UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 1999
Commission File Number: 333-37441
MEDICAL SCIENCE SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
TEXAS 94-3123681
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 N.E. LOOP 410, SUITE 820
SAN ANTONIO, TX 78216
(Address of principal executive offices)(Zip Code)
Issuer's Telephone Number: (210) 349-6400
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES (X) NO ( )
Title of Each Class Outstanding at May 10, 1999
- - ------------------- ----------------------------
Common stock, no par value 5,558,668
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
<PAGE>
================================================================================
MEDICAL SCIENCE SYSTEMS, INC.
Form 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C> <C> <C> <C>
Item 1. Condensed Consolidated Balance Sheets (Unaudited) at
March 31,1999 and December 31, 1998...............................2
Condensed Consolidated Statements of Operations (Unaudited) for the
three months ended March 31, 1999 and March 31, 1998..............3
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
three months ended March 31, 1999 and March 31, 1998..............4
Notes to Condensed Consolidated (Unaudited)
Financial Statements..............................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................12
Item 2. Changes in Securities...............................................12
Item 3. Default Upon Senior Securities......................................12
Item 4. Submission of Matters to a Vote of Security Holders.................12
Item 5. Other Information...................................................12
Item 6. Exhibits and Reports on Form 8-K....................................12
</TABLE>
i
<PAGE>
PART I
FINANCIAL INFORMATION
MEDICAL SCIENCE SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ............................................ $ 1,183,787 $ 2,432,271
Accounts receivable, net ............................................. 113,785 125,086
Prepaid Expenses ..................................................... 145,286 127,426
------------ ------------
Total current assets ................................................. 1,442,858 2,684,783
Furniture and equipment, net ......................................... 412,695 458,107
Other assets ......................................................... 530,000 530,000
TOTAL ASSETS ......................................................... $ 2,385,553 $ 3,672,890
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable ..................................................... $ 232,567 $ 278,773
Notes payable ........................................................ 26,111
47,813
Accrued expenses ..................................................... 450,550 433,859
Deferred income ...................................................... 274,439 275,321
Current portion of long-term debt .................................... 81,432 81,432
Current portion of capitalized lease obligations ..................... 102,379 104,837
------------ ------------
Total current liabilities ............................................ 1,167,478 1,222,035
Long-term debt, net .................................................. 427,498 447,856
Capitalized lease obligations, net ................................... 138,891 156,651
------------ ------------
Total liabilities .................................................... 1,733,867 1,826,542
------------ ------------
Preferred stock, no par value
5,000,000 shares authorized
none issued and outstanding ....................................... 0 0
Common stock, no par value
10,000,000 shares authorized
5,558,668 shares issued and outstanding ........................... 16,730,396 16,719,933
Retained earnings (Accumulated deficit) .............................. (16,078,710) (14,873,585)
Total shareholders' equity ........................................... 651,686 1,846,348
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................... $ 2,385,553 $ 3,672,890
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
<PAGE>
MEDICAL SCIENCE SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31, 1999 March 31, 1998
----------- -----------
(Unaudited) (Unaudited)
Sales .......................................... $ 92,738 $ 58,894
Cost of sales .................................. 32,911 30,087
----------- -----------
Gross profit ................................... 59,827 28,807
Research and development ....................... 555,125 516,922
Selling, general, and administrative expense ... 709,152 1,785,518
----------- -----------
Total expenses ................................. 1,264,277 2,302,440
----------- -----------
Loss from operations ........................... (1,204,450) (2,273,633)
Other income (expense):
Interest income ................................ 17,592 145,649
Interest expense ............................... (22,582) (24,290)
Other income ................................... 4,315 0
----------- -----------
Total other income (expense) ................... (675) 121,359
----------- -----------
Loss before provision for income taxes ......... (1,205,125) (2,152,274)
Provision for taxes ............................ 0 850
----------- -----------
NET LOSS ....................................... $(1,205,125) $(2,153,124)
=========== ===========
Basic loss per share ........................... (0.22) (0.39)
Diluted loss per share ......................... (0.22) (0.39)
Weighted average common shares outstanding ..... 5,548,583 5,540,895
3
<PAGE>
MEDICAL SCIENCE SYSTEMS, INC.
AND SUBSIDIARIES
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss ............................................ $(1,205,125) $(2,153,124)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .................. 50,586 34,297
Accretion of investments ....................... 0 (103,985)
(Increase) decrease in
Accounts receivable ............................ 11,301 3,672
Inventories .................................... 0 840
Prepaid expenses ............................... (17,859) (724)
Increase (decrease) in
Accounts payable ............................... (46,206) 25,674
Notes Payable .................................. (21,702) 0
Accrued expenses ............................... 16,691 (28,842)
Deferred income ................................ (882) 118,293
----------- -----------
Net cash used in operating activities ............... (1,213,196) (2,103,899)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment ................ (5,175) (89,103)
Decreases (Increases) in patents .................... 0 (68,159)
Maturity of investments ............................. 0 2,052,000
----------- -----------
Net cash provided by (used in) investing activities . (5,175) 1,894,738
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock ................................ 10,463 0
Principal payments of long-term debt ................ (20,358) (36,784)
Principal payments of capitalized lease obligations . (20,218) (11,865)
----------- -----------
Net cash used in financing activities ............... (30,113) (48,649)
----------- -----------
Net increase (decrease) in cash and equivalents ..... (1,248,484) (257,810)
Cash and equivalents, beginning of period ........... 2,432,271 6,005,059
----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD ................. $ 1,183,787 $ 5,747,249
=========== ===========
Interest paid ....................................... $ 22,582 $ 24,290
Income taxes paid ................................... $ 0 $ 1,600
</TABLE>
NOTE 1 - PRESENTATION OF INTERIM INFORMATION
As contemplated by the Securities and Exchange Commission under Item
310(b) of Regulation S-B, the accompanying consolidated financial
statements and footnotes have been condensed and therefore do not
contain all disclosures required by generally accepted accounting
principles. It is recommended that these interim consolidated financial
statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1998. The interim
financial data are unaudited; however, in the opinion of the management
of Medical Science Systems, Inc. and subsidiaries (the "Company"), the
accompanying unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary
to make the interim financial information not misleading. All
significant intercompany transactions and accounts have been eliminated
in consolidation. Results for interim periods are not necessarily
<PAGE>
indicative of those to be expected for the full year. Certain
classifications have been made in prior period financial statements to
conform with the current period presentation.
The accompanying financial statements of the Company have been prepared
on the basis of accounting principles applicable to a going concern.
Since its inception, the Company has incurred cumulative net losses of
approximately $16.1 million, including losses of approximately $1.2
million during the first quarter of 1999. In the three months ended
March 31, 1999, the Company had negative cash flows from operating
activities of approximately $1.2 million. As a result of these losses,
available cash resources are limited and will be depleted in 1999 absent
additional debt or equity funding. While the Company continues to pursue
sources of capital, there can be no assurance that they will be
successful in these efforts. These matters raise substantial doubt about
the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the
outcome of these uncertainties. The ability of the Company to continue
as a going concern is dependent upon the Company achieving significant
revenue increases from their existing genetic products, developing new
products, successfully marketing its products to customers at profitable
prices and obtaining significant levels of new capital. If the Company
is not successful in these efforts, the Company would likely be unable
to continue operating as a going concern.
The Company has retained the services of a New York City-based
investment banking firm to raise additional equity capital via a private
placement. A private placement memorandum has been prepared for this
offering and is currently being circulated to potential investors.
Management of the Company believes this offering can be successfully
concluded during the second quarter of 1999. In addition, management is
in discussions with a number of potential strategic partners and, if
discussions are successfully completed, believes there should be
up-front funding of some of the Company's development programs.
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. It is uncertain whether current genetic
susceptibility tests or others that the Company may develop will gain
commercial 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 revenues may 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 payers. If both
third-party payers 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 has entered into an agreement with Sheffield University,
whereby the Company will undertake the development and commercialization
of certain discoveries resulting from Sheffield University's research.
The agreement is non-cancelable for discoveries on which the parties
have reached a specific agreement, but may be terminated with or without
cause by either party upon six-months notice with respect to new
discoveries on which the parties have not yet reached agreement. If
Sheffield University terminated the agreement, such termination could
make the discovery and commercial introduction of new products more
difficult or unlikely.
NOTE 2 - CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments purchased with
original maturities of three months or less to be cash equivalents. The
Company maintains cash deposits at one bank. Deposits at this bank are
insured by the Federal Deposit Insurance Corporation up to $100,000. 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 - EARNINGS PER SHARE
The Company computes earnings (loss) per share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share." SFAS No. 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. Basic earnings per share is
computed using the weighted-average number of common shares outstanding
during the period. Common equivalent shares are excluded from the
computation if their effect is anti-dilutive. Net loss per share amounts
for all periods have been restated to conform to SFAS No. 128
requirements. Prior to SFAS No. 128, the Securities and Exchange
Commission ("SEC") required that, even where anti-dilutive, common and
common equivalent shares issued during the twelve-month period prior to
the filing of an IPO be included in the calculation of earnings per
share as if they were outstanding for all periods presented (using the
treasury stock method and the IPO price). Because of new requirements
issued in 1998 by the SEC for companies that recently completed an IPO
and interpretation by FASB of the initial application of SFAS No. 128,
the number of shares used in the calculation of basic net loss per share
has changed to exclude common equivalent shares, even when
anti-dilutive. Net loss per share for all periods presented has been
restated to conform with SFAS No.
128 and Staff Accounting Bulletin No. 98.
NOTE 4 - STOCK OPTIONS
During the quarter ended March 31, 1999, the Company issued 118,181
incentive stock options to certain employees. The options entitle the
holder to purchase shares of the Company's common stock at $0.75 per share
and expire ten years from the date of issuance.
NOTE 5 - SEGMENT INFORMATION
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes new
standards for reporting information about operating segments in annual and
interim financial statements, requiring that public business enterprises
report financial and descriptive information about its reportable segments
based on a management approach. SFAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas and
major customers. In applying the requirements of this statement, each of
the Company's geographic areas described below were determined to be an
operating segment as defined by the statement, but have been aggregated as
allowed by the statement for reporting purposes. As a result, the Company
continues to have one reportable segment, which is the development of
genetic susceptibility tests and therapeutic targets for common diseases.
The following table presents information about the Company by geographic
area.
FOR THE THREE MONTHS ENDED MARCH 31,
1999 1998
------------ ------------
Total Revenues:
United States ................... $ 74,335 $ 49,071
France .......................... 10,784 2,405
Other foreign ................... 7,619 7,418
------------ ------------
Total ..................... $ 92,738 $ 58,894
============ ============
Operating Income:
United States ................... $ (963,560) $ (1,859,832)
France .......................... (144,534) (100,034)
Other foreign ................... (96,356) (313,767)
------------ ------------
Total ..................... $ (1,204,450) $ (2,273,633)
============ ============
Assets:
United States ................... $ 2,385,553 $ 10,736,728
France .......................... 0 0
Other foreign ................... 0 0
------------ ------------
Total ..................... $ 2,385,553 $ 10,736,728
============ ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL OVERVIEW
Medical Science Systems, Inc., a Texas corporation ("MSSI" or the
"Company") develops and commercializes genetic diagnostic tests and
medical research tools. The Company's efforts are focused on genetic
factors that affect the rate of progression of clinical disease through
their influence on common host systems. The Company's first genetic test,
PST(R), a test predictive of risk for periodontal disease, is currently
marketed in the United States, France and Israel. Products under
development include tests predictive of risk for osteoporosis, coronary
artery disease, diabetic retinopathy, asthma and meningitis/sepsis.
The Company believes by combining genetic risk assessment with specific
therapeutic strategies, improved clinical outcomes and more cost-effective
management of these common diseases are achieved. MSSI also develops and
licenses its medical research tools, including BioFusion(R), to
pharmaceutical companies. BioFusion, a proprietary enabling system for
diagnostic and drug discovery and development, is a computer modeling
system that integrates genetic and other sub-cellular behavior, system
functions, and clinical symptoms to simulate complex diseases. This system
allows for the utilization of the rapidly increasing databases of gene
expression, cell biology, prognostic, pharmacogenomic and predictive
medicine databases being generated in companies and academic centers
worldwide.
The Company has retained the services of a New York City-based investment
banking firm to assist it in raising capital pursuant to a private
placement. Management of the Company believes that this offering will be
successfully concluded during the second quarter of 1999. In addition, the
Company is in discussions with a number of potential strategic partners
and, if such discussions are successfully completed, the Company believes
this will result in the up-front funding of some of its programs. There
can be no assurance that the private placement or any of the partnering
discussions will be completed.
The Company has followed a strategy of working with strategic partners at
the fundamental discovery stage. This strategy has given the Company
access to discoveries while reducing up-front research expenses. Since
1994, the Company has had a strategic alliance with the Department of
Molecular and Genetic Medicine at Sheffield University in the United
Kingdom ("Sheffield"). Under this alliance, Sheffield has provided to the
Company the fundamental discovery and genetic analysis from Sheffield's
research laboratories and the Company has focused on product development,
including clinical trials, and the commercialization of these discoveries.
The Company has entered into multiple joint development and
commercialization project agreements with Sheffield, and anticipates
entering into additional collaborative arrangements with Sheffield and
other parties in the future.
