<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 12, 1997.
REGISTRATION NO. 333-39253
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3 TO THE
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
ONTRO, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 2820 33-0638356
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
12675 DANIELSON COURT, SUITE 401, POWAY, CALIFORNIA 92064,
(619) 486-7200
(Address and telephone number of principal executive offices and principal place
of business)
CT CORPORATION SYSTEM
818 WEST SEVENTH STREET, LOS ANGELES, CA 90017, (213) 627-8252
(Name, address and telephone number of agent for service)
------------------------
COPIES TO:
DAVID A. FISHER, ESQ. THOMAS J. POLETTI, ESQ.
TIMOTHY J. FITZPATRICK, ESQ. SUSAN B. KALMAN, ESQ.
FISHER THURBER LLP FRESHMAN, MARANTZ, ORLANSKI,
4225 Executive Square, Suite 1600 COOPER & KLEIN
La Jolla, California 92037-1483 9100 Wilshire Blvd., 8th Floor East
Tel. (619) 535-9400 Beverly Hills, California 90212-3480
Fax (619) 535-1616 Tel. (310) 273-1870
Fax (310) 274-8357
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
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<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) UNIT(2) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Units (each Unit consists of one share
of Common Stock, no par value and
one Common Stock Purchase
Warrant)(3)......................... 3,335,000 $6.00 $20,010,000 $6,063.03
Common Stock, no par value(4)......... 3,335,000 -- -- --
Common Stock Purchase Warrants(5)..... 3,335,000 -- -- --
Common Stock, no par value, underlying
Warrants(6)......................... 3,335,000 $9.00 $30,015,000 $8,930.93
Representative's Option(7)............ 1 $0.001 $290.00 $8.79
Units underlying Representative's
Option (each Unit consists of one
share of Common Stock, no par value,
and one Common Stock Purchase
Warrant)............................ 290,000 $9.60 $2,784,000 $843.64
Common Stock, no par value, underlying
Representative's Option............. 290,000 -- -- --
Common Stock Purchase Warrants,
underlying Representative's
Option.............................. 290,000 -- -- --
Common Stock, no par value, underlying
Common Stock Purchase Warrants
underlying Representative's
Option.............................. 290,000 $9.00 $2,610,000 $790.91
Common Stock, no par value, owned by
the Selling Security Holders........ 70,587 $6.00 $423,522 $128.34
Common Stock, no par value, underlying
the Selling Security Holder's
Warrants(8)......................... 70,587 $9.00 $635,283 $192.51
Total................................. $16,958.15
</TABLE>
(1) Pursuant to Rule 416 under the Securities Act of 1933 (the "Act"), this
Registration Statement covers such additional indeterminate number of shares
of Common Stock and Warrants as may be issued by reason of adjustments in
the number of shares of Common Stock and Warrants pursuant to anti-dilution
provisions contained in the Warrants and Representative's Options. Because
such additional shares of Common Stock and Warrants will, if issued, be
issued for no additional consideration, no registration fee is required.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3) Includes 435,000 Units subject to the Underwriters' over-allotment option
(the "Over-allotment Option). The Common Shares included in these Units will
be offered by L.L. Knickerbocker Company, Inc. and the Warrants included in
these Units will be offered by the Registrant.
(4) Includes 435,000 shares of Common Stock subject to the Over-allotment
Option.
(5) Includes 435,000 Warrants subject to the Over-allotment Option. The Warrants
are exercisable over a three year period commencing on the closing date of
the Offering at 150% of the price of the Units offered herein.
(6) The number of shares of Common Stock specified is the number which may be
acquired upon exercise of the Warrants at the maximum exercise price
thereof.
(7) The Representative's Options entitle the Representative to purchase 290,000
Units at $9.60 per Unit. The Common Stock and Warrants included in the Units
underlying the Representative's Options may only be purchased together. The
Representative's Options are exercisable over a four year period commencing
one year from the effective date of this Registration Statement.
(8) The Selling Security Holders' Warrants are not registered herein. The
Selling Security Holders' Warrants are exercisable over a three year period
commencing on the closing date of the Offering at 150% of the Offering Price
of the Units.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION DATED DECEMBER 12, 1997
PROSPECTUS
2,900,000 UNITS
[LOGO]
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE THREE YEAR REDEEMABLE COMMON STOCK PURCHASE WARRANT
---------------------
Ontro, Inc. (the "Company") hereby offers units (the "Units"), each Unit
consisting of one share of the Company's Common Stock, no par value (the "Common
Shares"), and one three year redeemable Common Stock purchase warrant (the
"Warrant(s)"). Until the completion of this offering (the "Offering") the Common
Shares and the Warrants may only be purchased together as a Unit. The
anticipated initial public offering price of the Units is between $5.50 and
$6.00 per Unit ("Offering Price"), of which $.10 is the public offering price
allocated to the Warrants. Upon completion of the Offering, the Common Shares
and the Warrants will immediately trade separately, and the Units will not
trade. Each Warrant entitles the holder to purchase one Common Share at an
exercise price of 150% of the Offering Price of a Unit, until the date which is
three years from the date of this Prospectus. The Warrants are redeemable at the
option of the Company at $0.05 per Warrant following at least 30 days prior
notice if the closing price of the Common Stock equals or exceeds 200% of the
Offering Price for 20 consecutive trading days ending within the 30 days prior
to the date the notice of redemption is given, and at such time as there is a
current effective registration statement covering the Common Shares underlying
the Warrants. Upon 30 days written notice to all holders of the affected class
of Warrants, the Company shall have the right to reduce the exercise price
and/or extend the term of the Warrants. The Units, Common Shares and the
Warrants offered hereby are collectively sometimes hereinafter referred to as
the "Securities."
Simultaneously with the Offering made hereby, the Company is registering
70,587 shares of outstanding Common Stock owned by three shareholders (the
"Selling Security Holders") and the 70,587 shares of Common Stock underlying
outstanding warrants held by the same shareholders (the "Security Holders'
Warrants"). These shares may be resold by the Selling Security Holders from time
to time and at any time following the commencement of the offering. The Security
Holders' Warrants are identical to the Warrants
(COVER CONTINUED NEXT PAGE)
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY
INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE
"RISK FACTORS" BEGINNING ON PAGE EIGHT AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1)(2) COMPANY(2)(3)
<S> <C> <C> <C>
Per Unit...............................
Total..................................
</TABLE>
------------------------
(SEE NOTES, PAGE 3)
The Securities are offered by several underwriters ("Underwriters"), subject
to prior sale when, as, and if delivered to and accepted by the Underwriters and
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters reserve the right to withdraw, cancel, or modify
the Offering and to reject any offer to purchase in whole or in part. It is
expected that delivery of the certificates representing the Securities will be
made against payment therefor at the offices of the Representative, 9701
Wilshire Boulevard, Ninth Floor, Beverly Hills, California 90212, or through the
facilities of Depository Trust Company, on or about , 1997.
JOSEPH CHARLES & ASSOCIATES, INC.
The date of this Prospectus is , 1997.
<PAGE>
INSIDE FRONT COVER--PHOTOGRAPHS
1. BACKGROUND: BROWN ALL OVER BUT BOTTOM QUARTER OF PAGE.
2. LEFT SIDE OF PAGE: TEXT "PROPOSED DESIGN OF THE ONTRO SELF-HEATING
CONTAINER" PHOTO OF ONTRO CONTAINER WITH HOT COFFEE LABEL BELOW TEXT.
3. RIGHT SIDE TOP HALF OF PAGE: PHOTO OF COMPANY OFFICES SHOWING FRONT OF
BUILDING, ONTRO SIGN, AND ADDRESS. TEXT BELOW "ONTRO CORPORATE HEADQUARTERS
LOCATED IN POWAY, CALIFORNIA".
4. RIGHT SIDE CENTER OF PAGE: COMPANY LOGO
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OR
WARRANTS INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE>
(CONTINUED FROM COVER PAGE)
included in the Units offered hereby. The Company has covenanted to use its best
efforts to keep the Registration Statement of which this Prospectus is a part
effective in order to permit such resales, and it is expected that such resales
will be made from time to time on AMEX or otherwise. Such resales are subject to
prospectus delivery and other requirements of the Securities Act of 1933, as
amended. The Company will not receive any proceeds from the market sales of the
shares owned by the Selling Security Holders or the Common Stock underlying the
Security Holders' Warrants, although it will receive the proceeds from the
exercise of the Security Holders' Warrants. See "Concurrent Offering by Selling
Security Holders."
Prior to this Offering, there has been no public market for the Company's
Securities, and there can be no assurance that such a market will develop or be
sustained after this Offering. The Offering Price of the Units and the exercise
price and other terms of the Warrants have been determined by negotiation
between the Company and Joseph Charles & Associates, Inc., the representative of
the Underwriters (the "Representative"). The Offering Price does not necessarily
bear any particular relationship to common valuation criteria such as assets,
book value, performance or any other established criteria. For information
regarding the factors considered in determining the Offering Price of the Units
and the terms of the Warrants, see "Underwriting." The Company has applied to
have the Common Shares and Warrants approved for listing on the American Stock
Exchange, Inc. ("AMEX") under the symbols ONT and ONTW, respectively. The Units
will not be traded on AMEX or elsewhere.
NOTES
(1) Does not include additional compensation to be received by the
Representative in the form of: (i) a 2% non-accountable expense allowance
and (ii) the sale to the Representative for $290 of an option (the
"Representative's Option") to purchase 290,000 Units (each Unit consisting
of one Common Share and one Warrant) at a price of 160% of the Offering
Price of the Units, exercisable over a period of four years, commencing one
year from the date of this Prospectus. The Company has also agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
to be $1,000,000, including the Representative's non-accountable expense
allowance.
(3) The Company and L.L. Knickerbocker Company, Inc. ("Knickerbocker") have
granted the Underwriters an option (the "Over-allotment Option"),
exercisable within 45 days from the date of this Prospectus, to purchase up
to 435,000 Units on the same terms as set forth above, solely for the
purpose of covering over-allotments, if any. The Common Shares included in
such additional Units will be offered by Knickerbocker and the Warrants
included in such additional Units will be offered by the Company. If the
Over-allotment Option is exercised in full, the total price to the public,
Underwriting Discounts, and Proceeds to the Company with respect to the
Securities sold by the Company will be $ , $ , and $ ,
respectively and Knickerbocker will receive proceeds of $ ,
after payment of $ of Underwriting Discounts and Commissions. See
"Underwriting."
------------------------------
FORWARD-LOOKING STATEMENTS
When included in this Prospectus, the words "expects," "intends,"
"anticipates," "plans," "projects" and "estimates," and analogous or similar
expressions are intended to identify forward-looking statements. Such
statements, which include statements contained in "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," are inherently subject to a variety of
risks and uncertainties that could cause actual results to differ materially
from those reflected in such forward-looking statements. For a discussion of
certain of such risks, see "Risk Factors." These forward-looking statements
speak only as of the date of this Prospectus. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
------------------------
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, and in accordance
therewith will file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Company intends to
furnish its shareholders and the holders of the Securities with annual reports
containing audited financial statements and such other periodic reports as the
Company deems appropriate or as may be required by law. The Company's fiscal
year ends December 31.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS.
ALL SHARE AND PER SHARE INFORMATION GIVES EFFECT TO A 28.12 FOR ONE STOCK SPLIT
EFFECTED DECEMBER 31, 1996. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS
PROSPECTUS DOES NOT GIVE EFFECT TO THE EXERCISE OF: (i) THE OVER-ALLOTMENT
OPTION; (ii) ISSUANCE AND EXERCISE OF THE WARRANTS; (iii) THE REPRESENTATIVE'S
OPTION; OR (iv) OTHER OUTSTANDING WARRANTS AND OPTIONS.
THE COMPANY
Ontro, Inc. (the "Company" or "Ontro") is engaged in the research and
development of integrated thermal containers. The Company has the rights to
exploit a unique proprietary technology which it has incorporated into a
proposed product line of fully contained self-heating beverage containers
designed to heat liquid contents such as coffee, tea, hot chocolate, soups, and
baby formula. These proposed containers are similar to typical beverage
containers in size and shape, and are activated by the consumer to heat the
contents within a few minutes. The Company seeks to market its container
technology to develop and expand a consumer market for remote and mobile heating
of beverages and other products.
The Company's products are still in development and are not currently sold
commercially. The Company's first anticipated commercial product is a
self-heating beverage container which will require additional research and
development, including further design improvements, testing, and marketing
studies before it or any of the Company's other potential products under
development will be able to be successfully manufactured and marketed. There can
be no assurance these efforts will be successfully completed.
While the Company believes it is in the final stages of completing
development of its self-heating beverage container, significant additional work
testing or verifying different aspects of the containers is required before the
current demonstration models will be ready for commercial production. Additional
development issues which must be completed include, but are not limited to the
areas of seam failure, heat transfer, content related issues, heating control,
pasteurization, timing and temperature ranges, appearance, and packaging. There
can be no assurance these development issues will be successfully concluded.
The Company believes substantial market opportunities exist for the
exploitation of the Company's integrated thermal container technology. The
Company believes as society has become more mobile, demand has risen for remote
heating of goods, and conventional heating sources do not supply truly remote
consumption due primarily to inconvenience and the inability of consumers to
access these sources in a mobile environment. The Company's self-heating
containers are expected to meet the needs of consumers such as mothers requiring
warmed baby formula, commuters, mobile professionals, sports enthusiasts and
others without quick and convenient access to conventional heating sources.
The Company intends to become a leading provider of integrated thermal
containers and related technology to food, beverage and other manufacturers. In
order to do so the Company will have to complete the development of its proposed
products so they may be successfully manufactured and marketed. The Company's
principal strategies include:
SUB-LICENSE AGREEMENTS WITH MAJOR FOOD, BEVERAGE AND CONTAINER COMPANIES
The Company's principal marketing strategy is to target major food, beverage
and container manufacturers for the sub-license of its integrated thermal
container technologies. These manufacturers are expected to manufacture, label,
fill, market and distribute containers under their own brand name or for third
parties in exchange for providing the Company royalties and/or research and
development and marketing assistance. Management believes this approach should
allow the Company to access the manufacturing, marketing, name brand and
distribution capabilities of potential licensees without the high
4
<PAGE>
overhead costs of plant, equipment and labor. The Company believes its
integrated thermal containers could assist manufacturers in offering a
value-added product to complement existing product lines and assist in expanding
market share. To date, the Company has entered into an evaluation agreement with
Nestle USA Inc. ("Nestle") and a distribution agreement with Knickerbocker (see
below). To successfully implement this strategy, the Company will have to
complete its product development and market the proposed products to potential
sublicensees who will have to be independently satisfied with the products and
the market opportunity. There can be no assurance the Company will be able to
complete these objectives.
STRATEGIC MANUFACTURING AND MARKETING
Concurrently with seeking sub-license agreements, the Company plans to
directly produce and market self-heating beverage containers to selected niche
markets. The Company believes such manufacturing and marketing should provide
substantial benefits including: (i) additional revenues to fund marketing
efforts to major food, beverage and container companies as described above; (ii)
demonstration of product feasibility and the manufacturing process; and (iii)
providing evaluation units for use in conducting marketing and product
feasibility studies by the Company and others. The Company plans to selectively
market to customers and distributors whom the Company believes would not
interfere with potential sub-licenses the Company intends to seek with major
food and beverage container manufacturers. The Company intends to use a portion
of the net proceeds of this Offering to complete its development of a full-scale
production facility. In addition to completing its manufacturing facility and
successfully demonstrating its capacity to manufacture commercial quantities of
completed products, the Company will have to identify and obtain distribution
channels in such niche markets. There can be no assurance the Company will be
able to complete these objectives.
DEVELOP INTEGRATED THERMAL TECHNOLOGY FOR OTHER APPLICATIONS
The Company plans to develop additional integrated thermal containers to
further access the beverage market. The Company is designing a proprietary
thermos-Registered Trademark- type container with insertable thermal cartridges,
which would allow consumers to heat and re-heat an integrated thermal container
filled by the consumer with the liquid of their choice. The Company is
developing a disposable self-heating baby bottle, which could be pre-filled with
baby formula and heated on demand. The Company's plans also include additional
research and development into designs and potential uses of integrated thermal
containers for medical, pharmaceutical, health and beauty products, as well as
other potential industrial applications. The Company intends to utilize the
expertise of its management and Advisory Board to identify market opportunities
for its technology. There can be no assurance the Company will be able to
complete the design and development of, or market any such integrated thermal
containers.
The Company has entered into an evaluation agreement (the "Evaluation
Agreement") with Nestle which allows Nestle an exclusive period to review the
Company's designs and technology in order to determine Nestle's interest in
acquiring rights for the commercial use of the Company's self-heating food and
beverage containers. The Evaluation Agreement requires Nestle to cooperate with
the Company in evaluating certain commercial uses and markets for the Company's
technology, and includes an obligation to pay for one-half of the cost of
certain market research studies that are currently underway.
The Company has also entered into a distributorship agreement with
Knickerbocker, a marketer of specialty products. The Company and Knickerbocker
are working to develop certain specialty lines of beverages which would utilize
the Company's integrated thermal containers and be marketed by Knickerbocker.
Ontro was incorporated in the State of California under the name Self
Heating Container Corporation of California on November 8, 1994. The Company
changed its name to Ontro, Inc. on December 31,
5
<PAGE>
1996. The Company's offices are located at 12675 Danielson Court, Suite 401,
Poway, California 92064, and its telephone number is (619) 486-7200.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered by the
Company(1)....................... 2,900,000 Units
Common Stock Outstanding Prior to
this Offering(2)................. 3,089,478 shares
Common Stock Outstanding After
this Offering(3)................. 5,989,478 shares
Use of Proceeds................... The net proceeds of this Offering will be used for the
following: acquiring manufacturing equipment, marketing,
research and development, repayment of indebtedness,
expansion of facilities, prepaid royalties, and working
capital and general corporate purposes. The Company will
not receive the proceeds, if any, from the sale of
Common Shares underlying any Units sold on exercise of
the Over-allotment Option. See "Use of Proceeds."
Proposed AMEX Symbols
Common Shares................... ONT
Warrants........................ ONTW
</TABLE>
- ------------------------------
(1) Until completion of the Offering, the Units may only be purchased on the
basis of one Common Share and one Warrant per Unit. Upon completion of the
Offering, the Common Shares and the Warrants will be immediately detachable
and separately transferable. Each Warrant entitles the holder to purchase
one Common Share at a price per share equal to 150% of the Offering Price
until that date which is three years from the date of this Prospectus. The
Warrants are redeemable at the option of the Company, at $.05 per Warrant,
at any time upon 30 days prior written notice, if the closing price of the
Common Shares, as reported by the principal exchange on which the Common
Shares are quoted, equals or exceeds 200% of the Offering Price for 20
consecutive trading days within the 30 day period preceding the date of the
notice of redemption and at such time as there is a current effective
registration statement covering the Common Shares underlying the Warrants.
Upon 30 days written notice to all holders of the Warrants, the Company
shall have the right to reduce the exercise price and/or extend the term of
the Warrants. See "Description of Securities."
(2) Excludes shares issuable upon the exercise of options to purchase 1,379,506
shares of Common Stock outstanding as of the date of this Prospectus, and
warrants to purchase 400,587 shares of Common Stock outstanding as of the
date of this Prospectus.
(3) Excludes: (i) 2,900,000 shares reserved for issuance upon exercise of the
Warrants; (ii) 435,000 shares issuable upon exercise of the Warrants
included within the Over-allotment Option; (iii) 290,000 shares issuable
upon exercise of the Representative's Option; (iv) 290,000 shares issuable
upon exercise of the Representative's Warrants included in the
Representative's Option; (v) 545,400 shares reserved for issuance under the
Company's 1996 Omnibus Stock Plan (the "1996 Stock Plan"), of which options
to acquire 113,000 shares of Common Stock have been granted prior to the
date of this Prospectus; (vi) 1,266,506 shares underlying other outstanding
options granted prior to the date of this Prospectus; and (vii) 400,587
shares reserved for issuance upon exercise of outstanding warrants issued
prior to the date of this Prospectus. See "Risk Factors--Dilutive and Other
Adverse Effects of Outstanding Options and Warrants," "Use of Proceeds,"
"Dilution," and "Underwriting."
6
<PAGE>
<TABLE>
<S> <C>
Risk Factors...................... The Units offered hereby are speculative and involve a
high degree of risk, as well as immediate substantial
dilution. Among others, an investment in the Company is
subject to the risk the Company may not successfully
complete development of its proposed products, or if it
does, that such products may not perform up to market
expectations, or even if they do, that the contemplated
market for the products may not develop or accept the
Company's products to the extent anticipated. Until
substantial licensing activity or commercial sales occur
(if ever) the Company will continue to operate without
significant revenue and with ongoing requirements for
substantial capital investment. Unless the Company can
generate revenue, it will likely need to obtain
additional funds from outside sources. If the Company
cannot obtain such funds, it will not be able to
continue in business. Even upon completion of the
Offering, the Company will likely remain dependent on
business arrangements with third parties in order to
manufacture, market, sell and distribute its proposed
products. In addition, management will be able to
control the operation of the Company as a result of
stock and outstanding options held by management. The
Units should not be purchased by investors who cannot
afford the loss of their entire investment. See "Risk
Factors," "Dilution," and "Related Party Transactions."
Related Party Transactions........ The Company obtained all of the core technology for its
integrated thermal containers pursuant to a license
agreement (the "IHI License") with Insta-Heat, Inc.
("IHI"), an affiliated corporation, pursuant to which
the Company pays royalties to IHI.
The Company has also entered into a distributorship
agreement with Knickerbocker, a marketer of specialty
products. Knickerbocker is a significant shareholder of
both Ontro and IHI. Louis L. Knickerbocker is a director
of the Company and Knickerbocker.
The Company has entered into a consulting agreement with
Manhattan West, Inc., an affiliated corporation, to
assist the Company in locating and arranging
distributorship agreements. Pursuant to the consulting
agreement, Manhattan West, Inc. receives monthly
payments, and received an option to acquire Common
Stock.
See "Risk Factors--Conflicts of Interest," "Risk
Factors--IHI License," "Risk Factors--Offering to
Benefit Existing Stockholders," "Dilution,"
"Business--Distributorship Agreement,"
"Business--License Agreement with Insta-Heat, Inc.,"
"Certain Transactions," and "Related Party
Transactions."
</TABLE>
7
<PAGE>
SUMMARY FINANCIAL INFORMATION
The Summary Financial Information set forth below should be read in
conjunction with audited and unaudited financial statements included elsewhere
herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
STATEMENT OF OPERATIONS DATA: 1995 1996
--------- ---------- NINE MONTHS NINE MONTHS FROM INCEPTION
ENDED ENDED THROUGH
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------ ------------------ ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating expenses:
Marketing, general and
administrative.............. $ 94,500 $ 830,400 $ 399,700 $ 1,127,700 $ 2,064,900
Research and
development................. 67,900 235,900 231,200 402,000 705,800
Compensation related to grant
of stock options............ -- 379,300 379,300 26,400 405,700
--------- ---------- ------------------ ------------------ ------------------
Total operating
expenses.................. 162,400 1,445,600 1,010,200 1,556,100 3,176,400
Interest expense.............. 1,700 22,800 11,300 121,100 145,800
--------- ---------- ------------------ ------------------ ------------------
Net loss(1)................... $(164,100) $(1,468,400) $ (1,021,500) $ (1,677,200) $ (3,322,200)
--------- ---------- ------------------ ------------------ ------------------
--------- ---------- ------------------ ------------------ ------------------
Net loss per common
share(1).................... $ (0.07) $ (0.49) $ (0.37) $ (0.43)
--------- ---------- ------------------ ------------------
--------- ---------- ------------------ ------------------
Weighted average common and
common equivalent shares
outstanding(1).............. 2,423,800 3,024,100 2,733,700 3,864,600
--------- ---------- ------------------ ------------------
--------- ---------- ------------------ ------------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------
DECEMBER 31, PRO FORMA
1996 ACTUAL PRO FORMA(2) AS ADJUSTED(3)
------------ ---------- ------------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)............................ $ (220,800) $(1,504,300) $(1,164,300) $ 12,482,000
Total assets............................................ 328,600 660,100 1,150,100 13,161,900
Notes payable (bridge loans)............................ 110,000 1,245,000 1,395,000 --
Total liabilities....................................... 445,400 1,705,200 1,855,200 186,700
Deficit accumulated during the development stage........ (1,645,000) (3,322,200) (3,439,200) (3,512,900)
Shareholders' equity (deficit).......................... (116,800) (1,045,100) (705,100) 12,975,200
</TABLE>
- ------------------------------
(1) See Note 2 of Notes to Financial Statements for information concerning the
computation of net loss per common share and shares used in computing net
loss per common share.
(2) Pro forma reflects the issuance of 83,407 shares of Common Stock and 70,587
warrants to purchase Common Stock during October 1997 for an aggregate
consideration of $340,000 (the "Recent Issuances") the resulting
compensation expense of $117,000, and proceeds from two loans in December
1997 of $150,000 (the "December 1997 Loans").
(3) Adjusted to reflect the Recent Issuances (Note 2 above) and the sale by the
Company of the 2,900,000 Units offered hereby at an assumed Offering Price
of $5.50 per Unit and the application of the estimated net proceeds
therefrom of $13.7 million. The pro forma as adjusted also reflects the
repayment of principal and interest (and related write-off of $73,700 of
deferred financing costs) on certain loans in the original principal amount
of $1,245,000 (the "Bridge Loans"), repayment of the December 1997 Loans
(Note 2 above) in the original principal amount of $150,000, payment of
deferred consulting fees of $57,500 and the repayment of equipment leases of
approximately $145,000. See "Use of Proceeds," "Capitalization" and "Certain
Transactions."
8
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE IN NATURE,
INVOLVES A HIGH DEGREE OF RISK AND SHOULD NOT BE MADE BY ANY INVESTOR WHO CANNOT
AFFORD THE LOSS OF HIS/HER ENTIRE INVESTMENT. ACCORDINGLY, PROSPECTIVE INVESTORS
SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS, IN ADDITION TO ALL OF THE OTHER
INFORMATION PRESENTED IN THIS PROSPECTUS BEFORE PURCHASING THE SECURITIES
OFFERED HEREBY. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS PROSPECTUS.
RISK FACTORS RELATING TO THE COMPANY
NO OPERATING REVENUES; ACCUMULATED DEFICIT; EXPECTATION OF FUTURE LOSSES
The Company has experienced operating losses in each fiscal period since its
inception in 1994. As of September 30, 1997, the Company had a deficit
accumulated in the development stage of approximately $3.3 million and a working
capital deficiency of approximately $1.5 million. The Company expects to incur
additional operating losses through at least 1998 and possibly thereafter. The
Company has generated no revenues from operations. The development of the
Company's integrated thermal containers will require the commitment of
substantial resources in order to make it feasible for such containers to be
sold, or for the underlying technology to be licensed to third parties, and/or
for the Company to sell its proposed containers to distributors or others who
may be responsible for the manufacture and marketing of the proposed containers,
or to establish commercial scale manufacturing processes and facilities for such
manufacturing, and to establish additional quality control, marketing, sales and
administrative capabilities. There can be no assurance the Company will be
successful in any of these endeavors. There can be no assurance the Company will
enter into arrangements with third parties for product development and
commercialization, or will successfully market or license any containers. To
achieve profitable operations, the Company, alone or with others, must
successfully develop, manufacture and market its proprietary containers or
technologies. There can be no assurance the Company will be able to accomplish
these tasks. Significant delays in any of these matters could have a material
adverse impact on the Company's business, financial condition and results of
operations.
GOING CONCERN ASSUMPTION
The Company's independent auditors' report on the Company's financial
statements at December 31, 1996 and for the years ended December 31, 1995 and
1996 contains an explanatory paragraph indicating the Company had recurring
operating losses that raise substantial doubt about its ability to continue as a
going concern. In addition, the Company had an accumulated deficit of
approximately $3.3 million at September 30, 1997. The Company may require
substantial additional funds in the future, and there can be no assurance that
any independent auditors' report on the Company's future financial statements
will not include a similar explanatory paragraph if the Company is unable to
raise sufficient funds or generate sufficient cash from operations to cover the
cost of its operations. The existence of the explanatory paragraph may
materially adversely affect the Company's relationship with prospective
customers and suppliers, and therefore could have a material adverse effect on
the Company's business, financial condition and results of operations.
