5.50 per share; (ii) 800,579 shares of Common Stock subject
to outstanding options under our 1996 Equity Incentive Plan, exercisable at
$3.70 or $5.00 per share; (iii) 199,421 shares of Common Stock reserved for
issuance pursuant to our 1996 Equity Incentive Plan; (iv) the exercise of
the Underwriters' over-allotment option; and (v) 150,000 shares of Common
Stock subject to Underwriters' Warrants, exercisable at one hundred
thirty-five percent (135%) of the initial public offering price of the
Common Stock. See "Description of Securities" at page 52.
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<PAGE> 23
DILUTION
As of September 30, 1997, there were 3,738,007 shares of our Common Stock
outstanding, having a negative net tangible book value per share of
approximately $(0.46). Net tangible book value per share represents the amount
of our total tangible assets less our total liabilities, divided by the number
of shares of our Common Stock outstanding.
After giving effect to the sale of the 1,500,000 shares of Common Stock
under this offering at a price of $9.00 per share and the application of the net
proceeds therefrom (but assuming none of the options or warrants are exercised),
there would be a total of 5,238,007 shares of our Common Stock outstanding with
a net tangible book value of approximately $1.90 per share. This would represent
an immediate increase in net tangible book value of $2.36 per share to existing
shareholders and an immediate dilution of $7.10 per share to new investors.
Dilution is determined by subtracting net tangible book value per share after
the offering from the amount paid by new investors per share of Common Stock.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................. $9.00
Net tangible book value per share as of September 30, 1997........ $(0.46)
Increase attributable to new investors............................ 2.36
Adjusted net tangible book value per share after this offering...... 1.90
-----
Dilution per share to new investors................................. $7.10
=====
</TABLE>
The following table summarizes, on a pro forma basis, as of September 30,
1997, the difference between the existing shareholders and the new investors
with respect to the number of shares of Common Stock purchased from our company,
the total consideration paid and the average price per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 3,738,007 71.36% $ 2,190,600 13.96% $0.59
New investors............... 1,500,000 28.64 13,500,000 86.04 $9.00
--------- ------ ----------- ------
Total....................... 5,238,007 100.00% $15,690,600 100.00%
========= ====== =========== ======
</TABLE>
The foregoing table assumes (i) no exercise of the Underwriters'
over-allotment option; (ii) no exercise of the 150,000 Underwriters' Warrants;
(iii) no exercise of the 356,545 Bridge Warrants, exercisable at $5.50 per
share; and (iv) no exercise of stock options outstanding after September 30,
1997. As of September 30, 1997, there were options outstanding to purchase a
total of 800,579 shares of Common Stock under our 1996 Equity Incentive Plan, at
a weighted average exercise price of $4.37 per share. To the extent that any of
the shares of Common Stock are issued on exercise of any of these warrants,
options or additional options granted after September 30, 1997, there will be
further dilution to new investors. See "Description of Securities" at page 52.
19
<PAGE> 24
SELECTED FINANCIAL DATA
We are providing the following selected financial data to aid you in your
analysis of this potential investment. This information was derived from: (1)
our 1995 and 1996 historical financial statements; and (2) from our internally
prepared unaudited financial statements for the nine-month periods ended
September 30, 1996 and 1997. Our financial statements as of December 31, 1995
and 1996 with the notes thereto and the related reports of Singer Lewak
Greenbaum & Goldstein LLP, independent public accountants, together with our
internally prepared unaudited financial statements for the nine-month periods
ended September 30, 1996 and 1997 are included elsewhere in this Prospectus. Our
unaudited financial statements, in the opinion of management, include all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of our financial position and results of operations for the
unaudited interim periods. The selected financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" at page 21 and our financial statements and
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
DECEMBER 31, 1996 DECEMBER 31, 1995 1997 1996
----------------- ----------------- ----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues..................... $ 1,919 $ 1,873 $ 152 $ 1,905
Cost of sales................ 548 368 149 538
---------- ---------- ---------- ----------
Gross profit (loss).......... 1,371 1,505 3 1,367
Expenses:
Research and development... 958 582 785 682
Selling, general and
administrative.......... 1,163 756 2,164 776
---------- ---------- ---------- ----------
Total expenses.......... 2,121 1,338 2,949 1,458
---------- ---------- ---------- ----------
Operating income (loss)...... (750) 167 (2,946) (91)
Other income (expense),
net........................ (33) (14) (96) (6)
Provision for income taxes... (6) (3) -0- -0-
Net income (loss)............ $ (789) $ 150 $ (3,042) $ (97)
========== ========== ========== ==========
Earnings (loss) per share.... $ (.18) $ .03 $ (.71) $ .(02)
========== ========== ========== ==========
Shares used in computing
earnings (loss) per
share(1)................... 4,288,436 4,288,436 4,288,436 4,288,436
========== ========== ========== ==========
</TABLE>
- ---------------
(1) Includes all shares issuable upon the exercise of options and warrants
granted within one year prior to the date of this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------------------
(UNAUDITED)
(IN THOUSANDS)
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------ -------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... 870 1,100 10,980
Working capital.................................... 168 398 10,278
Total assets....................................... 1,437 1,667 11,547
Total shareholders' equity......................... (1,464) (1,464) 10,196
</TABLE>
- ---------------
(1) On a pro forma basis after giving effect to the issuance of $230,000 in
Bridge Loans subsequent to September 30, 1997 as if the issuance of Bridge
Loans occurred on September 30, 1997.
(2) On a pro forma as adjusted basis to give effect to the receipt of net
proceeds from the sale of 1,500,000 shares of Common Stock offered hereby
after deducting underwriting discounts and commissions and estimated
offering expenses.
20
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Financial Statements and related Notes contained elsewhere in this
Prospectus. This Prospectus contains forward-looking statements which involve
risks and uncertainties. Our actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" at page 8.
OVERVIEW
Since inception, we have devoted substantially all of our resources to
maintaining our research and development programs and supporting contract
research agreements. To date, we have received limited revenues from the sale of
our periodontal susceptibility test. Revenues received by us have historically
been payments pursuant to contract research agreements. For the fiscal year
ended December 31, 1996, we had a net loss of $789,000 and as of December 31,
1996 had a shareholder deficit of $700,000.
We had two research contracts with Alpharma, Inc. ("Alpharma") for the
clinical investigation of Alpharma's proprietary periodontitis antibiotic
product. These contracts and the payments associated therewith ended in June
1996.
We intend to enter into additional contract research agreements to assist
in the funding of our own internal research projects. There can be no assurance
that we will be able to enter into additional contract research agreements on
terms acceptable to us. We could incur losses for at least the next several
years, primarily due to expansion of our research and development programs,
increasing staffing costs and expansion of our facilities. Additionally, we
expect to incur substantial sales, marketing and other expenses in connection
with launching our genetic susceptibility testing business. We expect that
losses will fluctuate from quarter to quarter and that such fluctuations may be
substantial.
We devoted significant resources during the last fiscal year to the beta
testing and validation of our genetic susceptibility test related to
periodontitis, as well as building our sales and marketing force in preparation
for the commercial launch of the periodontal susceptibility test. Additional
outlays have been expended on the hiring of additional customer service
personnel and the associated increase in use of test materials and commercial
laboratory charges. We also incurred increased development expenses during the
year related to work on developing our genetic susceptibility tests for
osteoporosis, coronary artery disease and diabetic retinopathy. We expect
research and development expenses to continue to increase as personnel and
research and development facilities are expanded.
Selling, general and administrative expenses for the year ended December
31, 1996 increased $407,000 from the year ended December 31, 1995. The increase
was attributable to sales and marketing expenses related to the upcoming launch
of our periodontal susceptibility test and salaries and benefits paid to
existing and newly hired sales and marketing employees. We recently commercially
launched our periodontal susceptibility test on October 3, 1997. Additionally,
we expect that our general and administrative expenses will continue to increase
in support of our research and development efforts and the anticipated growth of
our genetic susceptibility testing business.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996.
Revenues for the nine months ended September 30, 1997 decreased by
$1,753,000 due to the decrease in contract research agreements. Research and
development expenses of $785,000 for the nine months ended September 30, 1997
were comparable to the $682,000 for the same period in 1996. The research and
development expenses are attributed to development expenses during the period
related to work on developing our genetic susceptibility tests for
periodontitis, osteoporosis, coronary artery disease and diabetic retinopathy.
Selling, general and administrative expenses increased by $1,388,000 for the
nine month period ended September 30, 1997 compared with the same period in
1996. The increase in 1997 was primarily due to
21
<PAGE> 26
the hiring of additional sales and marketing personnel and costs related to the
pre-commercial launch of our periodontal susceptibility test.
Interest income for the nine months ended September 30, 1997 decreased by
$6,000 primarily due to decreased funds available for investment. Interest
expense for the nine months ended September 30, 1997, amounted to $73,000, an
increase of $59,000 over the same period in 1996. The increase was due primarily
to an increased working capital line of credit, a long term loan with Bank of
America and the Bridge Loans.
The net loss for the nine months ended September 30, 1996 was $97,000
compared to $3,042,000 for the nine months ended September 30, 1997. The
difference is a result of the increased research and development expenses,
increased selling, general and administrative expenses and the decrease in
research contract revenues.
YEARS ENDED DECEMBER 31, 1996 AND 1995.
Revenues for the year ended December 31, 1996 increased by $46,000.
Research and development expenses increased to $958,000 for the year ended
December 31, 1996 from $582,000 for the year ended December 31, 1995. The
increase in research and development expenses is attributed to development
expenses during the period related to work on developing our genetic
susceptibility tests for periodontitis, osteoporosis, coronary artery disease
and diabetic retinopathy. Selling, general and administrative expenses increased
to $1,163,000 for the year ended December 31, 1996 from $756,000 for the year
ended December 31, 1995. The increase in 1996 was primarily due to the hiring of
additional personnel and costs related to the pre-commercial launch of our
periodontal susceptibility test.
Interest income for the year ended December 31, 1996 increased to $9,000
from $0 for the prior year, due to the increased funds available for investment.
These funds were raised in our private placement of common stock in starting in
November 1996 and through our contract research agreements with various
companies. Interest expense for the year ended December 31,1996, amounting to
$34,000, was due entirely to a working capital line of credit and a long term
loan with Bank of America.
The net income for the year ended December 31, 1995 was $150,000 compared
to a net loss of $789,000 for the year ended December 31, 1996. The difference
is a result of the increase in research and development expense, the increase in
selling, general and administrative expenses and the decrease in research
contract revenues.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations from inception through contract research
revenues and more recently through sales of common stock and borrowings. During
1997 we have received $1,882,000 in net proceeds from private placements of our
Common Stock. We raised an additional $1,780,000 through a debt/warrant offering
from August 1, 1997 through October 6, 1997.
We have also, for working capital purposes, entered into term loans with a
bank to effect borrowings originally in the amounts of $500,000 and $250,000. As
of September 30, 1997, our borrowings under the term loans were $483,000 and
$185,000, respectively.
As of September 30, 1997, our company had $870,000 in cash and cash
equivalents.
During the nine months ended September 30, 1997 and 1996, and the fiscal
years ended December 31, 1996 and 1995, our cash provided by (used in)
operations used in was $(2,469,000), $(23,000), $(442,000) and $112,000,
respectively. The cash used for operations was primarily to fund research and
development and sales and marketing expenses related to the introduction and
support of our genetic susceptibility tests.
We expect to use a portion of the net proceeds of this offering for
expanding sales and marketing efforts, funding of clinical studies, increasing
production or commercialization capacity, customer service and funding research
and development, the repayment of the investor Bridge Loans, as well as for
working capital and general corporate purposes. A portion of the proceeds may
also be used for investments in or acquisitions of complementary businesses,
products or technologies. See "Use of Proceeds" at page 17.
22
<PAGE> 27
BUSINESS
GENERAL DESCRIPTION
We provide genetic susceptibility testing services for common diseases that
are treatable and preventable. We have focused on four diseases initially:
periodontitis (gum disease), osteoporosis (bone disease), coronary artery
disease (heart disease) and diabetic retinopathy (blindness associated with
diabetes). Our tests identify genetic markers which, if present in a patient,
increase the probability that such patient will be affected by the disease or
that the disease will progress more rapidly and become more severe. Doctors and
dentists will use our genetic susceptibility tests to assess the risk involved
for individual patients and to adopt appropriate treatments or therapy,
including preventive measures. Our genetic tests will allow early determination
of genetic predisposition to these four diseases with the following potential
benefits:
(1) Patients with genetic predisposition to a disease may adopt health
care and lifestyle changes that will delay or prevent onset of the
disease or reduce disease severity;
(2) Early detection of genetic predisposition will allow doctors and
dentists to select the most appropriate (i) preventive strategy
where no disease symptoms are present or (ii) course of treatment
once the patient develops the disease; and
(3) Earlier and better treatment selection will motivate patients and
improve outcomes.
Our tests assist doctors in the development of better preventive treatment
strategies, aid patients in making more informed decisions, and help payers to
target healthcare investments where they make the biggest difference. We believe
that this will contribute to a better quality of life, while directing
healthcare resources to individuals who derive the greatest benefit.
Accordingly, our mission is to improve patient care and treatment outcomes by
incorporating genetic information regarding disease susceptibility into overall
risk assessment and treatment planning.
SCIENTIFIC BACKGROUND
Genetic Testing. For many years it was well accepted that genetics
influenced much of our health and behavior. Scientists frequently noted that
certain diseases "ran in families." The clear genetic influence on disease was
only known, however, for a few uncommon or rare conditions such as Down's
Syndrome or Tay-Sachs Disease. Such conditions involve either a major
abnormality in a chromosome or a genetic defect that is strong enough by itself
to cause a clinical problem. Both types of genetic abnormalities are so powerful
that they are usually evident in childhood.
Some diseases, such as Down's Syndrome, are essentially entirely genetic.
Others are essentially entirely environmental, such as an infected cut. The
purely genetic conditions tend to be rare, or at least uncommon. For example,
the defects in the gene associated with breast cancer are involved in only 5% to
10% of all breast cancers. Accordingly, 90% to 95% of all breast cancers are
caused by some other factor or factors.
Most of the common chronic diseases that cause the greatest debilitation
and cost for adults are diseases in which genetics interact with other factors,
such as lifestyle or environmental challenges to the body. We refer to such
diseases as "multi-factorial" because numerous factors contribute to the disease
(Figure 1). For example, while it has been demonstrated that there is a genetic
influence on the susceptibility to periodontitis, research has also shown that
periodontitis is influenced by factors such as smoking and oral hygiene.
23
<PAGE> 28
FIGURE 1
[CHART DEPICTING BIOLOGICAL AND BEHAVORIAL RISK FACTORS CONTRIBUTING TO DISEASE
PROGRESSION]
Source: Chart developed by Medical Science Systems, Inc. Copyright Medical
Science Systems, Inc.
In multi-factorial diseases the genetic influence is not due to a "genetic
defect" but a normal variation within the population. For example, for a
specific gene, 20% to 30% of the population may have a slight variation in the
genetic code that alters the function of that gene just enough under certain
environmental challenges that a specific disease is accelerated (Figure 1).
Since these variations are multiple forms of the same gene, they are called
genetic polymorphisms or genetic markers.
If the genetic polymorphisms associated with a common disease can be
identified, it is possible to predict those at high risk for disease and alter
the individual's lifestyle or provide early medication to prevent clinical
disease. If the polymorphism can be shown to actually be involved functionally
in accelerating the disease, then that information may be used to develop
innovative new treatments or preventive agents.
For example, it is well established that two proteins, interleukin-1
("IL-1") and tumor necrosis factor ("TNF") play a central role in many chronic
diseases that have inflammatory components. We have discovered specific genetic
variations that influence how much IL-1 and TNF are produced in the body. Our
findings in periodontal disease provide an example of how this works. Normally,
the body produces IL-1 and TNF in responses to a bacterial infection to help
activate the inflammatory and immune responses that will fight the infection.
This happens without producing any longlasting tissue damage. In a person where
a certain genetic variation exists, excessive levels of IL-1 or TNF are
produced. This causes an inflammatory response that may lead to tissue damage.
Our research revealed that individuals with two specific polymorphisms in the
IL-1 genes were predisposed to more severe periodontitis. Our periodontal
susceptibility test determines whether an individual has such a genetic
predisposition.
In general, it may be said that the early detection of a predisposition to
genetic diseases presents the best opportunity for medical intervention. Early
genetic diagnosis may improve the prognosis for a patient through supervision
and early intervention before the clinically detectable disorder occurs.
24
<PAGE> 29
PRODUCTS AND SERVICES
Genetic Susceptibility Test for Periodontal Disease (Patent Pending).
DESCRIPTION OF PERIODONTAL DISEASE TEST. Our first genetic susceptibility
test detects a genetic susceptibility to severe gum disease (periodontitis).
Periodontitis is a bacterially-induced chronic inflammation that destroys the
collagen fibers and bone that surround and support the teeth. Untreated,
periodontitis will eventually result in tooth loss.
Periodontitis results from a complex interplay of bacterial infection with
the patient which can often be modified through behavioral factors. The fact
that periodontal disease is both preventable and treatable makes predicting the
host response (or one's susceptibility to the development of periodontal
disease) "wanted information" for the patient and health care provider.
Periodontists have attempted for years to understand why patients with similar
plaque levels and oral bacterial profiles often show remarkably different
clinical characteristics. It is now possible to integrate genetics into overall
risk assessment so clinicians can identify that subset of patients who are
highly susceptible to rapid disease progression and severe periodontitis. This
discovery allows individual patients to be managed in a more targeted and
proactive way.
FIGURE 2
[BAR GRAPH DEPICTING DIFFERING SUSCEPTIBILITY TO PERIODONTITIS IN ADULTS]
Source: K. Kornman et al., Journal of Clinical Periodontology, January 1997.
25
<PAGE> 30
FIGURE 3
[BAR GRAPH DEPICTING DIFFERING BLEEDING RESPONSE ON PROBING IN ADULTS]
Source: Unpublished data analysis based on data developed under the study
reported by K. Kornman et. al, Journal of Clinical Periodontology,
January 1997.
Our periodontal susceptibility test is the result of a scientific
breakthrough in which an association was discovered between a specific IL-1
genotype and severe periodontal disease (Figure 2). IL-1 is a cytokine or
protein that is known to play a role in inflammation and the expression of
periodontal disease. Patients with this specific genotype have been found to
progress more rapidly towards severe periodontal disease and show increased
bleeding on probing (Figure 3). It has also been determined that cells with this
genotype produce as much as four times more IL-1 in response to the same
bacterial challenge. Since IL-1 in high concentrations is known to be
destructive to tissues, this may explain the more rapid progression of
periodontal disease experienced by patients with this specific IL-1 genotype
when faced with a bacterial challenge. Prevention or therapeutic intervention
aimed at reducing the bacterial challenge should decrease the stimulus for IL-1
production and thereby protect the patient against the potentially destructive
effects of this genotype. It is estimated that approximately 30% of the
population will test positive for this genotype.
We have developed our periodontal susceptibility test and continue to be
governed by a project agreement between our company and Sheffield University.
See "Competitive Advantages" at page 40.
A patent application related to the detection of genetic predisposition to
periodontal disease has been filed and assigned to us from Sheffield University,
Dr. Gordon Duff and Dr. Kenneth Kornman. We have received a Notice of Allowance
from the U.S. Patent and Trademark Office related to the patent's anticipated
issuance.
MARKET FOR PERIODONTAL SUSCEPTIBILITY TEST. The American Academy of
Periodontology estimates that:
"$5 billion was spent in 1990 to treat gingivitis and periodontal
disease, more than $10 billion is spent annually for the replacement of
teeth lost to periodontal disease, that 80% of all employed American
adults have some stage of periodontal disease and that periodontal
disease is the primary cause of tooth loss in adults 35 years and
older."
26
<PAGE> 31
In general, population based studies indicate that gingivitis (that is,
mild gum disease) affects 50% of the adult population. Studies also show that
periodontitis affects between 30% to 35% of U.S. adults and increases with age
after 35. Many of the affected individuals have mild clinical disease, but it
appears that 20% of the adult population have a level of periodontitis which
requires professional treatment.
The early identification of those individuals susceptible to severe
periodontal disease would allow for more aggressive prevention and treatment of
the disease. Early intervention is the key to preventing or stopping the
progression of the disease in order to minimize permanent loss of bone that
supports the teeth. Most periodontal disease is currently diagnosed only after
significant damage has already occurred. The patient is frequently referred to a
specialist if the patient does not respond to conventional cleaning therapy and
continues to experience substantial additional bone loss. The current dilemma is
the inability to differentiate between those patients likely to respond to the
normal conservative approaches such as scaling and root planing, oral hygiene
improvement and more regular dental visits, and those which will likely go
rapidly downhill despite customary therapy. Those who have periodontal disease
and are susceptible to the severe form of periodontitis need more aggressive
care such as more frequent monitoring and periodontal cleanings, earlier
treatment with drugs or even early surgical intervention in severe cases.
Early identification of patients at high risk for periodontitis will allow
general practitioner dentists, as well as periodontists, to better focus
resources and confidently choose the most cost-effective therapy. Moreover, use
of our periodontal susceptibility test will allow payors to better monitor
resource utilization and to better design dental insurance plans.
We commercially launched our periodontal susceptibility test on October 3,
1997.
Genetic Susceptibility Test for Osteoporosis (Patent Pending).
DESCRIPTION OF OSTEOPOROSIS SUSCEPTIBILITY TEST. The second genetic test we
are currently developing is a test for susceptibility to osteoporosis.
Osteoporosis, the most common bone disease, resulting in a decrease in the
amount of normal bone which leaves the affected individual more susceptible to
fractures. We have identified a genetic marker that in clinical trials was
associated with a more severe loss of bone through osteoporosis. The
osteoporosis susceptibility test is a genetic test capable of indicating a
greater susceptibility to severe osteoporosis in postmenopausal women. This
susceptibility appears to involve a more rapid loss of bone as estrogen levels
decrease and menopause occurs.
27
<PAGE> 32
We have completed three clinical trials of the osteoporosis susceptibility
test. The first trial focused on the relationship of the genetic test to
bone-mineral density ("BMD") in post-menopausal women with a history of bone
fractures. All three trials confirmed the association between the specific
genetic marker and the onset of osteoporosis (Figure 4).
FIGURE 4
[BAR GRAPH DEPICTING SUSCEPTIBILITY TO POST - MENOPAUSAL OSTEOPOROSIS]
Source: R. Eastell, G. Russell, G. W. Duff and co-workers, unpublished data on
file, Medical Science Systems, Inc.
Our test provides data that will allow practitioners to practice preventive
medicine. Ideally, all females should be tested for this genetic trait by
adolescence so that they are encouraged to develop healthy lifestyles to attain
peak bone mass prior to the onset of menopause. These lifestyles include
avoiding smoking, increasing the intake of calcium, and participating in regular
weight-bearing exercise. Results of this test will also assist women who are
approaching menopause in deciding whether to start treatment. On introduction
into the marketplace, this test will be targeted at all women in their
mid-thirties, the point in their lives when the estrogen level begins to
decrease. This will enable counseling at a sufficiently early stage in the
process that significant bone loss can be avoided through lifestyle modification
and/or drug/hormone therapy.
A patent application related to the method of testing for genetic
predisposition to osteoporosis has been filed and assigned to Sheffield
University. Sheffield University, has in turn, granted to us an exclusive
worldwide license to utilize the underlying patent. Under the terms of our
Project Agreement with Sheffield University, upon our commercialization of the
osteoporosis susceptibility test, Sheffield University is obligated to assign
the patent to us in its entirety. The U.S. Patent and Trademark Office has
recently issued a Notice of Allowance with respect to the aforementioned patent.
MARKET FOR OSTEOPOROSIS SUSCEPTIBILITY TEST. Twenty-eight million Americans
suffer from osteoporosis, of which 85% are women. Post-menopausal osteoporosis,
stemming from the loss of estrogen, affects more than one-half of all women over
65 years of age and has been detected in as many as 90% of women over age 75.
Osteoporosis is responsible for a majority of the 1.5 million bone fractures
each year, leading to disabilities costing more than $10 billion in medical,
social and nursing home costs. In 1991, one out of three
28
<PAGE> 33
American women were 50 years of age or older. The "baby boomer" generation began
to enter this age group in 1996.
In the past, a diagnosis of osteoporosis was made only after an elderly
individual had suffered a bone fracture. The current definition requires that
the individual has lost enough bone to put them at increased risk for fractures.
Since the strength of bones is largely determined by the mineral density of the
bones, an assessment of bone mineral density is currently the most reliable
method for determining whether one has osteoporosis. The diagnosis may therefore
be made by bone densitometry measurements that allow the calculation of the
density of bone relative to normal individuals. The key problem with this
approach is that it is directed at Those individuals who already have the
disease and have manifested symptoms. Although new therapies reverse some bone
loss, their primary benefit is in retarding future bone loss. Given that little
can be done to reverse damage that has already occurred, it appears that the
best management of osteoporosis will involve early detection and prevention.
By identifying at-risk individuals before symptoms appear, the individual
can be counseled to make appropriate life style changes or institute other
treatments. For example, calcium supplements and exercise have been shown to be
valuable preventive factors if used during a critical early age window. Hormone
replacement therapy has also been used successfully to combat osteoporosis
occurring after menopause. Hormone replacement therapy may be of greatest
benefit if used early in the disease process before major bone loss has
occurred. New treatment alternatives for osteoporosis include a class of drugs
that has recently been approved called bisphosphonates. Didronel(TM), a
bisphosphonate manufactured by Procter and Gamble Pharmaceuticals, is available
in much of Europe. Fosamax(TM), another new bisphosphonate produced by Merck,
has recently received FDA approval and is now marketed in the U.S.
Historically, it has been very difficult to reliably identify those women
who are at greater risk for developing severe osteoporosis. Although various
risk factors are strongly associated with osteoporosis, assessment of risk
factors in patients by means of questionnaires has not been a reliable means of
identifying women with low bone density. New urine or blood tests can detect
special chemical markers when the bone is actively being destroyed. However,
these chemical markers, like the bone density measurements, primarily provide
diagnostic information only after significant amounts of bone have been lost.
Unfortunately, the opportunity for increasing bone density by nutrition or
exercise occurs far before osteoporosis is detectable by such means.
Since our marker is genetic, we may test patients at an early age and
identify their risk. This provides the opportunity for disease prevention in the
form of lifestyle changes early enough to make a difference. This test may also
be valuable in selecting patients for early drug intervention to stop
osteoporosis. Such drugs include earlier supplementation with estrogen or a
preemptive use of a bisphosphonate-class drug such as Fosamax(TM).
We anticipate initiating marketing efforts related to a pre-commercial
phase for the osteoporosis susceptibility test in late 1997. See "Market
Development Strategy for Other Susceptibility Tests" at page 37. The full
commercial launch is anticipated to begin sometime in late 1998.
Genetic Susceptibility Test for Coronary Artery Disease (Patent Pending).
DESCRIPTION OF CAD TEST. The third genetic susceptibility test we are
developing is the coronary artery disease test (the "CAD test"). The CAD test is
a genetic test capable of detecting those individuals with a significantly
higher level of susceptibility to coronary artery disease. When an individual
has one copy of this specific genetic marker (i.e., is heterozygous) there is a
2.4 times greater chance of his developing coronary artery disease than the
general population. An individual who has two copies of the genetic marker
(i.e., is homozygous) has a 5.4 times greater chance of developing coronary
artery disease than the general population. It follows that being homozygous for
this particular genetic marker indicates a greater risk for coronary artery
disease than any other single risk factor (Figure 5).
29
<PAGE> 34
FIGURE 5
THE NEWLY IDENTIFIED GENETIC
POLYMORPHISM IS A STRONG RISK-MARKER
FOR CORONARY ARTERY DISEASE
<TABLE>
<CAPTION>
INCREASED RISK
RISK FACTOR/MARKER FOR CAD
------------------------------------ --------------
<S> <C>
Smoking 1 pack/day 2.4
Sedentary lifestyle 1.9
Severe obesity 3.3
Hypertension 2.1
High cholesterol (>240) 2.4
1 copy of new marker 2.4
2 copies of new marker 5.4
</TABLE>
Source: S. Francis, D. Crossman, G. W. Duff and co-workers. Submitted for
publication, 1997. Data on file at Medical Science Systems, Inc.
The availability of our CAD test will provide practitioners with a means of
truly practicing preventive medicine with respect to coronary artery disease.
The CAD test can be given to all individuals early in life because genetic risk
factors do not change over time. Individuals who test positive for the genotype
can be treated with more aggressive approaches to risk factor reduction. As
these individual age, they can be provided with more regular: (i) monitoring of
cholesterol levels; (ii) blood pressure testing; and (iii) early intervention to
alter the level of blood lipids (i.e., fats). Such an approach allows for truly
preventive medicine through early risk factor reduction and appropriate
monitoring for early detection of any problems.
A patent application related to the method of testing for genetic
predisposition to coronary artery disease has been filed and assigned to the
Sheffield University. Sheffield University, has in turn, granted to us an
exclusive worldwide license to utilize the underlying patent. Under the terms of
our Project Agreement with Sheffield University, upon our commercialization of
the CAD test, Sheffield University is obligated to assign the patent to us in
its entirety.
MARKET FOR CAD TEST. More than one in four Americans, or about 60 million,
have some form of cardiovascular disease. Cardiovascular diseases kill nearly
one million Americans every year -- more than all forms of cancer (about
500,000), accidents (about 85,000), and AIDS (about 38,000) combined. Since
1900, cardiovascular disease has been the number one cause of death in the U.S.
every year except 1918 (when there was a world-wide flu epidemic). If all forms
of cardiovascular disease were eliminated, life expectancy would rise by 7.78
years.
Atherosclerosis (or arteriosclerosis) refers to the progressive blockage of
arteries by plaque accumulation. Atherosclerosis is the principle cause of heart
attack, stroke and gangrene of the extremities. It is responsible for 50% of all
deaths in the U.S., Europe and Japan.
If atherosclerosis occurs in the arteries that supply blood to the heart,
then the disease is often referred to as coronary artery disease ("CAD"). CAD
results in heart attacks (myocardial infarctions) due to damage to the heart
muscle when blood supply (and therefore oxygen) is cut off and heart muscle
cells die. Approximately 13.5 million Americans suffer from coronary artery
disease, and approximately half a million Americans die each year from this
disease.
Although many theories exist, the causes and mechanisms of this build-up
are not completely understood. Because of this lack of understanding,
prediction, diagnosis, and treatment of atherosclerosis has centered on the
development of a set of risk factors that help to identify those individuals who
are most at
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risk. The primary approach to treatment for atherosclerosis, once diagnosed,
centers on controlling these risk factors.
Unfortunately, many of the classic risk factors, such as smoking, high
cholesterol levels, and high blood pressure, only account for about half of the
incidence of CAD. Because CAD is the leading cause of death among people in the
U.S., a tremendous amount of research over the past four decades has been
directed at CAD. Initially, serum lipids (e.g., triglycerides and total
cholesterol) were linked with CAD during the 1940s and 1950s These observations
have been refined to focus on high and low density lipoproteins (i.e., "HDLs"
and "LDLs") as potential factors in the cause of the disease and as potential
markers of the disease.
Preventive treatment, including lifestyle changes and drug therapy, is
directed primarily at reducing the risk factors. Treatment strategies usually
involve coronary artery by-pass surgery or angioplasty (i.e., expansion of the
blood vessel), both of which only treat the result and not the root cause(s) of
the disease. Though an increasingly large number of risk factors have been
identified, they still only account for slightly over half of the cases of
atherosclerosis.
The genetic susceptibility test that we are developing may offer a
potential solution to this dilemma. The CAD test is based on a genetic marker
that is associated with an increased susceptibility to coronary artery disease
that substantially exceeded the increased risk of other commonly associated
factors, such as smoking or high cholesterol.
We anticipate initiating marketing efforts related to a pre-commercial
phase for the CAD test in late 1998. See "Market Development Strategy for Other
Susceptibility Tests" at page 37. The full commercial launch is anticipated to
begin in 1999.
Genetic Susceptibility Test for Retinopathy in Diabetics (Patent Pending).
DESCRIPTION OF THE DIABETIC RETINOPATHY TEST. The fourth genetic
susceptibility test we are developing is a test to determine the susceptibility
to sight-threatening retinopathy in diabetics. This susceptibility involves a
continued and increased risk of losing vision when an individual has been
diagnosed with diabetes. The data from our first clinical trial involving over
500 diabetics is shown below (Figure 6). Of the individuals who did not have the
specific genetic marker (genotype negative), approximately 10% developed
sight-threatening retinopathy. The risk for this group remained low and
relatively constant for many years. For genotype positive individuals, however,
the risk continued to increase dramatically until nearly 50% ultimately
developed sight-threatening diabetic retinopathy.
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FIGURE 6
[GRAPH DEPICTING SUSCEPTIBILITY TO DIABETIC RETINOPATHY]
Source: P. Richardson, I. Rennie, G. W. Duff and co-workers. Submitted for
publication, 1997. Data on file at Medical Science Systems, Inc.
Sight-threatening diabetic retinopathy refers to diabetic complications
affecting the retina that predictably lead to severe loss of vision. Retinal
disease is one of numerous problems related to diabetes. Retinal disease is
primarily the result of the disruption of small blood vessels in the retina due
to: (i) capillary leakage; and/or (ii) destruction or obstruction of capillaries
causing damage to the tissues of the retina and the uncontrolled growth of new
blood vessels. Such retinal changes are a leading cause of blindness in the
western world.
A patent application related to the method of testing for the genetic
predisposition to retinopathy in patients with diabetes has been filed and
assigned to Sheffield University. Sheffield University, in turn, has granted us
an exclusive, worldwide license to utilize the underlying patent. Under the
terms of our Project Agreement with Sheffield University, upon our
commercialization of the diabetic retinopathy susceptibility test, Sheffield
University is obligated to assign the patent to us in its entirety.
MARKET FOR DIABETIC RETINOPATHY TEST. In the United States there are
approximately 16 million people suffering from diabetes mellitus (or are
diabetic). It is estimated that only half of this number have been diagnosed.
There are two general categories of diabetes mellitus. Type I diabetes, or
insulin-dependent diabetes mellitus, generally appears in patients under 20
years of age and is marked by severe insulin deficiency. Type I diabetes is
generally detected at its onset and requires insulin treatment to control. Type
II diabetes, or non-insulindependent diabetes mellitus, emerges in patients over
20, may remain undetected for years, and is marked by insulin resistance and an
insulin deficiency. Dietary changes may be able to control Type II diabetes,
however, insulin supplements (that is, injections) are often required. Ninety
percent of all diabetics have Type II diabetes.
Patients with either form of diabetes mellitus are at risk of developing
complications such as problems with their nervous system, kidneys, vision and
heart. Studies have shown that the duration of diabetes is
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associated with the increasing incidence of diabetic complications. Accordingly,
the longer an individual has diabetes, the greater his or her chances of
developing complications. These complications are a major clinical burden in
diabetes, but the origination and development of the disease are not well
understood.
Diabetic retinopathy is one of the most common complications of diabetes.
It is the fourth leading cause of legal blindness in the U.S. and the leading
cause of blindness in people ages 20 to 74. Each year 15,000 to 39,000 people
lose their sight from diabetic retinopathy. Early detection of retinopathy is
critical to the prevention of vision loss. The early stage of this disease is
known as nonproliferative retinopathy. Nonproliferative retinopathy is somewhat
difficult to detect but responds well to treatment. Nonproliferative
retinopathy, if untreated, can deteriorate with a resultant loss of vision.
Although treatment may arrest the condition, it will not restore lost vision.
Proliferative retinopathy is the final state of the disease. At this point,
the disease involves the production or growth of new tissue in and around the
retina. These types of growths can lead to serious vision loss including
blindness. Satisfactory treatment is difficult in advanced proliferative
retinopathy. Surgical procedures used at this stage will themselves result in a
loss of patient vision four percent of the time. Clearly, early treatment of
diabetic retinopathy is desirable.
We have identified a genetic marker that is correlated with an increased
risk of developing diabetic retinopathy in patients who have diabetes. This
correlation seems to indicate an earlier onset of retinopathy in patients who
have diabetes thus putting such individuals at risk of losing their sight at an
earlier age. The availability of such a test would allow practitioners to assess
a patient's risk of losing his or her sight due to diabetes at the time that he
or she is diagnosed with the disease. Preventive treatment would allow doctors
to practice truly preventive medicine, providing a means of identifying
susceptible patients early in the disease process. Enhanced assessment and
monitoring can then be initiated from the start, allowing early detection of
problems and preemptive treatment that will ultimately reduce the incidence of
diabetes related vision loss. This would translate into improvements in patient
quality of life and cost savings.
Confirmatory clinical studies of the diabetic retinopathy susceptibility
test are scheduled for completion in mid-1998. We anticipate initiating
marketing efforts related to a pre-commercial phase for the diabetic retinopathy
susceptibility test sometime in 1998. See "Market Development Strategy for Other
Susceptibility Tests" at page 37. The full commercial launch is anticipated to
begin sometime in 1999.
Testing Procedure. Each of our four genetic susceptibility tests will
require that the following single procedure be utilized. To conduct a genetic
susceptibility test, the doctor will draw a blood sample and submit it to our
customer service department. We will log in the sample and submit sample batches
to the testing laboratory. The laboratory will perform the test following our
specific protocol and inform us of the results. We, in turn, will advise the
doctor of the results, who informs the patient and determines the appropriate
course of action. At the time results are provided to the doctor, our billing
service (which we presently "outsource") will invoice the patient directly for
the test. The doctor will then invoice the patient for his or her professional
services related to administration of the test.
We are currently using Baylor University as our commercial laboratory. We
will continue to use one or more sophisticated, certified, and fully validated
laboratories, such as the Baylor facility, capable of providing consistent and
high quality analysis. Customer service is handled via our toll free "888"
numbers by our own staff who are knowledgeable about our genetic susceptibility
tests, the procedural requirements of the testing system and the related
diseases.
Pre-Marketing Trials/Status of Susceptibility Tests. As an internal
procedural standard, we conduct three categories of clinical trials in
conjunction with our genetic susceptibility tests. The first trial is called a
proof of principle trial, used to prove a laboratory finding. The results of
this trial are utilized to support the initial patent application and therefore
need to be completed before the patent application can be filed. The second
trial is a confirmatory trial. The purpose of the confirmatory trial is to
independently confirm the results of the proof of principle trial. The third
category of trial relates to clinical utility. The clinical utility trial is
conducted to learn what is the most effective utilization of the test in actual
clinical practice. The
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current trial status and actual and anticipated commercial launch date of each
of our four genetic susceptibility tests is depicted below:
STATUS OF CLINICAL TRIALS AND LAUNCH DATES
RELATED TO MSS' GENETIC SUSCEPTIBILITY TESTS
<TABLE>
<CAPTION>
INITIAL PROOF ACTUAL/ANTICIPATED
(PRIOR TO CONFIRMATORY COMMERCIAL
PATENT FILING) TRIAL CLINICAL UTILITY LAUNCH
-------------- ------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Periodontal Disease................ Completed Completed Completed October 1997
Osteoporosis....................... Completed Completed Underway Late 1998
Coronary Artery Disease............ Completed Completed Underway 1999
Diabetic Retinopathy............... Completed Underway Not Yet Started 1999
</TABLE>
Following confirmatory studies, additional trials are completed on larger
populations to help develop broad scientific evidence supporting the clinical
utility of each of our tests. Such additional trials not only strengthen the
support for each tests' known use (i.e., detecting genetic susceptibility) but
also lead to additional practical uses of the susceptibility tests (e.g., use of
the susceptibility tests to determine a patient's responsiveness to a given
drug).
Product Development. Beyond our current four genetic susceptibility tests,
we have on-going research to continue to identify other genetic markers that
appear to be associated with certain other common diseases. We plan on filing
additional patent applications to cover these discoveries. It is our intent to
bring these discoveries to market in the form of additional genetic
susceptibility tests. We have also come upon certain genetic markers that might
be likely candidates to serve as therapeutic targets -- or in other words, be
susceptible to influence by drug agents. We are considering certain
collaborative long term relationships with pharmaceutical companies as a method
to provide for either the licensing of our discoveries or to assist in the
research and development of future products.
There may be additional applications of either our testing services or the
underlying technology that we use to develop and support our genetic testing
services. We will seek to exploit opportunities to develop such additional
applications in conjunction with other companies so long as our company's focus
remains on genetic susceptibility testing. For example, we have recently granted
a worldwide, nonexclusive, nontransferable license to Digisphere, LLC to market
customized versions of our computer modeling technology to pharmaceutical
companies. Previously, we had only used our computer modeling technology for the
internal development of our genetic testing services. On August 1, 1997,
Digisphere, LLC was formed, representing a joint venture between our company and
Nelson Communications Inc. ("NCI"), one of the largest providers of health care
marketing services to pharmaceutical companies in the United States. See
"Transactions with Directors and Executive Officers" at page 50. Ownership of
Digisphere, LLC is divided approximately equally between our company and NCI.
Digisphere, LLC has a stated term which lasts until August 31, 2000, unless
extended. However, the arrangement may be terminated upon mutual agreement or if
certain performance goals are not met. The primary purpose of the joint venture
is to market our computer modeling technology to pharmaceutical companies as a
tool which provides medical education regarding disease progression. A secondary
purpose of the joint venture is to provide marketing information to those
patients who test positive on one of our tests and who subsequently send in a
business reply card seeking more information. In both aspects of the joint
venture, our company will be acting as the technology/information partner and
NCI will be functioning as the marketing partner. As of September 30, 1997, we
have not received any revenues from this joint venture.
MARKET AND SELLING STRATEGIES
General Strategy. Our strategy is to build a commercial operation based on
the delivery of our genetic susceptibility testing services on a worldwide
basis. Our testing services are aimed at multi-factorial diseases which are
treatable and preventable. Our strategy assumes that genetic tests revealing
susceptibility to preventable diseases will ultimately be highly valued by the
public, by clinicians involved in prevention and
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treatment planning, by industries involved in clinical trials and by healthcare
payers and administrators who need to direct limited resources where they will
make the biggest difference.
We intend to utilize a sales and marketing approach which will aim to
improve patient care and treatment outcomes by incorporating genetic information
regarding disease susceptibility into overall risk assessment and treatment
planning. We hope to accomplish this through educating doctors, managed care
organizations, industry and the public about the value of targeting healthcare
investments based on an individual's tendency to develop a specific disease. We
will seek to influence attitudes and mindsets through clearly articulating the
benefit for our customers and adopting a missionary sales approach in
partnership with crusaders in the field. Emphasis will be placed on building
strong relationships with key decision-makers and educators who will work with
us to overcome the obstacles and influence the acceptance of genetic testing,
especially testing that reveals wanted information, as part of the medical
standard of care.
Our initial goal will be to establish genetic tests such as our periodontal
susceptibility test into overall risk assessment and treatment planning for
patients. Ultimately, we envision these tests being used more broadly by
healthcare administrators and practitioners as a screening tool to direct
limited resources in a more targeted and proactive way.
Market Strategy for Specific Tests.
MARKET STRATEGY FOR PERIODONTAL SUSCEPTIBILITY TEST. We plan to develop the
worldwide market for our periodontal susceptibility test directly through a
number of centrally-driven tactics and thereby establish an environment in which
locally appropriate, focused selling efforts will be most likely to succeed. The
worldwide market will be segmented according to geography and customer groups,
with appropriate emphasis being given to specific segments as the business
grows. Wherever possible, we will initially sell our periodontal susceptibility
test directly, anticipating that once demand has been created we may elect to
work in partnership with other selling organizations that offer significantly
greater access to the market and/or a better competitive position.
GEOGRAPHIC SEGMENTATION PLAN. Initial emphasis will be placed on sales of
our periodontal susceptibility test in North America. North America represents
at least half of the worldwide opportunity for our periodontal susceptibility
test. We intend to market directly in the U.S. and Canada, focusing on specific
customer segments as outlined below. In a parallel effort, we will also begin to
develop a sales program in Europe, in partnership with local sales organizations
familiar with the periodontal market. Emphasis will be placed on Italy, since
momentum and a customer base have already been established during our
pre-commercial phase. In the meantime, European customers who want access to our
periodontal susceptibility test are being serviced directly out of the U.S. The
same is true for Asia and South America. It is anticipated that partners will be
sought for sales efforts in these regions as well.
CUSTOMER SEGMENTATION PLAN. There are several potential customers for our
periodontal susceptibility test who need to be targeted in a specific order and
with appropriate emphasis over time. Our study of the value-chain involved in
making or influencing a purchasing decision for our periodontal susceptibility
test revealed that some of the key players involved include: specialists
(primarily periodontists), general dentists, hygienists, reimbursement groups
(i.e., insurance companies, managed care organizations, etc.) and, of course,
the individuals (and their families) who are being tested. The degree to which
each of these groups embrace our periodontal susceptibility test will be
influenced by how others in the value-chain view the value of the information.
For example, initial feedback indicates that patients will be strongly
influenced by their doctors. Whereas, generalists may be influenced by how
specialists view the value of the test. Managed care organizations are likely to
be influenced by how attractive the test is to their current or potential
members. The influence diagram for the decision to purchase the test reveals a
high degree of interdependence between all of the groups. For this reason, it is
critical to develop the market in the right order and with the appropriate
selling message for the specific group being targeted. It is important not to
skip a step in the process or believe that, just because resistance to change in
a specific segment may be great, such segment may be ignored. The initial
segmentation plan we have developed will allow us to focus resources on the
group most likely to generate early sales growth, while at the same time
ensuring long-term sustainability and opportunity
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for growth. In light of the foregoing, we will be targeting four customer
groups: (i) Periodontists/ periodontally-oriented GPs; (ii) General
Practitioners; (iii) Managed Care/Buying Groups; and (iv) Oral Care Companies
with Dental Research Programs.
Periodontist/Periodontally-oriented GPs. During the launch period and early
adoption phase, emphasis will be placed on this segment in both North America
and Europe. From a market development standpoint, we recognize that it is
critical that our periodontal susceptibility test be understood and accepted by
"periodontists" for it to gain broad acceptance in the other segments.
Relationships with opinion leaders and professional organizations are
already well established in this segment. Key opinion leaders have their own
data to present, which can be further supported with educational materials that
we have developed. Speakers will be engaged who can interpret the scientific
message and translate the breakthrough and effectively convey its clinical value
to others. Our goal is to be highly visible at major periodontal meetings
(international, national and "large" regional) the first year, with educational
information on our periodontal susceptibility test either incorporated into the
main program, or as part of an associated continuing education program wherever
possible. Our periodontal susceptibility test was recently featured at the last
general session of the American Academy of Periodontology meeting in October
1997.
From a selling standpoint, periodontists can be reached with a relatively
small organization through attending their major meetings and sending targeted
mail/fax communications. We initially expect periodontists to be our major
source of revenue transitioning to dental general practitioners ("GPs") over the
course of the first year.
We will seek to convince/motivate periodontists, in addition to testing
their own patients, to take the "genetic susceptibility testing/risk assessment
message" to referring GPs, and in some cases, directly to patients to help build
their practices. As such, we see periodontists as important multipliers and an
integral part of the "selling effort." Support materials, such as updated
referral slide shows and general dentist's brochures, patient brochures,
"informatics" and press release packets, are already being provided to help
periodontists to be more effective in this role.
General Practitioners. We intend on developing this segment in a parallel
manner, with emphasis switching from periodontists to GPs as the business grows.
From a market development standpoint, we are working closely with leaders in the
American Dental Association to help them understand the benefits of our
periodontal susceptibility test to GPs, and to motivate then to educate their
membership. Our periodontal susceptibility test is already scheduled to be
presented at the American Dental Association's major fall meeting in Washington,
D.C., where the test will also be included in an exhibit on dental innovations
at the Smithsonian. Emphasis will be placed on translating the clinical value as
it relates to a general practice, with appropriate opinion leaders from their
own "camps" being identified for this purpose. GPs will be the target of mass
mailings and advertising campaigns to increase brand recognition for our
periodontal susceptibility test. In addition, we will seek to use periodontists
as "advocates" to reach their GP referral base. As the need for additional sales
activities within this segment grows, we will evaluate using a "co-marketing"
arrangement with a large GP-oriented sales organization.
Managed Care/Buying Groups. Initially, we expect most genetic tests to be
paid for by the consumer, not insurance companies or other payors. Our
contracted billing service will directly bill the patient who has utilized the
test. We realize, however, that successful commercialization of our products and
services may depend in part upon the availability of reimbursement or funding
from third-party health care payors such as federal and state governmental
agencies, private insurance plans and health maintenance organizations. Thus, In
the longer term, we intend to target this managed care/buying group segment by
building a sales and marketing organization aimed at understanding the value of
genetic testing and risk assessment to large buying groups (including managed
care organizations of all forms and governments in some countries) and "selling"
through negotiating contracts with the decision makers (and gate keepers). This
is clearly the trend in organized healthcare and presents an opportunity for
susceptibility tests such our periodontal susceptibility test. As we grow, this
capability should also generalize to other genetic tests. From a market
development standpoint, we intend to better understand the needs of this
segment, and tailor claim support
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studies/educational activities to satisfy these needs. Our periodontal
susceptibility test is already scheduled to be featured at the next meeting of
the National Association of Dental Plans.
Oral Care Companies with Dental Research Programs. An additional segment
that we intend to target involves companies with clinical research programs. We
have already sold some of our periodontal susceptibility tests to companies that
are interested in having patients in their clinical studies genotyped. Due to
the clear benefit of including this information in large clinical studies and
our strong preexisting relationships with many of the companies in this segment,
we view this as an opportunity to generate additional sales during the first
year with a limited selling effort. However, there can be no assurance that
future sales will be effected or that such sales will result in net income.
Public Awareness/PR Plan. Initially most of our sales and marketing effort
aimed at the general public will be indirect, primarily in the form of brochures
and other tools that a doctor can use to explain the tests and their value to
patients. We have initiated some public relations activities in order to
increase public awareness of our specific tests and genetic susceptibility
testing more generally through the popular media. For example, with our
periodontal susceptibility test, we have initiated some publications in
cooperation with a professional organization known as the American Association
of Periodontology, which has its own vested interest in increasing public
awareness about the disease and featuring significant discoveries that help
validate the importance of the profession. We will begin to use PR in
coordination with our other selling efforts aimed at each customer segment we
approach. With the commercial introduction of the periodontal susceptibility
test at the American Academy of Periodontology meeting in October 1997, we began
a campaign aimed at reaching the periodontal and general dentists. Ultimately,
we plan on marketing directly to the public in order to create consumer demand
for our tests.
Educational and Promotional Materials. As with any change of behavior
product, we anticipate the sales and promotional effort for our genetic
susceptibility test to be highly education-intensive and are planning to develop
several materials to support this effort. In addition, some promotional
materials will be developed that are primarily aimed at increasing
brand/logo/company recognition and creating a "high tech/ high value" image for
ourselves.
Market Development Strategy for Other Susceptibility Tests. We are also
preparing market development plans to implement the "pre-commercial phase" for
our osteoporosis tests. We intend to implement a similar strategy as is
currently being utilized with our periodontal susceptibility test. We will
initially involve the current academic and research "thought leaders" in the
development and verification of our tests results and clinical utility. We will
then develop a speaker circuit where these thought leaders will begin to convey
the clinical utility and importance of our tests to specialists within each
testing area (e.g., cardiologist for the CAD test). As the thought leaders begin
to reach and influence the specialists we will then begin to target generalists,
who presumably will be or have been influenced by the specialists. At this point
direct marketing can be introduced to complete the progression, resulting in
consumer demand. This segmentation strategy has been proven to be effective with
other medical devices and is already being implemented with respect to our
periodontal susceptibility test.
SELLING METHODS
Direct Sales. We plan to build demand for our susceptibility tests using a
small direct consultative sales organization specializing in genetic testing,
risk assessment and change of behavior. We do not plan on building a large sales
force capability in any specific market; however, when the need for additional
sales force activity increases within a particular segment, we will consider
"co-marketing" or other business arrangements with companies with a large sales
organization in the field. Our direct sales capability will focus on the
profession segment initially, then shift to institutional and large buying group
sales. After a sales partner has been brought on, we will focus on sales partner
support and trade/professional association meetings. We will thereafter continue
to seek to establish corporate partnerships which will produce revenues,
credibility and a market presence for our other services and products.
Professional and Industry Meetings/Trade Associations. Initially, we will
be present and market our products and services at all national and selected
regional associations and meetings where a genetic
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susceptibility test has applicability to the professionals in attendance. Over
time, we anticipate our partners playing an increasingly important role in the
specific disease markets where our tests are used.
INTELLECTUAL PROPERTY
Our commercial success will be dependent in part on our ability to obtain
patent protection on genes, genetic sequences and/or their relationship to
common diseases, or products or methods based on the association between
particular genes and diseases, discovered by us and Sheffield University. We
have ten patent applications pending, including applications covering each of
our four genetic susceptibility tests. In June 1997, a Notice of Allowance was
issued by the United States Patent and Trademark Office with respect to both our
periodontal and osteoporosis susceptibility tests. A Notice of Allowance is
granted by the Patent and Trademark Office, if, on examination of the
application, the patent application is found to be allowable. Thereafter a fee
for issuing the patent is due within three months from the date of the Notice of
Allowance. When the issue fee is paid, the patent issues as soon as possible
after the date of payment, dependent upon the backlog of patents at the Patent
and Trademark Office. The patent is then delivered or mailed on the day of its
grant, or as soon thereafter as possible. We paid the issue fee related to the
application for the periodontal susceptibility test on July 18, 1997 and for the
osteoporosis susceptibility test on September 8, 1997. While the issuance of
these patents is likely, the exact date of issuance is not known. It is rather
unlikely, but possible, that the United States Patent Trademark Commissioner
could disallow the granting of our patents at any time prior to the date of
issuance. We have filed and will continue to file foreign counterparts of our
U.S. applications within the appropriate time frames. Where we have originally
filed in another country, we plan to file U.S. and other foreign counterparts
within the appropriate time frame. These applications seek to protect these gene
markers and corresponding use of gene markers, and products derived therefrom
and uses therefor. Some of these applications also identify possible biological
functions for the genes and gene fragments based in part on a comparison to
genes or gene fragments included in public databases but do not contain any
laboratory or clinical data with respect to such biological functions.
We own the patent application covering the genetic marker related to our
periodontal susceptibility test. However, with each of the other tests, the
Section of Molecular Medicine at Sheffield University holds the patent
application but has granted us an exclusive worldwide, irrevocable, transferable
license to make, have made, use, offer to sell, license and otherwise transfer
products created under the applicable patents. Sheffield University has retained
the right to carry on internal research related to the underlying patents.
However, under the terms of our Project Agreements with Sheffield University,
upon the commercialization of each test, Sheffield University is obligated to
assign the patent to us in its entirety.
We have filed three patents related to our computer modeling software
technology, two of which are still pending and one of which has issued. We are
continuing to identify and develop applications related to additional genetic
markers. We have also applied for trademark protection for the name of our
periodontal susceptibility test. Our proprietary technology is subject to
numerous risks. See "Uncertain Ability to Protect Proprietary Technology" at
page 10.
ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF GENETIC SUSCEPTIBILITY TESTING
The prospect of broadly available genetic susceptibility testing has raised
issues which are currently being widely discussed by the medical and scientific
communities, as well as other interested groups and organizations, regarding the
appropriate utilization and the confidentiality of information provided by such
testing. The recent movement towards discovery and commercialization of
susceptibility tests for screening a person's likelihood of developing one or
more chronic conditions has also focused public and legislative attention on the
need to protect the privacy of genetic screening medical information. With the
progression towards more comprehensive record keeping by health insurers and
managed care firms, this need has led to a number of legal initiatives. The
recently enacted federal health insurance reform law (Kassebaum-Kennedy of 1996)
recognizes the comparability of information obtained by genetic means to other
types of personal medical information. The law prohibits insurance companies
from refusing health insurance coverage to individuals on the basis of their
medical history, including "genetic information." This legislation also
prohibits employees from discrimination in hiring practices on the same basis.
This should serve as an example
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of a trend to protect the privacy of patients, while allowing them to be
screened for conditions which, as medicine progresses, can be prevented, reduced
in severity, or cured. Although the current trend is pro-genetic testing,
governmental authorities could, for social or other purposes, limit the use of
genetic testing or prohibit testing for genetic susceptibility to certain
conditions.
We have attempted to take a proactive stance in the ethical arena. We have
engaged Dr. Philip Reilly, who is both an M.D. (board certified specialist in
clinical genetics) and an attorney to advise us in the area of genetic testing
and its ethical, legal and clinical utility ramifications. Additionally, we are
currently advising doctors who administer our genetic susceptibility tests to
take special efforts to maintain the confidentiality of the test results. Our
intent is to avoid information about test results being disclosed to insurers
until issues regarding insurability have been fully analyzed and acted upon by
the appropriate legislative bodies.
On August 1, 1997, we formed a joint venture named Digisphere, LLC whose
purpose, in part, will be to provide marketing information to those patients who
test positive on one of our tests and who subsequently send in a business reply
card seeking more information. See "Product Development" at page 34. The
confidentiality of patient information is subject to regulation by state law. A
variety of statutes and regulations exist safeguarding privacy and regulating
the disclosure and use of medical information. State constitutions may provide
privacy rights and states may provide private causes of action for violations of
an individual's "expectation of privacy." Tort liability may result from
unauthorized access and breaches of patient confidence. We intend to comply with
state law and regulations governing medical information privacy.