In December 1998, the Company signed an agreement with Washington Dental
Service, a member of the Delta Dental Plans Association, for the purchase
of 1,200 PST tests. The tests will be used in a study, sponsored by
Washington Dental Service, in collaboration with the University of
Washington School of Dentistry and Medical Science Systems. The study will
provide scientific and financial information about PST in a reimbursement
system. This study is expected to provide scientific and financial data
regarding the use of PST as a treatment-planning tool to assess risk. The
data from the study should be available for analysis in the last quarter
of 1999.
In December 1997, the Company entered into an agreement with Medicadent, a
French corporation ("Medicadent"), to market and sell PST in France. In
August 1998, the Company entered into an agreement with H.A. Systems, Ltd.
to market and sell PST in Israel. Medicadent commenced offering PST in
France in June 1998, and H.A. Systems commenced offering PST in Israel in
April 1999. No assurances can be made regarding the commercial acceptance
of PST. The Company anticipates additional international agreements for
the distribution of PST in 1999, but no assurances can be made that such
agreements will be entered into by the Company.
In March 1999, the Company entered into an agreement with the Straumann
Company, a leading supplier of dental implants, to market and sell PST in
the United States and Puerto Rico. Straumann launched its PST promotional
activities in April 1999.
In April 1999, the Company entered into an agreement with Dumex, a
subsidiary of AlPharma, a pharmaceutical manufacturer, to market and sell
PST in nine European countries (Austria, Denmark, Finland, Germany,
Ireland, Norway, Sweden, Switzerland and the U.K.). Dumex is well-known in
Europe as a manufacturer of oral health care products used by
periodontists.
The Company has been awarded four U.S. patents, and has sixteen U.S.
patent applications pending. The U.S. Patent & Trademark Office awarded
patents to the Company for its osteoporosis and periodontal disease
susceptibility tests and two patent awards for its biologic modeling
technology called BioFusion(R). BioFusion is used by the Company in the
discovery, development and commercialization process. The Company's
disease susceptibility patents seek to protect the use of its various
genetic markers as an indicator of risk for the specific disease covered,
as well as protecting various therapeutic applications which these markers
may have.
The Company has been granted a number of corresponding foreign patents and
has filed foreign counterparts of its U.S. applications within the
appropriate time frames. Where the Company has originally filed in another
country, it has filed and plans to continue to file U.S. and other foreign
counterparts within the appropriate time frame.
CURRENT FINANCIAL CONDITION
Since its inception, the Company has incurred cumulative net losses of
approximately $16.1 million including losses of approximately $1.2 million
during the first quarter of 1999. As a result of these losses, available
cash resources are limited and will be depleted in July 1999 absent
additional debt or equity funding. While the Company continues to pursue
sources of capital, there can be no assurance that they will be successful
in these efforts. The ability of the Company to continue as a going
concern is dependent upon the Company achieving significant revenue
increases from their existing genetic products, developing new products,
successfully marketing its products to customers at profitable prices and
obtaining significant levels of new capital. If the Company is not
successful in these efforts, the Company would likely be unable to
continue operating as a going concern.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 TO THREE MONTHS ENDED
MARCH 31, 1998
Gross revenue for the three months ended March 31, 1999 was $92,738
compared to $58,894 for the same period ended March 31, 1998, an increase
of 57%. The increase in revenue is attributable to an increase in the
number of genetic susceptibility tests sold by the Company. In the three
months ended March 31, 1999, the Company conducted 510 tests compared to
355 tests in the same period in 1998. Cost of sales was $32,911 for the
three months ended March 31, 1999 compared to $30,087 for 1998. Gross
profit margin was 64.5% in the three months ended March 31, 1999 compared
to 48.9% for the year earlier period, reflecting lower unit laboratory
costs for the Company's genetic tests due to the higher volume of tests.
Research and development expenses remained relatively stable. For the
three months ended March 31, 1999, the Company had R&D expenses of
$555,125 as compared to $516,922 for the first quarter of 1998.
Selling, general and administrative expenses were $709,152 in the first
quarter of 1999 compared to $1,785,518 in the first quarter of 1998, a
decrease of 60.3%. This decrease is a result of the Company's ongoing
cost-cutting initiatives and change in strategy to utilize collaborative
partners for its direct sales of its genetic tests. As a result of the
Company's effort to reduce costs, the Company had 18 full time employees
as of March 31, 1999 compared to 46 one year earlier.
Interest income in the first quarter of 1999 was $17,592 compared to
$145,649 in the first quarter of 1998. This decrease reflects lower
balances of cash in 1999 compared to the year earlier period, as cash was
utilized throughout 1998 to cover the Company's operating losses. Interest
expense of $22,582 was incurred during the period ended March 31, 1999,
compared to $24,290 in the same period in 1998. The reduction in interest
expense was due to the reduction in the principal amount of the bank debt
and lower interest rate on that debt.
Net loss was $1,205,125 for the first quarter of 1999 compared to a net
loss of $2,153,124 for the first quarter of 1998, a decrease of 44.0%.
This decrease reflects the reduction in sales and marketing expense as the
Company shifts to a collaborative partnering strategy. The Company
anticipates that it will continue to experience losses unless its genetic
testing revenues grow substantially from current levels and its efforts to
develop revenue from licensing its biologic modeling research tools are
successful. In addition, if the Company is successful in reaching
agreements with strategic partners on developing additional genetic tests,
milestone payments, if any, from these strategic partners to help cover
the Company's research and development expense could also reduce the net
loss. No assurances can be made that the Company will be able to increase
its revenues, either from genetic tests or licensing revenue, or that it
will be able to reach collaborative partnering agreements.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $1,213,196 during the quarter
ended March 31, 1999 and $2,103,899 during the same quarter of the prior
fiscal year. As of March 31, 1999, the Company had cash and cash
equivalents of $1,183,787.
The Company currently does not have any commitments for material capital
expenditures. The Company's obligation at March 31, 1999 for capitalized
lease obligations totaled $241,270, of which $138,891 is classified as
long-term and $102,379 is classified as current.
The Company has a term loan with the Bank of America NT&SA which matures
in June 2005. The principal balance at March 31, 1999 was $508,930, of
which $427,498 is classified long-term debt and $81,432 is classified
short-term debt. The Company has provided a certificate-of-deposit as
security for this loan, the balance of which at March 31, 1999 was
$530,000.
The Company anticipates that its existing cash and cash equivalents,
together with anticipated interest income and revenue, will be sufficient
to conduct its operations as planned through July 1999. However, the
Company's future capital requirements are anticipated to be substantial,
and the Company does not have commitments for additional capital at this
time. Such capital requirements are expected to arise from the commercial
launch of additional genetic tests, continued marketing and sales efforts
for PST, continued research and development efforts, the protection of the
Company's intellectual property rights (including preparing and filing of
patent applications), as well as operational, administrative, legal and
accounting expenses. The Company plans to raise capital through equity
and/or debt issuance when, and if, such capital is available to it. The
Company has retained the services of a New York City-based investment
banking firm to assist it in raising capital pursuant to a private
placement. Management of the Company believes that this offering will be
successfully concluded during the second quarter of 1999. THERE CAN BE NO
ASSURANCE THAT THE COMPANY WILL BE ABLE TO RAISE ANY ADDITIONAL NECESSARY
CAPITAL. IF ADDITIONAL AMOUNTS CANNOT BE RAISED, THE COMPANY WOULD SUFFER
MATERIAL ADVERSE CONSEQUENCES TO ITS BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND WOULD LIKELY BE REQUIRED TO SEEK PROTECTION
UNDER THE UNITED STATES BANKRUPTCY LAWS. SEE "Current Financial Condition"
on page 9 hereof.
The Company's Common Stock is currently listed on The NASDAQ SmallCap
Market and the Boston Stock Exchange. If the Company fails to maintain the
qualification for its Common Stock to trade on the NASDAQ SmallCap Market
or the Boston Stock Exchange, its Common Stock could be subject to
delisting. The NASDAQ Stock Market announced increases in the quantitative
standards, which became effective in February 1998, for maintenance of any
of (x) $2,000,000 of net tangible assets, (y) $35,000,000 of market
capitalization or (z) $500,000 of net income for two of the last three
years and a minimum bid price per share of $1.00. On February 3, 1999, we
received notice from NASDAQ that we are in violation of NASDAQ's minimum
bid price requirement and that if our Common Stock does not have a closing
bid price of at least $1.00 for ten consecutive trading days during the
90-day period ending May 3, 1999, our Common Stock will be subject to
delisting on May 3, 1999. The Company believes it has satisfied this
requirement by having a closing bid price of at least $1.00 for the ten
consecutive trading days ending March 29, 1999; however the Company has
not yet received notice from NASDAQ that such requirement was satisfied.
Furthermore, there can be no assurance that our stock price will maintain
such $1.00 minimum bid price. If the market price for our Common Stock
does fall below the $1.00 bid price, our Common Stock could be subject to
delisting from The NASDAQ SmallCap Market. On April 26, 1999, the Company
received notice from the NASDAQ SmallCap Market that the Company is in
violation of NASDAQ's minimum net tangible asset requirement. The Company
has retained the services of a New York City-based investment banking firm
to assist it in raising capital pursuant to a private placement.
Management believes that the Company, upon the successful conclusion of
this offering, will be in compliance with NASDAQ's minimum net tangible
asset requirement. However, there can be no assurance that the Company
will be able to raise the additional capital necessary to comply with
NASDAQ's minimum net tangible asset requirement. If the Company is unable
to achieve compliance with NASDAQ's minimum net tangible asset
requirement, the Company would likely be delisted from The NASDAQ SmallCap
Market and may also suffer material adverse consequences to its business,
financial condition and results of operations. Such NASDAQ delisting would
also greatly impair the Company's ability to raise additional necessary
capital through equity or debt financing.
YEAR 2000 COMPLIANCE
The efficient operation of the Company's business is dependent on its
computer software programs and operating systems (collectively, "Programs
and Systems"). These Programs and Systems are used in several key areas of
the Company's business, including financial reporting, as well as in
various administrative functions. The Company has evaluated its Programs
and Systems to identify potential year 2000 compliance problems, as well
as manual processes, external interfaces with customers, and services
supplied by vendors to coordinate year 2000 compliance and conversion. The
year 2000 problem refers to the limitations of the programming code in
certain existing software programs to recognize date sensitive information
for the year 2000 and beyond. Unless modified prior to the year 2000, such
systems may not properly recognize such information and could generate
erroneous data or cause a system to fail to operate properly. Based on
current information, the Company believes its Programs and Systems are
year 2000 compliant. However, because most computer systems are, by their
very nature, interdependent, it is possible that non-compliant third party
computers may not interface properly with the Company's computer systems.
The Company could be adversely affected by the year 2000 problem if it or
unrelated parties fail to successfully address this issue.
In the event the Company determines following the year 2000 date change
that its Programs and Systems are not year 2000 compliant, the Company
will likely experience considerable delays in compiling information
required for financial reporting and performing various administrative
functions. In the event of such occurrence, the Company's contingency
plans call for it to switch vendors to obtain hardware and/or software
that is 2000 compliant, and until such hardware and/or software can be
obtained, the company will plan to use non-computer systems for its
business, including information management services and financial
reporting, as well as its various administrative functions.
Year 2000 Information and Readiness Disclosure Act
To the maximum extent permitted by applicable law, the above information
is being designated as "Year 2000 Readiness Disclosure" pursuant to the
"Year 2000 Information and Readiness Disclosure Act" which was signed into
law on October 19, 1998.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 2, 1999, Entelos, Inc. filed an action against the Company in
United States District Court for the Northern District of California,
alleging that two of Entelos' principals, Samuel Holtzman and Thomas
Paterson, are co-inventors of the inventions claimed in two of the
Company's patents - U.S. Pat. Nos. 5,657,255 and 5,808,918, both of which
relate to the Company's BioFusion products. In the suit, Entelos seeks a
declaratory judgment that Entelos is the co-owner of all rights under the
foregoing patents, an order correcting the inventorship of the patents to
list Holtzman and Paterson as co-inventors, and restitution to Entelos of
its share of the profits obtained from the patents. The Company is
currently investigating the claims of co-inventorship and is engaged in
settlement discussions with Entelos in an effort to resolve the matter out
of court.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Sales of Unregistered Securities. On March 31, 1999, the Company issued
10,000 shares of Common Stock to Donner Corp. International ("Donner") in
connection with an agreement whereby Donner provided investor and public
relations services and other related services to the Company. Such shares
of Common Stock were issued pursuant to the exemptions from registration
provided under Regulation D ("Regulation D") of the rules and regulations
promulgated under the Securities Act of 1933, as amended (the "Securities
Act"), by the Securities and Exchange Commission and Section 4(2) of the
Securities Act. The Company relied upon certain representations and
warranties of Donner, including, among other things, as to its status as
an "accredited investor" (as that term is defined in Rule 501(a) of
Regulation D) and that the Common Stock was being acquired solely for
investment and not with a view to distribution.
Use of Proceeds from Sales of Registered Securities. On November 26, 1997,
the Company completed an initial public offering of its Common Stock, no
par value (the "Offering"). Aggregate proceeds from the Offering were
$16,200,000, and the net proceeds were $14,904,000. Of the net proceeds,
$1,855,617 has been used to repay debt, $3,391,143 has been used for
research and development expenses, $4,618,461 has been used for marketing
and sales expenses, $4,403,846 has been used for general and
administrative expenses, and the remaining $1,003,933 has been allocated
to general working capital requirements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders in the three months ended March
31, 1999.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Business Loan Agreement between the Company and Bank of America
dated June 5, 1998 (filed herewith)
10.2* Distribution Agreement between the Company and The Straumann Company
dated March 25, 1999 (filed herewith)
27 Financial Data Schedule (filed herewith)
*Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately with
the Securities and Exchange Commission.