FUTURE CAPITAL REQUIREMENTS UNCERTAIN; NO ASSURANCE OF FUTURE FUNDING
The Company will be required to make substantial expenditures to conduct
existing and planned research and development, to manufacture or contract for
the manufacture of, and to market its proposed containers. The net proceeds from
this Offering are expected to be approximately $13.7 million at an assumed
Offering Price of $5.50, assuming no exercise of the Over-allotment Option. In
the absence of
9
<PAGE>
receiving the proceeds of this Offering, the Company anticipates its existing
capital resources and cash generated from operations, if any, will be sufficient
to meet the Company's cash requirements only through the end of December 1997 at
its anticipated level of operations. The Company's future capital requirements
will depend upon numerous factors, including the amount of revenues generated
from operations (if any), the cost of the Company's sales and marketing
activities and the progress of the Company's research and development
activities, none of which can be predicted with certainty. The Company
anticipates the proceeds of this Offering, together with existing capital
resources and cash generated from operations, if any, will be sufficient to meet
the Company's cash requirements for at least the next 18 to 24 months at its
anticipated level of operations. However, the Company may seek additional
funding during the next 24 months and could seek additional funding after such
time. There can be no assurance any additional financing will be available on
acceptable terms, or at all, when required by the Company. Moreover, if
additional financing is not available, the Company could be required to reduce
or suspend its operations, seek an acquisition partner or sell securities on
terms that may be highly dilutive or otherwise disadvantageous to investors
purchasing the Units offered hereby. The Company has experienced in the past,
and may continue to experience, operational difficulties and delays in its
product development due to working capital constraints. Any such difficulties or
delays could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 1 of Notes to
Financial Statements.
The Company has no established bank financing arrangements, and it is not
anticipated the Company will secure any bank financing in the foreseeable
future. The Company intends to finance the development and marketing of its
proposed containers through license agreements, distribution agreements,
strategic alliances and other arrangements with third parties. There can be no
assurance such license, distribution, marketing, strategic, or other
collaborative arrangements will be obtained, or that additional funds will be
available when needed, or on terms acceptable to the Company. If adequate funds
are not available, the Company may be required to relinquish rights to certain
of its technologies or potential products the Company would not otherwise
relinquish. The Company's future cash requirements will be affected by results
of research and development, collaborative relationships, if any, changes in the
focus and direction of the Company's research and development programs,
competitive and technological advances, and other factors. See "Use of Proceeds"
and "Management's Discussion and Analysis of Results of Operations and Financial
Condition."
EARLY STAGE OF DEVELOPMENT; ABSENCE OF PRODUCTS
The Company is a development stage company. It has not completed the final
development of any product and, accordingly, has not begun to market or generate
revenues from operations. The Company's first anticipated commercial product is
a self-heating beverage container which will require additional research and
development, including further design improvements, testing, and marketing
studies before it will likely be introduced in the marketplace. There can be no
assurance the Company's research and development efforts will be successful, the
self-heating beverage container or any of the Company's other potential products
under development will be able to be manufactured at acceptable costs and
quality standards. See "Business--Manufacturing and Production." The Company
cannot predict with certainty when, if ever, it will begin to market the
proposed self-heating beverage container or any other integrated thermal
container it is developing, and currently does not expect them to be available
to consumers prior to the end of 1998.
While the Company believes it is in the final stages of completing
development of its self-heating beverage container, significant additional work
testing or verifying of different aspects of the containers is required before
the prototypes will be ready for commercial production. Such aspects include,
but are not limited to, the areas of seam failure, heat transfer, type of
content issues, heating control, pasteurization, timing and temperature ranges,
appearance, and packaging. The Company has identified certain unusual
circumstances where the self-heating container could heat to unacceptably high
levels and jeopardize the structural integrity of the container to the extent it
might not withstand the market reliability and quality
10
<PAGE>
control standards generally required of containers for food and beverage
products. The Company is currently researching the use of moderating agents to
inhibit such potential reactions. The Company is also researching different
compositions of the active ingredients to increase the predictability of the
heating reaction and simplify the manufacturing process. There can be no
assurance the Company will be successful in finalizing a commercially viable
design for its proposed products. See "Business."
COMPLETE DEPENDENCE ON MARKET ACCEPTANCE OF INTEGRATED THERMAL CONTAINERS
The Company has not yet commenced sales of its self-heating beverage
container, which is currently the Company's only substantially developed
product. The Company anticipates it will derive substantially all of its
revenues from the sale of licenses of its integrated thermal container
technology. Consequently, the Company is entirely dependent on the successful
introduction and commercial acceptance of this technology. Unless and until such
integrated thermal containers receive market acceptance, the Company will not
likely have any material source of revenue. There can be no assurance that
integrated thermal containers will achieve market acceptance. The Company's
ability to license its technology or sell its containers will be substantially
dependent on the results of certain market studies, and there can be no
assurance the studies currently underway or to be conducted in the future will
demonstrate the level of probable market acceptance sufficient to interest
licensees and distributors to enter into agreements with the Company regarding
its products and technologies. Although the Company has one distributor for its
containers, commercial acceptance of its containers will require the Company to
successfully establish sales through this and other distribution channels, of
which there can be no assurance. Any such failure will likely have a material
adverse effect on the Company's business, financial condition and results of
operations. Failure of the Company's integrated thermal containers to achieve
significant market acceptance will have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Overview."
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE
If the Company's proposed integrated thermal containers are commercially
accepted, such markets are expected to be characterized by rapid technological
advances, evolving industry standards, and frequent new product introductions
and enhancements. The introduction by competitors of containers embodying new
integrated thermal technologies and the emergence of industry standards could
render the Company's containers currently under development obsolete or
unmarketable. The Company's future success may depend upon its ability to keep
pace with technological development and respond to evolving consumer demands.
Failure by the Company to anticipate or respond adequately to technological
developments or changes in consumer tastes, or significant delays in product
development, could damage the Company's potential position in the marketplace
and could result in less revenues and/or lack of profits. The Company may need
to increase the size of its product development staff in the near term to meet
these challenges. There can be no assurance the Company will be successful in
hiring and training adequate product development personnel to meet its needs or
that it will have the resources to do so. There can be no assurance the Company
will be successful in developing and marketing its proposed containers, new
products, or product enhancements, or will not experience significant delays in
such endeavors in the future. Any failure to successfully develop and market its
integrated thermal containers or other products and product enhancements could
have a material adverse effect on the Company's financial condition, business,
and results from operations. See "Business."
IHI LICENSE
The Company has obtained all of the core technology for its integrated
thermal containers through the IHI License. IHI is an affiliated company which
owns three issued patents and patents pending concerning IHI's thermal
technologies. The IHI License grants the Company an exclusive worldwide license
in perpetuity to manufacture, use, sell, and promote IHI's technology, and for
all products developed in connection with the IHI technology. The IHI License
grants the Company the right to
11
<PAGE>
sub-license the technology and to subcontract the manufacture of the licensed
products. The IHI License requires minimum royalty payments of $50,000 per year
and also requires additional royalty payments from the Company on the sale of
products utilizing IHI technology subject to the Company achieving minimum
annual net income after payment of the royalty and of all taxes of no less than
$4 million. Upon achieving the required minimum net income, the IHI License
requires royalty payments equal to the greater of: (i) 2% of the gross sales of
integrated thermal containers and products developed in connection with it; or
(ii) 1.5 cents per unit sold up to the first $30 million in sales by the
Company. For sales in excess of $30 million, the IHI License requires royalty
payments (subject to the same minimum income levels) equal to the greater of:
(i) 3% of gross annual sales in excess of $30 million; or (ii) 1.5 cents per
unit sold. Royalty payments are reduced at such time as IHI does not hold one or
more patents or patent applications on the IHI technology. The Company is
required to prosecute any patent infringements of the IHI technology and to
defend any infringement claims brought in connection with the IHI technology.
Prosecution of patent infringement claims and the defense of infringement claims
could result in substantial costs to the Company. If the Company were unable to
pay such costs, the Company could lose the rights to the IHI technology, which
would likely have a material adverse impact on the business and financial
condition of the Company. The IHI License may be terminated in the event the
Company ceases its business, dissolves, liquidates, or on completion of any
proceeding in bankruptcy or reorganization, or the appointment of a permanent
receiver or trustee or any other proceeding under any law for the relief of
debtors or on any assignment for the benefit of the Company's creditors. If the
IHI License were terminated, the Company would lose all of its rights to the IHI
technology. The IHI License provides an option to the Company to purchase all of
the IHI technology and terminate the IHI License. However this option requires
the Company pay IHI $3 million and is only available through December 31, 2000,
including a one year right to extend upon the payment of $100,000. See
"Business--License Agreement with Insta-Heat, Inc."
CONFLICTS OF INTEREST
IHI has licensed its integrated thermal container technology and related
technology to the Company pursuant to the IHI License. Messrs. Berntsen and
Scudder, co-founders, officers, directors, and significant shareholders of the
Company are also co-founders, officers, directors, and significant shareholders
of IHI. The Board of Directors of IHI is comprised of Messrs. Scudder, Berntsen,
and their spouses. The Company and IHI currently have substantially similar
shareholders. These relationships raise substantial potential conflicts of
interest with regard to the development, licensing, marketing, and sale of the
IHI technology by the Company, as well as conflicts of interest in the
interpretation of the terms and conditions of the IHI License. The interests of
IHI may conflict with the interests of the Company in certain instances
regarding the IHI technology, including if the Company were unable to comply
with the terms of the IHI License. The directors of IHI may have fiduciary
obligations to IHI, which may influence them to take actions which are contrary
to the interests of the Company, and which could result in material adverse
consequences to the business, financial condition, and results of operations of
the Company. In the event of termination of the IHI License, the Company would
lose all of the technology relating to the integrated thermal process it is
currently developing, which would have a material adverse impact on the
financial condition, business, and results of operations of the Company. See
"Business--License Agreement with Insta-Heat, Inc."
IHI and the Company are both California corporations and are subject to
California law. California law requires transactions between corporations with
interested directors either be approved by the shareholders or by an independent
board of directors, and the transaction must also be just and reasonable. If
these conditions are not met, the person asserting the validity of the
transaction must prove the transaction is just and reasonable to the
corporation. The IHI License was approved by the shareholders of both IHI and
the Company. Any future material amendments to the IHI License will require that
the Company and IHI comply with these requirements of California law.
12
<PAGE>
The Company has entered into a Distributorship Agreement with Knickerbocker
(the "LLK Agreement.") Knickerbocker is a significant shareholder in the
Company, and Louis L. Knickerbocker the founder, Chief Executive Officer,
Chairman and President of Knickerbocker is a director of the Company.
Knickerbocker could be expected to exert substantial influence in connection
with the further development (if any) of the scope of the LLK Agreement, and the
products to be included thereunder, as well as other issues between the Company
and Knickerbocker with respect to the LLK Agreement and any related activities.
See "Business--Distributorship Agreement" and "Related Party Transactions."
On July 15, 1996, the Company entered into a consulting agreement with
Manhattan West, Inc. Pursuant to the consulting agreement, Manhattan West, Inc.
is to assist the Company in locating and arranging distributor agreements.
Manhattan West, Inc. introduced the Company to Knickerbocker. The consulting
agreement is for a term of 30 months, and requires Manhattan West, Inc. be paid
$15,000 per month from July 15, 1996, through April 15, 1997 and $5,000 per
month for the remainder of the term. Manhattan West, Inc. has agreed to defer
collection of a portion of its consulting fees until after completion of the
initial public offering of the Company's securities.
Also, on July 15, 1996, Manhattan West, Inc. purchased 143,102 shares of the
Company's Common Stock for a total consideration of $100,000 or $.70 per share,
and the Company granted an option to Manhattan West, Inc. to purchase 543,841
shares of the Company's Common Stock at an exercise price of $.01 per share
subject to certain conditions. In the event Manhattan West, Inc. exercises its
option, shareholders of the Company will experience significant additional
dilution. See "Related Party Transactions." and "Dilution."
OFFERING TO BENEFIT EXISTING STOCKHOLDERS AND RELATED PARTIES
Completion of this Offering will provide substantial benefits to existing
shareholders of the Company and other related parties. The assumed Offering
Price of $5.50 per Unit (of which $5.40 is attributed to one Common Share and
$0.10 is attributed to one Warrant) is substantially higher than the negative
$.35 per share book value of the shares held by existing shareholders. The
dollar figures in this risk factor reflect market values of Common Stock held
after the Offering and assumes an Offering Price of $5.50 per Unit. Purchasers
of the Units offered hereby will invest $16.0 million or 88.6% of the total
consideration paid for 48.4% of the Common Stock to be outstanding after the
Offering. The shares of Common Stock owned by existing shareholders would be
valued at approximately $17.0 million upon completion of the Offering; such
shares had a negative book value of $1,045,100 at September 30, 1997. In the
event the underwriters exercise the Over-allotment Option, Knickerbocker will
sell the 435,000 Common Shares included in such additional Units. If the
Over-allotment Option is exercised in full at a price of $5.50 per Unit,
Knickerbocker will receive from the proceeds of the Offering approximately
$2,349,000 or $5.40 per share (before commissions and other expenses); for
shares it purchased in September 1996 for $304,500 or $.70 per share. In
addition, the remaining 423,673 shares owned by Knickerbocker, for which it paid
$295,000, would have a market value of approximately $2,287,834 upon completion
of the Offering. The 1,015,197 shares beneficially owned by the two founders,
senior executive officers, and directors (James A. Scudder and James L.
Berntsen) purchased for approximately $.90 per share, would have a market value
of approximately $5,482,063 upon completion of the Offering. The 143,103 common
shares owned by Manhattan West, Inc. for which it paid $100,000 in July 1996 or
approximately $.70 per share will have a market value of approximately $772,756
upon completion of the Offering. In the event Manhattan West exercises the one
option and one warrant it holds and purchases an additional 553,841 common
shares, Manhattan West will pay additional consideration of approximately
$15,438.41 or $.03 per share for Common Stock with an approximate market value
upon completion of the Offering of $3,046,126. Manhattan West, Inc. will also
receive deferred consulting fees of approximately $77,000 upon completion of the
Offering. See "Bridge Loans" and "Related Party Transactions."
13
<PAGE>
Certain of the members of the Company's Advisory Board and other consultants
and professionals also have options to purchase a significant number of Common
Shares for exercise prices ranging from $.001 to $3.00 per share. See "Certain
Transactions."
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend, in large part, on IHI's or the Company's
ability to obtain patent protection for the proposed containers, both in the
United States and in foreign countries. IHI currently has three patents issued,
and one additional patent application pending in the United States. There have
been foreign counterparts to certain of these applications filed in other
countries on behalf of IHI. The Company intends to support IHI in filing
additional applications as appropriate for patents covering one or more proposed
containers and related processes. There can be no assurance patents will issue
from any of the pending applications, or for patents that have been issued or
may be issued, that the claims allowed will be sufficiently broad to protect the
Company's technology. In addition, there can be no assurance any patents issued
to IHI or to the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide adequate proprietary protection
to IHI or to the Company. In addition, any patents obtained by IHI or by the
Company will be of limited duration. All United States patents issuing from
patent applications filed June 8, 1995 or thereafter will have a term of 20
years from the date of filing. All United States patents in force before June 8,
1995 will have a term of the longer of: (i) 17 years from the date of issuance;
or (ii) 20 years from the date of filing. All United States patents issuing from
patent applications applied for before June 8, 1995 will have a term equal to
the longer of: (i) 17 years from the date of issuance; or (ii) 20 years from the
date of filing. All United States design patents have a 14 year life from the
date of issuance.
The commercial success of the Company may also depend upon avoiding
infringing on patents issued to competitors, and upon maintaining the IHI
License. If competitors prepare and file patent applications in the United
States that claim technology also claimed by IHI, the Company, in accordance
with the requirements of the IHI License, may have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office
("PTO") to determine the priority of invention, which could result in
substantial cost, even if the outcome is favorable to the Company. An adverse
outcome could subject the Company to significant liabilities to third parties,
and could require the Company to license disputed rights from third parties or
cease using all or part of the licensed technology. The Company is aware of U.S.
and foreign patents issued to third parties that broadly claim self-heating
technology similar to the IHI's. Although the Company believes its current
activities do not infringe on these patents, there can be no assurance the
Company's belief would be affirmed in any infringement litigation over the
patents, or that the Company's future technological developments would be
outside the scope of these patents. A U.S. patent application is maintained
under conditions of confidentiality while the application is pending in the PTO,
so the Company cannot determine the inventions being claimed in pending patent
applications filed by its competitors in the PTO. Further, U.S. patents do not
provide any remedies for infringement that occurred before the patent is
granted.
The Company also attempts to protect its proprietary and its licensed
technology and processes by seeking to obtain confidentiality agreements with
its contractors, consultants, employees, potential collaborative partners,
licensees, licensors and others. There can be no assurance these agreements will
adequately protect the Company, will not be breached, the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known or be independently discovered by competitors. This
approach could increase the risk to the Company which may not be able to protect
its proprietary and licensed technology.
There can be no assurance others will not independently develop similar or
more advanced technologies or designs around aspects of IHI's technology which
may be patented, or duplicate IHI's or the Company's trade secrets. In some
cases, the Company may rely on trade secrets to protect IHI's or its inventions.
There can be no assurance trade secrets will be established, secrecy obligations
will be honored,
14
<PAGE>
or that others will not independently develop similar or superior technology. To
the extent consultants, key employees, or other third parties apply
technological information independently developed by them or by others to
Company projects, disputes may arise as to the proprietary rights to such
information, which may not be resolved in favor of the Company. See
"Business--Patents and Proprietary Technology" and "Management."
LIMITED MANUFACTURING FACILITIES; PROBABLE SIGNIFICANT DEPENDENCE ON
SUB-LICENSEES FOR MANUFACTURE, MARKETING, AND SALE OF PROPOSED PRODUCTS
The Company's strategy is to sub-license its integrated thermal technologies
to major food, beverage, and container companies. The Company anticipates
requiring such companies to be responsible for the manufacture, marketing, and
sale of the overwhelming majority of the Company's proposed containers. With the
proceeds of this Offering, the Company intends to purchase equipment which will
enable it to manufacture self-heating beverage containers for testing and
marketing studies, and to sell limited quantities of certain self-heating
containers to distributors or other customers. The Company intends to require
most of its distributors and other customers to manufacture and market the
containers they purchase or sub-license, or to contract for the manufacture,
marketing, and distribution of the containers. There can be no assurance the
Company will enter into satisfactory license agreements with any parties for the
manufacture, marketing, or sale of its integrated thermal containers; such
licenses, if any, will result in revenues to the Company; the Company will enter
into any agreements with distributors or others for the manufacture, marketing,
or sale of its proposed containers, or that parties who do enter into such
agreements will perform adequately. In the event the Company is unable to
license its technology to third parties or is unable to require third parties to
manufacture, market, and sell substantial quantities of its proposed containers,
the Company could be required to develop adequate manufacturing facilities to
fulfill any demand for its containers. The development of such facilities could
require additional capital, personnel, and other resources beyond any available
from the proceeds of this Offering. There can be no assurance the Company will
be able to successfully establish such manufacturing operations or obtain any
additional capital.
PROBABLE DEPENDENCE ON OUTSIDE PARTIES FOR MARKETING AND DISTRIBUTION
If the Company is successful in completing the development of its proposed
integrated thermal containers the Company intends to primarily market its
proposed products through contractual arrangements with others such as
sub-licensing, distribution or similar collaborative agreements. This may result
in a lack of control by the Company over some or all of the material marketing
and distribution aspects of its potential products. There can be no assurance
the Company will be able to maintain the quality of its products when they are
manufactured by unrelated parties. Any significant quality control problems
could result in excessive recalls, increased product liability exposure, and
reduced market acceptance.
There can be no assurance the Company will enter into any marketing and
related arrangements on terms acceptable to the Company, or that any marketing
efforts undertaken on behalf of the Company by third parties will be successful.
The inability of the Company to license its products to others for their
distribution, or inadequacy of such licensees' distribution, or the inability of
the Company to enter into distributorship or similar agreements to market
products produced by the Company would likely have a material adverse impact on
the ability of the Company to market its products.
The Company may, in the future, determine to directly market certain of its
proposed containers. The Company has a limited marketing budget and resources.
Additional capital expenditures and management resources would be required to
develop more complete marketing and distribution capabilities. In the event the
Company elects to engage in broader or more direct marketing activities, there
can be no assurance the Company will be able to obtain the requisite funds, or
attract and retain the human and other resources necessary to successfully
expand its marketing plans for any of its potential products. See
"Business--Marketing."
15
<PAGE>
The Company's future growth and profitability is expected to depend, in
large part, on the success of its licensees, sub-licensees and distributors, if
any, and others who may participate in marketing efforts on behalf of the
Company. Success in marketing the Company's containers will be substantially
dependent on educating the targeted markets as to the distinctive
characteristics and perceived benefits of the Company's proposed containers.
COMPETITION
The Company believes competition among marketers of self-heating beverage
containers will be based primarily on price, product safety, ease of use,
quality, product recognition, access to distribution channels, product
innovation, and packaging. The competitive position of the Company will in part
depend on the ability of the Company to remain current in plastics manufacturing
technology and to anticipate innovations in integrated thermal container
technology, as well as changes in consumer preferences. If the Company's
integrated thermal containers are successfully received in the market, increased
competition is probable. Increased competition is likely to result in price
reductions, reduced operating margins, and loss of market share, any of which
could materially and adversely affect the Company's business, operating results,
and financial condition. There can be no assurance the Company will be able to
compete successfully, keep pace with technological developments, or have
sufficient funds to invest in new technologies, products, or processes.
There also can be no assurance companies in the food and beverage or
container industry, or other companies, will not enter the market for integrated
thermal containers with products that are superior to, less expensive, or which
achieve greater market acceptance than the Company's proposed containers. The
majority of food and beverage and container manufacturers are substantially
larger and more diversified than the Company; have substantially greater
financial and marketing resources than the Company; have greater name
recognition and distribution channels than the Company; and may have the ability
to develop competitively priced integrated thermal containers.
DEPENDENCE UPON KEY PERSONNEL
The Company's success in developing marketable containers and achieving a
competitive position will depend, in large part, on its ability to attract and
retain qualified management personnel, and in particular to retain Mr. Scudder
and Mr. Berntsen. The proprietary technology which has been licensed to the
Company by IHI was primarily developed by Mr. Scudder and Mr. Berntsen. Messrs.
Scudder and Berntsen have entered into employment agreements obligating them to
provide services to the Company through August 1999. The loss of either of these
individuals could have a material adverse impact on the business and operations
of the Company. The Company maintains life insurance policies on Messrs. Scudder
and Berntsen, but no assurance can be given that the proceeds from any such
policy will be adequate to offset the loss of their services. The Company will
need to hire additional management, administrative and engineering personnel in
the next year to meet its plans. Competition for such personnel is intense and
no assurance can be given that the Company will be able to hire and/or retain
adequate personnel. The Company's potential growth and any expansion into areas
and activities requiring additional expertise, such as expanded programs for
manufacturing and marketing, would be expected to place increased demands on the
Company's human resources. These demands are expected to require the addition of
new management personnel and the development of additional expertise by existing
management personnel. The failure to acquire such services or to develop such
expertise could have a material adverse effect on the Company's prospects for
success. In addition, the Company relies on consultants and advisors to assist
the Company from time to time in reviewing its marketing, management, research
and development strategies. Most if not all of the Company's consultants and
advisors are self-employed or are employees of other companies, and may have
commitments to, or consulting or advisory contracts with, more than one other
entity that may affect their ability to contribute to the Company. See
"Management."
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<PAGE>
EXPOSURE TO FLUCTUATIONS IN RESIN PRICES AND SUPPLY
Upon receipt of the proceeds from this Offering, the Company intends to
manufacture certain parts of the proposed integrated thermal containers using
plastic resins. The Company does not currently have agreements with any raw
material suppliers, including suppliers of resins. After this Offering, the
Company intends to enter into agreements with resin and other raw material
suppliers. There can be no assurance the Company will obtain supply agreements
on acceptable terms and conditions. Since plastic resin is anticipated to be a
principal component in the Company's proposed containers, the Company's
financial performance could become materially dependent on its ability, and the
ability of its licensees and/or distributors, if any, to acquire resin in
acceptable amounts and at acceptable costs, and to pass resin price increases on
to its future customers through contractual agreements or otherwise. The
capacity, supply, and demand for plastic resins and the petrochemical
intermediates from which they are produced are subject to cyclical price
fluctuations, including those arising from supply shortages. There can be no
assurance a significant increase in resin prices or a shortage of supply would
not have a material adverse impact on the business, financial condition, and
results from operations of the Company. See "Business-- Raw Materials and
Suppliers."
SUPPLY OF RAW MATERIALS; DEPENDENCE ON SINGLE SOURCE SUPPLIERS
The Company does not have agreements with the suppliers of any of its raw
materials. The Company currently obtains certain self-heating beverage container
components from single source suppliers. Specifically, the outside container and
the activating device (button) for the beverage container are supplied by
Johnson Controls, Inc. and Complex Tool & Mold, respectively. The Company
intends to purchase equipment with the proceeds of this Offering to manufacture
the outside container to provide an alternative supply source to Johnson
Controls, Inc. Although the Company is also currently dependent on Complex Tool
& Mold as the sole source of supply for one of its proprietary components, the
Company believes this component can be obtained from numerous suppliers and as a
result thereof the Company believes it is not materially dependent upon any
single source for any of its raw materials. Until such time as the Company
manufactures the outside container, locates a second source of supply for the
container and the activating device (button), there can be no assurance the
Company will be able to procure or substitute such components without a
significant interruption in its supply of component parts. The failure or delay
by any supplier to furnish the Company with these component parts could have a
material adverse effect on the Company's business, financial condition, and
results from operations.
ENVIRONMENTAL MATTERS
Federal, state, and local governments or regulatory agencies could enact
laws or regulations concerning environmental matters that may increase the cost
of producing, or otherwise adversely affect the demand for plastic products such
as those proposed by the Company. A decline in consumer preference for plastic
products due to environmental considerations could have a material adverse
effect upon the Company's business, financial condition, and results of
operations. In addition, certain of the Company's operations are subject to
federal, state, and local environmental laws and regulations that impose
limitations on the discharge of pollutants into the air and water, and establish
standards for the treatment, storage, and disposal of solid and hazardous
wastes. While the Company has not been required, in its limited history of
assembling integrated thermal containers, to make significant capital
expenditures in order to comply with applicable environmental laws and
regulations, the Company may have to make substantial future capital
expenditures due to changing compliance standards and environmental technology.
Furthermore, unknown contamination of sites currently or formerly owned or
operated by the Company (including contamination caused by prior owners and
operators of such sites) and off-site disposal of hazardous substances may give
rise to additional compliance costs.
In addition the principal components of the Company's products are made from
plastic. Although the Company's products use all recyclable plastics they cannot
generally be recycled into the same component
17
<PAGE>
parts, and there are likely fewer potential uses for the recycled plastic used
in the Company's products than there were for the original raw materials.
Therefore the Company would be expected to be contributing to an increasing
supply of plastic needing to be recycled into fewer uses or simply an increasing
amount of plastic, which although recyclable, may not be recycled. Similar
factors have been the source of increasing environmental concern by some and
increasing legislative and regulatory activity. The Company cannot predict the
nature of future legislation, regulation or liability exposure which may evolve
from these environmental concerns or the adverse impact it may have on the
Company. The Company does not have insurance coverage for environmental
liabilities and does not anticipate obtaining such coverage in the future. See
"Business--Environmental Matters and Government Regulation."
LIABILITY INSURANCE
The Company's proposed containers expose it to possible product liability
claims if, among other things, the use of its proposed containers results in
personal injury, death or property damage. There can be no assurance the Company
will have sufficient resources to satisfy any liability resulting from such
claims or will be able to cause its customers to indemnify or insure the Company
against such claims. The Company intends to obtain product liability insurance
prior to the commencement of commercial shipment of its products. There can be
no assurance such insurance coverage will be adequate in terms and scope to
protect the Company against material adverse effects in the event of a
successful claim, or that such insurance will be renewed, or the Company will be
able to acquire additional coverage when it deems it desirable to do so.
RISK FACTORS RELATING TO THIS OFFERING
IMMEDIATE AND SUBSTANTIAL DILUTION
An investor in this Offering will experience immediate and substantial
dilution of approximately $3.34, or 61%, per share between the adjusted pro
forma net tangible book value per share after the Offering and an assumed
Offering Price of $5.50 per Unit. To the extent that any Warrants, options or
other securities convertible into shares of Common Stock currently outstanding
or subsequently granted to purchase shares of Common Stock are exercisable at a
price less than the net tangible book value per share following the Offering,
there will be further dilution upon the exercise of such securities. See
"Dilution" and "Description of Securities."