COMPETITION
Although testing for major genetic defects, such as Down's Syndrome, has
been available for years, genetic susceptibility testing for multi-factorial
diseases is a newly emerging growth segment. Despite this segment's relatively
young age, companies other than ours do exist have research programs seeking
disease related genes for therapeutic and susceptibility testing purposes,
including some that involve treatable/ preventable disease. Other companies with
research programs include OncorMed, Inc. ("OncorMed"), Myriad Genetics, Inc.
("Myriad"), Genome Therapeutics Corp. ("GTC") and Sequana Therapeutics, Inc.
("Sequana"). Both GTC and Sequana have announced that they have research
programs focusing on osteoporosis. Myriad has a test for breast cancer and has
announced research programs for osteoporosis and coronary artery disease.
OncorMed, while engaged in the development of genetic susceptibility tests, is
focused solely on cancer.
Additionally, some of our competitors receive data and funding from the
Human Genome Project. The Human Genome Program is a federally funded program
focused on sequencing the human DNA and enriching the sequence data with
information about its biological function. To the extent our competitors receive
data and funding from the Human Genome Project at no cost to them, they may have
a competitive advantage over our company.
Each of the above noted company's involvement with genetic susceptibility
testing, together with large market capitalizations as public companies,
validates this newly emerging market. In the case of newly introduced products
requiring "change of behavior," (such as genetic susceptibility tests) multiple
competitors may accelerate market acceptance and penetration through increasing
awareness. Moreover, two different genetic susceptibility tests for the same
disease may in fact test or measure different components, and thus actually be
complementary when given in parallel as an overall assessment of risk, rather
than being competitive with each other.
Furthermore, with the exception of OncorMed, the primary focus of each of
the above-referenced companies is performing gene-identifying research for
pharmaceutical companies for therapeutic purposes, with genetic susceptibility
testing being a secondary goal. On the other hand, our company's primary
business focus is developing and commercializing genetic susceptibility tests
for common diseases, with only an ancillary drug discovery program. Factors
which further differentiate us from other companies are discussed below in
"Competitive Advantages" at page 40.
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<PAGE> 44
COMPETITIVE ADVANTAGES
Other companies have entered the market for genetic testing as medical
research has increasingly recognized the advantages provided by early detection
of genetic predisposition. Although many of these competitors have greater
financial and other resources than us (see "Competition" at page 39), we believe
that our company has many competitive advantages, including:
(1) Alliance with The University of Sheffield, U.K. Our efforts in the
genetic discovery and development process are complemented by a strategic
alliance with the Section of Molecular Medicine at The University of
Sheffield, U.K. Sheffield University is one of the world's leaders in
genetic aspects of common diseases with an inflammatory component.
Sheffield University's research is targeted around identifying and
discovering genes and genetic markers which appear to correlate with a
patient's susceptibility to common diseases.
Our relationship with Sheffield University offers another significant
advantage over our competitors in reducing the cost of genetics research.
The gene discovery process uses and generates vast amounts of information.
Such research is time consuming, costly, heavily dependent upon advanced
computer technology and unpredictable. Sheffield University has an
integrated genetics program consisting of approximately 46 M.D. and Ph.D.
scientists and researchers focusing on molecular genetics. Sheffield
University performs gene-identifying research for us, thereby reducing our
costs and allowing us to focus our attention on developing and
commercializing known genetic markers. Many of our competitors' primary
focus and capital is spent on performing gene-identifying research.
In exchange for Sheffield University's providing us with research and
discoveries, the company has agreed to pay Sheffield University a share of
the resultant net profits, with the percentage of net profits for our
company and Sheffield University to be agreed upon separately under project
agreements related to each test (each a "Project Agreement"). Pursuant to
such Project Agreements, our share of the net profits ranges from 50% to
67%. See "Reliance on Collaborative Partners" at page 9. Net profits will
be paid out to Sheffield University only after we have recovered the cost
of goods sold, all marketing and sales costs and all operational costs
related to each of the separate tests.
(2) Identified Genetic Markers. While many of our competitors are
currently seeking to identify diseaserelated genes, we have already
identified four genetic markers that indicate a patient's genetic
predisposition to certain diseases. Additionally, we are continuing to
identify other genetic markers and intend to file patent applications
related to the same.
(3) Focus on Diseases that are Treatable and Preventable. We are one of
the few companies that we know of that is focusing on genetic
susceptibility testing services for diseases that are treatable and
preventable. Most of our competitors have not focused on
treatable/preventable diseases but have instead focused on drug development
with a secondary emphasis on genetic testing. Other companies, such as
Myriad and OncorMed are developing tests for breast cancer for which there
is no known preventive treatment (except mastectomy). The value of this
information is, as a result, often times "unwanted" by the patient. Our
tests, on the other hand, when used in overall risk assessment, provide
doctors and patients with information regarding a patient's risk for
developing a potential future disease. Since the disease is treatable and
preventable, this information is "wanted." Doctors and patients may use
this wanted information to take preventive measures to slow down or avoid
disease progression and develop treatment plans based on a patient's future
risk for disease progression.
(4) Focus on Developing and Commercializing Genetic Susceptibility
Testing Services. Our company's primary business focus is to develop and
commercialize genetic susceptibility testing services. We are committed to
becoming one of the world's leaders in marketing and selling genetic
susceptibility tests. We believe that broad market acceptance of genetic
susceptibility testing, and any particular test, can be achieved only by
educating consumers and professionals about the benefits of genetic testing
and demonstrating how genetic testing can improve patient risk assessment
and treatment. In order to commercialize our own products and prepare the
markets we are entering, we have built and continue to expand a team with
significant experience in the commercialization process and marketing high
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<PAGE> 45
technology medical and dental products which require a change of behavior.
We have developed a focused marketing and sales strategy for our initial
product that includes segmentation, thought leader development, educational
marketing and consultative selling. See "Marketing and Selling Strategies"
at page 34.
(5) First to Market with a Genetic Susceptibility Test for a Disease
That is Treatable and Preventable. We are the only company that we know of
that has brought to market a test (our periodontal susceptibility test)
that identifies a genetic marker which indicates a greater susceptibility
to a disease which is treatable and preventable. As a result, we believe
that we are well-positioned to become a market leader in the periodontal
market and potentially in each of the other areas in which we have
developed or are developing tests.
(6) Computer Modeling Technology. We have developed a computer modeling
technology that simulates the biology of specific diseases. These
simulations include basic genetic, cellular and subcellular interactions,
as well as systems-level information about the clinical symptoms involved
in the disease process. They allow a comprehensive integration of
gene-expression data, basic biochemistry, and cell biology such that
disease-associated genetic findings may be linked to the clinical outcomes.
These simulations give us a competitive advantage by allowing us to more
accurately and efficiently:
(i) evaluate the combined effects of genetic markers and other risk
factors in order to establish risk assessment;
(ii) link risk assessment profiles to treatment regimes;
(iii) identify new candidate genes or genetic markers; and
(iv) design clinical trials more effectively.
(7) Integrated Risk Assessment and Treatment Planning Approach to
Multi-Factorial Diseases. While we recognize the importance of our genetic
susceptibility tests, we also acknowledge the reality of other risk factors
contributing to the development of disease. Thus certain diseases are often
referred to as "multi-factorial" given that several factors contribute to
their causation. See "Genetic Testing" at page 23. We have attempted to
take a holistic approach toward analyzing the disease process. Therefore
our risk assessment strategy includes not only the results of our genetic
susceptibility tests, but also other known risk factors. By combining our
test results together with present risk factors we are able to develop a
more accurate risk assessment tool. We then link patient testing criteria
to possible treatment suggestions. We package this data together with our
genetic susceptibility tests to enhance our tests' practical utility to
clinicians actually administering the tests.
(8) Experienced in Structuring Clinical Trials to Evaluate
Discoveries. We have extensive experience in product development, including
designing and conducting clinical trials to evaluate genetic and drug
discoveries. In the past, we provided clinical research services to
pharmaceutical and medical/dental device companies. We have performed
contract research for many of the world's leading health care and
pharmaceutical companies. Some of our representative clients have included:
Proctor & Gamble; Alpharma/Dumex; Implant Innovations, Inc.; W. L. Gore &
Associates; Teledyne WaterPik; and Oral B. Commencing in 1994, our research
team has increasingly focused on the development of our own products. Our
research capability expedites the development process and increases our
knowledge about target diseases. Moreover, we have already successfully
completed our initial proof trials on all four of our genetic
susceptibility test and confirmatory trials on three out of four of these
tests. See "Pre-Marketing Trials/Status of Susceptibility Tests" at page
33.
(9) Cost Effective Commercialization Process. Because we are focusing
primarily on genetic susceptibility testing services and intend to develop
at least four genetic susceptibility tests initially, with more tests in
the future, we have designed our current product distribution and customer
service operation in such a way that it can process, perform, track, bill
and collect large volumes of genetic tests with appropriate quality and
customer service support. We have carefully designed our product
distribution and customer service operations to allow for multi-test or
product capabilities. The design and functionality of our product
distribution and customer service operations has been created in such a
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<PAGE> 46
way as to enable us to easily move from a company currently selling only
one genetic susceptibility test to a company distributing a portfolio of
four or more such tests in multiple markets on a worldwide basis. Further,
our operations have the capability of processing additional tests or
products at even greater volumes with little or no modifications or
increases in capital outlays. Moreover, as each test or product is added
into our distribution stream, the cost per test to us decreases allowing
for increased profitability.
GOVERNMENT REGULATION
The sampling of blood, saliva or cheek scrapings from patients and
subsequent analysis in a clinical laboratory does not, at the present time,
require Federal Drug Administration ("FDA") or regulatory authority approval
inside the U.S. for either the sampling procedure or the analysis itself. The
samples are taken in the healthcare provider's office, using standard materials
previously approved as medical devices, such as sterile lancets and swabs. The
testing procedure itself is performed in one or more registered, certified
clinical laboratories under the auspices of the Clinical Laboratory Improvement
Amendments of 1988, administered by the Health Care Financing Administration.
The federal regulations governing approval of the laboratory facilities and
applicable state and local regulations governing the operation of clinical
laboratories would also apply. Changes in such regulatory schemes could require
advance regulatory approval of genetic susceptibility tests sometime in the
future could have a material adverse effect on our business.
In addition, while our main focus is on genetic susceptibility testing, we
may, in the future, endeavor to partner with pharmaceutical companies in the
area of drug development. Any drug products developed by us or our future
collaborative partners, prior to marketing in the United States, would be
required to undergo an extensive regulatory approval process by the FDA. The
regulatory process, which includes preclinical testing and clinical trials of
each therapeutic product in order to establish its safety and efficacy, can take
many years and requires the expenditure of substantial resources. Data obtained
from preclinical and clinical activities are susceptible to varying
interpretations which could delay, limit or prevent regulatory agency approval.
In addition, delays or rejections may be encountered during the period of
therapeutic development, including delays during the period of review of any
application. Delays in obtaining regulatory approvals could adversely affect the
marketing of any therapeutics developed by us or our collaborative partners,
impose costly procedures upon us and our collaborative partners' activities,
diminish any competitive advantages that we or our collaborative partners may
attain and adversely affect our ability to receive royalties. Once regulatory
approval of a product is granted, such approval may impose limitations on the
indicated uses for which it may be marketed. Further, even if such regulatory
approval is obtained, a marketed product and its manufacturer are subject to
continuing review. The discovery of previously unknown problems with a product
or manufacturer may result in restrictions on such product or manufacturer. Such
restriction could include withdrawal of the product from the market.
FACILITIES
Our company has offices in the following locations: Flagstaff, Arizona; San
Antonio, Texas; and Newport Beach, California. Flagstaff, Arizona is the site of
our global commercial operations, including our marketing, sales and customer
service organization. The San Antonio Research Center is the principal site of
our research and development and employs teams of top medical, dental and
computer scientists. Newport Beach is the site of our corporate headquarters.
Our commercial operations office located at 3100 N. West Street, Bldg. A,
Flagstaff, Arizona, contains 6,000 square feet and is held under a three-year
lease which expires in September 2000. Our research and development office,
located at 100 N.E. Loop 410, San Antonio, Texas, contains 1,961 usable square
feet and is held under a five-year lease that will convert into a month to month
tenancy on December 1, 2000 unless either party gives a prior 30 day notice. Our
corporate headquarters, located at 4400 MacArthur Boulevard, Suite 980, Newport
Beach, California, contains 1,798 usable square feet and is held under a
five-year lease which expires in April of 2001.
We believe that our current facilities are adequate for the foreseeable
future and that alternate facilities are readily available.
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<PAGE> 47
EMPLOYEES
As of September 30, 1997, we had 27 full-time employees. Most of our
employees are engaged directly in the development and commercialization of our
tests. We believe that the success of our business will depend, in part, on our
ability to attract and retain qualified personnel.
Our employees are not covered by a collective bargaining agreement, and we
consider our relations with our employees to be good.
LEGAL PROCEEDINGS
We are not a party to, nor is our property the subject of, any pending
legal proceeding.
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<PAGE> 48
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of our company are:
<TABLE>
<CAPTION>
NAME AGE POSITION SINCE
- ------------------------------- --- --------------------------------------------- -----
<S> <C> <C> <C>
Paul J. White, J.D., L.L.M.(1) 41 President, Chief Executive Officer and 1994
Chairman of the Board of Directors
Kenneth S. Kornman, DDS, Ph.D. 50 Chief Scientific Officer and Director 1986
Michael G. Newman, DDS 50 Executive Vice President, Secretary and 1986
Director
U. Spencer Allen, MS, MBA 55 Chief Financial Officer and Treasurer 1997
Jeanne Ambruster 40 Vice President, Global Business Operations 1997
Thomas A. Moore(1,2) 46 Director 1997
Ronald A. La Rosa(1,2,3) 40 Director 1997
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Mr. La Rosa will be appointed as a Director following the completion of this
offering.
Directors are elected to serve until the next annual meeting of
shareholders. Directors serve without cash compensation or other remuneration.
See "Principal Shareholders" at page 51.
Officers are elected by the Board of Directors and serve until their
successors are appointed by the Board of Directors. Biographical resumes of each
officer and director are set forth below.
Paul J. White, J.D., L.L.M. Mr. White joined the Company as President in
1994. Prior to joining our company, Mr. White was managing partner of White &
Resnick, Irvine, California, a mid-size law firm servicing emerging companies.
Mr. White was a business and corporate attorney and consultant to emerging
health care companies for 15 years. Mr. White holds a B.A. (History/Political
Science) from State University of New York at Brockport, a J.D. from
Southwestern University and an L.L.M. (Taxation) from the University of San
Diego.
Kenneth S. Kornman, D.D.S., Ph.D. Dr. Kornman is a co-founder, officer and
director of our company and currently serves as Chief Scientific Officer and
Director. Prior to founding our company in 1986, he was a Department Chair and
Professor at The University of Texas Health Science Center at San Antonio. He
has also been a consultant and scientific researcher for many of the major oral
care and pharmaceutical companies. Dr. Kornman currently holds academic
appointments at The University of Texas Health Science Center and Harvard
University. Dr. Kornman holds six patents in the pharmaceutical area, has
published two books and more than 100 articles and abstracts and has lectured
and consulted worldwide on the transfer of technology to clinical practice. Dr.
Kornman holds a B.A. in Economics from Duke University. He obtained a D.D.S.
from Emory University. Dr. Kornman also holds an M.S. (Periodontics) and a Ph.D.
(Microbiology) from the University of Michigan.
Michael G. Newman, D.D.S. Dr. Newman is a co-founder, officer and director
of our company and currently serves as Executive Vice President, Secretary and
Director. Prior to founding the Company in 1986, he was an adjunct Professor and
former Director of the Periodontal Microbiology Laboratory at the University of
California at Los Angeles (UCLA) and was president of the American Academy of
Periodontology. Dr. Newman is currently a member of the American College of
Dentists. Dr. Newman currently holds an academic appointment at UCLA. Dr. Newman
has published more than 200 articles and abstracts and is the co-author of four
books on microbiology, periodontitis and oral infections. Dr. Newman holds a
B.A. and a D.D.S. from the University of California at Los Angeles.
U. Spencer Allen, M.S., M.B.A. Mr. Allen joined the Company as Chief
Financial Officer in January 1997. From September 1996 to January 1997, Mr.
Allen functioned as an independent financial consultant. From August 1995 to
August 1996, Mr. Allen was the Vice President (Finance) and Chief
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<PAGE> 49
Financial Officer of Promart Industries, Inc., a houseware products
manufacturer. Mr. Allen worked as a self-employed financial consultant from
January 1994 to August 1995. Prior to that time, Mr. Allen functioned as general
manager of Slow Waltz Imports, Inc., a potpourri manufacturer. Mr. Allen holds
B.S. (Engineering Science) from the U.S. Air Force Academy, an M.S. (Electrical
Engineering) from the University of Southern California and an M.B.A. (Finance)
from George Washington University.
Jeanne Ambruster. Ms. Ambruster joined as Vice President, Global Business
Operations in February 1997. Prior to joining our company, Ms. Ambruster served
as Senior Manager of the Medical and Dental Technologies Business Division for
16 years with W.L. Gore & Associates. At W.L. Gore & Associates, she played a
key role in the growth of this division and was the senior business leader
responsible for building the company's dental product business. Ms. Ambruster
holds a B.A. (Biology and Chemistry) from Pitzer College.
Thomas A. Moore. Mr. Moore became a director of our company in 1997. Mr.
Moore is the Chief Executive Officer and President of Nelson Communications
Inc., one of the largest providers of health care marketing services in the
United States. Prior to joining NCI as President in 1996, Mr. Moore was
President of Procter & Gamble's $3 billion worldwide prescription and
over-the-counter health care business and Group Vice President of the Procter &
Gamble Company. He joined Procter & Gamble in 1973 and held positions of
increasing responsibility in the company's cleaning products, beauty care,
Richardson-Vicks and personal care divisions. He is Chairman of the American
Health Foundation -- a nonprofit organization that researched the nutritional
and environmental factors in cancer and other diseases. Mr. Moore holds a B.A.
(History) from Princeton University.
Ronald A. La Rosa, M.B.A. Mr. La Rosa will become a Director upon
completion of this offering. Mr. La Rosa is the President and Chief Executive
Officer of Delta Technical Coatings, Inc. ("Delta"), a privately-owned consumer
product marketing company. Mr. La Rosa has been with Delta for over five years.
Prior to joining Delta, Mr. La Rosa worked for over eleven years with various
subsidiaries of The Mennon Company, a $600 million consumer products company.
Mr. La Rosa's various job capacities included Vice President Finance,
Controller, Director of Controls and Director International Finance. Mr. La Rosa
is a member of both the American Institute of Certified Public Accountants and
the New Jersey Society of Certified Public Accountants. Mr. La Rosa holds a B.S.
(Accounting) and an M.B.A. (Finance) from Fairleigh Dickinson University.
KEY EMPLOYEES
Pamela K. Fink, Ph.D., Executive Director, Biologic Modeling Group. Dr.
Fink has operational responsibility for our company's computer technology
development. Dr. Fink is an expert in knowledge acquisition and simulation of
complex systems. Dr. Fink joined the Company as Executive Director, Biologic
Modeling Group in July 1994. She was formerly with the Southwest Research
Institute for 10 years as a Section Manager and Staff Scientist. Dr. Fink holds
a B.A. (Mathematics and Philosophy of Language) from Eckerd College and an M.A.
and Ph.D. in Computer Science from Duke University.
Debra J. Moore, M.S., Vice President, Product Development. Ms. Moore joined
the Company as the Vice President, Product Development in September 1990. Ms.
Moore has 19 years practical experience in identification and development of new
health care products. Prior to joining us, Ms. Moore spent 13 years at Procter &
Gamble Health Care where she was a Senior Manager in the Oral Care Product
Development and Professional Relations Division. Ms. Moore was a leader in the
research, development, manufacture and FDA approval of such products as Tartar
Control Crest and Peridex, the first prescription drug approved by the FDA for
the treatment of periodontal disease. Ms. Moore holds a B.S. (Chemistry) from
Central Michigan University and an M.S. (Organic Chemistry) from the University
of Wisconsin, Madison.
Evan B. Siegel, M.Phil, Ph.D., Vice President, Regulatory Affairs. Dr.
Siegel joined our company as Vice President of Regulatory Affairs in August
1996. From January 1994 to July 1996, Dr. Siegel was employed by Quintiles,
Inc., a multinational contract research organization, where he held positions as
Director, Regulatory Services, Director, Regulatory Consulting, and Principal
Regulatory Scientist. From November 1991 until February 1994, he held senior
management positions at Astra Pharmaceutical Products,
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<PAGE> 50
Inc. Previously, Dr. Siegel was Director, OTC Regulatory Affairs at Syntex, USA,
Inc. and Chief of Special Services and Supervising Toxicologist at the
California Food and Drug Branch and a reviewer at the U.S. Food and Drug
Administration. Dr. Siegel holds a B.S. (Physics) from Bucknell University, an
M.S. (Radiological Health), an M.Phil. (Virology) and a Ph.D. (Virology) from
Rutgers University.
Todd D. Snowden, Director of Worldwide Sales. Mr. Snowden joined our
company as Director of Worldwide Sales, in April 1997. From 1986 until joining
us, Mr. Snowden worked in the Regenerative Technologies division at W. L. Gore &
Associates, selling surgical devices and regenerative materials and as a product
manager with responsibility for all aspects of their products. Mr. Snowden holds
a B.S. (Biomedical Engineering) from Catholic University of America.
Nancy Whitley, Director of Market Development & Commercialization. Ms.
Whitley is involved in transitioning products in the development phase into the
marketplace, including leading pre and post-commercial product launches. Ms.
Whitley has been the Director of Market Development & Commercialization for our
company since February 1997. Prior to joining us, Ms. Whitley was a Senior
Manager in the Medical and Dental Technologies Business Division of W. L. Gore &
Associates where she worked for 19 years. Ms. Whitley holds a B.A. (Education)
from Northern Arizona University.
SCIENTIFIC EXPERTS
We have engaged a number of scientific experts to render services. With the
exception of one expert, we either (i) have entered into written agreements with
the expert, each of which provides that we are the sole and exclusive owner of
all proprietary rights to all genetic discoveries and related technology,
whether developed by us or our consultant; or (ii) receive services from the
consultant underneath existing agreements between our company and Sheffield
University. We currently have no written agreement in place with Dr. Bailit.
Some of our scientific experts are engaged on a project basis while others are
kept on a retainer and utilized in accordance with our current needs. Set forth
below is a brief description of each scientific expert's background.
PROFESSOR GORDON W. DUFF, M.A., PH.D., FRCP
Lord Florey Chair and Director of the Division of Molecular and Genetic
Medicine
The University of Sheffield, U.K.
Professor Duff is internationally recognized as a leader and innovator in
the genetic aspects of cytokines and the immuno-inflammatory response. He is a
fellow of the Royal College of Physicians, Edinburgh. Professor Duff holds a
B.A. (Animal Physiology), an M.A. (Physiology) and a B.M., B.Ch., all from the
University of Oxford and a Ph.D. in Medicine from the University of London.
FRANCESCO S. DI GIOVINE, M.D., PH.D.
Head of the Section of Molecular Medicine
in the Department of Molecular and Genetic Medicine
The University of Sheffield, U.K.
Dr. di Giovine is a molecular geneticist managing the Sheffield University
Molecular Medicine research and development laboratory. Dr. di Giovine holds a
M.D. from the University of Florence, Italy and a Ph.D. (Molecular Immunology)
from the University of Edinburgh, U.K.
PROFESSOR GRAHAM RUSSELL, M.B., CH.B, D.M., PH.D
Director of Division of Biochemical and Musculoskeletal Sciences
Professor of Human Metabolism and Clinical Biochemistry
The University of Sheffield, U.K.
Professor Russell is an internationally recognized researcher in the field
of osteoporosis. Professor Russell holds a B.A. (Biochemistry), an M.A.
(Biochemistry) and an M.B., Ch.B. (Pharmacology, Therapeutics and Toxicology)
from Cambridge University. Dr. Russell also holds a Ph.D. (Chemical Pathology)
from Leeds University, as well as a Doctor of Medicine (D.M.) from Oxford
University.
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<PAGE> 51
PHILIP R. REILLY M.D., J.D.
Eunice Shriver Center
Dr. Reilly is an expert in the area of genetic testing and its ethical,
legal and clinical utility ramifications. Dr. Reilly is a board certified
specialist in clinical genetics and an attorney. Dr. Reilly holds a B.A.
(Government) from Cornell University, a J.D. from Columbia University and a M.D.
from Yale University.
HOWARD L. BAILIT, D.M.D., PH.D.
University of Connecticut Health Center
Dr. Bailit is a former senior vice president of Medical Policies and
Programs for Aetna Health Plans and was responsible for the assessment and
acceptance of new medical technology. Dr. Bailit assists with the assessment of
new product opportunities with understanding of third-party payor issues. Dr.
Bailit holds a D.M.D. from Tufts Dental School, an M.A. (Anthropology) and a
Ph.D. (Anthropology) from Harvard University.
EXECUTIVE COMPENSATION
The following table sets forth total compensation for the year ended
December 31, 1996 for the Chief Executive Officer, and each of the other
executive officers of our company for each of the last three fiscal years (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------
AWARDS
ANNUAL COMPENSATION --------------------- PAYOUTS
--------------------------------- RESTRICTED SECURITIES -------
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
POSITION YEAR ($) ($) ($) ($) SARS (#) ($) ($)
- ------------------------ ---- ------- ----- ------------- ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul J. White 1996 138,332 -0- -0- -0- -0- -0- -0-
CEO, President 1995 102,226 -0- -0- -0- -0- -0- -0-
1994 60,607 -0- -0- -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------------
Kenneth S. Kornman 1996 154,886 -0- -0- -0- -0- -0- -0-
Chief Scientific
Officer 1995 103,735 -0- 23,797* -0- -0- -0- -0-
1994 217,629 -0- 30,000* -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------------
Michael G. Newman 1996 141,695 -0- -0- -0- -0- -0- -0-
Executive Vice
President 1995 121,536 -0- 23,797* -0- -0- -0- -0-
Secretary 1994 274,146 -0- 30,000* -0- -0- -0- -0-
</TABLE>
- ---------------
* These amounts reflect contributions made to our profit sharing plan.
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<PAGE> 52
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information concerning each grant of options
to purchase our Common Stock made during the year ended December 31, 1996 to the
Named Executive Officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/SARS GRANTED GRANTED TO EMPLOYEES EXERCISE OR BASE EXPIRATION
NAME (#) IN FISCAL YEAR PRICE ($/SH) DATE
- ----------------------------- -------------------- -------------------- ---------------- ----------
<S> <C> <C> <C> <C>
Paul J. White -0-* -0- -0- N/A
Kenneth S. Kornman -0-** -0- -0- N/A
Michael G. Newman -0-*** -0- -0- N/A
</TABLE>
- ---------------
* Does not reflect 25,000 stock options issued in 1997. Does not reflect
20,000 warrants purchased as part of a debt/warrant offering in 1997. See
"Debt/Warrant Offering" at page 50.
** Does not reflect 22,000 stock options issued in 1997. Does not reflect
20,000 warrants purchased as part of a debt/warrant offering in 1997. See
"Debt/Warrant Offering" at page 50.
*** Does not reflect 35,125 stock options issued in 1997. Does not reflect
20,000 warrants purchased as part of a debt/warrant offering in 1997. See
"Debt/Warrant Offering" at page 50.
1996 EQUITY INCENTIVE PLAN
Our 1996 Equity Incentive Plan (the "Plan") was adopted by the Board of
Directors and approved by the shareholders in June 1996. A total of 750,000
shares of Common Stock were originally reserved for issuance under the Plan. The
Plan was later amended by vote of both the Board of Directors and the
shareholders in May 1997 to increase the number of shares of Common Stock
reserved for issuance under the Plan to 1,000,000. The Plan provides for grants
of incentive stock options to employees (including officers and employee
directors), nonstatutory stock options to employees (including officers and
employee directors) and consultants (including non-employee directors), stock
appreciation rights ("SARs"), stock awards and stock bonuses. The Plan allows
for administration by either the Board of Directors or a committee thereunder,
which determines optionees and the terms of options granted, including the
exercise price, number of shares subject to the option and the exercisability
thereof.
The terms of options granted under the Plan generally may not exceed 10
years. The exercise price of options granted under the Plan is determined by the
Board of Directors, but, in the case of an incentive stock option, cannot be
less than 100% of the fair market value of the Common Stock on the date of
grant. The exercise price of all nonstatutory stock options must equal at least
85% of the fair market value of the Common Stock on the date of grant. The
exercise price of any stock option granted to an optionee who owns stock
possessing more than 10% of the voting power of all classes of stock of our
company must equal at least 110% of the fair market value of the Common Stock on
the date of grant. The exercise price may be paid in such consideration as
determined by the Board of Directors or a committee of the Board, including cash
and promissory notes. Options granted under the Plan to employees and
consultants have generally not been immediately exercisable and have vested over
a thirty-six (36) month period (at the rate of 16.66% of the shares subject to
the option at the end of six (6) months and 2.777% at the end of every full
month thereafter). No option may be transferred by the optionee other than by
will or the laws of descent or distribution. An optionee whose relationship with
us or any related corporation ceases for any reason (other than by death or
permanent and total disability) may exercise options in the three (3) month
period following such cessation (unless such options terminate or expire sooner
by their terms) or in such longer period determined by the Board of Directors,
provided a period of five (5) years is not exceeded.
Shares subject to options granted under the Plan which have lapsed or
terminated may again be subject to options granted under the Plan. Furthermore,
the Board of Directors may offer to exchange new options for
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<PAGE> 53
existing options, with the shares subject to the existing options again becoming
available for grant under the Plan. Upon any merger or consolidation in which we
are not the surviving corporation, all outstanding options shall either be
assumed or substituted by the surviving entity. If the surviving entity
determines not to assume or substitute such options, the options terminate as of
the closing of the merger or consolidation.
As of September 30, 1997, no shares of Common Stock had been issued upon
the exercise of options granted under the Plan, options to purchase 800,579
shares of Common Stock at a weighted average exercise price of $4.37 per share
were outstanding and 199,421 shares remained available for future options
grants. Prior to this offering, no SARs or restricted stock awards had been
given to our employees and consultants. The Plan will terminate in June 2006,
unless terminated sooner by the Board of Directors.
EMPLOYMENT AGREEMENTS
In January 1996, we entered into employment contracts with all three of the
Named Executive Officers. Mr. Paul J. White, the Chief Executive Officer and
President, currently receives an annual base salary of $140,000 a year, which
will increase to $170,000 for 1998. Drs. Kenneth S. Kornman and Michael G.
Newman each currently receive an annual base salary of $135,000, which will
increase to $165,000 for 1998. Each Named Executive Officer's employment
contract has a five year term (beginning in January 1996) which is automatically
renewed for an additional twelve months unless six-months prior written notice
is given by either party. Each of the Named Executive Officers is also receiving
a $600 a month automobile allowance.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our company's Amended and Restated Articles of Incorporation eliminates the
liability of directors for monetary damages for an act or omission in the
director's capacity as a director, except for: (i) a breach of a director's duty
of loyalty to our company or our shareholders; (ii) an act or omission not in
good faith that constitutes a breach of duty of that director to our Company or
an act or omission that involves intentional misconduct or a knowing violation
of the law; (iii) a transaction from which a director received an improper
benefit, whether or not the benefit resulted from an action taken within the
scope of the director's office; or (iv) an act or omission for which the
liability of a director is expressly provided for by an applicable statute.
If the Texas Miscellaneous Corporation Laws Act or the Texas Business
Corporation Act is amended to authorize action further eliminating or limiting
the personal liability of directors, then the liability of a director of our
company shall be eliminated or limited to the fullest extent permitted by such
statutes, as so amended. Any amendment, repeal or modification of such provision
shall be prospective only and shall not adversely affect any right or protection
of a director of our company existing at the time of such amendment, repeal or
modification.
Additionally, it is the position of the Securities and Exchange Commission
that indemnification of directors and officers for liabilities arising under the
Securities Act of 1933 is against public policy and unenforceable pursuant to
Section 14 of the Securities Act of 1933.
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<PAGE> 54
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We believe that the transactions set forth below were made on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
All future transactions, including loans, between us and our officers,
directors, principal shareholders and their affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested outside directors, and will continue to be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
PRIVATE PLACEMENT OF SECURITIES
Between November 1996 and January 1997, we sold 189,188 shares of our
Common Stock in a private placement at a price of $3.70 per share. Between March
1997 and September 1997, we sold 293,820 shares of our Common Stock in a second
private placement transaction at a price of $5.00 per share. Except for Thomas
Moore, who subsequently became one of our directors, all investors in both such
private placements were unrelated third party investors who purchased in
arms'-length transactions.
DEBT/WARRANT OFFERING
From August 1, 1997 through October 6, 1997, we borrowed an aggregate of
$1,780,000 from a group of lenders evidenced by promissory notes bearing
interest at 10% interest rate and due the earlier of fourteen months from the
date of the notes or the closing date of an initial public offering (the "Bridge
Loans"). As additional consideration for the Bridge Loans, we issued one warrant
for each $5.00 loaned to the Company for a total of 356,545 warrants (the
"Bridge Warrants"). Each Bridge Warrant entitles the holder to purchase one
share of Common Stock at $5.50 per share for a period of five years from the
date of issuance. The following officers and directors subscribed to the Bridge
Loans in the principal amount indicated after their names: Paul J. White
($100,000/20,000 Bridge Warrants); Kenneth S. Kornman ($100,000/20,000 Bridge
Warrants); Michael G. Newman ($100,000/20,000 Bridge Warrants); U. Spencer Allen
($50,000/10,000 Bridge Warrants); Jeanne Ambruster ($50,000/10,000 Bridge
Warrants); and Thomas A. Moore ($75,000/15,000 Bridge Warrants).
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
Our shareholders have elected Thomas A. Moore to serve as a director. Mr.
Moore is also the CEO and President of Nelson Communications, Inc. ("NCI"). We
have recently formed a joint venture with NCI. The primary purpose of the joint
venture is to market our computer modeling technology to pharmaceutical
companies as a tool which provides medical education regarding disease
progression. A secondary purpose of the joint venture is to provide marketing
information to those patients who test positive on one of our tests and who
subsequently send in a business reply card seeking more information. In both
aspects of the joint venture, our company will be acting as the
technology/information partner and NCI will be functioning as the marketing
partner. See "Product Development" at page 34. We believe that the terms of the
joint venture are at least as favorable to us as would be available from a
company other than NCI in an arm's-length transaction. The disinterested members
of the Board of Directors have unanimously approved the execution of this
agreement.
EMPLOYEE SALARY REDUCTION PLAN
In May 1997, in order to reduce our overhead and as an additional incentive
to our employees, we instituted a voluntary salary reduction plan where our
employees could choose to receive stock options instead of salary. Employees
were offered options to purchase 600 shares of Common Stock for every $1,000
their salary was reduced. Most of our employees participated, including all of
our officers. A total of 267,079 options to purchase Common Stock at an exercise
price of $5.00 or $5.50 per share were issued to employees.
50
<PAGE> 55
PRINCIPAL SHAREHOLDERS
As of September 30, 1997, we have issued 3,738,007 shares of Common Stock
to 72 holders of record. The following table sets forth certain information
regarding the beneficial ownership of shares of our Common Stock as of September
30, 1997 by (i) each of our company's directors and executive officers, (ii)
each person who beneficially owns more than 5% of the outstanding shares of
Common Stock, and (iii) all directors and officers of our company as a group.
Unless otherwise indicated, the shareholders listed below may be reached at 4400
MacArthur Boulevard, Suite 980, Newport Beach, California 92660.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED(1)
SHARES ---------------------------------
NAME BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- ---------------------------------------------------- ------------------ --------------- --------------
<S> <C> <C> <C>
Kenneth S. Kornman(2)............................... 1,131,235 30.26% 21.60%
100 N.E. Loop 410
San Antonio, Texas 78216
Paul J. White(3).................................... 1,121,110 29.99% 21.40%
Michael G. Newman(4)................................ 1,072,110 28.68% 20.47%
U. Spencer Allen(5)................................. 62,783 1.68% 1.20%
Jeanne Ambruster(6)................................. 38,999 1.04% *
3100 N. West St., Bldg. A
Flagstaff, Arizona 86004
Thomas A. Moore(7).................................. 75,998 2.03% 1.45%
41 Madison Avenue, Ste. 27
New York, New York 10010
Ronald A. LaRosa(8)................................. -- * *
231 S. Francisco Place
Anaheim Hills, California 92807
All Officers and Directors as a Group (7
persons)(9)....................................... 3,502,235 93.69% 66.86%
</TABLE>
- ---------------
* Less than one percent.
(1) Percentage of ownership for each holder is based on 3,738,007 shares of
Common Stock outstanding on September 30, 1997 together with applicable
options and warrants for such shareholder. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes shares over which the holder has voting or
investment power, subject to community property laws. Shares of Common Stock
subject to options and warrants that are currently exercisable or
exercisable within 60 days are deemed to be beneficially owned by the person
holding the option or warrants for computing such person's percentage, but
are not treated as outstanding for computing the percentage of any other
person.
(2) Includes 983,333 shares held in Rocklyn, Ltd., a Texas limited partnership
created for the benefit of the Kornman family, including Mr. Kornman.
Includes 27,902 shares issuable pursuant to options exercisable within 60
days of September 30, 1997 and 20,000 shares issuable pursuant to warrants
which are immediately exercisable.
(3) Mr. Paul J. White and Mrs. Suzette White, as trustees of the White Family
Trust, have voting power over 1,022,333 of such shares. The White Family
Trust was established for the benefit of members of the White family,
including Mr. White. Includes 60,000 shares held in irrevocable trusts
created for the benefit of the White's children. Mr. White disclaims
beneficial ownership of such shares. Includes 17,777 shares issuable
pursuant to options exercisable within 60 days of September 30, 1997 and
20,000 shares pursuant to warrants which are immediately exercisable.
(4) Mr. Michael G. Newman and Mrs. Susan L. Newman, as trustees of the Newman
Family Trust, have voting power over 806,556 of such shares. The Newman
Family Trust was created for the benefit of the family of Michael G. Newman
and Mrs. Susan L. Newman. Mr. and Mrs. Newman, as general partners of The
Michael and Susan Newman Family L.P., a Delaware limited partnership, have
voting power over 196,000 shares included therein. Mr. Newman disclaims
beneficial ownership of such shares. Includes
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<PAGE> 56
14,777 shares issuable pursuant to options exercisable within 60 days of
September 30, 1997 and 20,000 shares issuable pursuant to warrants which are
immediately exercisable.
(5) Includes 52,783 shares issuable pursuant to options which are exercisable
within 60 days of September 30, 1997 and 10,000 shares issuable pursuant to
warrants which are immediately exercisable.
(6) Includes 28,999 shares issuable pursuant to options which are exercisable
within 60 days of September 30, 1997 and 10,000 shares issuable pursuant to
warrants which are immediately exercisable.
(7) Includes 6,944 shares issuable pursuant to options which are exercisable
within 60 days of September 30, 1997 and 15,000 shares issuable pursuant to
warrants which are immediately exercisable.
(8) Mr. LaRosa will be appointed as a Director of our company upon completion of
this offering. Mr. LaRosa currently holds no beneficial interest in our
company.
(9) Includes all shares deposited in trust by the officers and directors of our
company, in which shares such officers and directors disclaim any beneficial
ownership interest.
DESCRIPTION OF SECURITIES
We are authorized to issue up to 10,000,000 shares of no par value Common
Stock and 5,000,000 shares of Preferred Stock. As of September 30, 1997, there
were outstanding 3,738,007 shares of Common Stock held of record by 72 persons.
No shares of Preferred Stock were issued or outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted upon by the shareholders. Holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefor. Upon the liquidation,
dissolution, or winding up of our company, the holders of Common Stock are
entitled to share ratably in all of our assets which are legally available for
distribution, after payment of all debts and other liabilities and the
liquidation preference of any outstanding Common Stock. Holders of Common Stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of Common Stock are, and the shares being sold by us in this
offering will be, when issued and delivered, validly issued, fully paid and
nonassessable.
Based upon the number of shares outstanding as of that date, and after
giving effect to the sale of the Common Stock offered hereby, there will be
5,238,007 shares of Common Stock outstanding (assuming no exercise of
outstanding options, warrants or the Underwriters' over-allotment option).
PREFERRED STOCK
Our company is authorized to issue up to 5,000,000 shares of Preferred
Stock. No shares of Preferred Stock are outstanding. The Board has the authority
without any further action by our shareholders to issue any or all of the
authorized shares of Preferred Stock in one or more series and to establish the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any series
or the designation of such series. The issuance of Preferred Stock could
adversely affect the holders of Common Stock and could have the effect of
delaying, deferring or preventing a change in our control. We have no present
plans to issue any shares of Preferred Stock. See "Effect of Preferred Stock and
Director Removal Provisions" at page 15.
OPTIONS AND WARRANTS
Options. As of September 30, 1997, 800,579 options to purchase our Common
Stock had been issued under our 1996 Equity Incentive Plan. These options vest
over time and have a per share exercise price from $3.70 to $5.00. See "1996
Equity Incentive Plan" at page 48.
Underwriters' Warrants. Upon completion of this offering, we will have
granted to the Underwriters warrants (the "Underwriters' Warrants") to purchase
150,000 shares of Common Stock. The Underwriters' Warrants are exercisable at a
price per share equal to 135% of the initial public offering price for a period
of
52
<PAGE> 57
four years commencing at the second year from the date of issuance. The
Underwriters' Warrants contain anti-dilution provisions providing for
adjustments of the exercise price and the number of shares underlying the
Underwriters' Warrants upon the occurrence of certain events, including any
recapitalization, reclassification, stock dividend, stock split, stock
combination or similar transaction. The Underwriters' Warrants grant to the
holders thereof certain registration rights which are described below. See
"Registration Rights" at page 53 and "Underwriting" at page 55.
Bridge Warrants. From August 1, 1997 through October 6, 1997, we borrowed
an aggregate of $1,780,000 from a group of lenders evidenced by promissory notes
bearing interest at 10% interest rate and due the earlier of fourteen months
from the date of the notes or the closing date an initial public offering (the
"Bridge Loans"). The Bridge Loans are subordinate to the prior payment in full
of all of our secured obligations currently existing or those created in the
future. As additional consideration for the Bridge Loans, we issued one warrant
for each $5.00 loaned to the Company for a total of 356,545 warrants (the
"Bridge Warrants"). Each Bridge Warrant entitles the holder to purchase one
share of Common Stock at $5.50 per share for a period of five years from the
date of issuance. We can call the Bridge Warrants if the Common Stock is listed
on a national market or NASDAQ system and has had a closing price of at least
$12.00 per share for thirty (30) consecutive trading days.
REGISTRATION RIGHTS
In connection with the Underwriters' Warrants, the holders of the Common
Stock issuable upon exercise of the Underwriters' Warrants have the right to
notice and inclusion in any registration statement filed by us for a period of
six (6) years commencing one year after our initial public offering closes
solely at our expense (but excluding fees and expenses of the holder's counsel
and any underwriting or selling commissions). Additionally, we agreed to allow
one demand registration for a period of four years from the effective date of
the registration statement, upon written demand of holder(s) representing a
majority of the outstanding Underwriters' Warrants, solely at our expense (but
excluding fees and expenses of the holder's counsel and any underwriting or
selling commissions). Additionally, the Bridge Warrant holders are permitted one
(1) S-3 demand registration upon request of holders of fifty percent (50%) of
the outstanding Bridge Warrants.
TRANSFER AGENT AND REGISTRAR
U.S. Stock Transfer Corporation will act as transfer agent and registrar
for our Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 5,238,007 outstanding shares
of Common Stock (assuming no exercise of outstanding options, warrants or
Underwriters' over-allotment option). Of these shares, the 1,500,000 shares sold
to the public in this offering will be freely tradeable without restrictions or
further registration under the Securities Act, except for any shares purchased
by our "affiliates" within the meaning of the Securities Act, which will be
subject to the resale limitations of Rule 144. The remaining 3,738,007 shares
held by existing shareholders were issued by us in private transactions in
reliance upon one or more exemptions under the Securities Act, are "restricted
securities" as that term is defined in Rule 144 promulgated under the Securities
Act. Such restricted securities may be sold in compliance with such Rule,
pursuant to registration under the Securities Act or pursuant to an exemption
therefrom. Generally, under Rule 144, each person holding restricted securities
for a period of one year may, every three months after such one year holding
period, sell in ordinary brokerage transactions or to market makers an amount of
shares equal to the greater of one percent of our then outstanding Common Stock
or the average weekly trading volume during the four weeks prior to the proposed
sale. In addition, sales under Rule 144 may be made only through unsolicited
"broker's transactions" or to a "market maker" and are subject to various other
conditions. The limitation on the number of shares which may be sold under Rule
144 and the "broker's transaction" requirement do not apply to restricted
securities sold for the account of a person who is not and
53
<PAGE> 58
has not been our "affiliate" (as that term is defined in the Act) during the
three months prior to the proposed sale and who has beneficially owned the
securities for at least two years.
Prior to the offering, there has been no market for the Common Stock, and
no predictions can be made as to the effect, if any, that sales of shares under
Rule 144 or the availability of shares for sale will have on the market prices
prevailing from time to time. Sales of substantial amounts of Common Stock in
the public market following this offering could lower the market price of the
Common Stock. Of the 5,238,007 shares of Common Stock to be outstanding after
this offering (assuming no exercise of outstanding options, warrants or the
overallotment option), 1,500,000 shares will be freely tradeable without
restriction. Upon expiration of the lock-up agreements entered into by the
officers and directors of our company, an additional 3,258,053 shares will
become eligible for sale one year from the close of this offering, subject to
the provisions of Rule 144. Of the remaining 479,954 shares of Common Stock,
5,000 shares will be eligible for resale under Rule 144 following this offering.
The remaining 474,954 shares will have been held for less than one year and will
become eligible for sale at various dates as the one-year holding period under
Rule 144 is satisfied.
In addition, we intend to file a registration statement on Form S-8 with
respect to the shares of Common Stock issuable upon exercise of options under
the 1996 Equity Incentive Plan (the "Plan"). The Plan authorizes the issuance of
options relating to up to 1,000,000 shares of Common Stock. Currently, there are
800,579 options that have been issued under the Plan which generally vest over
three years. See "1996 Equity Incentive Plan" at page 48. Upon filing of such
registration statement, the holders of such options may, subject to vesting
requirements, exercise and sell their shares immediately without restriction,
except affiliates who are subject to certain volume limitations and manner of
sale requirements of Rule 144. Holders of 356,545 warrants to purchase shares
are entitled to certain registration rights with respect to such shares. Upon
registration, such shares may be sold in the market without limitation. See
"Registration Rights" at page 53. Sales of such shares may decrease the market
price for our Common Stock. See "Underwriting" at page 55 and "Arbitrary
Offering Price of the Common Stock; Possible Volatility of Common Stock Price"
at page 15.
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<PAGE> 59
UNDERWRITING
CERTAIN PERSONS WHO PARTICIPATE IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES, INCLUDING
PURCHASES OF SHARES TO MAINTAIN THEIR MARKET PRICE OR PURCHASES TO COVER SOME OR
ALL OF THE UNDERWRITERS' SHORT POSITION IN THE SHARES.
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), we have agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom Nutmeg Securities, Ltd. is acting as representative (the "Representative"),
has severally agreed to purchase, the number of shares of Common Stock set forth
opposite its name below. Under certain circumstances, the commitments of
nondefaulting Underwriters may be increased as set forth in the Agreement Among
Underwriters.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------------ ----------
<S> <C>
Nutmeg Securities, Ltd............................................
Millennium Financial Group, Inc...................................
Total........................................................ 1,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above shares of Common Stock if any are purchased. The Underwriters propose to
offer the shares of Common Stock directly to the public at the public offering
price set forth on the cover page of this Prospectus.
We have granted to the Underwriters a 45-day over-allotment option to
purchase up to 225,000 additional shares of Common Stock at the public offering
price less the underwriting discount. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of the shares of
Common Stock offered hereby.
We have also agreed to sell to the Underwriters, for nominal consideration,
warrants (the "Underwriters' Warrants") to purchase the number of shares of our
Common Stock equal to 10% of the total number of shares of Common Stock sold in
this offering at a price per share equal to 135% of the initial public offering
price of the Common Stock. The Underwriters' Warrants will be exercisable for a
period of four years commencing one year following the closing of this offering
and will contain certain demand and "piggyback" registration rights with respect
to the Common Stock issuable upon the exercise of the Underwriters' Warrants.
The Underwriters' Warrants are not transferable (except to certain employees and
affiliates of the Underwriters). The exercise price and the number of shares
issuable upon exercise may, under certain circumstances, be subject to
adjustment pursuant to antidilution provisions.
We have agreed to allow the Underwriters a commission of eight percent (8%)
of the public offering price of the shares of Common Stock. Additionally, we
will be paying the Underwriters, following the closing of this offering, a
nonaccountable expense allowance equal to three percent (3%) of the aggregate
public offering price of the shares of Common Stock, less any applicable
deposits.
We have further agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be
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<PAGE> 60
required to make in respect thereof. We also have agreed to reimburse the
Underwriters for certain out-of-pocket expenses incurred in connection with the
offering.
The Underwriters have advised us that they do not intend to make sales to
discretionary accounts.
Our officers and directors who in the aggregate beneficially own 3,258,053
shares of Common Stock have agreed not to, directly or indirectly, sell, offer,
contract to sell, make any short sale, pledge or otherwise dispose of such
shares for a period of 12 months after the date of the closing of this offering.
In connection with this offering certain underwriters may engage in passive
market making transactions in the shares in accordance with Rule 103 of
Regulation M. Further, the Underwriters' selling group members and their
respective affiliates may engage in transactions that stabilize, maintain or
otherwise affect the market price of our shares. These transactions may include
stabilization transactions permitted by Rule 104 of Regulation M, under which
persons may bid for or purchase shares to stabilize the market price. The
Underwriters may also create a "short position" for their own account by selling
more shares in the offering than they are committed to purchase, and in that
case they may purchase shares in the open market after this offering is
completed to cover all or a part of their short position. The Representative may
also cover all or a portion of their short position, up to 225,000 shares, by
exercising their over-allotment option described above and on the cover of this
prospectus.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
Common Stock offered hereby will be passed upon for us by Jeffers, Wilson, Shaff
& Falk, LLP, Irvine, California. Certain legal matters in connection with the
offering will be passed upon for the Underwriters by William M. Prifti, Esq.,
Lynnfield, Massachusetts.
EXPERTS
The audited consolidated financial statements included in this Prospectus
and elsewhere in the Registration Statement have been audited by Singer Lewak
Greenbaum & Goldstein LLP, Los Angeles, California, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (the "Registration Statement") under the
Securities Act with respect to the securities offered hereby. 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 us and this offering,
reference is made to the Registration Statement, including the exhibits and
schedules filed therewith, copies of which may be obtained at prescribed rates
from the Commission at its principal office at 450 Fifth Street N.W.,
Washington, D.C. 20549, and at the following regional offices of the Commission:
75 Park Place, New York 10007, and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400 Chicago, Illinois 60604. In addition, the Commission
maintains a World Wide Web site on the Internet at http://www.sec.gov that
contains reports, proxy and information statements and other documents filed
electronically with the Commission, including the Registration Statement.
Descriptions contained in this Prospectus as to the contents of any agreement or
other documents filed as an exhibit to the Registration Statement are not
necessarily complete and each such description is qualified by reference to such
agreement or document.
We intend to furnish to our shareholders annual reports containing
financial statements audited and reported upon by our independent public
accountants.
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<PAGE> 61
INDEX TO FINANCIAL STATEMENTS OF MEDICAL SCIENCE SYSTEMS, INC.
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS............................... F-2
FINANCIAL STATEMENTS
Balance Sheets................................................................. F-3
Statements of Operations....................................................... F-4
Statements of Shareholders' Deficit............................................ F-5
Statements of Cash Flows....................................................... F-6
Notes to Financial Statements.................................................. F-7 - F-16
</TABLE>
F-1
<PAGE> 62
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Medical Science Systems, Inc.
We have audited the accompanying balance sheet of Medical Science Systems,
Inc. as of December 31, 1996 and the related statements of operations,
shareholders' deficit, and cash flows for each of the two years in the period
ended December 31, 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 Medical Science Systems,
Inc. as of December 31, 1996, and the results of its operations and its cash
flows, for each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
September 26, 1997
F-2
<PAGE> 63
MEDICAL SCIENCE SYSTEMS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND SEPTEMBER 30, 1997 (UNAUDITED)
ASSETS (Note 4)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents (Note 2).............................. $ 55,966 $ 869,627
Accounts receivable............................................. 12,359 6,365
Inventories..................................................... -- 6,721
Due from shareholder............................................ 6,565 --
Deposits........................................................ -- 17,816
---------- ----------
Total current assets......................................... 74,890 900,529
Furniture and equipment, net (Note 3)............................. 82,877 188,458
Patents........................................................... 154,195 261,475
Deferred offering costs........................................... -- 87,000
---------- ----------
Total assets............................................ $ 311,962 $ 1,437,462
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Revolving line of credit (Note 4)............................... $ 353,723 $ --
Accounts payable................................................ 219,669 320,922
Accrued expenses................................................ 44,384 202,539
Accrued officer compensation (Note 11).......................... 127,500 --
Deferred rent................................................... 12,703 10,217
Deferred income................................................. -- 10,400
Current portion of long-term debt (Note 4)...................... 44,489 147,648
Current portion of capitalized lease obligations (Note 10)...... 8,408 40,311
---------- ----------
Total current liabilities.................................... 810,876 732,037
Promissory notes (Note 5)......................................... 1,550,000
Long-term debt, less current portion (Note 4)..................... 173,798 524,176
Capitalized lease obligations, less current portion (Note 10)..... 27,036 94,790
---------- ----------
Total liabilities............................................ 1,011,710 2,901,003
---------- ----------
Commitments and contingencies (Note 10)
Shareholders' deficit (Notes 7 and 9) Preferred stock, no par
value 5,000,000 shares authorized none issued and outstanding... -- --
Common stock, no par value 10,000,000 shares authorized;
3,295,539 and 3,738,007 (unaudited) shares issued and
outstanding.................................................. 171,500 2,450,036
Accumulated deficit............................................. (871,248) (3,913,577)
---------- ----------
Total shareholders' deficit.................................. (699,748) (1,463,541)
---------- ----------
Total liabilities and shareholders' deficit............. $ 311,962 $ 1,437,462
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 64
MEDICAL SCIENCE SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ --------------------------
1996 1995 1997 1996
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Sales....................................... $1,918,879 $1,872,932 $ 152,476 $ 1,905,380
Cost of sales............................... 547,766 367,520 149,702 538,172
---------- ---------- ----------- -----------
Gross profit................................ 1,371,113 1,505,412 2,774 1,367,208
---------- ---------- ----------- -----------
Expenses
Research and development.................. 958,249 582,595 784,722 681,871
Selling, general, and administrative...... 1,162,768 755,785 2,164,141 776,064
---------- ---------- ----------- -----------
Total expenses......................... 2,121,017 1,338,380 2,948,863 1,457,935
---------- ---------- ----------- -----------
Income (loss) from operations............... (749,904) 167,032 (2,946,089) (90,727)
---------- ---------- ----------- -----------
Other income (expense)
Interest income........................... 8,561 35 2,417 7,918
Interest expense.......................... (34,229) (14,300) (73,189) (13,728)
Loss on disposal of assets................ (6,934) -- -- --
Financing costs (Note 5).................. -- (25,468) --
---------- ---------- ----------- -----------
Total other income (expense)........... (32,602) (14,265) (96,240) (5,810)
---------- ---------- ----------- -----------
Income (loss) before provision for income
taxes..................................... (782,506) 152,767 (3,042,329) (96,537)
Provision for income taxes.................. 6,040 2,755 --
---------- ---------- ----------- -----------
Net income (loss)........................... $ (788,546) $ 150,012 $(3,042,329) $ (96,537)
========== ========== =========== ===========
Earnings (loss) per common share............ $ (.18) $ .03 $ (.71) $ (.02)
========== ========== =========== ===========
Weighted average common shares
outstanding............................... 4,288,436 4,288,436 4,288,436 4,288,436
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 65
MEDICAL SCIENCE SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994.................. 3,249,999 $ 3,000 $ (100,714) $ (97,714)
Distribution to shareholders................ (132,000) (132,000)
Net income.................................. 150,012 150,012
--------- ---------- ----------- -----------
Balance, December 31, 1995.................. 3,249,999 3,000 (82,702) (79,702)
Sale of common stock (Note 7)............... 40,540 150,000 150,000
Common stock issued for services rendered... 5,000 18,500 18,500
Net loss.................................... (788,546) (788,546)
--------- ---------- ----------- -----------
Balance, December 31, 1996.................. 3,295,539 171,500 (871,248) (699,748)
Sale of common stock (unaudited) (Note 7)... 148,648 550,000 550,000
Sale of common stock (unaudited) (Note 7)... 293,820 1,469,100 1,469,100
Offering costs (unaudited).................. (136,975) (136,975)
Stock options issued for reduction in salary
(unaudited) (Note 9)...................... 370,943 370,943
Issuance of warrants for financing costs
(unaudited) (Note 5)...................... 25,468 25,468
Net loss (unaudited)........................ (3,042,329) (3,042,329)
--------- ---------- ----------- -----------
Balance, September 30, 1997 (unaudited)..... 3,738,007 $2,450,036 $(3,913,577) $(1,463,541)
========= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 66
MEDICAL SCIENCE SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------- --------------------------
1996 1995 1997 1996
--------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................ $(788,546) $150,012 $(3,042,329) $ (96,537)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities
Loss on sale of assets......................................... 6,934 -- -- --
Depreciation and amortization.................................. 27,330 14,118 48,610 20,446
Issuance of common stock for services.......................... 18,500 -- -- 18,500
Issuance of stock options in exchange for a reduction in
salary....................................................... -- -- 370,943 --
Issuance of warrants for financing activities.................. -- 25,468
(Increase) decrease in
Accounts receivable............................................ 315,241 (324,376) 5,994 286,746
Inventories.................................................... -- (6,721)
Prepaid expenses............................................... -- 900 -- --
Due from shareholder........................................... (6,565) 394 6,565 (42,000)
Deposits....................................................... -- (17,816)
Increase (decrease) in
Accounts payable............................................... 198,090 (69,143) 101,253 28,779
Accrued expenses............................................... 140,323 (25,497) 158,155 127,377
Accrued officer compensation................................... -- (127,500)
Unearned revenues.............................................. (366,051) 366,051 -- (366,051)
Deferred rent.................................................. 12,703 -- (2,486) --
Deferred income................................................ -- 10,400
--------- --------- ----------- ---------
Net cash provided by (used in) operating activities................ (442,041) 112,459 (2,469,464) (22,740)
--------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment.............................. (31,942) (35,743) (35,194) (7,268)
Increase in patents.............................................. (128,559) (25,636) (107,601) (37,500)
Proceeds from sale of assets..................................... 13,000 -- -- --
--------- --------- ----------- ---------
Net cash used in investing activities.............................. (147,501) (61,379) (142,795) (44,768)
--------- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock............................................. 150,000 -- 1,882,125 --
Issuance of promissory notes..................................... -- 1,550,000
Increase in deferred offering costs.............................. -- -- (87,000) --
Distribution to shareholders..................................... -- (132,000) -- --
Proceeds from note payable....................................... 250,000 -- -- 250,000
Principal payments on long-term debt............................. (31,713) -- (46,463) (21,244)
Borrowings on line of credit, net................................ 209,723 144,000 146,277 105,990
Principal payments on capital lease obligations.................. (5,120) -- (19,019) (4,104)
--------- -------- ----------- -----------
Net cash provided by financing activities.......................... 572,890 12,000 3,425,920 330,642
--------- -------- ----------- -----------
Net increase (decrease) in cash.................................... (16,652) 63,080 813,661 263,134
Cash and cash equivalents, beginning of period..................... 72,618 9,538 55,966 72,618
--------- -------- ----------- -----------
Cash and cash equivalents, end of period........................... $ 55,966 $ 72,618 $ 869,627 $ 335,752
========== ========= ============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid.................................................... $ 29,549 $ 14,300 $ 59,194 $ 13,728
========== ========= ============ ==========
Income taxes paid................................................ $ 6,040 $ 2,755 $ -- $ --
========== ========= ============ ==========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1996 and the nine months ended September
30, 1997 and 1996, the Company acquired furniture and equipment of $40,564,
$118,676 (unaudited), and $40,564 (unaudited), respectively, under capitalized
lease obligations.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 67
MEDICAL SCIENCE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED.)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
Medical Science Systems, Inc., a Texas corporation, (the "Company")
originally operated under two separate corporations, known as Oral Science
Systems and Oral Science Technologies. In 1995 Oral Science Systems was merged
into Oral Science Technologies and Oral Science Technologies was renamed Medical
Science Systems, Inc. The merger was accounted for in a manner similar to a
pooling of interest, accordingly, the results of operations for the year ended
December 31, 1995 include Oral Science Systems from January 1, 1995 to the date
of the merger.