(b) Reports on Form 8-K
Not applicable
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
10.1 Business Loan Agreement between the Company and Bank of America
dated June 5, 1998 (filed herewith)
10.2* Distribution Agreement between the Company and The Straumann Company
dated March 25, 1999 (filed herewith)
27 Financial Data Schedule (filed herewith)
* Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MEDICAL SCIENCE SYSTEMS, INC.
Date: May 17, 1999 By: /s/ U. SPENCER ALLEN
U. Spencer Allen
Chief Financial Officer and Treasurer
(Duly authorized signatory and Principal
Financial and Accounting Officer)
EXHIBIT 10.1
BANK OF AMERICA
- ------------------------------------------------------------------------------
|_| BUSINESS LINE |X| BUSINESS LOAN
AGREEMENT
To: Bank of America National Trust and Savings Association
Business Lending Services #1738
101 S. Marengo Avenue, 5th Floor
Pasadena, CA 91122
<TABLE>
<S> <C>
CUSTOMER NAME
MEDICAL SCIENCE SYSTEMS, INC.
LINE OF CREDIT/LOAN NO. CREDIT LIMIT/LOAN AMOUNT BRANCH NO. DEPOSIT ACCOUNT NO. ("ACCOUNT")
- ----------------------- ------------------------ ---------- -------------------------------
0740829-9003 $570,000.00 0694 06940-18831
</TABLE>
INTRODUCTION. This Agreement dated as of June 05, 1998 is entered into
between Medical Science Systems, Inc. (the "Borrower") and Bank of America
National Trust and Savings Association (the "Bank") concerning the Borrower's
Business Loan credit facility with the Bank. In consideration of, and to induce
the Bank to make available to the Borrower the credit facility described herein,
the Borrower agrees and warrants as follows:
|_| I.THE LINE OF CREDIT
A. NATURE OF THE LINE. If the box above is checked, the Bank has made
available to the Borrower a revolving line of credit ("Line") in the
principal amount shown above as "Credit Limit" subject to the terms and
conditions of this Agreement. This means that the Borrower, or any person
provided for in Section I.C. below, may request an advance of all or a part
of the Line at any time while the Line is available. Any amount repaid by
the Borrower becomes available for the Borrower to reborrow after the
expiration of a hold period for payments by personal checks of up to eleven
business days. If the Bank delays the availability of funds, it will mail
to the Borrower a notice within one business day.
B. ADVANCES. Advances under the Line may be in any amount not to exceed the
Credit Limit remaining available. Advances may be made by writing a credit
line check or by telephone authorization, deposited into the Borrower's
account listed above, if any, or such other of the Borrower's eligible
accounts with the Bank as designated by the Borrower in writing (the
"Account").
C. TELEPHONE AUTHORIZATION. The Bank may honor telephone instructions for
advances or repayments given by any one of the individuals who signed the
application for this Line on the Borrower's behalf, or any other individual
designated by any one of such authorized individuals. Repayments authorized
by telephone shall be withdrawn from the Borrower's Account. The Borrower
indemnifies and excuses the Bank (including its officers, employees, and
agents) from all liability, loss, and costs in connection with any act
resulting from telephone instructions it reasonably believes are made by
any individual authorized by the Borrower to give such instructions. This
indemnity and excuse will survive this Agreement's termination.
D. CREDIT LINE CHECKS.
1. WRITING CHECKS. The Bank will issue checks to the Borrower at no cost.
The Borrower may borrow money under the Line (up to the Credit Limit
remaining available) by writing checks. The Borrower agrees not to write
checks in an amount less than $300, and not to write more than five checks
in any one billing cycle. The Bank may charge a fee for any checks written
for a lesser amount, or if more than the permitted number of checks are
written. Each paid check will be charged to the Line. Checks may be signed
by any one individual who signed the application for credit. Only one
signature shall be required on any check.
2. STOP PAYMENTS. The Borrower may stop payment on a check as long as the
request is received by the Bank prior to the time the check is posted to
the Line. The request must include the information which the Bank requires.
The Borrower may be charged a fee to place or renew a stop payment order. A
stop payment shall be effective for 180 days. The Borrower must renew the
stop payment if it wishes the stop payment to be effective for a longer
period. In some cases, the Bank may pay a check even if a stop payment is
in effect. For example, if a branch of the Bank or another person or entity
becomes a "holder in due course" of a check, the Bank may still pay the
check and post the amount to the Line.
3. CHECK CERTIFICATION. The Bank will not certify checks.
<PAGE>
4. LOST OR STOLEN CHECKS. The Borrower must notify the Bank immediately at
the Bank of America Address shown at the top of the Agreement if any checks
are lost or stolen.
5. CANCELED CHECKS. The Bank will not return the canceled checks to the
Borrower, but will retain photocopies for eight (8) years. The Borrower
agrees to examine the monthly billing statement on the Account promptly in
order to identify improper or unauthorized transactions. If the Borrower
requests a copy of a check, the Borrower must write a letter to the Bank,
including the Account number, the check number and amount, and the date
that the check posted to the billing statement. The Bank may charge a fee
for providing a copy of checks.
6. AUTHORIZED USE. The checks issued to the Borrower must be used only by
the Borrower. If the Borrower permits anyone else to use its checks without
the Bank's consent, the Borrower will be obligated to pay for any advances
obtained by that person plus any interest and other charges attributable to
such advances.
7. RETURN OF CHECKS. At the Bank's request, the Borrower will return to the
Bank any unused checks if the Account is terminated. If any such event
occurs, the Bank may return any checks presented against the Account.
E. OVERDRAFT PROTECTION.
|_| If the box to the left is checked, the following paragraph applies: The
Line has been linked for overdraft protection to the following business
checking account with the Bank: N/A. If the business checking account is
overdrawn, the Bank will transfer funds from the Line to cover the
overdraft in multiples of $50 as long as there is sufficient available
credit on the Line. Overdraft protection is not accessible by in-branch
transaction, ATM withdrawal or transfer through your home or office
computer.
F. DEFAULTS. The Bank may, in its sole discretion, refuse to make advances
hereunder if an Event of Default has occurred (as defined in Section IX,
below).
G. AVAILABILITY OF THE LINE. Advances under the Line will be available until
the earlier of the following (the "Termination Date"): (1) N/A ; or (2) the
date the Bank terminates the Line because of an Event of Default pursuant
to Section IX.; or (3) the date the Line is canceled by the Borrower
pursuant to Section X.N. On the Termination Date, no further advances will
be available to the Borrower. The entire outstanding principal balance of
the Line, together with all accrued and unpaid interest thereon, and fees
and charges owing in connection therewith, shall be due and payable in full
on the Termination Date.
H. CREDIT LIMIT. A credit limit has been set on the Line and is shown above as
"Credit Limit." The Borrower agrees not to allow the principal amount which
the Borrower owes at any one time under this Agreement to exceed the Credit
Limit. The Bank does not have to honor any request for an advance which,
when added to the unpaid balance, would exceed the Credit Limit.
|X| II. THE LOAN
A. AMOUNT. If the box above is checked, the Bank has made available to the
Borrower a term loan ("Loan") in the principal amount shown above as "Loan
Amount" subject to the terms and conditions of this Agreement.
III. PAYMENTS AND INTEREST RATE
A. PAYMENTS
1. AMOUNT. The Borrower promises to pay to the Bank principal and/or
interest payments as indicated by the box checked below:
|_| A. INTEREST ONLY. The minimum payment due each month shall be the
amount of accrued interest.
|_| B. PRINCIPAL AND INTEREST. Principal and interest in monthly
installments of Dollars ($__________________).
|X| C. PRINCIPAL PLUS INTEREST. Principal in 84 monthly installments of
SIX THOUSAND SEVEN HUNDRED EIGHTY-SIX AND 00/100 DOLLARS ($6,786.00)
plus interest.
In addition, the Borrower must pay any amounts past due, any amount that
exceeds the Credit Limit, if applicable, and any other charges assessed as
described in this Agreement.
2. PAYMENT DATE. The payments shall be due and payable in full on the 1st
day of each month, beginning JULY 1, 1998 and continuing until JUNE 1,
2005, on which date all unpaid principal and interest shall be paid in
full. If the payment date falls on a Saturday or Sunday, or on a holiday on
which the Bank is closed, the payment shall be due on the next business
day. If this is a Loan, the principal and interest may also at the Bank's
option be due and payable in full upon an Event of Default in accordance
with Section IX. herein.
3. PAYMENT ALLOCATION. All sums received from the Borrower for application
to the Line or Loan shall be applied to the Borrower's obligation under the
Line or Loan in such order as determined by the Bank.
4. PREPAYMENT. The Borrower can pay the balance of the credit outstanding
under this Agreement in full or part at any time without premium or
penalty. The Bank may accept partial payments, whether or not marked "paid
in full" without losing the Bank's rights under this Agreement.
5. PAYMENT ADDRESS. Payments should be made to: Bank of America National
Trust and Savings Association
Business Lending Services #1738
P. O. Box 6012
Pasadena, CA 91102-6012
<PAGE>
6. CREDITING THE PAYMENT. If the Bank receives the payment at the above
address by 9:00 a.m. on any business day, except Saturday or Sunday, the
Bank will credit the payment to the amount outstanding under this Agreement
as of that day. Payments may also be made at any of the Bank's California
branches. Payments received at a branch after 4 p.m. (7 p.m. on Fridays) or
on a Saturday, Sunday or holiday will be posted the following business day.
7. AUTOMATIC REPAYMENT.
|X| If the box to the left is checked, the following paragraphs apply: A.
AUTOMATIC PAYMENT SERVICE. The Borrower hereby chooses to have its
principal and interest payments made pursuant to the Bank's Automatic
Payment Service, and authorizes the Bank to collect all sums due hereunder
by charging the full amount thereof to the Borrower's Account. Should there
be insufficient funds in the Account to pay when due all or any portion of
the amount due, the full amount of such deficiency shall be immediately due
and payable by the Borrower.
B. TERMINATION. If, for any reason during the term of this Agreement, this
Automatic Payment Service is terminated by the Borrower or the Bank, the
interest rate under this Agreement will increase by one (1) percentage
point and the amount of each payment will be increased accordingly.
B. INTEREST RATE
1. INTEREST RATE OPTIONS. The principal balance outstanding under this
Agreement shall bear interest per annum equal to:
|X| A. VARIABLE RATE. The Bank's Reference Rate plus 0.00 percentage
points, as said Reference Rate may change from time to time. The Reference
Rate is the rate of interest publicly announced from time to time by the
Bank in San Francisco, California as its Reference Rate. The Reference Rate
is set by the Bank based on various factors, including the Bank's costs and
desired return, general economic conditions and other factors, and is used
as a reference point for pricing some loans. The Bank may price loans to
its customers at, above, or below the Reference Rate. Any change in the
Reference Rate shall take effect at the opening of business on the day
specified in the public announcement of a change in the Bank's Reference
Rate.
|_| B. FIXED RATE. A fixed rate of N/A percentage points.
2. COMPUTATION OF INTEREST AND FEES. All computations of interest and fees
made or called for hereunder shall be calculated on the basis of:
|X| A. 360-DAY YEAR. A 360-day year and the actual number of days elapsed.
This results in more interest or a higher fee than if a 365-day year is
used.
|_| B. 365-DAY YEAR. An actual 365/366-day year and the actual number of
days elapsed.
3. DEFAULT RATE. Upon the occurrence and during the continuation of any
default under this Agreement, amounts outstanding under this Agreement will
at the option of the Bank bear interest at a rate per annum which is N/A
(____) percentage points higher than the rate of interest otherwise
provided under this Agreement. This will not constitute a waiver of any
default.
IV. FEES
A. PROMISE TO PAY FEES AND COSTS. The Borrower promises to pay according to
the terms of this Agreement, all amounts outstanding and fees and costs
which may be assessed under this Agreement including reasonable attorneys'
fees (which may include the allocated costs of in-house counsel), court
costs, and collection costs.
B. LOAN FEE. Upon the date of this Agreement, the Borrower will pay a
non-refundable loan fee of $250.00. If this is a Line, this fee may be paid
by check, charged to the Account, or treated as an advance. The advance
will be subject to all the terms of this Agreement.
C. OVERDRAFT TRANSFER FEE. Each overdraft advance shall be subject to an
overdraft transfer fee equal to 2 percent (2%) of the amount of the
advance, subject to a minimum of $3 and a maximum of $15.
D. LATE FEES. A late charge of 6% of the unpaid portion of the payment amount,
with a minimum fee of $5.00 and a maximum fee of $15.00, may be assessed if
payment is not received within fifteen days after the date the payment is
due. This fee may be changed by the Bank at its option.
E. OVERLIMIT FEES. An overlimit fee of $15 may be assessed each time the
Borrower exceeds the Credit Limit, regardless of whether the Bank permits
the Borrower to exceed the Credit Limit.
F. RETURNED ITEM FEE. The Borrower may be charged a returned item fee of $10
each time a payment is returned or if there are insufficient funds in the
Account when a payment is attempted through Automatic Payment Service.