CONTROL BY PRESENT SHAREHOLDERS; POSSIBLE DEPRESSIVE EFFECT ON THE COMPANY'S
SECURITIES
Without consideration of the Warrants, the Representative's Option, the
Over-allotment Option, or other outstanding options and warrants; the Company's
present shareholders will own 3,089,478 shares of Common Stock upon the
completion of this Offering, representing approximately 51.6% of the Company's
outstanding shares of Common Stock. The Company's officers and directors
currently own 1,893,870 of the 3,089,478 outstanding shares representing 61.3%
of the currently outstanding Common Stock. The Company's officers and directors
also have the right to acquire an additional 138,000 shares of Common Stock,
which are reserved for issuance upon the exercise of existing options.
Accordingly, without consideration of the Warrants, the Representative's Option,
the Over-allotment Option, or other outstanding options and warrants; if the
Company's officers and directors exercised all of the options they currently
hold, they could own up to 63.0% of the Company's outstanding Common Stock
before this Offering, and 33.2% of the Company's outstanding Common Stock after
this Offering. The price range for the officers' and directors' options is $1.00
to $5.00 per share. Even after this Offering, the Company's present shareholders
will be able to elect a majority of the Company's directors and otherwise
control the Company's operations. Also, the concentration of ownership by the
Company's officers and directors may discourage potential acquirors from seeking
control of the Company through the purchase of Common Stock, and this
possibility could have a depressive effect on the price of the Company's
Securities. See "Principal Shareholders" and "Description of Securities."
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<PAGE>
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS
Purchasers of Units will only be able to exercise the Warrants if a current
prospectus under the Securities Act relating to the shares underlying the
Warrants is then in effect, and such securities are qualified for sale or exempt
from qualification under the applicable securities laws of the states in which
the various holders of Warrants reside. Although the Company has undertaken to
use its best efforts to maintain the effectiveness of a current prospectus
covering the shares underlying the Warrants, there can be no assurance the
Company will be able to do so. The Warrants may have a lower value if such
securities are not qualified, or exempt from qualification in the states in
which the holders of Warrants reside, and may have no value if a current
prospectus, covering the shares issuable upon the exercise of the Warrants, is
not kept effective. See "Description of Securities--Warrants."
DILUTIVE AND OTHER ADVERSE EFFECTS OF OUTSTANDING OPTIONS AND WARRANTS
Under the terms of the Warrants, the Representative's Option, options issued
under the Company's 1996 Stock Plan, the Over-allotment Option, and other
outstanding options and warrants, the holders thereof are given an opportunity
to profit from a rise in the market price of the Common Stock with a resulting
dilution in the interests of the other shareholders. The terms on which the
Company may obtain additional financing may be adversely affected by the
existence of such options and warrants. For example, the holders of the Warrants
could exercise them at a time when the Company was attempting to obtain
additional capital through a new offering of securities on terms more favorable
than those provided by the Warrants. See "Management's Discussion and Analysis
of Financial Conditions and Results of Operations," "Underwriting," "Description
of Securities," and "Shares Eligible for Future Sale."
ARBITRARY DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY OF STOCK PRICE
The Offering Price of the Units and the exercise price and other terms of
the Warrants have been determined by negotiation between the Company and the
Representative and do not bear any relationship to any established valuation
criteria such as assets, book value, or prospective earnings. The market prices
for securities of emerging and development stage companies have historically
been volatile. Future announcements concerning the Company or its competitors,
including the results of testing, technological innovations or new commercial
products, government regulations, developments concerning proprietary rights,
litigation or public concern as to safety of potential containers developed by
the Company or others, may have a significant impact on the market price of the
Company's Securities. See "Underwriting."
POSSIBLE DEPRESSIVE EFFECT ON PRICE OF SECURITIES OF FUTURE SALES OF COMMON
STOCK
The sale or other disposition of much of the currently outstanding shares of
Common Stock is restricted by the Securities Act. Unless such sale is
registered, these shares may only be sold in compliance with Rule 144
promulgated under the Securities Act or some other exemption from registration
thereunder. For a description of the conditions under which shares may be sold
pursuant to Rule 144, see "Shares Eligible for Future Sale." Actual sales or the
prospect of sales of Common Stock under Rule 144 or otherwise in the future may
depress the prices of the Securities or any market that may develop, and may
also make it difficult for investors herein to sell the Securities. All officers
and directors and substantially all shareholders have agreed not to offer, sell,
assign, transfer, pledge or otherwise hypothecate without the Representative's
prior written consent, any of his/her securities of the Company for a period of
12 months from the date of this Prospectus. The sale or availability for sale of
substantial amounts of Common Stock in the public market after this Offering
could adversely affect the prevailing market price of the Securities and could
impair the Company's ability to raise additional capital through the sale of its
equity securities. See "Description of Securities," "Shares Eligible for Future
Sale," and "Underwriting."
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<PAGE>
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK
The Company's Board of Directors is authorized to issue up to 5,000,000
shares of preferred stock. The Board of Directors has the power to establish the
dividend rates, liquidation preferences, voting rights, redemption and
conversion terms, and all other rights, preferences and privileges with respect
to any series of preferred stock. The issuance of any series of preferred stock
having rights superior to those of the Common Stock may result in a decrease in
the value or market price of the Common Stock and could be used by the Board of
Directors as a means to prevent a change in control of the Company. Future
issuances of preferred stock may provide for dividends, certain preferences in
liquidation, as well as conversion rights. Such preferred stock issuances could
make the possible takeover of the Company, or the removal of management of the
Company, more difficult. The issuance of such preferred stock could discourage
hostile bids for control of the Company in which shareholders could receive
premiums for their Common Stock or Warrants, could adversely affect the voting
and other rights of the holders of the Common Stock, or could depress the market
price of the Common Stock or Warrants.
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS
Each Warrant will entitle the holder to purchase one Common Share at an
exercise price equal to 150% of the Offering Price commencing from the effective
date of the Registration Statement ("Effective Date"). The Warrants are
redeemable by the Company for $.05 per Warrant at any time after the Common
Shares and Warrants become separately tradable. To redeem the Warrants the
Company must provide at least 30 days prior written notice, and may only provide
such notice after the closing price of the Common Stock has for 20 consecutive
trading days within the 30 day period preceding the date of the notice of
redemption equaled or exceeded 200% of the Offering Price. In the event the
Company exercises its right to redeem the Warrants, a holder would be forced:
(i) to exercise the Warrant within the period of the notice of redemption, which
could occur at a time when it may be disadvantageous for them to do so; (ii) to
sell the Warrants at the then current market price, which could be at a time the
holder might otherwise wish to hold them; or (iii) to accept the redemption
price which will likely be substantially less than the market value of the
Warrants at the time of redemption. The Company may elect to call all of the
Warrants for redemption as soon as the trading price of its Common Stock meets
the minimum amount for the specified number of days, provided it is one year
from the Effective Date, or such earlier date as may be determined by the
Representative, and a current Prospectus relating to the Common Shares
underlying such Warrants is then in effect. See "Description of
Securities--Warrants."
BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS
Although the Company has tentatively allocated the net proceeds from this
Offering for various uses, the projected expenditures are estimates and
approximations only and do not represent firm commitments of the Company.
Accordingly, the Company's management will retain broad discretion in the use of
these funds. In the event the Company's plans change, or if the proceeds of this
Offering or cash flow otherwise prove to be insufficient to fund operations, the
Company may find it necessary or advisable to reallocate some or all of the
proceeds from the Offering or may be required to seek additional financing or
curtail its product development activities. There can be no assurance any
additional financing will be available to the Company or that any available
financing will be on commercially reasonable terms. See "Use of Proceeds."
ANTI-TAKEOVER PROVISIONS; LIMITATION ON VOTING RIGHTS
The Company's Amended and Restated Articles of Incorporation ("Articles")
and its Bylaws contain provisions that may make it more difficult to acquire
control of the Company by means of tender offer, over-the-counter purchases, a
proxy fight, or otherwise. The Articles also include provisions restricting
shareholder voting rights. The Company's Articles include a provision
prohibiting action by written consent of the shareholders. The Company's
Articles provide that certain provisions of the Articles may only be amended by
a vote of 66 2/3% of the shareholders. The Company's Articles also require that
20
<PAGE>
shareholders give advance notice to the Company of any nomination for election
to the Board of Directors, or other business to be brought at any shareholders'
meeting. This provision makes it more difficult for shareholders to nominate
candidates to the Board of Directors who are not supported by management. In
addition, the Articles require advance notice for shareholder proposals to be
brought before a meeting of shareholders and requires the notice to specify
certain information regarding the shareholder and the proposal. This provision
makes it more difficult to implement shareholder proposals even if a majority of
shareholders are in support thereof. Each of these provisions may also have the
effect of deterring hostile take-overs or delaying changes in control or
management of the Company. In addition, the indemnification provisions of the
Company's Articles and Bylaws may represent a conflict of interest between
management and the shareholders since officers and directors may be indemnified
prior to any judicial determinations as to their conduct. The Articles provide
that the shareholders' right to cumulative voting will terminate automatically
when the Company's shares are listed on either the New York Stock Exchange
("NYSE") or AMEX, or alternatively when the Company's shares are qualified for
trading as a National Market System ("NMS") security on the Nasdaq Stock Market
("Nasdaq"), and the Company has at least 800 shareholders as of the record date
for the most recent meeting of shareholders. Upon consummation of this Offering,
the Common Shares are anticipated to be listed on AMEX. Therefore, cumulative
voting will likely terminate following consummation of this Offering. When and
if the Company so qualifies, the absence of cumulative voting may have the
effect of limiting the ability of minority shareholders to effect changes in the
Board of Directors and, as a result, may have the effect of deterring hostile
takeovers or delaying or preventing changes in control or management of the
Company.
The Company's Articles also include a provision ("Fair Price Provision")
requiring the approval of the holders of 66 2/3% of the Company's voting stock
as a condition to a merger or certain other business transactions with, or
proposed by, a holder of 15% or more of the Company's voting stock (an
"Interested Shareholder"), except in cases where the continuing directors
approve the transaction or certain minimum price criteria and other procedural
requirements are met. A "Continuing Director" is a director who is not
affiliated with an Interested Shareholder and was elected prior to the time such
Interested Shareholder became an Interested Shareholder, or any successor chosen
by a majority of the Continuing Directors. The minimum price criteria generally
require that, in a transaction in which shareholders are to receive payments,
holders of Common Stock must receive a value equal to the highest price of: (i)
the price paid by the Interested Shareholder for Common Stock during the prior
two years; (ii) the Fair Market Value (as defined) at the time; or (iii) the
amount paid in the transaction in which such person became an Interested
Shareholder. In addition, such payment must be made in cash or in the type of
consideration paid by the Interested Shareholder for the greatest portion of the
Interested Shareholder's shares. The Company's Board of Directors believes the
Fair Price Provision will help assure similar treatment for all of the Company's
shareholders if certain kinds of business combinations are effected. However,
the Fair Price Provision may make it more difficult to accomplish certain
transactions potentially beneficial to shareholders, but opposed by the
incumbent Board of Directors.
The Company's Articles provide for a classified Board of Directors to
automatically become effective when the Company's shares are listed on either
NYSE or AMEX or alternatively when shares of Common Stock of the Company are
qualified for trading as a NMS security, and the Company has at least 800
shareholders as of the record date for the most recent meeting of shareholders.
The classified Board of Directors provisions, when and if effective, divide the
Board of Directors into two or more classes of directors serving staggered
two-year terms, with one director to be elected at each annual meeting of
shareholders. The classification of directors extends the time required to
change the composition of the Board of Directors. Upon consummation of this
Offering, the Common Shares and Warrants are anticipated to be listed on AMEX
which will result in a classified Board of Directors. See "Description of
Securities--Possible Anti-Takeover Effect of Certain Provisions of the Company's
Articles of Incorporation."
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<PAGE>
NO ASSURANCE OF PUBLIC MARKET
Prior to this Offering, there has been no public trading market of the
securities of the Company. There can be no assurance a regular trading market
for the Common Shares and Warrants will develop after this Offering or, if
developed, it will be sustained.
NO DIVIDENDS
The Company has never paid cash or other dividends on its Common Stock. It
is the Company's intention to retain earnings, if any, to finance the operation
and expansion of its business, and therefore, it does not expect to pay any cash
dividends in the foreseeable future. See "Dividend Policy."
POSSIBLE DELISTING OF SECURITIES FROM AMEX AND POSSIBLE MARKET ILLIQUIDITY
While the Company expects the Common Shares and Warrants will be included
for initial listing on AMEX there can be no assurance the Company will meet the
criteria for continued listing of the Securities on AMEX. Based on existing
listing criteria, an AMEX listing will generally require the Company to have a
minimum public distribution of 500,000 shares of Common Stock with a minimum of
800 public holders or a minimum distribution of 1,000,000 shares with a minimum
of 400 public holders, a minimum market price of $3.00 per share, shareholders'
equity of $4,000,000 and aggregate market value of publicly held shares of
$15,000,000. AMEX has adopted a number of alternative and additional criteria
for listing and there is no assurance the Company will be successful in
obtaining a listing or in maintaining its listing, if granted. In the event the
Company is either unsuccessful in obtaining an initial listing or is thereafter
delisted for any reason, investors would likely find it more difficult to
dispose of the Securities, or to obtain accurate quotations as to their value.
DISCLOSURES RELATING TO LOW PRICED STOCKS; POSSIBLE RESTRICTIONS ON RESALE OF
LOW PRICED STOCKS AND ON BROKER-DEALER SALES; POSSIBLE ADVERSE EFFECT OF
"PENNY STOCK" RULES ON LIQUIDITY FOR THE COMPANY'S SECURITIES
If the Securities were delisted from AMEX (see "Possible Delisting of
Securities from AMEX and Possible Market Illiquidity" above) at a time when the
Company had net tangible assets of $2,000,000 or less, further transactions in
the Securities would become subject to Rule 15g-9 under the Securities Exchange
Act of 1934 (the "Exchange Act"). Rule 15g-9 imposes additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and "accredited investors" (generally, individuals with a
net worth in excess of $1,000,000 or annual income exceeding $200,000
individually, or $300,000 together with their spouses). For transactions covered
by this Rule, a broker-dealer must make a special suitability determination for
the purchaser and have received the purchaser's written consent to the
transaction prior to the sale. Consequently, this Rule could affect the ability
of broker-dealers to sell the Securities, and may affect the ability of
purchasers in this Offering to sell any of the Securities acquired hereby in the
secondary market.
The Commission has adopted regulations which generally define a "penny
stock" to be any security of a company that has a market price (as therein
defined) less than $5.00 per share, or with an exercise price of less than $5.00
per share subject to certain exceptions, and which is not traded on any exchange
or quoted on Nasdaq. For any transaction by broker-dealers involving a penny
stock, unless exempt, the rules require delivery of a risk disclosure document
relating to the penny stock market prior to a transaction in a penny stock.
Disclosure is also required to be made about compensation payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in an account and information
on the limited market in penny stocks.
The foregoing restrictions will not apply to the Securities if the
Securities are listed on AMEX or another exchange or on Nasdaq, and have certain
price and volume information provided on a current and
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<PAGE>
continuing basis, or if the Company meets certain minimum net tangible asset
requirements, or certain average annual revenue criteria over specific periods.
There can be no assurance the Securities will continue to qualify for exemption
from these restrictions. If the Securities were subject to these restrictions,
the market liquidity for the Securities could be materially and adversely
affected.
CONTRACTUAL OBLIGATIONS TO REPRESENTATIVE
The Underwriting Agreement with the Representative provides for the
Company's continuing involvement with the Representative after the Offering,
including: (i) the Company's agreement to retain the Representative as a
consultant for two years from the date of this Prospectus for a fee of $3,000
per month; (ii) the Company's agreement to allow the Representative to nominate
one director or to designate a consultant to the Board of Directors for a period
of four years from the date of this Prospectus; (iii) the Company's agreement to
appoint the Representative as Warrant solicitation agent and to pay a fee for
such services equal to two percent of the exercise price of Warrant exercises
solicited by the Representative; and (iv) the grant to the Representative of an
option to purchase 290,000 Units at an exercise price of 160% of the Offering
Price. The ongoing fees to be paid to the Representative will reduce the amount
of working capital available for other purposes. See "Underwriting." In
addition, pursuant to a warrant agreement between the Company and the
Representative, the holders of the Representative's Option have the right, for a
period of five years, to require the registration under the Securities Act, at
the Company's expense, of the Common Shares and Warrants issuable upon exercise
of the Representative's Option and of the Common Shares issuable upon exercise
of the Warrants included therein, as well as certain "piggyback" registration
rights. The cost to the Company of effecting a demand registration may be
substantial. See "Description of Securities--Representative's Option."
To the extent the Representative elects to effect transactions in the
Company's Common Shares and Warrants, the Representative may exert a dominating
influence on the market for such Common Shares and Warrants. Such market making
activity may be discontinued at any time. In the event the Representative elects
or is forced to discontinue such activity following the completion of the
Offering, the price and liquidity of the Common Shares and Warrants may be
materially adversely affected. Further, as a result of the Representative's role
as a Warrant solicitation agent, unless granted an exemption by the Commission
from its rules, the Representative may be prohibited from engaging in any market
making activities with regard to the Company's Securities for the period from
one to five business days prior to any solicitation by the Representative of the
exercise of the Warrants until the later of: (i) termination of such
solicitation activity; or (ii) the termination, by waiver or otherwise, of any
right that the Representative may have to receive a fee for the exercise of the
Warrants following the solicitation. As a result, the Representative may be
unable to continue to provide a market for the Company's Securities under
certain periods while the Warrants are exercisable. See "Underwriting."
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<PAGE>
USE OF PROCEEDS
The Company estimates the net proceeds from the sale of the 2,900,000 Units
offered hereby will be approximately $13.7 million, assuming an Offering Price
of $5.50 per Unit, and after deducting underwriting discounts and commissions of
$1,196,250 and other expenses of this Offering estimated to be approximately
$1,000,000 (which includes the Representative's non-accountable expense
allowance). The Company intends to use the proceeds substantially as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE OF NET
APPLICATION OF PROCEEDS DOLLAR AMOUNT PROCEEDS
- -------------------------------------------------------------- -------------- -------------------
<S> <C> <C>
Acquisition of manufacturing equipment........................ $ 3,250,000 24%
Marketing..................................................... 2,300,000 17
Research and development...................................... 1,750,000 13
Repayment of certain loans and deferred consulting fees(1).... 1,716,000 12
Expansion of facilities(2).................................... 750,000 5
Prepaid royalties(3).......................................... 250,000 2
Working capital and general corporate purposes................ 3,738,000 27
-------------- ---
$ 13,754,000 100%
-------------- ---
-------------- ---
</TABLE>
- ------------------------
(1) Includes repayment of principal and accrued interest on the Bridge Loans,
repayment of the December 1997 Loans and payment of deferred consulting
fees to Manhattan West, Inc. in the amount of $77,000 as of December 1,
1997, increasing at the rate of $5,000 per month thereafter. The Bridge
Loans all provide for accruing interest at 10% per annum, with all interest
and principal due upon the earlier to occur of five business days after
completion of the Offering, or 25 months. The December 1997 Loans provide
for accruing interest at 12% per annum, with all interest and principal due
upon the earlier to occur of five business days after completion of the
Offering, or 120 days. The Bridge Loans were issued between December 1996
and May 1997. One Bridge Loan contains a provision which allows the Company
to convert the amount owed to Common Stock based on a purchase price of one
half of the Offering Price. All of the proceeds from the Bridge Loans and
the December 1997 Loans were expended on research and development, working
capital and general corporate purposes. The amount shown above also
includes repayment of equipment leases guaranteed by certain officers and
directors of the Company in the approximate amount of $145,000. See
"Certain Transactions." "Bridge Loans" and "Related Party Transactions."
(2) The Company has entered into a lease in order to relocate its facilities to
an approximately 28,400 square foot single user building presently under
construction. Includes the Company's estimate of costs to conform the
building to its requirements.
(3) Five year prepayment of minimum royalty due pursuant to IHI License.
The estimates shown above exclude any proceeds from exercise of any of the
Warrants, the Representative's Option, the Over-allotment Option, and other
outstanding options and warrants to acquire the Common Stock of the Company. The
Common Shares included in all Units purchased pursuant to exercise of the
Over-allotment Option will be sold by Knickerbocker and the Company will not
receive any of the proceeds from the sale of such Common Shares. The Company
will receive the proceeds from the sale of the Warrants included in all Units
purchased pursuant to exercise of the Over-allotment Option. The net proceeds,
if any, from the exercise of the Warrants, the Representative's Option or other
outstanding options and warrants will be added to working capital.
The Company may use a portion of the net proceeds of this Offering to
acquire businesses, products, or technologies anticipated by management to be
complementary to those of the Company. The Company has no present plans,
agreements, or commitments and is not currently engaged in any negotiations with
respect to any such transaction.
The Board of Directors has broad discretion in determining how the net
proceeds of this Offering will be applied. The foregoing represents the
Company's best estimate of the allocation and use of proceeds based upon its
present plans and certain assumptions including industry conditions and the
Company's anticipated expenditures. The projected expenditures described above
are estimates and approximations only and do not represent firm commitments of
the Company. Actual expenditures may vary substantially from these estimates
depending upon many factors, including the costs and results of research and
product
24
<PAGE>
development activities, marketing studies, product testing, product
availability, costs of third party manufacturing facilities, market acceptance
of the Company's proposed containers, changes in current regulations or
competitive conditions, and the availability of other financing arrangements.
The Company's future capital requirements will depend upon numerous factors,
including the amount of revenues generated from operations (if any), the cost of
the Company's sales and marketing activities and the progress of the Company's
research and development activities, none of which can be predicted with
certainty. The Company anticipates the proceeds of this Offering, together with
existing capital resources and cash generated from operations, if any, will be
sufficient to meet the Company's cash requirements for at least the next 18 to
24 months at its anticipated level of operations. However, the Company may seek
additional funding during the next 24 months and could seek additional funding
after such time. There can be no assurance any additional financing will be
available on acceptable terms, or at all, when required by the Company.
Moreover, if additional financing is not available, the Company could be
required to reduce or suspend its operations, seek an acquisition partner or
sell securities on terms that may be highly dilutive or otherwise
disadvantageous to investors purchasing the Units offered hereby. The Company
has experienced in the past, and may continue to experience, operational
difficulties and delays in its product development due to working capital
constraints. Any such difficulties or delays could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 1 of Notes to Financial Statements.
Pending use of the proceeds from this Offering as set forth above, the
Company will invest all or a portion of such proceeds in short-term bank
certificates of deposit, U.S. Government obligations, money market investments,
and short-term investment grade securities.
DIVIDEND POLICY
No dividends have ever been paid on the Company's Common Stock and the
Company does not currently anticipate paying any cash or other dividends on the
Common Stock, but instead intends to retain future earnings, if any, for
reinvestment in the Company. Future dividend policy will be determined by the
Board of Directors of the Company in light of prevailing financial need,
earnings, if any, as well as other relevant factors. In addition, any financing
which the Company may obtain in the future may contain provisions restricting
the Company's ability to pay dividends.
25
<PAGE>
DILUTION
Dilution represents the difference between the Offering Price per share paid
by purchasers in this Offering, and the pro forma net tangible book value per
share immediately after completion of this Offering. "Net tangible book value
per share" represents the amount of the Company's total assets less the amount
of its intangible assets and its liabilities, divided by the number of shares of
Common Stock outstanding. As of September 30, 1997, as adjusted for the Recent
Issuances, the negative net tangible book value of the Company was $(714,300),
or $(0.23) per share of Common Stock, based on 3,089,478 shares of Common Stock
outstanding as of the date of this Prospectus. After giving effect to the
receipt of the net proceeds from the sale by the Company of 2,900,000 Units
offered hereby at an estimated Offering Price of $5.50 per Unit (assuming no
part of the Offering Price is allocated to the Warrants), and after deduction of
estimated underwriting discounts and commissions and offering expenses to be
incurred by the Company in connection with this Offering, and after the
repayment of Bridge Loans (and related write-off of $73,700 of deferred
financing costs), the related accrued interest, and repayment of the December
1997 Loans and existing capital leases, the pro forma net tangible book value of
the Company at September 30, 1997 adjusted for the Recent Issuances would have
been approximately $12,966,000, or $2.16 per share based on 5,989,478 shares of
Common Stock to be outstanding. This represents an immediate increase in such
pro forma net tangible book value of $2.39 per share to existing shareholders
and an immediate dilution of $3.34 per share to new investors purchasing the
Units offered herein, which dilution amounts to approximately 61% of the
Offering Price per Common Share.
The following table illustrates the per share dilution resulting from this
Offering:
<TABLE>
<S> <C> <C> <C>
Assumed Offering Price per share(1)...................................................... $ 5.50
Negative tangible book value per share September 30, 1997.............................. $ (0.35)
Adjustment for the Recent Issuances(2)................................................. 0.12
---------
Negative tangible book value after Recent Issuances.................................... (0.23)
Increase in net tangible book value per share attributable to new investors............ 2.39
---------
Pro forma net tangible book value per share after Offering............................... 2.16
---------
Dilution per share to new investors(3)(4)................................................ 3.34
---------
---------
</TABLE>
- ------------------------------
(1) Assumes no allocation of the Offering Price to the Warrants.
(2) Pro forma reflects the Recent Issuances.
(3) Does not reflect the issuance of up to: (i) 435,000 shares contained in the
Units issuable upon exercise of the Warrants included as part of
Over-Allotment Option; (ii) 2,900,000 shares issuable upon exercise of the
Warrants included as part of the Units offered hereby; (iii) 580,000 shares
issuable upon exercise of the Representative's Option and the
Representative's Warrants included in the Representative's Option; (iv)
545,400 shares reserved for issuance under the Company's 1996 Stock Plan of
which options to acquire 113,000 shares have been granted prior to the date
of this Prospectus; and (v) 1,667,093 shares underlying other options and
warrants granted prior to the date of the Prospectus. See "Management,"
"Description of Securities," and "Underwriting."
(4) If all outstanding options and warrants were fully vested and were exercised
on September 30, 1997, dilution per share to new investors would increase to
$3.61 per share.
The following table sets forth, as of September 30, 1997, after giving
effect to the Recent Issuances: (i) the number of shares of Common Stock
purchased from the Company by the existing shareholders, the total consideration
paid and the average price per share paid for such shares by the existing
shareholders; and (ii) the number of Common Shares to be sold by the Company to
the purchasers of the 2,900,000 Units offered hereby, the total consideration to
be paid and the average price per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ----------- ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders.................................... 3,089,478 51.6% $2,047,000 11.4% $ 0.66
New Investors............................................ 2,900,000 48.4 15,950,000 88.6 $ 5.50(1)
--------- ----- ---------- -----------
Total.................................................. 5,989,478(2) 100.0% $17,997,000 100.0%
--------- ----- ---------- -----------
--------- ----- ---------- -----------
</TABLE>
- ------------------------------
(1) Of the assumed $5.50 Offering Price, $5.40 is attributed to one Common Share
and $0.10 is attributed to one Warrant.
(2) Does not reflect the issuance of up to: (i) 435,000 shares contained in the
Units issuable upon exercise of the Warrants included as part of
Over-Allotment Option; (ii) 2,900,000 shares issuable upon exercise of the
Warrants included as part of the Units offered hereby; (iii) 580,000 shares
issuable upon exercise of the Representative's Option and the
Representative's Warrants included in the Representative's Option; (iv)
545,400 shares reserved for issuance under the Company's 1996 Stock Plan of
which options to acquire 113,000 shares have been granted prior to the date
of this Prospectus; and (v) 1,667,093 shares underlying other options and
warrants granted prior to the date of the Prospectus. See "Management,"
"Description of Securities," and "Underwriting."
26
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company: (i) actual at September 30, 1997; (ii) pro forma to reflect the Recent
Issuances; and (iii) pro forma as adjusted to reflect the Recent Issuances and
the sale by the Company of 2,900,000 Units offered hereby at an estimated
Offering Price of $5.50 per Unit and the initial application of the estimated
net proceeds of approximately $13.7 million of this Offering (after deducting
the underwriting discounts and commissions and estimated related expenses to be
incurred). The table should be read in conjunction with the audited and
unaudited financial statements and notes thereto appearing elsewhere in the
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA(1) ADJUSTED(2)
------------- ------------- -------------
<S> <C> <C> <C>
Short term debt(3)................................................... $ 1,245,000 $ 1,395,000 --
------------- ------------- -------------
------------- ------------- -------------
Preferred Stock, no par value, 5,000,000 shares authorized, no shares
issued and outstanding............................................. $ -- $ -- $ --
Common Stock, no par value 20,000,000 shares authorized, 3,006,071
shares issued and outstanding actual; 3,089,478 shares issued and
outstanding pro forma; 5,989,478 shares issued and outstanding pro
forma as adjusted(4)............................................... 1,714,300 2,047,200 15,801,200
Additional paid-in capital........................................... 993,800 1,117,900 1,117,900
Deficit accumulated during the development stage..................... (3,322,200) (3,439,200) (3,512,900)
Deferred compensation................................................ (431,000) (431,000) (431,000)
------------- ------------- -------------
Total shareholders' equity (deficit)................................. (1,045,100) (705,100) 12,975,200
------------- ------------- -------------
Total capitalization................................................. $ (1,045,100) $ (705,100) $ 12,975,200
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(1) Pro forma reflects the Recent Issuances and the December 1997 Loans.