The Company is currently developing a line of genetic susceptibility tests
and therapeutic targets for common diseases. As of December 31, 1996, the
Company has commercially introduced one such product and is in various stages of
development for several others. The Company also provides clinical trials and
research services under contract to pharmaceutical companies, and such services
generated substantially all of the Company's revenues for the years ended
December 31, 1996 and 1995.
Interim Financial Information
The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management, are necessary to fairly state the Company's financial
position, the results of its operations, and cash flows for the periods present.
The results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of results for the entire fiscal year ending December 31,
1997.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reported periods. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the Company's
financial instruments including cash, accounts receivable, accounts payable,
accrued expenses, and accrued officer compensation, the carrying amounts
approximate fair value due to their short maturities. The amounts shown for line
of credit, long-term debt, and capital lease obligations also approximate fair
value because current interest rates and terms offered to the Company for
similar debt and lease agreements are substantially the same.
F-7
<PAGE> 68
MEDICAL SCIENCE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED.)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Furniture and Equipment
Furniture and equipment, including equipment under capital leases, are
stated at cost, less accumulated depreciation and amortization. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of three to five years as follows:
<TABLE>
<S> <C>
Computer equipment.................................. 3 years
Furniture and fixtures.............................. 5 years
Computer software................................... 3 years
Equipment under capital leases...................... 3 years
</TABLE>
Betterments, renewals, and extraordinary repairs that extend the life of
the asset are capitalized; other repairs and maintenance charges are expensed as
incurred. The cost and related accumulated depreciation applicable to assets
retired are removed from the accounts, and the gain or loss on disposition is
recognized in the statement of operations.
Patents
The cost of acquiring patents, which consists principally of legal fees, is
being amortized using the straight-line method of their useful lives of ten
years beginning from the time the patents are awarded. The Company was issued a
patent in August 1997 and currently has ten patents pending; accordingly, the
Company had not recognized any amortization related to the ten pending patents
as of September 30, 1997. The Company recognized $321 (unaudited) in
amortization expense for the nine months ended September 30, 1997 related to the
patent issued in August 1997.
Deferred Offering Costs
Amounts paid for costs associated with an anticipated initial public
offering ("IPO") are capitalized and will be recorded as a reduction to common
stock upon the completion of the IPO. In the event that the IPO is not
successful, the deferred offering costs will be charged to expense.
Revenue Recognition
Contract revenues are recognized ratably as services are provided based on
a fixed contract price or on negotiated hourly rates. The Company has no
unbilled accounts receivable under any contracts at December 31, 1996 and
September 30, 1997 (unaudited). Provision for anticipated losses on fixed-price
contracts is made in the period such losses are identified. Revenue from genetic
susceptibility tests is recognized when the tests have been completed and the
results reported to the doctors.
Concentrations of Credit Risk
The Company sells products and provides contract services for customers
primarily in the United States and extends credit based on an evaluation of the
customer's financial condition, generally without requiring collateral. Exposure
to losses on receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses.
F-8
<PAGE> 69
MEDICAL SCIENCE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED.)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During the year ended December 31, 1996, the Company did business with
three customers whose sales comprised approximately 99% of revenues. Amounts due
from these customers represented 100% of accounts receivable at December 31,
1996.
During the year ended December 31, 1995, the Company did business with two
customers whose sales comprised approximately 85% of revenues.
During the nine months ended September 30, 1996, the Company did business
with three customers whose sales comprised approximately 100% of revenues.
Research and Development
Research and development costs related to the development of new products
are expensed as incurred.
Income Taxes
Prior to September 30, 1996, the Company had elected to be treated as an
"S" corporation for federal and state tax purposes. Effective September 30,
1996, the Company terminated such election and became taxable as a "C"
corporation. The Company will not realize any future tax benefits of net
operating losses incurred prior to September 30, 1996.
The Company accounts for income taxes under the liability method required
by Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Deferred tax assets and liabilities reflect the expected future
tax consequences of events that have been included in the financial statements
and tax returns. Deferred tax assets and liabilities are determined based upon
the difference between the financial statement and tax bases of assets and
liabilities, using the enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company has not recorded any deferred
tax assets related to operating loss carryforwards generated subsequent to
September 30, 1996 due to the uncertainty of the Company's ability to ultimately
recognize the benefits of such carryforwards.
Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted average number of
common and common equivalent shares outstanding during the period. In connection
with the Company's IPO, common stock issued for consideration below the IPO per
share price (assuming an IPO price of $9.00) during the twelve months before the
filing of the registration statement, plus options and warrants to purchase the
Company's common stock issued for consideration below the IPO per share price
during the same period (using the treasury stock method), have been included in
the calculation of common shares outstanding as if they had been outstanding for
all periods presented.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly-liquid investments purchased with original maturities of three months or
less to be cash equivalents.
F-9
<PAGE> 70
MEDICAL SCIENCE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED.)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Risks and Uncertainties
Commercial success of genetic susceptibility tests will depend upon their
acceptance as medically useful and cost-effective by patients, physicians,
dentists, other members of the medical and dental community, and third-party
payers. The Company plans to expend substantial financial resources to promote
the benefits of the Company's susceptibility tests. It is uncertain whether
current genetic susceptibility tests or others that the Company may develop will
gain acceptance on a timely basis.
Research in the field of disease predisposing genes and genetic markers is
intense and highly competitive. The Company has many competitors in the United
States and abroad which have considerably greater financial, technical,
marketing, and other resources available. If the Company does not discover
disease predisposing genes or genetic markers and develop susceptibility tests
and launch such services or products before their competitors, then sales and
earnings will be reduced or eliminated.
The Company's ability to successfully commercialize genetic susceptibility
tests depends on obtaining adequate reimbursement for such products and related
treatment from government and private health care insurers and other third-party
payers. Doctors' decisions to recommend genetic susceptibility tests will be
influenced by the scope and reimbursement for such tests by third-party payors.
If both third-party payors and individuals are unwilling to pay for the test,
then the number of tests performed will significantly decrease, therefore
resulting in a reduction of revenues.
The Company entered into an agreement with Sheffield University, whereby
the Company will undertake the development and commercialization of any
discoveries resulting from Sheffield University's research. The agreement may be
terminated with or without cause by either party upon six-months notice. If
Sheffield University terminated the agreement, such termination could make the
discovery and commercial introduction of new products more difficult or
unlikely.
Recently Issued Accounting Pronouncement
The Financial Accounting Standards Board ("FASB") issued SFAS No. 128,
"Earnings Per Share," which is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. SFAS No. 128
requires public companies to present basic earnings per share and, if
applicable, diluted earnings per share instead of primary and fully-diluted
earnings per share. The Company does not believe that diluted earnings per share
in accordance with SFAS No. 128 will be materially different from the earnings
per share previously reported.
SFAS No. 129, "Disclosure of Information about Capital Structures," issued
by FASB is effective for financial statements ending after December 15, 1997.
The new standard reinstates various securities disclosure requirements
previously in effect under Accounting Principles Board ("APB") Opinion No. 15,
"Computing Earnings per Share," which has been superseded by SFAS No. 128. The
Company does not expect adoption of SFAS No. 129 to have a material effect, if
any, on its financial position or results of operations.
SFAS No. 130, "Reporting Comprehensive Income," issued by FASB is effective
for financial statements with fiscal years beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The Company does not expect adoption of SFAS No. 130 to have a material effect,
if any, on its financial position or results of operations.
F-10
<PAGE> 71
MEDICAL SCIENCE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED.)
NOTE 2 -- CASH
The Company maintains cash deposits at several banks. Deposits at each bank
are insured by the Federal Deposit Insurance Corporation up to $100,000. As of
December 31, 1996 and September 30, 1997, uninsured portions of balances held at
these financial institutions totaled $0 and $866,985 (unaudited), respectively.
The Company has not experienced any losses in such accounts and believes it is
not exposed to any significant credit risk on cash and cash equivalents.
NOTE 3 -- FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Computer equipment................................ $113,470 $ 132,542
Furniture and fixtures............................ 9,053 18,626
Computer software................................. 20,531 27,080
Equipment under capitalized leases................ 40,564 159,240
-------- --------
183,618 337,488
Less accumulated depreciation and amortization.... 100,741 149,030
-------- --------
Total................................... $ 82,877 $ 188,458
======== ========
</TABLE>
NOTE 4 -- NOTES PAYABLE AND REVOLVING LINE OF CREDIT WITH BANK
In March 1996, the Company entered into a revolving line of credit
agreement with a bank to borrow up to $250,000, and a note payable of $250,000,
for working capital purposes and to repay the outstanding borrowings under
certain promissory notes. In October 1996, the line of credit was increased to
provide for total borrowings of up to $500,000. The line of credit originally
matured in March 1997 and was extended to June 1997 at which time all
outstanding principal was converted into a five-year note payable, payable in
sixty monthly installments of $8,334 (unaudited) plus interest. The line of
credit bore interest at the bank's prime rate plus 1.75% (effectively 10% at
December 31, 1996) which was payable monthly in arrears. At December 31, 1996,
the Company had outstanding borrowings of $353,723 under the revolving line of
credit and at September 30, 1997 had outstanding borrowings of $671,824
(unaudited) under the notes payable.
The $250,000 note payable matures in March 2001 and requires monthly
payments of principal and interest of $5,222. The $250,000 note payable bears
interest at a fixed rate of 9.125% per annum. Required principal payments under
the $250,000 note payable are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------------------------------------------------------------
<S> <C>
1997............................................................ $ 44,489
1998............................................................ 48,724
1999............................................................ 53,361
2000............................................................ 58,439
2001............................................................ 13,274
--------
218,287
Less current portion.............................................. 44,489
--------
Long-term portion............................................ $ 173,798
========
</TABLE>
F-11
<PAGE> 72
MEDICAL SCIENCE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED.)
NOTE 4 -- TERM LOAN AND REVOLVING LINE OF CREDIT WITH BANK (CONTINUED)
Both the notes payable and the revolving line of credit are secured by
substantially all of the Company's assets and accounts receivable. In addition,
three of the Company's officers have personally guaranteed the Company's
obligations under the notes payable and the revolving line of credit. The
agreements also include certain covenants which restrict, among other things,
the occurrence of new indebtedness.
NOTE 5 -- PROMISSORY NOTES
In August and September 1997, the Company entered into several subscription
agreements to sell subordinated Promissory Notes ("Notes"). In addition, the
Company granted one warrant to purchase common stock at an exercise price of
$5.50 per share for each $5.00 loaned. The Company issued Notes in the amount of
$1,550,000 and issued 310,545 warrants to purchase the Company's common stock.
The Notes accrue interest at 10% per annum, and all unpaid principal and
interest are due the earlier of 14 months from the date of issuance or the sale
of equity securities which results in gross proceeds in excess of $6,000,000.
The warrants expire the earlier of five years from the date of issuance or upon
the occurrence of the Company's common stock traded on a national or regional
stock exchange and the closing price of the common stock equals or exceeds
$12.00 per share for thirty consecutive trading days. In connection with the
issuance of such warrants, the Company will recognize additional financing costs
of $310,545 over the 14-month term of the Notes with the unamortized portion at
the closing of the Company's IPO being expensed immediately as an extraordinary
loss on the extinguishment of debt.
NOTE 6 -- INCOME TAXES
Prior to September 30, 1996, the Company elected to be taxed as an "S"
corporation for federal and state income tax purposes; the Company's income or
loss for such periods was allocated among its shareholders. Consequently, the
Company has not recorded any tax provision for any period prior to such date.
Effective September 30, 1996, the Company terminated such election and became
taxable as a "C" corporation.
The Company has not recorded a current or deferred provision for federal
income taxes for the period from October 1, 1996 to December 31, 1996 due to
losses incurred during that period. The provision for income taxes represents
the minimum required for state franchise taxes. To reconcile from the federal
statutory tax rate of 34% to the Company's effective tax rate of approximately
1%, the deferred tax asset valuation reserve is deducted. At December 31, 1996,
the Company had net operating loss carryforwards of approximately $590,000 and
$295,000 for federal and state income tax purposes, respectively, expiring in
varying amounts through the year 2012, which are available to offset future
federal and state taxable income. The Company also had a research tax credit of
$14,400 at December 31, 1996 that expires in 2012. The ability of the Company to
utilize the federal and state net operating loss carryforwards may be subject to
annual limitations under certain provisions of the Internal Revenue Code as a
result of the private placements of common stock and issuance of stock options.
F-12
<PAGE> 73
MEDICAL SCIENCE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED.)
NOTE 6 -- INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Deferred tax assets Net operating loss carryforwards............ $219,900
Research tax credit carryforwards............................. 14,400
Accrual to cash adjustments................................... 82,900
Accrued payroll related costs................................. 71,800
--------
Total deferred tax assets............................. 389,000
Valuation allowance for deferred tax assets..................... 327,300
--------
61,700
Deferred tax liabilities Patents................................ 61,700
--------
Net deferred tax assets............................... $ --
========
</TABLE>
The valuation allowance increased by $276,900 from September 30, 1996 (the
date the Company elected to be taxed as a "C" corporation) to December 31, 1996.
NOTE 7 -- CAPITAL STOCK
Stock Split
In June 1996, the Company's shareholders approved a 1,083.333 for 1 stock
split which was completed in July 1996. All references in the financial
statements to numbers of common shares and per common share amounts have been
restated to reflect the stock split. All disclosures related to sales of common
stock, warrants, employee stock plans, and other common stock transactions for
all periods presented have also been restated to reflect the stock split.
Private Placements of Common Stock
In September 1996, the Company's Board of Directors authorized the private
offering of shares of the Company's common stock at $3.70 per share up to an
aggregate of $5,250,000. For the year ended December 31, 1996 and the nine
months ended September 30, 1997, the Company sold 40,540 and 148,648 (unaudited)
shares, respectively, of its common stock in private placement transactions at a
price of $3.70 per share. The gross proceeds of the sale were approximately
$150,000 and $550,000 (unaudited), respectively.
During the nine months ended September 30, 1997, the Company sold 293,820
(unaudited) shares of the Company's common stock at $5.00 (unaudited) per share
in a private placement. Gross proceeds from the sale were $1,469,100
(unaudited).
NOTE 8 -- EMPLOYEE BENEFIT PLAN
In 1988, the Company adopted a profit sharing plan covering substantially
all of its employees. Under the profit sharing plan, the Company may, at the
discretion of the Board of Directors, contribute a portion of the Company's
current or accumulated earnings. Company contributions, if any, are credited to
participant accounts and are immediately vested. During the years ended December
31, 1996 and 1995 and the nine
F-13
<PAGE> 74
MEDICAL SCIENCE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED.)
NOTE 8 -- EMPLOYEE BENEFIT PLAN (CONTINUED)
months ended September 30, 1997 (unaudited) and 1996 (unaudited), no
contributions were made to the profit sharing plan.
NOTE 9 -- STOCK OPTION PLAN
In June 1996, the Company's shareholders approved the adoption of the
Medical Science Systems, Inc. 1996 Equity Incentive Plan (the "Plan"). The Plan
provides for the award of nonqualified and incentive stock options, restricted
stock, and stock bonuses to employees, directors, officers, and consultants of
the Company. The Plan provides for the grant of nonqualified and incentive stock
options to all directors, officers, and employees of the Company. A total of
1,000,000 shares of the Company's common stock have been reserved for award
under the amended Plan.
Nonqualified and incentive stock options are granted at exercise prices
equal to the fair market value of the common stock on the date of grant.
One-sixth of the options are generally available for exercise at the end of six
months which the remainder of the grant is exercisable ratably over the next
30-month period provided the optionee remains in service to the Company. The
Company may also awardshare appreciation rights ("SARs") either in tandem with
stock options or independently. At December 31, 1996 and September 30, 1997
(unaudited), no SARs has been awarded under the Plan.
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies Accounting Principles
Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than for
restricted stock and options issued to outside third parties. If the Company had
elected to recognize compensation expense based upon the fair value at the grant
date for awards under this plan consistent with the methodology prescribed by
SFAS 123, the Company's net loss and loss per share would be reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Net loss
As reported................................... $ (788,546)
Pro forma..................................... $ (894,437)
Loss per common share
As reported................................... $ (0.18)
Pro forma..................................... $ (0.21)
</TABLE>
The fair value of these options was estimated at the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions for the years ended December 31, 1996: dividend yields of 0%;
expected volatility of 70%; risk-free interest rates of 6.0%; and expected life
of 3 years. The weighted average fair value of options granted during the year
ended December 31, 1996 was $1.87, and the weighted average exercise price was
$3.70.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the
F-14
<PAGE> 75
MEDICAL SCIENCE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED.)
NOTE 9 -- STOCK OPTION PLAN (CONTINUED)
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER GRANTED PRICE
OF SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Outstanding, December 31, 1995..................... -- $ --
Granted.......................................... 142,500 $ 3.70
Exercised........................................ -- $ --
Canceled......................................... -- $ --
-------
Outstanding, December 31, 1996..................... 142,500 $ 3.70
Granted (unaudited).............................. 658,079 $ 4.52
Exercised (unaudited)............................ -- $ --
Canceled (unaudited)............................. -- $ --
-------
Outstanding, September 30, 1997 (unaudited)........ 800,579 $ 4.37
=======
</TABLE>
The weighted average remaining contractual life of options outstanding
issued under the Plan is ten years at December 31, 1996.
The Plan also provides for the award of restricted stock to eligible
persons. Such awards may be at prices not less than 85% of the fair market value
of the Company's common stock as determined by the Board of Directors. In
addition, stock bonuses may be awarded to certain employees or officers of the
Company at the discretion of the Board of Directors. In September 1996, the
Company's Board of Directors issued a stock bonus of 5,000 shares to a
consultant of the Company. The estimated fair value of such shares at the date
of the award was charged to expense in 1996. As of September 30, 1997, the
Company has not awarded any restricted stock awards.
In May 1997, the Company offered to its employees the opportunity to
receive stock options to acquire shares of the Company's common stock at $5.00
to $5.50 per share in an exchange for a reduction of salary. Employees elected
to reduce their salaries up to 50% for the period from May 1997 to October 1997
in exchange for 600 stock options for each $1,000 of salary reduction. As a
result the Company issued 267,079 stock options in exchange for salary
reductions of $445,132. The Company will record an expense relating to the
issuance of these stock option in the amount of $74,189 per month for each of
the six months from May 1997 to October 1997.
F-15
<PAGE> 76
MEDICAL SCIENCE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED.)
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
The Company leases its office space under non-cancelable operating leases
expiring through April 2001. The Company also leases certain office furniture
and equipment under capitalized lease obligations. Future minimum rental
commitments under lease agreements with initial or remaining terms of one year
or more at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
------------------------------------------------------ -------- -------
<S> <C> <C>
1997................................................ $ 86,316 $11,376
1998................................................ 151,116 11,376
1999................................................ 151,116 11,376
2000................................................ 129,516 8,121
2001................................................ 9,440 891
-------- -------
$527,504 43,140
========
Less amount representing interest..................... 7,696
-------
35,444
Less current portion.................................. 8,408
-------
Long-term portion................................ $27,036
=======
</TABLE>
Included in furniture and equipment are capitalized leased equipment of
$40,564 and $159,240 (unaudited) with accumulated depreciation of $7,615 and
$34,010 (unaudited) at December 31, 1996 and September 30, 1997, respectively.
Rent expense was $59,594 and $30,943 for the years ended December 31, 1996
and 1995, respectively, and $64,247 (unaudited) and $33,472 (unaudited) for the
nine months ended September 30, 1997 and 1996, respectively.
Employment Agreements
The Company entered into employment agreements with certain key employees
of the Company which range from one to five years.
Sheffield University Master Agreement
In July 1996, the Company entered into a ten-year, exclusive agreement with
Sheffield University, whereby the Company will take the lead in the development
and commercialization of any discoveries resulting from Sheffield University's
research. The proceeds distributed to Sheffield University from the sale or
license of products or technologies developed or commercialized under this
agreement will be determined on a case-by-case basis.
Either party may terminate the agreement with no less than six-months
notice.
NOTE 11 -- RELATED PARTIES
During 1996, three officers of the Company agreed to defer a portion of
their salaries totaling $127,500. The Company intends to pay such amounts of
deferred compensation in 1997, and accordingly, they are presented as current
liabilities in the accompanying balance sheet as of December 31, 1996.
F-16
<PAGE> 77
MEDICAL SCIENCE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED.)
NOTE 11 -- RELATED PARTIES (CONTINUED)
Unaudited
During the nine months ended September 30, 1997, the Company paid the
deferred salaries of $127,500.
NOTE 12 -- SUBSEQUENT EVENTS (UNAUDITED)
From October 1, 1997 through October 6, 1997, the Company entered into
several subscription agreements to sell subordinated Promissory Notes ("Notes").
In addition, the Company granted one warrant to purchase common stock at an
exercise price of $5.50 per share for each $5.00 loaned. The Company issued
Notes in the amount of $230,000 and issued 46,000 warrants to purchase the
Company's common stock. The Notes accrue interest at 10% per annum, and all
unpaid principal and interest are due the earlier of fourteen months from the
date of issuance or the sale of equity securities which results in gross
proceeds in excess of $6,000,000. The warrants expire the earlier of five years
from the date of issuance or upon the occurrence of the Company's common stock
traded on a national or regional stock exchange and the closing price of the
common stock equals or exceeds $12.00 per share for 30 consecutive trading days.
In connection with the issuance of such warrants, the Company will recognize
additional financing costs of $46,000 over the fourteen month term of the Notes
with the unamortized portion at the closing of the Company's IPO being expensed
immediately as an extraordinary loss on the extinguishment of debt.
F-17
<PAGE> 78
======================================================
We have not authorized any dealer, salesperson or any other person to give
any information or to represent anything not contained in this Prospectus. You
must not rely on any unauthorized information. This Prospectus does not offer to
sell or buy any shares in any jurisdiction where it is unlawful. The information
in this Prospectus is current as of November , 1997.
------------------------
TABLE OF CONTENTS
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... 1
Risk Factors.......................... 8
The Company........................... 16
Use of Proceeds....................... 17
Dividend Policy....................... 18
Capitalization........................ 18
Dilution.............................. 19
Selected Financial Data............... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 23
Management............................ 44
Certain Relationships and Related
Party Transactions.................. 50
Principal Shareholders................ 51
Description of Securities............. 52
Shares Eligible for Future Sale....... 53
Underwriting.......................... 55
Legal Matters......................... 56
Experts............................... 56
Additional Information................ 56
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 199 , (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS THAT BUY, SELL OR TRADE THESE SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
1,500,000 SHARES
[MEDICAL SCIENCE LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
NUTMEG SECURITIES, INC.
MILLENIUM FINANCIAL GROUP, INC.
======================================================
<PAGE> 79
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our company's Amended and Restated Articles of Incorporation eliminates the
liability of directors for monetary damages for an act or omission in the
director's capacity as a director, except for: (1) a breach of a director's duty
of loyalty to our company or our shareholders; (2) an act or omission not in
good faith that constitutes a breach of duty of that director to our company or
an act or omission that involves intentional misconduct or a knowing violation
of the law; (3) a transaction from which a director received an improper
benefit, whether or not the benefit resulted from an action taken within the
scope of the director's office; or (4) an act or omission for which the
liability of a director is expressly provided for by an applicable statute.
If the Texas Miscellaneous Corporation Laws Act or the Texas Business
Corporation Act is amended to authorize action further eliminating or limiting
the personal liability of directors, then the liability of a director of our
company shall be eliminated or limited to the fullest extent permitted by such
statutes, as so amended. Any amendment, repeal or modification of such provision
shall be prospective only and shall not adversely affect any right or protection
of a director of our company existing at the time of such amendment, repeal or
modification.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with this
Registration Statement. All of such expenses are estimates, other than the
filing fees payable to the Securities and Exchange Commission.
<TABLE>
<S> <C>
Filing Fee -- Securities and Exchange Commission................ $ 5,257.00
Exchange Listing Fee............................................ 35,000.00
Fees and Expenses of Accountants................................ 45,000.00
Fees and Expenses of Counsel.................................... 120,000.00
Printing and Engraving Expenses................................. 75,000.00
Blue Sky Fees and Expenses...................................... 20,000.00
Transfer Agent Fees............................................. 4,000.00
Miscellaneous Expenses.......................................... 50,743.00
-----------
Total................................................. $ 355,000.00
===========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
1. Between November 1996 and January 1997, we sold 189,188 shares of our
Common Stock to seven (7) investors in a private placement at a price of $3.70
per share. No commissions or finder's fees were paid.
Within the 12 month period preceding such private placement, the Company
did not make any offer or sales of securities. These securities were issued in
reliance upon the exemption set forth in Rule 504 of Regulation D of the
Securities Act.
2. Between March 1997 and September 1997, we sold 292,060 shares of our
Common Stock to forty-six (46) investors in a second private placement
transaction at a price of $5.00 per share. We issued 1,760 shares of our Common
Stock as a finder's fee with respect to such private placement.
Fewer than 35 purchasers in such offering were unaccredited. Each purchaser
executed subscription agreements representing that such purchaser either alone
or with his representatives had knowledge and experience sufficient to evaluate
the merits and risks of the investment. These securities were issued in reliance
upon the exemption set forth in Rule 506 of Regulation D of the Securities Act.
3. From December 1996 through May 1997, our company has issued a total of
800,579 incentive and non-qualifying stock options to thirty-seven (37)
employees and consultants under our 1996 Equity Incentive Plan. Of the total
issued, 533,500 were issued in exchange for services rendered to our company.
These options generally vest over 36 months and have a per share exercise price
from $3.70 to $5.00. The balance of
II-1
<PAGE> 80
the options (267,079) were issued in May 1997. In order to reduce our overhead
and as an additional incentive to our employees, we instituted a voluntary
salary reduction plan where our employees could choose to receive stock options
instead of salary. Employees were offered options to purchase 600 shares of
Common Stock for every $1,000 their salary was reduced. Most of our employees
participated, including all of our officers. A total of 267,079 options to
purchase Common Stock at an exercise price of $5.00 or $5.50 per share were
issued. These options vested immediately.
The offer of these securities was made solely to directors and employees of
the Company. The offering was made without any public advertisement. These
securities were issued in reliance upon the exemptions set forth in Section 4(2)
of the Securities Act on the basis that they were issued under circumstances not
involving a public offering. It should also be noted that in December 1996, a
permit was issued by the California Department of Corporations qualifying grants
of options or common stock under the company's 1996 Equity Incentive Plan.
4. From August 1, 1997 through October 6, 1997, we borrowed an aggregate of
$1,780,000 from twenty-eight (28) lenders evidenced by promissory notes bearing
interest at 10% interest rate and due the earlier of fourteen months from the
date of the notes or the closing date of an initial public offering (the "Bridge
Loans"). As additional consideration for the Bridge Loans, we issued one warrant
for each $5.00 loaned to the Company for a total of 356,000 warrants (the
"Bridge Warrants"). Each Bridge Warrant entitles the holder to purchase one
share of Common Stock at $5.50 per share for a period of five years from the
date of issuance. An additional 545 Bridge Warrants were issued as a finder's
fee. The following officers and directors subscribed to the Bridge Loans in the
principal amount indicated after their names: Paul J. White ($100,000/20,000
Bridge Warrants); Kenneth S. Kornman ($100,000/20,000 Bridge Warrants); Michael
G. Newman ($100,000/20,000 Bridge Warrants); U. Spencer Allen ($50,000/10,000
Bridge Warrants); Jeanne Ambruster ($50,000/10,000 Bridge Warrants); and Thomas
A. Moore ($75,000/15,000 Bridge Warrants). The other twenty-one investors were
outside private parties. Other than the 545 Bridge Warrants referenced above, no
commissions or finder's fees were paid by the Company.
Fewer than 35 purchasers in such offering were unaccredited. Each purchaser
executed subscription agreements representing that such purchaser either alone
or with his representatives had knowledge and experience sufficient to evaluate
the merits and risks of the investment. These securities were issued in reliance
upon the exemption set forth in Rule 506 of Regulation D of the Securities Act.
ITEM 27. EXHIBITS.
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement.*
1.2 Form of Agreement Among Underwriters.*
1.3 Form of Selected Dealers Agreement.*
3.1 Amended and Restated Articles of Incorporation.*
3.2 Articles of Amendment to the Amended and Restated Articles of Incorporation.*
3.3 Amended and Restated Bylaws of the Company.*
3.4 Amendment to the Amended and Restated Bylaws.*
4.1 Form of Stock Certificate.
4.2 Form of Underwriter's Warrant.*
4.3 Form of Subordinated Promissory Note.*
4.4 Form of Security Agreement.*
4.5 Form of Warrant Agreement.*
4.6 Form of Warrant Certificate.*
4.7 $500,000 Term Loan with Bank of America.*
4.8 $250,000 Term Loan with Bank of America.*
4.9 Form of Lock-up Agreement.
</TABLE>
II-2
<PAGE> 81
<TABLE>
<S> <C>
5.1 Opinion of Jeffers, Wilson, Shaff & Falk, LLP.
10.1 Master Agreement for Technology Evaluation, Sheffield University.(1)
10.2 Research Support Agreement and Amendments to Various Existing Project
Agreements, Sheffield University.(1)
10.3 Development and Commercialization Project Agreement (Atherosclerosis including
Coronary Artery Disease), Sheffield University.(1)
10.4 Development and Commercialization Project Agreement (Eye Disease Among
Diabetics), Sheffield University.(1)
10.5 Development and Commercialization Project Agreement (Osteoporosis), Sheffield
University.(1)
10.6 Joint Project Agreement Between Gordon Duff and Medical Science Systems, Inc.
Governing the Periodontal Susceptibility Test.(1)
10.7 Employment Agreement with Paul J. White.*
10.8 Amendment of Employment Agreement with Paul J. White.*
10.9 Employment Agreement with Kenneth S. Kornman.*
10.10 Amendment of Employment Agreement with Kenneth S. Kornman.*
10.11 Employment Agreement with Michael G. Newman.*
10.12 Amendment of Employment Agreement with Michael G. Newman. *
10.13 Service Agreement Relating to Laboratory Services with Baylor University.(1)
10.14 Lease Agreement dated March 21, 1996 between Koll Center Newport Number 9 and
Company. *
10.15 Lease Agreement dated March 31, 1997 between Jim Jamison and Richard Henderson
and Company. *
10.16 Lease Agreement dated October 23, 1995 between Diamond Shamrock Leasing, Inc.
and Company. *
10.17 1996 Equity Incentive Plan. *
10.18 Amendment to the 1996 Equity Incentive Plan. *
10.19 Form of Stock Option Agreement. *
10.20 Stock Option Exercise Agreement. *
10.21 Operating Agreement of Disisphase, LLC. (1)
10.22 Disease Progression Explorer Development and License Agreement. (1)
23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP.
23.2 Consent of Counsel (previously filed under Exhibit 5.1).
24.1 Power of Attorney (included in signature page).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
(1) Confidential treatment has been requested with respect to portions of this
document. Omitted portions have been filed separately with the Securities
and Exchange Commission.
II-3
<PAGE> 82
ITEM 28. UNDERTAKINGS.
The undersigned small business issuer hereby undertakes:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our 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.
(2) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was declared
effective.
(ii) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-4
<PAGE> 83
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that is has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Newport
Beach, State of California, on October 29, 1997.
MEDICAL SCIENCE SYSTEMS, INC.
By: /s/ PAUL J. WHITE
------------------------------------
Paul J. White,
President and Chief Executive
Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Medical Science Systems, Inc.
do hereby constitute and appoint Paul J. White and U. Spencer Allen, or either
of them, acting individually, our true and lawful attorneys and agents, to do
any and all acts and things in our name and behalf in our capacities as
directors and officers and to execute any and all instruments for us and in our
names in the capacities indicated below, which said attorneys and agents, or any
one of them, may deem necessary or advisable to enable said corporation to
comply with the Securities Act of 1933, as amended, and any rules, regulations,
and requirements of the Securities and Exchange Commission, in connection with
this Registration Statement, including specifically, but without limitation,
power and authority to sign for us or any of us in our names and in the
capacities indicated below, any and all amendments (including post-effective
amendments) hereof; and we do hereby ratify and confirm all that the said
attorneys and agents, or any of them, shall do or cause to be done by virtue
hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- ---------------------------- -----------------
<S> <C> <C>
/s/ PAUL J. WHITE President, Chief Executive October 29, 1997
- --------------------------------------------- Officer and Director
Paul J. White
/s/ U. SPENCER ALLEN Principal Accounting October 29, 1997
- --------------------------------------------- Officer and Treasurer
U. Spencer Allen
/s/ KENNETH S. KORNMAN Chief Scientific Officer October 29, 1997
- --------------------------------------------- and Director
Kenneth S. Kornman
/s/ MICHAEL G. NEWMAN Executive Vice President, October 29, 1997
- --------------------------------------------- Secretary and Director
Michael G. Newman
/s/ THOMAS A. MOORE Director October 29, 1997
- ---------------------------------------------
Thomas A. Moore
</TABLE>
II-5
<PAGE> 84
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.*
1.2 Form of Agreement Among Underwriters.*
1.3 Form of Selected Dealers Agreement.*
3.1 Amended and Restated Articles of Incorporation.*
3.2 Articles of Amendment to the Amended and Restated Articles of Incorporation.*
3.3 Amended and Restated Bylaws of the Company.*
3.4 Amendment to the Amended and Restated Bylaws.*
4.1 Form of Stock Certificate.
4.2 Form of Underwriter's Warrant.*
4.3 Form of Subordinated Promissory Note.*
4.4 Form of Security Agreement.*
4.5 Form of Warrant Agreement.*
4.6 Form of Warrant Certificate.*
4.7 $500,000 Term Loan with Bank of America.*
4.8 $250,000 Term Loan with Bank of America.*
4.9 Form of Lock-up Agreement.
5.1 Opinion of Jeffers, Wilson, Shaff & Falk, LLP.
10.1 Master Agreement for Technology Evaluation, Sheffield University. (1)
10.2 Research Support Agreement and Amendments to Various Existing Project
Agreements, Sheffield University. (1)
10.3 Development and Commercialization Project Agreement (Atherosclerosis including
Coronary Artery Disease), Sheffield University. (1)
10.4 Development and Commercialization Project Agreement (Eye Disease Among
Diabetics), Sheffield University. (1)
10.5 Development and Commercialization Project Agreement (Osteoporosis), Sheffield
University. (1)
10.6 Joint Project Agreement Between Gordon Duff and Medical Science Systems, Inc.
Governing the Periodontal Susceptibility Test. (1)
10.7 Employment Agreement with Paul J. White.*
10.8 Amendment of Employment Agreement with Paul J. White.*
10.9 Employment Agreement with Kenneth S. Kornman.*
10.10 Amendment of Employment Agreement with Kenneth S. Kornman.*
10.11 Employment Agreement with Michael G. Newman.*
10.12 Amendment of Employment Agreement with Michael G. Newman.*
10.13 Service Agreement Relating to Laboratory Services with Baylor University.(1)
10.14 Lease Agreement dated March 21, 1996 between Koll Center Newport Number 9 and
Company.*
10.15 Lease Agreement dated March 31, 1997 between Jim Jamison and Richard Henderson
and Company.*
10.16 Lease Agreement dated October 23, 1995 between Diamond Shamrock Leasing, Inc.
and Company.*
10.17 1996 Equity Incentive Plan.*
10.18 Amendment to the 1996 Equity Incentive Plan.*
10.19 Form of Stock Option Agreement.*
10.20 Stock Option Exercise Agreement.*
10.21 Operating Agreement of Digisphere, LLC.(1)
10.22 Disease Progression Explorer Development and License Agreement.(1)
23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
(1) Confidential treatment has been requested with respect to portions of this
document. Omitted portions have been filed separately with the Securities
and Exchange Commission.
<PAGE> 1
EXHIBIT 4.1
MEDICAL SCIENCE SYSTEMS, INC.
The Corporation is authorized to issue two classes of stock,
Common Stock and Preferred Stock. The Board of Directors of the
Corporation has authority to fix the number of shares and the
designation of any series of Preferred Stock and to determine or
alter the rights, preferences, privileges and restrictions
granted to or imposed upon any unissued series of Preferred
Stock.
The following abbreviations, when used in the inscription on the
face of this certificate, shall be construed as though they were
written out in full according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in
common
UNIF GIFT MIN ACT- ...................... Custodian ........................
(Cust) (Minor)
under Uniform Gifts to Minors Act ..........................................
(State)
UNIF TRF MIN ACT - ......... Custodian (until age ..........)
(Cust)
.................under Uniform Transfers to Minors Act .....................
(Minor) (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
......................................
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
................................................
................................................
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
................................................ Shares of the common stock
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
................................................Attorney to transfer the said
stock on the books of the within named Corporation with full power of
substitution in the premises. Dated
X...............................................
X...............................................
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
By..............................................
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTIUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE> 2
[company logo]
MEDICAL SCIENCE SYSTEMS INCORPORATED
INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS
COMMON STOCK
CUSIP 584981 10 4
SEE REVERSE FOR CERTAIN DEFINITIONS
This Certifies that
is the recorder holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, NO PAR VALUE, OF
MEDICAL SCIENCE SYSTEMS, INC.
transferable on the books of the Corporation by the holder hereof
in person or by duly authorized Attorney upon surrender of this
certificate properly endorsed. This certificate is not valid
until countersigned by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
[signature]
Secretary
[corporate seal]
[signature]
President and Chief Executive Officer
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
BY
TRANSFER AGENT AND REGISTRAR,
AUTHORIZED SIGNATURE
<PAGE> 1
EXHIBIT 4.9
12-MONTH LOCK-UP AGREEMENT
--------------------------
NUTMEG SECURITIES, LTD
As Representative of the Several Underwriters
c/o NUTMEG SECURITIES, LTD.
495 Post Road East
Westport, Connecticut 06880
Ladies and Gentlemen:
The undersigned is a holder of securities of Medical Science Systems, Inc.,
a Texas corporation (the "Company"), and wishes to facilitate the initial public
offering of shares of the Company's Common Stock (the "Offering"). The
undersigned recognizes that such Offering, and the public market for shares of
the Company's common stock (the "Common Stock") created thereby, will be of
benefit to the undersigned.
In consideration of the foregoing and in order to induce you to act as
underwriters and representatives ("Representatives") of the several underwriters
(collectively, the "Underwriters") in connection with the Offering, the
undersigned hereby agrees that he, she or it will not, directly or indirectly,
on behalf of the Underwriters, offer to sell, sell, contract to sell, grant any
option to purchase or otherwise dispose (or announce any offer, offer of sale,
contract of sale, grant of any option to purchase or other disposition) of any
shares of Common Stock (including, without limitation, shares of Common Stock
acquired or to be acquired by the undersigned in the Offering as described in
the Form SB-2 Registration Statement filed by the Company with the Securities
and Exchange Commission, File No. 333-37441, the "Registration Statement"),
options to acquire shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock of the Company which he, she or it may
own directly, indirectly or beneficially (as defined by the Securities Exchange
Act of 1934 and the rules and regulations thereunder) for a period of twelve
(12) months following the day on which the Registration Statement shall become
effective by order of the Securities and Exchange Commission; provided, however,
that the foregoing restrictions shall not apply to transfers by will and the
laws of descent and distribution, bona fide gifts or transfers to an affiliate
of the undersigned so long as in each case such transferee agrees in writing to
be bound by the provisions of this Agreement and such writing is delivered to
the Company and the Representatives prior to effecting such transfer. The
undersigned further acknowledges and consents to the entry by the Company of
stop transfer instructions with the Company's transfer agent restricting the
transfer of shares of the Company's Common Stock held by the undersigned, except
for transfers in compliance with the provisions hereof. The undersigned confirms
that he, she or it understands that the Underwriters and the Company will rely
upon the representations set forth in this Agreement in proceeding with the
Offering.
Set forth below is the number of shares of Common Stock owned (including
shares of Common stock acquired or to be acquired in the Offering), or that
could be acquired upon the exercise of any option or the conversion or exchange
of any security owned by the undersigned.
1
<PAGE> 1
EXHIBIT 5.1
JEFFERS, WILSON, SHAFF & FALK, LLP
ATTORNEYS AT LAW
18881 VON KARMAN AVENUE
SUITE 1400
IRVINE, CALIFORNIA 92612
TELEPHONE: (714) 660-7700
FACSIMILE: (714) 660-7799
__________ __, 1997
Medical Science Systems, Inc.
4400 MacArthur Boulevard, Suite 980
Newport Beach, California 92660-2031
Re: Registration Statement on Form SB-2
Gentlemen:
We have acted as counsel to Medical Science Systems, Inc. (the
"Company"), a Texas corporation, in connection with the Registration Statement
on Form SB-2 (333-37441), filed with the Securities and Exchange Commission on
October 8, 1997, as amended (the "Registration Statement"), covering 1,500,000
shares of the Company's no par value Common Stock (the "Shares").
In acting as counsel for the Company and arriving at the opinions as
expressed below, we have examined and relied upon originals or copies, certified
or otherwise identified to our satisfaction, of such records of the Company,
agreements and other instruments, certificates of officers and representatives
of the Company, certificates of public officials and other documents as we have
deemed necessary or appropriate as a basis for the opinions expressed herein.
In connection with our examination we have assumed the genuineness of
all signatures, the authenticity of all documents tendered to us as originals,
the legal capacity of natural persons and the conformity to original documents
of all documents submitted to us as certified or photostated copies.
Based on the foregoing, and subject to the qualifications and
limitations set forth herein, it is our opinion that the Shares have been duly
authorized and when issued, delivered and paid for, will be validly issued,
fully paid and non-assessable.
We express no opinion with respect to laws other than those of the State
of California and federal laws of the United States of America, and we assume no
responsibility as to the applicability thereof, or the effect thereon, of the
laws of any other jurisdiction.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to its use as part of the Registration Statement.
Very truly yours,
JEFFERS, WILSON, SHAFF & FALK, LLP
/s/ Jeffers, Wilson, Shaff & Falk, LLP
<PAGE> 1
EXHIBIT 10.1
MASTER AGREEMENT FOR TECHNOLOGY EVALUATION
This Agreement, effective as of _____________, 1996 (the "Effective
Date"), is entered into between The University of Sheffield, Western Bank,
Sheffield S10 2TN, England ("University") and Medical Science Systems, Inc.,
4400 MacArthur Blvd., Suite 980, Newport Beach, California 92660 ("MSS").
RECITALS
A. The University possesses scientific expertise in genetics and other
scientific disciplines, and has laboratories and other facilities, staff and
clinical investigators for creating and developing proprietary information and
technologies in such disciplines.
B. MSS has experience in product discovery and development and
technology transfer, including evaluation of market and clinical utility of
technologies, patent and regulatory strategy, design, implementation, management
and monitoring of clinical trials, identification of and negotiation with
product development partners and the use of proprietarty research systems and
technologies supporting product discovery and development, and scientific
expertise in microbiology, periodontitis, inflammatory diseases and other
scientific disciplines.
C. The University and MSS desire to establish a joint cooperative
relationship pursuant to which various technologies can be developed and
products based thereon can be commercialized. It is expected that University
will take the lead in conducting fundamental discovery research and laboratory
development of such technologies, and MSS will take the lead in commercializing
products based upon such technologies and related product development.
D. The parties desire to establish in this Agreement a procedure
pursuant to which either party may submit ideas, inventions and proposed
products to the other for evaluation for potential joint development and
commercialization. If, based on such evaluation procedure, the parties mutually
agree to embark on a project to develop and commercialize particular
technologies and/or products, the parties will enter into a specific project
agreement defining their respective obligations and rights with respect to such
project. This Agreement is intended to define the basic structure that the
specific project agreements will take.
NOW, THEREFORE, in consideration of the foregoing premises and of the covenants
and conditions set forth herein, the parties agree as follows:
1. DEFINITIONS
1.1 "Confidential Information" consists of (i) any information
designated by a disclosing party as confidential, (ii) information contained in
or disclosed in connection with an Evaluation Proposal submitted by one of the
parties hereunder, and (iii) any non-public information relating to the product
plans, product designs, product costs, product prices, product
- ---------
* Confidential treatment has been requested with respect to portions of this
document. Omitted portions have been filed separately with the Securities and
Exchange Commission.
<PAGE> 2
names, finances, marketing plans, business opportunities, personnel, industry
contacts, research, development or know-how of University or MSS (as the case
may be). "Confidential Information" shall not include, however, any information
that (i) is already rightfully known to the receiving party at the time of
disclosure by the disclosing party, (ii) has become publicly known through no
wrongful act of the receiving party, (iii) has been rightfully received from a
third party authorized to make such disclosure without restriction, (iv) has
been independently developed by the receiving party or (v) has been approved for
release by written authorization of the disclosing party.
1.2 "Department" means any department at the University.
1.3 "Evaluation Proposal" means a written confidential proposal for the
potential joint development and/or commercialization of one or more Technologies
and/or one or more Products based thereon which is submitted by one party to the
other pursuant to the provisions of Section 2 below.
1.4 "Products" means commercial products based upon one or more
Technologies developed pursuant to a Project Agreement.
1.5 "Project" means a project for the joint development and/or
commercialization of one or more Technologies and/or one or more Products based
thereon that the parties mutually agree to undertake after submission and
evaluation of an Evaluation Proposal in accordance with the procedures set forth
in Section 2 below.
1.6 "Project Agreement" means a separate written agreement between the
parties that defines the precise scope of a Project and the respective
obligations and rights of the parties with respect thereto.
1.7 "SMM" means The Section of Molecular Medicine of the University's
Department of Medicine and Pharmacology.
1.8 "Summary Proposal" means a written confidential memorandum
describing the general nature and subject matter of an Evaluation Proposal that
one party proposes to submit to the other for full evaluation pursuant to the
provisions of Section 2 below.
1.9 "Technologies" means ideas, inventions, apparatus, systems, data,
discoveries, methods, processes, test procedures, diagnostic procedures,
therapeutic procedures and works of authorship.
2. SUBMISSION AND EVALUATION PROCEDURES
2.1 Notice of a Proposed Project. If MSS or any Section of the
University desires to propose a Project to the other party, it will notify the
other party of its intention, and the other party will have fourteen (14) days
to decide whether it wishes to first receive a Summary Proposal of the proposed
Project on a confidential basis. If so, the proposing party (the
<PAGE> 3
"Submitter") will then submit a Summary Proposal of the proposed Project to the
other party (the "Recipient"). The Recipient will notify the Submitter within
ten (10) business days of receipt of the Summary Proposal whether the Recipient
wishes to receive an Evaluation Proposal with respect to such Project. All
Projects submitted by or to any Section of the University hereunder will be
processed through the SMM under the supervision and direction of Professor
Gordon Duff.
2.2 Inital Review of Evaluation Proposal. A Recipient will have a period
of one (1) month to conduct an initial review of an Evaluation Proposal for a
proposed Project submitted by the other party hereunder, during which time the
Submitter agrees to provide reasonable information regarding the proposed
Project and any Technologies associated therewith. The Recipient will notify the
Submitter on or before expiration of the initial review period whether or not it
wishes to engage in a formal evaluation of the proposed Project. If the
Recipient does not notify the Submitter of its desire to proceed with a formal
evaluation of the proposed Project, then the Recipient will be deemed to have
decided not to proceed with a formal evaluation. If the Recipient decides not to
proceed with a formal evaluation, the Submitter will be free to publish,
develop, commercialize, and submit the proposed Project to other third parties.
2.3 Formal Evaluation of a Proposed Project. If the Recipient decides to
conduct a formal evaluation of a proposed Project, it will use all good faith
and reasonable efforts to complete the evaluation as efficiently and
expeditiously as possible. Unless otherwise agreed, such formal evaluation will
be completed within three (3) months of Recipient's determination to conduct the
formal evaluation. The Submitter agrees to provide all reasonable information,
cooperation and consultation with respect to the proposed Project at its cost to
assist the Recipient's evaluation. At the conclusion of the Recipient's formal
evaluation of the proposed Project, the Recipient will notify the Submitter in
writing of its decision to accept or reject the proposed Project for further
development and/or commercialization. If the Recipient does not notify the
Submitter of its desire to proceed with the proposed Project before the
expiration of the formal evaluation period, then the Recipient will be deemed to
have decided not to proceed with the proposed Project. If the Recipient decides
not to proceed with the proposed Project, the Submitter will be free to publish,
develop, commercialize, and submit the Project to other third parties. If the
Recipient decides to proceed with the proposed Project, the parties will
negotiate in good faith a Project Agreement for the Project, and will use all
good faith reasonable efforts to enter into such a Project Agreement within two
(2) months after the Recipient's decision to proceed with the proposed Project.
The Project Agreement will incorporate at a minimum the structure and provisions
described in Section 3 below.
2.4 Exclusivity.
(a) Right of First Offer. MSS agrees that it will submit any
proposed Project with respect to which research and/or development could be
adequately performed on a timely and cost effective basis with sufficient
qualified faculty and staff within the laboratories and other facilities of The
Section of Molecular Medicine at the University under the supervision and
direction of Prof. Gordon Duff (a "Qualified Project") to SMM first for
evaluation in accordance with the procedures of this Section 2 before offering
any such proposed Project to any other third party. SMM agrees that it will
submit any proposed Project for the commercialization of and/or
<PAGE> 4
development and marketing of Products based upon one or more Technologies
developed by SMM to MSS first for evaluation in accordance with the procedures
of this Section 2 before offering any such proposed Project to any other third
party. Notwithstanding the preceding two sentences, neither party will have an
obligation to submit any proposed Project to the other (i) which would create a
conflict of interest with a preexisting client or business partner or (ii) which
comprises or would require use of research funded by a third party, the data or
results of which the proposing party hereunder does not own or have license
rights sufficient to utilize in a Project with the other party hereunder. Each
party shall be free to determine in its sole discretion whether or not to submit
to the other party any proposed Project that is not a Qualified Project.
(b) Forbearance During the Evaluation Period. In order to provide
the Recipient sufficient incentive to devote its resources to review and
evaluation of proposed Projects, the Submitter agrees not to publish, license or
assign any Technologies associated therewith, or enter into any agreements with
third parties for the development or commercialization thereof, unless and until
the Recipient determines not to proceed with the proposed Project.
(c) Exclusivity With Respect to the Scope of the Project. Upon
mutual determination to proceed with a Project, the Project Agreement will
provide that the parties' relationship with respect to the research and
development and/or commercialization of Products within the scope of the Project
defined in the Project Agreement will be exclusive, unless otherwise mutually
agreed by the parties.
3. STRUCTURE OF PROJECT AGREEMENTS
3.1 Responsibilities and Schedule. Project responsibilities and initial
milestones will be set forth in the applicable Project Agreement.
3.2 Cost and Expenses. Costs and expenses to be incurred by the parties
in connection with their responsibilities under a Project will be allocated in
the Project Agreement on a case-by-case basis, and will be a factor in
determining the appropriate allocation of proceeds from commercialization.
Unless otherwise mutually agreed, each party will be responsible for its costs
of any travel incurred in connection with a Project, and the parties will share
the legal fees incurred in connection with a business transaction with a
commercial partner, and all legal fees and costs (including filing fees and
translation costs) associated with international patent filings and prosecution.
3.3 Research Funding. All research funding provided by third parties
relating to a Project or the results thereof will be allocated between the
parties in proportion to the allocation of responsibilities for such research.
Where allocation of responsibilities is not determinable, funds will be divided
using the same allocation as applies to proceeds from sale, license or other
disposition of Products.
3.4 Status Reports. The Project Agreement will provide for a Steering
Committee which will manage and make joint decisions for the Project. In
addition, there will be at least
<PAGE> 5
two in-person meetings between the parties regarding Project status annually,
which could be combined with or incorporate the Steering Committee meetings set
forth in any Project.
3.5 Proceeds/Net Profits of Commercialization. The distribution of
proceeds/net profits from the sale, license or other disposition of Products or
Technologies developed or commercialized under a Project Agreement will be
determined on a case-by-case basis using the following factors: (a) relative
development efforts preceding the Project Agreement; (b) anticipated research
and development responsibilities for the Project; (c) anticipated
commercialization responsibility; and (d) source and nature of original
submission. Each party will be responsible for allocation and distribution of
its portion of the proceeds to its faculty, employees or other persons or
entities to which it may be obligated, provided, however, that a Project
Agreement may provide that MSS may pay directly to [ * ] any portion
of the University's share of such proceeds/net profits to which [ * ] is
entitled. Each Project Agreement may contain a change of scope clause providing
that the distribution of the proceeds/net profits from the sale, license or
other disposition of Products or Technologies may chage in the event the scope
of one party's responsibilities under the Project change.
4. INTELLECTUAL PROPERTY
4.1 Pre-existing and Individually-Developed Technology. During the
period of evaluation of a proposed Project, each party will retain all rights in
pre-existing or independently-developed Technologies.
4.2 Ownership of Technologies and Products. Upon mutual agreement to
proceed with the Project for further development and/or commercialization, the
parties will, as part of the Project Agreement, define their respective rights
with respect to ownership and exploitation of Technologies and Products within
the scope of the Project.
4.3 Patent Prosecution and Enforcement of Intellectual Property Rights.
The Project Agreement will specify and allocate responsibility for prosecution
of patents and enforcement of intellectual property rights with respect to
Technologies and Products within the scope of the Project.
4.4 Personnel. The Project Agreement will provide that each party will
cause its respective employees, faculty, consultants and staff to execute such
agreements, assignments, applications and other documents as necessary to
perfect and protect each party's rights in the Technologies and Products within
the scope of the Project.