G. STATEMENT COPY FEE. A fee may be charged for each statement copy requested,
plus an hourly charge for any necessary research time.
V. SECURITY
A. SECURITY. As security for payment of this Line or Loan and all obligations
provided for herein, the Borrower grants to the Bank a security interest in
the property described below. The Borrower also grants to the Bank a
security interest in all renewals of this property, other property
substituted for it, and proceeds.
SAVINGS/CD - 0694501340 , GD BAG
<PAGE>
B. STOCKS/BONDS.
1. MARGIN CALL. If at any time the Credit Limit, if a Line, or the
outstanding balance, if a Loan, to collateral value ratio exceeds 60% for a
Line or Loan secured partially or completely by stock, or 65% for a Line or
Loan secured only by bonds, the Bank may send the Borrower notice
requesting additional collateral. The Bank may determine collateral value
using any reasonable method. If the additional collateral is not received
within the time given in the notice, the Borrower will be in default and
the Bank may terminate the Line or Loan as provided in Section IX.
2. RESTRICTION ON USE OF FUNDS. The Borrower agrees not to use the Line or
Loan to finance the purchase of margin stock (as defined by Regulation U)
or to pay obligations incurred in the purchase of such securities.
C. INSURANCE. The Borrower agrees to maintain all risk property damage
insurance policies covering the tangible property comprising the security.
Each insurance policy must be in an amount acceptable to the Bank. The
insurance must be issued by an insurance company acceptable to the Bank and
must include a lender's loss payable endorsement in favor of the Bank in a
form acceptable to the Bank. If the Borrower fails to maintain insurance on
the security described in Paragraph A. above, the Bank may, in its sole
discretion, obtain such insurance and the cost of the premiums shall be
payable on demand with interest at the interest rate herein.
VI. CONDITIONS
The Bank must receive the following items in form and content acceptable to
the Bank before it is required to extend any credit to the Borrower under
this Agreement.
A. AUTHORIZATION. Evidence that the execution, delivery and performance by the
Borrower of this Agreement and any instrument or agreement required under
this Agreement have been duly authorized.
B. GUARANTIES. Guaranties signed by those persons and in the amounts as
required.
C. SECURITY AGREEMENT. Signed original security agreement, financing
statements and fixture filings (together with collateral in which the Bank
requires a possessory security interest, which the Bank requires.
D. EVIDENCE OF PRIORITY. Evidence that security interests and liens in favor
of the Bank are valid, enforceable, and prior to all others' rights and
interests, except those the Bank consents to in writing.
VII. FINANCIAL STATEMENTS
The Borrower represents and warrants that:
A. Statements and data submitted in writing by the Borrower to the Bank in
connection with this request for credit are true and correct, and said
statements truly present the financial condition of the Borrower as of the
date thereof and the results of the operations of the Borrower for the
period covered thereby, and have been prepared on a consistently-maintained
basis, in accordance with generally accepted accounting principles or
another basis acceptable to the Bank. Since such date there have been no
material adverse changes in the ordinary course of business. The Borrower
has no knowledge of any liabilities, contingent or otherwise, at such date
not reflected in said statements, and the Borrower has not entered into any
special commitments or substantial contracts which are not reflected in
said statements, other than in the ordinary and normal course of its
business, which may have a materially adverse effect upon its financial
condition, operations or business as now conducted.
B. The representation and warranty contained in Section VII.A. above shall
apply to each financial statement submitted pursuant to Section VIII.B.
herein and shall be continuous and shall be automatically restated for each
such financial statement as of the date of such statement.
VIII. COVENANTS
The Borrower agrees that so long as credit is available under this
Agreement and until the Bank is repaid in full, it will, unless the Bank
shall otherwise consent in writing:
A. INSURANCE. Maintain public liability, property damage and worker's
compensation insurance and insurance on all its insurable property against
fire and other hazards with responsible insurance carriers to the extent
usually maintained by similar businesses.
B. RECORDS AND REPORTS. Maintain a standard and modern system of accounting in
accordance with generally accepted accounting principles or another basis
acceptable to the Bank on a basis consistently maintained; permit Bank's
representatives to have access to and to examine its properties, books and
records at all reasonable times; and furnish the Bank: (1) Promptly, a
notice in writing of the occurrence of any event of default hereunder or of
any event which would become an event of default hereunder upon giving of
notice, lapse of time, or both; and (2) The following financial information
and statements by one year from the date of this Agreement and annually
thereafter, and such other information relating to the affairs of the
Borrower as the Bank may request from time to time: a. Borrower's Financial
Statement. The Borrower's annual financial statements compiled by a
Certified Public Accountant ("CPA") acceptable to the Bank; b. Borrower's
Tax Return. The Borrower's federal income tax return (with all K-1 forms
attached), together with a statement of any contributions made by the
Borrower to any subchapter S corporation or trust, and copies of any
extensions of the filing date; c. Guarantor's Financial Statement. Each
guarantor's annual financial statement in form satisfactory to the Bank;
and
<PAGE>
d. Guarantor's Tax Return. Copies of each guarantor's federal income tax
return (with all K-1 forms attached), together with a statement of any
contributions made by the guarantor to any subchapter S corporation or
trust, and copies of any extensions of the filing date.
C. TYPE OF BUSINESS. Not make any substantial change in the character of its
business.
D. PURPOSE. Use the proceeds of this loan solely for business purposes.
E. OUTSIDE INDEBTEDNESS. Not create, incur, assume or permit to exist any
indebtedness for borrowed money other than loans from the Bank except
obligations now existing as shown on the credit application or the personal
financial statement or data submitted with such application pursuant to
Section VII.A. herein; or sell or transfer, either with or without
recourse, any accounts or notes receivable or any money due or to become
due.
F. LIENS AND ENCUMBRANCES. Not create, incur, assume or permit to exist any
mortgage, deed of trust, security interest (whether possessory or
non-possessory) or other encumbrance of any kind (including without
limitation, the charge upon property purchased under conditional sale or
other title retention agreement) upon or on any of its property or assets,
or sell, assign, pledge or otherwise transfer for security any of its
accounts, contract rights, general intangibles, or chattel paper with or
without recourse, whether now owned or hereafter acquired (hereinafter
collectively called "Liens"), other than (1) Liens for taxes not delinquent
or being contested in good faith in appropriate proceedings; (2) Liens in
connection with worker's compensation, unemployment insurance or social
security obligations; (3) Mechanics', workmen's, materialmen's, landlords',
carriers', or other like liens arising in the ordinary and normal course of
business with respect to obligations which are not due or which are being
contested in good faith; (4) Liens on margin stock as defined within
Regulation U of the Board of Governors of the Federal Reserve System, as
amended from time to time; and (5) Liens in favor of the Bank.
G. LOANS, SECONDARY LIABILITIES. Not make any loans or advances to any person
or other entity other than in the ordinary and normal course of its
business as now conducted; or guarantee or otherwise become liable upon the
obligation of any person or other entity, except by endorsement of
negotiable instruments for deposit or collection in the ordinary and normal
course of its business.
H. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Not purchase or
otherwise acquire the assets or business of any person or other entity, or
liquidate, dissolve, merge or consolidate, or commence any proceedings
therefor; or sell any assets except in the ordinary and normal course of
its business as now conducted, or sell, lease, assign, or transfer any
substantial part of its business or fixed assets, or any property or other
assets necessary for the continuance of its business as now conducted,
including without limitation the selling of any property or other asset
accompanied by the leasing back of the same.
I. COMPLIANCE WITH LAWS. Comply with the laws, regulations and orders of any
government body with authority over the Borrower's business.
J. TRUSTS. Not transfer any of the Borrower's assets to a trust.
IX. EVENTS OF DEFAULT
The occurrence of any of the following events of default shall, at the
Bank's option, terminate the Bank's obligation to extend credit under this
Agreement, and make all sums of principal and interest immediately due and
payable, all without demand, presentment or notice, all of which are hereby
expressly waived and the Bank may exercise all its rights against the
Borrower, any guarantor and any collateral as provided by law.
A. FAILURE TO PAY INDEBTEDNESS. Failure to pay when due any obligation of the
Borrower to the Bank.
B. OTHER DEFAULTS. The occurrence of any event of default whether or not
waived by the obligee under any other indebtedness extended by any
institution or individual to the Borrower.
C. BREACH OF COVENANT. Failure of the Borrower to perform any other term or
condition of this Agreement binding upon the Borrower.
D. BREACH OF WARRANTY. Any of the Borrower's representations or warranties
made herein or any statement or certificate at any time given pursuant
hereto or in connection herewith shall be false or misleading in any
material respect.
E. INSOLVENCY; RECEIVER OR TRUSTEE. The Borrower, any guarantor of the
Indebtedness of the Borrower to the Bank or general partner of the Borrower
shall become insolvent; or admit its inability to pay its debts as they
mature, or make an assignment for the benefit of creditors; or apply for or
consent to the appointment of a receiver or trustee for it or for a
substantial part of its property or business.
F. JUDGMENTS; ATTACHMENTS. Any money judgment, writ, or warrant of attachment,
or similar process shall be entered or filed against the Borrower or any
guarantor of any of the Borrower's obligations to the Bank or any of its
assets and shall remain unvacated, unbonded or unstayed for a period of 10
days or in any event later than 5 days prior to the date of any proposed
sale thereunder.
G. BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any
law for the relief of debtors shall be instituted by or against the
Borrower, any
<PAGE>
guarantor of the indebtedness of the Borrower to the Bank or general
partner of the Borrower.
H. MATERIAL ADVERSE CHANGE. A material adverse change occurs in the Borrower's
financial condition or the financial condition of any guarantor of the
Borrower's obligations to the Bank, which, in the opinion of the Bank,
would affect the ability of the Borrower to repay any advances made by the
Bank hereunder or any other of the Borrower's obligations hereunder, or of
such guarantor to perform under its guaranty.
I. GUARANTY. Any guaranty of the indebtedness of the Borrower to the Bank, at
any time after the execution and delivery of such guaranty and for any
reason other than satisfaction in full of all indebtedness incurred
hereunder, ceases to be in full force and effect or is declared to be null
and void; or the validity or enforceability thereof is contested in a
judicial proceeding; or any guarantor denies that it has any further
liability under such guaranty; or any guarantor defaults in any provision
of any guaranty; or any financial information provided by any guarantor is
false or misleading in any material respect.
J. DEATH. The Borrower or any guarantor dies; if the Borrower is a sole
proprietorship, any owner dies; if the Borrower is a trust, a trustor dies;
if the Borrower is a partnership, any general partner dies; or if the
Borrower is a corporation, any principal officer or majority stockholder
dies.
K. GOVERNMENT ACTION. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's or any guarantor's
financial condition or ability to repay.
L. DEFAULT IN SECURITY DOCUMENTS. A default shall occur in any document or
instrument provided by the Borrower to the Bank in connection with the
security provided the Bank pursuant to Section V.A. herein.
M. COLLATERAL VALUE. The Credit Limit, if a Line, or the principal balance, if
a Loan, equals or exceeds the collateral value.
N. LIEN PRIORITY. The Bank fails to have an enforceable first lien (except for
any prior liens to which the Bank has consented in writing) on or security
interest in any property given as security for this Line or Loan.
O. BANK REMEDIES. If the Borrower is in default the Bank may also without
prior notice, do any one or more of the following: (a) exercise any
remedies available to a secured party under the Uniform Commercial Code or
any other applicable law; (b) proceed in the foreclosure of its security
interest in the property described in the paragraph entitled "Security;"
(c) sell or otherwise dispose of the property at public or private sale,
upon terms and in such manner as it may determine and it may purchase same
at such sale; (d) refrain from disposing of the property and continue to
maintain possession of the property for such time as it deems appropriate
and the Borrower takes the risk of any depreciation in the value of the
property pending disposition; or (e) transfer any of the property into the
name of the Bank or the Bank's nominee.
X. MISCELLANEOUS PROVISIONS
A. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the
Bank, in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise
thereof or of any other right, power or privilege. All rights and remedies
existing under this Agreement are cumulative to, and not exclusive of, any
rights or remedies otherwise available.
B. OTHER AGREEMENTS. Nothing herein shall in any way limit the effect of the
conditions set forth in any security or other agreement executed by the
Borrower, but each and every condition hereof shall be in addition thereto.
C. GOVERNING LAW AND WAIVER. The Borrower understands and agrees that (1) this
Agreement will be governed by and interpreted in accordance with the laws
of the State of California; and (2) the Borrower waives its right, under
Section 1808.21 of the California Vehicle Code, to the confidentiality of
its residence address in the records of the Department of Motor Vehicles,
and the Borrower authorizes the Bank to request its residence address from
the Department of Motor Vehicles if required by the Bank in enforcing this
Agreement.
D. SEVERABILITY. If any provision of this Agreement is held to be
unenforceable, such determination shall not affect the validity of the
remaining provisions of this Agreement.
E. SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and the
Bank's successors and assigns. The Borrower agrees that it may not assign
this Agreement without the Bank's prior consent.