(2) Adjusted to reflect the Recent Issuances and the sale by the Company of the
2,900,000 Units offered hereby at an assumed Offering Price of $5.50 per
Unit, and the application of the estimated net proceeds therefrom of
approximately $13.7 million. The pro forma as adjusted also reflects the
repayment of principal and interest (and related write-off of $73,700 of
deferred financing costs) on the Bridge Loans, repayment of the December
1997 Loans, payment of deferred consulting fees of $57,500 and the repayment
of equipment leases of approximately $145,000. See "Use of Proceeds,"
"Capitalization" and "Certain Transactions."
(3) Consists of the Bridge Loans and the December 1997 Loans received by the
Company that will be repaid from the proceeds of this Offering.
(4) Excludes: (i) 2,900,000 shares reserved for issuance upon exercise of the
Warrants; (ii) 435,000 shares issuable upon exercise of the Warrants
included within the Over-allotment Option; (iii) 290,000 shares issuable
upon exercise of the Representative's Option; (iv) 290,000 shares issuable
upon exercise of the Representative's Warrants included in the
Representative's Option; (v) 545,400 shares reserved for issuance under the
Company's 1996 Stock Plan, of which options to acquire 113,000 shares of
Common Stock have been granted prior to the date of this Prospectus; (vi)
1,266,506 shares underlying other outstanding options granted prior to the
date of this Prospectus; and (vii) 400,587 shares reserved for issuance upon
exercise of outstanding warrants issued prior to the date of this
Prospectus. See "Management," "Description of Securities," "Underwriting,"
and Note 7 of Notes to Financial Statements.
27
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements and Notes thereto, and the independent
auditors' report, which contains an explanatory paragraph that states that the
Company's recurring losses from operations and net capital deficiency raise
substantial doubt about its ability to continue as a going concern, and other
financial information included elsewhere. The Statement of Operations Data for
the years ended December 31, 1995 and 1996, and the Balance Sheet Data as of
December 31, 1996 are derived from the financial statements of the Company,
which financial statements have been audited by KPMG Peat Marwick LLP,
independent auditors. The financial statements as of December 31, 1996, and for
each of the years in the two-year period ended December 31, 1996, and the
independent auditors' report thereon, are included elsewhere in this Prospectus.
The unaudited statement of operations data for the nine months ended September
30, 1996 and 1997, and the period from November 8, 1994 (inception) through
September 30, 1997, and the unaudited balance sheet at September 30, 1997 have
been derived from the unaudited financial statements of the Company also
appearing herein. The unaudited financial statements have been prepared on a
basis consistent with the Company's audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, that management
believes necessary for a fair presentation of the Company's financial position
and results of operations for these periods. Results of operations for the nine
months ended September 30, 1997 are not necessarily indicative of results to be
expected for the year ending December 31, 1997, or a full year.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, FROM INCEPTION
--------------------- NINE MONTHS ENDED NINE MONTHS ENDED THROUGH
1995 1996 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
--------- ---------- ------------------ ------------------ ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $ -- $ -- $ -- $ -- $ --
Operating expenses:
Marketing, general and
administrative................ 94,500 830,400 399,700 1,127,700 2,064,900
Research and development........ 67,900 235,900 231,200 402,000 705,800
Compensation related to grant of
stock options................. -- 379,300 379,300 26,400 405,700
--------- ---------- ------------------ ------------------ ------------------
Total operating expenses...... 162,400 1,445,600 1,010,200 1,556,100 3,176,400
Interest expense................ 1,700 22,800 11,300 121,100 145,800
--------- ---------- ------------------ ------------------ ------------------
Net loss(1)..................... $(164,100) $(1,468,400) $ (1,021,500) $ (1,677,200) $ (3,322,200)
--------- ---------- ------------------ ------------------ ------------------
--------- ---------- ------------------ ------------------ ------------------
Net loss per common share(1).... $ (0.07) $ (0.49) $ (0.37) $ (0.43)
--------- ---------- ------------------ ------------------
--------- ---------- ------------------ ------------------
Weighted average common and
common equivalent shares
outstanding(1)................ 2,423,800 3,024,100 2,733,700 3,864,600
--------- ---------- ------------------ ------------------
--------- ---------- ------------------ ------------------
Dividends paid.................. $ -- $ -- $ -- $ -- $ --
--------- ---------- ------------------ ------------------ ------------------
--------- ---------- ------------------ ------------------ ------------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------
PRO FORMA AS
DECEMBER 31, 1996 ACTUAL ADJUSTED(2)(3)
----------------- --------- ----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................................................. $ 12,000 71,800 $ 12,647,300
Working capital (deficit)........................................ (220,800) (1,504,300) 12,482,000
Total assets..................................................... 328,600 660,100 13,161,900
Total liabilities................................................ 445,400 1,705,200 186,700
Deficit accumulated during the development stage................. (1,645,000) (3,322,200) (3,512,900)
Shareholders' equity (deficit)................................... (116,800) (1,045,100) 12,975,200
</TABLE>
- ------------------------------
(1) See Note 2 of Notes to Financial Statements for information concerning the
computation of net loss per common share and shares used in computing net
loss per share.
(2) Pro forma reflects the Recent Issuances and the December 1997 Loans.
(3) Adjusted to reflect the Recent Issuances and the sale by the Company of the
2,900,000 Units offered hereby at an assumed Offering Price of $5.50 per
Unit, and the application of the estimated net proceeds therefrom of
approximately $13.7 million. The pro forma as adjusted also reflects the
repayment of principal and interest (and related write-off of $73,700 of
deferred financing costs) on the Bridge Loans, repayment of the December
1997 Loans, payment of deferred consulting fees of $57,500 and the repayment
of equipment leases of approximately $145,000. See "Use of Proceeds"
"Capitalization," and "Certain Transactions."
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE COMPANY'S FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. EXCEPT FOR THE HISTORICAL
INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS PROSPECTUS CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE
CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING APPLICABLE
TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS
PROSPECTUS. SEE "FORWARD-LOOKING STATEMENTS." THE COMPANY'S ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS
AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED
IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Ontro, Inc. is engaged in the research and development of integrated thermal
containers. The Company, through a related entity, has worldwide, exclusive
rights to patented and patent pending products and technology for self-heating
and self-cooling containers. The Company plans on licensing its integrated
thermal containers to food, beverage, and container manufacturers who will
manufacture, market, and sell the containers under their own brand names or to
third parties. At this time the Company is still in its development stage with
no commercially available products and there can be no assurance that the
Company will successfully develop, manufacture, and market its proprietary
containers or technologies.
The Company has never generated any revenue from product sales or through
licensing agreements and has relied on private equity financing, Bridge Loans
and the December 1997 Loans. The Company has been unprofitable since its
inception and expects to incur additional operating losses in 1997 and 1998. As
of September 30, 1997, the Company's accumulated deficit was $3,322,200, and it
had a working capital deficiency of $1,504,300. Until September, 1996, the
Company's shareholders elected to have the Company be treated as an S
Corporation in which all losses passed through to the shareholders to be
reported on their personal tax returns. In September 1996, the Company elected
to be treated as a C Corporation for tax reporting purposes. At December 31,
1996, the Company had available net operating loss carry forwards of
approximately $548,000 for federal income tax reporting purposes which expire in
2011.
The Company's recurring operating losses and cash flow deficiencies and
working capital and shareholders' deficiencies as of December 31, 1996, raise
substantial doubt about the Company's ability to continue as a going concern.
Therefore, Management believes the Company will need substantial funds from debt
or equity financing such as the funds that would be provided if this Offering
were consummated.
LIQUIDITY AND CAPITAL RESOURCES
From inception the Company financed its operations primarily through private
placements of equity securities, which provided aggregate net proceeds of
approximately $2,047,000 and loans received during the past year of $1,395,000.
The Company raised $1,245,000 from sales of the Bridge Loans from December,
1996 through May, 1997 and $150,000 from the December 1997 Loans. At September
30, 1997, the Company's current liabilities exceeded its current assets by
approximately $1,504,300 and its cash balance was $71,800. Since that date, the
Company has received the proceeds from the Recent Issuances and the December
1997 Loans and the Company's cash position continues to decline.
Net cash used by operating activities for the years ended 1995 and 1996 was
$132,100 and $693,800 respectively. The Company's net cash flow used by
investing activities was $32,500 in 1995 and $150,100 in 1996. Net cash flow
from financing activities was $146,000 in 1995 and $854,300 in 1996.
29
<PAGE>
During the 12-month period following the consummation of this Offering the
Company plans to spend $3,250,000 for capital equipment and $750,000 for
improvement to its new facility.
The Company's future capital requirements will depend upon numerous factors,
including the amount of revenues generated from operations (if any), the cost of
the Company's sales and marketing activities and the progress of the Company's
research and development activities, none of which can be predicted with
certainty. The Company anticipates the proceeds of this Offering, together with
existing capital resources and cash generated from operations, if any, will be
sufficient to meet the Company's cash requirements for at least the next 18-24
months at its anticipated level of operations. However, the Company may seek
additional funding during the next 24 months and could seek additional funding
after such time. There can be no assurance any additional financing will be
available on acceptable terms, or at all, when required by the Company.
Moreover, if additional financing is not available, the Company could be
required to reduce or suspend its operations, seek an acquisition partner or
sell securities on terms that may be highly dilutive or otherwise
disadvantageous to investors purchasing the Units offered hereby. The Company
has experienced in the past, and may continue to experience, operational
difficulties and delays in its product development due to working capital
constraints. Any such difficulties or delays could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 1 of Notes to Financial Statements.
RESULTS OF OPERATIONS
The Company incurred a loss of $1,677,200 in the nine months ended September
30, 1997 (the "1997 first nine months"); $1,021,500 in the nine months ended
September 30, 1996 (the "1996 first nine months"); $1,468,400 for the year ended
December 31, 1996 ("1996"); and $164,100 for the year ended December 31, 1995
("1995").
Research and development expenses increased $170,800 to $402,000 for the
1997 first nine months from $231,200 for the 1996 first nine months and
increased $168,000 to $235,900 for 1996 from $67,900 for 1995. These increases
were due to additional costs of outside consultants and companies hired by the
Company to aid in its research and development efforts, as well as salaries paid
to employees in 1996. Prior to May, 1996, the Company did not pay any salaries
to employees.
The Company's marketing, general and administrative expenses increased
$728,000 to $1,127,700 in the 1997 first nine months from $399,700 in the 1996
first nine months, and increased $735,900 to $830,400 in 1996 from $94,500 in
1995. These increases were due to a number of factors including the following:
(1) the hiring of business consultants to develop long-term marketing and
business strategies, (2) employee salaries in 1996, (3) increase in professional
fees, and (4) overall increase in corporate expenses due to increased business
activities at the Company.
During 1996, the Board of Directors granted and the stockholders approved
1,216,506 stock options outside the 1996 Stock Plan at a price range of $0.001
to $3.00 to non-employees. The Company recognized $379,300 of compensation
expense to non-employees relating to these options during 1996 and deferred
$405,700 of compensation expense for options that have not vested as of December
31, 1996 using the prescribed valuation methods of SFAS No. 123. The Company
determined that the per share weighted average fair value of stock options
granted during 1996 was $0.67 on the date of grant.
Interest expense was $121,100 in the 1997 first nine months compared to
$11,300 in the 1996 first nine months and increased $21,100 to $22,800 in 1996
from $1,700 in 1995 due to short term borrowings and equipment financing.
30
<PAGE>
NEW ACCOUNTING STANDARDS
In February, 1997, the FASB issued SFAS No. 128, "EARNINGS PER SHARE." This
statement specified the computation, presentation, and disclosure requirements
for earnings per share for entities with publicly held common stock or potential
common stock. This statement shall be effective for financial statements for
both interim and annual periods ending after December 15, 1997. Earlier
application is not permitted. At this time the Company does not believe that
this statement will have a significant impact on the financial position or
results of operations for the year ending December 31, 1997.
In February, 1997, the FASB issued SFAS No. 129, "DISCLOSURE OF INFORMATION
ABOUT CAPITAL STRUCTURE." This statement shall be effective for financial
statements for both interim and annual periods ending after December 15, 1997.
At this time the Company does not believe that this statement will have a
significant impact on the financial position or results of operations for the
year ending December 31, 1997.
In June, 1997, the FASB issued SFAS No. 130, "REPORTING COMPREHENSIVE
INCOME." This statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purposes financial statements. This statement shall be
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. At this time the Company does not believe that this statement will
have a significant impact on the financial position or results of operations for
the year ending December 31, 1998.
In June, 1997, the FASB issued SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION." This statement established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. This statement shall be effective for fiscal years
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. At this time the
Company does not believe that this statement will have a significant impact on
the financial position or results of operations for the year ending December 31,
1998.
31
<PAGE>
BUSINESS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT
LIMITED TO, STATEMENTS REGARDING FUTURE EVENTS AND THE COMPANY'S PLANS AND
EXPECTATIONS. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," AS
WELL AS THOSE DISCUSSED ELSEWHERE IN THE PROSPECTUS OR INCORPORATED HEREIN BY
REFERENCE. SEE "FORWARD-LOOKING STATEMENTS."
OVERVIEW
Ontro, Inc. (the "Company" or "Ontro") is engaged in the research and
development of integrated thermal containers. The Company has the rights to
exploit a unique proprietary technology which it has incorporated into a
proposed product line of fully contained self-heating beverage containers
designed to heat liquid contents such as coffee, tea, hot chocolate, soups, and
baby formula. These containers are similar to typical beverage containers in
size and shape, and are activated by the consumer to heat the contents within a
few minutes. The Company seeks to market its container technology to develop and
expand a consumer market for remote and mobile heating of beverages and other
products.
The Company's products are still in development and are not currently sold
commercially. The Company's first anticipated commercial product is a
self-heating beverage container which will require additional research and
development, including further design improvements, testing, and marketing
studies before it or any of the Company's other potential products under
development will be able to be successfully manufactured and marketed. There can
be no assurance these efforts will be successfully completed.
While the Company believes it is in the final stages of completing
development of its self-heating beverage container, significant additional work
testing or verifying different aspects of the containers is required before the
current demonstration models will be ready for commercial production. Additional
development issues which must be completed include, but are not limited to the
areas of seam failure, heat transfer, content related issues, heating control,
pasteurization, timing and temperature ranges, appearance, and packaging. There
can be no assurance these development issues will be successfully concluded.
The Company believes substantial market opportunities exist for the
exploitation of the Company's integrated thermal container technology. The
Company believes as society has become more mobile, demand has risen for remote
heating of goods, and conventional heating sources do not supply truly remote
consumption due primarily to inconvenience and the inability of consumers to
access these sources in a mobile environment. The Company's self-heating
containers are expected to meet the needs of consumers such as mothers requiring
warmed baby formula, commuters, mobile professionals, sports enthusiasts and
others without quick and convenient access to conventional heating sources.
The Company intends to become a leading provider of integrated thermal
containers and related technology to food, beverage and other manufacturers. In
order to do so the Company will have to complete the development of its proposed
products so they may be successfully manufactured and marketed. The Company's
principal strategies include:
SUB-LICENSE AGREEMENTS WITH MAJOR FOOD, BEVERAGE AND CONTAINER COMPANIES.
The Company's principal marketing strategy is to target major food, beverage
and container manufacturers for the sub-license of its integrated thermal
container technologies. These manufacturers are expected to manufacture, label,
fill, market and distribute containers under their own brand name or for third
parties in exchange for providing the Company royalties and/or research and
development and marketing assistance. Management believes this approach should
allow the Company to access the manufacturing, marketing, name brand and
distribution capabilities of potential licensees without the high overhead costs
of plant, equipment and labor. The Company believes its integrated thermal
containers
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could assist manufacturers in offering a value-added product to complement
existing product lines and assist in expanding market share. To date, the
Company has entered into an evaluation agreement with Nestle USA Inc. ("Nestle")
and a distribution agreement with Knickerbocker (see below). To successfully
implement this strategy, the Company will have to complete its product
development, and market the proposed products to potential sublicensees who will
have to be independently satisfied with the products and the market opportunity.
There can be no assurance the Company will be able to complete these objectives.
STRATEGIC MANUFACTURING AND MARKETING.
Concurrently with seeking sub-license agreements, the Company plans to
directly produce and market self-heating beverage containers to selected niche
markets. The Company believes such manufacturing and marketing should provide
substantial benefits including: (i) additional revenues to fund marketing
efforts to major food, beverage and container companies as described above; (ii)
demonstration of product feasibility and the manufacturing process; and (iii)
providing evaluation units for use in conducting marketing and product
feasibility studies by the Company and others. The Company plans to selectively
market to customers and distributors whom the Company believes would not
interfere with potential sub-licenses the Company intends to seek with major
food and beverage container manufacturers. The Company intends to use a portion
of the net proceeds of this Offering to complete its development of a full-scale
production facility. In addition to completing its manufacturing facility and
successfully demonstrating its capacity to manufacture commercial quantities of
completed products, the Company will have to identify and obtain distribution
channels in such niche markets. There can be no assurance the Company will be
able to complete these objectives.
DEVELOP INTEGRATED THERMAL TECHNOLOGY FOR OTHER APPLICATIONS.
The Company plans to develop additional integrated thermal containers to
further access the beverage market. The Company is designing a proprietary
reusable thermos-Registered Trademark- type container with insertable thermal
cartridges, which would allow the consumer to heat and re-heat, an integrated
thermal container filled by the consumer with the liquid of his/her choice. The
Company is developing a disposable self-heating baby bottle, which could be
pre-filled with formula and heated on demand. The Company's plans also include
additional research and development into designs and potential uses of
integrated thermal containers for medical, pharmaceutical, health, and beauty
products, as well as other potential industrial applications. The Company
intends to utilize the expertise of its management and Advisory Board to
identify market opportunities for its technology. There can be no assurance the
Company will be able to complete the design and development of, or market any
such integrated thermal containers.
The Company has entered into an evaluation agreement (the "Evaluation
Agreement") with Nestle which allows Nestle an exclusive period to review the
Company's designs and technology in order to determine Nestle's interest in
acquiring rights for the commercial use of the Company's self-heating food and
beverage containers. The Evaluation Agreement requires Nestle to cooperate with
the Company in evaluating certain commercial uses and markets for the Company's
technology, and includes an obligation to pay for one-half of the cost of
certain market research studies that are currently underway.
The Company has also entered into the LLK Agreement with Knickerbocker, a
marketer of specialty products. The Company and Knickerbocker are working to
develop certain specialty lines of beverages which would utilize the Company's
integrated thermal containers and be marketed by Knickerbocker.
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PRODUCTS
SELF-HEATING BEVERAGE CONTAINERS
The Company's first product is a fully contained, disposable, self-heating
beverage container similar in size and shape to an ordinary 16-ounce beverage
can. The containers are being designed to be heated by pushing a button on the
bottom of the container. Activating the heating mechanism by pressing the button
causes the contents in the container, such as approximately 10 ounces of coffee,
soup, tea, hot chocolate or baby formula, to safely warm to a pre-determined
range of temperatures within a specified range of time periods. The container
can then be opened by a typical style pop top for immediate
[GRAPHIC]
consumption. At its current stage of development the Company's initial proposed
product has been manufactured, test marketed in limited quantities. The product
requires additional research and development including further design
improvements, testing and marketing studies before it is introduced into the
marketplace. The Company believes with the application of the proceeds of this
Offering that the development of it's initial proposed product can be completed
in a manner that would allow this product to be available to the marketplace in
the last quarter of
1998.
The Company's proposed self-heating containers heat the contents inside the
container through a patented and patent pending process developed by the
Company. The process utilizes two separate compartments in the container. One
compartment holds the beverage or food. The second compartment contains
non-toxic heat activating ingredients and water which are segregated into two
component areas.
Pressing the button causes the water to be mixed with the active ingredients
and heat develops from the resulting chemical reaction.
To date, the Company has developed several prototypes which it believes
demonstrate the feasibility of its self-heating beverage container technology.
Management believes the key attributes of its systems are the following:
EASE OF USE -- This system is designed so that a consumer can activate the
system merely by pushing a button; the contents are heated to a predetermined
range of temperatures within a specified range of time periods.
EASE OF USE BY MANUFACTURER -- The Company's products are designed to be
easily integrated into a manufacturer's existing production system. The current
design of the self-heating container is similar to a 16 oz. beverage container,
which configuration should allow manufacturers to integrate containers on an
existing assembly line for filling without substantial modification to their
existing manufacturing processes.
In addition, the Company's product is designed to be easily modified to
provide heated contents at a pre-determined range of temperatures within a
specified range of time periods. By varying the amount of heat activating
ingredients in the heating compartment, the manufacturer can tailor the time and
temperature to heat to the contents without altering the container itself.
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EASE OF DISPLAY BY RETAIL DISTRIBUTORS -- The container's current 16 oz.
style beverage configuration should allow distributors the ability to easily
integrate the product in space and point of purchase displays at supermarkets
and convenience stores without substantial modification to existing displays.
PRICING -- The Company has designed the product to be easily and simply
manufactured, with readily available components. The Company believes that
manufacturers are more likely to integrate the process with existing products so
long as the incorporation of such technology does not result in substantial
price increases to consumers.
USE OF NON-TOXIC MATERIALS -- The Company's products utilize non-toxic,
natural materials in its heating process. Management believes that consumers
could be more likely to purchase the Company's products if they believe the
beverage contents are not subject to toxic contamination from the heating
source.
The Company is continually evaluating certain design features of its
self-heating containers to refine such items as: the speed and efficiency of the
heat transfer; suitability for high viscosity contents; maintaining structural
integrity of the container; temperature control; and ease of use. Certain
aspects of the product are still under development. See "Manufacturing and
Products."
OTHER PROPOSED PRODUCTS
The Company is developing a self-heating food container which could be
pre-filled with items such as chili, soups, stews, and other food products. The
Company is also designing a proprietary reusable thermos-Registered Trademark-
type container with insertable thermal cartridges, which would allow the
consumer to heat and re-heat, or cool and re-cool, an integrated thermal
container filled by the consumer with the beverage of his/her choice.
The Company plans to develop similar containers of differing designs, which
may be able to be used for beverages or food. For example, the Company is
developing a disposable self-heating baby bottle, which could be pre-filled with
formula and heated on demand. The Company plans on conducting additional
research and development into designs and potential uses of integrated thermal
containers for medical, pharmaceutical, health and beauty products, and other
potential industrial applications.
The Company believes it can formulate differing active ingredients to enable
the contents of its integrated thermal containers to be cooled. The Company is
currently investigating the development of self-cooling technology. As of the
date of this Prospectus, the Company has not expended substantial research and
development efforts toward and has not produced any prototypes of a self-cooling
container.
For the nine months ended September 30, 1997 and the years ended December
31, 1996 and 1995, the Company expended $402,000, $235,900 and $67,900,
respectively, on research and development. The Company intends to spend a
portion of the net proceeds of this Offering on additional research and
development.
MARKETING
The Company's principal marketing strategy is to sub-license to major
manufacturers rights to integrated thermal container technologies developed by
or licensed to the Company. The initial focus of the Company's marketing efforts
will be on food and beverage and container manufacturers such as Nestle who the
Company believes may choose to package or sell containers, including such
contents as coffee, tea, hot chocolate, low-viscosity soups, and baby formula.
The Company is targeting companies such as Nestle which have large operations in
an effort to take advantage of their marketing and distribution capabilities and
brand name recognition. The Company intends to expend a portion of the proceeds
of this Offering on marketing.
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Since the Company believes securing such sub-license agreements may be a
very time consuming process, the Company also plans to produce and sell
self-heating beverage containers to customers and distributors. The Company
believes this secondary marketing strategy may assist in generating revenues
prior to the time larger volume sub-license agreements, if any, are obtained.
The Company plans to select such customers and distributors who the Company
believes would not interfere with sub-licenses the Company intends to seek with
major food and beverage container manufacturers. The Company has executed one
distributorship agreement of this type to market its integrated thermal
containers. See "Distributorship Agreement."
There can be no assurance this secondary marketing strategy of direct sales
or distribution arrangements will be successful, or if it is, that such
agreements will not preclude or impede sub-license agreements, if any, with
major food and beverage or container manufacturers. The Company intends to
retain a small sales staff to pursue such direct sale and distribution
opportunities. To assist in securing sub-license candidates and to determine the
potential market for its proposed containers, the Company intends to conduct
significant marketing studies in the next year. It is anticipated such marketing
studies will be contracted from third parties; however, the Company may conduct
a portion of such marketing studies internally. There can be no assurance the
results of such marketing studies will be favorable to the Company. If they are
not, they could have a material adverse impact on the business, financial
condition, and results from operations of the Company.
DISTRIBUTORSHIP AGREEMENT
The Company has entered into the LLK Agreement with Knickerbocker dated
April 4, 1997. The LLK Agreement grants Knickerbocker certain rights to market
and distribute certain products incorporated in the Company's integrated thermal
containers. Knickerbocker has the right to appoint sub-distributors, subject to
approval by the Company. Pursuant to the LLK Agreement, in the first calendar
month after the Company accepts an order, Knickerbocker must purchase a minimum
of 50,000 containers; the minimum requirement in the second month is 100,000
containers; a 200,000 container minimum is required in the third month; a
250,000 container minimum is required during each calendar month thereafter for
the next succeeding three month period; and a minimum of 750,000 containers is
required during each three month period thereafter. Failure to purchase the
minimum requirements is grounds for termination. Knickerbocker has agreed not to
disclose any confidential information of the Company during the term of the LLK
Agreement. The term of the LLK Agreement is five years. The price to be paid by
Knickerbocker for the containers is the published list price current at the time
of shipment. The Company is not required to ship any containers to Knickerbocker
until the applicable integrated thermal container is fully developed and ready
for commercial production. Although the Company anticipates its self-heating
containers may be ready to go to market in the fourth quarter of 1998, no date
is currently set for when any of the Company's integrated thermal containers
will be ready for commercial production. There can be no assurance Knickerbocker
will ever order any containers from the Company, or that the Company will be
able to develop any integrated thermal container to a point it is ready for
commercial production. Knickerbocker owns 858,673 shares of Common Stock, which
it purchased for $600,000 in September, 1996. Knickerbocker owns 29,262 shares
of IHI Common Stock, which it purchased for $50,000 in September, 1996. Louis L.
Knickerbocker, Chairman, Chief Executive Officer, President, and significant
shareholder of Knickerbocker, is a director of the Company.
MANUFACTURING AND PRODUCTION
The Company intends to sub-license most of the integrated thermal container
technology developed by IHI to large food, beverage, and container
manufacturers. The Company believes this strategy could provide material
benefits, including use of the greater manufacturing, marketing, and
distribution expertise of such companies, and potential reduction of substantial
manufacturing costs. While no sub-license agreements have been executed to date,
the Company anticipates entering into sub-licenses where the sub-
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licensees are responsible for purchasing the raw materials, manufacturing or
contracting for the manufacture of the container, labeling, filling, marketing,
selling, and distributing the integrated thermal container technology or any
other related technologies licensed by the Company and sub-licensed to them.
There can be no assurance the Company will be able to sub-license the IHI
technology to anyone including such companies, or on what terms.
As of the date hereof, the Company has a semi-automated production facility
located in approximately 2,000 square feet of industrial space. The production
facility is used to manufacture and assemble the components of the Company's
self-heating beverage containers. With the proceeds of this Offering, the
Company intends to move its administration offices and this production facility
to leased office-industrial space of approximately 28,400 square feet, and to
install additional integrated thermal container manufacturing equipment. The
Company's proposed new facility will be dedicated to research and development
and to manufacturing and assembling integrated thermal containers. The purpose
of the manufacturing and assembly facilities are to demonstrate the commercial
viability of the Company's manufacturing processes, to supply enough
self-heating containers for additional testing and market studies, and to
produce self-heating beverage containers which can be sold directly or to
distributors. It is anticipated containers sold directly or to distributors will
be filled, packaged, and distributed by the customer, the distributor or their
contract manufacturer. The Company does not intend to fill the contents of any
containers at its facilities. The Company's semi-automated production facility
is designed to allow most of the component parts of the Company's self-heating
beverage container, with the exception of the activating device, to be
manufactured on the Company's premises. The Company believes its production
facility will assist commercialization efforts as it is anticipated such
production efforts will assist in further refinement of the Company's integrated
thermal containers following future testing and marketing studies.