5. CONFIDENTIALITY
5.1 Confidential Information. Each party shall use Confidential
Information of the other solely for implementing its respective rights and
obligations under this Agreement or any Project Agreement. Neither party will
use or disclose Confidential Information of the other except as expressly
permitted under this Agreement or any Project Agreement. Any such
<PAGE> 6
Confidential Information shall be protected by the recipient from disclosure to
others with at least the same degree of care as that which is accorded to its
own proprietary information, but in no event with less than reasonable care. The
obligations of this Section 5.1 will survive for a period of five (5) years from
disclosure (or, with respect to Confidential Information relating to a Project
Agreement, the later of such time or two (2) years from termination of such
Project Agreement), notwithstanding any earlier termination or expiration of
this Agreement or any Project Agreement.
5.2 Publication.
(a) Each party recognizes that publication of research results is
an important part of the mission of the University and is important to
scientific researchers at the University and at MSS. However, the parties
acknowledge the intent of this Agreement is to maximize the commercialization
potential of Project Technologies and Products, and that publication should not
unduly interfere with that goal. Consequently, the parties agree that
publication issues will be determined mutually in good faith in recognition of
these interests. In particular, the parties will submit in advance and review
jointly proposals for publishing any information relating to any Project
Technologies or Products and determine whether in each instance publication is
in the best interests of the parties and the scope, authorship (e.g., individual
or joint) and timing of such publication. The Project Agreements may further
define procedures for the clearance of such publications with respect to any
particular Project. Neither party, nor any person who participated in the
development of Project Technologies or Products shall submit for publication,
submit abstracts of, publish or present at any academic seminar, professional
society meeting or similar event any Project Technologies or Products unless it
has complied with the provisions of this Section 5.2 and any applicable
provisions in the relevant Project Agreement.
(b) Assuming publication has been agreed to by the parties, all
publications and presentations at meetings will, unless otherwise agreed in a
particular Project Agreement, comply with the following procedures. All persons
wishing to publish an article shall provide to a designated person of the other
party advance copies of all abstracts and articles proposed to be submitted for
publication at least ninety (90) days prior to intended publication or
disclosure. For presentations at meetings where written papers will not be
available, the person intending to make such presentation will inform a
designated person of the other party of such intent and the contents of the
intended presentation in writing at least ninety (90) days prior to the
presentation. Each party will use its reasonable best efforts to review such
information within thirty (30) days after submission to the designated person of
such party and provide the person intending to make such publication or
disclosure comments on such disclosure based on the protection of intellectual
property rights in the information to be published or disclosed and the
maximization of commercialization potential of Project Technologies and
Products. The parties will agree in good faith on appropriate modifications, if
any, to be made. In addition, each party will use its reasonable best efforts to
cooperate with the other in the filing of any patent applications prior to the
date of actual publication or disclosure. Each party will ensure that its
faculty, staff, students, employees and consultants comply with the requirements
of this Section 5.2
6. TERM AND TERMINATION
<PAGE> 7
6.1 Term. This Agreement will continue in effect for a period of ten
(10) years from the Effective Date, unless terminated earlier in accordance with
this section.
6.2 Termination for Cause. Either party may terminate this Agreement
upon written notice in the event: (a) the other party breaches a material term
of the Agreement, and fails to cure such breach within thirty (30) days
following notice of such breach from the non-breaching party; or (b) the other
party ceases to do business in the ordinary course, or files or has filed
against it a petition for bankruptcy, and such petition is not dismissed within
sixty (60) days of filing.
6.3 Termination Without Cause. Either party may terminate this Agreement
at any time with or without cause on not less than six (6) months notice. Such
termination, however, shall not apply to, and the Agreement will continue with
respect to, any proposed Projects which are, as of the effective date of
termination, under review or evaluation or approved for development and/or
commercialization.
6.4 Effect of Termination. In the event of any expiration or termination
of this Agreement, each party shall retain all of its rights in pre-existing or
independently developed Technologies not yet subject to a Project Agreement.
Rights with respect to Technologies and/or Products that are the subject of a
Project Agreement shall survive as provided in the applicable Project Agreement.
Termination or expiration of this Agreement will not affect the continued
enforceability of any Project Agreement or any rights governing Technologies
and/or Products subject to such Project Agreement. The provisions of Sections
5.1, 6.4, 7 and 8 of this Agreement will survive any termination or expiration.
7. DISCLAIMERS OF WARRANTY AND LIABILITY
7.1 Disclaimer of Warranties. EXCEPT AS EXPRESSLY SET FORTH IN A PROJECT
AGREEMENT, NEITHER PARTY MAKES ANY WARRANTY, EXPRESS OR IMPLIED, RELATING TO
THIS AGREEMENT, ANY PROJECT AGREEMENT OR ANY TECHNOLOGIES OR PRODUCTS, INCLUDING
BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE OR NON-INFRINGEMENT.
7.2 Limitation of Liability. EXCEPT FOR ANY WILLFUL BREACH OF SECTION 5,
NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL,
CONSEQUENTIAL OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF
LIABILITY, ARISING OUT OF THIS AGREEMENT OR ANY PROJECT AGREEMENT.
8. GENERAL PROVISIONS
<PAGE> 8
8.1 Governing Law. This Agreement and any Project Agreement will be
governed by and construed in accordance with the substantive laws of the United
States and the State of California, without regard to or application of choice
of law rules or principles.
8.2 Waiver and Modification. Failure by either party to enforce any
provision of this Agreement or any Project Agreement will not be deemed a waiver
of future enforcement of that or any other provision. Any waiver, amendment or
other modification of any provision of this Agreement or any Project Agreement
will be effective only if in writing and signed by the parties.
8.3 Severability. If for any reason a court of competent jurisdiction
finds any provision or portion of this Agreement or any Project Agreement to be
unenforceable, that provision of the Agreement or Project Agreement will be
enforced to the maximum extent permissible so as to effect the intent of the
parties, and the remainder of this Agreement or Project Agreement will continue
in full force and effect.
8.4 Notices. All notices required or permitted under this Agreement or
any Project Agreement will be in writing, will reference this Agreement or
Project Agreement and will be deemed given: (i) when sent by confirmed
facsimile; (ii) ten (10) working days after having been sent by registered or
certified mail, return receipt requested, postage prepaid; or (iii) five (5)
working day after deposit with a commercial overnight carrier, with written
verification of receipt. All communications will be sent to the addresses set
forth below or to such other address as may be designated by a party by giving
written notice to the other party pursuant to this section:
To MSS:
Paul J. White
President and CEO
Medical Science Systems, Inc.
4400 McArthur Blvd., Suite 980
Newport Beach, CA 92660
U.S.A.
To the University:
[ * ]
with a copy to:
<PAGE> 9
[ * ]
<PAGE> 10
Professor Gordon W. Duff
Lord Florey Chair of Molecular Medicine
The University of Sheffield
Department of Medicine and Pharmacology
Royal Hallamshire Hospital
Sheffield, S10 2JF
England
8.5 Delays Beyond Control. Neither party will be liable to the other
party for any failure or delay in performance caused by reasons beyond such
party's reasonable control, and such failure or delay will not constitute a
material breach of this Agreement or any Project Agreement.
8.6 Assignment. Neither party may assign its rights or obligations
hereunder or under any Project Agreement, by operation of law or otherwise,
without express written consent of the other party, which consent will not be
unreasonably withheld. Any attempted assignment without such consent shall be
void. Subject to the foregoing, this Agreement and any Project Agreement will
benefit and bind the successors and assigns of the parties.
8.7 No Third Party Beneficiaries; No Agency. Except as expressly
provided herein to the contrary, no provision of this Agreement or any Project
Agreement, express or implied, is intended or will be construed to confer
rights, remedies or other benefits to any third party under or by reason of this
Agreement or any Project Agreement. This Agreement or any Project Agreement will
not be construed as creating an agency, partnership or any other form of legal
association (other than as expressly set forth herein) between the parties.
8.8 Entire Agreement. This Agreement, including all exhibits,
constitutes the entire agreement between the parties with respect to the subject
matter hereof, and supersedes and replaces all prior or contemporaneous
understandings or agreements, written or oral, regarding such subject matter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement through
their duly authorized representatives as set forth below.
THE UNIVERSITY OF SHEFFIELD MEDICAL SCIENCE SYSTEMS, INC.
By: By:
----------------------------- ----------------------------------
Printed Name: Printed Name:
------------------- ------------------------
Title: Title:
-------------------------- -------------------------------
<PAGE> 1
EXHIBIT 10.2
MEDICAL SCIENCE SYSTEMS
RESEARCH SUPPORT AGREEMENT
AND
AMENDMENTS TO VARIOUS EXISTING PROJECT AGREEMENTS
This Research Support Agreement and Amendment to Various Existing
Project Agreements (this "Agreement") is entered into and made effective as of
this 1st day of July, 1997 by and between The University of Sheffield, Western
Bank, Sheffield S10 2TN, England ("University"), acting through The Department
of Molecular & Genetic Medicine, and Medical Science Systems Incorporated, 4400
MacArthur Blvd., Suite 980, Newport Beach, California 92660 ("MSS").
RECITALS
A. The University and MSS are parties to a Master Agreement for
Technology Evaluation dated July 1, 1996, as amended (the "Master Agreement"),
under which the parties established a joint cooperative relationship pursuant to
which various technologies can be developed and products based thereon can be
commercialized. Under the Master Agreement, it is expected that the University
will take the lead in conducting fundamental discovery research and laboratory
development of such technologies, and MSS will take the lead in commercializing
products based upon such technologies and related product development.
B. The Master Agreement establishes a procedure pursuant to which either
party may submit ideas, inventions and proposed products to the other for
evaluation for potential joint development and commercialization. If, based on
such evaluation procedure, the parties mutually agree to embark on one or more
projects to develop and commercialize particular technologies and/or products,
the Master Agreement contemplates that the parties will enter into one or more
specific project agreements (the "Project Agreements") defining their respective
obligations and rights with respect to such projects.
C. Pursuant to the procedures set forth in the Master Agreement, MSS and
the University have before the date of this Agreement entered into the following
Project Agreements (which shall be referred to collectively herein as the
"Existing Project Agreements"):
- "Development and Commercialization Project Agreement
(Atherosclerosis Including Coronary Artery Disease)" dated Sept.
1, 1996 (the "Atherosclerosis Project Agreement");
- "Development and Commercialization Project Agreement (Eye
Diseases Among Diabetics)" dated Sept. 1, 1996 (the "Eye
Diseases Project Agreement");
- "Development and Commercialization Project Agreement
(Osteoporosis)" dated Sept. 1, 1996 (the "Osteoporosis Project
Agreement").
D. Since the Existing Project Agreements were executed, the Steering
Committee has determined that MSS will itself market and commercialize the
initial genetic tests for screening
- ---------
* Confidential treatment has been requested with respect to portions of this
document. Omitted portions have been filed separately with the Securities and
Exchange Commission.
<PAGE> 2
patients for predisposition to atherosclerosis (including coronary artery
disease), eye diseases among diabetics, periodontal disease, and osteoporosis,
either directly and/or through co-promotion/distribution/agency relationships.
The Steering Committee has also determined that MSS will assume responsibility
and funding for all of the clinical utility studies and marketing enhancement
studies under the Atherosclerosis Project Agreement and the Eye Diseases Project
Agreement, and for any remaining clinical utility studies and marketing
enhancement studies under the Osteoporosis Project. Based on these
responsibilities on the part of MSS, the parties desire to amend the Existing
Project Agreements to provide for a reallocation of Net Proceeds between MSS and
the University.
E. MSS desires to provide funding to the University to support an
investigator employed by the University who will assist the University in
performing its obligations under various Project Agreements entered into by the
parties related to diagnostic and/or monitoring genetic tests. MSS further
desires to provide funding to the Research Consultancy Unit of the University to
support the work of the Research Consultancy Unit on such Project Agreements.
MSS and the University desire to set forth the terms and conditions on which MSS
will provide such funding.
NOW, THEREFORE, in consideration of the foregoing premises and of the
provisions of this Agreement, the parties agree as follows:
1. DEFINITIONS
Capitalized terms not otherwise defined in this Agreement shall have the
meaning given those terms in the Master Agreement and the various applicable
Project Agreements. In addition, the following terms shall have the following
meanings:
1.1 "Consultancy Agreement" means any agreement between MSS and
personnel of the University (other than a Project Agreement), whether existing
as of the effective date of this Agreement or entered into after the effective
date of this Agreement, pursuant to which MSS funds such personnel to render
services to or on behalf of MSS.
1.2 "Contract Period" means a one year period commencing upon the
execution of this Agreement, which period will be automatically extended by one
year increments unless either party elects not to renew this Agreement pursuant
to Section 5.1 below.
1.3 "Investigator" means a post-doctoral researcher to be employed by
the University, for whom MSS shall provide funding to the University hereunder
to assist the University in performing its obligations under various Project
Agreements between the parties.
2. PAYMENTS BY MSS TO THE UNIVERSITY
2.1 Payments by MSS. During the Contract Period, MSS agrees to provide
the University the following amounts annually:
<PAGE> 3
(a) Research Grant: A research grant to The Department of Molecular &
Genetic Medicine, commencing on July 1, 1997, of forty thousand dollars
($40,000) per year, payable monthly, which the University will use to
fund the efforts of the Investigator, who will devote his full time
efforts during the Contract Period solely to assisting the University in
performing its obligations under those Project Agreements between the
parties to which the parties have agreed the Investigator should devote
his efforts.
(b) RCU Funding: A grant to the Research Consultancy Unit ("RCU") of the
University, commencing on October 1, 1997, in the amount of twenty five
thousand dollars ($25,000) per year, payable monthly, to support the
work of the RCU on various Project Agreements.
2.2 Possible Funding of Additional Investigators. The parties
acknowledge that as additional Project Agreements are executed, it may be
desirable to fund one or more additional investigators to support the University
in performing its obligations under the Project Agreements. The parties will
discuss the need for such additional support and, if they agree such additional
support is necessary or desirable, will mutually agree to the amount of any such
additional research grant that MSS will provide to the University and the
duration of the same.
2.3 Credit Against Net Proceeds Payable to the University. All amounts
paid by MSS pursuant to this Section 2 and to any University personnel pursuant
to Consultancy Agreements shall be fully creditable by MSS against any portion
of Net Proceeds payable to the University by MSS under any Project Agreement
from the commercialization of any Product or technology developed and marketed
under a Project Agreement.
2.4 Stock Options in MSS. In addition to the payments described in
Sections 2.1 and 2.2 above, the University has been granted twenty-five thousand
(25,000) stock options in MSS, pursuant to and governed by the terms and
conditions of one or more separate written agreements between the parties.
3. TERMS GOVERNING WORK BY THE INVESTIGATOR
Any work performed by the Investigator with respect to a particular
Project shall be governed by the terms and conditions of the relevant Project
Agreement, as amended by Section 4 below of this Agreement, and any applicable
provisions of the Master Agreement. Without limiting the generality of the
preceding sentence, the ownership, pursuit of protection of Intellectual
Property Rights, and use of any Innovations and Joint Innovations created in
whole or in part out of the Investigator's work on a Project shall be governed
by the relevant provisions of the pertinent Project Agreement. Similarly,
publication of research results or other information resulting from the work of
the Investigator on a Project will be governed by the procedures set forth in
Section 5 of the Master Agreement.
<PAGE> 4
4. AMENDMENTS TO EXISTING PROJECT AGREEMENTS
4.1 Amendments Applicable to All Existing Project Agreements. In view of
the decisions of the Steering Committee reflected in Recital D above and of
other agreements reached between the parties, MSS and the University agree that
all Existing Project Agreements are hereby amended as follows:
(a) Revision of Definition of "Innovations". The definition of
"Innovations" in Section 1 of each of the Existing Project Agreements is
replaced with the following:
"Innovations" means all ideas, inventions, apparatus, systems, data,
discoveries, methods, processes, improvements, works of authorship and
other innovations of any kind within the Project Scope, whether or not
they are eligible for patent, copyright, trademark, service mark, trade
dress, trade secret or other legal protection. Examples of Innovations
include: [ * ] "Innovations" does not include any computer information
technology or products (including but not limited to MSS' Biofusion(TM)
or other software products and technology), and the usage of any such
technology or products shall not be deemed to be within the Project
Scope.
(b) Revision of Definition of "Intellectual Property Rights". The
definition of "Intellectual Property Rights" in Section 1 of each of the
Existing Project Agreements is replaced with the following:
"Intellectual Property Rights" means patent applications, patents,
design rights or other similar invention rights, rights of priority,
copyrights, trademarks, service marks, trade dress, trade secret rights
and other intangible rights, whether existing under statutory or common
law, in any country in the world.
(c) Revision of Definition of "Joint Innovations". The definition
of "Joint Innovations" in Section 1 of each of the Existing Project Agreements
is replaced with the following:
"Joint Innovations" means all inventions, improvements, works of
authorship and other innovations of any kind within the Project Scope
that may be made, conceived, developed or reduced to practice jointly by
MSS and by SMM and their respective employees, consultants, faculty,
technicians, visiting scientists, students, and/or post-doctoral
associates in the course of this Agreement, whether or not they are
eligible for patent, copyright, trademark, service mark, trade dress,
trade secret or other legal protection. Examples of Joint Innovations
include but are not limited to: [ * ].
<PAGE> 5
(d) Revision of Definition of "Licensed Patents". The definition
of "Licensed Patents" in Section 1 of each of the Existing Project Agreements is
replaced with the following:
"Licensed Patents" means (i) any United States patents that may issue to
the University during the term of this Agreement covering any test
developed by or on behalf of the University and all divisionals,
continuations, continuations-in-part, reissues, extensions, and
reexaminations thereof that may issue in the United States during the
term of this Agreement, (ii) any corresponding foreign patents that may
issue to the University during the term of this Agreement with respect
to any of the preceding patents, and all divisionals, continuations,
continuations-in-part, reissues, extensions, and reexaminations thereof,
and (iii) any other patents that may issue to the University during the
term of this Agreement, and all divisionals, continuations,
continuations-in-part, reissues, extensions, and reexaminations thereof,
to the extent they cover any Innovations within the Project Scope.
(e) Revision of Definition of "Net Proceeds". The definition of
"Net Proceeds" in Section 1 of each of the Existing Project Agreements is
replaced with the following:
"Net Proceeds" means all gross revenue to MSS from the commercial
distribution of a Product or payments related to a Product (whether for
sales agency rights or distribution rights, license fees, development
costs or other monies payable by a Third Party), minus the following:
(i) all promotional, trade, quantity, and cash discounts
actually allowed, and credits and allowances actually granted on account
of rejections, returns or billing errors;
(ii) the cost of goods sold (COGS), including but not
limited to all mailing, delivery or other transportation charges and
taxes imposed on the commercial distribution of a Product, any charges
by an Approved Lab incurred with respect to such Product (including an
Approved Lab operated in-house by MSS or by a Third Party), Test
Sampling Materials and labor, and commissions, royalties, or other fees
paid related to the Product;
(iii) all marketing and sales costs, including but not
limited to trade shows, educational programs, thought leader
development, marketing materials, market enhancement clinical studies,
marketing, sales and administrative personnel and consultants related to
the commercial distribution of the Product;
(iv) all operational costs, including but not limited to
supplies, customer service, billing and collection, production, quality
assurance personnel and consultants related to the commercial
distribution of the Product;
(v) all costs to sponsor and monitor clinical utility
trials which MSS is responsible for;
<PAGE> 6
(vi) all facility costs (including facilities used for an
in-house Approved Lab and commercial service centers that support the
marketing, distribution and collection of test materials, laboratory
routing, results reporting, invoicing and collection), including but not
limited to rent, directly related to the commercial distribution of the
Product;
(vii) all equipment and other capital expenditures and any
related depreciation;
(viii) legal fees incurred in engaging a Third Party;
(ix) all costs associated with the preparation, filing and
prosecution of all patent applications other than the initial patent
application filed in either the United Kingdom or the United States for
a Product, including but not limited to filing fees, translation costs
and legal fees (but not including any internal staff of MSS and overhead
costs incurred with respect to any patent applications that MSS has
responsibility for hereunder);
(x) regulatory costs, if any, including but not limited to
filing fees and legal fees; and
(xi) all other costs that may be incurred with respect to
the commercialization of the Product, such as patent litigation costs,
indemnities and warranties to a Third Party or to end users of Products,
and any insurance premiums to insure against potential liability.
In computing Net Proceeds, all revenue, costs and deductions will
be accounted for using generally accepted accounting principles
consistently applied. Losses, if any, from previous quarters will be
carried forward and revenues which become bad debt will be reconciled
quarterly. The parties recognize that, depending upon the specific
responsibilities assumed by each of the parties with respect to the
commercialization of a particular Product, the costs and expenses to be
deducted in computing Net Proceeds may be incurred by either MSS or the
University. The parties recognize that as multiple Products are
commercialized, some of the costs and expenses to be deducted in
computing Net Proceeds would be amortized over multiple Products or over
products within the scope of other project agreements between the
parties, all as determined by the Steering Committee.
(f) Costs of Carrying Out Responsibilities. Section 3.4 of each
of the Existing Project Agreements is replaced with the following:
3.4 Costs of Carrying Out Responsibilities; Sinking Fund.
(a) Costs to be Borne by the Parties Individually. Subject
to the deduction of costs in computing Net Proceeds as set forth in the
definition of "Net
<PAGE> 7
Proceeds" in Section 1 above, each party will carry out the activities
for which it is responsible at its own expense, including the costs of
any research and development, commercialization costs, internal staff
and overhead costs, consultants and other outside contractors assisting
a party in performing its duties.
(b) Sinking Fund. After a Commercialization Event occurs
with respect to a Product and Net Proceeds are being generated, the
Steering Committee will determine a percentage of the Net Proceeds that
will be directed into an MSS sinking fund out of which future costs that
are deductible in computing Net Proceeds in accordance with the
definition of "Net Proceeds" in Section 1 above and any liabilities
incurred will be paid.
(g) Deletion of Section 5.2. Section 5.2 of each of the Existing
Project Agreements is deleted and Section 5.3 is renumbered to be Section 5.2.
4.2 Amendments Applicable to the Atherosclerosis Project Agreement. In
view of the decisions of the Steering Committee reflected in Recital D above and
of other agreements reached between the parties, MSS and the University agree
that the Atherosclerosis Project Agreement is hereby amended as follows:
(a) Revision of Definition of "Products". The definition of
"Products" in Section 1.14 is replaced with the following:
1.14 "Products" means any products or services related to the
Project (such as the Initial Coronary Artery Disease Test or new
diagnostic and/or monitoring genetic tests, diagnostics, therapeutics,
or related services) based upon any University Innovation, MSS
Innovation, or Joint Innovation within the Project Scope.
(b) Revision of Definition of "Project Scope". Clause (ii) of the
definition of "Project Scope" in Section 1.16 is replaced with the following:
(ii) [ * ]
(c) Test Standards. Section 3.2(iii) is amended to read as
follows:
(iii) Ensuring that all tests are run consistent with United States and
European Community standards. MSS will monitor, audit, and assist the
University with the proper paperwork required under United States
standards.
<PAGE> 8
(d) Revision of Definition of "Test Sampling Materials". The
definition of "Test Sampling Materials" in Section 1.20 is replaced with the
following:
1.20 "Test Sampling Materials" means the packaging, the clinical
materials and accompanying instructional materials to be used to obtain
a sample from a patient for delivery to an Approved Lab for performing
the genetic analysis of an Atherosclerosis Test on such sample, and the
subsequent materials reporting the results of the genetic analysis to a
patient.
(e) Division of "Net Proceeds". The second paragraph of Section
5.1 is deleted in its entirety. The word "new" in the first line of the third
paragraph of Section 5.1 is deleted. The phrase "other type of" is inserted
before the word "Product" in the second line of the first sentence of the first
paragraph of Section 5.1, so that such sentence reads "The allocation of Net
Proceeds between MSS and the University with respect to each other type of
Product within the Project Scope ..." Insert the following sentence in front of
the first sentence of the first paragraph of Section 5.1:
Net Proceeds with respect to the Initial Coronary Artery Disease Test
and all other diagnostic and/or monitoring genetic tests that are
commercialized hereunder will be allocated [ * ] to MSS and [ * ]
to the University.
4.3 Amendments Applicable to the Eye Diseases Project Agreement. In view
of the decisions of the Steering Committee reflected in Recital D above and of
other agreements reached between the parties, MSS and the University agree that
the Eye Diseases Project Agreement is hereby amended as follows:
(a) Revision of Definition of "Products". The definition of
"Products" in Section 1.14 is replaced with the following:
1.14 "Products" means any products or services related to the
Project (such as the Initial Eye Disease Test or new diagnostic and/or
monitoring genetic tests, diagnostics, therapeutics, or related
services) based upon any University Innovation, MSS Innovation, or Joint
Innovation within the Project Scope.
(b) Revision of Definition of "Project Scope". Clause (ii) of the
definition of "Project Scope" in Section 1.16 is replaced with the following:
(ii) [ * ]
(c) Test Standards. Section 3.2(v) is amended to read as follows:
<PAGE> 9
(iii) Ensuring that all tests are run consistent with United States and
European Community standards. MSS will monitor, audit, and assist the
University with the proper paperwork required under United States
standards.
(d) Revision of Definition of "Test Sampling Materials". The
definition of "Test Sampling Materials" in Section 1.20 is replaced with the
following:
1.20 "Test Sampling Materials" means the packaging, the clinical
materials and accompanying instructional materials to be used to obtain
a sample from a patient for delivery to an Approved Lab for performing
the genetic analysis of an Eye Disease Test on such sample, and the
subsequent materials reporting the results of the genetic analysis to a
patient.
(e) Division of "Net Proceeds". The second paragraph of Section
5.1 is deleted in its entirety. The word "new" in the first line of the third
paragraph of Section 5.1 is deleted. The phrase "other type of" is inserted
before the word "Product" in the second line of the first sentence of the first
paragraph of Section 5.1, so that such sentence reads "The allocation of Net
Proceeds between MSS and the University with respect to each other type of
Product within the Project Scope ..." Insert the following sentence in front of
the first sentence of the first paragraph of Section 5.1:
Net Proceeds with respect to the Initial Eye Disease Test and all other
diagnostic and/or monitoring genetic tests that are commercialized
hereunder will be allocated [ * ] to MSS and [ * ] to the University.
4.4 Amendments Applicable to the Osteoporosis Project Agreement. In view
of the decisions of the Steering Committee reflected in Recital D above and of
other agreements reached between the parties, MSS and the University agree that
the Osteoporosis Project Agreement is hereby amended as follows:
(a) Revision of Definition of "Products". The definition of
"Products" in Section 1.14 is replaced with the following:
1.14 "Products" means any products or services related to the
Project (such as the Initial Osteoporosis Test or new diagnostic and/or
monitoring genetic tests, diagnostics, therapeutics, or related
services) based upon any University Innovation, MSS Innovation, or Joint
Innovation within the Project Scope.
(b) Revision of Definition of "Project Scope". Clause (ii) of the
definition of "Project Scope" in Section 1.16 is replaced with the following:
(ii) [ * ]
<PAGE> 10
[ * ]
<PAGE> 11
(c) Test Standards. Section 3.2(v) is amended to read as follows:
(iii) Ensuring that all tests are run consistent with United States and
European Community standards. MSS will monitor, audit, and assist the
University with the proper paperwork required under United States
standards.
(d) Revision of Definition of "Test Sampling Materials". The
definition of "Test Sampling Materials" in Section 1.20 is replaced with the
following:
1.20 "Test Sampling Materials" means the packaging, the clinical
materials and accompanying instructional materials to be used to obtain
a sample from a patient for delivery to an Approved Lab for performing
the genetic analysis of an Osteoporosis Test on such sample, and the
subsequent materials reporting the results of the genetic analysis to a
patient.
(e) Division of "Net Proceeds". The second paragraph of Section
5.1 is deleted in its entirety. The word "new" in the first line of the third
paragraph of Section 5.1 is deleted. The phrase "other type of" is inserted
before the word "Product" in the second line of the first sentence of the first
paragraph of Section 5.1, so that such sentence reads "The allocation of Net
Proceeds between MSS and the University with respect to each other type of
Product within the Project Scope ..." Insert the following sentence in front of
the first sentence of the first paragraph of Section 5.1:
Net Proceeds with respect to the Initial Osteoporosis Test will be
allocated [ * ] to MSS and [ * ] to the University. Net Proceeds with
respect to all other diagnostic and/or monitoring genetic tests that are
commercialized hereunder will be allocated [ * ] to MSS and [ * ] to the
University.
5. TERM AND TERMINATION
5.1 Term. Unless sooner terminated in accordance with the provisions of
this Section 5, this Agreement shall continue in effect for an initial Contract
Period of one year, which period will be automatically extended in one (1) year
increments unless either party gives the other party written notice of its
election not to renew this Agreement at least ninety (90) days in advance of the
scheduled renewal date.
5.2 Termination for Breach. Either party may, upon sixty (60) days
written notice to the other party, terminate this Agreement in the event of a
material breach of this Agreement by the other party, if such breach is not
cured during the sixty (60) day notice period.
5.3 Termination by MSS. MSS may terminate this Agreement at any time
upon six (6) months written notice to the University; provided, however, that
the budget allocated to support any particular Project on which the Investigator
is working shall be appropriately prorated to allow for reasonable costs and to
reimburse for all contractual commitments incurred
<PAGE> 12
by the Investigator or the University in performance of this Agreement prior to
such termination, if such contractual commitments cannot be canceled by the
Investigator or the University.
5.4 Survival. The provisions of Section 2.3, all of Section 4, and this
Section 5.4 shall survive the expiration or termination of this Agreement.
6. GENERAL
6.1 Independent Contractors. The University and the Investigator, on the
one hand, and MSS, on the other hand, are independent contractors, and nothing
in this Agreement or otherwise shall place MSS and the University in the
relationship of partners, joint venturers or agents, nor shall the Investigator
be deemed an employee of MSS or entitled to participate in any benefits of MSS
offered to its employees.
6.2 Governing Law. This Agreement will be governed by and construed in
accordance with the substantive laws of the United States and the State of
California, without regard to or application of provisions relating to choice of
law.
6.3 Waiver and Modification. Failure by either party to enforce any
provision of this Agreement will not be deemed a waiver of future enforcement of
that or any other provision. Any waiver, amendment or other modification of any
provision of this Agreement will be effective only if in writing and signed by
the parties.
6.4 Severability. If for any reason a court of competent jurisdiction
finds any provision or portion of this Agreement to be unenforceable, that
provision will be enforced to the maximum extent permissible so as to effect the
intent of the parties, and the remainder of this Agreement will continue in full
force and effect.
6.5 Notices. All notices required or permitted under this Agreement will
be in writing, will reference this Agreement and will be deemed given: (i) when
sent by confirmed facsimile; (ii) ten (10) working days after having been sent
by registered or certified mail, return receipt requested, postage prepaid; or
(iii) five (5) working days after deposit with a commercial overnight carrier,
with written verification of receipt. All communications will be sent to the
addresses set forth below or to such other address as may be designated by a
party by giving written notice to the other party pursuant to this section:
To MSS:
Paul J. White
President and CEO
Medical Science Systems, Inc.
4400 McArthur Blvd., Suite 980
Newport Beach, CA 92660
U.S.A.
<PAGE> 13
To the University:
[ * ]
Professor Gordon W. Duff
Lord Florey Chair of Department of Molecular
& Genetic Medicine
The University of Sheffield
Royal Hallamshire Hospital
Sheffield, S10 2JF
England
6.6 Delays Beyond Control. Neither party will be liable to the other
party for any failure or delay in performance caused by reasons beyond such
party's reasonable control, and such failure or delay will not constitute a
material breach of this Agreement.
6.7 Assignment. Neither party may assign its rights or obligations
hereunder, by operation of law or otherwise, without express written consent of
the other party, which consent will not be unreasonably withheld. Any attempted
assignment without such consent shall be void. Subject to the foregoing, this
Agreement will benefit and bind the successors and assigns of the parties.
6.8 No Third Party Beneficiaries. Except as expressly provided herein to
the contrary, no provision of this Agreement, express or implied, is intended or
will be construed to confer rights, remedies or other benefits to any third
party under or by reason of this Agreement.
6.9 Entire Agreement. This Agreement, the Master Agreement and the
relevant Project Agreements, including all exhibits, constitute the entire
agreement between the parties with respect to the subject matter hereof, and
supersede and replace all prior or contemporaneous understandings or agreements,
written or oral, regarding such subject matter.
<PAGE> 14
6.10 Multiple Counterparts. This Agreement may be executed in multiple
counterparts, each of which will be considered an original and all of which
together will constitute one agreement. This Agreement may be executed by the
attachment of signature pages which have been previously executed.
6.11 Cumulation. All rights and remedies enumerated in this Agreement
will be cumulative and none will exclude any other right or remedy permitted
herein or by law.
6.12 Headings. The headings contained in this Agreement are inserted for
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement through
their duly authorized representatives as set forth below:
MEDICAL SCIENCE SYSTEMS, INC. THE UNIVERSITY OF SHEFFIELD
By: By:
----------------------------- --------------------------------------
Printed Name: Printed Name:
-------------------- ----------------------------
Title: Title:
--------------------------- -----------------------------------
<PAGE> 1
EXHIBIT 10.3
MEDICAL SCIENCE SYSTEMS
DEVELOPMENT AND COMMERCIALIZATION PROJECT AGREEMENT
(ATHEROSCLEROSIS INCLUDING CORONARY ARTERY DISEASE)
This Agreement is entered into and made effective as of this ___ day of
___________, 1996 (the "Effective Date") by and between Medical Science Systems,
Inc. a Texas corporation having its principal place of business at 4400
MacArthur Blvd., Suite 980, Newport Beach, CA 92660 ("MSS") and The University
of Sheffield, Western Bank, Sheffield S10 2TN, England ("University"), acting
through The Section of Molecular Medicine of the University's Department of
Medicine and Pharmacology ("SMM").
RECITALS
A. University and MSS have entered into a Master Agreement for
Technology Evaluation dated July 1, 1996 (the "Master Agreement"). Following the
procedures set forth in the Master Agreement, the parties have agreed to work
together on a project as defined herein to perform additional development and
commercialization of certain technology relating to the association between
genetics and coronary artery disease.
B. This Agreement is intended to supplement the provisions set forth in
the Master Agreement with respect to such technology, and sets forth additional
terms and conditions agreed to by the parties with respect to the project.
C. It is contemplated that MSS may locate and engage a third party to
assist in the commercialization of products based upon the technology that is
the subject of the project, or MSS may itself commercialize certain products
based upon the technology. This Agreement is also intended to set forth the
terms and conditions upon which MSS will locate and engage such third party or
itself commercialize such products.
NOW, THEREFORE, in consideration of the foregoing premises and of the
terms and conditions of this Agreement, the parties agree as follows:
1. DEFINITIONS
1.1 "Approved Lab" means a laboratory (which may be an internal
laboratory of the University and/or MSS or a third party laboratory) mutually
approved by MSS and SMM pursuant to Section 3.5 below to conduct Test
Administrations.
1.2 "Atherosclerosis Test" means [ * ].
- ---------
* Confidential treatment has been requested with respect to portions of this
document. Omitted portions have been filed separately with the Securities and
Exchange Commission.
<PAGE> 2
1.3 "Brand Name(s)" means the trademark(s), service mark(s) and/or
logo(s) or other designations under which Products are marketed and promoted by
MSS or a Third Party.
1.4 "Commercialization Event" means either of the following with respect
to a Product: (i) entry into a business arrangement with a Third Party (whether
through a license and/or development agreement, distribution agreement, joint
venture, co-promotion, or other structure) for the further development, clinical
testing, marketing and/or sale of such Product in one or more markets, or (ii)
decision by the Steering Committee to engage MSS to commercially distribute such
Product in one or more markets directly to end users or through distribution
channels set up by MSS (rather than through a Third Party).
1.5 "Confidential Information" shall be as defined in Section 1 of the
Master Agreement.
1.6 "Initial Coronary Artery Disease Test" means the [ * ].
1.7 "Innovations" means all ideas, inventions, apparatus, systems, data,
discoveries, methods, processes, improvements, works of authorship and other
innovations of any kind within the Project Scope, whether or not they are
eligible for patent, copyright, trademark, trade secret or other legal
protection. Examples of Innovations include: [ * ]. "Innovations" does not
include any preexisting MSS computer information technology or products
(including but not limited to MSS' Biofusion(TM) and Medical Decision
Explorer(TM) products and technology), and the usage of any such technology or
products shall not be deemed to be within the Project Scope.
1.8 "Intellectual Property Rights" means patent applications, patents,
design rights or other similar invention rights, rights of priority, copyrights,
trademarks, trade secret rights and other intangible rights, whether existing
under statutory or common law, in any country in the world.
1.9 "Joint Innovations" means all inventions, improvements, works of
authorship and other innovations of any kind within the Project Scope that may
be made, conceived, developed or reduced to practice jointly by MSS and by SMM
and their respective employees, consultants, faculty, technicians, visiting
scientists, students, and/or post-doctoral associates in the course of this
Agreement, whether or not they are eligible for patent, copyright, trademark,
trade secret or other legal protection. Examples of Joint Innovations include
but are not limited to: [ * ].
1.10 "Licensed Patents" means (i) any United States patents that may
issue to the University during the term of this Agreement covering an
Atherosclerosis Test (including the Initial Coronary Artery Disease Test)
developed by or on behalf of the University and all
<PAGE> 3
divisionals, reissues, and reexaminations thereof that may issue in the United
States during the term of this Agreement, (ii) any corresponding foreign patents
that may issue to the University during the term of this Agreement with respect
to any of the preceding patents, and all divisionals, reissues, and
reexaminations thereof, and (iii) any other patents that may issue to the
University during the term of this Agreement, and all divisionals, reissues, and
reexaminations thereof, to the extent they cover any Innovations within the
Project Scope.
1.11 "Licensed Invention" means any apparatus, system, process, method
or other invention claimed in any of the Licensed Patents, and any work of
authorship, know how, trade secret and other technology within the Project Scope
covered by any other Intellectual Property Right of the University.
1.12 "MSS Innovations" means all Innovations within the Project Scope
that may be made, conceived, developed or reduced to practice solely by MSS and
its employees, consultants, and technicians.
1.13 "Net Proceeds" means the following:
(i) In the case of a Commercialization Event with a Third Party,
all royalties, license fees, or other monies payable by such Third Party based
upon the commercial distribution of a Product in one or more markets; and
(ii) In the case of a decision by the Steering Committee to
engage MSS to commercially distribute one or more Products in one or more
markets directly to end users or through distribution channels set up by MSS,
the gross amount actually received by MSS from the commercial distribution of a
Product, less (i) any delivery or other transportation charges and taxes imposed
on the transaction, (ii) any charges by an Approved Lab incurred with respect to
such Product, (iii) the cost of goods sold (COGS), (iv) actual out of pocket
costs for advertising, travel, trade shows, educational programs and other
marketing and sales expenses (but not including salaries of personnel) directly
related to the commercial distribution of the Product, (v) as determined by the
Steering Committee, either a reasonable administrative and sales overhead
charge, or the actual personnel costs for marketing, sales and administrative
functions, with respect to the commercial distribution of the Product, all of
the foregoing computed in accordance with generally accepted accounting
principles, and (vi) carryover losses, if any, from a previous quarter. It is
recognized by the parties that, depending upon the specific responsibilities
assumed by each of the parties, the foregoing costs and expenses may be incurred
by either MSS or the University.
1.14 "Products" means any products or services related to the Project
(such as new tests, diagnostics, therapeutics, or related services) based upon
any University Innovation, MSS Innovation, or Joint Innovation within the
Project Scope.
1.15 "Project" means the development and commercialization activities to
be undertaken by MSS, SMM and Third Parties (if any) pursuant to this Agreement
within the Project Scope.
<PAGE> 4
1.16 "Project Scope" means:
(i) [ * ], and
(ii) [ * ].
1.17 "Steering Committee" shall be as defined in Section 2 below.
1.18 "Subsidiary" means a corporation, company or other entity more than
fifty percent (50%) of whose outstanding shares or securities (representing the
right to vote for the election of directors or other managing authority) are,
now or hereafter, owned or controlled, directly or indirectly, by a party to
this Agreement; provided that any such corporation, company or other entity will
be deemed to be a Subsidiary only so long as such ownership or control exists.
1.19 "Test Administration" means the performing of the genetic analysis
of an Atherosclerosis Test by an Approved Lab based upon a sample gathered from
a patient using Test Sampling Materials.
1.20 "Test Sampling Materials" means a container that will be used to
transport a sample from a patient to an Approved Lab for performing the genetic
analysis of an Atherosclerosis Test on such sample, and accompanying
instructional materials.
1.21 "Third Party" means a third party entity engaged by MSS, with the
approval of the Steering Committee, in accordance with this Agreement to assist
in the further development, clinical testing, marketing and/or commercial
distribution of one or more Products in one or more markets.
1.22 "University Innovations" means all Innovations within the Project
Scope that may be made, conceived, developed or reduced to practice solely by
SMM and its faculty, employees, consultants, technicians, visiting scientists,
students and post doctoral associates.
2. STEERING COMMITTEE
2.1 General Responsibilities of the Steering Committee. A four-person
steering committee, consisting initially of Paul White and Kenneth Kornman for
MSS and Gordon Duff and [ * ] for the University (the "Steering Committee"),
will make joint decisions
<PAGE> 5
and provide high level management with respect to the Project. [ * ] will
also serve on the Steering Committee as a representative of the employees,
faculty, consultants and staff working on the Project. Each person on the
Steering Committee will have one vote. Each party may nominate alternative or
replacement members to serve on the Steering Committee with the consent of the
other party, which consent will not be unreasonably withheld. The Steering
Committee will meet on a regular basis as the committee members may determine to
be necessary. Written minutes of the meetings of the Steering Committee will be
kept and will be promptly circulated after each meeting to the committee members
for approval. The Project will consist of an initial phase and any follow-on
phases that the Steering Committee may determine to pursue. During the initial
phase, the parties will, in accordance with their respective responsibilities
set forth in Section 3 below, file and prosecute U.S. and international patents
covering the Initial Coronary Artery Disease Test and any other Innovations that
the Steering Committee may determine, conduct clinical studies to generate
appropriate clinical data and, if such data demonstrates strong clinical utility
of potential Products, identify and engage an appropriate Third Party. If the
Steering Committee determines that the clinical data is not strong enough to
seek a Third Party, the Steering Committee will determine the next step(s) that
should be taken. After completion of the initial phase of the Project, the
Steering Committee will review and make decisions as to the next step(s) that
should be taken, which may include additional research and/or development and
testing of Products, seeking of additional Third Parties, direct sales, or
termination of the Project.
2.2 Determinations With Respect to Commercialization of Individual
Products. The Steering Committee will determine with respect to each Product or
class of Products to be commercialized pursuant to the Project, whether to
engage a Third Party to assist in the further development, clinical testing,
marketing and/or commercial distribution of such Product(s) in one or more
markets, or whether to engage MSS to commercially distribute such Product(s) in
one or more markets directly to end users or through distribution channels set
up by MSS. In the event that the Steering Committee determines to engage a Third
Party with respect to a particular Product, MSS will identify potential Third
Parties and the Steering Committee will select one with which MSS will be
authorized to negotiate an appropriate engagement with respect to such Product,
or to extend a previous engagement to cover such Product.
3. RESPONSIBILITIES OF THE PARTIES
This Section sets forth the responsibilities of the parties during the
Project, including but not limited to the initial phase of the Project.
3.1 Responsibilities of MSS. Subject to the high level management and
direction of the Steering Committee, MSS will have responsibility for the
following activities:
(i) Conducting overall management and oversight of the Project.
(ii) Developing a patent strategy with respect to Innovations and
Products and the determination of which countries patents should be filed in.
<PAGE> 6
(iii) Preparing and filing in the United States the initial
patent application with respect to the Initial Coronary Artery Disease Test and
any other Innovations the Steering Committee may determine to file patents for
during the Project.
(iv) Preparing, filing, and prosecuting all international patent
applications (subject to the shared cost obligations set forth in Section 3.4
below) that the Steering Committee determine to file during the Project, to the
extent the foregoing is not handled by one or more Third Parties.
(v) Developing an initial regulatory strategy with respect to
Innovations and Products to be developed during the Project for markets in which
the Steering Committee determines MSS should seek to establish Third Parties
(but not including the actual preparation or filing of documentation for any
regulatory approval or license, which will be handled by MSS or a Third Party as
the Steering Committee may determine, subject to the shared cost obligations set
forth in Section 3.4).
(vii) Identifying potential Third Parties and preparing the
business plans necessary to support the engagement of one or more Third Parties,
conducting negotiations with respect to such engagement, and monitoring of any
Third Parties engaged.
(vii) Handling public relations with respect to Innovations to
support the initial market development and the search for appropriate Third
Parties.
(viii) Handling public relations, with the input and consultation
of the University, with respect to scientific breakthroughs and data embodied in
or associated with Atherosclerosis Tests and other Products and their underlying
scientific research;
MSS will use reasonable efforts to perform its responsibilities set
forth in this Section 3.1 in accordance with any timeline set by the Steering
Committee.
3.2 Responsibilities of the University. Subject to the high level
management and direction of the Steering Committee, the University will have
responsibility for the following activities:
(i) Conducting genetic laboratory analysis on such data and
interpretation of the results for the Initial Coronary Artery Disease Test.
(ii) Further technical development of Innovations and Products by
seeking potential new gene sequences and running confirming genetic laboratory
tests.
(iii) Ensuring that all tests are run consistent with European
Community standards.
(iv) Ensuring that the employees, faculty, consultants and staff
working on the Project maintain written documentation of their work (such as
laboratory notebooks) sufficient to establish dates of invention, the substance
of their work on the Project at various dates, and any
<PAGE> 7
other information necessary or desirable for seeking patent protection and
establishing priority of invention.
(v) Providing assistance in validation of Approved Labs if
necessary.
(vi) Providing reasonable technical presentation support and
assistance to MSS if requested by MSS.
(vii) Participation in a reasonable number of educational
programs with respect to Innovations and Products, if requested by MSS or a
Third Party.
The University will use reasonable efforts to perform its
responsibilities set forth in this Section 3.2 in accordance with any timeline
set by the Steering Committee.
3.3 Additional Responsibilities and Reallocation of Responsibilities.
The parties recognize that with respect to the development, testing and
commercialization of any particular Product (including the Initial Coronary
Artery Disease Test), additional responsibilities not enumerated in Sections 3.1
and 3.2 above may need to be allocated to the parties, and it may further become
desirable to reallocate some of the responsibilities enumerated in Sections 3.1
and 3.2 between the parties. In either case, the Steering Committee will have
responsibility for making any such allocation or reallocation of
responsibilities.
3.4 Costs of Carrying Out Responsibilities; Shared Costs.
(a) Costs to be Borne by the Parties Individually. Subject to the
shared cost obligations of this Section 3.4, each party will carry out the
activities for which it is responsible at its own expense, including the costs
of any research and development, internal staff and overhead costs, consultants
and other outside contractors assisting a party in performing its duties, travel
costs, initial U.S. patent filing and prosecution costs, locating and engaging
Third Parties, and public relations.
(b) Shared Costs. The parties recognize that there will be shared
costs incurred under the Project, which will be borne by the parties in
proportion to each party's share of Net Proceeds. Shared costs will include the
following: legal fees incurred in engaging a Third Party; all costs associated
with the preparation, filing and prosecution of international patent
applications, including filing fees, translation costs and legal fees (although
MSS will be responsible for its internal staff and overhead costs incurred with
respect to any patent applications that it has responsibility for); regulatory
costs, if any, including filing fees and legal fees; other costs that may be
incurred with respect to the commercialization of Products, whether through MSS
or a Third Party, such as patent litigation costs, indemnities and warranties to
a Third Party or to end users of Products, and any insurance premiums to insure
against potential liability; and any other costs approved by the Steering
Committee to be shared costs.
(c) Payment of Shared Costs. The parties will contribute to
shared costs as they are incurred. After a Commercialization Event occurs with
respect to a Product and Net Proceeds are being generated: (i) The Steering
Committee will determine a percentage of the Net Proceeds that will be directed
into a sinking fund out of which shared costs and any liabilities
<PAGE> 8
incurred will be paid, and (ii) to the extent that the sinking fund contains
insufficient funds to pay any shared costs incurred, MSS will have the option to
require the University to contribute its share of the balance directly to MSS,
or to pay such shared costs directly and to offset the University's share of
such costs against the share of any Net Proceeds or development funds to which
the University is entitled hereunder.
3.5 Selection of Approved Labs. MSS and the University will by mutual
agreement establish one or more Approved Labs to conduct Test Administrations.
Neither party will unreasonably withhold its consent to the establishment of a
particular Approved Lab. Such Approved Labs must have the technical and
professional capability to conduct Test Administrations in a competent, cost
efficient and timely manner, must meet all applicable governmental regulatory
requirements, and must be able to handle reasonable anticipated volumes. In the
event that either party determines, in the exercise of good faith judgment, that
an Approved Lab previously agreed to by the parties is unacceptable or
undesirable, then the Steering Committee will determine whether a different
Approved Lab should be established and, if so, will establish a replacement
Approved Lab.
3.6 Use of Approved Labs. Each party agrees that it will conduct or
cause to be conducted Test Administrations only through an Approved Lab, except
that either party may at its option use other laboratories to conduct Test
Administrations in conjunction with internal development of products outside the
Project Scope.
4. GRANT OF LICENSES
4.1 Grant. Subject to the terms and conditions of this Agreement, the
University hereby grants to MSS a worldwide, irrevocable, transferable license
under the Licensed Patents and any other applicable Intellectual Property Rights
owned by the University to make, have made, use, offer to sell, sell, license
and otherwise transfer Products within the Project Scope and to conduct Test
Administrations, and to sublicense Third Parties, distributors and Subsidiaries
of MSS, and Approved Labs to do any of the foregoing, all subject to the
approval of the Steering Committee in accordance with Section 2 above.
4.2 Exclusivity. The license granted in Section 4.1 shall be exclusive
to MSS, except that the University retains the right to practice and use any
Licensed Invention for its own internal research purposes and in carrying out
any of its responsibilities under Section 3.2 above.
5. DIVISION OF NET PROCEEDS
5.1 Allocation of Net Proceeds With Respect to Products. The allocation
of Net Proceeds between MSS and the University with respect to each Product
within the Project Scope will be determined by the Steering Committee based on
general guidelines to be generated by the Steering Committee for each type of
Product to be developed and commercialized hereunder (the "General Guidelines").
The General Guidelines for a particular type of Product will contain a set of
weights assigned to each responsibility that could potentially be allocated
between the parties for the development and/or commercialization of a particular
Product of that type. With respect
<PAGE> 9
to each particular Product of a defined type, the parties will generate and
execute a set of specific guidelines for that particular Product (the "Specific
Guidelines"), which will list those of the responsibilities contained in the
General Guidelines that are applicable to that particular Product, will allocate
each such responsibility to one of the parties, and will credit to such party
the weight associated with such responsibility in the General Guidelines. Each
party's share of the Net Proceeds generated by such particular Product will then
equal its percentage share of the total weights in the Specific Guidelines
assigned to such party, subject to any minimum share such party may be entitled
to as listed in the General Guidelines and/or the Specific Guidelines. If a
responsibility listed in the General Guidelines for a type of Product is not
relevant to a particular Product of that type, then the weight for that
responsibility will be listed as zero in the Specific Guidelines for that
particular Product. For example, if the total weights for all assigned
responsibilities in the Specific Guidelines equals 80 and the weights associated
with the responsibilities assigned to one party in the Specific Guidelines
equals 30, then such party would be entitled to 37.5% of the Net Proceeds
generated by that particular Product.
Schedule 1 contains the General Guidelines for genetic test Products the
parties have agreed to as of the Effective Date. Schedule 2 contains the
Specific Guidelines the parties have agreed to as of the Effective Date for the
Initial Coronary Artery Disease Test based upon the responsibilities for the
Initial Coronary Artery Disease Test set forth in Section 3 above. In the event
that the Steering Committee reallocates the responsibilities for the Initial
Coronary Artery Disease Test, or adds new responsibilities to one or both of the
parties, the Steering Committee will determine and execute a revised set of
Specific Guidelines for the Initial Coronary Artery Disease Test based upon the
reallocated responsibilities and the cost thereof.
As new General Guidelines are generated by the Steering Committee for
other Product types, the parties will set forth such General Guidelines in a new
Schedule to this Agreement, and when executed by a majority of the members of
the Steering Committee, such General Guidelines shall then become a part of this
Agreement. Similarly, as Specific Guidelines for a particular Product of that
type are generated, the parties will set forth such Specific Guidelines in a new
Schedule to this Agreement, and when executed by a majority of the members of
the Steering Committee, such Specific Guidelines shall then become a part of
this Agreement. The Steering Committee may revise any General Guidelines or
Specific Guidelines based upon a reallocation of responsibilities thereunder and
the associated cost thereof and, upon doing so, shall set forth the revised
guidelines in a new Schedule which, when executed by a majority of the members
of the Steering Committee, shall become a part of this Agreement.
5.2 Development Funding from a Third Party. Any development funding
received from a Third Party will be allocated by the Steering Committee between
MSS and the University in proportion to the responsibilities each party
undertakes that is covered by such funding and the effect such responsibilities
may have on the division of Net Proceeds.
5.3 Payment Directly to Prof. Duff. MSS may pay directly to Prof.
Gordon Duff any portion of the University's share of Net Proceeds to which
Prof. Duff is entitled.
<PAGE> 10
6. REPORTING AND DISTRIBUTION OF NET PROCEEDS
6.1 Reports and Payment. MSS will, within forty-five (45) days after the
close of each calendar quarter during the term of this Agreement, issue a
written report to the University reporting the Net Proceeds generated by MSS
during such quarter, and a computation of the share thereof due each party
hereunder. Full payment, net of any setoffs for shared costs to which MSS may be
entitled under Section 3.4(c) above, of the University's share of such Net
Proceeds for such calendar quarter will accompany such report.
6.2 Books and Records. MSS will keep, and will cause its distributors to
keep, full, true, and accurate records with respect to Net Proceeds. MSS will
give access to such records at reasonable times, no more than once per year, for
three (3) years following the end of the calendar year to which they pertain, to
a mutually acceptable independent certified public accountant retained by the
University for the purpose of verifying the accuracy of the reports supplied to
the University hereunder. The University will pay for the cost of such
independent certified public accountant, except in the event that such
inspection reveals that MSS has understated or underpaid the amounts due
hereunder to the University in an average amount of five percent (5%) or more
over a six (6) month period, then the MSS will pay or reimburse the University
for the entire cost of such inspection. MSS agrees to pay the balance of such
amounts due, together with the cost of the inspection, to the University within
ten (10) days after written notice by the University of MSS's understatement or
underpayment.
7. OWNERSHIP
7.1 MSS Innovations. MSS shall be the sole and exclusive owner of MSS
Innovations, any Product based thereon after a Commercialization Event, the
Brand Name(s), and all Intellectual Property Rights in the foregoing, subject to
the University's right to share in Net Proceeds generated from the
commercialization thereof in accordance with this Agreement. The University
agrees to execute documents, including but not limited to assignment documents,
as reasonably requested by MSS to establish, confirm and perfect MSS's rights in
any of the foregoing.
7.2 University Innovations. The University shall be the sole and
exclusive owner of University Innovations and of all Intellectual Property
Rights therein, provided, however, that upon the occurrence of a
Commercialization Event with respect to a University Innovation and/or a Product
based thereon, the University agrees to assign to MSS all right and title to
such University Innovation and/or Product and to all Intellectual Property
Rights therein, subject to the University's right to share in Net Proceeds
generated from the commercialization thereof in accordance with this Agreement.
Each party agrees to execute documents, including but not limited to assignment
documents, as reasonably requested by the other party to establish, confirm and
perfect the other party's rights in accordance with the foregoing.
7.3 Joint Ownership. MSS and the University shall be joint owners of
equal undivided interests in any Joint Innovations developed by them, provided,
however, that (i) during the term of this Agreement, each party agrees to
exploit its joint ownership rights consistent with MSS's exclusivity as defined
in Section 4.2 above, and (ii) upon the occurrence of a Commercialization
<PAGE> 11
Event with respect to a Joint Innovation and/or a Product based thereon, the
University agrees to assign to MSS all right and title to such Joint Innovation
and/or Product and to all Intellectual Property Rights therein, subject to the
University's right to share in Net Proceeds generated from the commercialization
thereof in accordance with this Agreement. After expiration or termination of
this Agreement, each party shall be free to exploit, without the permission of
the other party and without any duty of accounting, its joint ownership rights
in any Joint Innovations that have not been assigned to MSS under this Section
7.3.
8. PUBLICATION
Publication of research results or other information within the Project
Scope will be governed by the procedures set forth in Section 5 of the Master
Agreement. The Steering Committee will act as the "designated person" of each
party as referenced in Section 5 of the Master Agreement, and will have the
authority to determine the content and timing of any such publication.
9. TERM
Unless earlier terminated in accordance with the terms of Section 10
below or by determination of the Steering Committee to abandon the Project and
terminate this Agreement, this Agreement shall remain in effect from the
Effective Date for a period of ten (10) years, and shall thereafter
automatically renew for additional one (1) year periods, unless either party
gives written notice to the other party at least six (6) months in advance of
any renewal date that such party does not wish to renew this Agreement.