F. HAZARDOUS WASTE INDEMNIFICATION. The Borrower will indemnify and hold
harmless the Bank from any loss or liability directly or indirectly arising
out of the use, generation, manufacture, production, storage, release,
threatened release, discharge, disposal or presence of a hazardous
substance. This indemnity will apply whether the hazardous substance is on,
under or about the Borrower's property or operations or property leased to
the Borrower. The indemnity includes but is not limited to attorneys' fees
(including the reasonable estimate of the allocated cost of in-house
counsel and staff). The indemnity extends to the Bank, its parent,
subsidiaries and all of their directors, officers, employees, agents,
successors, attorneys and assigns. For these purposes, the term "hazardous
substances" means any substance which is or becomes designated as
"hazardous" or "toxic" under any federal, state or local law. This
indemnity will survive repayment of the Borrower's obligations to the Bank.
<PAGE>
G. MULTIPLE BORROWERS. If there are two or more Borrowers under this
Agreement, each will be individually obligated to repay the Bank in full,
and all will be obligated together. The Bank may terminate the availability
of credit under this Agreement if the Bank receives conflicting
instructions from the Borrowers.
H. ONE AGREEMENT. This Agreement and any related security or other agreements
required by this Agreement collectively: (1) represent the sum of the
understandings and agreements between the Bank and the Borrower concerning
this credit; and (2) replace any prior oral or written agreements between
the Bank and the Borrower concerning this credit; and (3) are intended by
the Bank and the Borrower as the final, complete and exclusive statement of
the terms agreed to by them. In the event of any conflict between this
Agreement and any other agreements required by this Agreement, this
Agreement will prevail.
I. CHANGE OF TERMS. The bank may change any term or condition of this
Agreement, to the extent permitted by law, by providing written notice to
the Borrower. Any such change shall apply to any unpaid balance outstanding
under this Agreement as well as any future transactions under this
Agreement.
J. NOTICE. As required herein, notice to the Bank shall be sent to the address
shown on the Borrower's latest billing statement, to be effective when
received. Any written notice to the Borrower shall be sent to the
Borrower's address in the Bank's records, to be effective when deposited in
the U.S. mail, postage prepaid, unless otherwise stated in the notice. The
Borrower agrees to notify the Bank promptly in writing of a change in the
Borrower's mailing address.
K. COSTS. If the Bank incurs any expense in connection with administering or
enforcing this Agreement, or if the Bank takes collection action under this
Agreement, it is entitled to costs and reasonable attorneys' fees,
including any allocated costs of in-house counsel. At the Bank's option,
the Bank may add these costs to the principal amount outstanding under this
Agreement.
L. ATTORNEYS' FEES. In the event of a lawsuit or arbitration procedure, the
prevailing party is entitled to recover costs and reasonable attorneys'
fees (including any allocated costs of in-house counsel) incurred in
connection with the lawsuit or arbitration proceeding, as determined by the
court or arbitrator.
M. TELEPHONE MONITORING. To the extent not prohibited by law, the Bank's
personnel may listen to telephone calls between the Borrower and the Bank's
employees for the purpose of monitoring the quality of service the Borrower
receives.
N. CANCELLATION BY THE BORROWER. The Borrower may cancel this Agreement by
written notice to the Bank. The Borrower's request will take effect at the
time it is received by the Bank. If there is more than one Borrower, the
Bank may treat a request by one of them under this paragraph as a request
by all of them. At the time of cancellation, the outstanding balance will
be immediately due and payable.
<PAGE>
O. ARBITRATION. 1. This paragraph concerns the resolution of any controversies
or claims between the Borrower and the Bank, including but not limited to
those that arise from: (a) This Agreement (including any renewals,
extensions or modifications of this Agreement); (b) Any document, agreement
or procedure related to or delivered in connection with this Agreement; (c)
Any violation of this Agreement; or (d) Any claims for damages resulting
from any business conducted between the Borrower and the Bank, including
claims for injury to persons, property or business interests (torts).
2. At the request of the Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United States
Arbitration Act. The United States Arbitration Act will apply despite the
provisions of paragraph C., "Governing Law and Waiver," above.
3. Arbitration proceedings will be administered by the American Arbitration
Association and will be subject to its commercial rules of arbitration.
4. For purposes of the application of the statute of limitations, the
filing of an arbitration pursuant to this paragraph is the equivalent of
the filing of a lawsuit, and any claim or controversy which may be
arbitrated under this paragraph is subject to any applicable statute of
limitations. The arbitrators will have the authority to decide whether any
such claim or controversy is barred by the statute of limitations and, if
so, to dismiss the arbitration on that basis.
5. If there is a dispute as to whether an issue is arbitrable, the
arbitrators will have the authority to resolve any such dispute.
6. The decision that results from an arbitration proceeding may be
submitted to any authorized court of law to be confirmed and enforced.
7. This provision does not limit the right of the Borrower or the Bank to:
(a) exercise self-help remedies such as setoff; (b) foreclose against or
sell any real or personal property collateral; or (c) act in a court of
law, before, during or after the arbitration proceeding to obtain (i) an
interim remedy; and/or (ii) additional or supplementary remedies.
8. The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrower or the Bank, including the
suing party, to submit the controversy or claim to arbitration if the other
party contests the lawsuit.
This Agreement is effective as of the date stated at the top of the first
page.
<PAGE>
MEDICAL SCIENCE SYSTEMS, INC.
By: By:
U. Spencer Allen, Chief Financial Officer
By: By:
Paul J. White, President
By: By:
Classification: Confidential
<PAGE>
BANK OF AMERICA
- --------------------------------------------------------------------------------
SECURITY AGREEMENT
(DEPOSIT ACCOUNTS)
1. GRANT OF SECURITY INTEREST.
As security for any and all Indebtedness (as defined below) of MEDICAL
SCIENCE SYSTEMS, INC. ("Debtors"), the undersigned MEDICAL SCIENCE SYSTEMS,
INC. ("Pledgors") hereby irrevocably and unconditionally grant a security
interest in and assign and transfer the Deposit Accounts (as defined below)
to Bank of America National Trust and Savings Association ("Secured
Party").
- ------------------------------------------------------------------------------
2. INDEBTEDNESS.
"Indebtedness" means all debts, obligations or liabilities now or hereafter
existing, absolute or contingent, of Debtors or any one or more of them to
Secured Party, whether voluntary or involuntary, whether due or not due, or
whether incurred directly or indirectly or acquired by Secured Party by
assignment or otherwise. Unless otherwise agreed in writing, "Indebtedness"
shall not include such debts, obligations or liabilities which are or may
hereafter be "consumer credit" subject to the disclosure requirements of
the Federal Truth-in-Lending law or any regulation promulgated thereunder.
- ------------------------------------------------------------------------------
3. DEPOSIT ACCOUNTS.
For purposes of this Agreement, "Deposit Accounts" means the following
deposit account(s) opened by Pledgors with Secured Party, any renewals or
rollovers thereof, and any proceeds thereof:
<TABLE>
<S> <C>
DEPOSIT ACCOUNT NUMBER OPEN OR ISSUE DATE CURRENT PRINCIPAL AMOUNT MATURITY DATE
- ---------------------- ------------------ ------------------------ -------------
06945-01340
</TABLE>
- ------------------------------------------------------------------------------
4. NO OTHER SECURITY INTERESTS.
Pledgors hereby represent and warrant to Secured Party that they own each
of the Deposit Accounts free and clear of any and all liens, encumbrances,
or interest of any third parties other than the security interest of
Secured Party.
- ------------------------------------------------------------------------------
5. WITHDRAWALS; RENEWALS; ROLLOVERS.
Pledgors shall not withdraw funds from the Deposit Accounts without Secured
Party's prior written consent. Pledgors agree that, upon maturity of any
Deposit Account with a maturity date, such Deposit Account shall be renewed
at Secured Party's then prevailing rate of interest for successive ninety
(90) day periods (or such other time period as may be agreed by Secured
Party and Pledgors).
- ------------------------------------------------------------------------------
6. CERTIFICATES. Upon Secured Party's request, Pledgors shall deliver any
certificate evidencing any of the Deposit Accounts to Secured Party, duly
endorsed over to Secured Party, as necessary.
- ------------------------------------------------------------------------------
7. INTEREST PAYMENTS.
Notwithstanding Secured Party's security interest in the proceeds of the
Deposit Accounts, Secured Party will continue to pay to Pledgors interest
accruing thereunder until the occurrence of an Event of Default under this
Agreement.
- ------------------------------------------------------------------------------
8. COSTS.
All advances, charges, costs and expenses, including reasonable attorneys'
fees, incurred or paid by Secured Party in exercising any right, power or
remedy conferred by this Agreement or in the enforcement thereof, shall
become a part of the Indebtedness
<PAGE>
secured hereunder and shall be paid to Secured Party by Debtors immediately
and without demand, with interest thereon at an annual rate equal to the
highest rate of interest of any Indebtedness secured by this Agreement.
Such costs and attorneys' fees shall include, without limitation, the
allocated cost of in-house counsel.
- ------------------------------------------------------------------------------
9. EVENTS OF DEFAULT.
At the option of Secured Party and without necessity of demand or notice,
all or any part of the Indebtedness of Debtors shall immediately become due
and payable irrespective of any agreed maturity upon the happening of any
of the following events ("Events of Default"); provided, however, that all
Indebtedness of Debtors automatically shall become immediately due and
payable if a bankruptcy petition is filed with respect to any Debtor: (a)
failure to keep or perform any of the terms or provisions of this
Agreement; (b) default in the payment of principal or interest or any other
default with respect to any Indebtedness of Debtors; (c) the levy of any
attachment, execution or other process against any of the collateral; (d)
the death, insolvency, failure in business, commission of an act of
bankruptcy, general assignment for the benefit of creditors, filing of any
petition in bankruptcy or for relief under the provisions of the Bankruptcy
Code, of, by, or against any Debtor or Pledgor or any comaker,
accommodation maker, surety or guarantor of the Indebtedness or any
endorser of any note or other document evidencing the Indebtedness. Upon
the happening of any of the foregoing specified events, any agreement for
further financial accommodation by Secured Party shall terminate at its
option.
- ------------------------------------------------------------------------------
10. REMEDIES.
Upon the happening of any Event of Default, Secured Party may then exercise
as to such collateral all the rights, powers and remedies of an owner and
all rights, powers and remedies of a secured party under the California
Uniform Commercial Code and other laws. Secured party may exercise any
rights of setoff, without notice, against any funds in any Deposit Account.
- ------------------------------------------------------------------------------
11. WAIVERS.
Pledgors waive any right to require Secured Party to (a) proceed against
any person, (b) proceed against or exhaust any collateral, or (c) pursue
any other remedy in Secured Party's power; and waive any defense arising by
reason of any disability or other defense of any Debtor or any other
person, or by reason of the cessation from any cause whatsoever of the
liability of Debtors or any other person. Pledgors waive any right of
subrogation, reimbursement, indemnification, and contribution (contractual,
statutory or otherwise), including without limitation, any claim or right
of subrogation under the Bankruptcy Code (Title 11 of the U.S. Code) or any
successor statute, arising from the existence or performance of this
Agreement, and Pledgors waive any right to enforce any remedy which Bank
now has or may hereafter have against Debtors or against any other person,
and waive any benefit of, and any right to participate in, any security now
or hereafter held by Secured Party. If any Pledgor is not also a Debtor
with respect to a specified Indebtedness, such Pledgor authorizes Secured
Party without notice or demand and without affecting Pledgor's liability
hereunder from time to time to: (a) renew, extend, accelerate or otherwise
change the time for payment of, or otherwise change the terms of, such
Indebtedness or any part thereof, including increase or decrease of the
rate of interest thereon; (b) take and hold security, other than the
collateral herein described, for the payment of such Indebtedness or any
part thereof, and exchange, enforce, waive and release the collateral
herein described or any part thereof or any such other security; and (c)
release or substitute Debtors, or any of the endorsers or guarantors of
such Indebtedness or any part thereof, or any other parties thereto.
- ------------------------------------------------------------------------------
12. TRANSFER OF COLLATERAL.
Upon the transfer of all or any part of the Indebtedness, Secured Party may
transfer all or any part of the collateral and shall be fully discharged
thereafter from all liability and responsibility with respect to such
collateral so transferred, and the transferee shall be vested with all the
rights and powers of Secured Party hereunder with respect to such
collateral so transferred; but with respect to any collateral not so
transferred Secured Party shall retain all rights and powers hereby given.
- ------------------------------------------------------------------------------
13. CONTINUING AGREEMENT.
This is a continuing Agreement and all the rights, powers and remedies
hereunder shall apply to all past, present and future Indebtedness of
Debtors, including that arising under successive transactions which shall
either continue the Indebtedness, increase or decrease it, or from time to
time create new Indebtedness after all or any prior Indebtedness has been
satisfied, and notwithstanding the death, incapacity, or bankruptcy of any
Debtor, or any other event or proceeding affecting any Debtor.
- ------------------------------------------------------------------------------
14. CONTINUING POWERS.
Until all Indebtedness shall have been paid in full all rights, powers and
remedies granted to Secured Party hereunder shall continue to exist and may
be exercised by Secured Party at the time specified hereunder irrespective
of the fact that the
<PAGE>
Indebtedness or any part thereof may have become barred by any statute of
limitations, or that the personal liability of any Debtor may have ceased.
- ------------------------------------------------------------------------------
15. OTHER RIGHTS.
The rights, powers and remedies given to Secured Party by this Agreement
shall be in addition to all rights, powers and remedies given to Secured
Party by virtue of any statute or rule of law. Any forbearance or failure
or delay by Secured Party in exercising any right, power or remedy
hereunder shall not be deemed to be a waiver of such right, power or
remedy, and any single or partial exercise of any right, power or remedy
hereunder shall not preclude the further exercise thereof; and every right,
power and remedy of Secured Party shall continue in full force and effect
until such right, power or remedy is specifically waived by an instrument
in writing executed by Secured party.