Contractors currently retained by the Company utilize the blow-molding
process to produce the main component of the Company's self-heating beverage
containers. In the blow-molding process, pellets of plastic resin are heated and
extruded into a tube of plastic. A two-piece metal mold is then closed around
the plastic tube, and high pressure air is blown into it, causing a plastic
container to form in conformance to the mold's shape. The Company believes the
blow-molding method is an established process in the plastic beverage container
industry. The Company believes the blow-molding process offers certain
advantages, including the following: it is less expensive than injection
molding; it is expected to allow the Company to completely control the thickness
of the inner and outer walls of the container thereby assisting in heat
retention and heat transfer; it generally results in a strong oxygen barrier
which could increase shelf stability; and all equipment used in the process is
generally available and can be purchased with little, if any, custom parts or
conversions. The Company intends to expend a substantial portion of the proceeds
of this Offering on acquiring and incorporating blow-molding equipment into its
production facility.
The Company has implemented certain quality control procedures for its
production facility. The Company's quality control personnel now regularly
monitor the manufacturing process and the Company anticipates they will monitor
additional items in the future such as blow-molding to assure the plastic
containers and component parts are free from defects. At such time, when the
Company sells integrated thermal containers produced by its facilities, if ever,
the Company expects some or all of its customers will impose additional quality
control standards. It is possible such customer or other required quality
control standards will require the expenditure of substantial resources over a
long period of time, or that the Company will determine such measures are not
cost-effective.
To ensure contents are not contaminated during or after packaging and to
comply with food and beverage manufacturers' requirements, the Company has
refined the design of its containers so they may be filled by the various
sterilization processes, generally in use today for food and beverage
containers. The design of its containers currently allows them to be processed
through all but one (hot fill, aseptic, ultra high temperature, pasteurization,
and irradiation) method of sterilization. The Company is continuing to further
the development of its designs to enable its containers to also be suitable for
the "retort" method
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of sterilization. Sterilization methods generally expose the containers to high
temperatures and/or pressures, for a designated period of time to sterilize the
container of microorganisms which could have an effect upon the contents
therein. Some sterilization processes place a great deal of stress on a
container because the process subjects the container to high pressure and/or
high temperature for a period of time which can challenge the seams or
compromise the integrity of a plastic container. The Company believes its
self-heating beverage containers will be able to satisfactorily endure the
various sterilization processes with a beverage or liquid inside. There can be
no assurance the Company will resolve these design issues or resolve other
design issues which may appear during testing or commercial use.
To ensure sub-licensees, if any, comply with the level of quality control
standards the Company anticipates will be essential for its success, the Company
intends to require its sub-licensees to comply with what are known as the ISO
9000 standards. The Company plans to actively review the production processes
and to routinely test the goods produced by its sub-licensees. The Company also
plans on requiring any contract manufacturers to also comply with ISO 9000
standards. The Company believes ISO 9000 standards are generally regarded as
fairly rigorous. There can be no assurance the Company will be able to
successfully require sub-licensees or contractors to comply with these
standards, or any specific quality control standards.
The Company intends to design all integrated thermal containers used by its
licensees or contract manufacturers, and intends to participate in the design of
such parties' production tooling and molds. The Company plans on requiring molds
and tooling used for the manufacture of containers utilizing its technologies to
comply with specifications and quality control parameters established by the
Company. There can be no assurance the Company will be able to adequately
monitor, require or assure such parameters are met or otherwise, adequately
control the manufacturing processes of any licensee or contract manufacturer.
The Company estimates its improved production facility utilizing a single
blow-molder and one eight hour shift should be able to produce approximately
2,000,000 containers per year, and using a double shift should be able to
produce approximately 4,000,000 containers per year. It is anticipated these
production figures could be increased with the installation of additional
equipment. There can be no assurance the proposed production facility, if
completed, will produce the estimated number of containers or if this number of
containers is produced, it will be sufficient to supply the demand, if any,
which may result for containers manufactured by the Company.
RAW MATERIALS AND SUPPLIERS
The primary raw materials used by the Company in the manufacture of its
integrated thermal containers are plastic resins, polyvinyl chloride (plastic),
calcium oxide, water, and foil seal lids. The Company does not currently have
agreements with any of its suppliers for the purchase of its raw materials.
Since it began developing its current self-heating prototypes the Company
has relied on Johnson Controls, Inc. and Complex Tool & Mold as the sole sources
of supply for its containers and the proprietary component containing the water
and the activation trigger, respectively. With the proceeds of this Offering,
the Company intends to purchase blow-molding equipment and to manufacture
self-heating beverage containers at its semi-automated production facility,
while continuing to rely on Johnson Controls, Inc. as a supplier of related
equipment components. There can be no assurance Johnson Controls, Inc. will be
able to continue to supply the Company with adequate amounts of such components
on a timely basis, so the Company will be able to meet its production
requirements, if any. The unanticipated loss of Johnson Controls, Inc. or
Complex Tool & Mold as suppliers, or a delay in container shipments which occurs
before the Company begins to manufacture its containers, could have a material
adverse impact on the Company, although the Company believes numerous other
suppliers are available for these components. The Company does not believe it is
materially dependent upon any single source for any of its raw materials. The
Company anticipates it will enter into agreements with certain raw material
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suppliers after the completion of this Offering, although there can be no
assurance it will obtain supply agreements, if any, on acceptable terms and
conditions with any supplier.
The Company believes increases in the prices of its raw materials should be
able to be passed along to its licensees and customers. The inability to pass on
increased raw material costs could have a material adverse impact on the
Company's business, financial condition, and results from operations,
particularly if the Company is not able to pass on such price increases in the
license agreements, if any, with its intended market of food, beverage or
container manufacturers.
The primary plastic resins used by the Company are produced from
petrochemical intermediates derived from products of the natural gas and crude
oil refining processes. Natural gas and crude oil markets in the past have
experienced substantial cyclical price fluctuations as well as other market
disturbances, including shortages of supply and crises in some of the larger oil
producing regions of the world. The capacity, supply, and demand for plastic
resins and the petrochemical intermediates from which they are produced are also
subject to cyclical and other market factors. Consequently, plastic resin prices
may fluctuate as a result of natural gas and crude oil prices and the capacity,
supply and demand for resin and petrochemical intermediates.
LICENSE AGREEMENT WITH INSTA-HEAT, INC.
The Company's integrated thermal container technology was developed by
Insta-Heat, Inc., an affiliated corporation. IHI owns three issued and one
pending patent, and all intellectual property relating to the integrated thermal
container technology the Company is developing. The Company secured the
exclusive worldwide rights to IHI's proprietary technology and all associated
intellectual property from IHI, pursuant to a license agreement dated September
30, 1995, as amended. The IHI License grants the Company an exclusive worldwide
license in perpetuity to manufacture, use, sell, and promote IHI's intellectual
property and technologies and all possible commercial uses, improvements, and
products developed with IHI's technologies. The IHI License grants the Company
the right to sub-license the IHI technologies and to subcontract the manufacture
of all commercial uses and products resulting from the integrated thermal
container technology. The IHI License also grants the Company the right to
license all additional technology and intellectual property developed by IHI,
and all improvements to and continuations thereof.
The IHI License requires minimum royalty payments of $50,000 per year and
also requires additional royalty payments from the Company on the sale of
products utilizing IHI technology subject to the Company achieving $4 million
minimum annual net operating income after payment of the royalty and all taxes.
Upon achieving the required minimum net operating income the IHI License
requires additional royalty payments equal to the greater of: (i) two percent of
the gross sales of integrated thermal containers and products developed in
connection with it; or (ii) 1.5 cents per unit sold, for up to the first $30
million in sales by the Company. For sales in excess of $30 million the IHI
License requires additional royalty payments (subject to the same minimum income
levels) equal to the greater of: (i) three percent of gross annual sales in
excess of $30 million; or (ii) 1.5 cents per Unit sold. Additional royalty
payments are reduced 25% when IHI does not hold one or more issued patents or
patent applications on the IHI technology or any commercial uses or products
developed in connection therewith. Pursuant to the terms of the IHI License, the
Company is required to prosecute any patent infringement claims regarding the
IHI technology, and to defend any infringement claims brought against IHI or the
Company. In addition, the Company is required to indemnify IHI for any claims or
lawsuits brought against IHI, regarding the IHI technology. The License may be
terminated in the event the Company ceases its business, dissolves or
liquidates, or on completion of any proceeding in bankruptcy or reorganization,
or the appointment of a permanent receiver or trustee, or any other proceeding
under any law for the relief of debtors, or on any assignment for the benefit of
the Company's creditors. Termination of the IHI License would have a material
adverse impact on the business, financial condition, and results from operations
of the Company since the Company would lose all its rights to the IHI
technology.
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The IHI License includes an option in favor of the Company to purchase all
of the IHI technology and terminate the License for a payment to IHI of $3
million. The option term lasts until December 31, 1999 and may be extended for
one year at the election of the Company upon payment to IHI of $100,000. Any
prepaid minimum royalties may be applied to the option extension payments. The
Company plans to use a portion of the proceeds received from this Offering
($250,000) to prepay the minimum annual royalty payments required by the IHI
License for a period of five years.
IHI is an affiliated corporation. Messrs. Berntsen and Scudder, co-founders,
officers, directors, and significant shareholders of the Company are also
co-founders, officers, directors, and significant shareholders of IHI. The Board
of Directors of IHI is comprised of Messrs. Scudder, Berntsen, and their
spouses. These relationships raise substantial conflicts of interest with regard
to the development, licensing, marketing, and sale of the IHI technology by the
Company, as well as conflicts of interest regarding the option to purchase the
technology and interpreting the terms and conditions of the IHI License. The
interests of IHI may conflict with the interests of the Company in certain
instances regarding the IHI technology, including, but not limited to, if the
Company were unable to pay the minimum annual royalty due, if the Company sought
to amend or seek interpretations of the IHI License, if royalty payments were
late, in the event of copyright or patent infringement claims against IHI or the
Company, or adverse claims to the ownership of related technology. The common
directors of the Company and IHI may have fiduciary obligations to both the
Company and to IHI. The IHI directors may take actions which are contrary to the
interests of the Company, and which could foreseeably result in material adverse
consequences to the business and operations of the Company.
IHI, and the Company, are both California corporations and are subject to
California law. California law requires that transactions between corporations
with interested directors be either approved by the shareholders or by an
independent board of directors, and also requires a determination that the
transaction is just and reasonable. A person asserting the validity of such
transactions must prove the transaction is just and reasonable to the
corporation it is asserted against if these conditions are not met. The IHI
License agreement was approved by the shareholders of both IHI and the Company.
Any future material amendments to the IHI License agreement will require the
Company and IHI comply with these requirements of California law.
PATENTS AND PROPRIETARY TECHNOLOGY
To date, IHI has three issued patents and one patent application pending in
the United States, each one relating to various aspects of IHI's integrated
thermal container technology. Patent No. 5,461,867 was issued October 31, 1995
and includes 39 claims regarding a container with an integral module for heating
or cooling contents. Patent No. DES 371,513 was issued July 9, 1996, and
includes one claim regarding an end cap for a container. Patent No. 5,626,022
was issued May 6, 1997, and is a continuation in part of Patent No. 5,461,867
and includes 25 claims regarding a container with an integral module for heating
or cooling the contents. There can be no assurance any patents will be issued to
IHI as a result of IHI's pending application, or if issued, such patents
combined with existing IHI patents will be sufficiently broad to afford
protection against competitors using similar technology. The Company's success
will depend in large part on its ability and that of IHI to obtain patents for
integrated thermal container technologies and related technologies, if any, to
defend patents once obtained, to maintain trade secrets and to operate without
infringing upon the proprietary rights of others, both in the United States and
in foreign countries. IHI also has foreign patents pending for certain elements
of the current and earlier designs of its integrated thermal containers.
There can be no assurance any patents issued to IHI or the Company will not
be challenged, invalidated, or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company. Litigation over
patent or other intellectual property claims could result in substantial costs
to the Company. The Company is required by the IHI License agreement to
prosecute and defend all infringement claims, necessary to enforce the Company's
license rights or to determine the scope and
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validity of others' proprietary rights. U.S. patents do not provide any remedies
for infringement occurring before a patent is granted. Because patent rights are
territorial, the Company may not have an effective remedy against use of its
patented technology in any country in which IHI or the Company does not, at the
time, have an issued patent.
The commercial success of the Company may also depend upon avoiding the
infringement of patents issued to competitors and upon maintaining the IHI
License. All of the Company's currently proposed containers and all containers
currently under development are based on the IHI License. If competitors prepare
and file patent applications in the United States claiming technology also
claimed as proprietary by the Company, the Company may be forced to participate
in interference proceedings declared by the PTO to determine the priority of the
invention. Such proceedings could result in substantial costs to the Company,
even if the outcome is favorable to the Company. An adverse outcome of such
proceedings could subject the Company to significant liabilities to third
parties and could require the Company to license disputed rights from third
parties or cease using the infringing technology. The Company is aware of U.S.
patents issued to third parties that broadly claim self-heating technology
similar to IHI's. Although the Company believes its current and proposed
activities do not and will not infringe upon these patents, there can be no
assurance the Company's belief would be affirmed in any litigation over any
patent or the Company's future technological developments will be outside the
scope of these patents. A U.S. patent application is maintained under conditions
of confidentiality while the application is pending in the PTO, so the Company
cannot determine the inventions being claimed in pending patent applications
filed by its competitors. U.S. patents do not provide remedies for infringement
occurring before the patent is granted.
The Company relies on certain technologies which are not patentable and are
therefore potentially available to the Company's competitors. The Company also
relies on certain proprietary trade secrets and know-how which may not be
patentable. Although the Company has taken steps to protect its unpatented
technologies, trade secrets, and know-how, in part through the use of
confidentiality agreements with certain employees, consultants, and contractors,
there can be no assurance these agreements will not be breached, the Company
would have adequate remedies for any breach, or the Company's trade secrets will
not otherwise become known or be independently developed or discovered by
competitors.
TRADEMARKS
The Company filed two trademark applications with the United States Patent
and Trademark Office on February 10, 1997 to register the name "Ontro" and the
Company logo. The filed applications have been published and are awaiting
statement of use filings. IHI has one registered trademark, "Anytime-Anywhere,"
and has filed an application for the trademark "Insta-Heat." Pursuant to the IHI
License, IHI uses and has licensed to the Company trademarks claimed by IHI.
COMPETITION
The Company believes the market for integrated thermal containers is an
emerging market. There can be no assurance there will be sufficient demand for a
producer of such containers to profit therefrom. The plastic and beverage
container industry is highly competitive and sensitive to changing consumer
preferences and demands. The Company is aware of five firms that currently
manufacture or market self-heating containers or products sold in self-heating
containers. The Company believes one of these firms manufactures and markets its
containers in the U.S. and the other four currently manufacture and market
exclusively in foreign countries. The Company is not aware of any other current
direct competition for integrated thermal containers in the U.S. marketplace.
The Company believes the other competitors manufacture self-heating
containers for meals, a single serving hot espresso container and at least two
providers of self-heating hot sake containers. The Company believes each of
these foreign firms hold one or more U.S. patents on their designs.
41
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The Company believes at least two of the known competitors use a reactant
system similar to the Company's proposed self-heating containers.
The Company believes competition among marketers of self-heating beverage
containers will be based primarily on price, product safety, ease of use,
quality, product recognition, access to distribution channels, product
innovation, and packaging. The competitive position of the Company will in part
depend on the ability of the Company to remain current in plastics manufacturing
technology and to anticipate innovations in integrated thermal container
technology as well as changes in consumer preferences. If the Company's
integrated thermal containers are successfully received in the market, increased
competition is probable. Increased competition is likely to result in price
reductions, reduced operating margins, and loss of market share, any of which
could materially and adversely affect the Company's business, operating results,
and financial condition. There can be no assurance the Company will be able to
compete successfully, keep pace with technological developments, or have
sufficient funds to invest in new technologies, products, or processes.
There also can be no assurance companies in the food and beverage or
container industry, or other companies, will not enter the market for integrated
thermal containers with products that are superior to, less expensive, or which
achieve greater market acceptance than the Company's proposed containers. The
majority of food and beverage and container manufacturers are substantially
larger and more diversified than the Company; have substantially greater
financial and marketing resources than the Company; have greater name
recognition and distribution channels than the Company; and may have the ability
to develop competitively priced integrated thermal containers.
LIABILITY INSURANCE
The Company's proposed containers expose it to possible product liability
claims if, among other things, the use of its proposed containers results in
personal injury, death or property damage. There can be no assurance the Company
will have sufficient resources to satisfy any liability resulting from such
claims or will be able to cause its customers to indemnify or insure the Company
against such claims. The Company intends to obtain product liability insurance
prior to the commencement of commercial shipment of its products. There can be
no assurance such insurance coverage will be adequate in terms and scope to
protect the Company against material adverse effects in the event of a
successful claim, or that such insurance will be renewed, or the Company will be
able to acquire additional coverage when it deems it desirable to do so.
ENVIRONMENTAL MATTERS AND GOVERNMENT REGULATIONS
All of the currently projected uses for the Company's integrated thermal
containers presently fall under the authority in the United States of the United
States Food and Drug Administration ("FDA") and the United States Department of
Agriculture ("USDA"). The FDA regulates the material content of direct-contact
food containers and packages, including certain thin wall containers
manufactured by the Company. The Company does not intend to fill any of its
proposed self-heating beverage containers on its premises and expects that
licensees or distributors will be responsible for filling the containers with
beverages and complying with appropriate FDA regulations. The Company uses
approved resins and pigments in its direct-contact food products and believes
its proposed containers will be in material compliance with all applicable FDA
and USDA regulations.
The Company, like all companies in the plastics industry, is also subject to
federal, state, and local legislation designed to reduce solid wastes by
requiring, among other things, plastics to be degradable in landfills, minimum
levels of recycled content, various recycling requirements, disposal fees and
limits on the use of plastic products. In addition, various consumer and special
interest groups have lobbied from time to time for the implementation of
additional environmental protection measures. The Company does not know of any
legislation promulgated to date or similar initiatives that would, if enacted,
have a material
42
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adverse effect on its business. There can be no assurance future legislative or
regulatory enactments or other similar initiatives would not have a material
adverse effect on the Company's business, financial condition, and results from
operations. See "Risk Factors--Environmental Matters."
EMPLOYEES
As of the date of this Prospectus, the Company employs eight full-time
employees. None of the Company's employees are represented by a labor union or
bound by a collective bargaining agreement. The Company believes its employee
relations are good.
PROPERTIES
The Company leases approximately 2,000 square feet of space for its
production facility located at 12625 Danielson Court, Suite 110, Poway,
California 92064, at a monthly rent of $1,142. The lease expired August 31, 1997
and has been extended to April 30, 1998. The Company also leases office space at
12675 Danielson Court, Suite 401, Poway, California 92064, at a monthly rent of
$982. That lease also expired August 31, 1997 and has been extended to April 30,
1998. The Company has entered into a lease for approximately 28,400 square feet
of space to be built in the Pomerado Business Park located in Poway, California
92064. The provisions of the lease provide for commencement of the lease term
during March, 1998. The lease has an initial term of five years with a renewal
option to the Company for an additional three years. Base rent for the initial
term is $0.445 per square foot (approximately $12,600 per month). Base rent for
the extension term is $0.56 per square foot (approximately $15,900 per month).
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS, AND KEY EMPLOYEES
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- ----------- -----------------------------------------------------
<S> <C> <C>
James A. Scudder..................................... 41 President, Chief Executive Officer and Director
James L. Berntsen.................................... 41 Executive Vice President, Secretary and Director
Kevin A. Hainley(1).................................. 40 Chief Financial Officer
Allan C. Mayer, Jr................................... 48 Vice President, Marketing
Robert F. Coston(1).................................. 64 Director
Louis L. Knickerbocker(1)............................ 53 Director
</TABLE>
- ------------------------
(1) Members of the Audit Committee
JAMES A. SCUDDER, a co-founder of the Company, has been President, Chief
Executive Officer, and a director of the Company since its inception in 1994.
From 1986 to 1993, Mr. Scudder was President of Operations of Gourmet Quality
Foods, Inc., a frozen foods manufacturing and distribution company. From 1978 to
1986, Mr. Scudder developed, owned, and operated three restaurants in San Diego,
California.
JAMES L. BERNTSEN, a co-founder of the Company, has been Executive Vice
President, Secretary, and a director of the Company since its inception in 1994.
From 1988 to 1993, Mr. Berntsen was the President and Chief Executive Officer of
Minds in Motion, Inc., a distributor of copier and printer products. From 1978
to 1987, Mr. Berntsen developed, owned, and operated two restaurants in San
Diego, California.
ALLAN C. MAYER, JR. joined the Company as the Vice President of Marketing in
October 1996. Since 1991, he has been the President of Allan C. Mayer &
Associates, a company which provides management support in the areas of
strategic planning, new business development, marketing and communications. From
1989 to 1991, Mr. Mayer was Vice President of Marketing & Sales at Energetics
Corporation, a technology company. From 1987 to 1989, Mr. Mayer was Vice
President of Marketing at Crescent Foods, Inc., a food distribution company.
KEVIN A. HAINLEY joined the Company as Chief Financial Officer in December
1996. From 1992 to November, 1996, Mr. Hainley was corporate controller of
Hometown Buffet, Inc., a restaurant operator. From 1986 to 1992, Mr. Hainley was
an accountant with KPMG Peat Marwick LLP. Mr. Hainley is a Certified Public
Accountant.
LOUIS L. KNICKERBOCKER has been a director of the Company since February
1997. From 1985 through the present, Mr. Knickerbocker has been the President,
Chief Executive Officer, and a director of the L.L. Knickerbocker Company, Inc.,
a California-based company which specializes in selling celebrity endorsed
products through home shopping television channels.
ROBERT F. COSTON has been a director of the Company since October 1997. Mr.
Coston has been a self-employed consultant since 1990, specializing in
production and distribution of various food products. Mr. Coston was President
of Ardmore Farms, Inc., a subsidiary of the Quaker Oats Company, from 1986
through 1989. He held various positions with A.E. Staley Manufacturing Company
from 1981 to 1986. Mr. Coston was a Vice President and General Manager of the
Carnation Company from 1978 to 1981, and held various positions with General
Foods Corp. from 1959 to 1978. He has a B.S. in Civil Engineering from Lehigh
University.
All directors hold office until the next annual meeting of shareholders and
the election and qualification of their successors, if any. The Company's
Articles provide that a classified Board of Directors will automatically become
effective when shares of Common Stock of the Company become listed on NYSE or
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AMEX, or alternatively when they are qualified for trading as a NMS security on
Nasdaq and the Company has at least 800 shareholders as of the record date for
the most recent annual meeting of shareholders. The classified Board of Director
provisions, when and if effective, divide the Board of Directors into two
classes of directors serving staggered two-year terms. Upon consummation of this
Offering, the Common Shares are anticipated to be listed on AMEX, and therefore,
a classified Board of Directors will likely become operative following such
consummation. Directors currently receive no cash compensation for serving on
the Board of Directors and may receive reimbursement of reasonable expenses
incurred in attending meetings. All executive officers serve at the discretion
of the Board of Directors. There are no family relationships between any of the
directors or executive officers of the Company.
The Company has agreed, for a period of four years from the closing of this
Offering, if so requested by the Representative, to allow the Representative to
designate one nominee for election as a director of the Company, and if the
Company is unable to maintain directors and officers liability insurance, the
Representative has the right to designate a consultant to the Company's Board of
Directors who has the right to attend directors' meetings and will be
compensated on the same basis as outside members of the Board of Directors.
Messrs. Scudder and Berntsen and Knickerbocker have entered into agreements with
the Representative to vote their shares in favor of the election of the
Representative's designee to the Board of Directors. The Representative has not
yet exercised its right to designate such a person.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has an Audit Committee. The Board of
Directors does not have a Compensation Committee or a Nominating Committee. The
functions of the compensation and nominating committees are currently performed
by the Board of Directors.
AUDIT COMMITTEE
The Audit Committee recommends a public accounting firm to be appointed by
the Board of Directors, subject to ratification by the shareholders, as
independent auditors to audit the Company's financial statements and to perform
services related to the audit. The Audit Committee also has the responsibility
to review the scope and results of the audit with the independent auditors,
review with management and the independent auditors the Company's interim and
year-end operating results, consider the adequacy of the internal accounting and
control procedures of the Company, review any non-audit services to be performed
by the independent auditors, and consider the effect of such performance on the
auditor's independence. The Audit Committee was established in January 1997, and
currently consists of Messrs. Knickerbocker, Coston, and Hainley.
ADVISORY BOARD
The Company's Advisory Board is composed of persons with expertise in fields
related to the Company's business. Since the Company's technology, financing and
business plans are in the development stage, the advisors currently meet
routinely as a group, but meetings of all advisors may not be held or may not be
held as often in the future. Certain of these advisors and other advisors and
consultants also meet from time to time with the Company's personnel and
management to discuss the Company's present and long-term planning, research and
development, marketing, and finance matters. Members of the Advisory Board are
not presently compensated by the Company as members of the Advisory Board,
except with respect to stock options granted to them as discussed herein. The
Company currently provides reimbursement of advisors' expenses, and has no plans
to provide additional compensation to its advisors, but may do so in the future.
The Company presently has written consulting arrangements with four of these
advisors; Messrs. Hanson, Petterson, Potomac, and Thorogood, who provide more
definitive or extensive consulting services to the Company. These
advisor/consultants are being compensated by the Company.
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The Company has not required the members of its Advisory Board to agree not
to provide services to other entities that might conflict with the activities
they provide as advisors. All advisors are expected to devote only a small
portion of their time to the Company, are generally employed by employers other
than the Company, and may have commitments to and/or consulting or advisory
contracts with other entities that may limit their availability to the Company.
These entities may also be competitors or potential customers of the Company.
Furthermore, inventions or processes unrelated to integrated thermal containers
discovered by advisors will not, unless otherwise agreed, become the property of
the Company, but will remain such inventor's property, or the property of their
employers. The Company does not believe it is dependent on any member of the
Advisory Board, and believes the loss of any member will not have a material
adverse impact on the business or operations of the Company. The Company
believes it could obtain comparable services from other advisors in each given
field should the Company lose any member of its Advisory Board. Each member of
the Advisory Board has been granted options to purchase Common Stock of the
Company in consideration for their service on the Advisory Board. See "Certain
Transactions." The members of the Advisory Board currently are:
C. ROWLAND HANSON is the founder of C.R.H. Associates a management
consulting firm specializing in strategic planning, marketing, and
communications. Prior to forming C.R.H., Mr. Hanson was Vice President of
Corporate Communications at Microsoft Corporation. Before joining Microsoft
Corporation, Mr. Hanson was Vice President of Marketing for Neutrogena
Corporation, and held various marketing positions with the Carnation Company and
General Mills, Inc. Mr. Hanson received a B.B.A. in Marketing from Loyola
University, and an MBA from the University of Pennsylvania Wharton School of
Business.
ROBERT B. HORSMAN is the President and a director of San Diego National
Bank, where he has held various positions since 1981. From 1972 to 1981, Mr.
Horsman held various positions with California First Bank. He received his
B.B.A. in Finance/Banking from Texas Tech University.
FRED HULL is the immediate past President of Nestle Brands Foodservice
Company, the food service division of Nestle U.S.A. Mr. Hull joined the
Carnation Company in 1959, which was acquired by Nestle in 1985. He received a
B.S. in Business Administration from the University of Colorado.
SUZANNE JOHNSON is a co-founder, Vice President, and member of the
Management Committee of Vantis International a subsidiary of The BASES Group.
Ms. Johnson joined The BASES Group in 1985. Prior to joining The BASES Group,
Suzanne worked for Walker Research and prior to that she worked for Ketchum
Advertising.
JAMES W. MASON, PH.D., has been an independent consultant and President of
J. Mason Associates, Inc. from 1995 to the present. From 1991 to 1995, he was
the Chief Chemist for Seal Laboratories, where he was responsible for all
organic chemical analysis, quality control, and product development. From 1990
to 1991, Dr. Mason was an independent consultant. From 1987 to 1990, he was the
manager of the analytical service center for Baxter Health Care. Dr. Mason
specializes in the chemistry of plastics. He received his B.S. in Chemistry from
the University of California, Los Angeles, and his Ph.D. from the University of
California, Los Angeles.