10. TERMINATION
10.1 Termination Upon Notice of Breach. In the event that either party
breaches or defaults under any material term or condition of this Agreement,
including but not limited to failure to make timely payment of monies due, and
such breach or default is not cured within thirty (30) days of written notice of
the same from the other party, the other party may, in addition to any other
remedy that it may have at law or in equity or under this Agreement, terminate
this Agreement.
10.2 Termination by the Steering Committee. The Steering Committee may
at any time determine to abandon the Project and terminate this Agreement on a
timeline as set by the Steering Committee.
10.3 Termination by MSS. MSS may at its option upon written notice to
the University terminate this Agreement in the event that Prof. Gordon Duff
is no longer an employee of the University or ceases to be the head of SMM.
<PAGE> 12
10.4 Immediate Termination Upon Certain Events of Bankruptcy. Either
party may at its option terminate this Agreement immediately upon written notice
to the other party upon the occurrence of any of the following events:
(a) In the event that the other party makes an assignment for the
benefit of creditors; admits in writing its inability to pay its debts as they
become due; files a voluntary petition in bankruptcy; is adjudicated to be
bankrupt or insolvent; files a petition seeking for itself any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
arrangement under any present or future statute, law or regulation, or files an
answer or similar pleading admitting the material allegations of a petition
filed against it in any such proceeding; or consents to or acquiesces in the
appointment of, or has its business placed in the hands of, a trustee, receiver,
assignee, or liquidator of it or any substantial part of its business, assets or
properties, whether by voluntary act or otherwise; or
(b) In the event that either party ceases doing business as a
going concern, or it or its shareholders take any action in anticipation of or
furtherance of dissolution or liquidation.
10.5 Effect of Termination.
(a) Provisions Applying to All Terminations. In the event of any
termination of this Agreement for any reason, the following provisions shall
apply:
(i) except as provided in this Section 10.5 or under
Section 10.6 below, all further obligations of both parties under this Agreement
will cease as of the date of termination of this Agreement;
(ii) each party shall retain ownership (including joint
ownership) of any Innovations and/or Products to which it had title in
accordance with the provisions of this Agreement on the date of such
termination, including but not limited to title by virtue of an assignment after
a Commercialization Event; and
(iii) with respect to any Product(s) for which a
Commercialization Event has occurred as of the date of termination of this
Agreement, the Steering Committee will determine how the division of Net
Proceeds from such Product(s) should be reallocated between the parties, both
immediately and over time, based upon the additional responsibilities with
respect to such Product(s) that MSS will have to assume post termination of this
Agreement, and MSS will be entitled to deduct its reasonable cost of all such
additional responsibilities from the University's share of any such Net
Proceeds, provided, however, that in no event shall the deduction of such costs
cause the University's share of such Net Proceeds to fall below ten percent
(10%) in any given calendar quarter.
(b) Provisions Applying to Specific Events of Termination. In
addition to the provisions of subsection (a), the following provisions shall
apply with respect to specific events of termination affecting Products for
which no Commercialization Event has occurred:
(i) Termination by MSS. In the event that MSS terminates
this Agreement pursuant to Sections 10.1 or 10.4, or the University elects not
to renew this
<PAGE> 13
Agreement pursuant to Section 9, then with respect to any Product for which data
exists or proof of principle studies are underway but no Commercialization Event
has yet occurred as of the date of termination, the license rights granted by
the University to MSS under Section 4 above shall continue, and MSS shall have
the right to continue development of any such Product and to take such Product
into commercial distribution (either itself or through a Third Party), provided
that (1) if such Product is placed into commercial distribution, then the
Steering Committee will determine how the Net Proceeds from such Product should
be allocated between the parties, both immediately and over time, based upon the
additional responsibilities that MSS assumes with respect to such Product post
termination of this Agreement and (2) MSS will be entitled to deduct its
reasonable cost of all such additional responsibilities from the University's
share of any Net Proceeds generated by such Product, except that, unless
otherwise determined by the Steering Committee, in no event shall the deduction
of such costs cause the University's share of such Net Proceeds to fall below
ten percent (10%) in any given calendar quarter.
(ii) Termination by the University. In the event that the
University terminates this Agreement pursuant to Sections 10.1 or 10.4, or MSS
elects not to renew this Agreement pursuant to Section 9, then, at the
University's option, the University may either:
(1) terminate all licenses granted by the
University to MSS under this Agreement with respect to any Product(s) for which
no Commercialization Event has yet occurred as of the date of termination, and
elect to itself continue development of any such Product and to take such
Product into commercial distribution (either itself or through a Third Party),
provided that (x) if such Product is placed into commercial distribution, then
the Steering Committee will determine how the Net Proceeds from such Product
should be allocated between the parties, both immediately and over time, based
upon the additional responsibilities that the University assumes with respect to
such Product post termination of this Agreement and (y) the University will be
entitled to deduct its reasonable cost of all such additional responsibilities
from MSS's share of any Net Proceeds generated by such Product, except that,
unless otherwise determined by the Steering Committee, in no event shall the
deduction of such costs cause MSS's share of such Net Proceeds to fall below
ten percent (10%) in any given calendar quarter; or
(2) allow the license rights granted by the
University to MSS under Section 4 above to continue and allow MSS to continue
development of any such Product and to take such Product into commercial
distribution (either itself or through a Third Party), provided that (x) if such
Product is placed into commercial distribution, then the Steering Committee will
determine how the Net Proceeds from such Product should be allocated between the
parties, both immediately and over time, based upon the additional
responsibilities that MSS assumes with respect to such Product post termination
of this Agreement and (y) MSS will be entitled to deduct its reasonable cost of
all such additional responsibilities from the University's share of any Net
Proceeds generated by such Product, except that, unless otherwise determined by
the Steering Committee, in no event shall the deduction of such costs cause the
University's share of such Net Proceeds to fall below ten percent (10%) in any
given calendar quarter.
(iii) Termination by the Steering Committee or by MSS
Under Section 10.3. In the event this Agreement is terminated by the Steering
Committee pursuant to Section 10.2 or by MSS pursuant to Section 10.3, then the
Steering Committee will decide whether MSS or the University (if any) should
assume responsibility for continuing development of any
<PAGE> 14
Product for which a Commercialization Event has not occurred as of the date of
such termination, and in the event MSS assumes such responsibility, then any
licenses granted by the University to MSS under this Agreement will survive
termination of this Agreement. The Steering Committee will also determine how
the Net Proceeds generated by any such Product should be allocated between the
parties, based upon the additional responsibilities assumed by the party having
responsibility for continuing development of such Product post termination of
this Agreement, and the party assuming such responsibility will be entitled to
deduct its reasonable cost of all such additional responsibilities from the
other party's share of any Net Proceeds generated by such Product, except that,
unless otherwise determined by the Steering Committee, in no event shall the
deduction of such costs by one party cause the other party's share of such Net
Proceeds to fall below ten percent (10%) in any given calendar quarter.
10.6 Survival of Certain Provisions. The provisions of Sections 6.2, 7,
10.5, 10.6, 12, 13.1, 13.2, 14.3, 15, 17, and 18 of this Agreement will survive
the expiration or termination of this Agreement.
11. PERSONNEL
Each party will cause its respective employees, faculty, consultants and
staff to execute such agreements, assignments, applications and other documents
as necessary to perfect and protect each party's rights as defined in this
Agreement with respect to Innovations and Products within the Project Scope.
12. SETTLEMENT OF DISPUTES
12.1 Basic Dispute Resolution Procedures. Any dispute between the
parties either with respect to the interpretation of any provision of this
Agreement or with respect to the performance of either party shall be resolved
as specified in this Section.
(a) Upon the written request of either party, each of the parties
will appoint a designated representative who does not devote substantially all
of his or her time to performance under this Agreement, whose task it will be to
meet for the purpose of endeavoring to resolve such dispute.
(b) The designated representatives shall meet as often as
necessary during a fifteen (15) day period (or such other time as the parties
may agree) to gather and furnish to the other all information with respect to
the matter in issue which is appropriate and germane in connection with its
resolution.
(c) Such representatives shall discuss the problem and negotiate
in good faith in an effort to resolve the dispute without the necessity of any
formal proceeding relating thereto.
(d) During the course of such negotiation, all reasonable
requests made by one party to the other for nonprivileged information reasonably
related to this Agreement, will be honored in order that each of the parties may
be fully advised of the other's position.
<PAGE> 15
(e) The specific format for such discussions will be left to the
discretion of the designated representatives, but may include the preparation of
agreed upon statements of fact or written statements of position furnished to
the other party.
12.2 Escalation Procedures. If the designated representatives cannot
resolve the dispute, then the dispute shall be escalated to a member of the
Board of Directors or Trustees of each of the University and of MSS, for their
review and resolution. If the dispute cannot be resolved by such persons, then
the parties may initiate formal proceedings; however, formal proceedings for the
resolution of any such dispute may not be commenced until the earlier of:
(a) The designated representatives concluding in good faith that
amicable resolution through continued negotiation of the matter in issue does
not appear likely; or
(b) Sixty (60) days after the initial request to negotiate such
dispute (unless preliminary or temporary relief of an emergency nature is sought
by one of the parties); or
(c) Thirty (30) days before the statute of limitations governing
any cause of action relating to such dispute would expire.
12.3 Arbitration of Monetary Disputes.
(a) Procedures. Any monetary disputes between the parties
concerning the amount of monies due or payable under this Agreement which the
parties are unable to resolve pursuant to the provisions of Sections 12.1 and
12.2 above, will be settled by arbitration in Orange County, California (unless
otherwise agreed) under the then-prevailing rules of American Arbitration
Association. There will be one (1) arbitrator chosen by mutual agreement of the
parties or, in the event the parties cannot agree within thirty (30) calendar
days of issuance of a written demand for arbitration by either party, by the
American Arbitration Association. All proceedings by the arbitrator shall be
conducted in accordance with the rules of the American Arbitration Association,
except to the extent the provisions of such rules are modified by this Agreement
or the mutual agreement of the parties. Either party will have the right to
discovery of evidence, but by the following methods only: requests for
production of documents and depositions of no more than three (3) individuals.
The arbitrator will supervise discovery and may, at the request of either party,
limit expenses of discovery (including reasonable attorneys' fees) to the
requesting party for good cause shown. All discovery will be completed, and the
arbitration hearing will commence, within forty-five (45) days after appointment
of the arbitrator. Subject to the foregoing, discovery matters will be governed
by the Federal Rules of Civil Procedure as applicable to civil actions in the
United States District Courts. The arbitration hearing will conclude within
thirty (30) days after it commences. The award rendered in arbitration will be
in writing and will be final and binding, and may be enforced in any court of
competent jurisdiction. The fees and expenses of the arbitrator will be paid by
the non-prevailing party.
(b) Approval of One Substantive Position of the Parties. In all
arbitration proceedings submitted under this Section 12.3, the arbitrator shall
be required to agree upon and approve the substantive position advocated by
either MSS or the University with respect to each
<PAGE> 16
disputed item(s). Any decision rendered by the arbitrator that does not reflect
a substantive position advocated by either MSS or the University shall be beyond
the scope of authority granted to the arbitrator and shall be void. No decision
of the arbitrator shall ever be construed as or have the effect of amending or
altering this Agreement or the parties' rights and responsibilities with respect
thereto.
12.4 Other Disputes. Except as provided in Section 12.3 above, the
parties will have no obligation to arbitrate any other disputes, claims or
controversies of any kind arising out of or related to this Agreement, including
but not limited to any dispute, claim or controversy relating to the scope of
the Project or the party's respective ownership rights to any Innovation or
Product. In addition, any claim by one party against the other for injunctive or
preliminary relief, whether or not related to this Agreement, may be litigated
in a court of competent jurisdiction.
13. CONFIDENTIALITY AND PRESS RELEASE
In addition to the provisions of Section 5 of the Master Agreement, the
following confidentiality provisions shall apply:
13.1 Confidentiality of the Agreement. The parties agree to maintain all
terms and conditions of this Agreement in confidence, except that (i) MSS may
state that it has received a license from the University under this Agreement
and may name the patents and Intellectual Property Rights to which such license
rights apply; (ii) The University may state that it has licensed certain
commercial exploitation rights within the Project Scope to MSS; (iii) this
Agreement may be disclosed to either party's attorneys, accountants or other
professional advisors in the course of seeking professional advice and to the
extent required by applicable law or regulations or court order; and (iv) this
Agreement may be disclosed by MSS to entities with which MSS is discussing a
proposed sale of its stock, sale of all or substantially all of its assets,
obtaining financing or entering into a partnering arrangement, provided that the
entity to whom the terms of this Agreement is to be disclosed has executed a
reasonable non-disclosure agreement.
13.2 Protection of Confidential Information. Each party agrees to keep
all Confidential Information of the other party to which it has access hereunder
strictly confidential, and agrees that it will not, except with the express
permission of the other party or as required by applicable law or regulations or
by court order, use such information except in the performance of this
Agreement, or disclose any such Confidential Information to any person or entity
other than its own employees, consultants, faculty, technicians, visiting
scientists, students, and/or post-doctoral associates who have a need to know
and who have been informed in advance of the receiving party's obligations with
respect to such Confidential Information.
13.3 Press Release. The parties agree to issue a mutually agreeable
joint press release with respect to this Agreement. Each party agrees that it
will not issue a press release with respect to this Agreement until such joint
press release has first been issued.
<PAGE> 17
14. REPRESENTATIONS AND WARRANTIES
14.1 By the University. The University represents and warrants to MSS
that:
(a) Ownership. The University is the sole and exclusive owner of
any Licensed Patents and any University Innovations supplied hereunder to MSS
for commercial exploitation;
(b) Authority. The University has the full right and power to
grant the licenses to MSS set forth in this Agreement and to supply the
University Innovations to MSS for commercialization hereunder;
(c) Inconsistent Obligations. There are no outstanding
agreements, licenses, assignments or encumbrances inconsistent with the
provisions of such licenses or with any other provision of this Agreement; and
(d) Infringement of Rights of Others. To the best of the
University's knowledge as of the Effective Date, the University knows of no
third parties' rights which would be infringed by practicing the inventions
claimed in the Licensed Patents within the scope of the licenses granted to MSS
hereunder or by the commercialization as contemplated hereunder of the
University Innovations in existence as of the Effective Date. The University
will promptly notify MSS in the event that it learns or has cause to believe at
any time that any third parties' rights would or might be infringed by
practicing the inventions claimed in any Licensed Patents or by any Product or
Innovation being commercialized hereunder. In the event that a claim is made
against MSS or a Third Party that the manufacture, use, sale, distribution or
other commercial exploitation of a Product or Innovation infringes the
Intellectual Property Rights of a third party, then MSS or the Third Party (as
applicable) will fund the cost of any litigation resulting out of such claim,
but will be entitled to recover up to two-thirds (or whatever other fraction of
the Net Proceeds generated by such Product or Innovation the University is
entitled to hereunder at the time such litigation commences) of its costs and
any damages awarded against it out of the sinking fund established pursuant to
Section 3.4 above and, to the extent the sinking fund contains insufficient
funds, the University's current and future share of any Net Proceeds; provided
that in the event MSS or the Third Party is found to have willfully infringed
such third party's Intellectual Property Rights (and such willfulness was not
caused by the University), then MSS or the Third Party shall not be entitled to
recover any portion of any enhanced damages awarded based upon such willfulness,
and provided further that the University will be entitled to have counsel of its
own choosing participate in (but not control) any such litigation at the
University's sole expense.
14.2 By MSS. MSS represents and warrants to the University that there
are no outstanding agreements, licenses, assignments or encumbrances
inconsistent with the provisions of such licenses or with any other provision of
this Agreement.
14.3 No Other Warranties. EXCEPT AS SET FORTH IN THIS SECTION, NEITHER
PARTY MAKES ANY OTHER WARRANTY, EXPRESS OR IMPLIED, RELATING TO THIS AGREEMENT
OR ANY INNOVATION OR PRODUCT, AND EACH PARTY SPECIFICALLY DISCLAIMS ANY IMPLIED
WARRANTY OR CONDITION OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
<PAGE> 18
15. INDEMNITIES
15.1 By MSS. MSS agrees to defend, indemnify, and hold the University
harmless from and against any and all third-party claims (other than claims for
infringement of a third party's Intellectual Property Rights to the extent such
claims fall within the provisions of Section 14 above), damages, actions,
liabilities, costs and expenses arising out of or in connection with (i) any
damage, including but not limited to damage to any property and personal injury
or death, by whomever suffered arising out of or resulting from any negligent or
willful act of MSS relating to the subject matter of this Agreement, and (ii)
any breach or claimed breach of the warranties and representations set forth in
Section 14.2 above.
15.2 By the University. The University agrees to defend, indemnify, and
hold MSS harmless from and against any and all third-party claims, damages,
actions, liabilities, costs and expenses arising out of or in connection with
(i) any damage, including but not limited to damage to any property and personal
injury or death, by whomever suffered arising out of or resulting from any
negligent or willful act of the University relating to the subject matter of
this Agreement, and (ii) any breach or claimed breach of the warranties and
representations set forth in Section 14.1 above.
16. ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS
In the event that either party becomes aware of an infringement or
potential infringement of the Licensed Patents or of any other Intellectual
Property Right of either the University or MSS within the Project Scope, such
party will promptly notify the other party and provide the details known to it.
The Steering Committee will then promptly confer about such infringement or
potential infringement. Within ten (10) business days thereafter, each party
will notify the other of its decision whether or not it wishes to participate in
litigation against the infringer or potential infringer. Any such litigation
will proceed as follows:
(a) Both Parties Elect to Participate. In the event that both parties
elect to participate in such litigation, the parties will mutually agree upon
counsel to bring such litigation. The parties will share equally the costs
(including the fees of attorneys and other professionals) of any such
litigation. MSS may recover all or a portion of its share of any such costs from
the sinking fund established pursuant to Section 3.4 above and, to the extent
the sinking fund contains insufficient funds, as an offset to the University's
share of Net Proceeds. All damages or lump sum settlement payments recovered
from the prosecution or settlement of such litigation shall, after deduction of
all reasonable costs and fees of attorneys and other professionals incurred in
pursuing such litigation, be divided equally between the parties. Each party
agrees to join such action as a named plaintiff to the extent necessary to
obtain jurisdiction or if deemed a necessary party.
(b) MSS Decides to Participate and the University Does Not. In the event
that MSS elects to participate in such litigation and the University does not,
then MSS may initiate and control such litigation at its own expense. In the
event MSS institutes such litigation, (i) the
<PAGE> 19
University may at its option have counsel of its choosing participate in such
litigation provided such counsel does not interfere with MSS's control of such
litigation, (ii) the University will join such action as a plaintiff to the
extent necessary to obtain jurisdiction or if the University is deemed a
necessary party, and (iii) if such litigation is based upon the Licensed Patents
or any other Intellectual Property Rights of the University, MSS will not settle
any such litigation without the express approval of the University to the terms
and conditions of any such settlement. All damages or lump sum settlement
payments recovered from the prosecution or settlement of such litigation shall
be retained by MSS.
(c) The University Decides to Participate and MSS Does Not. In the event
that the University elects to participate in such litigation and MSS does not,
then the University may institute and control such litigation at its own
expense. In the event the University institutes such litigation, (i) MSS may at
its option have counsel of its choosing participate in such litigation provided
such counsel does not interfere with the University's control of such
litigation, (ii) MSS will join such action as a plaintiff to the extent
necessary to obtain jurisdiction or if MSS is deemed a necessary party, and
(iii) if such litigation is based upon any Intellectual Property Right of MSS,
the University will not settle any such litigation without the express approval
of MSS to the terms and conditions of any such settlement. All damages or lump
sum settlement payments recovered from the prosecution or settlement of such
litigation shall be retained by the University.
17. LIMITATION OF LIABILITY
EXCEPT FOR ANY WILLFUL BREACH OF SECTIONS 8 OR 13, NEITHER PARTY SHALL
BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL OR INCIDENTAL
DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING OUT OF THIS
AGREEMENT.
18. GENERAL
18.1 Governing Law. This Agreement will be governed by and construed in
accordance with the substantive laws of the United States and the State of
California, without regard to or application of provisions relating to choice of
law.
18.2 Waiver and Modification. Failure by either party to enforce any
provision of this Agreement will not be deemed a waiver of future enforcement of
that or any other provision. Any waiver, amendment or other modification of any
provision of this Agreement will be effective only if in writing and signed by
the parties.
18.3 Severability. If for any reason a court of competent jurisdiction
finds any provision or portion of this Agreement to be unenforceable, that
provision will be enforced to the maximum extent permissible so as to effect the
intent of the parties, and the remainder of this Agreement will continue in full
force and effect.
<PAGE> 20
18.4 Notices. All notices required or permitted under this Agreement
will be in writing, will reference this Agreement and will be deemed given: (i)
when sent by confirmed facsimile; (ii) ten (10) working days after having been
sent by registered or certified mail, return receipt requested, postage prepaid;
or (iii) five (5) working days after deposit with a commercial overnight
carrier, with written verification of receipt. All communications will be sent
to the addresses set forth below or to such other address as may be designated
by a party by giving written notice to the other party pursuant to this section:
To MSS:
Paul J. White
President and CEO
Medical Science Systems, Inc.
4400 McArthur Blvd., Suite 980
Newport Beach, CA 92660
U.S.A.
To the University:
[ * ]
with a copy to:
[ * ]
Professor Gordon W. Duff
Lord Florey Chair of Molecular Medicine
The University of Sheffield
Department of Medicine and Pharmacology
Royal Hallamshire Hospital
Sheffield, S10 2JF
England
18.5 Delays Beyond Control. Neither party will be liable to the other
party for any failure or delay in performance caused by reasons beyond such
party's reasonable control, and such failure or delay will not constitute a
material breach of this Agreement.
<PAGE> 21
18.6 Assignment. Neither party may assign its rights or obligations
hereunder, by operation of law or otherwise, without express written consent of
the other party, which consent will not be unreasonably withheld. Any attempted
assignment without such consent shall be void. Subject to the foregoing, this
Agreement will benefit and bind the successors and assigns of the parties.
18.7 No Third Party Beneficiaries; No Agency. Except as expressly
provided herein to the contrary, no provision of this Agreement, express or
implied, is intended or will be construed to confer rights, remedies or other
benefits to any third party under or by reason of this Agreement. This Agreement
will not be construed as creating an agency, partnership or any other form of
legal association (other than as expressly set forth herein) between the
parties.
18.8 Entire Agreement. This Agreement and the Master Agreement,
including all exhibits, constitutes the entire agreement between the parties
with respect to the subject matter hereof, and supersede and replace all prior
or contemporaneous understandings or agreements, written or oral, regarding such
subject matter.
18.9 Multiple Counterparts. This Agreement may be executed in multiple
counterparts, each of which will be considered an original and all of which
together will constitute one agreement. This Agreement may be executed by the
attachment of signature pages which have been previously executed.
18.10 Cumulation. All rights and remedies enumerated in this Agreement
will be cumulative and none will exclude any other right or remedy permitted
herein or by law.
18.11 Venue and Personal Jurisdiction. Any suit or other proceeding not
subject to arbitration under Section 12 will be brought solely in the federal
courts in the Central District of California, if jurisdiction in such court can
be obtained, and otherwise in the state courts of California, and each party
hereby irrevocably submits to, and waives any objections to, the exercise of
personal jurisdiction thereof and venue therein.
18.12 Headings. The headings contained in this Agreement are inserted
for convenience of reference only and are not intended to be a part of or to
affect the meaning or interpretation of this Agreement.
18.13 Incorporation of the Master Agreement. Except as specifically
provided in this Agreement, the relevant terms and conditions of the Master
Agreement are hereby incorporated by reference into this Agreement.
<PAGE> 22
IN WITNESS WHEREOF, the parties have executed this Agreement through
their duly authorized representatives as set forth below:
MEDICAL SCIENCE SYSTEMS, INC. THE UNIVERSITY OF SHEFFIELD
By: By:
---------------------------- ----------------------------------
Printed Name: Printed Name:
------------------ ------------------------
Title: Title:
------------------------- -------------------------------
<PAGE> 23
SCHEDULE 1
GENERAL GUIDELINES FOR ALLOCATING NET PROCEEDS FOR
GENETIC TEST PRODUCTS
[ * ]
<PAGE> 24
SCHEDULE 2
SPECIFIC GUIDELINES FOR ALLOCATING NET PROCEEDS FOR
INITIAL CORONARY ARTERY DISEASE TEST
[ * ]
<PAGE> 1
EXHIBIT 10.4
MEDICAL SCIENCE SYSTEMS
DEVELOPMENT AND COMMERCIALIZATION PROJECT AGREEMENT
(EYE DISEASES AMONG DIABETICS)
This Agreement is entered into and made effective as of this ___ day of
___________, 1996 (the "Effective Date") by and between Medical Science Systems,
Inc. a Texas corporation having its principal place of business at 4400
MacArthur Blvd., Suite 980, Newport Beach, CA 92660 ("MSS") and The University
of Sheffield, Western Bank, Sheffield S10 2TN, England ("University"), acting
through The Section of Molecular Medicine of the University's Department of
Medicine and Pharmacology ("SMM").
RECITALS
A. University and MSS have entered into a Master Agreement for
Technology Evaluation dated July 1, 1996 (the "Master Agreement"). Following the
procedures set forth in the Master Agreement, the parties have agreed to work
together on a project as defined herein to perform additional development and
commercialization of certain technology relating to the association between
genetics and eye diseases among diabetics.
B. This Agreement is intended to supplement the provisions set forth in
the Master Agreement with respect to such technology, and sets forth additional
terms and conditions agreed to by the parties with respect to the project.
C. It is contemplated that MSS may locate and engage a third party to
assist in the commercialization of products based upon the technology that is
the subject of the project, or MSS may itself commercialize certain products
based upon the technology. This Agreement is also intended to set forth the
terms and conditions upon which MSS will locate and engage such third party or
itself commercialize such products.
NOW, THEREFORE, in consideration of the foregoing premises and of the
terms and conditions of this Agreement, the parties agree as follows:
1. DEFINITIONS
1.1 "Approved Lab" means a laboratory (which may be an internal
laboratory of the University and/or MSS or a third party laboratory) mutually
approved by MSS and SMM pursuant to Section 3.5 below to conduct Test
Administrations.
1.2 "Brand Name(s)" means the trademark(s), service mark(s) and/or
logo(s) or other designations under which Products are marketed and promoted by
MSS or a Third Party.
1.3 "Commercialization Event" means either of the following with respect
to a Product: (i) entry into a business arrangement with a Third Party (whether
through a license and/or
- ---------
* Confidential treatment has been requested with respect to portions of this
document. Omitted portions have been filed separately with the Securities and
Exchange Commission.
<PAGE> 2
development agreement, distribution agreement, joint venture, co-promotion, or
other structure) for the further development, clinical testing, marketing and/or
sale of such Product in one or more markets, or (ii) decision by the Steering
Committee to engage MSS to commercially distribute such Product in one or more
markets directly to end users or through distribution channels set up by MSS
(rather than through a Third Party).
1.4 "Confidential Information" shall be as defined in Section 1 of the
Master Agreement.
1.5 "Eye Disease Test" means [ * ].
1.6 "Initial Eye Disease Test" means [ * ].
1.7 "Innovations" means all ideas, inventions, apparatus, systems, data,
discoveries, methods, processes, improvements, works of authorship and other
innovations of any kind within the Project Scope, whether or not they are
eligible for patent, copyright, trademark, trade secret or other legal
protection. Examples of Innovations include: [ * ]. "Innovations" does not
include any preexisting MSS computer information technology or products
(including but not limited to MSS' Biofusion(TM) and Medical Decision
Explorer(TM) products and technology), and the usage of any such technology or
products shall not be deemed to be within the Project Scope.
1.8 "Intellectual Property Rights" means patent applications, patents,
design rights or other similar invention rights, rights of priority, copyrights,
trademarks, trade secret rights and other intangible rights, whether existing
under statutory or common law, in any country in the world.
1.9 "Joint Innovations" means all inventions, improvements, works of
authorship and other innovations of any kind within the Project Scope that may
be made, conceived, developed or reduced to practice jointly by MSS and by SMM
and their respective employees, consultants, faculty, technicians, visiting
scientists, students, and/or post-doctoral associates in the course of this
Agreement, whether or not they are eligible for patent, copyright, trademark,
trade secret or other legal protection. Examples of Joint Innovations include
but are not limited to: genetic, biochemical, or chemical based therapeutic
targets, new genes or gene sequences, DNA sequences, and improvements to any of
the foregoing.
1.10 "Licensed Patents" means (i) any United States patents that may
issue to the University during the term of this Agreement covering an Eye
Disease Test (including the Initial Eye Disease Test) developed by or on behalf
of the University and all divisionals, reissues, and
<PAGE> 3
reexaminations thereof that may issue in the United States during the term of
this Agreement, (ii) any corresponding foreign patents that may issue to the
University during the term of this Agreement with respect to any of the
preceding patents, and all divisionals, reissues, and reexaminations thereof,
and (iii) any other patents that may issue to the University during the term of
this Agreement, and all divisionals, reissues, and reexaminations thereof, to
the extent they cover any Innovations within the Project Scope.
1.11 "Licensed Invention" means any apparatus, system, process, method
or other invention claimed in any of the Licensed Patents, and any work of
authorship, know how, trade secret and other technology within the Project Scope
covered by any other Intellectual Property Right of the University.
1.12 "MSS Innovations" means all Innovations within the Project Scope
that may be made, conceived, developed or reduced to practice solely by MSS and
its employees, consultants, and technicians.
1.13 "Net Proceeds" means the following:
(i) In the case of a Commercialization Event with a Third Party,
all royalties, license fees, or other monies payable by such Third Party based
upon the commercial distribution of a Product in one or more markets; and
(ii) In the case of a decision by the Steering Committee to
engage MSS to commercially distribute one or more Products in one or more
markets directly to end users or through distribution channels set up by MSS,
the gross amount actually received by MSS from the commercial distribution of a
Product, less (i) any delivery or other transportation charges and taxes imposed
on the transaction, (ii) any charges by an Approved Lab incurred with respect to
such Product, (iii) the cost of goods sold (COGS), (iv) actual out of pocket
costs for advertising, travel, trade shows, educational programs and other
marketing and sales expenses (but not including salaries of personnel) directly
related to the commercial distribution of the Product, (v) as determined by the
Steering Committee, either a reasonable administrative and sales overhead
charge, or the actual personnel costs for marketing, sales and administrative
functions, with respect to the commercial distribution of the Product, all of
the foregoing computed in accordance with generally accepted accounting
principles, and (vi) carryover losses, if any, from a previous quarter. It is
recognized by the parties that, depending upon the specific responsibilities
assumed by each of the parties, the foregoing costs and expenses may be incurred
by either MSS or the University.
1.14 "Products" means any products or services related to the Project
(such as new tests, diagnostics, therapeutics, or related services) based upon
any University Innovation, MSS Innovation, or Joint Innovation within the
Project Scope.
1.15 "Project" means the development and commercialization activities to
be undertaken by MSS, SMM and Third Parties (if any) pursuant to this Agreement
within the Project Scope.
1.16 "Project Scope" means:
<PAGE> 4
(i) [ * ], and
(ii) [ * ].
1.17 "Steering Committee" shall be as defined in Section 2 below.
1.18 "Subsidiary" means a corporation, company or other entity more than
fifty percent (50%) of whose outstanding shares or securities (representing the
right to vote for the election of directors or other managing authority) are,
now or hereafter, owned or controlled, directly or indirectly, by a party to
this Agreement; provided that any such corporation, company or other entity will
be deemed to be a Subsidiary only so long as such ownership or control exists.
1.19 "Test Administration" means the performing of the genetic analysis
of an Eye Disease Test by an Approved Lab based upon a sample gathered from a
patient using Test Sampling Materials.
1.20 "Test Sampling Materials" means a container that will be used to
transport a sample from a patient to an Approved Lab for performing the genetic
analysis of an Eye Disease Test on such sample, and accompanying instructional
materials.
1.21 "Third Party" means a third party entity engaged by MSS, with the
approval of the Steering Committee, in accordance with this Agreement to assist
in the further development, clinical testing, marketing and/or commercial
distribution of one or more Products in one or more markets.
1.22 "University Innovations" means all Innovations within the Project
Scope that may be made, conceived, developed or reduced to practice solely by
SMM and its faculty, employees, consultants, technicians, visiting scientists,
students and post doctoral associates.
2. STEERING COMMITTEE
2.1 General Responsibilities of the Steering Committee. A four-person
steering committee, consisting initially of Paul White and Kenneth Kornman for
MSS and Gordon Duff and [ * ] for the University (the "Steering Committee"),
will make joint decisions and provide high level management with respect to the
Project. Gordon Duff will also serve on
<PAGE> 5
the Steering Committee as a representative of the employees, faculty,
consultants and staff working on the Project. Each person on the Steering
Committee will have one vote. Each party may nominate alternative or replacement
members to serve on the Steering Committee with the consent of the other party,
which consent will not be unreasonably withheld. The Steering Committee will
meet on a regular basis as the committee members may determine to be necessary.
Written minutes of the meetings of the Steering Committee will be kept and will
be promptly circulated after each meeting to the committee members for approval.
The Project will consist of an initial phase and any follow-on phases that the
Steering Committee may determine to pursue. During the initial phase, the
parties will, in accordance with their respective responsibilities set forth in
Section 3 below, file and prosecute U.S. and international patents covering the
Initial Eye Disease Test and any other Innovations that the Steering Committee
may determine, conduct clinical studies to generate appropriate clinical data
and, if such data demonstrates strong clinical utility of potential Products,
identify and engage an appropriate Third Party. If the Steering Committee
determines that the clinical data is not strong enough to seek a Third Party,
the Steering Committee will determine the next step(s) that should be taken.
After completion of the initial phase of the Project, the Steering Committee
will review and make decisions as to the next step(s) that should be taken,
which may include additional research and/or development and testing of
Products, seeking of additional Third Parties, direct sales, or termination of
the Project.
2.2 Determinations With Respect to Commercialization of Individual
Products. The Steering Committee will determine with respect to each Product or
class of Products to be commercialized pursuant to the Project, whether to
engage a Third Party to assist in the further development, clinical testing,
marketing and/or commercial distribution of such Product(s) in one or more
markets, or whether to engage MSS to commercially distribute such Product(s) in
one or more markets directly to end users or through distribution channels set
up by MSS. In the event that the Steering Committee determines to engage a Third
Party with respect to a particular Product, MSS will identify potential Third
Parties and the Steering Committee will select one with which MSS will be
authorized to negotiate an appropriate engagement with respect to such Product,
or to extend a previous engagement to cover such Product.
3. RESPONSIBILITIES OF THE PARTIES
This Section sets forth the responsibilities of the parties during the
Project, including but not limited to the initial phase of the Project.
3.1 Responsibilities of MSS. Subject to the high level management and
direction of the Steering Committee, MSS will have responsibility for the
following activities:
(i) Conducting overall management and oversight of the Project.
(ii) Providing assistance if needed with the design of
confirmatory clinical trials to demonstrate clinical utility or to support other
claims the University would like to make with respect to the results of research
conducted for the Initial Eye Disease Test.
<PAGE> 6
(iii) Providing assistance with data analysis and statistical
support with respect to the confirmatory clinical trials for the Initial Eye
Disease Test.
(iv) Developing a patent strategy with respect to Innovations and
Products and the determination of which countries patents should be filed in.
(v) Preparing and filing in the United States the initial patent
application with respect to the Initial Eye Disease Test and any other
Innovations the Steering Committee may determine to file patents for during the
Project.
(vi) Preparing, filing, and prosecuting all international patent
applications (subject to the shared cost obligations set forth in Section 3.4
below) that the Steering Committee determine to file during the Project, to the
extent the foregoing is not handled by one or more Third Parties.
(vii) Developing an initial regulatory strategy with respect to
Innovations and Products to be developed during the Project for markets in which
the Steering Committee determines MSS should seek to establish Third Parties
(but not including the actual preparation or filing of documentation for any
regulatory approval or license, which will be handled by MSS or a Third Party as
the Steering Committee may determine, subject to the shared cost obligations set
forth in Section 3.4).
(viii) Identifying potential Third Parties and preparing the
business plans necessary to support the engagement of one or more Third Parties,
conducting negotiations with respect to such engagement, and monitoring of any
Third Parties engaged.
(ix) Handling public relations with respect to Innovations to
support the initial market development and the search for appropriate Third
Parties.
(x) Handling public relations, with the input and consultation of
the University, with respect to scientific breakthroughs and data embodied in or
associated with Eye Disease Tests and other Products and their underlying
scientific research;
MSS will use reasonable efforts to perform its responsibilities set
forth in this Section 3.1 in accordance with any timeline set by the Steering
Committee.
3.2 Responsibilities of the University. Subject to the high level
management and direction of the Steering Committee, the University will have
responsibility for the following activities:
(i) Expanding the data and running confirmatory clinical studies
with respect to the Initial Eye Disease Test.
(ii) Conducting data analysis and providing statistical support
with respect to data being produced by the University for the Initial Eye
Disease Test.
<PAGE> 7
(iii) Conducting genetic laboratory analysis on all such data and
interpretation of the results for the Initial Eye Disease Test.
(iv) Further technical development of Innovations and Products by
seeking potential new gene sequences and running confirming genetic laboratory
tests.
(v) Ensuring that all tests are run consistent with European
Community standards.
(vi) Ensuring that the employees, faculty, consultants and staff
working on the Project maintain written documentation of their work (such as
laboratory notebooks) sufficient to establish dates of invention, the substance
of their work on the Project at various dates, and any other information
necessary or desirable for seeking patent protection and establishing priority
of invention.
(vii) Providing assistance in validation of Approved Labs if
necessary.
(viii) Providing reasonable technical presentation support and
assistance to MSS if requested by MSS.
(ix) Participation in a reasonable number of educational programs
with respect to Innovations and Products, if requested by MSS or a Third Party.
The University will use reasonable efforts to perform its
responsibilities set forth in this Section 3.2 in accordance with any timeline
set by the Steering Committee.
3.3 Additional Responsibilities and Reallocation of Responsibilities.
The parties recognize that with respect to the development, testing and
commercialization of any particular Product (including the Initial Eye Disease
Test), additional responsibilities not enumerated in Sections 3.1 and 3.2 above
may need to be allocated to the parties, and it may further become desirable to
reallocate some of the responsibilities enumerated in Sections 3.1 and 3.2
between the parties. In either case, the Steering Committee will have
responsibility for making any such allocation or reallocation of
responsibilities.
3.4 Costs of Carrying Out Responsibilities; Shared Costs.
(a) Costs to be Borne by the Parties Individually. Subject to the
shared cost obligations of this Section 3.4, each party will carry out the
activities for which it is responsible at its own expense, including the costs
of any research and development, internal staff and overhead costs, consultants
and other outside contractors assisting a party in performing its duties, travel
costs, initial U.S. patent filing and prosecution costs, locating and engaging
Third Parties, and public relations.
(b) Shared Costs. The parties recognize that there will be shared
costs incurred under the Project, which will be borne by the parties in
proportion to each party's share of Net Proceeds. Shared costs will include the
following: legal fees incurred in engaging a Third Party; all costs associated
with the preparation, filing and prosecution of international patent
<PAGE> 8
applications, including filing fees, translation costs and legal fees (although
MSS will be responsible for its internal staff and overhead costs incurred with
respect to any patent applications that it has responsibility for); regulatory
costs, if any, including filing fees and legal fees; other costs that may be
incurred with respect to the commercialization of Products, whether through MSS
or a Third Party, such as patent litigation costs, indemnities and warranties to
a Third Party or to end users of Products, and any insurance premiums to insure
against potential liability; and any other costs approved by the Steering
Committee to be shared costs.
(c) Payment of Shared Costs. The parties will contribute to
shared costs as they are incurred. After a Commercialization Event occurs with
respect to a Product and Net Proceeds are being generated: (i) The Steering
Committee will determine a percentage of the Net Proceeds that will be directed
into a sinking fund out of which shared costs and any liabilities incurred will
be paid, and (ii) to the extent that the sinking fund contains insufficient
funds to pay any shared costs incurred, MSS will have the option to require the
University to contribute its share of the balance directly to MSS, or to pay
such shared costs directly and to offset the University's share of such costs
against the share of any Net Proceeds or development funds to which the
University is entitled hereunder.
3.5 Selection of Approved Labs. MSS and the University will by mutual
agreement establish one or more Approved Labs to conduct Test Administrations.
Neither party will unreasonably withhold its consent to the establishment of a
particular Approved Lab. Such Approved Labs must have the technical and
professional capability to conduct Test Administrations in a competent, cost
efficient and timely manner, must meet all applicable governmental regulatory
requirements, and must be able to handle reasonable anticipated volumes. In the
event that either party determines, in the exercise of good faith judgment, that
an Approved Lab previously agreed to by the parties is unacceptable or
undesirable, then the Steering Committee will determine whether a different
Approved Lab should be established and, if so, will establish a replacement
Approved Lab.
3.6 Use of Approved Labs. Each party agrees that it will conduct or
cause to be conducted Test Administrations only through an Approved Lab, except
that either party may at its option use other laboratories to conduct Test
Administrations in conjunction with internal development of products outside the
Project Scope.
4. GRANT OF LICENSES
4.1 Grant. Subject to the terms and conditions of this Agreement, the
University hereby grants to MSS a worldwide, irrevocable, transferable license
under the Licensed Patents and any other applicable Intellectual Property Rights
owned by the University to make, have made, use, offer to sell, sell, license
and otherwise transfer Products within the Project Scope and to conduct Test
Administrations, and to sublicense Third Parties, distributors and Subsidiaries
of MSS, and Approved Labs to do any of the foregoing, all subject to the
approval of the Steering Committee in accordance with Section 2 above.
<PAGE> 9
4.2 Exclusivity. The license granted in Section 4.1 shall be exclusive
to MSS, except that the University retains the right to practice and use any
Licensed Invention for its own internal research purposes and in carrying out
any of its responsibilities under Section 3.2 above.
5. DIVISION OF NET PROCEEDS
5.1 Allocation of Net Proceeds With Respect to Products. The allocation
of Net Proceeds between MSS and the University with respect to each Product
within the Project Scope will be determined by the Steering Committee based on
general guidelines to be generated by the Steering Committee for each type of
Product to be developed and commercialized hereunder (the "General Guidelines").
The General Guidelines for a particular type of Product will contain a set of
weights assigned to each responsibility that could potentially be allocated
between the parties for the development and/or commercialization of a particular
Product of that type. With respect to each particular Product of a defined type,
the parties will generate and execute a set of specific guidelines for that
particular Product (the "Specific Guidelines"), which will list those of the
responsibilities contained in the General Guidelines that are applicable to that
particular Product, will allocate each such responsibility to one of the
parties, and will credit to such party the weight associated with such
responsibility in the General Guidelines. Each party's share of the Net Proceeds
generated by such particular Product will then equal its percentage share of the
total weights in the Specific Guidelines assigned to such party, subject to any
minimum share such party may be entitled to as listed in the General Guidelines
and/or the Specific Guidelines. If a responsibility listed in the General
Guidelines for a type of Product is not relevant to a particular Product of that
type, then the weight for that responsibility will be listed as zero in the
Specific Guidelines for that particular Product. For example, if the total
weights for all assigned responsibilities in the Specific Guidelines equals 80
and the weights associated with the responsibilities assigned to one party in
the Specific Guidelines equals 30, then such party would be entitled to 37.5% of
the Net Proceeds generated by that particular Product.
Schedule 1 contains the General Guidelines for genetic test Products the
parties have agreed to as of the Effective Date. Schedule 2 contains the
Specific Guidelines the parties have agreed to as of the Effective Date for the
Initial Eye Disease Test based upon the responsibilities for the Initial Eye
Disease Test set forth in Section 3 above. In the event that the Steering
Committee reallocates the responsibilities for the Initial Eye Disease Test, or
adds new responsibilities to one or both of the parties, the Steering Committee
will determine and execute a revised set of Specific Guidelines for the Initial
Eye Disease Test based upon the reallocated responsibilities and the cost
thereof.
As new General Guidelines are generated by the Steering Committee for
other Product types, the parties will set forth such General Guidelines in a new
Schedule to this Agreement, and when executed by a majority of the members of
the Steering Committee, such General Guidelines shall then become a part of this
Agreement. Similarly, as Specific Guidelines for a particular Product of that
type are generated, the parties will set forth such Specific Guidelines in a new
Schedule to this Agreement, and when executed by a majority of the members of
the Steering Committee, such Specific Guidelines shall then become a part of
this Agreement. The Steering Committee may revise any General Guidelines or
Specific Guidelines based upon a
<PAGE> 10
reallocation of responsibilities thereunder and the associated cost thereof and,
upon doing so, shall set forth the revised guidelines in a new Schedule which,
when executed by a majority of the members of the Steering Committee, shall
become a part of this Agreement.
5.2 Development Funding from a Third Party. Any development funding
received from a Third Party will be allocated by the Steering Committee between
MSS and the University in proportion to the responsibilities each party
undertakes that is covered by such funding and the effect such responsibilities
may have on the division of Net Proceeds.
5.3 Payment Directly to Prof. Duff. MSS may pay directly to Prof.
Gordon Duff any portion of the University's share of Net Proceeds to which
Prof. Duff is entitled.
6. REPORTING AND DISTRIBUTION OF NET PROCEEDS
6.1 Reports and Payment. MSS will, within forty-five (45) days after the
close of each calendar quarter during the term of this Agreement, issue a
written report to the University reporting the Net Proceeds generated by MSS
during such quarter, and a computation of the share thereof due each party
hereunder. Full payment, net of any setoffs for shared costs to which MSS may be
entitled under Section 3.4(c) above, of the University's share of such Net
Proceeds for such calendar quarter will accompany such report.
6.2 Books and Records. MSS will keep, and will cause its distributors to
keep, full, true, and accurate records with respect to Net Proceeds. MSS will
give access to such records at reasonable times, no more than once per year, for
three (3) years following the end of the calendar year to which they pertain, to
a mutually acceptable independent certified public accountant retained by the
University for the purpose of verifying the accuracy of the reports supplied to
the University hereunder. The University will pay for the cost of such
independent certified public accountant, except in the event that such
inspection reveals that MSS has understated or underpaid the amounts due
hereunder to the University in an average amount of five percent (5%) or more
over a six (6) month period, then the MSS will pay or reimburse the University
for the entire cost of such inspection. MSS agrees to pay the balance of such
amounts due, together with the cost of the inspection, to the University within
ten (10) days after written notice by the University of MSS's understatement or
underpayment.
7. OWNERSHIP
7.1 MSS Innovations. MSS shall be the sole and exclusive owner of MSS
Innovations, any Product based thereon after a Commercialization Event, the
Brand Name(s), and all Intellectual Property Rights in the foregoing, subject to
the University's right to share in Net Proceeds generated from the
commercialization thereof in accordance with this Agreement. The University
agrees to execute documents, including but not limited to assignment documents,
as reasonably requested by MSS to establish, confirm and perfect MSS's rights in
any of the foregoing.
<PAGE> 11
7.2 University Innovations. The University shall be the sole and
exclusive owner of University Innovations and of all Intellectual Property
Rights therein, provided, however, that upon the occurrence of a
Commercialization Event with respect to a University Innovation and/or a Product
based thereon, the University agrees to assign to MSS all right and title to
such University Innovation and/or Product and to all Intellectual Property
Rights therein, subject to the University's right to share in Net Proceeds
generated from the commercialization thereof in accordance with this Agreement.
Each party agrees to execute documents, including but not limited to assignment
documents, as reasonably requested by the other party to establish, confirm and
perfect the other party's rights in accordance with the foregoing.
7.3 Joint Ownership. MSS and the University shall be joint owners of
equal undivided interests in any Joint Innovations developed by them, provided,
however, that (i) during the term of this Agreement, each party agrees to
exploit its joint ownership rights consistent with MSS's exclusivity as defined
in Section 4.2 above, and (ii) upon the occurrence of a Commercialization Event
with respect to a Joint Innovation and/or a Product based thereon, the
University agrees to assign to MSS all right and title to such Joint Innovation
and/or Product and to all Intellectual Property Rights therein, subject to the
University's right to share in Net Proceeds generated from the commercialization
thereof in accordance with this Agreement. After expiration or termination of
this Agreement, each party shall be free to exploit, without the permission of
the other party and without any duty of accounting, its joint ownership rights
in any Joint Innovations that have not been assigned to MSS under this Section
7.3.
8. PUBLICATION
Publication of research results or other information within the Project
Scope will be governed by the procedures set forth in Section 5 of the Master
Agreement. The Steering Committee will act as the "designated person" of each
party as referenced in Section 5 of the Master Agreement, and will have the
authority to determine the content and timing of any such publication.
9. TERM
Unless earlier terminated in accordance with the terms of Section 10
below or by determination of the Steering Committee to abandon the Project and
terminate this Agreement, this Agreement shall remain in effect from the
Effective Date for a period of ten (10) years, and shall thereafter
automatically renew for additional one (1) year periods, unless either party
gives written notice to the other party at least six (6) months in advance of
any renewal date that such party does not wish to renew this Agreement.
10. TERMINATION
10.1 Termination Upon Notice of Breach. In the event that either party
breaches or defaults under any material term or condition of this Agreement,
including but not limited to
<PAGE> 12
failure to make timely payment of monies due, and such breach or default is not
cured within thirty (30) days of written notice of the same from the other
party, the other party may, in addition to any other remedy that it may have at
law or in equity or under this Agreement, terminate this Agreement.
10.2 Termination by the Steering Committee. The Steering Committee may
at any time determine to abandon the Project and terminate this Agreement on a
timeline as set by the Steering Committee.
10.3 Termination by MSS. MSS may at its option upon written notice to
the University terminate this Agreement in the event that Prof. Gordon Duff
is no longer an employee of the University or ceases to be the head of SMM.
10.4 Immediate Termination Upon Certain Events of Bankruptcy. Either
party may at its option terminate this Agreement immediately upon written notice
to the other party upon the occurrence of any of the following events:
(a) In the event that the other party makes an assignment for the
benefit of creditors; admits in writing its inability to pay its debts as they
become due; files a voluntary petition in bankruptcy; is adjudicated to be
bankrupt or insolvent; files a petition seeking for itself any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
arrangement under any present or future statute, law or regulation, or files an
answer or similar pleading admitting the material allegations of a petition
filed against it in any such proceeding; or consents to or acquiesces in the
appointment of, or has its business placed in the hands of, a trustee, receiver,
assignee, or liquidator of it or any substantial part of its business, assets or
properties, whether by voluntary act or otherwise; or
(b) In the event that either party ceases doing business as a
going concern, or it or its shareholders take any action in anticipation of or
furtherance of dissolution or liquidation.
10.5 Effect of Termination.
(a) Provisions Applying to All Terminations. In the event of any
termination of this Agreement for any reason, the following provisions shall
apply:
(i) except as provided in this Section 10.5 or under
Section 10.6 below, all further obligations of both parties under this Agreement
will cease as of the date of termination of this Agreement;
(ii) each party shall retain ownership (including joint
ownership) of any Innovations and/or Products to which it had title in
accordance with the provisions of this Agreement on the date of such
termination, including but not limited to title by virtue of an assignment after
a Commercialization Event; and
(iii) with respect to any Product(s) for which a
Commercialization Event has occurred as of the date of termination of this
Agreement, the Steering Committee will
<PAGE> 13
determine how the division of Net Proceeds from such Product(s) should be
reallocated between the parties, both immediately and over time, based upon the
additional responsibilities with respect to such Product(s) that MSS will have
to assume post termination of this Agreement, and MSS will be entitled to deduct
its reasonable cost of all such additional responsibilities from the
University's share of any such Net Proceeds, provided, however, that in no event
shall the deduction of such costs cause the University's share of such Net
Proceeds to fall below ten percent (10%) in any given calendar quarter.
(b) Provisions Applying to Specific Events of Termination. In
addition to the provisions of subsection (a), the following provisions shall
apply with respect to specific events of termination affecting Products for
which no Commercialization Event has occurred:
(i) Termination by MSS. In the event that MSS terminates
this Agreement pursuant to Sections 10.1 or 10.4, or the University elects not
to renew this Agreement pursuant to Section 9, then with respect to any Product
for which data exists or proof of principle studies are underway but no
Commercialization Event has yet occurred as of the date of termination, the
license rights granted by the University to MSS under Section 4 above shall
continue, and MSS shall have the right to continue development of any such
Product and to take such Product into commercial distribution (either itself or
through a Third Party), provided that (1) if such Product is placed into
commercial distribution, then the Steering Committee will determine how the Net
Proceeds from such Product should be allocated between the parties, both
immediately and over time, based upon the additional responsibilities that MSS
assumes with respect to such Product post termination of this Agreement and (2)
MSS will be entitled to deduct its reasonable cost of all such additional
responsibilities from the University's share of any Net Proceeds generated by
such Product, except that, unless otherwise determined by the Steering
Committee, in no event shall the deduction of such costs cause the University's
share of such Net Proceeds to fall below ten percent (10%) in any given calendar
quarter.
(ii) Termination by the University. In the event that the
University terminates this Agreement pursuant to Sections 10.1 or 10.4, or MSS
elects not to renew this Agreement pursuant to Section 9, then, at the
University's option, the University may either:
(1) terminate all licenses granted by the
University to MSS under this Agreement with respect to any Product(s) for which
no Commercialization Event has yet occurred as of the date of termination, and
elect to itself continue development of any such Product and to take such
Product into commercial distribution (either itself or through a Third Party),
provided that (x) if such Product is placed into commercial distribution, then
the Steering Committee will determine how the Net Proceeds from such Product
should be allocated between the parties, both immediately and over time, based
upon the additional responsibilities that the University assumes with respect to
such Product post termination of this Agreement and (y) the University will be
entitled to deduct its reasonable cost of all such additional responsibilities
from MSS's share of any Net Proceeds generated by such Product, except that,
unless otherwise determined by the Steering Committee, in no event shall the
deduction of such costs cause MSS's share of such Net Proceeds to fall below
ten percent (10%) in any given calendar quarter; or
<PAGE> 14
(2) allow the license rights granted by the
University to MSS under Section 4 above to continue and allow MSS to continue
development of any such Product and to take such Product into commercial
distribution (either itself or through a Third Party), provided that (x) if such
Product is placed into commercial distribution, then the Steering Committee will
determine how the Net Proceeds from such Product should be allocated between the
parties, both immediately and over time, based upon the additional
responsibilities that MSS assumes with respect to such Product post termination
of this Agreement and (y) MSS will be entitled to deduct its reasonable cost of
all such additional responsibilities from the University's share of any Net
Proceeds generated by such Product, except that, unless otherwise determined by
the Steering Committee, in no event shall the deduction of such costs cause the
University's share of such Net Proceeds to fall below ten percent (10%) in any
given calendar quarter.
(iii) Termination by the Steering Committee or by MSS
Under Section 10.3. In the event this Agreement is terminated by the Steering
Committee pursuant to Section 10.2 or by MSS pursuant to Section 10.3, then the
Steering Committee will decide whether MSS or the University (if any) should
assume responsibility for continuing development of any Product for which a
Commercialization Event has not occurred as of the date of such termination, and
in the event MSS assumes such responsibility, then any licenses granted by the
University to MSS under this Agreement will survive termination of this
Agreement. The Steering Committee will also determine how the Net Proceeds
generated by any such Product should be allocated between the parties, based
upon the additional responsibilities assumed by the party having responsibility
for continuing development of such Product post termination of this Agreement,
and the party assuming such responsibility will be entitled to deduct its
reasonable cost of all such additional responsibilities from the other party's
share of any Net Proceeds generated by such Product, except that, unless
otherwise determined by the Steering Committee, in no event shall the deduction
of such costs by one party cause the other party's share of such Net Proceeds to
fall below ten percent (10%) in any given calendar quarter.
10.6 Survival of Certain Provisions. The provisions of Sections 6.2, 7,
10.5, 10.6, 12, 13.1, 13.2, 14.3, 15, 17, and 18 of this Agreement will survive
the expiration or termination of this Agreement.
11. PERSONNEL
Each party will cause its respective employees, faculty, consultants and
staff to execute such agreements, assignments, applications and other documents
as necessary to perfect and protect each party's rights as defined in this
Agreement with respect to Innovations and Products within the Project Scope.
12. SETTLEMENT OF DISPUTES
12.1 Basic Dispute Resolution Procedures. Any dispute between the
parties either with respect to the interpretation of any provision of this
Agreement or with respect to the performance of either party shall be resolved
as specified in this Section.
<PAGE> 15
(a) Upon the written request of either party, each of the parties
will appoint a designated representative who does not devote substantially all
of his or her time to performance under this Agreement, whose task it will be to
meet for the purpose of endeavoring to resolve such dispute.
(b) The designated representatives shall meet as often as
necessary during a fifteen (15) day period (or such other time as the parties
may agree) to gather and furnish to the other all information with respect to
the matter in issue which is appropriate and germane in connection with its
resolution.
(c) Such representatives shall discuss the problem and negotiate
in good faith in an effort to resolve the dispute without the necessity of any
formal proceeding relating thereto.