- ------------------------------------------------------------------------------
16. PLEDGORS' RESIDENCE.
Each Pledgor represents and warrants that Pledgor resides in, or, if
Pledgor is not an individual, has its executive office in the state
specified on the signature page hereof. Each Pledgor agrees to give Secured
Party at least thirty (30) days' notice before changing its state of
residence or chief executive office.
- ------------------------------------------------------------------------------
17. SINGULAR AND PLURAL.
All words used herein in the plural shall be deemed to have been used in
the singular where the context and construction so require, and the
obligations and undertakings hereunder are joint and several.
- ------------------------------------------------------------------------------
18. TERMINATION.
This Security Agreement shall remain in full force and effect until
terminated by Secured Party.
- ------------------------------------------------------------------------------
19. CALIFORNIA LAW.
This Agreement shall be governed by the laws of the State of California.
<PAGE>
IN WITNESS WHEREOF, Secured Party and Pledgors have executed this Agreement
as of June 05, 1998 .
MEDICAL SCIENCE SYSTEMS, INC.
By: Pledgor(s) Address:
U. Spencer Allen, Chief Financial Officer
4400 McArthur Blvd., #980
Newport Beach, CA 92660-2031
By:
Paul J. White, President
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
By: Bank Address:
Bank of America NT & SA
Business Lending Services #1738
P. O. Box 6012
By: Pasadena, CA 91102-6012
TAXPAYER INFORMATION (OWNER'S CERTIFICATION)
My Taxpayer Identification Number (TIN) to be used for tax reporting purposes
is: _______________________. Under penalties of perjury, I certify that the
taxpayer information provided is true, correct and complete.
x
- ----------------------------------------------------------------------
Owner's Signature (Holder of TIN to be used for tax reporting purposes)
Paul J. White, President
(Check if Applicable)
|_| EXEMPT FOREIGN PERSONS, INDIVIDUALS. I am neither a citizen nor a resident
of, nor am I doing business in the United States, and I have not, and do
not plan to be, present in the United States for 183 or more days during
the calendar year.*
|_| EXEMPT FOREIGN PERSONS, NON-INDIVIDUALS. The Owner is not a U.S.
corporation, partnership, estate or trust and the collateral is not
effectively connected (related) to any U.S. trade or business the Owner is
currently engaged in or plans to engage in during the year.*
|_| I am subject to backup withholding under the provisions of Internal Revenue
Section Code 3406(a)(1)(C) as notified by the Internal Revenue Service.
* Exempt Foreign Person status is valid for three years. Prior to the third
year you will be required to recertify your status as an Exempt Foreign
Person.
[Confidential treatment has been requested for portions of this exhibit. The
confidential portions have been redacted and are denoted by [**]. The
confidential portions have been separately filed with the Securities and
Exchange Commission.]
EXHIBIT 10.2
EXCLUSIVE INDEPENDENT REPRESENTATIVE
This Agreement is entered into and made effective as of March 25, 1999, by and
between Medical Science Systems, Inc., a Texas corporation with its Principal
offices located at 100 N.E. Loop 410, Suite 820, San Antonio TX 78216-4749,
United States ("MSS") and The Straumann Company, dba Straumann USA, a Delaware
company with its principal offices located at 1601 Trapelo Road, Waltham,
Massachusetts 02154.
A. MSS has rights to a certain genetic test for evaluating patients for
predisposition to periodontal disease, hereinafter referred to as the "PST
Test," which is the subject of U.S. Pat. 5,686,246 issued Nov. 11, 1997 and
titled "Detecting Genetic Predisposition to Periodontal Disease." MSS desires to
have the PST Test marketed and promoted in Territory.
B. Representative has expertise in the marketing and promotion of products in
the dental market in Territory. Representative wishes to act as an independent
representative of MSS for the marketing and promotion of the PST Test in
Territory. The parties desire to define in this Agreement the terms and
conditions upon which Representative will act as an independent representative
of MSS.
NOW, THEREFORE, MSS and Representative agree as follows:
1. DEFINITIONS.
1.1 "Dental Provider" means dental specialists and general dentists.
1.2 "Intellectual Property Rights" means patent rights, copyright rights
(including, but not limited to, rights in audiovisual works and Moral Rights),
trade secret rights, and any other intellectual property rights recognized by
the law of each applicable jurisdiction.
1.3 "Launch Date" means the date agreed upon by the parties upon which
Representative will begin the marketing of PST Tests and solicitation of orders
for Sample Collection Materials (SCMs) in the United States, as set forth in
Exhibit A.
1.4 "Marks" means those trademarks, tradenames, brand names, service marks,
service names, and/or logos of MSS listed in Exhibit B hereto under which the
PST Test may be marketed or promoted by Representative in accordance with
Section 8.4 (Trademarks). Exhibit B may be amended from time to time to add new
Marks of MSS that Representative is permitted to use in connection with the
marketing and promotion of the PST Test hereunder.
1.5 "MSS Products" means any product or service of MSS that Representative
markets and promotes pursuant to this Agreement.
1.6 "Sample Collection Materials (SCMs)" means the packaging, clinical materials
and accompanying instructions to be used to obtain a Sample from a Patient for
delivery to a laboratory.
1.7 "Representative" means The Straumann Company dba Straumann, USA.
<PAGE>
1.8 "Sub-Representatives" means any sub-representative of Representative,
approved by MSS in accordance with Section 2.2 (No Sub-Representatives Without
Consent).
1.9 "PST Test" means the performing of the genetic analysis for evaluating
patients for predisposition to periodontal disease and reporting of the result
to the requesting Dental Provider.
1.10 "Territory" means the territories defined in Exhibit A.
2. APPOINTMENT AS INDEPENDENT REPRESENTATIVE OF MSS.
2.1 Appointment. MSS hereby appoints Representative, and Representative hereby
accepts such appointment, as an independent sales representative of MSS for the
limited purposes of promoting and marketing the use of the PST Test, and
soliciting orders for SCM's to Dental Providers, in the Territory.
Representative's appointment as an independent sales representative of MSS shall
be exclusive for all Dental Providers in the Territory during the initial term
set pursuant to Section 11.1 and shall thereafter remain exclusive so long as
Representative meets the minimum annual sales goals set pursuant to Section 3.7.
2.2 No Sub-Representatives Without Consent. Representative has no right and
agrees not to appoint any Sub-Representatives or to delegate any of its duties
hereunder without the advance written permission of MSS, which MSS may grant or
deny at its sole discretion. In the event MSS provides such permission, any such
Sub-Representative shall comply with all of Representative's duties and
obligations hereunder. Representative shall be fully responsible for any actions
of any Sub-Representative, including breach by such Sub-Representative of any of
the obligations under this Agreement, to the same extent as if Representative
itself had engaged in such actions or committed such breach.
2.3 Independent Contractor. Representative's relationship with MSS during the
term of this Agreement will be that of an independent contractor. Representative
will not have, and will not represent that it has, any authority to bind MSS, to
assume or create any obligation, express or implied, to enter into any
agreements, or to make any warranties or representations, on behalf of MSS or in
MSS' name other than as expressly authorized herein. Nothing contained herein
shall be deemed to create the relationship of franchiser/franchisee,
partnership, or joint venture between the parties, and neither Representative
nor its employees are, or shall act as, employees of MSS.
2.4 Solicitation Outside the Territory. Representative will not solicit
customers outside the Territory.
3. REPRESENTATIVE'S OBLIGATIONS.
Representative will be responsible for carrying out the following activities at
its own expense:
<PAGE>
[Confidential treatment has been requested for portions of this page. The
confidential portions have been redacted and are denoted by [**]. The
confidential portions have been separately filed with the Securities and
Exchange Commission.]
3.1 Creation of Market Plan. Representative will create, with the participation
of MSS, a detailed written market plan for promotion of the PST Test in the
Territory.
3.2 Marketing Materials and Sales Tools. Representative will be responsible for
the development of marketing materials and sales tools for promotion of the PST
Test in the Territory. Representative will provide MSS with copies of all
marketing materials and sales tools to review and approve prior to their use in
the Territory. (MSS will review primarily for trademark, technical claims, etc.)
MSS will not unreasonably withhold its approval and must provide a response
within (5) working days of receipt of materials. MSS will make available to
Representative marketing materials and sales tools developed to date for the
U.S. market as well as draft copy of additional materials for use in the
Territory. MSS will be responsible for the core images, indications and claims
remaining consistent worldwide.
3.3 Attendance at Trade Shows. Representative will incorporate PST into all
meetings, trade shows and exhibitions that it attends and that are relevant in
the Territory. This includes making booth modifications, and incorporating PST
into special offers, promotional, educational materials, sponsorships and other
activities as are determined appropriate by the Representative.
3.4 Sales Efforts. Representative will use reasonable effort to (a) organize and
incorporate the PST Test into its sales training program and; (b) diligently
promote the PST Test and solicit orders for SCMs and follow-up to get and keep
Dental Providers submitting tests in the Territory through its sales force.
3.5 Market Development Activities. Representative will incorporate the PST Test
into appropriate market development activities in the Territory, including but
not limited to continuing education and university programs, advertising,
thought leaders and speaker programs, and marketing studies.
3.6 Shipping and Handling of Sample Collection Materials Kits to Dental
Providers. Representative will be responsible for promptly shipping Sample
Collection Materials to Dental Providers who have placed orders. Representative
shall purchase Sample Collection Materials from MSS. Representative will be
solely responsible for invoicing Dental Providers for SCMs, including shipping
costs, at the agreed upon prices as set forth in Section 5, and for collection
of invoices from such Dental Providers.
3.7 Annual Sales Goals and Minimums. Cumulative annual sales goals and annual
minimum sales requirements to be met by Representative will be set on a yearly
basis in accordance with the provisions of this Section. Representative will use
its best efforts to meet the annual sales goals and minimums applicable for each
annual period during the term of this Agreement.
(a) Sales Minimums. [**]
(b) Sales Goals. Sales goals will be set by mutual agreement, based on input
from MSS and Representative, on an annual basis.
<PAGE>
[Confidential treatment has been requested for portions of this page. The
confidential portions have been redacted and are denoted by [**]. The
confidential portions have been separately filed with the Securities and
Exchange Commission.]
3.8 Market Information. Representative will advise MSS promptly concerning any
market information that may come to Representative's attention respecting MSS,
the PST Test, MSS' market position, or the continued competitiveness of the PST
Test, complaints, or claims by customers, or other persons about MSS or the PST
Test. MSS will be solely responsible for the reporting of any complaints to the
Food and Drug Administration (FDA). Representative will notify MSS in writing
promptly of any opportunity for development or distribution within the Territory
perceived by Representative, and MSS and Representative will discuss all such
opportunities.
4. MSS' OBLIGATIONS.
MSS will be responsible for carrying out the following activities at its own
expense:
4.1 Assistance with Creation of Market Plan. MSS will assist Representative with
the creation of the detailed written market plan for promotion of the PST Test
in the Territory.
4.2 Technical Support for Creation of Marketing Materials and Sales Tools. MSS
will review and provide input on all marketing material and sales tools
developed by Representative including draft copy. MSS will make available to
Representative marketing materials and sales tools developed to date for the
U.S. market as well as existing draft copy of additional materials for use in
the Territory. MSS will be responsible for the core images, indications and
claims remaining consistent worldwide.
4.3 Sales Training and Technical Support. MSS will provide sales training to
Representative's sales force at an agreed to scheduled sales training
meeting. MSS will provide ongoing technical support by having MSS personnel
available by phone to answer sales force and Dental Provider questions. MSS will
also send an MSS representative to support Representative's efforts at
exhibits and trade shows including continuing educational programs if deemed
desirable by the parties.
4.4 Ongoing PST Brand Support and Advertising in International Journals. At its
sole discretion, MSS will advertise in international journals to support the PST
Test Brand and its ongoing representatives in various markets. MSS will also
produce a PST technical bulletin summarizing clinical research developments on a
periodic basis, but no less often than semi-annually, which it will provide to
all of its representatives worldwide.
4.5 Shipment of Sample Collection Materials to Representative. MSS will ship an
initial order of [**] Sample Collection Materials to Representative to be
shipped in [**] lots of [**] each 30 days apart. MSS will ship subsequent orders
of Sample Collection Materials to Representative upon request for delivery by
Representative. The minimum quantity for subsequent orders shall be [**]. MSS
will charge Representative an agreed upon price set forth under Section 5.
4.6 Handling of Samples; Reporting Results of PST Tests. MSS will be solely
responsible, either directly or through its reference laboratory, for processing
PST Tests and reporting the results back to Dental Providers. MSS will provide
the Dental Provider
<PAGE>
[Confidential treatment has been requested for portions of this page. The
confidential portions have been redacted and are denoted by [**]. The
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Exchange Commission.]
with information that will help him/her discuss the results with their patients
(e.g., current MSS patient brochure).
4.7 Invoicing and Collection to Dental Providers, Patients and Insurance. MSS
will be solely responsible, either directly or through its reference laboratory,
for invoicing Dental Provider, patient and/or insurance provider for PST Tests
at the agreed upon prices as set forth in Section 5, and for collection of
invoices from such parties.