SALVATORE LA BARBERA is the President of Terracommercial Real Estate
Corporation, a commercial real estate company he founded in the 1970's. Mr. La
Barbera is a licensed California Real Estate Broker, and both his and
Terracommercial's businesses are involved primarily in shopping center
development. Mr. La Barbera served as Chairman of the Board of Info.NET from
December, 1993 through June, 1996, when the company was merged into Simply
Interactive. A former Professor of Mathematics and Computer Programming at San
Jose State University, Mr. La Barbera also founded Passatempo Development
Corporation, an importer of agricultural equipment, developed an agricultural
equipment retail agency, and founded and was Chairman of Cal West Auto Auction,
Inc. Mr. La Barbera received his Bachelors and Masters degrees in Mathematics
from San Jose State University.
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<PAGE>
TOR PETTERSON is the founder of Tor Petterson Associates, designers and
engineers of industrial products. Among other products, he was the designer of
the Ray-O-Vac Workhorse and Roughneck flashlight lines, the Snakelight and the
Nissan thermos lines. Mr. Petterson has received an honorary degree as a Doctor
of Engineering Science and is the author of numerous patents.
L. LAWRENCE POTOMAC is an Attorney, Certified Public Accountant, Certified
Financial Planner, and a licensed principal of the National Association of
Securities Dealers. Mr. Potomac has been President of Financial Insight
Corporation in La Jolla, California since 1980. Financial Insight provides
financial planning, investment analysis, tax advice, and prepares and files tax
returns and other tax reports for an international clientele. Prior to acquiring
Financial Insight Corporation, Mr. Potomac was the Chief Financial Officer for
Electron Inc., a manufacturer of electronic equipment in Rancho Bernardo
California, and prior to that was with the public accounting firms of Peat
Marwick Mitchell & Co., and Arthur Andersen & Co. Mr. Potomac is a graduate of
Stanford University and received his law degree and a Master of Business
Administration from Cornell University.
D. SCOTT THOROGOOD is the founder of the Trinalta Group LLC, a consultant to
technology companies. From 1994 to 1995, Mr. Thorogood was Chief Executive
Officer of the Info.NET Technology Corporation. Mr. Thorogood served as Chief
Executive Officer of OASiS, Inc. from 1992 until it was acquired by Sybase, Inc
in 1994. From 1990 to 1992, he worked for Texas Instruments Advanced Information
Management Division. From 1987 to 1990 he worked for Fourth Generation
Technologies. Mr. Thorogood received a B.S. in Mathematics and Psychology from
the University of Alberta.
EXECUTIVE COMPENSATION
The following table sets forth compensation for services rendered in all
capacities to the Company during the fiscal year ended December 31, 1996 paid to
the Chief Executive Officer and the Executive Vice President of the Company. No
executive officer received compensation exceeding $100,000 during the fiscal
years ended December 31, 1994, 1995 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------
-------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
SALARY COMPENSATION OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) BONUS ($) ($) ($) ($)(1)
- ------------------------------------------ --------- --------- ----------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
James A. Scudder, Chief Executive 1996 62,000 -- -- -- 30,000
Officer, President 1995 -- -- -- -- 17,000
and Director 1994 -- -- -- -- 4,500
James L. Berntsen 1996 62,000 -- -- -- 30,000
Executive Vice President, Secretary 1995 -- -- -- -- 17,000
and Director 1994 -- -- -- -- 4,500
</TABLE>
- ------------------------
(1) Represents consulting fees and Common Stock issued in consideration for
guaranteeing certain equipment leases to the Company.
OPTION GRANTS
The following table sets forth certain information as of December 31, 1996,
concerning the stock option grants to all of the Company's executive officers
made for the fiscal year ended December 31, 1996. No stock appreciation rights,
restricted stock awards, or long-term performance awards have been granted as of
the date of this Prospectus.
47
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES IN EXERCISE OR BASE EXPIRATION
NAME GRANTED(1) FISCAL YEAR PRICE PER SHARE DATE
- ---------------------------------- ------------------- ----------------------- ----------------- ------------
<S> <C> <C> <C> <C>
Kevin A. Hainley(2)............... 60,000 50% $ 1.00 12/30/2006
Allan C. Mayer, Jr(2)............. 60,000 50% $ 1.00 12/30/2006
</TABLE>
- ------------------------------
(1) The options granted to the Company's executive officers were all granted
under the Company's 1996 Stock Plan.
(2) Mr. Mayer joined the Company in October 1996, and Mr. Hainley joined the
Company in December 1996. Messrs. Hainley and Mayer are currently being
compensated at annual rates of $96,000 and both of their employment
agreements provide for salary increases to $120,000 per year following
completion of this Offering, and certain other conditions.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning option exercises and
option holdings under the 1996 Stock Plan for the year ended December 31, 1996,
with respect to all of the Company's executive officers.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE REALIZED NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
MARKET PRICE AT OPTIONS/SAR'S AT FISCAL THE-MONEY OPTIONS/SAR'S AT
SHARES EXERCISE LESS YEAR-END FISCAL YEAR END ($)(1)
ACQUIRED ON EXERCISE PRICE -------------------------- ----------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ------------- ----------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kevin A. Hainley.......... -- -- 12,000 48,000 3,000 12,000
Allan C. Mayer, Jr........ -- -- 12,000 48,000 3,000 12,000
</TABLE>
- ------------------------------
(1) Assuming the market value of the Company's restricted Common Stock on
December 31, 1996 was $1.25 based on an independent appraisal.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with each of Messrs. Scudder,
Berntsen, Hainley and Mayer. Mr. Scudder's employment agreement provides for his
employment by the Company as its President and Chief Executive Officer at an
initial annual salary of $96,000, which shall automatically increase to $144,000
per year after the completion of this Offering. Mr. Berntsen's employment
agreement provides for his employment by the Company as its Executive Vice
President at an initial annual salary of $96,000, which shall automatically
increase to $144,000 after the completion of this Offering. Messrs. Scudder and
Berntsen are party to agreements providing for an initial term expiring on
August 31, 1999. Messrs. Hainley and Mayer are party to agreements providing for
an initial term expiring on December 31, 1997. Each officer may receive bonuses
awarded in the discretion of the Board of Directors. The agreements do not
provide for any fixed or formula bonuses to be paid to the officers. The
Employment Agreements provide that Messrs. Scudder and Berntsen may, at their
election, receive a severance payment equal to 299% of their average annual base
salary and bonuses during the preceding five year period in the event of a
change of control as defined in their employment agreements. The Company also
has employment agreements with Messrs. Hainley and Mayer for one year terms,
each at annual salaries of $96,000, which shall increase to $120,000 for both
after the completion of this Offering and certain other conditions.
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1996 STOCK OPTION PLAN
PURPOSE. The Company's 1996 Stock Plan was adopted by the Board of
Directors in November 1996, and approved by the shareholders in December 1996.
545,400 shares of the Company's Common Stock are currently reserved for issuance
pursuant to options or stock awards granted pursuant to the 1996 Stock Plan of
which options to acquire 113,000 shares of Common Stock have been granted prior
to the date of this Prospectus. The purpose of the 1996 Stock Plan is to provide
an incentive to eligible employees, officers, directors, and consultants, whose
present and potential contributions are important to the continued success of
the Company, to afford these individuals the opportunity to acquire a
proprietary interest in the Company, and to enable the Company to enlist and
retain in its employment qualified personnel for the successful conduct of its
business. It is intended this purpose will be effected through the granting of:
(i) Stock Options, including incentive stock options ("Incentive Stock Options")
under Section 422 of the Internal Revenue Code and non-qualified stock options
("Non-qualified Stock Options") which are not intended to meet the requirements
of such section; (ii) stock appreciation rights ("Stock Appreciation Rights");
(iii) restricted stock ("Restricted Stock"); and (iv) long-term performance
awards ("Long Term Performance Awards").
Officers, directors, consultants, and other employees of the Company whom
the Board of Directors deems to have the potential to contribute to the success
of the Company shall be eligible to receive awards under the 1996 Stock Plan.
The 1996 Stock Plan provides that Non-qualified Stock Options, Stock
Appreciation Rights, Restricted Stock, and Long-Term Performance Awards may be
granted to employees (including officers), directors, and consultants of the
Company or any parent or subsidiary of the Company. The 1996 Stock Plan provides
Incentive Stock Options may only be granted to employees (including officers) of
the Company or any parent or subsidiary of the Company.
The 1996 Stock Plan is administered by the Board of Directors, or a duly
appointed committee thereof. Subject to the provisions of the 1996 Stock Plan,
the Board of Directors or a committee thereof has full power to select the
eligible individuals to whom awards will be granted, to make any combination of
awards to any participant and to determine the specific terms of each grant. The
interpretation and construction of any provision of the 1996 Stock Plan by the
Board of Directors shall be final and conclusive. The Board of Directors shall
have discretion in determining the number of shares and other terms of each
option granted to each recipient. Each option grant shall be evidenced by an
option agreement that shall specify the option price, the duration of the
option, the number of shares to which the option pertains, the percentage of the
option that may be exercised on specified dates in the future, and such other
provisions as the Board of Directors shall determine.
The option price for each grant of an option shall be determined by the
Board of Directors, provided that, in the case of Incentive Stock Options, the
option price shall not be less than the fair market value of a share of the
Company's Common Stock, or in the case of Incentive Stock Options granted to the
holder of 10% or more of the Company's Common Stock, at least 110% of the fair
market value of such shares on the date of grant.
All options granted under the 1996 Stock Plan shall expire no later than 10
years from the date of grant, subject to the limitations set forth in the 1996
Stock Plan. Options may be granted authorizing exercise by payment to the
Company of cash or by surrender of shares of the Company's Common Stock already
owned by the employee, a combination of cash and such shares, or such other
consideration as is approved by the Board of Directors.
The 1996 Stock Plan places limitations on the exercise of options under
certain circumstances upon or after termination of employment or in the event of
the death, disability, or termination associated with a change in control (as
defined in the 1996 Stock Plan) of the Company. At the discretion of the Board
of Directors the agreement evidencing the grant of a stock option may contain
additional limitations upon the exercise of the option under specified
circumstances, or may provide certain limited rights to exercise such options
under specified circumstances. The granting of an option under the 1996 Stock
Plan does not
49
<PAGE>
accord the recipient the rights of a shareholder, and such rights shall only
accrue after the exercise of an option, and the issuance of the underlying
shares of Common Stock in the recipient's name.
The 1996 Stock Plan provides for the award of shares of Common Stock of the
Company which are subject to certain restrictions ("Restricted Stock") provided
in the 1996 Stock Plan or otherwise determined by the Board of Directors.
Restricted Stock awards pursuant to the 1996 Stock Plan will be represented by a
stock certificate registered in the name of a recipient to whom the award is
made subject to the restrictions upon which it is granted. Upon the grant of
Restricted Stock, such recipient will be entitled to vote the Restricted Stock
and to exercise other rights as a shareholder of the Company, including the
right to receive all dividends and other distributions paid or made with respect
to the Restricted Stock. Pursuant to the 1996 Stock Plan, a Restricted Stock
award recipient may not sell, transfer, pledge, exchange, hypothecate, or
otherwise dispose of the Restricted Stock during the restriction period
designated by the Board of Directors, except by testamentary disposition, or as
may otherwise be determined by the Board of Directors. When the conditions of a
Restricted Stock award established by the Board of Directors lapse or are
satisfied, the Company will deliver stock certificates representing the shares
of Common Stock which are no longer subject to any restrictions, except those
required by applicable law.
Pursuant to the 1996 Stock Plan, the Board of Directors in its discretion
may grant Stock Appreciation Rights ("SARs"). A Stock Appreciation Right
generally will entitle the holder to receive money or stock from the Company in
an amount equal to the excess, if any, of the aggregate fair market value of the
Company's Common Stock which is subject to such right over the fair market value
of the same stock on the date of grant. The Company may grant SARs allowing for
the payment of the amount to which the participant exercising the SAR is
entitled by delivering shares of the Company's Common Stock or cash or a
combination of stock and cash as the Board of Directors in its sole discretion
may determine. SARs may contain additional rights, limitations, terms, and
conditions which the Board of Directors otherwise deems desirable.
The 1996 Stock Plan also permits the granting of Long-Term Performance
Awards. Such awards, if issued, are anticipated to be based upon Company,
subsidiary, and/or individual performance over designated periods based on such
performance factors or other criteria as the Board of Directors deems
appropriate. Performance objectives may vary from participant to participant,
group to group, and period to period. Such awards will generally be granted for
no cash consideration. The Board of Directors may adjust Long-Term Performance
Awards as they deem necessary or appropriate in order to avoid windfalls or
hardships or to compensate for changes in tax, accounting, legal rules, or other
circumstances. Long-Term Performance Awards may be payable in cash or Common
Stock (including Restricted Stock).
Options, SARs, Restricted Stock Awards, and Long-Term Performance Awards
granted pursuant to the 1996 Stock Plan will generally be nontransferable by the
participant, other than by will or by the laws of descent and distribution, and
may generally be exercised only by the participant during the lifetime of the
participant.
Subject to the 1996 Stock Plan's change in control provisions, in the event
of a sale of all or substantially all of the assets of the Company or the merger
of the Company with or into another corporation, each outstanding Option, SAR,
Restricted Stock award, or Long-Term Performance Award shall be assumed or
substituted by such successor corporation or a parent or subsidiary of such
successor corporation. In the event the successor corporation does not agree to
such assumption or substitution, the administrators shall, in lieu of such
assumption or substitution, provide for the participant to have the right to
exercise the Option, SAR, Restricted Stock award, or Long-Term Performance Award
as to all or a portion of the Common Stock subject to the option, including
shares of Common Stock as to which the option would not otherwise be
exercisable.
50
<PAGE>
As of the date of this Prospectus, options to purchase an aggregate of
113,000 shares of Common Stock at an exercise price range of $1.00 to $3.00 were
granted under the 1996 Stock Plan, such options vesting at the rate of 20% to
33.3% per year.
The Company has agreed with the Representative that except with respect to
options granted under the 1996 Stock Plan at an exercise price equal to the fair
market value on the date of grant, it will not, for a period of 18 months from
the date of this Prospectus, issue any options, or warrants, or sell any shares
of capital stock without the prior written consent of the Representative.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Articles that eliminate to the
fullest extent permissible under California law the liability of its directors
to the Company for monetary damages. Such limitation of liability does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
The Company's Articles and Bylaws provide that the Company shall indemnify
its directors and officers to the fullest extent permitted under California law,
and the forms of indemnification include indemnification in circumstances in
which indemnification is otherwise discretionary under California law. The
Company has entered into indemnification agreements with its officers and
directors containing provisions that may require the Company, among other
things, to indemnify the officers and directors against certain liabilities that
may arise by reason of their status or service as directors or officers (other
than liabilities arising from intentional or knowing and culpable violations of
law) and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified. The Company has obtained an
insurance policy covering officers and directors for claims made that such
officers or directors may otherwise be required to pay or for which the Company
is required to indemnify them, subject to certain exclusions. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors of the Company pursuant to the foregoing provision, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee, or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened material litigation or proceeding which may result in a claim for
such indemnification.
51
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's outstanding Common Stock on a pro forma
basis as of the date of this Prospectus, and as adjusted to reflect the sale of
the 2,900,000 Units offered hereby by: (i) each person (or group of affiliated
persons) who is known by the Company to own beneficially more than five percent
of the Company's Common Stock; (ii) each of the Company's directors; (iii) each
executive officer of the Company; and (iv) all directors and executive officers
of the Company as a group.
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE
SHARES BENEFICIALLY OWNED(2)
BENEFICIALLY ----------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) BEFORE OFFERING AFTER OFFERING
- ---------------------------------------------------------------------- ----------- ----------------- ---------------
<S> <C> <C> <C>
James A. Scudder(3)(4)................................................ 1,258,217 40.7% 21.0%
James L. Berntsen(3).................................................. 453,923 14.7 7.6
Robert F. Coston(5)................................................... 30,000 1.0 *
Kevin A. Hainley(6)................................................... 68,000 2.2 1.1
Allan C. Mayer, Jr.(7)................................................ 60,000 1.9 1.0
Louis L. Knickerbocker(8)(9)
30055 Commerce, Rancho Santa Margarita, CA 92688.................... 858,673 27.8 14.3
All directors and executive officers as a group (6 persons)(4)(9)..... 2,031,870 65.8 70.9
</TABLE>
- ------------------------------
* Less than 1%
(1) Calculated pursuant to Rule 13d-3(d)1 of the Exchange Act. Shares not
outstanding that are subject to options or other rights which may be
exercised by the holder thereof within 60 days of the date of this
Prospectus and, in addition, including all shares subject to the outstanding
options in favor of Robert Coston, Kevin Hainley, and Allan Mayer, are
deemed outstanding for the purposes of calculating the number and percentage
owned by such shareholder and all directors and officers as a group, but are
not deemed outstanding for the purpose of calculating the percentage owned
by any other shareholder listed.
(2) Percentage of ownership is based on 3,089,478 shares of Common Stock
outstanding as of the date of this Prospectus and 5,989,478 shares of Common
Stock outstanding after the Offering, without consideration of the Warrants,
the Representative's Option, the Over-allotment Option, other outstanding
options and warrants except as set forth below. The Company believes the
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and the information
contained in these notes. Except as set forth above, the address of each
person set forth above is the address of the Company appearing elsewhere in
this Prospectus.
(3) The shareholder has entered into an agreement with the Representative to
vote these shares in favor of the election to the Board of Directors of the
designee of the Representative.
(4) Includes 696,943 shares of Common Stock which are or may become subject to a
Voting Trust Agreement dated December 31, 1996, between Manhattan West,
Inc., the trustee, and the Company ("Manhattan Trust"). The 696,943 shares
potentially subject to the Manhattan Trust include 553,841 shares which
Manhattan West, Inc. has the right to acquire upon exercise of one option
and one warrant both of which may be exercised within 60 days of the date of
this Prospectus. The term of the Manhattan Trust continues for five years,
subject to an extension for an additional term of up to 10 years upon the
written agreement of Manhattan West and the trustee and provided Manhattan
West, Inc. continues to own the Common Stock subject to the Trust. The sole
voting trustee is James A. Scudder, the Chief Executive Officer and a
director of the Company. The trustee who has sole power to vote or direct
the vote of such shares. The trustee does not have any power to exercise the
option to acquire the shares underlying the option, is not entitled to any
dividends paid to the shares subject to the Manhattan Trust, if any, may not
hypothecate the shares subject to the Manhattan Trust, is not entitled to
any proceeds form the sale of the shares, and does not have any power to
sell or direct the sale of any of the shares held in the Manhattan Trust.
Mr. Scudder disclaims beneficial ownership of the 143,102 shares held in the
Manhattan Trust, and the additional 553,841 shares which may be held in the
Manhattan Trust. David F. Bahr is the sole officer of Manhattan West, Inc.,
Tariq S. Khan is the sole director and Manhattan West, International, Ltd.,
a British Virgin Islands corporation is the sole shareholder of Manhattan
West, Inc. The beneficial owners of Manhattan West International, Ltd. are
Wolfgang Marxer, Michael Parton and Urs Stirnimann, each a resident of the
British Virgin Islands.
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<PAGE>
(5) Represents 30,000 shares which Mr. Coston has the right to acquire upon
exercise of options, only 15,000 of which may be exercised within 60 days of
the date of this Prospectus.
(6) Includes 48,000 shares which Mr. Hainley has the right to acquire upon
exercise of options, 12,000 of which may be exercised within 60 days of the
date of this Prospectus.
(7) Includes 60,000 shares which Mr. Mayer has the right to acquire upon
exercise of options, only 24,000 of which may be exercised within 60 days of
the date of this Prospectus.
(8) Louis L. Knickerbocker, a director of the Company, is the President, Chief
Executive Officer and Chairman of the L.L. Knickerbocker Company, Inc. Mr.
Knickerbocker and his spouse own approximately 40% of the common stock of
the L.L. Knickerbocker Company, Inc.
(9) Includes 858,673 shares owned by Knickerbocker. Knickerbocker has entered
into an agreement with the Representative to vote these shares in favor of
the election to the Board of Directors of the designee of the
Representative.
CONCURRENT OFFERING BY SELLING SECURITY HOLDERS
An aggregate of 70,587 shares of Common Stock owned by the Selling Security
Holders and 70,587 shares of Common Stock issuable upon exercise of the warrants
also owned by the Selling Security Holders (the "Security Holders' Warrants")
are being registered simultaneously with this Offering for resale by the Selling
Security Holders from time to time and at any time following the commencement of
the Offering. The Security Holders' Common Stock, including the Common Stock
underlying the Security Holders' Warrants will not be subject to any restriction
on sale and may be sold at any time following this Offering.
The following table sets forth information with respect to the Selling
Security Holders, who will own an aggregate of 141,174 shares of Common Stock
including 70,587 shares of Common Stock issuable upon exercise of the Security
Holders' Warrants all of which are being registered hereby. The shares of Common
Stock owned by the Selling Security Holders including the shares of Common Stock
issuable upon exercise of the Security Holders' Warrants may be sold from time
to time in the future. The Security Holders' Warrants may be exercised and the
Common Stock underlying the Security Holders' Warrants may be purchased and sold
at the earliest on the effective date of this Prospectus or any prospectus
covering any Common Stock of the Company. The Company will not receive any of
the proceeds from the sale of the Common Stock by the Selling Security Holders,
although the Company will receive proceeds from the exercise of the Security
Holders' Warrants. The costs of qualifying these shares under federal and state
securities laws, will be paid by the Company. Sales by the Selling Security
Holders, or even the potential of such sales, could have an adverse effect on
the market prices of the Common Shares or the Warrants.
<TABLE>
<CAPTION>
SHARES OWNED
SHARES AFTER
NAME OFFERED(1) OFFERING
- ---------------------------------------------------------------------------------- ---------------- -------------
<S> <C> <C>
Francesca Daniels................................................................. 11,764 --
Grant King........................................................................ 82,352 --
Henri B. Schkud................................................................... 47,058 --
-------
Total........................................................................... 141,174 --
-------
-------
</TABLE>
- ------------------------------
(1) Includes shares underlying Selling Security Holders' Warrants.
Francesca Daniels is the President of Financial Sciences of America,
("FSA"). FSA has provided investor relations services to Knickerbocker as an
independent contractor since November 1995. Grant King is the President of a
Knickerbocker subsidiary located in Bangkok, Thailand. There are no other
material relationships between any of the Selling Security Holders and the
Company, nor have any such material relationships existed within the past three
years. The Company has been informed by the Representative and the other
Underwriters that there are no agreements between the Representative and
53
<PAGE>
the other Underwriters and any Selling Security Holder regarding the
distribution of the Common Stock held by the Selling Security Holders or the
Common Stock underlying the Security Holders' Warrants.
The sale by the Selling Security Holders of the Common Stock and the Common
Stock underlying the Security Holders' Warrants may be effected from time to
time in transactions (which may include block transactions by or for the account
of the Selling Security Holders) on an exchange or in negotiated transactions, a
combination of such methods of sale or otherwise. Sales may be made at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices.
Selling Security Holders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Security Holders, or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time on an exchange,
in negotiated transactions or otherwise. Such broker-dealers, if any, may
receive compensation in the form of discounts, concessions or commissions from
the Selling Security Holders and/or the purchasers from whom such broker-dealer
may act as an agent or to whom they may sell as principals or otherwise (which
compensation as to a particular broker-dealer may exceed customary commissions).
At the time a particular offer to sell Common Stock is made by or on behalf
of a Selling Shareholder, to the extent required, a prospectus shall be
distributed which will set forth the number of shares being offered and the
terms of the offering, including the name or names of any underwriters, dealers
or agents, if any, the purchase price paid by any underwriter for shares
purchased from the Selling Security Holders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers, and the proposed selling
price to the public.
If any of the following events occur, the prospectus will be amended to
include additional disclosure before an offer or sale of Common Stock by the
Selling Security Holders are made: (a) to the extent such securities are sold at
a fixed price or by option at a price other than the prevailing market price,
such price would be set forth in the prospectus; (b) if the securities are sold
in block transactions and the purchaser wishes to resell, such arrangements
would be described in the prospectus; and (c) if the compensation paid to
broker-dealers is other than usual and customary discounts, concessions or
commissions, disclosure of the terms of the transaction would be included in the
prospectus. The prospectus would also disclose if there are other changes to the
stated plan of distribution, including arrangements that either individually or
as a group would constitute an orchestrated distribution of the securities.
Under applicable rules and regulations of the Securities Exchange Act of
1934 (the "Exchange Act"), any person engaged in the distribution of the Common
Stock may not simultaneously engage in market making activities with respect to
any securities of the Company for a period of at least one (and possibly five)
business days prior to the commencement of the pricing of the Common Stock.
Accordingly, in the event the Representative or any of the other Underwriters is
engaged in a distribution of the Common Stock, they will not be able to make a
market in the Company's securities during the applicable restrictive period.
However, none of the Underwriters has agreed to nor are any of them obligated to
act as a broker-dealer in the sale of the Common Stock by the Selling Security
Holders. In addition, each Selling Security Holder desiring to sell Common Stock
will be subject to the applicable provisions of the Exchange Act and the rules
and regulations thereunder, including without limitation Regulation M Rules 101,
102 and 104, which provisions may limit the timing of the purchases and sales of
shares of the Company's securities by such Selling Security Holders.
The Selling Security Holders and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of the securities may be deemed underwriting
discounts and commissions under the Securities Act.
54
<PAGE>
CERTAIN TRANSACTIONS
Messrs. Scudder and Berntsen acquired 652,946 and 435,298 shares,
respectively, of the Company's Common Stock in exchange for $21,000 and $14,000,
respectively, in December 1994. 95,693 of these shares were subsequently
transferred by Mr. Scudder, and 20,550 of these shares were subsequently
transferred by Mr. Berntsen to parties unrelated to the Company.
On September 30, 1995, the Company entered into the IHI License with IHI,
which was subsequently amended on April 4, 1997 and December 4, 1997. The IHI
License grants to the Company the exclusive worldwide rights in perpetuity to
manufacture, use, sell, promote and sublicense all IHI intellectual property,
all additional IHI technology and all improvements or continuations thereof. The
IHI License requires minimum royalty payments of $50,000 per year and also
requires additional royalty payments from the Company on the sale of products
using the IHI technology subject to certain conditions. See "Business--License
Agreement with Insta-Heat, Inc."
James Scudder was issued 28,120 shares of Common Stock of the Company on
June 8, 1996, in exchange for the guarantee along with certain other guarantors
of equipment lease payments to the Company with a value of approximately
$200,000. A portion of the net proceeds of this Offering will be used to repay
these leases.
James Berntsen was issued 28,120 shares of Common Stock of the Company on
July 7, 1996, in exchange for his guarantee of equipment lease payments in the
amount of $65,518 for the benefit of the Company. A portion of the net proceeds
of this Offering will be used to repay these leases.
In 1995, Steve McKay, a shareholder, loaned the Company the principal amount
of $8,000 which was repaid with interest in 1996.
Between February 29, 1996 and October 2, 1996, IHI loaned an aggregate of
$92,000 to the Company, interest free. All of these amounts were repaid by
October 2, 1996.
On March 6, 1995, May 16, 1995, June 30, 1995, June 30, 1995, October 31,
1995, and November 30, 1995, James Berntsen loaned the Company the principal
sums of $15,000; $5,000; $3,900; $9,963; $5,063; $5,000; and $1,000,
respectively, all of which were represented by promissory notes payable on
demand and bearing interest at the rate of eight percent per anum. The Company
also owed Mr. Berntsen accrued consulting fees in the amount of $16,500 as of
December 31, 1996. As of September 30, 1997 the balance of the above noted
promissory notes and accrued consulting fees owed by the Company was $0.
On July 1, 1996, the Company entered into a consulting agreement with Scott
Thorogood, a member of the Company's Advisory Board, to provide administrative,
financial, and organizational advice and services. The agreement was extended on
August 1, 1997 for an additional term of one year. Mr. Thorogood receives $7,500
per month for his part-time consulting services.
On July 15, 1996, the Company entered into a consulting agreement with
Manhattan West, Inc. to assist the Company in locating and arranging distributor
agreements. The agreement is for a term of 30 months. Manhattan West, Inc. is to
receive $15,000 per month from July 15, 1996 through April 15, 1997, and $5,000
per month for the remainder of the term for its part-time consulting services.
Manhattan West, Inc. has agreed to defer collection of a portion of its
consulting fees until after the initial public offering of the Company's
securities. See "Related Party Transactions."
On July 15, 1996, the Company issued 143,102 shares of Common Stock to
Manhattan West, Inc., for a total consideration of $100,000, and granted an
option to Manhattan West to purchase 543,841 shares of Common Stock at an
exercise price of $.0002 per share. See "Related Party Transactions."
On August 5, 1996, the Company entered into a consulting agreement with L.