(d) During the course of such negotiation, all reasonable
requests made by one party to the other for nonprivileged information reasonably
related to this Agreement, will be honored in order that each of the parties may
be fully advised of the other's position.
(e) The specific format for such discussions will be left to the
discretion of the designated representatives, but may include the preparation of
agreed upon statements of fact or written statements of position furnished to
the other party.
12.2 Escalation Procedures. If the designated representatives cannot
resolve the dispute, then the dispute shall be escalated to a member of the
Board of Directors or Trustees of each of the University and of MSS, for their
review and resolution. If the dispute cannot be resolved by such persons, then
the parties may initiate formal proceedings; however, formal proceedings for the
resolution of any such dispute may not be commenced until the earlier of:
(a) The designated representatives concluding in good faith that
amicable resolution through continued negotiation of the matter in issue does
not appear likely; or
(b) Sixty (60) days after the initial request to negotiate such
dispute (unless preliminary or temporary relief of an emergency nature is sought
by one of the parties); or
(c) Thirty (30) days before the statute of limitations governing
any cause of action relating to such dispute would expire.
12.3 Arbitration of Monetary Disputes.
(a) Procedures. Any monetary disputes between the parties
concerning the amount of monies due or payable under this Agreement which the
parties are unable to resolve pursuant to the provisions of Sections 12.1 and
12.2 above, will be settled by arbitration in Orange County, California (unless
otherwise agreed) under the then-prevailing rules of American Arbitration
Association. There will be one (1) arbitrator chosen by mutual agreement of the
parties or, in the event the parties cannot agree within thirty (30) calendar
days of issuance of a written demand for arbitration by either party, by the
American Arbitration Association. All
<PAGE> 16
proceedings by the arbitrator shall be conducted in accordance with the rules of
the American Arbitration Association, except to the extent the provisions of
such rules are modified by this Agreement or the mutual agreement of the
parties. Either party will have the right to discovery of evidence, but by the
following methods only: requests for production of documents and depositions of
no more than three (3) individuals. The arbitrator will supervise discovery and
may, at the request of either party, limit expenses of discovery (including
reasonable attorneys' fees) to the requesting party for good cause shown. All
discovery will be completed, and the arbitration hearing will commence, within
forty-five (45) days after appointment of the arbitrator. Subject to the
foregoing, discovery matters will be governed by the Federal Rules of Civil
Procedure as applicable to civil actions in the United States District Courts.
The arbitration hearing will conclude within thirty (30) days after it
commences. The award rendered in arbitration will be in writing and will be
final and binding, and may be enforced in any court of competent jurisdiction.
The fees and expenses of the arbitrator will be paid by the non-prevailing
party.
(b) Approval of One Substantive Position of the Parties. In all
arbitration proceedings submitted under this Section 12.3, the arbitrator shall
be required to agree upon and approve the substantive position advocated by
either MSS or the University with respect to each disputed item(s). Any decision
rendered by the arbitrator that does not reflect a substantive position
advocated by either MSS or the University shall be beyond the scope of authority
granted to the arbitrator and shall be void. No decision of the arbitrator shall
ever be construed as or have the effect of amending or altering this Agreement
or the parties' rights and responsibilities with respect thereto.
12.4 Other Disputes. Except as provided in Section 12.3 above, the
parties will have no obligation to arbitrate any other disputes, claims or
controversies of any kind arising out of or related to this Agreement, including
but not limited to any dispute, claim or controversy relating to the scope of
the Project or the party's respective ownership rights to any Innovation or
Product. In addition, any claim by one party against the other for injunctive or
preliminary relief, whether or not related to this Agreement, may be litigated
in a court of competent jurisdiction.
13. CONFIDENTIALITY AND PRESS RELEASE
In addition to the provisions of Section 5 of the Master Agreement, the
following confidentiality provisions shall apply:
13.1 Confidentiality of the Agreement. The parties agree to maintain all
terms and conditions of this Agreement in confidence, except that (i) MSS may
state that it has received a license from the University under this Agreement
and may name the patents and Intellectual Property Rights to which such license
rights apply; (ii) The University may state that it has licensed certain
commercial exploitation rights within the Project Scope to MSS; (iii) this
Agreement may be disclosed to either party's attorneys, accountants or other
professional advisors in the course of seeking professional advice and to the
extent required by applicable law or regulations or court order; and (iv) this
Agreement may be disclosed by MSS to entities with which MSS is discussing a
proposed sale of its stock, sale of all or substantially all of its assets,
<PAGE> 17
obtaining financing or entering into a partnering arrangement, provided that the
entity to whom the terms of this Agreement is to be disclosed has executed a
reasonable non-disclosure agreement.
13.2 Protection of Confidential Information. Each party agrees to keep
all Confidential Information of the other party to which it has access hereunder
strictly confidential, and agrees that it will not, except with the express
permission of the other party or as required by applicable law or regulations or
by court order, use such information except in the performance of this
Agreement, or disclose any such Confidential Information to any person or entity
other than its own employees, consultants, faculty, technicians, visiting
scientists, students, and/or post-doctoral associates who have a need to know
and who have been informed in advance of the receiving party's obligations with
respect to such Confidential Information.
13.3 Press Release. The parties agree to issue a mutually agreeable
joint press release with respect to this Agreement. Each party agrees that it
will not issue a press release with respect to this Agreement until such joint
press release has first been issued.
14. REPRESENTATIONS AND WARRANTIES
14.1 By the University. The University represents and warrants to MSS
that:
(a) Ownership. The University is the sole and exclusive owner of
any Licensed Patents and any University Innovations supplied hereunder to MSS
for commercial exploitation;
(b) Authority. The University has the full right and power to
grant the licenses to MSS set forth in this Agreement and to supply the
University Innovations to MSS for commercialization hereunder;
(c) Inconsistent Obligations. There are no outstanding
agreements, licenses, assignments or encumbrances inconsistent with the
provisions of such licenses or with any other provision of this Agreement; and
(d) Infringement of Rights of Others. To the best of the
University's knowledge as of the Effective Date, the University knows of no
third parties' rights which would be infringed by practicing the inventions
claimed in the Licensed Patents within the scope of the licenses granted to MSS
hereunder or by the commercialization as contemplated hereunder of the
University Innovations in existence as of the Effective Date. The University
will promptly notify MSS in the event that it learns or has cause to believe at
any time that any third parties' rights would or might be infringed by
practicing the inventions claimed in any Licensed Patents or by any Product or
Innovation being commercialized hereunder. In the event that a claim is made
against MSS or a Third Party that the manufacture, use, sale, distribution or
other commercial exploitation of a Product or Innovation infringes the
Intellectual Property Rights of a third party, then MSS or the Third Party (as
applicable) will fund the cost of any litigation resulting out of such claim,
but will be entitled to recover up to two-thirds (or whatever other fraction of
the Net Proceeds generated by such Product or Innovation the University is
entitled to hereunder at the
<PAGE> 18
time such litigation commences) of its costs and any damages awarded against it
out of the sinking fund established pursuant to Section 3.4 above and, to the
extent the sinking fund contains insufficient funds, the University's current
and future share of any Net Proceeds; provided that in the event MSS or the
Third Party is found to have willfully infringed such third party's Intellectual
Property Rights (and such willfulness was not caused by the University), then
MSS or the Third Party shall not be entitled to recover any portion of any
enhanced damages awarded based upon such willfulness, and provided further that
the University will be entitled to have counsel of its own choosing participate
in (but not control) any such litigation at the University's sole expense.
14.2 By MSS. MSS represents and warrants to the University that there
are no outstanding agreements, licenses, assignments or encumbrances
inconsistent with the provisions of such licenses or with any other provision of
this Agreement.
14.3 No Other Warranties. EXCEPT AS SET FORTH IN THIS SECTION, NEITHER
PARTY MAKES ANY OTHER WARRANTY, EXPRESS OR IMPLIED, RELATING TO THIS AGREEMENT
OR ANY INNOVATION OR PRODUCT, AND EACH PARTY SPECIFICALLY DISCLAIMS ANY IMPLIED
WARRANTY OR CONDITION OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
15. INDEMNITIES
15.1 By MSS. MSS agrees to defend, indemnify, and hold the University
harmless from and against any and all third-party claims (other than claims for
infringement of a third party's Intellectual Property Rights to the extent such
claims fall within the provisions of Section 14 above), damages, actions,
liabilities, costs and expenses arising out of or in connection with (i) any
damage, including but not limited to damage to any property and personal injury
or death, by whomever suffered arising out of or resulting from any negligent or
willful act of MSS relating to the subject matter of this Agreement, and (ii)
any breach or claimed breach of the warranties and representations set forth in
Section 14.2 above.
15.2 By the University. The University agrees to defend, indemnify, and
hold MSS harmless from and against any and all third-party claims, damages,
actions, liabilities, costs and expenses arising out of or in connection with
(i) any damage, including but not limited to damage to any property and personal
injury or death, by whomever suffered arising out of or resulting from any
negligent or willful act of the University relating to the subject matter of
this Agreement, and (ii) any breach or claimed breach of the warranties and
representations set forth in Section 14.1 above.
16. ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS
In the event that either party becomes aware of an infringement or
potential infringement of the Licensed Patents or of any other Intellectual
Property Right of either the University or MSS within the Project Scope, such
party will promptly notify the other party and provide the
<PAGE> 19
details known to it. The Steering Committee will then promptly confer about such
infringement or potential infringement. Within ten (10) business days
thereafter, each party will notify the other of its decision whether or not it
wishes to participate in litigation against the infringer or potential
infringer. Any such litigation will proceed as follows:
(a) Both Parties Elect to Participate. In the event that both parties
elect to participate in such litigation, the parties will mutually agree upon
counsel to bring such litigation. The parties will share equally the costs
(including the fees of attorneys and other professionals) of any such
litigation. MSS may recover all or a portion of its share of any such costs from
the sinking fund established pursuant to Section 3.4 above and, to the extent
the sinking fund contains insufficient funds, as an offset to the University's
share of Net Proceeds. All damages or lump sum settlement payments recovered
from the prosecution or settlement of such litigation shall, after deduction of
all reasonable costs and fees of attorneys and other professionals incurred in
pursuing such litigation, be divided equally between the parties. Each party
agrees to join such action as a named plaintiff to the extent necessary to
obtain jurisdiction or if deemed a necessary party.
(b) MSS Decides to Participate and the University Does Not. In the event
that MSS elects to participate in such litigation and the University does not,
then MSS may initiate and control such litigation at its own expense. In the
event MSS institutes such litigation, (i) the University may at its option have
counsel of its choosing participate in such litigation provided such counsel
does not interfere with MSS's control of such litigation, (ii) the University
will join such action as a plaintiff to the extent necessary to obtain
jurisdiction or if the University is deemed a necessary party, and (iii) if such
litigation is based upon the Licensed Patents or any other Intellectual Property
Rights of the University, MSS will not settle any such litigation without the
express approval of the University to the terms and conditions of any such
settlement. All damages or lump sum settlement payments recovered from the
prosecution or settlement of such litigation shall be retained by MSS.
(c) The University Decides to Participate and MSS Does Not. In the event
that the University elects to participate in such litigation and MSS does not,
then the University may institute and control such litigation at its own
expense. In the event the University institutes such litigation, (i) MSS may at
its option have counsel of its choosing participate in such litigation provided
such counsel does not interfere with the University's control of such
litigation, (ii) MSS will join such action as a plaintiff to the extent
necessary to obtain jurisdiction or if MSS is deemed a necessary party, and
(iii) if such litigation is based upon any Intellectual Property Right of MSS,
the University will not settle any such litigation without the express approval
of MSS to the terms and conditions of any such settlement. All damages or lump
sum settlement payments recovered from the prosecution or settlement of such
litigation shall be retained by the University.
17. LIMITATION OF LIABILITY
EXCEPT FOR ANY WILLFUL BREACH OF SECTIONS 8 OR 13, NEITHER PARTY SHALL
BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL
<PAGE> 20
OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING
OUT OF THIS AGREEMENT.
18. GENERAL
18.1 Governing Law. This Agreement will be governed by and construed in
accordance with the substantive laws of the United States and the State of
California, without regard to or application of provisions relating to choice of
law.
18.2 Waiver and Modification. Failure by either party to enforce any
provision of this Agreement will not be deemed a waiver of future enforcement of
that or any other provision. Any waiver, amendment or other modification of any
provision of this Agreement will be effective only if in writing and signed by
the parties.
18.3 Severability. If for any reason a court of competent jurisdiction
finds any provision or portion of this Agreement to be unenforceable, that
provision will be enforced to the maximum extent permissible so as to effect the
intent of the parties, and the remainder of this Agreement will continue in full
force and effect.
18.4 Notices. All notices required or permitted under this Agreement
will be in writing, will reference this Agreement and will be deemed given: (i)
when sent by confirmed facsimile; (ii) ten (10) working days after having been
sent by registered or certified mail, return receipt requested, postage prepaid;
or (iii) five (5) working days after deposit with a commercial overnight
carrier, with written verification of receipt. All communications will be sent
to the addresses set forth below or to such other address as may be designated
by a party by giving written notice to the other party pursuant to this section:
To MSS:
Paul J. White
President and CEO
Medical Science Systems, Inc.
4400 McArthur Blvd., Suite 980
Newport Beach, CA 92660
U.S.A.
To the University:
[ * ]
<PAGE> 21
with a copy to:
[ * ]
Professor Gordon W. Duff
Lord Florey Chair of Molecular Medicine
The University of Sheffield
Department of Medicine and Pharmacology
Royal Hallamshire Hospital
Sheffield, S10 2JF
England
18.5 Delays Beyond Control. Neither party will be liable to the other
party for any failure or delay in performance caused by reasons beyond such
party's reasonable control, and such failure or delay will not constitute a
material breach of this Agreement.
18.6 Assignment. Neither party may assign its rights or obligations
hereunder, by operation of law or otherwise, without express written consent of
the other party, which consent will not be unreasonably withheld. Any attempted
assignment without such consent shall be void. Subject to the foregoing, this
Agreement will benefit and bind the successors and assigns of the parties.
18.7 No Third Party Beneficiaries; No Agency. Except as expressly
provided herein to the contrary, no provision of this Agreement, express or
implied, is intended or will be construed to confer rights, remedies or other
benefits to any third party under or by reason of this Agreement. This Agreement
will not be construed as creating an agency, partnership or any other form of
legal association (other than as expressly set forth herein) between the
parties.
18.8 Entire Agreement. This Agreement and the Master Agreement,
including all exhibits, constitutes the entire agreement between the parties
with respect to the subject matter hereof, and supersede and replace all prior
or contemporaneous understandings or agreements, written or oral, regarding such
subject matter.
18.9 Multiple Counterparts. This Agreement may be executed in multiple
counterparts, each of which will be considered an original and all of which
together will constitute one agreement. This Agreement may be executed by the
attachment of signature pages which have been previously executed.
18.10 Cumulation. All rights and remedies enumerated in this Agreement
will be cumulative and none will exclude any other right or remedy permitted
herein or by law.
<PAGE> 22
18.11 Venue and Personal Jurisdiction. Any suit or other proceeding not
subject to arbitration under Section 12 will be brought solely in the federal
courts in the Central District of California, if jurisdiction in such court can
be obtained, and otherwise in the state courts of California, and each party
hereby irrevocably submits to, and waives any objections to, the exercise of
personal jurisdiction thereof and venue therein.
18.12 Headings. The headings contained in this Agreement are inserted
for convenience of reference only and are not intended to be a part of or to
affect the meaning or interpretation of this Agreement.
18.13 Incorporation of the Master Agreement. Except as specifically
provided in this Agreement, the relevant terms and conditions of the Master
Agreement are hereby incorporated by reference into this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement through
their duly authorized representatives as set forth below:
MEDICAL SCIENCE SYSTEMS, INC. THE UNIVERSITY OF SHEFFIELD
By: By:
--------------------------------- -------------------------------------
Printed Name: Printed Name:
----------------------- ---------------------------
Title: Title:
------------------------------ ----------------------------------
<PAGE> 23
SCHEDULE 1
GENERAL GUIDELINES FOR ALLOCATING NET PROCEEDS FOR
GENETIC TEST PRODUCTS
<TABLE>
<CAPTION>
<S> <C> <C>
[ * ]
</TABLE>
<PAGE> 24
SCHEDULE 2
SPECIFIC GUIDELINES FOR ALLOCATING NET PROCEEDS FOR
INITIAL EYE DISEASE TEST
<TABLE>
<CAPTION>
<S> <C> <C> <C>
[ * ]
</TABLE>
<PAGE> 1
EXHIBIT 10.5
MEDICAL SCIENCE SYSTEMS
DEVELOPMENT AND COMMERCIALIZATION PROJECT AGREEMENT
(OSTEOPOROSIS)
This Agreement is entered into and made effective as of this ___ day of
___________, 1996 (the "Effective Date") by and between Medical Science Systems,
Inc. a Texas corporation having its principal place of business at 4400
MacArthur Blvd., Suite 980, Newport Beach, CA 92660 ("MSS") and The University
of Sheffield, Western Bank, Sheffield S10 2TN, England ("University"), acting
through The Section of Molecular Medicine of the University's Department of
Medicine and Pharmacology ("SMM").
RECITALS
A. University and MSS have entered into a Master Agreement for
Technology Evaluation dated July 1, 1996 (the "Master Agreement"). Following the
procedures set forth in the Master Agreement, the parties have agreed to work
together on a project as defined herein to perform additional development and
commercialization of certain technology relating to the association between
osteoporosis and genetics.
B. This Agreement is intended to supplement the provisions set forth in
the Master Agreement with respect to such technology, and sets forth additional
terms and conditions agreed to by the parties with respect to the project.
C. It is contemplated that MSS may locate and engage a third party to
assist in the commercialization of products based upon the technology that is
the subject of the project, or MSS may itself commercialize certain products
based upon the technology. This Agreement is also intended to set forth the
terms and conditions upon which MSS will locate and engage such third party or
itself commercialize such products.
NOW, THEREFORE, in consideration of the foregoing premises and of the
terms and conditions of this Agreement, the parties agree as follows:
1. DEFINITIONS
1.1 "Approved Lab" means a laboratory (which may be an internal
laboratory of the University and/or MSS or a third party laboratory) mutually
approved by MSS and SMM pursuant to Section 3.5 below to conduct Test
Administrations.
1.2 "Brand Name(s)" means the trademark(s), service mark(s) and/or
logo(s) or other designations under which Products are marketed and promoted by
MSS or a Third Party.
1.3 "Commercialization Event" means either of the following with respect
to a Product: (i) entry into a business arrangement with a Third Party (whether
through a license and/or development agreement, distribution agreement, joint
venture, co-promotion, or other structure)
- ---------
* Confidential treatment has been requested with respect to portions of this
document. Omitted portions have been filed separately with the Securities and
Exchange Commission.
<PAGE> 2
for the further development, clinical testing, marketing and/or sale of such
Product in one or more markets, or (ii) decision by the Steering Committee to
engage MSS to commercially distribute such Product in one or more markets
directly to end users or through distribution channels set up by MSS (rather
than through a Third Party).
1.4 "Confidential Information" shall be as defined in Section 1 of the
Master Agreement.
1.5 "Initial Osteoporosis Test" means the [ * ].
1.6 "Innovations" means all ideas, inventions, apparatus, systems, data,
discoveries, methods, processes, improvements, works of authorship and other
innovations of any kind within the Project Scope, whether or not they are
eligible for patent, copyright, trademark, trade secret or other legal
protection. Examples of Innovations include: [ * ]. "Innovations" does not
include any preexisting MSS computer information technology or products
(including but not limited to MSS' Biofusion(TM) and Medical Decision
Explorer(TM) products and technology), and the usage of any such technology or
products shall not be deemed to be within the Project Scope.
1.7 "Intellectual Property Rights" means patent applications, patents,
design rights or other similar invention rights, rights of priority, copyrights,
trademarks, trade secret rights and other intangible rights, whether existing
under statutory or common law, in any country in the world.
1.8 "Joint Innovations" means all inventions, improvements, works of
authorship and other innovations of any kind within the Project Scope that may
be made, conceived, developed or reduced to practice jointly by MSS and by SMM
and their respective employees, consultants, faculty, technicians, visiting
scientists, students, and/or post-doctoral associates in the course of this
Agreement, whether or not they are eligible for patent, copyright, trademark,
trade secret or other legal protection. Examples of Joint Innovations include
but are not limited to: [ * ].
1.9 "Licensed Patents" means (i) any United States patents that may
issue to the University during the term of this Agreement covering an
Osteoporosis Test (including the Initial Osteoporosis Test) developed by or on
behalf of the University and all divisionals, reissues, and reexaminations
thereof that may issue in the United States during the term of this Agreement,
(ii) any corresponding foreign patents that may issue to the University during
the term of this Agreement with respect to any of the preceding patents, and all
divisionals, reissues, and reexaminations thereof, and (iii) any other patents
that may issue to the University during the
<PAGE> 3
term of this Agreement, and all divisionals, reissues, and reexaminations
thereof, to the extent they cover any Innovations within the Project Scope.
1.10 "Licensed Invention" means any apparatus, system, process, method
or other invention claimed in any of the Licensed Patents, and any work of
authorship, know how, trade secret and other technology within the Project Scope
covered by any other Intellectual Property Right of the University.
1.11 "MSS Innovations" means all Innovations within the Project Scope
that may be made, conceived, developed or reduced to practice solely by MSS and
its employees, consultants, and technicians.
1.12 "Net Proceeds" means the following:
(i) In the case of a Commercialization Event with a Third Party,
all royalties, license fees, or other monies payable by such Third Party based
upon the commercial distribution of a Product in one or more markets; and
(ii) In the case of a decision by the Steering Committee to
engage MSS to commercially distribute one or more Products in one or more
markets directly to end users or through distribution channels set up by MSS,
the gross amount actually received by MSS from the commercial distribution of a
Product, less (i) any delivery or other transportation charges and taxes imposed
on the transaction, (ii) any charges by an Approved Lab incurred with respect to
such Product, (iii) the cost of goods sold (COGS), (iv) actual out of pocket
costs for advertising, travel, trade shows, educational programs and other
marketing and sales expenses (but not including salaries of personnel) directly
related to the commercial distribution of the Product, (v) as determined by the
Steering Committee, either a reasonable administrative and sales overhead
charge, or the actual personnel costs for marketing, sales and administrative
functions, with respect to the commercial distribution of the Product, all of
the foregoing computed in accordance with generally accepted accounting
principles, and (vi) carryover losses, if any, from a previous quarter. It is
recognized by the parties that, depending upon the specific responsibilities
assumed by each of the parties, the foregoing costs and expenses may be incurred
by either MSS or the University.
1.13 "Osteoporosis Test" means [ * ].
1.14 "Products" means any products or services related to the Project
(such as new tests, diagnostics, therapeutics, or related services) based upon
any University Innovation, MSS Innovation, or Joint Innovation within the
Project Scope.
1.15 "Project" means the development and commercialization activities to
be undertaken by MSS, SMM and Third Parties (if any) pursuant to this Agreement
within the Project Scope.
1.16 "Project Scope" means:
<PAGE> 4
(i) [ * ], and
(ii) [ * ].
1.17 "Steering Committee" shall be as defined in Section 2 below.
1.18 "Subsidiary" means a corporation, company or other entity more than
fifty percent (50%) of whose outstanding shares or securities (representing the
right to vote for the election of directors or other managing authority) are,
now or hereafter, owned or controlled, directly or indirectly, by a party to
this Agreement; provided that any such corporation, company or other entity will
be deemed to be a Subsidiary only so long as such ownership or control exists.
1.19 "Test Administration" means the performing of the genetic analysis
of an Osteoporosis Test by an Approved Lab based upon a sample gathered from a
patient using Test Sampling Materials.
1.20 "Test Sampling Materials" means a container that will be used to
transport a sample from a patient to an Approved Lab for performing the genetic
analysis of an Osteoporosis Test on such sample, and accompanying instructional
materials.
1.21 "Third Party" means a third party entity engaged by MSS, with the
approval of the Steering Committee, in accordance with this Agreement to assist
in the further development, clinical testing, marketing and/or commercial
distribution of one or more Products in one or more markets.
1.22 "University Innovations" means all Innovations within the Project
Scope that may be made, conceived, developed or reduced to practice solely by
SMM and its faculty, employees, consultants, technicians, visiting scientists,
students and post doctoral associates.
2. STEERING COMMITTEE
2.1 General Responsibilities of the Steering Committee. A four-person
steering committee, consisting initially of Paul White and Kenneth Kornman for
MSS and Gordon Duff and [ * ] for the University (the "Steering Committee"),
will make joint decisions and provide high level management with respect to the
Project. Gordon Duff will also serve on the Steering Committee as a
representative of the employees, faculty, consultants and staff
<PAGE> 5
working on the Project. Each person on the Steering Committee will have one
vote. Each party may nominate alternative or replacement members to serve on the
Steering Committee with the consent of the other party, which consent will not
be unreasonably withheld. The Steering Committee will meet on a regular basis as
the committee members may determine to be necessary. Written minutes of the
meetings of the Steering Committee will be kept and will be promptly circulated
after each meeting to the committee members for approval. The Project will
consist of an initial phase and any follow-on phases that the Steering Committee
may determine to pursue. During the initial phase, the parties will, in
accordance with their respective responsibilities set forth in Section 3 below,
file and prosecute U.S. and international patents covering the Initial
Osteoporosis Test and any other Innovations that the Steering Committee may
determine, conduct clinical studies to generate appropriate clinical data and,
if such data demonstrates strong clinical utility of potential Products,
identify and engage an appropriate Third Party. If the Steering Committee
determines that the clinical data is not strong enough to seek a Third Party,
the Steering Committee will determine the next step(s) that should be taken.
After completion of the initial phase of the Project, the Steering Committee
will review and make decisions as to the next step(s) that should be taken,
which may include additional research and/or development and testing of
Products, seeking of additional Third Parties, direct sales, or termination of
the Project.
2.2 Determinations With Respect to Commercialization of Individual
Products. The Steering Committee will determine with respect to each Product or
class of Products to be commercialized pursuant to the Project, whether to
engage a Third Party to assist in the further development, clinical testing,
marketing and/or commercial distribution of such Product(s) in one or more
markets, or whether to engage MSS to commercially distribute such Product(s) in
one or more markets directly to end users or through distribution channels set
up by MSS. In the event that the Steering Committee determines to engage a Third
Party with respect to a particular Product, MSS will identify potential Third
Parties and the Steering Committee will select one with which MSS will be
authorized to negotiate an appropriate engagement with respect to such Product,
or to extend a previous engagement to cover such Product.
3. RESPONSIBILITIES OF THE PARTIES
This Section sets forth the responsibilities of the parties during the
Project, including but not limited to the initial phase of the Project.
3.1 Responsibilities of MSS. Subject to the high level management and
direction of the Steering Committee, MSS will have responsibility for the
following activities:
(i) Conducting overall management and oversight of the Project.
(ii) Providing assistance if needed with the design of
confirmatory clinical trials to demonstrate clinical utility or to support other
claims the University would like to make with respect to the results of research
conducted for the Initial Osteoporosis Test.
(iii) Providing assistance with data analysis and statistical
support with respect to the confirmatory clinical trials for the Initial
Osteoporosis Test.
<PAGE> 6
(iv) Developing a patent strategy with respect to Innovations and
Products and the determination of which countries patents should be filed in.
(v) Preparing and filing in the United States the initial patent
application with respect to the Initial Osteoporosis Test and any other
Innovations the Steering Committee may determine to file patents for during the
Project.
(vi) Preparing, filing, and prosecuting all international patent
applications (subject to the shared cost obligations set forth in Section 3.4
below) that the Steering Committee determine to file during the Project, to the
extent the foregoing is not handled by one or more Third Parties.
(vii) Developing an initial regulatory strategy with respect to
Innovations and Products to be developed during the Project for markets in which
the Steering Committee determines MSS should seek to establish Third Parties
(but not including the actual preparation or filing of documentation for any
regulatory approval or license, which will be handled by MSS or a Third Party as
the Steering Committee may determine, subject to the shared cost obligations set
forth in Section 3.4).
(viii) Identifying potential Third Parties and preparing the
business plans necessary to support the engagement of one or more Third Parties,
conducting negotiations with respect to such engagement, and monitoring of any
Third Parties engaged.
(ix) Handling public relations with respect to Innovations to
support the initial market development and the search for appropriate Third
Parties.
(x) Handling public relations, with the input and consultation of
the University, with respect to scientific breakthroughs and data embodied in or
associated with Osteoporosis Tests and other Products and their underlying
scientific research;
MSS will use reasonable efforts to perform its responsibilities set
forth in this Section 3.1 in accordance with any timeline set by the Steering
Committee.
3.2 Responsibilities of the University. Subject to the high level
management and direction of the Steering Committee, the University will have
responsibility for the following activities:
(i) Expanding the data and running confirmatory clinical studies
with respect to the Initial Osteoporosis Test.
(ii) Conducting data analysis and providing statistical support
with respect to data being produced by the University for the Initial
Osteoporosis Test.
(iii) Conducting genetic laboratory analysis on all such data and
interpretation of the results for the Initial Osteoporosis Test.
<PAGE> 7
(iv) Further technical development of Innovations and Products by
seeking potential new gene sequences and running confirming genetic laboratory
tests.
(v) Ensuring that all tests are run consistent with European
Community standards.
(vi) Ensuring that the employees, faculty, consultants and staff
working on the Project maintain written documentation of their work (such as
laboratory notebooks) sufficient to establish dates of invention, the substance
of their work on the Project at various dates, and any other information
necessary or desirable for seeking patent protection and establishing priority
of invention.
(vii) Providing assistance in validation of Approved Labs if
necessary.
(viii) Providing reasonable technical presentation support and
assistance to MSS if requested by MSS.
(ix) Participation in a reasonable number of educational programs
with respect to Innovations and Products, if requested by MSS or a Third Party.
The University will use reasonable efforts to perform its
responsibilities set forth in this Section 3.2 in accordance with any timeline
set by the Steering Committee.
3.3 Additional Responsibilities and Reallocation of Responsibilities.
The parties recognize that with respect to the development, testing and
commercialization of any particular Product (including the Initial Osteoporosis
Test), additional responsibilities not enumerated in Sections 3.1 and 3.2 above
may need to be allocated to the parties, and it may further become desirable to
reallocate some of the responsibilities enumerated in Sections 3.1 and 3.2
between the parties. In either case, the Steering Committee will have
responsibility for making any such allocation or reallocation of
responsibilities.
3.4 Costs of Carrying Out Responsibilities; Shared Costs.
(a) Costs to be Borne by the Parties Individually. Subject to the
shared cost obligations of this Section 3.4, each party will carry out the
activities for which it is responsible at its own expense, including the costs
of any research and development, internal staff and overhead costs, consultants
and other outside contractors assisting a party in performing its duties, travel
costs, initial U.S. patent filing and prosecution costs, locating and engaging
Third Parties, and public relations.
(b) Shared Costs. The parties recognize that there will be shared
costs incurred under the Project, which will be borne by the parties in
proportion to each party's share of Net Proceeds. Shared costs will include the
following: legal fees incurred in engaging a Third Party; all costs associated
with the preparation, filing and prosecution of international patent
applications, including filing fees, translation costs and legal fees (although
MSS will be responsible for its internal staff and overhead costs incurred with
respect to any patent applications that it has responsibility for); regulatory
costs, if any, including filing fees and legal fees; other costs that may be
incurred with respect to the commercialization of Products, whether
<PAGE> 8
through MSS or a Third Party, such as patent litigation costs, indemnities and
warranties to a Third Party or to end users of Products, and any insurance
premiums to insure against potential liability; and any other costs approved by
the Steering Committee to be shared costs.
(c) Payment of Shared Costs. The parties will contribute to
shared costs as they are incurred. After a Commercialization Event occurs with
respect to a Product and Net Proceeds are being generated: (i) The Steering
Committee will determine a percentage of the Net Proceeds that will be directed
into a sinking fund out of which shared costs and any liabilities incurred will
be paid, and (ii) to the extent that the sinking fund contains insufficient
funds to pay any shared costs incurred, MSS will have the option to require the
University to contribute its share of the balance directly to MSS, or to pay
such shared costs directly and to offset the University's share of such costs
against the share of any Net Proceeds or development funds to which the
University is entitled hereunder.
3.5 Selection of Approved Labs. MSS and the University will by mutual
agreement establish one or more Approved Labs to conduct Test Administrations.
Neither party will unreasonably withhold its consent to the establishment of a
particular Approved Lab. Such Approved Labs must have the technical and
professional capability to conduct Test Administrations in a competent, cost
efficient and timely manner, must meet all applicable governmental regulatory
requirements, and must be able to handle reasonable anticipated volumes. In the
event that either party determines, in the exercise of good faith judgment, that
an Approved Lab previously agreed to by the parties is unacceptable or
undesirable, then the Steering Committee will determine whether a different
Approved Lab should be established and, if so, will establish a replacement
Approved Lab.
3.6 Use of Approved Labs. Each party agrees that it will conduct or
cause to be conducted Test Administrations only through an Approved Lab, except
that either party may at its option use other laboratories to conduct Test
Administrations in conjunction with internal development of products outside the
Project Scope.
4. GRANT OF LICENSES
4.1 Grant. Subject to the terms and conditions of this Agreement, the
University hereby grants to MSS a worldwide, irrevocable, transferable license
under the Licensed Patents and any other applicable Intellectual Property Rights
owned by the University to make, have made, use, offer to sell, sell, license
and otherwise transfer Products within the Project Scope and to conduct Test
Administrations, and to sublicense Third Parties, distributors and Subsidiaries
of MSS, and Approved Labs to do any of the foregoing, all subject to the
approval of the Steering Committee in accordance with Section 2 above.
4.2 Exclusivity. The license granted in Section 4.1 shall be exclusive
to MSS, except that the University retains the right to practice and use any
Licensed Invention for its own internal research purposes and in carrying out
any of its responsibilities under Section 3.2 above.
<PAGE> 9
5. DIVISION OF NET PROCEEDS
5.1 Allocation of Net Proceeds With Respect to Products. The allocation
of Net Proceeds between MSS and the University with respect to each Product
within the Project Scope will be determined by the Steering Committee based on
general guidelines to be generated by the Steering Committee for each type of
Product to be developed and commercialized hereunder (the "General Guidelines").
The General Guidelines for a particular type of Product will contain a set of
weights assigned to each responsibility that could potentially be allocated
between the parties for the development and/or commercialization of a particular
Product of that type. With respect to each particular Product of a defined type,
the parties will generate and execute a set of specific guidelines for that
particular Product (the "Specific Guidelines"), which will list those of the
responsibilities contained in the General Guidelines that are applicable to that
particular Product, will allocate each such responsibility to one of the
parties, and will credit to such party the weight associated with such
responsibility in the General Guidelines. Each party's share of the Net Proceeds
generated by such particular Product will then equal its percentage share of the
total weights in the Specific Guidelines assigned to such party, subject to any
minimum share such party may be entitled to as listed in the General Guidelines
and/or the Specific Guidelines. If a responsibility listed in the General
Guidelines for a type of Product is not relevant to a particular Product of that
type, then the weight for that responsibility will be listed as zero in the
Specific Guidelines for that particular Product. For example, if the total
weights for all assigned responsibilities in the Specific Guidelines equals 80
and the weights associated with the responsibilities assigned to one party in
the Specific Guidelines equals 30, then such party would be entitled to 37.5% of
the Net Proceeds generated by that particular Product.
Schedule 1 contains the General Guidelines for genetic test Products the
parties have agreed to as of the Effective Date. Schedule 2 contains the
Specific Guidelines the parties have agreed to as of the Effective Date for the
Initial Osteoporosis Test based upon the responsibilities for the Initial
Osteoporosis Test set forth in Section 3 above. In the event that the Steering
Committee reallocates the responsibilities for the Initial Osteoporosis Test, or
adds new responsibilities to one or both of the parties, the Steering Committee
will determine and execute a revised set of Specific Guidelines for the Initial
Osteoporosis Test based upon the reallocated responsibilities and the cost
thereof.
As new General Guidelines are generated by the Steering Committee for
other Product types, the parties will set forth such General Guidelines in a new
Schedule to this Agreement, and when executed by a majority of the members of
the Steering Committee, such General Guidelines shall then become a part of this
Agreement. Similarly, as Specific Guidelines for a particular Product of that
type are generated, the parties will set forth such Specific Guidelines in a new
Schedule to this Agreement, and when executed by a majority of the members of
the Steering Committee, such Specific Guidelines shall then become a part of
this Agreement. The Steering Committee may revise any General Guidelines or
Specific Guidelines based upon a reallocation of responsibilities thereunder and
the associated cost thereof and, upon doing so, shall set forth the revised
guidelines in a new Schedule which, when executed by a majority of the members
of the Steering Committee, shall become a part of this Agreement.
5.2 Development Funding from a Third Party. Any development funding
received from a Third Party will be allocated by the Steering Committee between
MSS and the University in
<PAGE> 10
proportion to the responsibilities each party undertakes that is covered by such
funding and the effect such responsibilities may have on the division of Net
Proceeds.
5.3 Payment Directly to Prof. Duff. MSS may pay directly to Prof. Gordon
Duff any portion of the University's share of Net Proceeds to which Prof. Duff
is entitled.
6. REPORTING AND DISTRIBUTION OF NET PROCEEDS
6.1 Reports and Payment. MSS will, within forty-five (45) days after the
close of each calendar quarter during the term of this Agreement, issue a
written report to the University reporting the Net Proceeds generated by MSS
during such quarter, and a computation of the share thereof due each party
hereunder. Full payment, net of any setoffs for shared costs to which MSS may be
entitled under Section 3.4(c) above, of the University's share of such Net
Proceeds for such calendar quarter will accompany such report.
6.2 Books and Records. MSS will keep, and will cause its distributors to
keep, full, true, and accurate records with respect to Net Proceeds. MSS will
give access to such records at reasonable times, no more than once per year, for
three (3) years following the end of the calendar year to which they pertain, to
a mutually acceptable independent certified public accountant retained by the
University for the purpose of verifying the accuracy of the reports supplied to
the University hereunder. The University will pay for the cost of such
independent certified public accountant, except in the event that such
inspection reveals that MSS has understated or underpaid the amounts due
hereunder to the University in an average amount of five percent (5%) or more
over a six (6) month period, then the MSS will pay or reimburse the University
for the entire cost of such inspection. MSS agrees to pay the balance of such
amounts due, together with the cost of the inspection, to the University within
ten (10) days after written notice by the University of MSS's understatement or
underpayment.
7. OWNERSHIP
7.1 MSS Innovations. MSS shall be the sole and exclusive owner of MSS
Innovations, any Product based thereon after a Commercialization Event, the
Brand Name(s), and all Intellectual Property Rights in the foregoing, subject to
the University's right to share in Net Proceeds generated from the
commercialization thereof in accordance with this Agreement. The University
agrees to execute documents, including but not limited to assignment documents,
as reasonably requested by MSS to establish, confirm and perfect MSS's rights in
any of the foregoing.
7.2 University Innovations. The University shall be the sole and
exclusive owner of University Innovations and of all Intellectual Property
Rights therein, provided, however, that upon the occurrence of a
Commercialization Event with respect to a University Innovation and/or a Product
based thereon, the University agrees to assign to MSS all right and title to
such University Innovation and/or Product and to all Intellectual Property
Rights therein, subject to the University's right to share in Net Proceeds
generated from the commercialization thereof in accordance with this Agreement.
Each party agrees to execute documents, including but not
<PAGE> 11
limited to assignment documents, as reasonably requested by the other party to
establish, confirm and perfect the other party's rights in accordance with the
foregoing.
7.3 Joint Ownership. MSS and the University shall be joint owners of
equal undivided interests in any Joint Innovations developed by them, provided,
however, that (i) during the term of this Agreement, each party agrees to
exploit its joint ownership rights consistent with MSS's exclusivity as defined
in Section 4.2 above, and (ii) upon the occurrence of a Commercialization Event
with respect to a Joint Innovation and/or a Product based thereon, the
University agrees to assign to MSS all right and title to such Joint Innovation
and/or Product and to all Intellectual Property Rights therein, subject to the
University's right to share in Net Proceeds generated from the commercialization
thereof in accordance with this Agreement. After expiration or termination of
this Agreement, each party shall be free to exploit, without the permission of
the other party and without any duty of accounting, its joint ownership rights
in any Joint Innovations that have not been assigned to MSS under this Section
7.3.
8. PUBLICATION
Publication of research results or other information within the Project
Scope will be governed by the procedures set forth in Section 5 of the Master
Agreement. The Steering Committee will act as the "designated person" of each
party as referenced in Section 5 of the Master Agreement, and will have the
authority to determine the content and timing of any such publication.
9. TERM
Unless earlier terminated in accordance with the terms of Section 10
below or by determination of the Steering Committee to abandon the Project and
terminate this Agreement, this Agreement shall remain in effect from the
Effective Date for a period of ten (10) years, and shall thereafter
automatically renew for additional one (1) year periods, unless either party
gives written notice to the other party at least six (6) months in advance of
any renewal date that such party does not wish to renew this Agreement.
10. TERMINATION
10.1 Termination Upon Notice of Breach. In the event that either party
breaches or defaults under any material term or condition of this Agreement,
including but not limited to failure to make timely payment of monies due, and
such breach or default is not cured within thirty (30) days of written notice of
the same from the other party, the other party may, in addition to any other
remedy that it may have at law or in equity or under this Agreement, terminate
this Agreement.
<PAGE> 12
10.2 Termination by the Steering Committee. The Steering Committee may
at any time determine to abandon the Project and terminate this Agreement on a
timeline as set by the Steering Committee.
10.3 Termination by MSS. MSS may at its option upon written notice to
the University terminate this Agreement in the event that Prof. Gordon Duff is
no longer an employee of the University or ceases to be the head of SMM.
10.4 Immediate Termination Upon Certain Events of Bankruptcy. Either
party may at its option terminate this Agreement immediately upon written notice
to the other party upon the occurrence of any of the following events:
(a) In the event that the other party makes an assignment for the
benefit of creditors; admits in writing its inability to pay its debts as they
become due; files a voluntary petition in bankruptcy; is adjudicated to be
bankrupt or insolvent; files a petition seeking for itself any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
arrangement under any present or future statute, law or regulation, or files an
answer or similar pleading admitting the material allegations of a petition
filed against it in any such proceeding; or consents to or acquiesces in the
appointment of, or has its business placed in the hands of, a trustee, receiver,
assignee, or liquidator of it or any substantial part of its business, assets or
properties, whether by voluntary act or otherwise; or
(b) In the event that either party ceases doing business as a
going concern, or it or its shareholders take any action in anticipation of or
furtherance of dissolution or liquidation.
10.5 Effect of Termination.
(a) Provisions Applying to All Terminations. In the event of any
termination of this Agreement for any reason, the following provisions shall
apply:
(i) except as provided in this Section 10.5 or under
Section 10.6 below, all further obligations of both parties under this Agreement
will cease as of the date of termination of this Agreement;
(ii) each party shall retain ownership (including joint
ownership) of any Innovations and/or Products to which it had title in
accordance with the provisions of this Agreement on the date of such
termination, including but not limited to title by virtue of an assignment after
a Commercialization Event; and
(iii) with respect to any Product(s) for which a
Commercialization Event has occurred as of the date of termination of this
Agreement, the Steering Committee will determine how the division of Net
Proceeds from such Product(s) should be reallocated between the parties, both
immediately and over time, based upon the additional responsibilities with
respect to such Product(s) that MSS will have to assume post termination of this
Agreement, and MSS will be entitled to deduct its reasonable cost of all such
additional responsibilities from the University's share of any such Net
Proceeds, provided, however, that in no event shall the
<PAGE> 13
deduction of such costs cause the University's share of such Net Proceeds to
fall below ten percent (10%) in any given calendar quarter.
(b) Provisions Applying to Specific Events of Termination. In
addition to the provisions of subsection (a), the following provisions shall
apply with respect to specific events of termination affecting Products for
which no Commercialization Event has occurred:
(i) Termination by MSS. In the event that MSS terminates
this Agreement pursuant to Sections 10.1 or 10.4, or the University elects not
to renew this Agreement pursuant to Section 9, then with respect to any Product
for which data exists or proof of principle studies are underway but no
Commercialization Event has yet occurred as of the date of termination, the
license rights granted by the University to MSS under Section 4 above shall
continue, and MSS shall have the right to continue development of any such
Product and to take such Product into commercial distribution (either itself or
through a Third Party), provided that (1) if such Product is placed into
commercial distribution, then the Steering Committee will determine how the Net
Proceeds from such Product should be allocated between the parties, both
immediately and over time, based upon the additional responsibilities that MSS
assumes with respect to such Product post termination of this Agreement and (2)
MSS will be entitled to deduct its reasonable cost of all such additional
responsibilities from the University's share of any Net Proceeds generated by
such Product, except that, unless otherwise determined by the Steering
Committee, in no event shall the deduction of such costs cause the University's
share of such Net Proceeds to fall below ten percent (10%) in any given
calendar quarter.
(ii) Termination by the University. In the event that the
University terminates this Agreement pursuant to Sections 10.1 or 10.4, or MSS
elects not to renew this Agreement pursuant to Section 9, then, at the
University's option, the University may either:
(1) terminate all licenses granted by the
University to MSS under this Agreement with respect to any Product(s) for which
no Commercialization Event has yet occurred as of the date of termination, and
elect to itself continue development of any such Product and to take such
Product into commercial distribution (either itself or through a Third Party),
provided that (x) if such Product is placed into commercial distribution, then
the Steering Committee will determine how the Net Proceeds from such Product
should be allocated between the parties, both immediately and over time, based
upon the additional responsibilities that the University assumes with respect to
such Product post termination of this Agreement and (y) the University will be
entitled to deduct its reasonable cost of all such additional responsibilities
from MSS's share of any Net Proceeds generated by such Product, except that,
unless otherwise determined by the Steering Committee, in no event shall the
deduction of such costs cause MSS's share of such Net Proceeds to fall below
ten percent (10%) in any given calendar quarter; or
(2) allow the license rights granted by the
University to MSS under Section 4 above to continue and allow MSS to continue
development of any such Product and to take such Product into commercial
distribution (either itself or through a Third Party), provided that (x) if such
Product is placed into commercial distribution, then the Steering Committee will
determine how the Net Proceeds from such Product should be allocated between the
parties, both immediately and over time, based upon the additional
responsibilities that MSS assumes with respect to such Product post termination
of this Agreement and (y) MSS will be
<PAGE> 14
entitled to deduct its reasonable cost of all such additional responsibilities
from the University's share of any Net Proceeds generated by such Product,
except that, unless otherwise determined by the Steering Committee, in no event
shall the deduction of such costs cause the University's share of such Net
Proceeds to fall below ten percent (10%) in any given calendar quarter.
(iii) Termination by the Steering Committee or by MSS
Under Section 10.3. In the event this Agreement is terminated by the Steering
Committee pursuant to Section 10.2 or by MSS pursuant to Section 10.3, then the
Steering Committee will decide whether MSS or the University (if any) should
assume responsibility for continuing development of any Product for which a
Commercialization Event has not occurred as of the date of such termination, and
in the event MSS assumes such responsibility, then any licenses granted by the
University to MSS under this Agreement will survive termination of this
Agreement. The Steering Committee will also determine how the Net Proceeds
generated by any such Product should be allocated between the parties, based
upon the additional responsibilities assumed by the party having responsibility
for continuing development of such Product post termination of this Agreement,
and the party assuming such responsibility will be entitled to deduct its
reasonable cost of all such additional responsibilities from the other party's
share of any Net Proceeds generated by such Product, except that, unless
otherwise determined by the Steering Committee, in no event shall the deduction
of such costs by one party cause the other party's share of such Net Proceeds to
fall below ten percent (10%) in any given calendar quarter.
10.6 Survival of Certain Provisions. The provisions of Sections 6.2, 7,
10.5, 10.6, 12, 13.1, 13.2, 14.3, 15, 17, and 18 of this Agreement will survive
the expiration or termination of this Agreement.
11. PERSONNEL
Each party will cause its respective employees, faculty, consultants and
staff to execute such agreements, assignments, applications and other documents
as necessary to perfect and protect each party's rights as defined in this
Agreement with respect to Innovations and Products within the Project Scope.
12. SETTLEMENT OF DISPUTES
12.1 Basic Dispute Resolution Procedures. Any dispute between the
parties either with respect to the interpretation of any provision of this
Agreement or with respect to the performance of either party shall be resolved
as specified in this Section.
(a) Upon the written request of either party, each of the parties
will appoint a designated representative who does not devote substantially all
of his or her time to performance under this Agreement, whose task it will be to
meet for the purpose of endeavoring to resolve such dispute.
(b) The designated representatives shall meet as often as
necessary during a fifteen (15) day period (or such other time as the parties
may agree) to gather and furnish to the
<PAGE> 15
other all information with respect to the matter in issue which is appropriate
and germane in connection with its resolution.
(c) Such representatives shall discuss the problem and negotiate
in good faith in an effort to resolve the dispute without the necessity of any
formal proceeding relating thereto.
(d) During the course of such negotiation, all reasonable
requests made by one party to the other for nonprivileged information reasonably
related to this Agreement, will be honored in order that each of the parties may
be fully advised of the other's position.
(e) The specific format for such discussions will be left to the
discretion of the designated representatives, but may include the preparation of
agreed upon statements of fact or written statements of position furnished to
the other party.
12.2 Escalation Procedures. If the designated representatives cannot
resolve the dispute, then the dispute shall be escalated to a member of the
Board of Directors or Trustees of each of the University and of MSS, for their
review and resolution. If the dispute cannot be resolved by such persons, then
the parties may initiate formal proceedings; however, formal proceedings for the
resolution of any such dispute may not be commenced until the earlier of:
(a) The designated representatives concluding in good faith that
amicable resolution through continued negotiation of the matter in issue does
not appear likely; or
(b) Sixty (60) days after the initial request to negotiate such
dispute (unless preliminary or temporary relief of an emergency nature is sought
by one of the parties); or
(c) Thirty (30) days before the statute of limitations governing
any cause of action relating to such dispute would expire.
12.3 Arbitration of Monetary Disputes.
(a) Procedures. Any monetary disputes between the parties
concerning the amount of monies due or payable under this Agreement which the
parties are unable to resolve pursuant to the provisions of Sections 12.1 and
12.2 above, will be settled by arbitration in Orange County, California (unless
otherwise agreed) under the then-prevailing rules of American Arbitration
Association. There will be one (1) arbitrator chosen by mutual agreement of the
parties or, in the event the parties cannot agree within thirty (30) calendar
days of issuance of a written demand for arbitration by either party, by the
American Arbitration Association. All proceedings by the arbitrator shall be
conducted in accordance with the rules of the American Arbitration Association,
except to the extent the provisions of such rules are modified by this Agreement
or the mutual agreement of the parties. Either party will have the right to
discovery of evidence, but by the following methods only: requests for
production of documents and depositions of no more than three (3) individuals.
The arbitrator will supervise discovery and may, at the request of either party,
limit expenses of discovery (including reasonable attorneys' fees) to the
requesting party for good cause shown. All discovery will be completed, and the
arbitration hearing will commence, within forty-five (45) days after appointment
of the arbitrator. Subject to the foregoing, discovery matters will be governed
by the Federal Rules of Civil
<PAGE> 16
Procedure as applicable to civil actions in the United States District Courts.
The arbitration hearing will conclude within thirty (30) days after it
commences. The award rendered in arbitration will be in writing and will be
final and binding, and may be enforced in any court of competent jurisdiction.
The fees and expenses of the arbitrator will be paid by the non-prevailing
party.
(b) Approval of One Substantive Position of the Parties. In all
arbitration proceedings submitted under this Section 12.3, the arbitrator shall
be required to agree upon and approve the substantive position advocated by
either MSS or the University with respect to each disputed item(s). Any decision
rendered by the arbitrator that does not reflect a substantive position
advocated by either MSS or the University shall be beyond the scope of authority
granted to the arbitrator and shall be void. No decision of the arbitrator shall
ever be construed as or have the effect of amending or altering this Agreement
or the parties' rights and responsibilities with respect thereto.
12.4 Other Disputes. Except as provided in Section 12.3 above, the
parties will have no obligation to arbitrate any other disputes, claims or
controversies of any kind arising out of or related to this Agreement, including
but not limited to any dispute, claim or controversy relating to the scope of
the Project or the party's respective ownership rights to any Innovation or
Product. In addition, any claim by one party against the other for injunctive or
preliminary relief, whether or not related to this Agreement, may be litigated
in a court of competent jurisdiction.
13. CONFIDENTIALITY AND PRESS RELEASE
In addition to the provisions of Section 5 of the Master Agreement, the
following confidentiality provisions shall apply:
13.1 Confidentiality of the Agreement. The parties agree to maintain all
terms and conditions of this Agreement in confidence, except that (i) MSS may
state that it has received a license from the University under this Agreement
and may name the patents and Intellectual Property Rights to which such license
rights apply; (ii) The University may state that it has licensed certain
commercial exploitation rights within the Project Scope to MSS; (iii) this
Agreement may be disclosed to either party's attorneys, accountants or other
professional advisors in the course of seeking professional advice and to the
extent required by applicable law or regulations or court order; and (iv) this
Agreement may be disclosed by MSS to entities with which MSS is discussing a
proposed sale of its stock, sale of all or substantially all of its assets,
obtaining financing or entering into a partnering arrangement, provided that the
entity to whom the terms of this Agreement is to be disclosed has executed a
reasonable non-disclosure agreement.
13.2 Protection of Confidential Information. Each party agrees to keep
all Confidential Information of the other party to which it has access hereunder
strictly confidential, and agrees that it will not, except with the express
permission of the other party or as required by applicable law or regulations or
by court order, use such information except in the performance of this
Agreement, or disclose any such Confidential Information to any person or entity
other than its own employees, consultants, faculty, technicians, visiting
scientists, students, and/or post-
<PAGE> 17
doctoral associates who have a need to know and who have been informed in
advance of the receiving party's obligations with respect to such Confidential
Information.
13.3 Press Release. The parties agree to issue a mutually agreeable
joint press release with respect to this Agreement. Each party agrees that it
will not issue a press release with respect to this Agreement until such joint
press release has first been issued.
14. REPRESENTATIONS AND WARRANTIES
14.1 By the University. The University represents and warrants to MSS
that:
(a) Ownership. The University is the sole and exclusive owner of
any Licensed Patents and any University Innovations supplied hereunder to MSS
for commercial exploitation;
(b) Authority. The University has the full right and power to
grant the licenses to MSS set forth in this Agreement and to supply the
University Innovations to MSS for commercialization hereunder;
(c) Inconsistent Obligations. There are no outstanding
agreements, licenses, assignments or encumbrances inconsistent with the
provisions of such licenses or with any other provision of this Agreement; and
(d) Infringement of Rights of Others. To the best of the
University's knowledge as of the Effective Date, the University knows of no
third parties' rights which would be infringed by practicing the inventions
claimed in the Licensed Patents within the scope of the licenses granted to MSS
hereunder or by the commercialization as contemplated hereunder of the
University Innovations in existence as of the Effective Date. The University
will promptly notify MSS in the event that it learns or has cause to believe at
any time that any third parties' rights would or might be infringed by
practicing the inventions claimed in any Licensed Patents or by any Product or
Innovation being commercialized hereunder. In the event that a claim is made
against MSS or a Third Party that the manufacture, use, sale, distribution or
other commercial exploitation of a Product or Innovation infringes the
Intellectual Property Rights of a third party, then MSS or the Third Party (as
applicable) will fund the cost of any litigation resulting out of such claim,
but will be entitled to recover up to two-thirds (or whatever other fraction of
the Net Proceeds generated by such Product or Innovation the University is
entitled to hereunder at the time such litigation commences) of its costs and
any damages awarded against it out of the sinking fund established pursuant to
Section 3.4 above and, to the extent the sinking fund contains insufficient
funds, the University's current and future share of any Net Proceeds; provided
that in the event MSS or the Third Party is found to have willfully infringed
such third party's Intellectual Property Rights (and such willfulness was not
caused by the University), then MSS or the Third Party shall not be entitled to
recover any portion of any enhanced damages awarded based upon such willfulness,
and provided further that the University will be entitled to have counsel of its
own choosing participate in (but not control) any such litigation at the
University's sole expense.
<PAGE> 18
14.2 By MSS. MSS represents and warrants to the University that there
are no outstanding agreements, licenses, assignments or encumbrances
inconsistent with the provisions of such licenses or with any other provision of
this Agreement.
14.3 No Other Warranties. EXCEPT AS SET FORTH IN THIS SECTION, NEITHER
PARTY MAKES ANY OTHER WARRANTY, EXPRESS OR IMPLIED, RELATING TO THIS AGREEMENT
OR ANY INNOVATION OR PRODUCT, AND EACH PARTY SPECIFICALLY DISCLAIMS ANY IMPLIED
WARRANTY OR CONDITION OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
15. INDEMNITIES
15.1 By MSS. MSS agrees to defend, indemnify, and hold the University
harmless from and against any and all third-party claims (other than claims for
infringement of a third party's Intellectual Property Rights to the extent such
claims fall within the provisions of Section 14 above), damages, actions,
liabilities, costs and expenses arising out of or in connection with (i) any
damage, including but not limited to damage to any property and personal injury
or death, by whomever suffered arising out of or resulting from any negligent or
willful act of MSS relating to the subject matter of this Agreement, and (ii)
any breach or claimed breach of the warranties and representations set forth in
Section 14.2 above.