4.8 Regulatory Approval of the PST Test. MSS has taken responsibility for all
regulatory approval or government licenses required to market, promote, sell or
use the PST Test in the Territory. If additional approvals or licenses become
necessary MSS will take all actions necessary to secure such approvals and
licenses, Representative will provide reasonable assistance to MSS.
4.9 Marks. MSS will have sole control of the trademarks, trade names, brand
names, service marks and/or service names under which the PST Test is marketed
and promoted.
5. PRICING.
5.1 Pricing of the PST Test. The initial price for PST Test for Dental Providers
in the US has been [**] excluding promotional offers. Any change to the PST test
price will be jointly agreed to by Representative and MSS. MSS will discuss any
anticipated increases or decreases of these prices with Representative. The
Representative and MSS shall negotiate in good faith to reach an agreement on
the price of the PST Test. Subject to the foregoing, MSS reserves the right,
from time to time at its discretion and upon at least three (3) months advance
written notice to Representative, to make reasonable adjustments to its prices
and to any other matters relating to the sale of PST Tests.
5.2 Pricing of the Sample Collection Material Kits to Representative. The
initial price for Sample Collection Materials Kits charged by MSS to
Representative shall be [**] per Kit except that [**]. Any change to the Sample
Collection Materials Kits price will be jointly agreed to by Representative and
MSS. MSS and the Representative will discuss any anticipated increases or
decreases of these prices provided that MSS shall have the ultimate authority
and responsibility for setting and adjusting such price to the Representative.
Subject to the foregoing, MSS reserves the right, from time to time and upon at
least three (3) months advance written notice to Representative, to make
reasonable proposals for adjustments to its prices and to any other matters
relating to the sale of Sample Collection Materials Kits. The Representative
will not unreasonably withhold its approval for these changes. Representative
will have the option of procuring the Sample Collection Materials Kits from
alternative sources. MSS will make a good faith effort to assist Representative
in developing an alternative source. MSS has final approval for the Sample
Collection Materials Kits from an alternative source and MSS will not
unreasonably withhold its approval.
5.3 Pricing of the Sample Collection Materials Kits by Representative. The
initial price for Sample Collection Materials Kits charged by Representative to
the Dental Provider shall be determined by the Representative, but will be no
greater than [**] per kit
<PAGE>
[Confidential treatment has been requested for portions of this page. The
confidential portions have been redacted and are denoted by [**]. The
confidential portions have been separately filed with the Securities and
Exchange Commission.]
without notifying MSS. The Representative shall have the ultimate authority and
responsibility for setting and adjusting such price to the customer.
6. REPRESENTATIVE COMMISSIONS.
In consideration of the services of Representative under this Agreement, MSS
will pay Representative commissions as set forth below:
6.1 Criteria for Commissions. Representative is eligible to receive commissions
only with respect to PST Tests that were submitted by Dental Providers in the
Territory. In no case will commissions be paid on orders by Dental Providers
from whom Representative is not authorized to solicit orders.
6.2 Commission Basis. As to orders meeting the criteria of Section 6.1, MSS will
pay Representative commissions in accordance with the following and Exhibit C
attached.
(a) "Commission Basis" is defined as the amount invoiced by MSS for PST Tests
submitted by Dental Providers in the Territory, except as set forth in
subsection (b) below. Commission Basis will not include any amounts charged for
SCMs or any associated with separately itemized incidental charges, such as
shipping and handling of SCMs or Samples or prepaid revenue from Dental
Providers (revenue invoiced and received from a Dental Provider for a PST Test
which has not yet been submitted) as of the day before the Launch Date.
(b) "Excluded Dental Provider PST Tests" [**]. In the event that any such
Institution, including those listed in Exhibit D, agrees to cover the cost of,
or to mandate the use of PST Tests for patients under its care or covered by its
policy, then MSS and Representative will negotiate in good faith to determine
whether Representative shall be entitled to a commission schedule, and to
determine the rate of such commission, with respect to revenue generated from
sales to such Institutions or reimbursed by such Institutions. The determination
will be based on the business arrangement agreed to with the Institution, price
per PST Test to be received by MSS and whether Representative would be
supporting the use by the Dental Providers covered by the Institution.
(c) Commission payable by MSS to Representative = Applicable Commission Rate x
Commission Basis
6.3 Procedure For and Timing of Payment. On a monthly basis, MSS will provide a
report listing all Dental Providers who have submitted test samples and the date
that an invoice was prepared. MSS will pay Representative a commission based on
PST Tests submitted by the Dental Provider and invoiced to the patient's
insurance and/or directly to the patient. The commission rate will vary with
volume, as described in Exhibit C. Payments will be issued by MSS within ninety
(90) days after the close of each month and will be paid in US dollars.
6.4 Right to Audit. Upon at least ten (10) working days prior notice to MSS,
Representative, and its certified public accountants and other auditors shall
have the right to access, audit and copy, during normal business hours and no
more than once
<PAGE>
per calendar year, those books and records of MSS pertaining to activities under
this Agreement solely for the purpose of verifying the correctness of payments
made by MSS hereunder. Such audit shall be at Representative's own expense,
except in the event that such audit reveals an underpayment by MSS of five
percent (5%) or more in any given month, MSS shall reimburse Representative for
the reasonable cost of such audit. Representative and its certified public
accountants and other auditors shall keep all such books and records, the
information contained therein, and copies thereof, confidential and shall not
disclose any of the foregoing to any third party or use any of the foregoing for
any purpose other than to verify the correctness of commission payments made by
MSS hereunder. Prompt adjustment shall be made by MSS to compensate for any
errors or omissions disclosed by any such audit.
7. CONFIDENTIALITY.
7.1 "Confidential Information" means (a) the design, technology and know-how of
the PST Test or of any other service or product of MSS, except insofar as
disclosed by normal use of the product; (b) non-public information concerning
MSS' financing, financial status, research and development, proposed new
services or products, marketing plans and pricing, unless and until publicly
announced; and (c) any information designated by MSS as confidential or
proprietary in writing. "Confidential Information" will not include information
that:
(a) is in or enters the public domain without breach of this Agreement;
(b) MSS customarily provides to others without restriction on disclosure;
(c) Representative rightfully receives from a third party without restriction on
disclosure and without breach of a nondisclosure obligation;
(d) Representative develops independently without access to Confidential
Information, which Representative can prove with written evidence;
(e) any information that a party is required to disclose in connection with any
legal proceeding.
7.2 Obligations. Representative agrees:
(a) that it will not disclose to any third party or use, other than as expressly
permitted hereunder, any Confidential Information of MSS;
(b) that it will not disclose to any third party other than its attorneys,
accountants and other professional advisors the terms of this Agreement, except
as may be necessary to enforce this Agreement; and
(c) that it will take all reasonable measures to maintain the confidentiality
and to prevent the unauthorized use of all Confidential Information in its
possession or control, which will in no event be less than the measures it uses
to maintain the confidentiality of its own information of similar importance.
<PAGE>
7.3 Injunctive Relief. Representative acknowledges that unauthorized use or
disclosure of the Confidential Information would cause substantial harm to MSS
that could not be remedied by the payment of damages alone. Accordingly,
Representative agrees that MSS will be entitled to preliminary and permanent
injunctive relief and other equitable relief for any breach of this Section 7.
8. PROPRIETARY RIGHTS.
8.1 MSS' Ownership. MSS is and will remain the sole and exclusive owner of all
intellectual property rights in the PST Test and the Marks.
8.2 Representative's Duties. Representative will use its reasonable efforts to
protect MSS' Intellectual Property Rights in the PST Test and will report
promptly to MSS any infringement of such rights of which Representative becomes
aware.
8.3 Third Party Infringement. MSS reserves the sole and exclusive right at its
discretion to assert claims against third parties for infringement or
misappropriation of its Intellectual Property Rights in the PST Test.
8.4 Trademarks. Subject to the terms and conditions of this Agreement, MSS
grants Representative a non-exclusive, non-transferable license for the term of
this Agreement to use in Representative's marketing of the PST Test only those
Marks listed in Exhibit B, provided that such use is in accordance with MSS'
trademark usage guidelines then in effect. Such use must reference such Marks as
being owned by MSS. Nothing in this Agreement grants Representative ownership or
any rights in or to use any Marks, except in accordance with this license. The
rights granted to Representative in this license will terminate upon any
termination or expiration of this Agreement. Upon such termination or
expiration, Representative will no longer make any use of any Marks.
Representative has paid no consideration for the use of the Marks and
Representative agrees that it will not at any time (i) claim any interest in any
of the Marks; (ii) register, seek to register, or cause to be registered any of
the Marks, other than in MSS' name and at MSS' specific request; or (iii) adopt
and use any trademark, tradename, brand name, service mark, service name, and/or
logo that might be confusingly similar to the Marks. Representative will assist
MSS, if requested and at MSS' expense, to register the Marks in MSS' name in the
Territory.
9. INDEMNITIES.
9.1 Distribution Indemnity. Subject to the limitations set forth in Section 10
(Limitation of Liability), Representative agrees to defend (or settle) and
indemnify MSS against any third party claims against MSS for loss, damage,
liability, or expense (including but not limited to reasonable attorneys' fees)
arising out of the gross negligence or willful misconduct of Representative or
any Sub-Representatives in connection with the promotion or marketing of the PST
Test under this Agreement.
9.2 Products Liability Indemnity. Subject to the limitations set forth in
Section 10 (Limitation of Liability), MSS agrees to defend (or settle) and
indemnify Representative against any third party claims against Representative
for loss, damage, liability or expense (including but not limited to reasonable
attorneys' fees) arising out of any
<PAGE>
defect or alleged defect in the Sample Collection Materials or the processing of
PST Tests. MSS will provide Representative with a copy of the products liability
insurance policy and notice to the insurance carrier adding Representative to
the parties to be notified of any changes and/or cancellations to the policy
prior to the Launch Date. Representative will propose any changes deemed
necessary to the coverage and MSS will implement all reasonable changes.
Representative will provide MSS with a copy of its products liability insurance
policy and will add MSS as a recipient of notices of changes and/or
cancellations of the policy.
9.3 Infringement Indemnity.
(a) Duty to Indemnify and Defend.
(i) Subject to the limitations set forth in Section 10 (Limitation of
Liability), MSS will defend (or settle) and indemnify Representative against any
third party claims against Representative to the extent that it is based on a
claim that the use of the Marks or of the PST Test as delivered under this
Agreement infringes any copyright, misappropriates any trade secret, or
infringes any patent.
(ii) Subject to the limitations set forth in Section 10 (Limitation of
Liability), MSS will pay any and all costs, damages, and expenses (including but
not limited to reasonable attorneys' fees) awarded against Representative in any
such action or proceeding to the extent attributable to any such claim.
(iii) MSS will have no obligation under this Section as to any action,
proceeding, or claim unless: (A) MSS is notified of it promptly; (B) MSS has
control of its defense and settlement; and (C) Representative provides MSS with
reasonable assistance at the cost and expense of MSS in its defense and
settlement.
(b) Sole Remedy. THE FOREGOING ARE MSS' SOLE AND EXCLUSIVE OBLIGATIONS, AND
REPRESENTATIVE'S SOLE AND EXCLUSIVE REMEDIES, WITH RESPECT TO INFRINGEMENT OR
MISAPPROPRIATION OF INTELLECTUAL PROPERTY RIGHTS OF ANY KIND.
(c) Exclusions. MSS will have no obligations under this Section 9.3 with respect
to infringement or misappropriation to the extent arising from (i) modifications
by Representative to the PST Test that were not authorized by MSS or (ii) the
use of the PST Test in combination with products or processes not approved of or
provided by MSS.
10. LIMITATIONS OF LIABILITY.
10.1 Failure of Essential Purpose. The parties have agreed that the limitations
and exclusions of liability specified in this Section 10 will survive and apply
even if any limited remedy specified in this Agreement is found to have failed
of its essential purpose.
10.2 Basis of the Bargain. Representative acknowledges that MSS has set its
prices and entered into this Agreement in reliance upon the limitations of
liability and the
<PAGE>
[Confidential treatment has been requested for portions of this page. The
confidential portions have been redacted and are denoted by [**]. The
confidential portions have been separately filed with the Securities and
Exchange Commission.]
disclaimers of warranties and damages set forth herein, and that the same form
an essential basis of the bargain between the parties.
11. TERM AND TERMINATION.
11.1 Term. The term of this Agreement will begin on the Launch Date and will
continue for a period of [**], counted from the Launch Date unless it is
terminated earlier in accordance with the provisions hereof. [**]
11.2 Events of Termination for Cause. Either party will have the right to
terminate this Agreement if:
(a) the other party breaches any material term or condition of this Agreement
and fails to cure such breach within sixty (60) days after written notice;
(b) the other party becomes the subject of a voluntary petition in bankruptcy or
any voluntary proceeding relating to insolvency, receivership, liquidation, or
composition for the benefit of creditors; or
(c) the other party becomes the subject of an involuntary petition in bankruptcy
or any involuntary proceeding relating to insolvency, receivership, liquidation,
or composition for the benefit of creditors, if such petition or proceeding is
not dismissed within sixty (60) days of filing.