Lawrence Potomac, a member of the Company's Advisory Board, to provide financial
and administrative services to the
55
<PAGE>
Company. The agreement extends through July 31, 1998. Mr. Potomac receives
$1,000 per month for his part-time consulting services.
On August 15, 1996, the Company entered into a consulting agreement with
C.R.H. & Associates to provide marketing and strategic planning advice and
assistance. C. Rowland Hanson, a member of the Company's Advisory Board, is the
principal member of C.R.H. & Associates. The agreement was amended to be by and
between the Company and Mr. Hanson and was extended through December 31, 1999.
Mr. Hanson receives $7,500 per month for his part-time consulting services,
which increases to $10,000 per month upon completion of an initial public
offering of the Company's securities.
On September 20, 1996, the Company issued 858,673 shares of Common Stock to
Knickerbocker for $600,000.
On December 31, 1996, the Board of Directors granted Scott Thorogood an
option to acquire 250,930 shares of Common Stock for $.001 per share.
On December 31, 1996, the Board of Directors granted Rowland Hanson an
option to acquire 198,000 shares of Common Stock for $.001 per share.
On December 31, 1996, the Board of Directors granted L. Lawrence Potomac an
option to acquire 59,400 shares of Common Stock for $.001 per share. On July 24,
1997, Mr. Potomac exercised a portion of this option and purchased 5,000 shares
of Common Stock for $5.00.
On December 31, 1996 the Board of Directors granted Kevin Hainley, Chief
Financial Officer of the Company, an incentive stock option under the 1996 Stock
Plan to purchase 60,000 shares of Common Stock for $1.00 per share, which may be
exercised for 10 years. 20% of such option vested immediately and an additional
20% vests at the end of each year thereafter, provided Mr. Hainley is employed
by the Company as its Chief Financial Officer. On March 14, 1997, Mr. Hainley
exercised a portion of this option and purchased 12,000 shares of Common Stock
for $12,000.
On December 31, 1996, the Board of Directors granted Allan Mayer, Vice
President-Marketing of the Company, an incentive stock option under the 1996
Stock Plan, to purchase 60,000 shares of Common Stock for $1.00 per share, which
may be exercised for 10 years. 20% of such option vested immediately and an
additional 20% vests at the end of each year thereafter, provided Mr. Mayer is
employed as an officer of the Company at the end of each year.
On December 31, 1996, the Board of Directors granted Robert Coston, a
director of the Company, an option to acquire 20,000 shares of Common Stock for
$2.50 per share. The option vests 25% at the end of each year over the first
four years of its five year term, provided Mr. Coston is a member of the Board
of Directors or the Advisory Board at the end of each year.
On December 31, 1996, the Board of Directors granted James Mason, a member
of the Advisory Board, an option to acquire 20,000 shares of Common Stock for
$2.50 per share. The option vests 25% at the end of each year over the first
four years of its five year term, provided Mr. Mason is a member of the Advisory
Board at the end of each year.
On December 31, 1996, the Board of Directors granted Robert Horsman, a
member of the Advisory Board, an option to acquire 20,000 shares of Common Stock
for $2.50 per share. The option vests 25% at the end of each year over the first
four years of the five year term, provided Mr. Horsman is a member of the
Advisory Board at the end of each year.
On December 31, 1996, the Board of Directors granted Tor Petterson, a member
of the Advisory Board, an option to acquire 20,000 shares of Common Stock for
$2.50 per share. The option vests 25% at the end of each year over the first
four years of the five year term, provided Mr. Petterson is a member of the
Advisory Board at the end of each year.
56
<PAGE>
On February 15, 1997, the Board of Directors granted Fred Hull, a member of
the Advisory Board, an option to acquire 20,000 shares of Common Stock for $2.50
per share. The option vests 25% at the end of each year over the first four
years of the five year term, provided Mr. Hull is a member of the Advisory Board
at the end of each year.
On February 15, 1997, the Board of Directors granted Suzanne Johnson, a
member of the Advisory Board, an option to acquire 5,000 shares of Common Stock
for $3.00 per share. The option vests 25% at the end of each year over the first
four years of the five year term, provided Ms. Johnson is a member of the
Advisory Board at the end of each year.
On April 4, 1997, the Company entered into the LLK Agreement with
Knickerbocker to develop certain specialty lines of beverages which would
utilize the Company's integrated thermal containers and be marketed by
Knickerbocker. See "Business--Distribution Agreement," and "Related Party
Transactions."
On April 8, 1997, Manhattan West, Inc. loaned the Company $55,000 as part of
the Bridge Loans, and in consideration therefor acquired a warrant to purchase
10,000 shares of the Company's Common Stock for $1.00 per share at any time
during the earlier to occur of: (i) 25 months from the date thereof; or (ii) 30
days from the date the loan is fully repaid. The Bridge Loans are all
anticipated to be repaid with a portion of the net proceeds of the Offering.
On May 22, 1997, the Board of Directors granted Salvatore La Barbera, a
member of the Advisory Board, an option to acquire 20,000 shares of Common Stock
for $3.00 per share. The option vests 25% at the end of each year over the first
four years of the five year term, provided Mr. La Barbera is a member of the
Advisory Board at the end of each year.
On October 27, 1997, the Board of Directors granted Robert Coston, a
director, an option to acquire 10,000 shares of Common Stock for $5.00 per share
in consideration for his agreement to become a member of the Company's Board of
Directors. The option has a five year term.
All future transactions by the Company with officers, directors, and five
percent shareholders and their affiliates will be entered into only if the
Company believes that such transactions are reasonably expected to benefit the
Company and the terms of such transactions are no less favorable to the Company
than could be obtained from unaffiliated parties. Furthermore, such transactions
will be approved by a majority of disinterested directors.
BRIDGE LOANS
BRIDGE LOANS. Between December, 1996 and May, 1997, the Company entered into
Bridge Loans totaling $1,245,000 with twelve investors for the purpose of
providing operating capital for the Company. In addition to receiving a
promissory note bearing interest at a rate of 10%, each bridge lender was issued
a warrant to purchase 20,000 shares of the Company's Common Stock for every
$110,000 loaned to the Company. The warrants issued in connection with the
Bridge Loans are exercisable at $1.00 per share. All but one of the warrants are
exercisable until the later to occur of: (1) 24 months from the date of the
Bridge Loan; or (2) 30 days after repayment of the Bridge Loan. One Bridge Loan
included a warrant exercisable for 48 months and also included a right in favor
of the Company to convert that Bridge Loan into common stock at a share value of
one-half of the Offering Price. The Company intends to repay the Bridge Loans
plus accrued interest with a portion of the proceeds of the Offering in the
estimated amount of $1,348,000.
DECEMBER 1997 LOANS. In December 1997, the Company borrowed a total of
$150,000 from two investors. The loans bear interest at 12% per annum and are
due and payable upon the earlier to occur of 5 business days after the
completion of the Offering, or 120 days.
57
<PAGE>
RELATED PARTY TRANSACTIONS
MANHATTAN WEST, INC. The Company has entered into certain transactions with
Manhattan West, Inc., a California corporation.
On July 15, 1996, the Company entered into a consulting agreement with
Manhattan West, Inc. Pursuant to the consulting agreement, Manhattan West, Inc.
is to assist the Company in locating and arranging distributor agreements.
Manhattan West, Inc. introduced the Company to Knickerbocker. The consulting
agreement is for a term of 30 months, and requires Manhattan West, Inc. be paid
$15,000 per month from July 15, 1996, through April 15, 1997 and $5,000 per
month for the remainder of the term. Manhattan West, Inc. has agreed to defer
collection of a portion of its consulting fees until after completion of the
initial public offering of the Company's securities.
Also, on July 15, 1996, Manhattan West, Inc. purchased 143,102 shares of the
Company's Common Stock for a total consideration of $100,000 or $.70 per share,
and the Company granted an option to Manhattan West, Inc. to purchase 543,841
shares of the Company's Common Stock at an exercise price of $.01 per share
subject to certain conditions. In the event Manhattan West, Inc. exercises its
option, shareholders of the Company will experience significant additional
dilution. See "Certain Transactions" and "Dilution." On the same day Manhattan
West, Inc. was granted an option to purchase 25,749 shares of the common stock
of IHI at an exercise price of $.001 per share subject to certain conditions.
In connection with these transactions, Manhattan West, Inc. entered into the
Manhattan Trust in order for Mr. Scudder to maintain voting control of any of
the Company's Common Stock held by Manhattan West, Inc. The shares subject to
the Manhattan Trust include 553,841 shares which Manhattan West, Inc. has the
right to acquire upon exercise of the option granted to Manhattan West, Inc. on
July 15, 1996 and the warrant acquired by Manhattan West, Inc. in connection
with one Bridge Loan in the amount of $55,000. On April 8, 1997, Manhattan West,
Inc. loaned $55,000 to the Company as a Bridge Loan. The term of the Manhattan
Trust is five years, subject to an extension for an additional term of up to 10
years upon the written agreement of Manhattan West, Inc. and the trustee. The
trust is specific to Manhattan West, Inc. and does not encumber the shares
following a transfer of such shares by Manhattan West, Inc. to a third party.
The sole voting trustee is James A. Scudder, the Chief Executive Officer and a
director of the Company. The trustee who has sole power to vote or direct the
vote of such shares. The trustee does not have any power to exercise the option
or the warrant in favor of Manhattan West, Inc., is not entitled to any
dividends paid to the shares subject to the Manhattan Trust, may not transfer or
hypothecate the shares subject to the Manhattan Trust, is not entitled to any
proceeds from the sale of the shares, and does not have any power to sell or
direct the sale of any of the shares held in the Manhattan Trust. Mr. Scudder
disclaims beneficial ownership of the 143,102 shares held in the Manhattan Trust
and the additional 553,932 shares which may be held in the Manhattan Trust. See
"Principal Shareholders."
The sole officer of Manhattan West, Inc. is David F. Bahr. The sole director
is Tariq S. Khan, and the sole shareholder is Manhattan West International,
Ltd., a British Virgin Islands corporation. The beneficial owners of Manhattan
West International, Ltd. are Wolfgang Marxer, Michael Parton and Urs Stirnimann,
each a resident of the British Virgin Islands.
L.L. KNICKERBOCKER & COMPANY, INC. In September, 1996, Knickerbocker
purchased 858,673 shares of the Company's common stock for $600,000. On the same
day Knickerbocker purchased 29,260 shares of the common stock of IHI for
$50,000. The Company entered into the LLK Agreement with Knickerbocker on April
4, 1997. The founder, Chairman, Chief Executive Officer and President of
Knickerbocker is Louis L. Knickerbocker, a director of the Company. The Company
and Knickerbocker are working to develop certain specialty lines of beverages
which would utilize the Company's integrated thermal containers and could be
marketed by Knickerbocker. The LLK Agreement grants Knickerbocker certain rights
to market and distribute the Company's integrated thermal containers in defined
potential markets subject to certain conditions. See "Business--Distributorship
Agreement."
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Knickerbocker has agreed to provide up to 435,000 Common Shares included in
the Units which may be issued upon exercise of the Over-allotment Option. The
sale by Knickerbocker of Common Shares included in the the Units within the
Over-allotment Option would result in a substantial benefit to Knickerbocker.
See "Description of Securities," "Risk Factors--Offering to Benefit Existing
Stockholders and Related Parties" and "Description of Securities."
INSTA-HEAT, INC. The Company has obtained all of the core technology for its
integrated thermal containers through the IHI License with Insta-Heat, Inc. The
IHI License requires the Company to pay IHI minimum royalty payments of $50,000
per year and also requires additional royalty payments from the Company on the
sale of products utilizing IHI technology subject to the Company achieving
minimum annual net income of no less than $4 million after payment of the
royalty and all taxes. See "Business-- License Agreement with Insta-Heat, Inc."
Messrs. Berntsen and Scudder are co-founders, officers, directors, and
significant shareholders of the Company. They are also co-founders, officers,
directors, and significant shareholders of IHI. The Board of Directors of IHI is
comprised of Messrs. Scudder, Berntsen, and their spouses. The Company and IHI
currently have substantially similar shareholders. These relationships raise
substantial potential conflicts of interest with regard to the development,
licensing, marketing, and sale of the IHI technology by the Company, as well as
conflicts of interest in the interpretation of the terms and conditions of the
IHI License. In addition, Messrs. Scudder and Berntsen, Knickerbocker, Manhattan
West, Inc., and the other IHI shareholders could receive substantial dividends
from their ownership of IHI stock even if the Company is not successful and is
only able to pay the minimum royalty payments to IHI. See "Risk Factors--IHI
License" and "Risk Factors--Conflicts of Interest."
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DESCRIPTION OF SECURITIES
The following description of the capital stock of the Company and certain
provisions of the Company's Articles and Bylaws is a summary and is qualified in
its entirety by the provisions of the Articles and Bylaws, which have been filed
as exhibits to the Company's Registration Statement, of which this Prospectus is
a part.
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Common Stock, no par value, and
5,000,000 shares of Preferred Stock, no par value ("Preferred Stock"). As of the
date of this Prospectus, 3,089,478 shares of Common Stock were outstanding,
there were 70 holders of record of the Company's Common Stock, and no Preferred
Stock was outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. The holders of
Common Stock are entitled to cumulative voting rights with respect to the
election of directors, and as a consequence, minority shareholders will be able
to elect directors on the basis of their votes alone. The shareholders right to
cumulative voting will terminate automatically when the Company shares are
listed on NYSE or AMEX, or alternatively are qualified for trading as a NMS
security on Nasdaq and the Company has at least 800 shareholders as of the
record date for its most recent meeting of shareholders. The Common Stock is
anticipated to be listed on AMEX after the consummation of the Offering and,
therefore, it is not anticipated that cumulative voting rights will continue.
See "Possible Anti-Takeover Effect of Certain Provisions of the Company's
Articles of Incorporation." Subject to preferences that may be applicable to any
then outstanding shares of Preferred Stock, holders of Common Stock are entitled
to receive ratably such dividends as may be declared by the Board of Directors
out of funds legally available therefor. See "Dividend Policy." In the event of
a liquidation, dissolution or winding up of the Company, holders of the Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding Preferred
Stock. Holders of Common Stock have no preemptive rights and no right to convert
their Common Stock into any other securities. There are no redemption or sinking
fund provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
this Offering will be, fully paid and nonassessable.
PREFERRED STOCK
The Preferred Stock may be issued in series, and shares of each series will
have such rights and preferences as are fixed by the Board of Directors in the
resolutions authorizing the issuance of that particular series. In designating
any series of Preferred Stock, the Board of Directors may, without further
action by the holders of Common Stock, fix the number of shares constituting
that series, and fix the dividend rights, dividend rate, conversion rights,
voting rights (which may be greater or lesser than the voting rights of the
Common Stock), rights and terms of redemption (including any sinking fund
provisions), and the liquidation preferences of that series of Preferred Stock.
It should be expected that the holders of any series of Preferred Stock, when
and if issued, will have priority claims to dividends and to any distributions
upon liquidation of the Company, and possibly other preferences over the holders
of Common Stock.
The Board of Directors may issue one or more series of Preferred Stock
without action of the shareholders of the Company. Accordingly, the issuance of
Preferred Stock may adversely affect the rights of the holders of the Common
Stock. In addition, the issuance of Preferred Stock may be used as an "anti-
takeover" device without further action on the part of the shareholders.
Issuance of Preferred Stock may dilute the voting power of a holder of Common
Stock (such as by issuing Preferred Stock with super-voting rights), may
discourage bids for the Company's Common Stock, and may render more difficult
the removal
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of current management, even if such removal may be in the shareholders' best
interest. The Company has no current plans to issue any Preferred Stock.
PRESENTLY OUTSTANDING WARRANTS
As of the date of this Prospectus, the Company has outstanding warrants to
purchase 400,587 shares of Common Stock. 70,587 of these Warrants comprise the
Security Holders' Warrants. All of the remaining warrants may be exercised for
up to 36 months from the date of issuance, and will all expire by the end of
May, 2000. The exercise price of 230,000 of these warrants is $1.00 per share,
and the exercise price of the remaining 100,000 is $3.00 per share. The exercise
price of each of these warrants is subject to adjustment in the event of stock
splits, stock dividends and similar events, and if at any time the Common Stock
of the Company trades on an exchange, Nasdaq, the OTC Bulletin Board, or in the
pink sheets for $8.00 per share for 20 out of 30 consecutive trading days, the
Company has the right to shorten the exercise period for these warrants by
providing 10 days prior written notice to the warrant holder, granting the
warrant holder 45 days after the last day of the 30 day trading period to
exercise the warrant. The Company must have an effective registration statement
covering all of the shares of Common Stock underlying the warrants before it can
provide notice to shorten the exercise period. The Company must also use its
best efforts to keep the registration statement effective for a minimum period
of six months after the termination of the shortened exercise period.
The Security Holders' Warrants may be exercised to purchase 70,587 shares of
Common Stock on substantially identical terms as the Warrants offered herein.
OPTIONS
As of the date of this Prospectus, options to purchase a total of 1,379,506
shares of Common Stock were outstanding. 609,665 of the shares underlying these
options are capable of being exercised as of the date of this Prospectus. An
additional 543,841 of the shares underlying these options will be capable of
being exercised upon completion of this Offering. The Company has granted
Incentive Stock Options to certain of its employees for the purchase of up to an
aggregate of 113,000 shares of Common Stock pursuant to the 1996 Stock Plan. An
aggregate of 545,400 shares of Common Stock are currently reserved under the
1996 Stock Plan, and options may be granted under the 1996 Stock Plan which can
be exercised for a period of up to 10 years and may contain such other terms as
the Board of Directors or a committee appointed to administer the 1996 Stock
Plan may determine. See "Management--Stock Option Plan."
UNITS
Each Unit consists of one Common Share and one Warrant. Each Warrant
entitles the holder thereof to purchase one Common Share. The Warrants may be
exercised for three years from the date of this Prospectus. Upon completion of
the Offering the Warrants and Common Shares comprising the Units will be
immediately detachable and separately transferable from the date of this
Prospectus. The Offering Price of the Units is allocated $5.40 to the Common
Share and $.10 to the Warrant.
WARRANTS
In connection with this Offering, the Company has authorized the issuance of
up to 3,625,000 Warrants (including 435,000 Warrants that may be issued by the
Company upon exercise of the Over-allotment Option, and 290,000 warrants that
may be issued upon exercise of the Representative's Option), and has reserved
3,625,000 shares of Common Stock for issuance upon exercise of such Warrants.
Each Warrant entitles the holder to purchase one Common Share at an exercise
price equal to 150% of the Offering Price of the Common Shares subject to
adjustment, for a period of three years commencing from the date of this
Prospectus. The Warrants will trade separately immediately after this Offering.
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Each Warrant will be redeemable by the Company for $.05 per Warrant at any
time upon 30 days prior written notice to the holder, at any time the closing
bid price per share of the Company's Common Stock equals or exceeds 200% of the
Offering Price of a Common Share for 20 consecutive trading days within the 30
day period prior to the date notice of redemption is given, and further provided
at such time there is a current effective registration statement covering the
Common Shares underlying the Warrants. The Company presently expects to call all
of the Warrants for redemption as soon as legally possible, but several factors
may modify that intention. In the event the Company provides a notice of
redemption, a holder of the Warrants would be forced to exercise such holder's
Warrants within the period set forth in the notice of redemption and pay the
exercise price including at a time when it may be disadvantageous for such
holder to do so, or to sell the Warrants at the current market price including
at a time when such holder might otherwise wish to hold the Warrants, or to
accept the redemption price which will likely be substantially less than the
market value of the Warrants.
The Warrants will be issued in registered form under a Warrant Agreement
between the Company and ChaseMellon Shareholder Services, as warrant agent (the
"Warrant Agent"). The Common Shares underlying the Warrants, when issued upon
exercise of a Warrant in accordance with its terms, will be fully paid and
nonassessable, and the Company will pay any transfer tax incurred as a result of
the issuance of Common Shares to the holder upon its exercise.
Holders of the Warrants will be able to sell the Warrants, if a market
exists, rather than exercise them. However, there can be no assurance that a
market will develop, or if developed, will continue for the Warrants.
Each Warrant may be exercised by surrendering the Warrant certificate, with
the formal subscription form on the reverse side of the Warrant certificate
properly completed and executed, together with payment of the exercise price to
the Warrant Agent. Prior to their expiration or redemption by the Company, the
Warrants may be exercised in whole or, from time to time, in part. If less than
all of the Warrants evidenced by a Warrant certificate are exercised, a new
Warrant certificate will be issued for the remaining number of Warrants.
Prior to the exercise of the Warrants, the holders of the Warrants will not
have any of the rights or privileges of shareholders of the Company (except to
the extent they own Common Stock of the Company). The exercise price of the
Warrants and the number of Common Shares issuable upon the exercise thereof are
subject to adjustment upon the occurrence of certain events such as stock
splits, stock dividends, recapitalizations, mergers or consolidations, as set
forth in the Warrant Agreement. No adjustment of the exercise price will be
required unless such adjustment would require an increase or decrease of at
least one percent in the number of Common Shares issuable upon exercise of the
Warrants; however, any such adjustment not made will be carried forward and
taken into account in any subsequent adjustment.
For the life of the Warrants, the Warrant holders have the opportunity to
profit from a rise in the market price of the Common Stock without assuming the
risk of ownership of the Common Shares issuable upon the exercise of the
Warrants, with a resulting dilution in the interest of the Company's
shareholders by reason of the exercise of Warrants at any time, if ever, when
the exercise price of the Warrants is less than the market price for the Common
Stock. The terms on which the Company may be able to obtain additional capital
during the life of the Warrants may be adversely affected as a result of the
outstanding Warrants. The Warrant holders may exercise their Warrants at a time
when the Company would seek capital by offering Common Stock on terms more
favorable to the Company than those provided in the Warrants. In such an event
the existence of the outstanding Warrants could have a material adverse impact
on the price and/or terms the Company may be able to obtain from an offering of
its Common Stock.
For a holder to exercise the Warrants there must be a current registration
statement in effect with the Commission and registration or qualification with,
or approval from, various state securities agencies with
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respect to the shares underlying the Warrants. The Company has agreed to use its
best efforts to cause a registration statement with respect to such shares under
the Securities Act to continue to be effective during the term of the Warrants
and to take such other actions under the laws of various states as may be
required to cause the sale of Common Shares upon exercise of the Warrants to be
lawful. However, the Company will not be required to honor the exercise of
Warrants if, in the opinion of the Company's Board of Directors upon advice of
counsel, the sale of the underlying shares upon exercise would be unlawful.
The Company is not required to issue fractional shares of Common Stock, and
in lieu thereof will make a cash payment based upon the current market value of
such fractional shares. A holder of the Warrants will not possess any voting or
any other rights as a shareholder of the Company unless he or she exercises the
Warrants.
The Warrant exercise price was arbitrarily determined by negotiation between
the Company and the Representative. The Company may reduce the exercise price of
the Warrants or extend the warrant expiration date upon notice to Warrant
holders. The foregoing is merely a summary of the rights and privileges of the
holders of Warrants, and is qualified in its entirety by reference to the
Warrant Agreement.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth certain federal income tax consequences,
under current law, which may result from the purchase and ownership of the
Units, and the Common Shares and Warrants constituting the Units. The Company
has not requested and does not intend to request a ruling from the Internal
Revenue Service or a formal tax opinion from its counsel on any tax aspect of
this Offering. This tax discussion is intended only as a descriptive summary and
does not purport to be a complete analysis or listing of all potential federal
income tax effects resulting from or which may result from the purchase and
ownership of the Units, Common Shares, or Warrants. Prospective purchasers of
the Units should consult their own tax advisors with respect to the tax
consequences to them from the purchase and ownership of the Securities, and the
applicability and effect of federal, state, local, foreign and other tax laws.
The Company has allocated the cost of each Unit between each of its elements
(one Common Share at a cost of $5.40 and one Warrant to purchase one Common
Share at a cost of $0.10) in accordance with their perceived relative fair
market values at the time of issuance. The portion of the cost of a Unit
allocated to each element will constitute the initial tax basis of such element
for federal income tax purposes.
No gain or loss will be recognized by a holder of a Warrant on the holder's
purchase of Common Shares for cash upon exercise of the Warrant. The adjusted
tax basis of the Common Shares so acquired will be equal to the tax basis of the
Warrant plus the exercise price. The holding period of the Common Shares
acquired upon the exercise of the Warrant will begin on the date the Warrant is
exercised.
The sale of Common Shares or the sale of a Warrant will result in the
recognition of gain or loss to the holder in an amount equal to the difference
between the amount realized (generally the cash and fair market value of other
property received) and the holder's adjusted tax basis therein. Such a sale of
Common Shares will result in capital gain or loss, provided the Common Shares
are a capital asset in the hands of the holder. The sale of a Warrant will
likewise result in capital gain or loss, provided the Warrant is a capital asset
in the hands of the holder and the Common Shares underlying the Warrant would be
a capital asset to the holder if acquired by the holder.
Under Section 305 of the Internal Revenue Code of 1986, as amended, certain
actual or constructive distributions of stock (including warrants to purchase
stock) with respect to such stock (or warrants) may be taxable to the
shareholders (or Warrant holders) of the Company. Adjustments in the exercise
price of the Warrants, or the number of shares which may be purchased upon
exercise of the Warrants, in each case
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made pursuant to certain provisions of the Warrants, may result in a
distribution which is taxable as a dividend to the holders of Warrants.
If a Warrant is not exercised and allowed to expire, the Warrant will be
deemed to have been sold or exchanged for no consideration on the expiration
date. Any loss to the holder of a Warrant will be a capital loss if the Warrant
was held as a capital asset and if the Common Shares underlying the Warrant
would have been a capital asset had such Warrant been exercised.
No gain or loss will be recognized by the Company upon the acquisition,
exercise or expiration of any Warrants.
REPRESENTATIVE'S OPTION
At the closing of this Offering, the Company has agreed to sell to the
Representative the Representative's Option for an aggregate purchase price of
$290 ($0.001 per underlying Unit). The Representative's Option grant to the
Representative the right to purchase up to 290,000 Units from the Company (each
Unit consisting of one Common Share, and one warrant to purchase one Common
Share each of which to be under terms substantially identical to the Common
Shares and Warrants offered herein). The Representative's Option may be
exercised for a period of four years commencing one year after the date of this
Prospectus at an exercise price of 160% of the Offering Price of the Units, and
will contain certain anti-dilution provisions. The Representative's Option will
be restricted from sale, assignment, transfer or hypothecation prior to its
exercise date except to officers of the Representative and members of the
selling group and officers and partners thereof.
The Representative's Option to acquire up to 290,000 Units contains certain
registration rights under the Securities Act relating to the shares of Common
Shares and Representative's Warrants included in the Units underlying the
Representative's Option and the shares of Common Stock issuable upon exercise of
the Representative's Warrants included in such Units (collectively, the
"Representative Shares"). Under the terms of the Representative's Option, the
Company is obligated to register all or part of the Representative Shares if it
receives a request to do so by the holders owning or entitled to purchase a
majority of the Representative Shares, provided that the request is made 12
months after the date of this Prospectus. The Representative's Option provides
for one such request, at the Company's expense. The demand registration right
contained in the Representative's Option will expire five years from the date of
this Prospectus. In addition, if the Company proposes to register any of its
securities under the Securities Act for its own account, holders of the
Representative's Option or Representative's Shares are entitled to notice of
such registration and the Company is obligated to use all reasonable efforts to
cause the Representative Shares to be included, provided that the underwriter of
any such offering shall have the right to limit the number of shares included in
the registration. The Company is responsible for all expenses incurred in
connection with any such piggyback registration of the Representative Shares.
The piggyback registration rights contained in the Representative's Option will
expire no later than five years from the date of this Prospectus. The exercise
of such registration rights by the Representative may result in dilution in the
interests in the Company of then-present stockholders, hinder efforts by the
Company to arrange future financings of the Company and/or have an adverse
effect on the market price of the Company's Common Stock and Warrants. See
"Underwriting."
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF
INCORPORATION
The holders of Common Stock are currently entitled to one vote for each
common share held of record on all matters submitted to a vote of the
shareholders other than the election of directors, in which event any holder may
demand cumulative voting. Under cumulative voting, the holders of Common Stock
are entitled to cast for each share held the number of votes equal to the number
of directors to be elected, which is currently four. A holder may cast all of
his or her votes for one nominee or distribute them among any number of nominees
for election. The Company's Articles provide that the shareholders' right to
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cumulative voting will terminate automatically when the Company's shares are
listed on NYSE or AMEX, or alternatively are qualified for trading as a NMS
security on Nasdaq, provided further the Company has at least 800 shareholders
as of the record date for the most recent annual meeting of its shareholders.