15.2 By the University. The University agrees to defend, indemnify, and
hold MSS harmless from and against any and all third-party claims, damages,
actions, liabilities, costs and expenses arising out of or in connection with
(i) any damage, including but not limited to damage to any property and personal
injury or death, by whomever suffered arising out of or resulting from any
negligent or willful act of the University relating to the subject matter of
this Agreement, and (ii) any breach or claimed breach of the warranties and
representations set forth in Section 14.1 above.
16. ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS
In the event that either party becomes aware of an infringement or
potential infringement of the Licensed Patents or of any other Intellectual
Property Right of either the University or MSS within the Project Scope, such
party will promptly notify the other party and provide the details known to it.
The Steering Committee will then promptly confer about such infringement or
potential infringement. Within ten (10) business days thereafter, each party
will notify the other of its decision whether or not it wishes to participate in
litigation against the infringer or potential infringer. Any such litigation
will proceed as follows:
(a) Both Parties Elect to Participate. In the event that both parties
elect to participate in such litigation, the parties will mutually agree upon
counsel to bring such litigation. The parties will share equally the costs
(including the fees of attorneys and other professionals) of any such
litigation. MSS may recover all or a portion of its share of any such costs from
the sinking fund established pursuant to Section 3.4 above and, to the extent
the sinking fund contains insufficient funds, as an offset to the University's
share of Net Proceeds. All damages or lump sum
<PAGE> 19
settlement payments recovered from the prosecution or settlement of such
litigation shall, after deduction of all reasonable costs and fees of attorneys
and other professionals incurred in pursuing such litigation, be divided equally
between the parties. Each party agrees to join such action as a named plaintiff
to the extent necessary to obtain jurisdiction or if deemed a necessary party.
(b) MSS Decides to Participate and the University Does Not. In the event
that MSS elects to participate in such litigation and the University does not,
then MSS may initiate and control such litigation at its own expense. In the
event MSS institutes such litigation, (i) the University may at its option have
counsel of its choosing participate in such litigation provided such counsel
does not interfere with MSS's control of such litigation, (ii) the University
will join such action as a plaintiff to the extent necessary to obtain
jurisdiction or if the University is deemed a necessary party, and (iii) if such
litigation is based upon the Licensed Patents or any other Intellectual Property
Rights of the University, MSS will not settle any such litigation without the
express approval of the University to the terms and conditions of any such
settlement. All damages or lump sum settlement payments recovered from the
prosecution or settlement of such litigation shall be retained by MSS.
(c) The University Decides to Participate and MSS Does Not. In the event
that the University elects to participate in such litigation and MSS does not,
then the University may institute and control such litigation at its own
expense. In the event the University institutes such litigation, (i) MSS may at
its option have counsel of its choosing participate in such litigation provided
such counsel does not interfere with the University's control of such
litigation, (ii) MSS will join such action as a plaintiff to the extent
necessary to obtain jurisdiction or if MSS is deemed a necessary party, and
(iii) if such litigation is based upon any Intellectual Property Right of MSS,
the University will not settle any such litigation without the express approval
of MSS to the terms and conditions of any such settlement. All damages or lump
sum settlement payments recovered from the prosecution or settlement of such
litigation shall be retained by the University.
17. LIMITATION OF LIABILITY
EXCEPT FOR ANY WILLFUL BREACH OF SECTIONS 8 OR 13, NEITHER PARTY SHALL
BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL OR INCIDENTAL
DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING OUT OF THIS
AGREEMENT.
18. GENERAL
18.1 Governing Law. This Agreement will be governed by and construed in
accordance with the substantive laws of the United States and the State of
California, without regard to or application of provisions relating to choice of
law.
18.2 Waiver and Modification. Failure by either party to enforce any
provision of this Agreement will not be deemed a waiver of future enforcement of
that or any other provision.
<PAGE> 20
Any waiver, amendment or other modification of any provision of this Agreement
will be effective only if in writing and signed by the parties.
18.3 Severability. If for any reason a court of competent jurisdiction
finds any provision or portion of this Agreement to be unenforceable, that
provision will be enforced to the maximum extent permissible so as to effect the
intent of the parties, and the remainder of this Agreement will continue in full
force and effect.
18.4 Notices. All notices required or permitted under this Agreement
will be in writing, will reference this Agreement and will be deemed given: (i)
when sent by confirmed facsimile; (ii) ten (10) working days after having been
sent by registered or certified mail, return receipt requested, postage prepaid;
or (iii) five (5) working days after deposit with a commercial overnight
carrier, with written verification of receipt. All communications will be sent
to the addresses set forth below or to such other address as may be designated
by a party by giving written notice to the other party pursuant to this section:
To MSS:
Paul J. White
President and CEO
Medical Science Systems, Inc.
4400 McArthur Blvd., Suite 980
Newport Beach, CA 92660
U.S.A.
To the University:
[ * ]
with a copy to:
[ * ]
<PAGE> 21
Professor Gordon W. Duff
Lord Florey Chair of Molecular Medicine
The University of Sheffield
Department of Medicine and Pharmacology
Royal Hallamshire Hospital
Sheffield, S10 2JF
England
18.5 Delays Beyond Control. Neither party will be liable to the other
party for any failure or delay in performance caused by reasons beyond such
party's reasonable control, and such failure or delay will not constitute a
material breach of this Agreement.
18.6 Assignment. Neither party may assign its rights or obligations
hereunder, by operation of law or otherwise, without express written consent of
the other party, which consent will not be unreasonably withheld. Any attempted
assignment without such consent shall be void. Subject to the foregoing, this
Agreement will benefit and bind the successors and assigns of the parties.
18.7 No Third Party Beneficiaries; No Agency. Except as expressly
provided herein to the contrary, no provision of this Agreement, express or
implied, is intended or will be construed to confer rights, remedies or other
benefits to any third party under or by reason of this Agreement. This Agreement
will not be construed as creating an agency, partnership or any other form of
legal association (other than as expressly set forth herein) between the
parties.
18.8 Entire Agreement. This Agreement and the Master Agreement,
including all exhibits, constitutes the entire agreement between the parties
with respect to the subject matter hereof, and supersede and replace all prior
or contemporaneous understandings or agreements, written or oral, regarding such
subject matter.
18.9 Multiple Counterparts. This Agreement may be executed in multiple
counterparts, each of which will be considered an original and all of which
together will constitute one agreement. This Agreement may be executed by the
attachment of signature pages which have been previously executed.
18.10 Cumulation. All rights and remedies enumerated in this Agreement
will be cumulative and none will exclude any other right or remedy permitted
herein or by law.
18.11 Venue and Personal Jurisdiction. Any suit or other proceeding not
subject to arbitration under Section 12 will be brought solely in the federal
courts in the Central District of California, if jurisdiction in such court can
be obtained, and otherwise in the state courts of California, and each party
hereby irrevocably submits to, and waives any objections to, the exercise of
personal jurisdiction thereof and venue therein.
18.12 Headings. The headings contained in this Agreement are inserted
for convenience of reference only and are not intended to be a part of or to
affect the meaning or interpretation of this Agreement.
<PAGE> 22
18.13 Incorporation of the Master Agreement. Except as specifically
provided in this Agreement, the relevant terms and conditions of the Master
Agreement are hereby incorporated by reference into this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement through
their duly authorized representatives as set forth below:
MEDICAL SCIENCE SYSTEMS, INC. THE UNIVERSITY OF SHEFFIELD
By: By:
------------------------------ --------------------------------------
Printed Name: Printed Name:
-------------------- ----------------------------
Title: Title:
--------------------------- -----------------------------------
<PAGE> 23
EXHIBIT A
DESCRIPTION OF SMM GENETIC OSTEOPOROSIS PROJECT
EXISTING AS OF THE EFFECTIVE DATE OF THIS AGREEMENT
<PAGE> 24
SCHEDULE 1
GENERAL GUIDELINES FOR ALLOCATING NET PROCEEDS FOR
GENETIC TEST PRODUCTS
[ * ]
<PAGE> 25
SCHEDULE 2
SPECIFIC GUIDELINES FOR ALLOCATING NET PROCEEDS FOR
INITIAL OSTEOPOROSIS TEST
[ * ]
<PAGE> 1
EXHIBIT 10.6
November 9, 1994
Gordon W. Duff, Ph.D., FRCP PERSONAL & CONFIDENTIAL
Sheffield S10 3BZ
Re: Joint Project
Dear Professor Duff:
The purpose of this letter is to outline the terms and conditions which
our company and you will be working together. We each agree as follows:
1) The purpose of the project is set forth in Exhibit A to the Mutual
Nondisclosure Agreement ("Nondisclosure Agreement") signed by us on October 19,
1994. Both parties agree to be bound by the terms and conditions of that
agreement, and will not disclose the details without the prior written consent
of the other party. The Nondisclosure Agreement is incorporated herein by this
reference.
2) MSS has provided and will be responsible to handle and provide for
the project, at its cost:
(a) the research concept and product concept idea set forth in
the Nondisclosure Agreement.
(b) patent analysis and strategy
(c) expertise in the selection of patients who are most likely to
be valuable in the project and access to the patient population.
(d) conducting a four month clinical trial for the collection of
patient samples and clinical data on a minimum of 150 patients in three groups
of 50 patients each;
(e) conduct a Simulated Biology ("Sim Bio") discovery research
project over a 4 month period to construct a computer biologic model to
incorporate the genetic markers.
- ---------
* Confidential treatment has been requested with respect to portions of this
document. Omitted portions have been filed separately with the Securities and
Exchange Commission.
<PAGE> 2
Gordon W. Duff, Ph.D., FRCP
November 9, 1994
Page 2
(f) interpretation of how the resulting research data may apply
to periodontal diseases;
(g) handle all patent filings in the United States or Worldwide.
(h) attempt to transfer the research findings into a practical
diagnostic or other product;
(i) at MSS election, testing of the potential diagnostic or other
product in a small clinical trial to establish "proof of principle".
(j) handle the negotiations and contracts for the sale, license,
further development or other business arrangement with a company for
product development, commercialization and/or marketing.
You will be responsible to handle and provide for the project, at your
cost:
(a) Resources for the genetic analysis of the standard set of
markers of our samples and in interpretation of the results. We would provide
you with a minimum of fifty (50) patients in each of the three groups, so you
would have a minimum of one hundred fifty (150) samples. The maximum number of
samples that you will be required to analyze from each group is one hundred
(100) samples per group or three hundred (300) total. The specifics will be set
forth in Schedule A ;
3) The Project plan with relevant time tables and deliverable due dates
for each of us are set forth in Schedule A.
4) The economic sharing on the project would be as follows:
(a) [ * ].
5) Our organization would handle the negotiations and sale, license, or
other disposition of any inventions and discoveries. We would have the authority
to negotiate and be bound both of us to a business arrangement that would bring
a minimum of $500,000.00 paid
<PAGE> 3
Gordon W. Duff, Ph.D., FRCP
November 9, 1994
Page 3
over a 5 year period. If an offer came in that was below that amount, we would
need to mutually agree on the arrangement.
6) As part of this arrangement, we will each be exchanging information
that is either confidential and/or non-public information. We will each continue
to own our respective separate data and we would agree not to use the other
party's data without the permission of the party. All joint data and/or results
and any insights derived, including insights into the use of the new data or
results outside the scope of the current purpose of this project shall be
documented during and at the end of the project. As to joint data or results
coming from the clinical or laboratory analysis called for under this project,
or insights derived during the collaboration, we would each have the right to
use any such jointly developed data in any manner including another project,
only with the written approval and agreement of the other party. Neither of us
would publish or make presentations in any public forum as to joint data
developed without the permission of the other. Both parties will be authors on
any publications of the joint data. Primary authorship of joint data will be
determined by mutual agreement depending upon the particular focus of the
manuscript. Both of us recognize that this is a commercial venture and the need
for secrecy is of paramount importance to secure legal protection of the data
and results and device or product coming therefrom, and to secure a product
development business arrangement.
7) The parties agree that this arrangement is a mutually exclusive
arrangement so that neither of us would perform or be involved in any other
genetic research in the oral care area during the project. Additionally, you
agree not to conduct or be involved in any genetic research for periodontal
disease or dental caries without MSS written consent for a period of 5 years
from the date of this Agreement.
8) It is the intent of the parties to collaborate on future projects of
oral manifestations of systemic conditions or in other disease areas where the
application of our respective technologies and know-how can be applied in a
commercial venture. The parties agree to negotiate in good faith the terms and
conditions of such future venture(s) based upon tangible and intangible
contributions to the project.
9) Termination of Agreement. This Agreement shall immediately be deemed
terminated upon the occurrence of the following:
(a) Mutual Consent: Upon the mutual agreement of all parties.
(b) Death. Upon your death.
<PAGE> 4
Gordon W. Duff, Ph.D., FRCP
November 9, 1994
Page 4
(c) Cause. Should either party materially breach their
obligations under this Agreement after a thirty (30) day notice and cure period.
Notwithstanding termination of this Agreement, the provisions of Section 1, 4,
5, 6 and 7 shall survive the termination.
10) This letter is intended to constitute a binding letter agreement on
all parties. All parties agree to cooperate with each other and execute any and
all legal documents reasonably necessary or appropriate to carry out the intent
of this agreement.
11) This agreement constitutes the entire understanding between the
parties with respect to the subject matter hereof, superseding all negotiations,
prior discussion and preliminary agreements, if any.
12) This agreement shall not be modified or amended except in writing
signed by you and a duly empowered officer of the Company.
13) This agreement shall be construed under and governed in accordance
with, the laws of the State of California.
14) Except as otherwise provided in this Agreement, the provisions
hereof shall be binding upon and shall inure to the benefit of the parties
hereto, their personal representatives, heirs, executives, administrators,
successors and/or permitted assigns.
15) Neither this Agreement nor the rights, duties or obligations arising
hereunder shall be assignable by either of us.
Sincerely,
MEDICAL SCIENCE SYSTEMS
By:
--------------------------------------
PAUL J. WHITE
Chief Executive Officer
THE UNDERSIGNED AGREES TO ALL TERMS AND CONDITIONS SET FORTH IN THIS LETTER
<PAGE> 5
Gordon W. Duff, Ph.D., FRCP
November 9, 1994
Page 5
Dated: _______________________________
Professor Gordon W. Duff
<PAGE> 6
Gordon W. Duff, Ph.D., FRCP
November 9, 1994
Page 6
SCHEDULE A
----------
<TABLE>
<CAPTION>
Deliverable Due Date
- ----------- --------
<S> <C>
MSS to decide study location, Protocol Development November 1, 1994
Pre-Clinical Trial Initiation Phase
Start Sim Bio Modeling Project. November 15, 1994
MSS receives Amplicards and samples of data output Late December, 1994
from laboratory.
MSS to institute clinical trial. January 1, 1995
MSS to send first 40 samples to U.K. February 1, 1995
Completion of sample collection by MSS. Late February, 1995
[ * ] July 1, 1995
MSS completes data analysis on standard set of markers. September 1, 1995
</TABLE>
<PAGE> 1
EXHIBIT 10.13
SERVICE AGREEMENT
This AGREEMENT is entered into between MEDICAL SCIENCE SYSTEMS, 4400
MACARTHUR BLVD., STE. 980, NEWPORT BEACH, CA 92660 (hereinafter referred to as
"COMPANY"), and BAYLOR COLLEGE OF MEDICINE, DEPARTMENT OF MOLECULAR AND HUMAN
GENETICS, DNA DIAGNOSTIC LABORATORY, located at One Baylor Plaza, Houston, Texas
77030-3498 (hereinafter referred to as "BAYLOR"), with C. SUE RICHARDS, PH.D.
(herein referred to as "PRINCIPAL INVESTIGATOR"). COMPANY, PRINCIPAL
INVESTIGATOR, and BAYLOR may hereinafter be referred to individually as a
"PARTY" and collectively as the "PARTIES".
WHEREAS, COMPANY has developed a genetic test for screening patients for
predisposition to severe periodontal disease (the "PERIODONTAL TEST", defined as
IL1alpha and IL1-beta), the description for which is set forth in Exhibit A
hereto;
WHEREAS, BAYLOR has adequate laboratory facilities and skilled personnel
to perform the PERIODONTAL TEST in accordance with an assay which was developed
at Baylor, using specimens collected from patients, as described in Exhibit A,
under the supervision and direction of PRINCIPAL INVESTIGATOR;
WHEREAS, COMPANY desires to retain BAYLOR to perform the PERIODONTAL TEST
based upon specimens sent to BAYLOR by COMPANY or its customers and to deliver
the results of such tests back to COMPANY on the terms and conditions set forth
in this AGREEMENT ("TEST SERVICES");
WHEREAS, it is anticipated that representatives of each PARTY will receive
or have access to technical and scientific information which is in writing and
is labeled as being confidential by the disclosing PARTY (hereafter referred to
as the "CONFIDENTIAL INFORMATION");
WHEREAS, the PARTIES are willing to maintain such CONFIDENTIAL INFORMATION
in confidence and each believes it would be seriously harmed if the CONFIDENTIAL
INFORMATION were disclosed to third parties;
NOW, THEREFORE, in consideration of the foregoing and the mutual
benefits to be derived from the above-mentioned services and other good and
valuable consideration, the PARTIES do hereby agree as follows:
1.0 Each PARTY agrees to:
1.1 restrict CONFIDENTIAL INFORMATION received solely to its
employees and consultants on a need-to-know basis and solely to
the extent reasonably necessary to enable the PARTIES and their
employees to perform their obligations under this AGREEMENT;
and
- ---------
* Confidential treatment has been requested with respect to portions of this
document. Omitted portions have been filed separately with the Securities and
Exchange Commission.
<PAGE> 2
1.2 not disclose CONFIDENTIAL INFORMATION to any third party unless
prior to such disclosure the PARTY from whom the CONFIDENTIAL
INFORMATION was received shall have expressly agreed in writing
to such a disclosure; and
1.3 use the CONFIDENTIAL INFORMATION solely for the performance of
the PARTIES' obligations under this AGREEMENT and not make
copies thereof, except as necessary to perform such
obligations; and
1.4 instruct all recipients of the CONFIDENTIAL INFORMATION that it
is subject to a Non-Disclosure and Confidentiality Agreement
and cannot be used or disclosed except pursuant to a written
agreement; and
1.5 use, and require all recipients to use, the same degree of
care to protect the CONFIDENTIAL INFORMATION against
unauthorized use or disclosure as the receiving PARTY uses to
protect its own proprietary CONFIDENTIAL INFORMATION.
BAYLOR agrees that the PERIODONTAL TEST, whether disclosed to BAYLOR
in writing or orally, and all results of performing the PERIODONTAL
TEST on specimens hereunder, shall be deemed to be CONFIDENTIAL
INFORMATION subject to the restrictions of this AGREEMENT.
2.0 EXCEPTIONS. Notwithstanding anything to the contrary contained
herein, the PARTY receiving CONFIDENTIAL INFORMATION shall have no
obligation to preserve the confidentiality of any CONFIDENTIAL
INFORMATION (whether received before or after the date of this
AGREEMENT) which:
2.1 has passed into the public domain prior to or after its
disclosure to the PARTY, other than through acts or omissions
attributable to the receiving PARTY; or
2.2 was rightfully obtained subsequent to the date of this
AGREEMENT, other than under binder of secrecy from a third
party not acquiring the CONFIDENTIAL INFORMATION under an
obligation of confidentiality from the disclosing PARTY; or
2.3 the receiving PARTY can show the CONFIDENTIAL INFORMATION was
previously in its possession prior to disclosure thereof by the
disclosing Party; or
2.4 the receiving PARTY is required to disclose by law or legal
process, provided that, prior to any such disclosure the
receiving PARTY will notify the disclosing PARTY that it
intends to make such disclosure; or
2
<PAGE> 3
2.5 developed by the recipient independent of the information
received, or performed under, this AGREEMENT.
3.0 RETURN OF CONFIDENTIAL INFORMATION. Upon request, PRINCIPAL
INVESTIGATOR will return all CONFIDENTIAL INFORMATION provided by
COMPANY and all copies thereof. Nothing contained in this AGREEMENT
shall be construed as granting or conferring any rights, by license
or otherwise, in any CONFIDENTIAL INFORMATION disclosed to the
receiving PARTY other than to use such CONFIDENTIAL INFORMATION
in the performance of obligations under this AGREEMENT, in
accordance with Section 1.0 above. Not withstanding the above, a
party may retain a copy of any confidential information of the other
party to the extent required by any regulation or law.
4.0 BAYLOR SERVICES. BAYLOR agrees to perform the PERIODONTAL TEST based
upon specimens shipped to BAYLOR by COMPANY or its customers in
accordance with the requirements set forth in Exhibit A for the
PERIODONTAL TEST. Pricing and payment terms for the performance of
the PERIODONTAL TEST is specified in Exhibit A. BAYLOR will report
the results of the performance of such tests directly to COMPANY,
in accordance with the terms set forth in Exhibit A. BAYLOR warrants
that it has adequate laboratory facilities and skilled personnel to
perform the PERIODONTAL TEST properly developed by Baylor. BAYLOR
warrants that all TEST SERVICES will be performed in accordance
with current laboratory standards, and in compliance with all
applicable federal, state and local laws and regulations.
5.0 NOTICE OF PUBLICATION. BAYLOR agrees to submit a copy to COMPANY of
any proposed publication or presentation relating to the PERIODONTAL
TEST, INVENTIONS, or JOINT INVENTION to COMPANY, for its review, at
least sixty (60) days prior to the estimated date of publication or
presentation of such material to a journal, editor, or other third
party, and if no response is received within thirty (30) days of the
date submitted to COMPANY, it will be conclusively presumed that the
presentation or publication may proceed without delay. If COMPANY
determines that the proposed presentation or publication contains
patentable subject matters which require protection or CONFIDENTIAL
INFORMATION, COMPANY may request the delay of the presentation or
publication for a period of time not to exceed ninety (90) days for
the purpose of allowing the pursuit of such protection. In the event
that COMPANY identifies CONFIDENTIAL INFORMATION contained in the
proposed presentation or publication, the PARTIES shall discuss
changes which shall prevent disclosure of CONFIDENTIAL INFORMATION.
Title to any copyrightable material produced or composed in relation
to such presentation or publication by BAYLOR or its RESEARCHERS
shall remain with BAYLOR and RESEARCHERS, provided that BAYLOR and
its RESEARCHERS shall grant to
3
<PAGE> 4
COMPANY an irrevocable, royalty-free, non-exclusive right to
reproduce, distribute and use all such copyrighted material in
conjunction with the approval, registration, marketing or sale of
the PERIODONTAL TEST or any INVENTION or JOINT INVENTION. In all
such cases, COMPANY will use its best efforts to implement such
protection in ways that minimize the impact on planned publication
schedules.
6.0 INDEMNIFICATION
6.1 BAYLOR'S INDEMNIFICATION. COMPANY shall indemnify, defend and
hold harmless BAYLOR and its researchers, their affiliates,
officers, directors, employees and agents from any and all
claims, demands, suits or proceedings arising out of any side
effect, adverse reaction or illness occurring as a result of
the performance of the PERIODONTAL TEST, provided, however,
any such injury, loss or damage is not due to the negligence
or intentional misconduct of BAYLOR or its RESEARCHERS,
and the PERIODONTAL TEST has been administered in accordance
with the assay supplied by COMPANY and any other protocol or
instructions that COMPANY may supply from time to time to
BAYLOR for the performance of the PERIODONTAL TEST. The
foregoing indemnity is subject to the conditions that (i)
BAYLOR and its RESEARCHERS promptly notify COMPANY in writing
after BAYLOR or its RESEARCHERS receives notice of any claim;
(ii) COMPANY is given the opportunity, at its option at any
time during the pendency of such claim, to have the sole
control of the defense, trial and/or any related settlement
negotiations; and (iii) BAYLOR and its RESEARCHERS fully
cooperate with COMPANY in the defense, trial and/or settlement
of any such claim.
6.2 COMPANY'S INDEMNIFICATION. BAYLOR shall indemnify, defend and
hold harmless COMPANY and its affiliates, officers, directors,
employees and agents from any and all claims, demands, suits or
proceedings arising out of the negligence or willful act of
BAYLOR or its RESEARCHERS or the performance of this AGREEMENT.
The foregoing indemnity is subject to the conditions that (i)
COMPANY promptly notifies BAYLOR in writing after COMPANY
receives notice of any claim; (ii) BAYLOR is given the
opportunity, at its option at any time during the pendency of
such claim, to have the sole control of the defense, trial
and/or any related settlement negotiations; and (iii) COMPANY
fully cooperates with BAYLOR in the defense, trial and/or
settlement of any such claim.
7.0 TERM AND TERMINATION
7.1 EFFECTIVE DATE. This AGREEMENT shall become effective as of
its execution by both PARTIES and shall continue in effect
until terminated as set forth herein.
7.2 TERMINATION. Either PARTY may, upon thirty (30) days written
notice to the other PARTY, terminate this Agreement in the
event of a material breach of this
4
<PAGE> 5
AGREEMENT by the other PARTY; provided, however, if such breach
is cured within such thirty (30) day period, this AGREEMENT
shall not be terminated. Either PARTY may terminate this
AGREEMENT for any reason or no reason, at any time, upon six
(6) months advance written notice to the other PARTY.
7.3 RETURN OF CONFIDENTIAL INFORMATION. Upon AGREEMENT termination,
each PARTY shall return all CONFIDENTIAL INFORMATION and copies
of CONFIDENTIAL INFORMATION of the other PARTY within its
possession or under its control to the other PARTY, within ten
(10) days thereof. COMPANY shall,within thirty (30) days of
termination, pay any sums due and owing to BAYLOR hereunder.
The provisions of Paragraphs 3.0, 5.0-7.0, 8.1, and 9.0-15.0
shall survive the termination of expiration of this AGREEMENT.
The provisions of Paragraph 1.0 of this AGREEMENT shall
survive. In accordance with Paragraph 12.0 below. Not
withstanding the above, a party may retain a copy of any
confidential information of the other party to the extent
required by any regulation or law.
8.0 RECORD KEEPING. PARTIES agree that unauthorized disclosure of
CONFIDENTIAL INFORMATION would result in irreparable harm.
Accordingly, in the event that a PARTY breaches its obligations
as provided under the AGREEMENT by disclosure or use of CONFIDENTIAL
INFORMATION, it is agreed by the PARTIES that the injured PARTY
shall be entitled to enjoin any further breach and may take such
additional action as it deems necessary and appropriate, including
seeking damages in any court of competent jurisdiction.
8.1 CONFIDENTIALITY. Either PARTY may disclose CONFIDENTIAL
INFORMATION to the extent, but only to the extent, that
disclosure is reasonably necessary in prosecuting or defending
litigation where material harm to the disclosing PARTY would
otherwise result (but such disclosure shall be subject to an
appropriate protective order in such litigation) or in
complying with or demonstrating compliance with government
regulations.
8.2 RECORD ACCESS. Each PARTY shall keep and allow the other
PARTY reasonable access to full and accurate books and records
of all services rendered under this AGREEMENT as required by
state and/or federal law.
9.0 USE OF BAYLOR NAME. COMPANY agrees that it will not at any time
during or following termination of this AGREEMENT use the name of
BAYLOR or any other names, insignia, symbol(s), or logotypes
associated with BAYLOR or any variant, or variants thereof, or the
names of the Principal Investigator, or any other BAYLOR faculty
member or employee, orally or in any literature, advertising, or
other materials (other than simply to state that BAYLOR will perform
the PERIODONTAL TEST for COMPANY and its customers) without the
prior written consent of BAYLOR, which consent may be withheld at
BAYLOR'S sole discretion.
5
<PAGE> 6
10.0 CONFIDENTIALITY OF TRADE SECRETS AND OTHER INTELLECTUAL PROPERTY.
BAYLOR agrees to make no public presentations about the PERIODONTAL
TEST or this AGREEMENT outside of appropriate scientific meetings,
to issue no news releases about the PERIODONTAL TEST or this
AGREEMENT, and neither PARTY shall make use of the other's name, in
any form of public information, without the written permission of
the other PARTY, except as permitted in this paragraph or in
paragraph 10.0 above.
11.0 SURVIVAL. Except as provided in Paragraph 2.0, the provisions of
this AGREEMENT shall continue as to any item of CONFIDENTIAL
INFORMATION disclosed for a period of five (5) years following
termination or expiration of this AGREEMENT.
12.0 INSURANCE.
12.1 BAYLOR'S INSURANCE OBLIGATIONS. Throughout the term of this
AGREEMENT, BAYLOR shall provide the following insurance or
equivalent coverage through the self-insurance program of
BAYLOR:
12.1.1 Worker's compensation and employer's liability insurance
covering its statutory and legal obligations for
employee, job-related injuries. Said policy shall
provide at least for statutory benefits;
12.1.2 General liability insurance coverage for third-party
claims for bodily injury and property damage with
limits of at least one million dollars ($1,000,000)
per occurrence and two million dollars ($2,000,000)
annual aggregate.
All such insurance shall contain a waiver of subrogation pursuant
to which the insurer waives all express and implied rights of
subrogation against COMPANY and its directors, officers, staff
members, employees, and agents. Upon receipt of COMPANY's written
request, BAYLOR shall provide COMPANY with certificates evidencing
the above insurance or equivalent coverages.
12.2 COMPANY'S INSURANCE OBLIGATIONS. During the term of this
Agreement, COMPANY shall provide the following insurance:
12.2.1 Worker's compensation and employer's liability insurance
covering its statutory and legal obligations for
employee job-related injuries. Said policy shall at
least provide for statutory benefits;
6
<PAGE> 7
12.2.2 General liability insurance coverage for third-party
claims for bodily injury and property damage with
limits of at least one million dollars ($1,000,000)
per occurrence and two million dollars ($2,000,000)
annual aggregate;
All such insurance shall contain a waiver of subrogation
pursuant to which the insurer waives all express and implied
rights of subrogation against BAYLOR and its trustees,
officers, employees, residents, faculty, and agents.
12.3 Proof of Insurance. Upon receipt of a written request from
either PARTY, the other PARTY shall provide the requesting
PARTY with certificates evidencing the above insurance
coverage.
13.0 NOTICES. Except as otherwise expressly provided herein, all notices
required or permitted to be given under this AGREEMENT must be in
writing and must either be delivered personally to the designated
agent of the PARTY to whom the notice is directed or be mailed by
registered or certified mails, return receipt requested, addressed
as shown below. Either PARTY may, at any time, change the address
for notices by delivering or mailing, as aforesaid, a notice stating
the change and setting forth the changed address. Any notice
hereunder shall be deemed effective when personally delivered or
when deposited, postage prepaid, with the United States Postal
Services, addressed as herein before provided. Notice must be given
to the following:
MEDICAL SCIENCE SYSTEMS BAYLOR COLLEGE OF MEDICINE
ATTN: PAUL WHITE, J.D. ATTN: C. SUE RICHARDS, PH.D.
President Laboratory Director
Medical Science Systems Baylor DNA Diagnostic Laboratory
4400 MacArthur Blvd, Suite 980 Department of Molecular and Human
Newport Beach, CA 92660 Genetics
One Baylor Plaza
Houston, TX 77030-3498
14.0 This AGREEMENT shall inure to the benefit of and be binding upon
the PARTIES.
15.0 ASSIGNMENT. This AGREEMENT and all rights and obligations hereunder
are personal to the PARTIES hereto and may not be assigned without
the express prior written consent of the other PARTY. Any assignment
or attempt to assign in the absences of such written consent shall
be void and without effect.
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<PAGE> 8
16.0 SEVERABILITY. Each provision of this AGREEMENT shall be considered
separable and, if for any reason, a provision which is not essential
to the effectuation of the basic purposes of the AGREEMENT is
determined to be invalid or contrary to any existing or future law,
such invalidity shall not impair the operation of or affect those
provisions of this AGREEMENT that are valid.
17.0 FORCE MAJEURE. Neither PARTY shall be liable nor deemed to be in
default for any delay or failure in performance under this AGREEMENT
or other interruption of service deemed resulting, directly or
indirectly, from acts of God, acts of public enemy, war, accidents,
fires, explosions, hurricanes, floods, failure of transportation,
strikers, or other work interruptions by either PARTY's employees,
or any similar cause beyond the reasonable control of either PARTY.
18.0 WAIVER. A waiver by either PARTY of breach or violation of any
provision or clause of this AGREEMENT shall not operate as, or be
construed to be, a waiver of any subsequent breach of this
AGREEMENT. No delay in acting with regard to any breach of this
AGREEMENT shall be construed to be a waiver of such breach.
19.0 NON-DISCRIMINATION. The PARTIES hereby agree that neither PARTY
shall fail or refuse to hire or to discharge any individual, or
otherwise to discriminate against any individual with respect to his
or her compensation, terms, conditions or privileges OF employment
under any provision of this AGREEMENT, because of such individual's
race, color, religion, sex, age, veteran status, handicap or
national origin.
20.0 AGREEMENT EXECUTION. Each multiple original of this document shall
be deemed an original, but all multiple copies together shall
constitute one and the same instrument.
21.0 ENTIRE AGREEMENT. This AGREEMENT sets forth the entire agreement of
the PARTIES with respect to the subject matter contained herein and
may not be modified, amended, or discharged, except as expressly
stated herein or by a written agreement duly executed by all PARTIES
hereto.
22.0 CAPTIONS. All captions in this Agreement are solely for convenience
and are not part of this agreement.
8
<PAGE> 9
IN WITNESS WHEREOF, the PARTIES hereto have caused this AGREEMENT to be
executed in duplicate and delivered this AGREEMENT as of the date and year as
executed below.
MEDICAL SCIENCE SYSTEMS BAYLOR COLLEGE OF MEDICINE
Department of Molecular and Human
Genetics.
/s/ PAUL WHITE /s/ C. SUE RICHARDS
- --------------------------------- --------------------------------
Signature C. Sue Richards, Ph.D
Laboratory Director
Baylor DNA Diagnostic Laboratory
Paul White, J.D.
President
Date: 12-7-96 Date: 12-3-96
------- -------
9
<PAGE> 10
EXHIBIT A
REFERRAL SERVICE
Performing the PERIODONTAL TEST of COMPANY.
DEFINITION OF PERIODONTAL TEST:
IL-1alpha and IL-1 beta
SPECIMEN REQUIREMENTS
Buccal Swab: two swabs per patient, 40 seconds each from both cheeks
Blood: Blood spots on filter paper/cardboard mounts from finger sticks
SHIPPING SAMPLES
Overnight shipping (within the United States only) will be provided BY Baylor
via AIRBORNE EXPRESS. Company will be responsible for all international
shipping. Company will arrange for specimens to be shipped directly to Baylor.
Specimens will not be received on weekends. Company will request referring
physicians to mark packages appropriately for weekday arrival at Baylor.
Specific information should be preprinted on Airborne air-bills:
- the TO section should have the Baylor DNA Lab's address filled in
- the BILL RECEIVER box should be checked and the Baylor DNA Lab's
account # should be printed on the line next to it
- the NUMBER OF PKGS box should say 1
- the WEIGHT box should say 1 lb
Baylor will not pay for shipping of unmarked packages
- LAB PACK should be checked
- TYPE of service should be checked Express
REPORTING
BAYLOR will report batched test results directly to COMPANY via diskette. BAYLOR
will provide patient and doctor data agreed to by both parties to COMPANY.
WEEKLY TESTING
AS of the Effective Date, the Baylor DNA laboratory plans to run the PST(TM)
weekly. Sample shipments will need to be scheduled to arrive no later than
Friday afternoon in order to make the next run date.
BILLING
BAYLOR will bill COMPANY monthly for submitted samples.
10
<PAGE> 11
[ * ]
11
<PAGE> 1
EXHIBIT 10.21
OPERATING AGREEMENT
OF
DIGISPHERE, LLC
- ---------
* Confidential treatment has been requested with respect to portions of this
document. Omitted portions have been filed separately with the Securities and
Exchange Commission.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Explanatory Statement...................................................................... 1
Article I. Defined Terms................................................................ 1
Article II. Formation and Name; Office; Purpose; Term................................... 5
2.1 Organization........................................................... 5
2.2 Name of the Company.................................................... 5
2.3 Purpose................................................................ 5
2.4 Term................................................................... 5
2.5 Resident Agent/Name and Address........................................ 5
2.6 Principal Place of Business............................................ 5
2.7 Members................................................................ 5
Article III. Members; Capital; Capital Accounts.......................................... 5
3.1 Initial Contributions.................................................. 5
3.2 No Additional Contributions............................................ 5
3.3 No Personal Liability.................................................. 6
3.4 No Interest on Contributions........................................... 6
3.5 Return of Contributions................................................ 6
3.6 Form of Return of Capital.............................................. 6
3.7 Capital Accounts....................................................... 6
Article IV. Profit, Loss, and Distributions............................................. 6
4.1 Cash Flow.............................................................. 6
4.2 Allocation of Profit or Loss........................................... 6
4.3 Regulatory Allocations................................................. 6
4.4 Liquidation and Dissolution............................................ 8
4.5 General................................................................ 8
Article V. Management; Rights, Powers, Duties and Permitted Expenses................... 8
5.1 Meetings of and Voting by Members...................................... 8
5.2 Board of Directors...................................................... 9
5.3 Action by Unanimous Written Consent.....................................10
5.4 Duties of Parties.......................................................10
5.5 Indemnification of Members..............................................11
5.6 Limitations on Liability................................................12
5.7 Day to Day Management...................................................12
5.8 Certain Duties..........................................................13
5.9 Certain Company Actions.................................................14
5.10 Permitted Expenses......................................................15
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Article VI. Responsibilities of Members..................................................15
6.1 Contracting Procedures and Services.....................................15
6.2 Certain Agreements of the Members.......................................15
6.3 Confidentiality.........................................................16
Article VII. Transfer of Interests........................................................17
7.1 Transfers...............................................................17
Article VIII. Dissolution, Liquidation, and Termination of the Company.....................17
8.1 Events of Dissolution...................................................17
8.2 Noticing Procedure for Failure to Meet Performance Goals................19
8.3 Withdrawal..............................................................19
8.4 Procedure for Winding Up and Distribution...............................19
8.5 Filing of Certificate of Cancellation...................................19
Article IX. Books, Records, Accounting, and Tax Elections................................20
9.1 Bank Accounts...........................................................20
9.2 Maintenance of Books and Records........................................20
9.3 Right to Inspect Books and Records; Receive Information.................21
9.4 Annual Accounting Period................................................21
9.5 Tax Matters Partner.....................................................21
9.6 Accountants.............................................................21
9.7 Accounting Method.......................................................21
Article X. General Provisions...........................................................22
10.1 Assurances.............................................................22
10.2 Notifications..........................................................22
10.3 Complete Agreement.....................................................22
10.4 Applicable Law.........................................................22
10.5 Section Titles.........................................................23
10.6 Binding Provisions.....................................................23
10.7 Jurisdiction and Venue.................................................23
10.8 Terms..................................................................23
10.9 Separability of Provisions.............................................23
10.10 Counterparts...........................................................23
10.11 Estoppel Certificate...................................................23
10.12 Publicity and Reports..................................................23
10.13 Creditors .............................................................24
10.14 Expenses ..............................................................24
</TABLE>
ii
<PAGE> 4
OPERATING AGREEMENT
OF
DIGISPHERE, LLC.
This Operating Agreement (this "Agreement") is entered into as of August
1, 1997, by and between Medical Science Systems, Inc., a Texas corporation
("MSS"), Digisphere Inc., a subsidiary of Nelson Communications Inc., a Delaware
corporation, and Nelson Communications Inc., a Delaware corporation ("NCI").
EXPLANATORY STATEMENT
MSS is a biotechnology company developing genetic prognostic tests, risk
assessment tools, treatment services and therapeutic products;
MSS is commercializing its genetic prognostics tests worldwide in all
market segments including doctors, patients, consumers, payers, industry and
institutions;
MSS has developed a risk assessment software tool known as the Disease
Progression Explorer that can be used to educate doctors and patients about
disease progression;
MSS will be offering the Disease Progression Explorer and treatment
planning services in support of its genetic prognostic commercialization
efforts;
MSS desires that the Disease Progression Explorer be marketed and
distributed independent of MSS efforts;
NCI is a company specializing in medical advertising, education,
graphics, public relations and direct to consumer marketing;
NCI offers these services to businesses and institutions who are
developing and/or selling medical products or services to doctors and patients,
or who are educating doctors, patients, consumers and/or students, about a
disease; and
The parties desire to operate a business through a limited liability
company known as Digisphere, LLC, a Delaware limited liability company, and to
organize and operate a limited liability company in accordance with the terms
and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
DEFINED TERMS
The following capitalized terms shall have the respective meanings
specified in this Article I. Capitalized terms not defined in this Agreement
shall have the meaning specified in the Act.
1
<PAGE> 5
"Act" means the Delaware Limited Liability Company Act, Delaware Code,
Title 6, SectionSection 18-101 et seq. as amended from time to time.
"Affiliate" means (a) a Person directly or indirectly controlling,
controlled by, or under common control with another Person; (b) a Person owning
or controlling more than 10 percent or more of the outstanding voting securities
or beneficial interests of another Person; and/or (c) an officer, director,
partner, or member of the immediate family of an officer, director, or partner
of another Person.
"Agreement" means this Operating Agreement, as amended from time to
time, including each exhibit hereto.
"Capital Account" means the account to be maintained by the Company for
each Member in accordance with the following provisions:
(i) a Member's Capital Account shall be credited with the amount
of money and the fair market value of any property contributed to the
Company (net of liabilities secured by such property that the Company
either assumes or to which such property is subject), the amount of any
Company unsecured liabilities assumed by the Member, and the Member's
distributive share of Profit and any item in the nature of income or
gain specially allocated to the Member pursuant to the provisions of
Section 4.3 (other than Section 4.3.2); and
(ii) a Member's Capital Account shall be debited with the amount
of money and the fair market value of any Company property distributed
to the Member (net of liabilities secured by such distributed property
that the Member either assumes or to which such property is subject),
the amount of any unsecured liabilities of the Member assumed by the
Company, and the Member's distributive share of Loss and any item in the
nature of expenses or losses specially allocated to the Member pursuant
to the provisions of Section 4.3 (other than Section 4.3.2).
If any Interest is transferred pursuant to the terms of this Agreement,
the transferee shall succeed to the Capital Account of the transferor to the
extent the Capital Account is attributable to the transferred Interest. If the
book value of Company property is adjusted pursuant to Section 4.3.2, the
Capital Account of each Member shall be adjusted to reflect the aggregate
adjustment in the same manner as if the Company had recognized gain or loss
equal to the amount of such aggregate adjustment. It is intended that the
Capital Accounts of all Members shall be maintained in compliance with Code
Section 704(b) and the Regulations thereunder, and all provisions of this
Agreement relating to the maintenance of Capital Accounts shall be interpreted
and applied in a manner consistent with the Regulations.
"Cash Flow" means all cash funds derived from operations of the Company
(including interest received on reserves), without reduction for any non-cash
charges, but less cash funds used to pay current operating expenses and to pay
or establish reasonable reserves for future expenses, debt payments, capital
improvements, and replacements as determined by the Members.
2
<PAGE> 6
"Client(s)" means businesses and institutions who are developing and/or
selling medical products or services to doctors and patients, or who are
educating doctors, patients, consumers and/or students about a disease. This
includes pharmaceutical companies, academic institutions, foundations, biotech
or biomedical companies, device and diagnostic companies.
"Code" means the Internal Revenue Code of 1986, as amended, or any
corresponding provision of any succeeding revenue law.
"Company" means Digisphere, LLC, the limited liability company formed in
accordance with this Agreement.
"Contribution" means any money, property, or services rendered, or a
promissory note or other binding obligation to contribute money or property, or
to render services as permitted in this title, which a Member contributes to the
capital of the Company in that Member's capacity as a Member pursuant to an
agreement between the Members, including an agreement as to value.
"Interest" means a Person's right to share in the Cash Flow, income,
gains, losses, deductions, credit, or similar items of, and to receive
distributions from, the Company, any right to vote or participate in management,
and any right to information concerning the business and affairs of the Company.
"Disease Progression Explorer" means the technology described and
licensed to Company under the license agreement attached as Exhibit "A" (the
"License Agreement).
"Member" means any Person who executes a counterpart of this Agreement
as a Member and any Person who subsequently is admitted as a Member of the
Company.
"Member Loan Nonrecourse Deductions" means any Company deductions that
would be Nonrecourse Deductions if they were not attributable to a loan made or
guaranteed by a Member.
"Minimum Gain" has the meaning set forth in Regulation Section
1.704-2(d). Minimum Gain shall be computed separately for each Member in a
manner consistent with the Regulations under Section 704(b) of the Code.
"Nonrecourse Deductions" means net increase, if any, in the amount of
Minimum Gain during that taxable year, determined according to the provisions of
Regulation Section 1.704-2(c).
"Nonrecourse Liability" has the meaning set forth in Regulation Section
1.704-2(b)(3).
"Percentage" means, as to a Member, the percentage set forth after the
Member's name on Exhibit B, as amended from time to time.
"Person" means and includes an individual, corporation, partnership,
association, limited liability company, trust, estate, or other entity.
3
<PAGE> 7
"Profit" and "Loss" means, for each taxable year of the Company (or
other period for which Profit or Loss must be computed), the Company's taxable
income or loss determined in accordance with Section 703(a) of the Code, with
the following adjustments:
(i) all items of income, gain, loss, deduction, or credit required
to be stated separately pursuant to Section 703(a)(1) of the Code shall
be included in computing taxable income or loss;
(ii) any tax-exempt income of the Company, not otherwise taken
into account in computing Profit or Loss, shall be included in computing
taxable income or loss;
(iii) any expenditures of the Company described in Section
705(a)(2)(B) of the Code (or treated as such pursuant to Regulation
Section 1.704-1(b)(2)(iv)(i)) and not otherwise taken into account in
computing Profit or Loss, shall be subtracted from taxable income or
loss;
(iv) gain or loss resulting from any taxable disposition of
Company property shall be computed by reference to the book value as
adjusted under Regulation Section 1.704-1(b) ("adjusted book value") of
the property disposed of, notwithstanding the fact that the adjusted
book value differs from the adjusted basis of the property for federal
income tax purposes;
(v) in lieu of the depreciation, amortization or cost recovery
deductions allowable in computing taxable income or loss, there shall be
taken into account the depreciation computed based upon the adjusted
book value of the asset; and
(vi) notwithstanding any other provision of this definition, any
items which are specially allocated pursuant to Section 4.3 hereof shall
not be taken into account in computing Profit or Loss.
"Regulation" means the income tax regulations, including any temporary
regulations, from time to time promulgated under the Code by the U.S. Treasury
Department.
"Secretary of State" means the Secretary of State of the State of
Delaware.
"Targeted Marketing Information Service" means the Company providing
some or all of the following services to Clients: medical education advertising,
product samples, medical literature, newsletters or other product support; an
"Answer Line"; Behavior Modification; or other services meant to support the
sale, use or compliance with a Client's product or service.
"Transfer" means, when used as a noun, any sale, hypothecation, pledge,
assignment, attachment, or other transfer, and, when used as a verb, to sell,
hypothecate, pledge, assign, or otherwise transfer. Transfer does not include a
transfer by operation of law in connection with the merger or consolidation of a
Member or the sale or other transfer of all or substantially all of the assets
of a Member.
4
<PAGE> 8
ARTICLE II
FORMATION AND NAME; OFFICE; PURPOSE; TERM
2.1 Organization. The parties hereby organize a limited liability
company pursuant to the Act and the provisions of this Agreement. The Company
shall cause a Certificate of Formation to be prepared, executed, and filed with
the Secretary of State. The Company shall further cause such other documents to
be filed as shall be necessary to comply with applicable law and to qualify the
Company to do business in each jurisdiction in which such qualification is
required.
2.2 Name of the Company. The name of the Company is Digisphere, LLC.
2.3 Purpose. The purpose of the Company is to promote, distribute and
provide worldwide to potential Clients: 1.) the Disease Progression Explorer as
a medical education tool for doctors and patients; and 2.) a Targeted Marketing
Information Service reaching patients diagnosed as susceptible to disease from
MSS prognostic tests. The Company shall not engage in any other business unless
approved by the Members.
2.4 Term. The Company shall continue in existence until August 31, 2000,
unless sooner dissolved as provided by this Agreement or the Act.
2.5 Resident Agent/Name and Address. The name of the Company's resident
agent in the state of Delaware is Incorporating Services, Ltd., and the address
of the Company's resident agent in the state of Delaware is 15 East North
Street, Dover, Delaware 19901.
2.6 Principal Place of Business. The Company's principal place of
business shall be located at 214 Carnegie Center, Princeton, NJ 08540, or at any
other place within the state of New Jersey upon which the Members agree.
2.7 Members. The name, present mailing address, taxpayer identification
number, and Percentage of each Member are set forth on Exhibit "B".
ARTICLE III
MEMBERS; CAPITAL; CAPITAL ACCOUNTS
3.1. Initial Contributions. Upon the execution of this Agreement, the
Members shall make the following contributions to the Company:
3.1.1 NCI will contribute [ * ] as its initial contribution.
3.1.2 MSS will contribute [ * ] as its initial contribution.
3.2 No Additional Contributions. The intent of the Members is to hold
capital contributions to a minimum, relying on up front Client payments to
generate the majority or all necessary working capital. No Member shall be
required to contribute any additional capital to the
5
<PAGE> 9
Company, unless agreed upon in writing by all Members of the Company, and then,
such additional capital contributions, if any, shall be made by the Members in
proportion to their Percentages.
3.3 No Personal Liability. No Member shall have personal liability for
any obligation of the Company except as expressly provided by law.
3.4 No Interest on Contributions. Members shall not be paid interest
with respect to Contributions unless otherwise agreed in writing by the Members.
3.5 Return of Contributions. Except as otherwise provided in this
Agreement, Members shall not have the right to receive the return of any
Contribution or withdraw capital from the Company, except upon the dissolution
of the Company.
3.6 Form of Return of Capital. If a Member is entitled to receive the
return of a Contribution, upon unanimous approval of the Members the Company may
distribute, in lieu of money, property having a value equal to the amount of
money distributable to such Person.
3.7 Capital Accounts. A separate Capital Account shall be maintained for
each Member.
ARTICLE IV
PROFIT, LOSS, AND DISTRIBUTIONS
4.1 Cash Flow. Cash Flow for each taxable year of the Company shall be
distributed to the Members in such amounts and at such times as the Members
shall agree upon, except as otherwise required by this section. All such
distributions shall be made to the Members at the same time or times in
proportion to their Percentage. For each taxable year of the Company, to the
extent that sufficient Cash Flow is available, a distribution sufficient to
satisfy the tax consequence to each Members resulting from its Interest in the
Company shall be distributed no later than seventy-five (75) days after the end
of the taxable year.
4.2 Allocation of Profit or Loss. After giving effect to the special
allocations set forth in Section 4.3, for any taxable year of the Company,
Profit and Loss shall be allocated to the Members in proportion to their
Percentages. If Losses are reallocated under Section 4.3.1., subsequent
allocations of Profit and Loss shall be made so that, to the extent possible,
the net amount allocated pursuant to this Section 4.2 equals the net amount that
would have been allocated to each Member if no reallocation had occurred under
Section 4.3.1.
4.3 Regulatory Allocations.
4.3.1 Minimum Gain Chargebacks and Qualified Income Offset. No
Member shall be allocated Losses or deductions if the allocation causes the
Member to have an Adjusted Capital Account Deficit; instead, such items shall be
allocated to the other Members. In order to comply with the "minimum gain
chargeback" requirements of the Regulations, and not withstanding any
6
<PAGE> 10
other provision of this Agreement to the contrary, in the event there is a net
decrease in a Member's share of Minimum Gain and/or Member nonrecourse debt
Minimum Gain as provided in Regulation Section 1.704-2(i)(2) (determined by
substituting "Member" for "partner") during a Company taxable year, such Member
shall be allocated items of income and gain for that year (and if necessary,
other years) before any other allocation is made. It is the intent of the
parties hereto that any allocation pursuant to this Paragraph 4.3.1 shall
constitute a "minimum gain chargeback" and a "qualified income offset" under the
Regulations and the Company may conform the provisions of this Paragraph 4.3.1
to the requirements for a minimum gain chargeback and a qualified income offset.
4.3.2 Contributed Property and Book-Ups. In accordance with the
Code and the Regulations, income, gain, loss, and deduction with respect to any
property contributed (or deemed contributed) to the Company shall, solely for
tax purposes, be allocated among the Members so as to take account any variation
between the adjusted basis of the property to the Company for federal income tax
purposes and its fair market value at the date of Contribution (or deemed
Contribution). The Company will use the method for allocating such items as the
Members may agree.
4.3.3. Nonrecourse Deductions. Nonrecourse Deductions for a
taxable year or other period shall be specially allocated among the Members in
proportion to their Percentages.
4.3.4 Member Loan Nonrecourse Deductions. Any Member Loan
Nonrecourse Deductions for any taxable year or other period shall be specially
allocated to the Member who bears the risk of loss with respect to the loan to
which the Member Loan Nonrecourse Deductions are attributable in accordance with
Regulation 1.704-2(i).
4.3.5 Unrealized Receivables. If a Member's share of Profits or
capital is reduced (provided the reduction does not result in a complete
termination of the Member's Interest), the Member's share of the Company's
"unrealized receivables" and "substantially appreciated inventory" (within the
meaning of Section 751 of the Code) shall not be reduced, so that,
notwithstanding any other provision of this Agreement to the contrary, that
portion of the Profit otherwise allocable upon a liquidation or dissolution of
the Company pursuant to Section 4.4 hereof which is taxable as ordinary income
(recaptured) for federal income tax purposes shall, to the extent possible
without increasing the total gain to the Company or to any Member, be specially
allocated among the Members in proportion to the deductions (or basis reductions
treated as deductions) giving rise to such recapture.
4.3.6 Withholding. All amounts required to be withheld pursuant to
Section 1446 of the Code or any other provision of federal, state, or local tax
law shall be treated as amounts actually distributed to the affected Members for
all purposes under this Agreement.
4.3.7 Intent of Allocations. The tax allocation provisions of this
Agreement are intended to produce final Capital Account balances of the Members
that will permit liquidating distributions that are made in accordance with such
final Capital Account balances under Section 4.4.1 to be equal to the
distributions that would occur if such distributions were made to the Members in
proportion to their Percentages.
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<PAGE> 11
4.4 Liquidation and Dissolution.
4.4.1 Upon liquidation of the Company, the assets of the Company
shall be distributed to the Members in accordance with their positive balances
in their respective Capital Accounts, after giving effect to all Contributions,
distributions, and allocations for all periods.
4.4.2 No Member shall be obligated to restore a Negative Capital
Account.
4.4.3 Any remaining assets of the Company after giving effect to
Section 4.4.1 shall be distributed to the Members in proportion to their
Percentages.
4.5 General.
4.5.1 Except as otherwise provided in this Agreement, the timing
and amount of all distributions shall be determined by the Members.
4.5.2 If any assets of the Company are distributed in kind to the
Members, those assets shall be valued on the basis of their fair market value,
and any Member entitled to any interest in those assets shall receive that
interest as a tenant-in-common with all other Members so entitled. Unless the
Members otherwise agree, the fair market value of the assets shall be determined
by an independent appraiser who shall be selected by the Members. The Profit or
Loss for each unsold asset shall be determined as if the asset had been sold at
its fair market value, and the Profit or Loss shall be allocated as provided in
Section 4.2 and shall be properly credited or charged to the Capital Accounts of
the Members prior to the distribution of the assets in liquidation pursuant to
Section 4.4.
4.5.3 All Profit and Loss shall be allocated, and all
distributions shall be made, to the Persons shown on the records of the Company
to have been Members as of the last day of the taxable year for which the
allocation or distribution is to be made. Notwithstanding the foregoing, unless
the Company's taxable year is separated into segments, if there is a Transfer or
an Involuntary Withdrawal during the taxable year, the Profit and Loss shall be
allocated between the original Member and the successor on the basis of the
number of days each was a Member during the taxable year; provided, however, the
Company's taxable year shall be segregated into two or more segments in order to
account for Profit, Loss or proceeds attributable to a sale, disposition or
financing of assets of the Company.
ARTICLE V
MANAGEMENT: RIGHTS, POWERS, DUTIES AND PERMITTED EXPENSES
5.1 Meetings of and Voting by Members.
5.1.1 A meeting of the Members may be called at any time by any
Member. Meetings of Members may be held at the Company's principal place of
business or at any other place designated by the Person or Persons calling the
meeting provided the Members mutually consent. Not less than ten (10) nor more
than sixty (60) days before each meeting, the Person or
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<PAGE> 12
Persons calling the meeting shall give written notice of the meeting to each
Member entitled to Vote at the meeting. The notice shall state the time, place,
and purpose of the meeting. Notwithstanding the foregoing provisions, each
Member who is entitled to notice may waive notice, either before or after the
meeting, by executing a waiver of such notice, or by appearing at and
participating, in person or by proxy, in the meeting. At a meeting of the
Members, the presence in person or by proxy of Members holding Percentages which
aggregate one-hundred percent (100%) constitutes a quorum. A Member may vote
either in person or by written proxy signed by the Member or by the Member's
duly authorized attorney in fact.