11.3 Rights to Negotiate a License. In the event a condition described in
Section 11.2 (b) or (c) above occurs against MSS, or in the event is deemed to
have breached this agreement pursuant to Section 11.2 (a) above, as determine
under procedures set forth in Section 13, Representative will have the following
options: For a period of ninety days (90) from the event listed in Section 11.2
(b) or (c), or the final arbitration ruling under Section 11.2 (a): (1)
Representative may terminate this Agreement as set forth in Section 11.2; or (2)
Representative and MSS will negotiate in good faith to enter into an exclusive
license agreement in the Territory to:
(a) assist and enable Representative to continue business in the Territory on a
basis comparable to that which existed prior to the breach.
(b) grant Representative a license for exclusive rights to MSS' intellectual
properties pertaining to the PST Test.
(c) provide Representative with all specifications and vendor information for
all materials used in the Sample Collection Materials Kit and the PST Test and
to inform vendors of Representative's right to purchase any proprietary
material.
(d) provide Representative with a list of all laboratories that have performed
the PST Test in the Territory.
(e) provide Representative with current customer account information for
processed PST Tests and introduce Representative to the organization managing
the collection process in the Territory.
<PAGE>
(f) to establish a royalty agreement to be paid by Representative to MSS for all
PST Tests processed in the Territory.
11.4 Termination by MSS for Failure to Meet Minimum Sales. Effective at any time
after the first two (2) years after the Launch Date, MSS may terminate this
Agreement upon six (6) months written notice to Representative in the event that
Representative fails to meet the preceding year's annual minimum sales
requirement set pursuant to Section 3.7 (Annual Sales Goals and Minimums),
unless during such six (6) month period Representative cures such failure by
reaching a level of sales that makes up the previous year's deficit to the
minimum, and is on track to meet the current year's minimum.
11.5 Commission Rights on Termination. Upon termination of this Agreement,
Representative will be entitled to commissions on PST Tests that satisfy the
requirements of this Agreement only if samples are received by MSS within (90)
days of the effective date of termination.
11.6 Effect of Termination. Upon termination or expiration of this Agreement:
(a) Representative will immediately return to MSS all copies of Confidential
Information in its possession or control, and an officer of Representative will
certify to MSS in writing that Representative has done so; (b) Representative
will immediately cease to use any and all of the Marks; (c) Representative will
immediately return all marketing material provided to Representative by MSS; (d)
Representative and MSS will reconcile commissions paid pursuant to Section 6
(Representative's Commission) and (e) Representative will return all SCM Kit
inventory to MSS for full refund.
11.7 No Damages for Termination. NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR
DAMAGES OF ANY KIND, INCLUDING INCIDENTAL OR CONSEQUENTIAL DAMAGES, ON ACCOUNT
OF THE TERMINATION OR EXPIRATION OF THIS AGREEMENT IN ACCORDANCE WITH ITS TERMS.
REPRESENTATIVE WAIVES ANY RIGHT IT MAY HAVE TO RECEIVE ANY COMPENSATION OR
REPARATIONS ON TERMINATION OR EXPIRATION OF THIS AGREEMENT UNDER THE LAW OF THE
TERRITORY OR OTHERWISE, OTHER THAN AS EXPRESSLY PROVIDED IN THIS AGREEMENT.
Without limiting the generality of the preceding sentence, neither party will be
liable to the other on account of termination or expiration of this Agreement
for reimbursement or damages for the loss of goodwill, prospective profits or
anticipated income, or on account of any expenditures, investments, leases or
commitments made by either party or for any other reason whatsoever based upon
or growing out of such termination or expiration.
11.8 Nonexclusive Remedy. Except as otherwise provided in this Agreement, the
exercise by either party of any remedy under this Agreement will be without
prejudice to its other remedies under this Agreement or otherwise.
11.9 Survival. The rights and obligations of the parties contained in Sections 7
(Confidentiality), 8 (Proprietary Rights), 9 (Indemnities), 10 (Limitations of
Liability), and 11.6 (Effect of Termination) will survive the termination or
expiration of this Agreement.
<PAGE>
12. COMPLIANCE WITH LAW.
12.1 General Compliance. Each party agrees to comply with all applicable laws,
rules, and regulations in connection with its activities under this Agreement.
13. ARBITRATION.
13.1 Agreement to Submit. Except as provided below, the parties agree to submit
disputes between them, or their respective successors and assigns, relating to
this Agreement and its formation, breach, performance, interpretation and
application (collectively, the "Disputes" and individually, a "Dispute").
13.2 Procedure. Arbitration will be in San Antonio, Texas. Except as provided
below, all Disputes will be submitted to and settled by arbitration in
accordance with the provisions of the Federal Arbitration Act, 9 U.S.C.
ss.ss.1-15, as amended. The terms of the commercial arbitration rules of the
American Arbitration Association (The "AAA") shall apply except to the extent
they conflict with the provisions of this Section 13. The arbitration shall be
conducted by a single independent arbitrator. The parties shall endeavor to
select an independent arbitrator by mutual agreement. If such agreement cannot
be reached within 30- calendar days after a Dispute has arisen, the selection of
the arbitrator(s) shall be made in accordance with Rule 13 of the Rules as
presently in effect. The arbitrator shall be a member of a state bar engaged in
the practice of law in the United States or a retired member of a state or the
Federal judiciary in the United States. The award of the arbitrator shall be
based on the evidence admitted and the substantive law of the State of Texas and
shall contain an award for each issue and counter claim. The award shall be made
30 days following the close of the final hearing and the filing of any
post-hearing briefs authorized by the arbitrator. The award of the arbitrator
shall be final and binding on the parties hereto. Each party shall be entitled
to inspect and obtain a copy of non-privileged relevant documents in the
possession or control of the other party. All such discovery shall be in
accordance with procedures approved by the arbitrator. Unless otherwise provided
in the award, each party shall bear its own costs of discovery. Each party shall
be entitled to take five (5) depositions. Each party shall be entitled to submit
one set of interrogatories which require no more than 30 answers. All discovery
shall be expedited, consistent with the nature and complexity of the claim or
dispute and consistent with fairness and justice. The arbitrator shall have the
power to compel any party to comply with discovery requests of the other parties
and to issue binding orders relating to any discovery dispute which shall be
enforceable in the same manner as awards. The arbitrator also shall have the
power to impose sanctions for abuse or frustration of the arbitration process
including, without limitation, the refusal to comply with orders of the
arbitrator relating to discovery and compliance with subpoenas. The arbitrator
may require the non-prevailing party to pay the prevailing party's attorneys'
fees and costs incurred in connection with the arbitration. It is further agreed
that any of the parties hereto may petition the United States District Court for
the Western District of Texas, San Antonio Division, for a judgement to be
entered upon any award entered through such arbitration proceedings.
13.3 Evidence. Each party agrees to supply to the arbitrator in accordance with
a timetable to be established by the arbitrator such materials as the arbitrator
may
<PAGE>
reasonably require in order to render a decision. Each party shall supply to the
other party hereto copies of any and all materials which are supplied to the
arbitrator concurrently with delivery of such materials to the arbitrator. In
addition, each party shall supply to the other party at least ten (10) business
days prior to the commencement of any hearing in the arbitration copies of any
and all documents which such party intends to introduce or upon which such party
intends to rely in connection with such hearing, as well as a list of any and
all witnesses whose testimony such party intends to introduce in connection with
such hearing. Additional documents or witnesses may be introduced only if the
arbitrator determines that good cause has been shown. Each party shall also have
the right to submit written briefs to the arbitrator in accordance with a
timetable to be established by the arbitrator. All testimony of witnesses at any
arbitration proceeding held pursuant to these provisions shall be taken under
oath. To the extent either party maintains in good faith that any documents
submitted or testimony introduced in connection with such arbitration contain
confidential information or trade secrets, the parties shall negotiate in good
faith in an effort to reach agreement regarding terms and conditions for keeping
such materials and testimony confidential. If the parties are unable to agree
upon such terms, the arbitrator shall have the right to impose appropriate
restrictions to maintain the confidentiality of any confidential information or
trade secrets in connection with the arbitration.
13.4 Burden of Proof. For any claim submitted to arbitration, the burden of
proof shall be as it would be if the claim were litigated in a judicial
proceeding in the federal district courts of the State of Texas.
13.5 Payment of Costs. Each party hereby agrees to pay one-half of the
compensation to be paid to the arbitrator in any arbitration under this Section
13 and one-half of the costs of transcripts and other expenses of the
arbitration proceedings; provided, however, that the prevailing party in any
arbitration proceeding as determined by the arbitrator shall be entitled to an
award of its direct costs and reasonable expenses of attorneys, accountants and
other professionals incurred in connection with the proceeding (but not
including reimbursement of the compensation paid by such party to the
arbitrator), to be paid by the losing party. In the event of a dispute as to
whether a party qualifies as a prevailing party under this Section 13.6, the
arbitrator shall resolve such dispute and may apportion such costs, fees and
expenses between the parties as the arbitrator deems just and equitable.
13.6 Attorneys' Fees in Related Actions. In the event of any legal action
relating to the arbitration, including any action to stay the arbitration, to
vacate, modify or correct any award or otherwise, the prevailing party in the
action as determined by the court will be entitled to recover from the other its
court costs and reasonable fees and expenses of attorneys, accountants and other
professionals incurred in connection with the action, including such costs, fees
and expenses upon appeal.
13.7 Exceptions. Neither party will be required to arbitrate any dispute
relating to actual or threatened: (a) unauthorized disclosure of Confidential
Information or (b) violation of MSS' Intellectual Property Rights. Either party
will be entitled to have injunctive, preliminary or other equitable relief, in
addition to damages, including
<PAGE>
reasonable attorneys' fees and costs, to remedy any actual or threatened
violation of its rights with respect to which arbitration is not required
hereunder.
14. GENERAL.
14.1 Assignment. This Agreement will bind and inure to the benefit of each
party's permitted successors and assigns. Neither party may assign this
Agreement, in whole or in part, without the written consent of the other. Any
attempt to assign this Agreement without such consent will be null and void.
14.2 Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Texas, U.S.A.
14.3 Severability. If any provision of this Agreement is found invalid or
unenforceable, that provision will be enforced to the maximum extent
permissible, and the other provisions of this Agreement will remain in force.
14.4 Force Majeure. Except for payments due under this Agreement, neither party
will be responsible for any failure to perform due to causes beyond its
reasonable control (each a "Force Majeure"), including, but not limited to, acts
of God, war, riot, embargoes, acts of civil or military authorities, denial of
or delays in processing of export license applications, fire, floods,
earthquakes, accidents, strikes, or fuel crises, provided that such party gives
prompt written notice thereof to the other party. The time for performance will
be extended for a period equal to the duration of the Force Majeure. In the
event a Force Majeure lasts for more than sixty (60) days, the parties shall
discuss how best to overcome the Force Majeure. In the event a Force Majeure
lasts for more than one-hundred-and-twenty (120) days, either party may
terminate this Agreement with immediate effect.
14.5 Notices. Each notice required or permitted to be sent under this Agreement
shall be given by telecopier transmission or by certified mail (return receipt
requested) or recognized commercial overnight courier to MSS and to
Representative at the addresses and telecopier numbers indicated below. Either
party may change its address and/or telecopier number for purposes of this
Agreement by giving the other party prior written notice of its new address
and/or telecopier number to be confirmed by telephone conversation with the
recipient.
MSS
Paul J. White,President,100 N.E. Loop 410, Suite 820,San Antonio, TX 78216
Phone: 210-349-6400 Fax: 210-384-3356
Representative
William J. Ryan, President, 1601 Trapelo Road Waltham, MA 02154
Phone: 781-890-0001 Fax: 781-890-6464
<PAGE>
14.6 Waiver. No failure of either party to exercise or enforce any of its rights
under this Agreement will act as a waiver of such rights.
14.7 Entire Agreement. This Agreement and its exhibits are the complete and
exclusive agreement between the parties with respect to the subject matter
hereof, superseding and replacing any and all prior agreements, communications,
and understandings (both written and oral) regarding such subject matter. This
Agreement may only be modified, or any rights under it waived, by a written
document executed by both parties.
14.8 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.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly-authorized representatives set forth below as of the Effective Date.
MEDICAL SCIENCE SYSTEMS, INC. STRAUMANN, USA
By: By:
Printed Name: Paul J. White Printed Name: William J. Ryan
Title: President Title: President
Date of Signature: Date of Signature:
Facsimile: 210-384-3356 Facsimile: 781-890-6464
<PAGE>
[Confidential treatment has been requested for portions of this page. The
confidential portions have been redacted and are denoted by [**]. The
confidential portions have been separately filed with the Securities and
Exchange Commission.]
EXHIBIT A
Territory:
Dental Providers located in the United States of America and Puerto Rico
Launch Date: April 9, 1999
EXHIBIT B
Marks
Mark Serial Number (if registration secured or applied for)PST75/177259 (United
States)
EXHIBIT C
Commission Rates
MSS shall pay Straumann a commission [**]
EXHIBIT D
[**]
EXHIBIT E
[**]
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,183,787
<SECURITIES> 0
<RECEIVABLES> 134,784
<ALLOWANCES> 20,999
<INVENTORY> 0
<CURRENT-ASSETS> 1,442,858
<PP&E> 797,782
<DEPRECIATION> 385,087
<TOTAL-ASSETS> 2,385,553
<CURRENT-LIABILITIES> 1,167,478
<BONDS> 0
0
0
<COMMON> 16,730,396
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,385,553
<SALES> 36,967
<TOTAL-REVENUES> 36,967
<CGS> 17,237
<TOTAL-COSTS> 389,196
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 7,164
<INCOME-PRETAX> (376,042)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (376,042)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