5.1.2 Except as otherwise provided in this Agreement, the
unanimous affirmative Vote of all Members present at the meeting in person and
by proxy shall be required to approve any matter coming before the Members.
5.1.3 Unless approved by the Members, no Member shall be entitled
to compensation for services performed for the Company. However, upon
substantiation of the amount and purpose thereof, the Members shall be entitled
to reimbursement for expenses reasonably incurred, and advances of funds to be
expended, in furtherance of the business of the Company, as described in Section
5.9.
5.2 Board of Directors.
5.2.1 To facilitate the meeting and voting process, the Company
shall establish a Board of Directors (the "Board") and the Members shall each
designate one authorized agent to sit on the Board (individually, the "Director"
and collectively, the "Directors"). The Director shall be authorized to appear
at member meetings and vote on behalf of the Member as an authorized agent of
the Member. The Board shall oversee the operations of the Company. The Board
shall meet regularly, at times and places agreed upon by the Directors, to
discuss and guide the course of the Company's activities.
5.2.2 Each Member shall have the right to designate and remove,
with or without cause, its Director.
5.2.3 The Members have designated the following individuals to
serve as the initial Directors as of the date of the commencement of the term of
the Company: Mr. Paul J. White (designated by MSS) and Mr. Thomas A. Moore
(designated by NCI).
5.2.4 Unless approved by the Members, no Director shall be
entitled to compensation for services performed for the Company. However, upon
substantiation of the amount and purpose thereof, the Director shall be entitled
to reimbursement for expenses reasonably incurred, and advances of funds to be
expended, in furtherance of the business of the Company, as described in Section
5.9.
5.2.5 Except as otherwise provided in this Agreement, the
unanimous affirmative vote of all Directors present at the meeting in person and
by proxy shall be required to approve any matter coming before the Directors.
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5.3 Action by Unanimous Written Consent. In lieu of holding a meeting,
the Members and/or the Directors may take action by unanimous written consents
specifying the action to be taken, which consents must be executed and delivered
to the Company by all the Members.
5.4 Duties of Parties.
5.4.1 It is acknowledged that the Members and their respective
Affiliates are, among other things, in the business of providing services that
are similar to and may be competitive with the business of the Company. The
Members agree that, during the term of the Company and thereafter, each Member
and its Affiliates may continue to engage in such business activities and
solicit and deal with Clients and prospective Clients of the Company and in
other business activities and ventures of every nature, independently or with
others, and neither the Company nor the other Members shall have any right or
interest in such activities and ventures or in the resulting income or profits.
5.4.2 (a) Notwithstanding anything to the contrary in this
Agreement or any exhibit attached hereto, during the term of the
Company, NCI agrees that it will not, directly or indirectly engage in,
or have any interest in any person, firm, corporation or business
(whether as an employee, officer, director, agent, security holder,
creditor, consultant, contractor or otherwise) that engages in any
activity in any county or counties in any area throughout the world,
which is the same as, similar to, or competitive in any manner with the
software licensed to Company by MSS in any such area as of the effective
date of this Agreement, for so long as the Company or any of its
successors shall engage in any of such activities in any such area. The
intent of this section is not to limit NCI's ability to provide medical
education programs consistent with its normal course of business, but to
restrict them from selling competitive software. Notwithstanding the
foregoing, any competitive Targeted Marketing Information Service
contemplated by NCI with respect to disease areas with which MSS is
apparently not involved shall be reviewed with MSS and may be canceled
at their request if a similar product is under development by MSS for
marketing by the Company within two years of the request.
Notwithstanding anything to the contrary hereinabove, nothing contained
herein shall prevent NCI and its Affiliates from owning less than five
percent (5%) of the capital stock of a corporation the common stock of
which is publicly traded on a national securities exchange or through
NASDAQ.
(b) The parties intend that the covenant contained in
subparagraph 5.4.2(a) shall be construed as a series of separate
covenants, one for each area (whether a country, state, county or other
political subdivision) referred to in this section. Except for
geographic coverage, each such separate covenant shall be deemed
identical in terms to the covenant contained in subparagraph 5.4.2(a).
If in any judicial proceeding a court shall refuse to enforce any of the
separate covenants deemed included in subparagraph 5.4.2(a), then such
unenforceable covenant shall be deemed eliminated from this Agreement to
the extent necessary to permit the remaining separate covenants to be
enforced.
5.4.3 Except as otherwise expressly provided in Article VI,
Members have the right to maintain, expand, or diversify their own other
investment interests and activities and to
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receive and enjoy profits or compensation therefrom. Each Member waives any
rights the Member might otherwise have to share or participate in such other
interests or activities of any other Member or the Member's Affiliates.
5.5 Indemnification of Members.
5.5.1 A Member shall not be liable, responsible, or accountable,
in damages or otherwise, to any other Member or to the Company for any act
performed by the Member with respect to Company matters, and within the standard
of care specified in Section 5.4.3(b).
5.5.2 The Company shall indemnify each Member for any act
performed by the Member with respect to Company matters, unless such act
constitutes grossly negligent or reckless conduct, intentional misconduct, or a
knowing violation of law.
5.5.3 MSS represents and warrants to Company that (a) to the best
of its knowledge, it is the sole owner of title to the Disease Progression
Explorer and all related patents, trademarks, copyrights and proprietary rights
therein, including, but not limited to, computer software and (b) as of the
effective date of this Agreement, MSS has not received any communications or
claims alleging that the Disease Progression Explorer violates the rights of any
person or entity. Subject to the limitations of liability set forth in Section
5.6 below, MSS agrees to indemnify and hold Company harmless from and against
any and all loss, liability, damage and expense (including, but not limited to,
reasonable attorneys' fees and expenses incurred by Company in establishing
liability under, or the enforcing of, this indemnity) arising out of or
resulting from a breach or alleged breach of the foregoing representation and
warranty.
5.5.4 Subject to the limitations of liability set forth in Section
5.6 below, MSS agrees to indemnify and hold the Company harmless from and
against any and all loss, liability, damage and expense (including, but not
limited to, reasonable attorneys' fees and expenses incurred by the Company in
establishing liability under, or the enforcing of, this indemnity) arising out
of or resulting from a claim that the Disease Progression Explorer or any
version thereof as supplied by MSS infringes a patent, copyright, trade secret
or other intellectual property right of a third party, provided that the Company
gives MSS prompt written notice of any such claim and allows MSS to direct the
defense and settlement of the claim. Notwithstanding the foregoing, MSS will
have no liability for any infringement claim of any kind: (i) to the extent it
is based on modification of the Disease Progression Explorer or any version
thereof by a party other than MSS, with or without authorization, or combination
of the same with hardware or software not supplied by MSS, if the claim would
have been avoided by the use of the Disease Progression Explorer or the version
thereof apart from such combination or would have been avoided if the same had
not been modified or had been combined with other hardware or software; (ii) to
the extent it results from failure of the Company to use updated or modified
software or hardware provided by MSS for avoiding infringement; or (iii) to the
extent it results from compliance by MSS with designs, plans or specifications
furnished by or on behalf of a client of the Company. THE PROVISIONS OF THIS
SECTION 5.5.4 SET FORTH THE ENTIRE LIABILITY OF MSS AND THE SOLE REMEDIES OF THE
COMPANY WITH RESPECT TO INFRINGEMENT AND ALLEGATIONS OF INFRINGEMENT OF
INTELLECTUAL
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PROPERTY RIGHTS OR OTHER PROPRIETARY RIGHTS OF ANY KIND OF ANY THIRD
PARTY.
5.5.5 Except as provided elsewhere in this Agreement, the Company
shall indemnify and hold each Member harmless from and against any and all loss,
liability, damage and expense (including, but not limited to, reasonable
attorneys' fees and expenses incurred by such Member in establishing liability
under, or the enforcing of, this indemnity) arising out of or resulting from any
acts or omissions of the Company in connection with its activities under this
Agreement or with the marketing, promotion, sale, licensing or other
distribution of the Disease Progression Explorer or any version thereof, or of
the Targeted Marketing Information Service.
5.6 Limitations of Liability
5.6.1 Disclaimer of Certain Types of Liability. REGARDLESS OF
WHETHER ANY REMEDY SET FORTH HEREIN FAILS OF ITS ESSENTIAL PURPOSE OR OTHERWISE,
IN NO EVENT SHALL MSS BE LIABLE TO NCI OR THE COMPANY OR ANY OTHER PARTY,
WHETHER ARISING UNDER CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY,
BREACH OF WARRANTY, INDEMNITY OR OTHERWISE, FOR LOSS OF ANTICIPATED PROFITS,
COST OF MONEY, LOSS OF USE OF CAPITAL OR REVENUE, OR FOR ANY SPECIAL,
INCIDENTAL, INDIRECT OR CONSEQUENTIAL LOSS OR DAMAGES OF ANY KIND, EVEN IF MSS
HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGES.
5.6.2 Limitations on Amount of Liability.
(a) WITH RESPECT TO LIABILITY ARISING OUT OF A
PARTICULAR CLIENT VERSION OF THE DISEASE PROGRESSION EXPLORER SUPPLIED BY MSS,
IN NO EVENT SHALL MSS' TOTAL CUMULATIVE LIABILITY TO NCI, THE COMPANY AND ANY
OTHER PARTY FOR SUCH CLIENT VERSION UNDER THIS AGREEMENT AND UNDER THE LICENSE
AGREEMENT EXCEED THE SUM OF THE TOTAL DEVELOPMENT COSTS REIMBURSED TO MSS FOR
SUCH CLIENT VERSION UNDER THE LICENSE AGREEMENT PLUS ANY PROFITS DISTRIBUTED TO
MSS BY THE COMPANY ARISING OUT OF THE CLIENT CONTRACT PURSUANT TO WHICH SUCH
CLIENT VERSION WAS DEVELOPED.
(b) IN NO EVENT SHALL MSS' TOTAL CUMULATIVE LIABILITY
TO THE COMPANY AND ANY OTHER PARTY UNDER THIS AGREEMENT AND UNDER THE LICENSE
AGREEMENT, FROM ALL CAUSES OF ACTION OF ANY KIND, WHETHER ARISING UNDER
CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, BREACH OF WARRANTY,
INDEMNITY OR OTHERWISE, EXCEED THE SUM OF THE TOTAL PROFITS DISTRIBUTED TO MSS
BY THE COMPANY.
5.7 Day-to-Day Management
5.7.1 The day-to-day operations of the Company shall be managed by
one manager (the "Manager"). Except as specifically provided otherwise in this
Agreement, the Manager shall have the right to act for and bind the Company in
the ordinary course of its
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business. Subject to Section 5.9, the signature of the Manager shall be
sufficient to bind the Company for any transaction conducted or occurring in the
ordinary course of the Company's business. The Manager shall keep the Directors
advised of the ongoing activities and developments of the Company and shall
provide the Member with copies of all contracts and commitments entered into by
the Company. The Directors hereby appoint Glenn Griffith as the initial Manager.
5.7.2 The Manager may be replaced or removed at any time (with or
without cause) by written agreement of the Members. The Members may also
appoint, and replace and remove (with or without cause), such other officers and
employees of the Company as the Members shall agree to in writing. Officers
shall have such authority and responsibilities as shall be assigned to them by
the Members. The Manager and the other officers and employees of the Company may
receive such compensation from the Company as the Members shall determine.
5.8 Certain Duties. The Manager shall be responsible for performing, or
causing to be performed, the following duties:
5.8.1 at least annually, or at such other times as the Members
shall determine, the Manager shall prepare budgets of the Company for review by
and the written approval of the Directors;
5.8.2 the Manager shall cause to be paid, on behalf of the Company
and solely from its funds, all payments required to be made by the Company in
connection with the business and operations of the Company;
5.8.3 at the reasonable expense of the Company, the Manager shall
cause to be prepared and filed all Company tax returns and reports required to
be filed with governmental authorities, after review and approval by the
Directors;
5.8.4 at the reasonable expense of the Company, as soon as
practicable after the end of each fiscal year of the Company, but not more than
75 days after the end of each such fiscal year, the Manager shall cause to be
provided to each Member:
(a) all information necessary for the preparation by
each Member of its federal income tax returns; and
(b) an audited financial statement of the Company for
such fiscal year, prepared by the Company's then serving
accountants, containing a balance sheet and statements of income
and cash flows; and
5.8.5 at the reasonable expense of the Company, as soon as
practicable after the end of each month, but not more than 15 days after the end
of each such month, the Manager shall cause to be provided to each Member an
unaudited financial statement of the Company for such month, prepared by
accounting personnel, containing a balance sheet and statements of income and
cash flows.
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5.9 Certain Company Actions. Notwithstanding the provisions of Section
5.7.1, except as provided in or contemplated by the budget of the Company
attached to this Agreement as Exhibit "C" or in any revised or subsequent budget
approved in writing by the Members (in each case, an "Approved Budget"), the
following actions shall not be deemed to be within the scope of the ordinary
day-to-day business and operations of the Company and shall require the
unanimous written approval of one-hundred percent (100%) of the Members:
5.9.1 the sale of all or substantially all of the Company's assets
or of any asset with a selling price of more than $2,500;
5.9.2 the borrowing of money by the Company, other than accounts
payable of the Company incurred in the normal course of the Company's business;
5.9.3 the lending of Company funds to any person or entity, other
than accounts receivable arising out of the normal course of the Company's
business;
5.9.4 the purchase or lease of any real property;
5.9.5 the purchase of any personal property costing in excess of
$2,500 as to any item or group of related items or the lease of any item or
group of related items of personal property requiring annual lease payments in
excess of $5,000 or with a term in excess of one year;
5.9.6 the institution or settlement of any claim or litigation;
5.9.7 any merger, business combination, joint venture or
acquisition or the entry into any line of business not contemplated by Section
2.3;
5.9.8 any commitment of funds in excess of $5,000 for any item or
matter or any group of related items or matters;
5.9.9 subject to Section 6.2, any commitment for the Company to
provide services to a Client, or any commitment by the Company to obtain
services, in excess of $150,000;
5.9.10 the grant or acquisition of any license, franchise or
similar right to or from (as the case may be) any Person or entity;
5.9.11 the pledge, mortgage or encumbrance of any asset or
property of the Company;
5.9.12 the entry into any contract or commitment with any
Affiliate of a Member;
5.9.13 the selection and engagement of legal counsel;
5.9.14 a decision to continue the business of the Company after
dissolution of the Company;
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5.9.15 approval of the transfer of a Membership Interest and
admission of an assignee as a Member; and
5.9.16 an amendment to the Certificate of Formation or this
Agreement.
5.10 Permitted Expenses. Upon substantiation of the amount and purpose
thereof, the Company will reimburse the Members and Directors for certain
permitted expenses in accordance with the criteria listed on Exhibit "D".
Expenses meeting the aforementioned criteria shall be paid without the Members'
consent.
ARTICLE VI
RESPONSIBILITIES OF MEMBERS
6.1 Contracting Procedures and Services.
6.1.1 Contracts with Clients. It is expected that:
(a) the Company will provide its services (collectively,
"Client Services") to Clients of the Company ("Clients")
principally pursuant to written contracts ("Client Contracts")
with Clients; and
(b) for the foreseeable future, a substantial portion of
Client Services will be performed for Clients by MSS and NCI
personnel, on behalf of the Company pursuant to contracts between
MSS, NCI and the Company, including the services of the Manager.
6.1.2 Member Services. MSS will enter into an exclusive license
with the Company to distribute the Disease Progression Explorer in the form of
the license attached hereto as Exhibit "B" (the "License Agreement"). To the
extent that any of the terms, conditions, provisions and covenants in this
Agreement conflict with the terms of the License Agreement, the License
Agreement shall control and prevail.
6.2 Certain Agreements of the Members.
6.2.1 Each Member, and its appropriate officers and employees,
shall devote to the business of the Company such time and attention, and
perform such services, as it reasonably determines to be necessary to
fulfill its responsibilities under this Agreement. The Members shall
cooperate in all aspects of the Company's business. The actual division
of labor between the Members will be determined by the needs of the
Company and particular Clients. The Company, with the assistance of each
of the Members (as appropriate), will develop and price contract
proposals to prospective Clients of the Company.
6.2.2 NCI shall be primarily (but not exclusively) responsible for
supporting the Company's sales, marketing and training, including,
specifically:
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(a) sales and marketing of all products or services of
fered by the Company;
(b) preparation of collateral material to support selling
and marketing efforts for all products and services offered by the
Company;
(c) market research as deemed necessary;
(d) Client Services, including Client evaluation, needs,
billing and collection;
(e) Client relations and project management, including
participating jointly with MSS in Client projects; and
(f) day-to-day business operations as necessary.
6.2.3 MSS shall be primarily (but not exclusively) responsible for
supporting contract fulfillment with the Company's Clients, including
specifically:
(a) the creation of Client versions of the Disease
Progression Explorers for Clients of the Company;
(b) the creation of a demonstration version of the Disease
Progression Explorer to be used by NCI in the marketing and sale
of the Disease Progression Explorer;
(c) training of Clients in the use of Client versions
pursuant to the Client Contracts;
(d) the facilitation of the submission of business reply
solicitations to patients who have utilized MSS' genetic
prognostics tests (assuming patient consent and the absence of the
violation of any applicable laws) to further the development of
the Company's Targeted Marketing Information Service; and
(e) assisting NCI with the project management of Client
versions of the Disease Progression Explorer or other medical
education software tools developed for the Clients of the Company.
6.3 Confidentiality. Each Member agrees that it and its Affiliates will
not, at any time while it is a Member (except in furtherance of the Company's
business), directly or indirectly use, disclose or make available to anyone any
confidential information concerning the Company or the other Member. Such
confidential information includes (but is not limited to) computer programs
(source and object codes), systems and technology; Client and prospective Client
names, leads and information; information supplied by Clients to the Company in
confidence; prices charged or proposed to be charged to Clients; cost
information; supplier information; employee names, compensation, benefits and
related data; engineering and technical data and equipment specifications;
Client service requirements; information regarding equipment and facilities; the
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Company's business policies and plans; and the Company's banking, financial, tax
and accounting information. Confidential information does not include (a)
information known to a Member or an Affiliate prior to the date of this
Agreement, (b) information already known to, or readily ascertainable by, the
public or which becomes known to the public other than as a result of disclosure
by such Member, or (c) information required to be disclosed by law or judicial
process.
ARTICLE VII
TRANSFER OF INTERESTS
7.1 Transfers. Except with the consent of the other Members, no Member
may Transfer all, or any portion of, or any interest or rights in, the Interest
owned by the Member. Each Member hereby acknowledges the reasonableness of this
prohibition in view of the purposes of the Company and the relationship of the
Members.
7.1.1 The attempted Transfer of any portion or all of an Interest
in violation of the prohibition contained in this Section 7.1 shall be deemed
invalid, null and void, and of no force or effect.
7.1.2 A transferee by operation of law shall not be entitled to
any vote or role in the management of the Company. Such a transferee by
operation of law shall succeed only to the economic interest of the transferring
Member for purposes of distributing cash and allocating Profits or Loss.
7.1.3 No new Member shall be admitted to the Company without the
consent of all Members.
ARTICLE VIII
DISSOLUTION, LIQUIDATION, AND TERMINATION OF THE COMPANY
8.1 Events of Dissolution. The Company shall be dissolved upon the
happening of the first to occur of an event specified in Section 18-801 of the
Act or any of the following events:
8.1.1 when the period fixed for its duration in Section 2.4 has
expired, provided however that the parties may mutually agree to extend this
period;
8.1.2 upon the unanimous approval of all Members;
8.1.3 subject to the provisions of Section 8.2, upon a material
breach of the obligations set forth in this Agreement, including failure to meet
the following agreed upon performance goals (the "Performance Goals"):
a) NCI agrees to seek to attain the following Performance
Goals during the first two years of the Company's existence:
(i) good faith reasonable efforts to market and
distribute a Targeted Marketing Information Service to
Clients;
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(ii) good faith reasonable efforts to market and
distribute the Disease Progression Explorer to Clients;
(iii) meeting the financial and managerial
responsibilities detailed in this Agreement;
(iv) maintaining strong communications with
Clients, consistent with the level needed to continue the
project;
(v) [ * ]
(vi) [ * ]
(vii) [ * ]
b) MSS agrees to seek to obtain the following Performance
Goals during the first two (2) years of the Company's existence:
(i) good faith reasonable efforts to fulfill the
terms of the License Agreement;
(ii) good faith reasonable efforts to fulfill the
terms of the Client Contracts approved by MSS; and
(iii) responsiveness within one business day, if
practicable, to NCI or Client needs for system support.
c) The Members agree to adjust the Performance Goals at
the end of two (2) years after the initial market test period by
mutual good faith negotiations taking into account the actual
number of Client version Disease Progression Explorers distributed
during the preceding two (2) year period as well the then existing
potential markets, and the potential market size based Targeted
Market Information Service. Such negotiations shall commence as
soon as practically possible after the close of such two (2) year
period, and the Members shall use their good faith efforts to
conclude such negotiations within one (1) month. In the event that
the Members are unable to agree in good faith on new Performance
Goals, then
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said Performance Goals shall remain at their previous amount until
the expiration of the Agreement term.
8.2 Noticing Procedure for Failure to Meet Performance Goals. Failure to
materially meet the obligations set forth in this Agreement or the Performance
Goals shall be grounds for the complaining member (the "Noticing Member") to
demand remedy in writing (the "Written Demand for Remedy") to the non-performing
Member (the "Non-performing Member"). The Written Demand for Remedy shall be in
reasonable detail. If the remedies are not made by the Non-performing Member
within 30 days of the date of receipt by the Non-performing member of the
Written Demand for Remedy, the Noticing Member may withdraw, as detailed below.
8.3 Withdrawal. A Noticing Member may withdraw from the Company prior to
the expiration of the term of the Company in the event of the failure of a
Non-performing Member to cure a noticed failure to materially meet its
obligations set forth in this Agreement or to meet a Performance Goal within the
allotted time prescribed in Section 8.2. A Noticing Member that wishes to
withdraw from the Company (a "Withdrawing Member") shall give at least 90 days'
notice (a "Notice of Withdrawal") of its intent to withdraw to the
Non-performing Member, including the effective date of the proposed withdrawal.
Unless the Members otherwise agree in writing, following the giving of a Notice
of Withdrawal, the Company shall be dissolved and liquidated so that the
liquidation is completed by the date (not less than 90 days after the date of
the Notice of Withdrawal unless otherwise agreed in writing by the Members)
specified in the Notice of Withdrawal or as soon as may be practicable
thereafter. If a Member shall give a Notice of Withdrawal and the other Member
wishes to continue the business of the Company, the Members shall negotiate in
good faith the purchase of the Interest of the Withdrawing Member by the
remaining Member on terms and conditions that are satisfactory to both Members.
In the event of a withdrawal by either Member, the License Agreement shall also
terminate on withdrawal. The provisions of this Section 8.3 shall be the sole
remedy of a Noticing Member for a breach of this Agreement by a Non-performing
Member, and no Non-performing Member shall be liable to the Noticing Member for
damages arising out of any such breach.
8.4 Procedure for Winding Up and Distribution. If the Company is
dissolved, the remaining Members shall wind up its affairs. On winding up of the
Company, the assets of the Company shall be distributed, first, to creditors of
the Company, including Members who are creditors, in satisfaction of the
liabilities of the Company, and then, to the Members in accordance with Section
4.4 of this Agreement. The withdrawal of a Member or the termination of the
Company shall not relieve a withdrawing Member of its obligation (if any) to the
Company or any Client made in connection with any Client Contract.
8.5 Filing of Certificate of Cancellation. Upon completion of winding up
the affairs of the Company, the Members shall promptly file the Certificate of
Cancellation with the Secretary of State. If there are no remaining Members,
such Certificate shall be filed by the last Person to be a Member; if there are
no remaining Members, or last Person to be a Member, the Certificate shall be
filed by the legal or personal representatives of the last Person to be a
Member.
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ARTICLE IX
BOOKS, RECORDS, ACCOUNTING, AND TAX ELECTIONS
9.1 Bank Accounts. All funds of the Company shall be deposited in a bank
account or accounts opened in the Company's name. The Members shall determine
the financial institution or institutions at which the accounts will be opened
and maintained, the types of accounts, and the Persons who will have authority
with respect to the accounts and the funds therein.
9.2 Maintenance of Books and Records.
9.2.1 The Manager shall keep or cause to be kept complete and
accurate books, records, and financial statements of the Company and supporting
documentation of transactions with respect to the conduct of the Company's
business. Such books, records, financial statements, and documents shall include
but not be limited to the following:
(a) a current list of the full name and last known
business or residence address of each Member, in alphabetical
order, with the Contribution and the share in Profits and Losses
of each Member specified in such list;
(b) the Certificate of Formation, including all
amendments; and any powers of attorney under which the Certificate
of Formation or amendments were executed;
(c) federal, state, and local income tax or information
returns and reports, if any, for the six most recent taxable
years;
(d) this Agreement and any amendments; and any powers of
attorney under which this Agreement or amendments were executed;
(e) financial statements for the six most recent years;
(f) internal books and records for the current and three
most recent years;
(g) a true copy of relevant records indicating the amount,
cost, and value of all property which the Company owns, claims,
possesses, or controls; and
(h) all interests and agreements to which the Company is a
party.
9.2.2 Such books, records, and financial statements of the Company
and supporting documentation shall be kept, maintained, and available at the
Company's office within the State of New Jersey.
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9.3 Right to Inspect Books and Records; Receive Information.
9.3.1 Upon the request of a Member the Company shall promptly
deliver to the requesting Member at the expense of the Company a copy of this
Agreement, as well as the information required to be maintained by the Company
under Section 9.2.1.
9.3.2 Each Member has the right upon request to do the following:
(a) to inspect and copy during normal business hours any
of the records required to be maintained by the Company under
Section 9.2.1 of this Agreement; and
(b) to obtain from the Company promptly after becoming
available, a copy of the Company's federal, state, and local
income tax or information returns for each year.
9.3.3 The Company shall send or shall cause to be sent to each
Member within 90 days after the end of each fiscal year of the Company: (i) such
information as is necessary to complete federal and state income tax or
information returns, and (ii) a copy of the Company's federal, state, and local
income tax or information returns for the fiscal year; provided, however, that
if the Company's independent public accountants determine that the Company then
lacks sufficient information to prepare such tax returns, the Company may
request an extension of the time to file such returns, if legally available for
such returns, and notify the Members of such determination.
9.4 Annual Accounting Period. The annual accounting period of the
Company shall end on the 31st of December each year.
9.5 Tax Matters Partner. NCI shall be the "Tax Matters Partner" for the
purposes of Code Section 6231. However, all actions taken by the Tax Matters
Partner shall be by mutual consent of the Members.
9.6 Accountants. Unless the Members shall otherwise agree, the
accountants for the Company shall be Kelly Massad LLP. In the event of the
termination of the services of Kelly Massad LLP as the accountants for the
Company, new accountants shall be selected by the unanimous consent of the
Members.
9.7 Accounting Method. The Company shall keep its accounting records in
accordance with generally accepted accounting principles. The Company shall
elect to be taxed as a partnership under the Internal Revenue Code of 1986, as
amended. The Company shall report its income for tax purposes on such basis as
the Members shall agree upon in consultation with the Company's Accountants.
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ARTICLE X
GENERAL PROVISIONS
10.1 Assurances. Each Member shall execute all certificates and other
documents and shall do all such filing, recording, publishing, and other acts as
the Members deem reasonably appropriate to comply with the requirements of law
for the formation and operation of the Company and to comply with any laws,
rules, and regulations relating to the acquisition, operation, or holding of the
property of the Company.
10.2 Notifications. Any notice, demand, consent, election, offer,
approval, request, or other communication (collectively a "notice") required or
permitted under this Agreement must be in writing and either delivered
personally or sent by certified or registered mail, postage prepaid, return
receipt requested or by recognized overnight courier service. A notice must be
addressed to a Member as follows:
If to NCI:
Nelson Communications Inc.
41 Madison Avenue
New York, NY 10010
Attn: Thomas A. Moore
If to MSS:
Medical Science Systems, Inc.
4400 MacArthur Boulevard, Suite 980
Newport Beach, CA 92660-2031
Attn: Paul J. White
If to Digisphere Inc.:
Digisphere Inc.
214 Carnegie Center
Princeton, NJ 08540
A notice to the Company must be addressed to the Company's principal office. All
notices shall be effective upon receipt. Any party may designate, by notice to
all of the others, substitute addresses or addressees for notices; and,
thereafter, notices are to be directed to those substitute addresses or
addressees.
10.3 Complete Agreement. This Agreement constitutes the complete and
exclusive statement of the agreement among the Members with respect to its
subject matter. It supersedes all prior written and oral statements among the
Members, including any prior representation, statement, condition, or warranty
with respect to its subject matter. Except as expressly provided otherwise
herein, this Agreement may not be amended without the written consent of all of
the Members.
10.4 Applicable Law. All questions concerning the construction,
validity, and interpretation of this Agreement and the performance of the
obligations imposed by this Agreement shall be governed by the internal law, not
the law of conflicts, of the State of Delaware.
22
<PAGE> 26
10.5 Section Titles. The headings herein are inserted as a matter of
convenience only and do not define, limit, or describe the scope of this
Agreement or the intent of the provisions hereof.
10.6 Binding Provisions. This Agreement is binding upon, and inures to
the benefit of, the parties hereto and their respective heirs, executors,
administrators, personal and legal representatives, successors, and permitted
assigns.
10.7 Terms. Common nouns and pronouns shall be deemed to refer to the
masculine, feminine, neuter, singular, and plural, as the identity of the Person
may in the context require.
10.8 Separability of Provisions. Each provision of this Agreement shall
be considered separable; and if, for any reason, any provision or provisions
herein are determined to be invalid and contrary to any existing or future law,
such invalidity shall not impair the operation of or affect those portions of
this Agreement which are valid.
10.9 Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, including telecopied counterparts, each of which shall be
deemed an original and all of which, when taken together, constitute one and the
same document. The signature of any party to any counterpart shall be deemed a
signature to, and may be appended to, any other counterpart.
10.10 Estoppel Certificate. Each Member shall, within ten (10) days
after written request by any Member, deliver to the requesting Person a
certificate stating, to the Member's knowledge, that: (a) this Agreement is in
full force and effect; (b) this Agreement has not been modified except by any
instrument or instruments identified in the certificate; and (c) there is no
default hereunder by the requesting Person, or if there is a default, the nature
and extent thereof.
10.11 Publicity and Reports. Each Member shall coordinate all publicity
relating to the transactions contemplated by this Agreement, and no party shall
issue any press release, publicity statement or other public notice relating to
this Agreement, or the transactions contemplated by this Agreement, without
obtaining the prior written consent of all Members except to the extent that a
particular action is required by applicable law. Consent shall not be
unreasonably withheld. Notwithstanding the foregoing, unless required by law, no
press release, publicity statement or other public notice shall be issued within
the first six (6) months of this Agreement.
10.12 Representations and Warranties. Each Member represents and
warrants to the other Member that:
(a) Such Member is a corporation duly organized, validly existing
and in good standing under the laws of its state or organization.
(b) All corporate action on the part of such Member necessary for
the authorization, execution and delivery of this Agreement and the performance
of its obligations under this Agreement has been taken, and this Agreement
constitutes a valid and legally binding obligation of such Member, enforceable
in accordance with its terms.
10.13 Creditors. The provisions of this Agreement shall not be for the
benefit of, or enforceable by, any creditor of the Company. The appointment of
any manager, officer or
23
<PAGE> 27
employee of the Company pursuant to this Agreement shall not give any contract
rights to such officer or employee.
10.14 Expenses. Each member shall pay its own expenses and the fees and
disbursements of its counsel and accountants in connection with the preparation
and negotiation of this Agreement.
IN WITNESS WHEREOF, the parties have executed, this Agreement as of the
date set forth above.
MEMBERS:
"MSS" "NCI"
Medical Science Systems, Inc., Nelson Communications Inc.,
a Texas corporation a Delaware corporation
By: By:
------------------------- -------------------------------------
Name: Paul J. White Name: Thomas A. Moore
Title: President/Chief Title: President/Chief Executive Officer
Executive Officer
Digisphere Inc.,
a Delaware corporation
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
24
<PAGE> 28
EXHIBIT "A"
LICENSE AGREEMENT
<PAGE> 29
EXHIBIT "B"
MEMBERS
<TABLE>
<CAPTION>
MEMBER PERCENTAGE TAX ID NO. ADDRESS
- ------ ---------- ---------- -------
<S> <C> <C> <C>
Medical Science Systems, Inc. [ * ] 94-3123681 4400 MacArthur, Ste. 980
Newport Beach, CA 92660
Nelson Communications Inc. [ * ] _________ 41 Madison Avenue, Ste. 27
New York, NY 10010
Attn: Thomas A. Moore
</TABLE>
<PAGE> 30
EXHIBIT "C"
BUDGET
(TO BE PROVIDED)
<PAGE> 31
EXHIBIT "D"
PERMITTED EXPENSE CRITERIA
1. Development costs paid pursuant to the License Agreement.
2. Maintenance fees to MSS.
3. Travel costs related to the creation of Client versions pursuant to
Client Contracts for MSS and NCI.
4. Prorata direct expense of Manager (salary and benefits in performing
services to Company).
<PAGE> 1
EXHIBIT 10.22
DISEASE PROGRESSION EXPLORER
DEVELOPMENT AND LICENSE AGREEMENT
This Disease Progression Explorer Development and License Agreement
(this "Agreement") is entered into and made effective as of this 1st day of
August, 1997 (the "Effective Date") by and between Medical Science Systems, Inc.
("MSS") and Digisphere, LLC ("Digisphere").
RECITALS
A. MSS and Nelson Communications, Inc. are members of Digisphere, which
was formed, among other things, to develop and market customized versions of a
computer program of MSS known as the "Disease Progression Explorer."
B. The parties desire that MSS develop such customized versions and
grant a license to Digisphere to make and license copies of such customized
versions to clients of Digisphere.
C. The parties desire to enter into this Agreement to set forth the
terms and conditions upon which MSS will develop customized versions of its
Disease Progression Explorer for clients of Digisphere, and will grant to
Digisphere a license to grant sublicenses to its clients to use customized
versions of the Disease Progression Explorer.
NOW, THEREFORE, in consideration of the foregoing premises and of the
terms and conditions of this Agreement, the parties agree as follows:
1. DEFINITIONS
1.1 "Client" means a client of Digisphere that has entered into a Client
Contract with Digisphere for the development and license of a Client Version.
1.2 "Client Contract" means a written agreement between a Client and
Digisphere, approved by MSS, containing the Specifications for a Client Version
of the Disease Progression Explorer to be developed by MSS, the Schedule upon
which such Client Version will be developed, and the terms and conditions upon
which such Client Version will be licensed to the Client.
1.3 "Client Version" means a customized version of the Disease
Progression Explorer, targeted toward a particular disease and associated
clinical data supplied by the Client, created by MSS for a Client pursuant to
the provisions of Section 2 below.
1.4 "Demonstration Version" means a demonstration version of the Disease
Progression Explorer developed by MSS that Digisphere may use under the terms
and conditions of this Agreement to demonstrate the capabilities and potential
benefits of the Disease Progression Explorer to potential Clients, including any
Enhancements thereto that MSS may make.
- ---------
* Confidential treatment has been requested with respect to portions of this
document. Omitted portions have been filed separately with the Securities and
Exchange Commission.
<PAGE> 2
1.5 "Disease Progression Explorer" means MSS' computer software system
that allows entry of data about a specific patient to project how a given
disease will progress, in terms of key clinical signs and/or symptoms, over a
specified period of time, including any Enhancements thereto that MSS may make.
The Disease Progression Explorer is further described in Exhibit A hereto.
1.6 "Effective Date" means the date identified in the first paragraph of
this Agreement.
1.7 "Enhancements" means modifications, improvements, and updates to the
Disease Progression Explorer and/or to a Client Version that enhance or improve
its functionality, capabilities, and/or ease of use.
1.8 "Error Correction" means a bug fix or other modification that
corrects a malfunction or defect in a Client Version that causes it not to
conform to its Specifications.
1.9 "Intellectual Property Rights" means all forms of intellectual
property rights and protections that may be obtained for, or may pertain to, the
Disease Progression Explorer, the Demonstration Version, and Client Versions,
including but not limited to:
(a) all right, title and interest in and to all patents and all
filed, pending or potential applications for patents, including any reissues,
reexaminations, divisions, continuations or continuations-in-part applications
throughout the world now or hereafter filed;
(b) all right, title and interest in and to all trade secrets,
and all trade secret rights and equivalent rights arising under the common law,
state law, federal law, treaties and laws of foreign countries;
(c) all right, title and interest in and to all copyrights and
other literary property or authors' rights, whether or not protected by
copyright, under common law, state law, federal law, treaties, and laws of
foreign countries; and
(d) all right, title and interest in and to all proprietary
indicia, trademarks, tradenames, symbols, logos and/or brand names under common
law, state law, federal law, treaties, and laws of foreign countries.
1.10 "Inventions" means any concepts, ideas, formulas, algorithms, know
how, technology, methods, processes, data, discoveries, plans, specifications,
techniques, user interfaces, trade secrets and other innovations embodied in or
related to the Disease Progression Explorer, the Demonstration Version and
Client Versions.
1.11 "LLC Agreement" means the Operating Agreement of Digisphere, LLC
dated August 1, 1997 between MSS and Nelson Communications, Inc.
Disease Progression Explorer Development and License Agreement Page 2
<PAGE> 3
1.12 "Maintenance Agreement" means a written agreement, approved by MSS,
between Digisphere and a Client, pursuant to which the Client will be entitled
to receive Error Corrections and/or Enhancements to the Client Version after the
Warranty Period.
1.13 "Marks" means all proprietary indicia, trademarks, tradenames,
symbols, logos and/or brand names adopted or used from time to time by MSS to
identify the Disease Progression Explorer and/or Client Versions, including but
not limited to "Disease Progression Explorer."
1.14 "Schedule" means, with respect to a particular Client Version, a
schedule contained in the corresponding Client Contract setting forth a
timeline, milestones and/or deliverables for the development of the Client
Version.
1.15 "Specifications" means, with respect to a particular Client
Version, the specifications set forth in the corresponding Client Contract to
which the Client Version to be developed by MSS will conform.
1.16 "Trademarks" means all right, title and interest under common law,
state law, federal law, treaties, and laws of foreign countries in and to all
proprietary indicia, trademarks, tradenames, symbols, logos and/or brand names
used on or in conjunction with the Disease Progression Explorer, the
Demonstration Version, and the Client Versions.
1.17 "Warranty Period" means the ninety (90) day period after first
delivery to a Client by Digisphere of a Client Version.
2. DEVELOPMENT AND TRAINING OBLIGATIONS
2.1 Delivery of Demonstration Version; Development of Enhancements. As
of the Effective Date, development of the Demonstration Version by MSS is
substantially complete. Promptly upon execution of this Agreement, MSS will
deliver an executable copy of the Demonstration Version to Digisphere. MSS may
from time to time in its discretion, but shall have no obligation to, create
Enhancements to the Disease Progression Explorer and the Demonstration Version
that MSS considers desirable or that Digisphere may suggest.
2.2 Development of Client Versions. MSS agrees to develop Client
Versions in accordance with the applicable Specifications and Schedules set
forth in the corresponding Client Contracts, subject to the following
conditions:
(a) Digisphere will consult with MSS to create the Specifications
and Schedule for each Client Version that a Client desires to have developed and
to sublicense from Digisphere pursuant to a Client Contract. Digisphere will not
enter into a Client Contract until it has received approval from MSS with
respect to the Specifications and Schedule contained therein, with respect to
any training obligations for the Client set forth therein, and with respect to
any sublicense rights to be granted to the Client with respect to the Client
Version to be developed
Disease Progression Explorer Development and License Agreement Page 3
<PAGE> 4
for the Client. As provided in Section 3.2 below, MSS reserves the right to
require Digisphere to use form sublicense provisions developed by MSS'
intellectual property counsel in granting such sublicenses to its Clients.
(b) The Client Contract will require that the Client provide the
following for the development and testing of the Client Version:
(i) The selected disease area of interest and the goals
and objectives for the development of the Client Version;
(ii) Data on the clinical progression of the disease over
time as it is affected by the various risk factors and patient attributes;
(iii) One or more experts to interpret the data on
clinical progression and to convert that data into disease progression profiles
of clinical symptoms over time, which must be done for each risk factor to be
considered, both independent and dependent factors; these experts must also
support the validation and verification of the system; and
(iv) One or more targeted end users of the Client Version
to support initial system design as well as interim and final system review.
2.3 Training by MSS. MSS will perform any Client training obligations
with respect to a Client Version to which MSS has agreed per the provisions of
Section 2.2(a) above.
2.4 Development of Additional Medical Educational Software Tools. The
parties recognize that it may be desirable in the future to have MSS develop and
license to Digisphere additional medical educational software tools other than
the Disease Progression Explorer. If the parties mutually agree to do so, the
terms and conditions upon which such development will take place, and the scope
and nature of Digisphere's license rights with respect thereto, shall be set
forth in one or more separate written agreements between the parties.
2.5 Reimbursement of Certain Costs. In accordance with the provisions of
the LLC Agreement, MSS shall be entitled to be reimbursed by Digisphere for its
actual, direct costs incurred in performing its obligations under this Section 2
with respect to Client Contracts, including salaries and benefits of employees
performing such obligations, costs of hardware and software purchased or
licensed for or on behalf of a Client, payments made to consultants or experts
assisting MSS in performing its obligations, and reasonable costs for travel,
lodging and meals incurred in the course of performing such obligations. Such
cost reimbursements shall be paid to MSS in accordance with the payment
procedures set forth in Section 6 below.
2.6 Source Code. All copies of the Demonstration Version and the Client
Versions will be supplied to Digisphere by MSS in executable form only. However,
should a Client of Digisphere require that the source code of a Client Version
be placed into escrow, MSS agrees to place such source code into a commercial
source code escrow subject to a written escrow agreement containing terms
governing the escrow which are acceptable to MSS, including but not limited to
the conditions under which the source code may be released from the escrow, the
Disease Progression Explorer Development and License Agreement Page 4
<PAGE> 5
scope of the license rights that the recipient of the source code will have to
use such source code, and the obligations of the recipient to protect the
confidentiality and MSS's rights in such source code. Digisphere and/or its
Clients will bear all costs of such escrow, including setup fees, annual
maintenance fees and other administrative fees charged by the escrow agent, and
direct costs incurred by MSS with respect to such escrow.
3. GRANT OF LICENSES
3.1 Grant With Respect to the Demonstration Version. Subject to the
terms and conditions of this Agreement, MSS grants to Digisphere a worldwide,
nontransferable license under MSS' Intellectual Property Rights other than the
Trademarks to use, copy, and distribute copies of the Demonstration Version
solely for the purpose of pursuing potential Clients. The foregoing license
shall be exclusive to Digisphere, subject to the rights reserved to MSS set
forth in Section 3.4 below. Digisphere has no right to modify the Demonstration
Version or create derivative works based thereon, or to license any other party
to do so.
3.2 Grant With Respect to Client Versions. Subject to the terms and
conditions of this Agreement, MSS grants to Digisphere, with respect to each
Client Version developed by MSS hereunder, a worldwide, nontransferable license
under MSS' Intellectual Property Rights other than the Trademarks to use, copy,
and distribute copies of such Client Version to its Client in accordance with
the applicable Client Contract, and to sublicense the Client to use and copy
such Client Version only as permitted in the applicable Client Contract. MSS
reserves the right to have its own intellectual property counsel develop or
modify from time to time form sublicense provisions and to require that
Digisphere use such provisions in granting sublicenses to its Clients. The
license set forth in this Section 3.2 shall be exclusive to Digisphere, subject
to the rights reserved to MSS set forth in Section 3.4 below. Digisphere has no
right to modify any Client Version or create derivative works based thereon, or
to sublicense any Client or other party to do so.
3.3 Grant With Respect to Trademarks. Subject to the terms and
conditions of this Agreement, MSS grants to Digisphere a worldwide,
nonexclusive, nontransferable license under MSS' Trademarks to use the Marks in
Digisphere's marketing and promoting of Client Versions and on copies of Client
Versions, provided that such use is in accordance with MSS' trademark usage
guidelines then in effect. Such use must reference the Marks as being owned by
MSS. Nothing in this Agreement grants Digisphere ownership or any rights in or
to use the Marks, except in accordance with this license. The rights granted to
Digisphere in this license will terminate upon any termination or expiration of
this Agreement. Upon such termination or expiration, Digisphere will no longer
make any use of any Marks. Digisphere has paid no consideration for the use of
MSS' Marks and Digisphere agrees that it will not at any time (i) claim any
interest in any of MSS' Marks; (ii) register, seek to register, or cause to be
registered any of MSS' Marks, other than in MSS' name and at MSS' specific
request; (iii) adopt and use any trademark that might be confusingly similar to
MSS' trade names, trademarks or logos; (iv) attach any trademark, logo or trade
designations other than the Marks to the Client Versions; or (v) affix any MSS
trademark, logo or trade name to products other than the appropriate Client
Versions. Digisphere will assist MSS, if requested and at MSS' expense, to
register MSS' Marks
Disease Progression Explorer Development and License Agreement Page 5
<PAGE> 6
in MSS' name anywhere in the world. MSS retains the right to use the Marks in
any way in connection with its own business.
3.4 Rights Reserved By MSS. Notwithstanding the grants of exclusivity
set forth in Sections 3.1 and 3.2 above, MSS shall have the right to develop its
own versions of the Disease Progression Explorer targeted toward specific
diseases and to distribute copies of the same, and of the Demonstration Version,
with or without charge, in conjunction with or in support of the sale or
marketing of MSS products. In addition, MSS retains the right to use, modify,
copy, and create derivative works based upon any Client Version solely for
internal purposes in conjunction with the discovery, development and
conmmercialization of MSS products.
3.5 No Other Rights. Except as expressly set forth in this Section 3, no
license or other right is granted herein by MSS, directly or by implication,
estoppel or otherwise, and no such license or other right will arise from the
consummation of this Agreement or of the LLC Agreement or from any acts,
statements or dealings leading to such consummation.
4. OWNERSHIP
MSS shall remain the sole and exclusive owner of the Disease Progression
Explorer, all Client Versions and Enhancements thereof, the Demonstration
Version, and all Inventions related to any of the foregoing, and of all
Intellectual Property Rights therein, subject to the license rights granted to
Digisphere hereunder. MSS shall have the sole right to pursue the securing,
registration, recordation and/or perfection of Intellectual Property Rights in
the Disease Progression Explorer, all Client Versions and Enhancements thereof,
the Demonstration Version, and all Inventions related to any of the foregoing.
5. LIMITED WARRANTY
5.1 Limited Warranty During the Warranty Period. With respect to each
Client Version, MSS warrants to Digisphere for the Warranty Period that the
Client Version will function in accordance with its applicable Specifications in
the corresponding Client Contract. Provided MSS is able to reproduce the error
on a computer at its own facilities, MSS will modify or replace, at no
additional charge to the Client, any Client Version to correct any error therein
reported to MSS during the Warranty Period which causes the Client Version not
to function in accordance with its applicable Specifications in the
corresponding Client Contract. In the event that MSS is unable after reasonable
efforts to correct any such error, MSS may at its option require Digisphere to
refund to the Client, and reimburse Digisphere for, any fees paid by the Client
for the Client Version that contains the error, less a reasonable rental charge
for the period during which the Client has had use of the Client Version, using
straight line depreciation assuming a useful life of the Client Version of three
(3) years. The foregoing remedies shall be Digisphere's and the Client's sole
and exclusive remedies for errors contained in and for the performance of the
Client Version. The limited warranty set forth in this Section 5.1 shall
automatically become null and void if any person other than MSS modifies the
Client Version in any way.
Disease Progression Explorer Development and License Agreement Page 6
<PAGE> 7
5.2 Supply of Error Corrections and Enhancements After the Warranty
Period. With respect to a particular Client Version, MSS shall supply Error
Corrections and Enhancements for such Client Version after expiration of the
Warranty Period only in accordance with a Maintenance Agreement, if any,
approved by MSS and entered into between the Client and Digisphere. MSS shall be
entitled to receive ninety percent (90%) of all fees paid by the Client under
such Maintenance Agreement, which shall be paid to MSS in accordance with the
payment procedures set forth in Section 6 below.
5.3 Disclaimer. EXCEPT AS EXPRESSLY SET FORTH IN THIS SECTION, MSS MAKES
NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, AND MSS EXPRESSLY
DISCLAIMS ANY AND ALL SUCH OTHER WARRANTIES, INCLUDING BUT NOT LIMITED TO ANY
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND
ANY WARRANTIES OF NON-INFRINGEMENT. MSS does not warrant that any Client Version
will be error free or that it will function without interruption.
6. PAYMENT PROVISIONS
Within fifteen (15) days after the close of each calendar month, MSS
shall supply to Digisphere a written report detailing all costs with respect to
such month that are reimbursable to MSS in accordance with the provisions of
Section 2.5 above. Within fifteen (15) days thereafter, Digisphere shall supply
to MSS a written report detailing all fees paid during such month under
Maintenance Agreements and a calculation of the amount of the same to which MSS
is entitled in accordance with the provisions of Section 5.2 above. Digisphere
shall deliver to MSS with each such report full payment in the amount of the
reimbursable costs to which MSS is entitled for such month and the portion of
fees paid under Maintenance Agreements to which MSS is entitled for such month.
7. TERM
Unless earlier terminated in accordance with the provisions of Section 8
below, this Agreement shall remain in effect for so long as the LLC Agreement is
in effect. This Agreement shall automatically terminate upon any termination of
the LLC Agreement.
8. TERMINATION
8.1 Termination Upon Notice of Breach. Either party may terminate this
Agreement upon the other party's failure to cure the breach of and comply with
any of the terms or conditions of this Agreement within thirty (30) days after
receipt of written notice of default concerning the same.
Disease Progression Explorer Development and License Agreement Page 7
<PAGE> 8
8.2 Termination by MSS. MSS may terminate this Agreement in the event
that (i) Digisphere fails to meet the revenue targets for Client Versions of the
Disease Progression Explorer set forth in the LLC Agreement or determined in
accordance with the procedures set forth in the LLC Agreement, subject to any
relevant cure periods contained therein, or (ii) Digisphere fails to exercise
the good faith efforts to market and promote Client Versions of the Disease
Progression Explorer as required by the LLC Agreement, subject to any relevant
cure periods contained therein.
8.3 Immediate Termination Upon Certain Events of Bankruptcy. Either
party may at its option terminate this Agreement immediately upon written notice
to the other party upon the occurrence of any of the following events:
(a) In the event that the other party makes an assignment for the
benefit of creditors; admits in writing its inability to pay its debts as they
become due; files a voluntary petition in bankruptcy; is adjudicated to be
bankrupt or insolvent; files a petition seeking for itself any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
arrangement under any present or future statute, law or regulation, or files an
answer or similar pleading admitting the material allegations of a petition
filed against it in any such proceeding; or consents to or acquiesces in the
appointment of, or has its business placed in the hands of, a trustee, receiver,
assignee, or liquidator of it or any substantial part of its business, assets or
properties, whether by voluntary act or otherwise; or
(b) In the event that either party ceases doing business as a
going concern, or it or its shareholders take any action in anticipation of or
furtherance of dissolution or liquidation.
8.4 Effect of Termination. The rights of termination set forth in this
Section 8 shall be in addition to any other remedy that the terminating party
may have at law or in equity. Upon termination of this Agreement, all license
rights granted to Digisphere hereunder shall automatically terminate, and
Digisphere shall, within ten (10) business days thereafter, at MSS' sole option,
either return to MSS all copies of the Disease Progression Explorer, all Client
Versions and Enhancements thereof, and the Demonstration Version within
Digisphere's possession or under its control, or certify to MSS through one of
Digisphere's officers that all copies of the foregoing within Digisphere's
possesstion or uncer its control have been destroyed. Termination of this
Agreement shall not affect the right of any Client to continue to utilize any
Client Version licensed and delivered to the Client prior to such termination,
so long as the Client's use of the same is in accordance with the applicable
Client Contract.
8.5 Survival. The provisions of Sections 4.1, 5.3, 8.4, 8.5, 9 and 10
shall survive the termination or expiration of this Agreement.
9. LIMITATIONS OF LIABILITY
REGARDLESS WHETHER ANY REMEDY SET FORTH HEREIN FAILS OF ITS ESSENTIAL
PURPOSE OR OTHERWISE, IN NO EVENT SHALL MSS BE LIABLE, WHETHER ARISING UNDER
CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT
Disease Progression Explorer Development and License Agreement Page 8
<PAGE> 9
LIABILITY, BREACH OF WARRANTY OR OTHERWISE, FOR LOSS OF ANTICIPATED PROFITS,
COST OF MONEY, LOSS OF USE OF CAPITAL OR REVENUE, OR FOR ANY SPECIAL,
INCIDENTAL, INDIRECT OR CONSEQUENTIAL LOSS OR DAMAGES OF ANY KIND, EVEN IF MSS
HAS BEEN ADVISED OF THE POSSIBILITY FO SUCH LOSS OR DAMAGES.
10. GENERAL
10.1 Applicable Law. All questions concerning the construction,
validity, and interpretation of this Agreement and the performance of the
obligations imposed by this Agreement shall be governed by the internal law, not
the law of conflicts, of the State of California.
10.2 Seperability of Provisions. Each provision of this Agreement shall
be considered separable; and if, for any reason, any provision or provisions
herein are determined to be invalid and contrary to any existing or future law,
such invalidity shall not impair the operation of or affect those portions of
this Agreement which are valid.
10.3 Notices. All notices required or permitted under this Agreement
will be in writing, will reference this Agreement and will be deemed given: (i)
when sent by confirmed facsimile; (ii) five (5) working days after having been
sent by registered or certified mail, return receipt requested, postage prepaid;
or (iii) one (1) working day after deposit with a commercial overnight carrier,
with written verification of receipt. All communications will be sent to the
addresses set forth below or to such other address as may be designated by a
party by giving written notice to the other party pursuant to this Section:
To MSS:
Paul J. White
President and CEO
Medical Science Systems, Inc.
4400 McArthur Blvd., Suite 980
Newport Beach, CA 92660
To Digisphere:
Digisphere
214 Carnegie Center
Princeton, NJ 08540
Attn: Thomas A. Moore, Director
Paul J. White, Director
10.4 Delays Beyond Control. Neither party will be liable to the other
party for any failure or delay in performance caused by reasons beyond such
party's reasonable control, and such failure or delay will not constitute a
material breach of this Agreement.
Disease Progression Explorer Development and License Agreement Page 9
<PAGE> 10
10.5 Assignment. Neither party may assign its rights or obligations
hereunder, by operation of law or otherwise, without express written consent of
the other party, which consent will not be unreasonably withheld. Any attempted
assignment without such consent shall be void. Subject to the foregoing, this
Agreement will benefit and bind the successors and assigns of the parties.
10.6 No Third Party Beneficiaries; No Agency. Except as expressly
provided herein to the contrary, no provision of this Agreement, express or
implied, is intended or will be construed to confer rights, remedies or other
benefits to any third party under or by reason of this Agreement. This Agreement
will not be construed as creating an agency, partnership or any other form of
legal association (other than as expressly set forth herein) between the
parties.
10.7 Complete Agreement. This Agreement and the LLC Agreement, including
all exhibits, constitutes the complete and exclusive statement of the agreement
with respect to the subject matter hereof. It supersedes all prior written and
oral statements other than the LLC Agreement, including any prior
representation, statement, condition, or warranty. This Agreement may not be
amended without the written consent of both of the parties.
10.8 Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original and all of
which, when taken together, constitute one and the same document. The signature
of any party to any counterpart shall be deemed a signature to, and may be
appended to, any other counterpart.
10.9 Section Titles. The headings herein are inserted as a matter of
convenience only and do not define, limit, or describe the scope of this
Agreement or the intent of the provisions hereof.
10.10 Terms. Common nouns and pronouns shall be deemed to refer to the
masculine, feminine, neuter, singular, and plural, as the identity of the person
may in the context require.
IN WITNESS WHEREOF, the parties have executed this Agreement through
their duly authorized representatives as set forth below:
MEDICAL SCIENCE SYSTEMS, INC. DIGISPHERE, LLC
By: By:
--------------------------- -----------------------------------
Thomas A. Moore, Director
Printed Name:
-----------------
Title: By:
------------------------ -----------------------------------
Paul J. White, Director
Disease Progression Explorer Development and License Agreement Page 10
<PAGE> 11
EXHIBIT A
DESCRIPTION OF DISEASE PROGRESSION EXPLORER
The Disease Progression Explorer is a computer software system that allows entry
of data about a specific patient to project how a given disease will progress,
in terms of key clinical signs and/or symptoms, over a specified period of time.
The tool can be used for a number of purposes, including 1) education of the
patient in terms of how the patient's risk factors affect progression of the
disease and how altering those risk factors can alter that progression, 2)
support of the practitioner in comparing how different therapeutic approaches
might affect disease progression in a particular patient, and 3) providing a
means for the payer to assess how a selected therapeutic regimen works on a
given type of patient.
MODULES
[ * ]
Disease Progression Explorer Development and License Agreement Page 11
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated September 26, 1997, accompanying the financial
statements of Medical Science Systems, Inc. contained in the Registration
Statement and Prospectus. We consent to the use of the aforementioned report in
the Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts."
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
October 29, 1997
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