Upon consummation of this Offering, the Company's Common Shares are anticipated
to be listed on AMEX and therefore cumulative voting will likely terminate after
consummation of this Offering. The absence of cumulative voting may have the
effect of limiting the ability of minority shareholders to effect changes in the
Board of Directors, and may have the effect of deterring hostile takeovers or
delaying or preventing changes in control or management of the Company.
The Company's Articles also include a provision ("Fair Price Provision")
that requires the approval of the holders of two-thirds of the Company's voting
stock as a condition to a merger or certain other business transactions with, or
proposed by a holder of 15% or more of the Company's voting stock (an
"Interested Shareholder"), except in cases where the continuing directors
approve the transaction or certain minimum price criteria and other procedural
requirements are met. A "Continuing Director" is a director who is not
affiliated with an Interested Shareholder and was elected prior to the time such
Interested Shareholder became an Interested Shareholder, or any successor chosen
by a majority of the Continuing Directors. The minimum price criteria generally
require that, in a transaction in which shareholders are to receive payments,
holders of Common Stock must receive a value equal to the higher of either the
price paid by the Interested Shareholder for Common Stock during the prior two
years, the Fair Market Value (as defined in the Articles) at the time, or the
amount paid in the transaction in which such person became an Interested
Shareholder, and that such payment be made in cash or in the type of
consideration paid by the Interested Shareholder for the greatest portion of its
shares. The Company's Board of Directors believes the Fair Price Provision will
help assure all of the Company's shareholders will be treated similarly if
certain kinds of business combinations are effected. However, the Fair Price
Provision may also make it more difficult to accomplish certain transactions
that could be beneficial to shareholders but are opposed by the incumbent Board
of Directors.
The Company's Articles provide for a classified Board of Directors to
automatically become effective when the shares of Common Stock of the Company
are listed on NYSE or AMEX, or alternatively are qualified for trading as a NMS
security, and when the Company has at least 800 shareholders as of the record
date for the most recent annual meeting of its shareholders. The classified
Board of Director provisions, when and if effective, divide the Board of
Directors into two classes of directors serving staggered two-year terms. The
classification of directors has the effect of making it take more time to change
the composition of a majority of the Board of Directors. Upon consummation of
this Offering, the Company's Common Shares are anticipated to be listed on AMEX
and therefore a classified Board of Directors will likely become operative
following consummation of the Offering.
The Company's Articles also require any action required or permitted to be
taken by shareholders of the Company must be effected at a duly called meeting
of shareholders and may not be effected by a consent in writing. The Company's
Articles also provide newly created directorships resulting from any increase in
the authorized number of directors may be filled by a majority vote of the
directors then in office. In addition, the Articles of the Company require
shareholders give advance notice to the Company's Secretary of any director
nominations or other business to be brought by shareholders at any shareholders'
meeting. The Articles also require the approval of two-thirds of the Company's
voting stock to amend certain provisions of the Articles. Each of these
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company. See "Risk Factors--Anti-
Takeover Provisions; Limitation on Voting Rights" and "Management."
AMERICAN STOCK EXCHANGE LISTING
The Company has applied for a listing of the Common Shares and Warrants on
AMEX under the symbols "ONT" and "ONTW", respectively. This Offering is the
initial public offering of the Securities and, accordingly, there is currently
no public trading market for any such Securities. Even if the Common
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Shares and Warrants are accepted for trading on AMEX, there can be no assurance
that a public trading market will ever develop or, if one develops, that it will
be maintained. Although it has no legal obligation to do so, the Representative
from time to time may act as a market maker and otherwise effect transactions
for its own account, or for the account of others, in the Securities. The
Representative, if it so participates, may be a dominating influence in any
market that may develop for any of the Securities.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock and the
Warrant Agent for the Company's Warrants is ChaseMellon Shareholder Services.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 5,989,478 shares of
Common Stock outstanding, assuming no exercise of the Warrants, the
Over-allotment Option, the Warrants included in the Representative's Option, and
other outstanding warrants and options. All of the 2,900,000 Common Shares sold
in this Offering (plus any Common Shares sold upon exercise of the
Over-allotment Option) will be freely transferable and tradable without
restriction or further registration under the Securities Act except for any
shares purchased or held by any affiliate of the Company, which will be subject
to the resale limitations of Rule 144 under the Securities Act. An aggregate of
141,174 shares of Common Stock, including 70,587 underlying the Security
Holders' Warrants are being registered simultaneously with this Offering for
resale by the Selling Security Holders from time to time. When sold, such shares
will be freely tradable without restrictions or further registration under the
Securities Act. See "Concurrent Offering by Selling Security Holders." The
remaining 3,018,891 shares of Common Stock were issued and sold by the Company
in private transactions ("Restricted Shares") and are eligible for public sale
only if registered under the Securities Act, sold in accordance with Rule 144
thereunder, or pursuant to an exemption from such registration requirements.
Holders of the Warrants included in the Units offered hereby will be
entitled to purchase an aggregate of 2,900,000 Common Shares upon exercise of
the Warrants at any time during the three-year period following the date of this
Prospectus, provided the Company satisfies certain securities registration
requirements with respect to the shares underlying the Warrants. See
"Description of Securities-- Warrants." Any and all Common Shares purchased upon
exercise of the Warrants will be freely tradable, provided such registration
requirements are met.
Up to 290,000 Common Shares and 290,000 Warrants may be purchased by the
Representative during the four year period commencing upon the first anniversary
date of this Prospectus through the exercise of the Representative's Option and
the Representative's Warrants included therein. Any and all securities purchased
upon exercise of the Representative's Option will not be freely tradable unless
the Company satisfies certain securities registration requirements. See
"Underwriting."
Approximately 339,087 of the Restricted Shares are currently eligible for
sale in the public market pursuant to Rule 144(k). All of these shares are
subject to the lock-up agreement not to sell which is described below. In
addition, as of the date of this Prospectus, 545,400 shares are reserved for
issuance pursuant to the 1996 Stock Plan of which options to acquire 113,000
shares have been granted, and in addition another 1,266,506 shares are reserved
for issuance upon the exercise of other outstanding options and 400,587 shares
are reserved for issuance upon exercise of outstanding warrants. All of the
shares underlying outstanding options and 330,000 of the shares underlying
outstanding warrants are subject to the lock-up agreement described below.
Approximately 1,555,760 of all outstanding options and warrants shall be capable
of being exercised upon completion of this Offering, 1,483,506 which are all
subject to the lock-up agreement described below.
The Company, its executive officers and directors, and certain other
shareholders of the Company owning an aggregate of approximately 3,018,891
shares of Common Stock and an additional 1,379,506
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shares subject to outstanding options and warrants, have agreed they will not,
without the prior written consent of the Representative, sell or otherwise
transfer or dispose of, pledge or hypothecate any securities of the Company for
a period of 12 months from the date of this Prospectus (the "Lock-up Period").
The Representative, in its sole discretion at any time and without notice to the
public, may release any or all of the Company's securities from these lock-up
agreements and permit holders of the Company's securities to resell all or any
portion of the securities held by them at any time prior to the expiration of
the Lock-up Period.
In general, under Rule 144 as currently in effect, (beginning 90 days after
the date of this Prospectus), any holder of Restricted Shares, including an
affiliate of the Company, as to which at least one year has elapsed since the
later of the date of their acquisition thereof from the Company or from an
affiliate, would be entitled within any three month period to sell a number of
shares that does not exceed the greater of one percent of the then outstanding
shares of Common Stock (approximately 55,895 shares immediately after the
completion of this Offering assuming no exercise of the Over-allotment Option)
or the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 are subject to certain requirements relating to
notice and availability of current public information about the Company.
However, a person (or persons whose shares are aggregated) who is not deemed to
have been an affiliate of the Company at any time during the 90 days immediately
preceding the sale and who beneficially owns Restricted Shares is entitled to
sell such shares under Rule 144(k) without regard to the limitations described
above; provided that at least two years have lapsed since the date the shares
were acquired. The foregoing is a summary of Rule 144 and is not intended to be
a complete description of the rule and other applicable regulations.
Prior to this Offering, there has been no public market for the Company's
securities. Following this Offering, the Company cannot predict the effect, if
any, that market sales of the Common Stock, or the availability of such shares
for sale pursuant to Rule 144, registration rights or otherwise, will have on
the market price prevailing from time to time. Nevertheless, sales by the
existing shareholders of substantial amounts of Common Stock in the public
market could adversely affect prevailing market prices for the Company's
securities and the ability of the Company to obtain additional equity financing.
In addition, the availability for sale of substantial amounts of Common Shares
acquired through the exercise of the Warrants, other options or warrants, or the
Representative's Option and the Representative's Warrants included therein could
adversely affect prevailing market prices for the Common Stock.
67
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting Agreement,
the Underwriters named below, for whom Joseph Charles & Associates, Inc., is
acting as the Representative, have severally agreed to purchase from the
Company, and the Company has agreed to sell to the Underwriters named below, the
aggregate number of Securities set forth opposite their respective names in the
table below at the price to the public less underwriting discounts set forth on
the cover page of this Prospectus. The Units are being sold on a firm commitment
basis. The Underwriting Agreement provides, however, the obligations of the
Underwriters to pay for and accept delivery of the Units are subject to certain
conditions precedent. The Underwriters are committed to purchase all of the
Securities offered hereby if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF UNITS
UNDERWRITERS TO BE PURCHASED
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Joseph Charles & Associates, Inc. ...........................................
---------------
Total.................................................................... 2,900,000
---------------
---------------
</TABLE>
The Representative has informed the Company the Underwriters do not expect
to sell any Units to any accounts over which they have discretionary authority.
The Representative has advised the Company the Underwriters propose to offer
the Units directly to the public at the Offering Price set forth on the cover
page of this Prospectus, and to selected dealers at that price, less a
concession of not more than $ per Unit. The Underwriters may allow a discount
of not more than $0. per Unit on sales to certain dealers. After the initial
offering to the public, the price to the public of the Units of Common Shares
and Warrants and the other terms may be changed.
The Company has granted the Representative an option, which may be exercised
during the 45 day period following the date of this Prospectus, to purchase up
to 435,000 additional Units at the Offering Price, less the underwriting
discounts and commissions. The Underwriters may exercise such option only for
the purpose of covering any over-allotments in the sale of the Units offered
hereby.
The Company has agreed to pay the Representative a non-accountable expense
allowance of 2% of the gross proceeds received by the Company from the sale of
the Units. In addition to the Underwriters' discount and the non-accountable
expense allowance, the Company is required to pay the costs of qualifying the
Securities under federal and state securities laws, together with legal and
accounting fees, printing and other costs incurred by the Company in connection
with this Offering.
The Company has also agreed to retain the Representative as a financial
consultant for a period of two years from the date of this Prospectus for a fee
of $3,000 per month, payable in advance at the closing of the Offering. The
financial consulting services to be provided by the Representative include
assisting in the development of a long-term financial strategy and working with
financial analysts.
The Company has also agreed, for a period of four years from the date of
this Prospectus, at the option of the Representative, to nominate a designee of
the Representative reasonably acceptable to the
68
<PAGE>
Company, for election to the Company's Board of Directors or, at the option of
the Representative, if the Company is unable to obtain directors and officers
insurance satisfactory to the Representative, to designate a consultant to the
Board of Directors who will have the right to attend all Board of Directors and
committee meetings thereof, and who will be compensated on the same basis as
non-employee members of the Board. The Representative has not yet exercised its
right to designate such a person.
The Company has agreed with the Representative if the Company redeems the
Warrants the Representative will act as the Company exclusive solicitation agent
and the Company will pay the Representative a fee of 2% of the aggregate
exercise price if: (i) the exercise of the Warrant was solicited by a member of
the National Association of Securities Dealers, Inc. who is so designated in
writing by the holder exercising the Warrant; (ii) the Warrant is not held in a
discretionary account except where prior specific written approval for the
exercise has been received; (iii) disclosure of compensation arrangements was
made both at the time of the Offering and at the time of exercise of the
Warrant; (iv) the solicitation of the exercise of the Warrant was not in
violation of applicable rules promulgated under the Exchange Act; and (v) the
Representative provides bona fide services in connection with the solicitation
of the Warrant. No solicitation fee will be paid to the Representative on
Warrants exercised within one year of the date of this Prospectus or on Warrants
voluntarily exercised at any time without solicitation. In addition, unless
granted an exemption by the Commission from applicable rules under the Exchange
Act, the Representative will be prohibited from engaging in any market making
activities or solicited brokerage activities until the later of the termination
of such solicitation activity or the termination by waiver or otherwise of any
right the Representative may have to receive a fee for the exercise of the
Warrants following such solicitation. Such a prohibition, while in effect, could
impair the liquidity and market price of the Securities.
At the closing of this Offering, and subject to the terms and conditions of
the Underwriting Agreement between the Company and the Representative, the
Company has agreed to sell to the Representative the Representative's Option for
an aggregate purchase price of $290 as additional compensation in connection
with this Offering. The Representative's Option grants to the Representative the
right to purchase up to 290,000 Units (each consisting of one Common Share and
one Warrant) at a price equal to 160% of the Offering Price. The Warrants
underlying the Representative's Option will have an exercise price and other
terms identical to the Warrants being offered to the public pursuant to this
Prospectus.
The Representative's Option may be exercised for a four-year period,
commencing one year from the date of this Prospectus. The Representative's
Option will be restricted from sale, transfer, assignment, or hypothecation for
a period of one year from the date of this Prospectus, except to officers, and
employees of the Representative, other Underwriters and/or their officers and
employees. The Representative's Option will also contain anti-dilution
provisions for stock splits, stock dividends, recombinations and
reorganizations, a one-time demand registration provision (at the Company's
expense), and piggyback registration rights (which registration rights will
expire five years from the date of this Prospectus).
Except in connection with acquisitions or the grant of options to the
Company's officers and employees under the Company's 1996 Stock Plan, and at an
exercise price equal to the fair market value the Company has agreed, for a
period of 18 months from the closing of this Offering, not to issue, sell, or
purchase any shares of Common Stock or other equity securities of the Company
without the prior written consent of the Representative. The officers,
directors, and certain shareholders have agreed they will not except in certain
circumstances, offer, sell, or otherwise dispose of any securities of the
Company owned by them for a period of 12 months from the closing of this
Offering without the prior written consent of the Representative, which consent
may be withheld in its sole discretion. The Representative may, in its
discretion and without notice to the public, waive such restrictions and permit
such holders to sell any or all of their securities of the Company, the effect
of which could be a substantial decline in the trading price of the Company's
Common Stock or Warrants.
69
<PAGE>
Prior to this Offering, there has been no public market for the Common
Shares or Warrants and there can be no assurance a market will develop or be
sustained following this Offering. The Offering Price of the Common Shares and
Warrants and the exercise price of the Warrants were determined by negotiations
between the Representative and the Company. Among the factors considered in
determining the Offering Price and the exercise price of the Warrants were the
prospects for the Company, an assessment of the industry in which the Company
operates, the assessment of management, the number of Common Shares and Warrants
offered, the price purchasers of the Securities might be expected to pay given
the nature of the Company and the general condition of the securities markets at
the time of the Offering. Accordingly, the Offering Price set forth on the cover
page of this Prospectus should not necessarily be considered an indication of
the actual value of the Company or the Common Shares or Warrants. The price of
the Securities is subject to change as a result of market conditions and other
factors, and no assurance can be given the Common Shares or Warrants can be
resold at their respective Offering Price.
Certain persons participating in the Offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Shares and Warrants at levels above those which might otherwise
prevail in the open market, including by entering stabilizing bids, effecting
syndicate covering transactions or imposing penalty bids. A stabilizing bid
means the placing of any bid or effecting of any purchases, for the purpose of
pegging, fixing or maintaining the price of the Common Shares or Warrants. A
syndicate covering transaction means the placing of any bid on behalf of the
underwriting syndicate or the effecting of any purchase to reduce a short
position created in connection with the Offering. A penalty bid means an
arrangement that permits the Representative to reclaim a selling concession from
a syndicate member in connection with the Offering when Common Shares or
Warrants sold by the syndicate member are purchased in syndicate covering
transactions. Such transactions may be effected on AMEX or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Securities
offered hereby have been passed upon for the Company by Fisher Thurber LLP.
David A. Fisher is the owner of an option to purchase 50,000 shares of Common
Stock at $2.50 per share and is a partner of Fisher Thurber LLP. Certain legal
matters will be passed upon for the Underwriters by Freshman, Marantz, Orlanski,
Cooper & Klein, a law corporation, Beverly Hills, California.
EXPERTS
The financial statements of the Company as of December 31, 1996 and for the
years ended December 31, 1995 and 1996, and the period from November 8, 1994
(inception) through December 31, 1996 have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of such firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the December 31, 1996 financial
statements contains an explanatory paragraph that states that the Company has
suffered recurring losses from operations and has a net capital deficiency that
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 that uncertainty.
70
<PAGE>
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 ("Registration
Statement") under the Securities Act with the Commission in Washington, D.C.
with respect to the Units offered by this Prospectus. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all the
information set forth in or annexed as exhibits to the Registration Statement
and the exhibits and schedules thereto on file with the Commission pursuant to
the Securities Act and the rules and regulations of the Commission thereunder.
For further information with respect to the Company and the Units offered by
this Prospectus, reference is made to the Registration Statement and to the
financial statements, schedules and exhibits filed as part thereof. Copies of
the Registration Statement, together with such financial statements and
exhibits, may be obtained from the Public Reference Section of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices located at 500 West Madison Street,
Chicago, Illinois 60661 and 75 Park Place, New York, New York 10007, upon
payment of the charges prescribed therefor by the Commission. Statements
contained in this Prospectus as to the contents of any contract or other
documents are not necessarily complete, and in each instance reference is made
to the copy of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Commission maintains a World Wide Web site containing reports,
proxy and information statements and other information regarding registrants who
file electronically with the Commission. The address of the site is
http://www.sec.gov.
71
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ONTRO, INC.
Independent Auditors' Report............................................................................... F-2
Balance Sheets:
December 31, 1996
Unaudited September 30, 1997............................................................................. F-3
Statements of Operations:
Years ended December 31, 1995 and 1996,
Period from inception (November 8, 1994) through December 31, 1996,
Unaudited nine months ended September 30, 1996 and 1997, and
Unaudited period from inception (November 8, 1994) through September 30, 1997............................ F-4
Statements of Shareholders' Equity (Deficit):
Years ended December 31, 1995 and 1996
Unaudited period from inception (November 8, 1994) through September 30, 1997............................ F-5
Statements of Cash Flows:
Years ended December 31, 1995 and 1996,
Period from inception (November 8, 1994) through December 31, 1996,
Unaudited nine months ended September 30, 1996 and 1997, and
Unaudited period from inception (November 8, 1994) through September 30, 1997............................ F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Ontro, Inc.:
We have audited the accompanying balance sheet of Ontro, Inc. (a development
stage enterprise) as of December 31, 1996, and the related statements of
operations, shareholders' equity (deficit), and cash flows for the years ended
December 31, 1995 and 1996 and the period from November 8, 1994 (inception)
through December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ontro, Inc. (a development
stage enterprise) as of December 31, 1996, and the results of its operations and
its cash flows for the years ended December 31, 1995 and 1996 and the period
from November 8, 1994 (inception) through December 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
San Diego, California
February 14, 1997
F-2
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------- SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 12,000 $ 71,800
Prepaid expenses and other current assets......................................... 2,500 11,800
------------- -------------
Total current assets............................................................ 14,500 83,600
Property and equipment, net......................................................... 287,200 439,900
Deferred financing costs............................................................ 7,000 73,700
Other assets........................................................................ 13,600 53,700
Intangible assets, net.............................................................. 6,300 9,200
------------- -------------
$ 328,600 $ 660,100
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accrued consulting fees........................................................... $ 85,500 $ 72,500
Other accrued expenses............................................................ 111,000 207,800
Current portion of capital lease obligations...................................... 26,800 37,300
Payroll taxes payable............................................................. 12,000 25,300
Notes payable (bridge loans)...................................................... -- 1,245,000
------------- -------------
Total current liabilities....................................................... 235,300 1,587,900
Note payable (bridge loans)......................................................... 110,000 --
Capital lease obligations, excluding current portion................................ 100,100 117,300
------------- -------------
Total liabilities............................................................... 445,400 1,705,200
------------- -------------
Shareholders' equity (deficit):
Preferred stock, no par value, 5,000,000 shares authorized, no shares issued...... -- --
Common stock, no par value, 20,000,000 shares authorized, 2,726,900 and 3,006,071
shares issued and outstanding as of December 31, 1996, and September 30, 1997,
respectively.................................................................... 1,141,900 1,714,300
Additional paid-in capital........................................................ 792,000 993,800
Deficit accumulated during the development stage.................................. (1,645,000) (3,322,200)
Deferred compensation............................................................. (405,700) (431,000)
------------- -------------
Total shareholders' equity (deficit)............................................ (116,800) (1,045,100)
------------- -------------
Commitments and contingencies (note 12)
$ 328,600 $ 660,100
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED FROM INCEPTION
SEPTEMBER 30, (NOVEMBER 8, 1994)
FROM INCEPTION ------------------------ THROUGH SEPTEMBER 30,
YEAR ENDED YEAR ENDED (NOVEMBER 8, 1994) 1996 1997 1997
DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31, ----------- ----------- ---------------------
1995 1996 1996
------------ ------------- -------------------- (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
Marketing, general and
administrative...... $ 94,500 $ 830,400 $ 937,200 $ 399,700 $1,127,700 $ 2,064,900
Research and
development......... 67,900 235,900 303,800 231,200 402,000 705,800
Compensation related
to grant of stock
options............. -- 379,300 379,300 379,300 26,400 405,700
------------ ------------- ----------- ----------- ----------- -----------
Total operating
expenses........ 162,400 1,445,600 1,620,300 1,010,200 1,556,100 3,176,400
Interest expense........ 1,700 22,800 24,700 11,300 121,100 145,800
------------ ------------- ----------- ----------- ----------- -----------
Net loss.......... $ (164,100) $(1,468,400) $ (1,645,000) ($1,021,500) ($1,677,200) $(3,322,200)
------------ ------------- ----------- ----------- ----------- -----------
------------ ------------- ----------- ----------- ----------- -----------
Net loss per
common share.... $ (0.07) $ (0.49) $ (0.37) $ (0.43)
------------ ------------- ----------- -----------
------------ ------------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THE PERIOD FROM NOVEMBER 8, 1994 (INCEPTION) THROUGH SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING THE SHAREHOLDERS'
-------------------- PAID-IN DEVELOPMENT DEFERRED EQUITY
SHARES AMOUNT CAPITAL STAGE COMPENSATION (DEFICIT)
--------- --------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at November 8, 1994 (inception)... -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock at $.032 per
share................................... 1,088,200 35,000 -- -- -- 35,000
Net loss.................................. -- -- -- (12,500) -- (12,500)
--------- --------- ----------- ----------- ------------ ------------
Balance at December 31, 1994.............. 1,088,200 35,000 -- (12,500) -- 22,500
Issuance of common stock at $.032 per
share................................... 177,100 5,700 -- -- -- 5,700
Issuance of common stock at $.889 per
share................................... 98,400 87,500 -- -- -- 87,500
Net loss.................................. -- -- -- (164,100) -- (164,100)
--------- --------- ----------- ----------- ------------ ------------
Balance at December 31, 1995.............. 1,363,700 128,200 -- (176,600) -- (48,400)
Issuance of common stock at $.699 per
share................................... 1,001,800 700,000 -- -- -- 700,000
Issuance of common stock at $.71 per share
for services............................ 42,200 29,900 -- -- -- 29,900
Issuance of common stock at $.889 per
share................................... 119,500 106,300 -- -- -- 106,300
Issuance of common stock at $.889 per
share for services...................... 59,100 52,500 -- -- -- 52,500
Issuance of common stock at $.889 per
share in exchange for loan guarantees... 140,600 125,000 -- -- -- 125,000
Fair value of detachable warrants on
debt.................................... -- -- 7,000 -- -- 7,000
Issuance of stock options................. -- -- 785,000 -- (405,700) 379,300
Net loss.................................. -- -- -- (1,468,400) -- (1,468,400)
--------- --------- ----------- ----------- ------------ ------------
Balance at December 31, 1996.............. 2,726,900 1,141,900 792,000 (1,645,000) 405,700 (116,800)
Exercise of stock options (unaudited)..... 17,000 12,000 -- -- -- 12,000
Fair value of detachable warrants on debt
(unaudited)............................. -- -- 94,500 -- -- 94,500
Issuance of common stock at $2.25 per
share and warrants (unaudited).......... 222,222 444,400 55,600 -- -- 500,000
Issuance of common stock at $3.13 per
share (unaudited)....................... 31,949 100,000 -- -- -- 100,000
Issuance of stock options (unaudited)..... -- -- 51,700 -- (40,800) 10,900
Issuance of common stock at $2.00 per
share for services (unaudited).......... 8,000 16,000 -- -- -- 16,000
Compensation related to grant of stock
options (unaudited)..................... -- -- -- -- 15,500 15,500
Net loss (unaudited)...................... -- -- -- (1,677,200) -- (1,677,200)
--------- --------- ----------- ----------- ------------ ------------
Balance at September 30, 1997
(unaudited)............................. 3,006,071 $1,714,300 $ 993,800 ($3,322,200) $ (431,000) $(1,045,100)
--------- --------- ----------- ----------- ------------ ------------
--------- --------- ----------- ----------- ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THE PERIOD FROM NOVEMBER 8, 1994 (INCEPTION) THROUGH SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER FROM INCEPTION
31, (NOVEMBER 8, 1994) NINE MONTHS ENDED FROM INCEPTION
--------------------- THROUGH DECEMBER SEPTEMBER 30, (NOVEMBER 8, 1994)
1995 1996 31, 1996 ------------------------ THROUGH SEPTEMBER
--------- ---------- ------------------ 1996 1997 30, 1997
----------- ----------- ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss........................ $(164,100) $(1,468,400) $ (1,645,000) ($1,021,500) ($1,677,200) $ (3,322,200)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................ 800 26,700 27,600 8,700 47,700 75,300
Amortization of debt issue
discount cost............... -- -- -- -- 27,800 27,800
Issuance of common stock for
services.................... -- 207,400 207,400 177,500 16,000 223,400
Compensation related to grant
of stock options............ -- 379,300 379,300 379,300 26,400 405,700
(Increase) decrease in prepaid
and other current assets.... (1,300) (1,200) (2,500) 1,300 (9,300) (11,800)
Increase in other assets...... (900) (12,700) (13,600) (12,600) (40,100) (53,700)
Increase in accrued
expenses.................... 33,400 175,100 208,500 115,700 97,100 305,600
--------- ---------- ------------------ ----------- ----------- ------------------
Net cash used in operating
activities................ (132,100) (693,800) (838,300) (351,600) (1,511,600) (2,349,900)
--------- ---------- ------------------ ----------- ----------- ------------------
Cash flows from investing
activities:
Intangible assets............... (6,500) -- (9,000) -- (4,700) (13,700)
Purchase of property and
equipment..................... (26,000) (150,100) (176,100) (85,800) (146,500) (322,600)
--------- ---------- ------------------ ----------- ----------- ------------------
Net cash used in investing
activities................ (32,500) (150,100) (185,100) (85,800) (151,200) (336,300)
--------- ---------- ------------------ ----------- ----------- ------------------
Cash flows from financing
activities:
Proceeds from issuance of common
stock......................... 93,200 806,300 934,500 806,300 612,000 1,546,500
Proceeds from notes payable..... -- 110,000 110,000 -- 1,135,000 1,245,000
Net proceeds from (payments on)
notes payable to
shareholder................... 52,900 (52,900) -- (47,000) -- --
Payments on advance from
shareholder................... (100) -- -- -- -- --
Net proceeds from (payments on)
advances from related party... -- -- -- 92,500 -- --
Payments on capital lease
obligations................... -- (9,100) (9,100) (3,200) (24,400) (33,500)
--------- ---------- ------------------ ----------- ----------- ------------------
Net cash provided by
financing activities...... 146,000 854,300 1,035,400 848,600 1,722,600 2,758,000
--------- ---------- ------------------ ----------- ----------- ------------------
Net increase (decrease) in cash... (18,600) 10,400 12,000 411,200 59,800 71,800
Cash, beginning of period......... 20,200 1,600 -- 1,600 12,000 --
--------- ---------- ------------------ ----------- ----------- ------------------
Cash, end of period............... $ 1,600 $ 12,000 $ 12,000 $ 412,800 $ 71,800 $ 71,800
--------- ---------- ------------------ ----------- ----------- ------------------
--------- ---------- ------------------ ----------- ----------- ------------------
Supplemental disclosure of cash
flow information:
Cash paid during the period for
interest...................... $ -- $ 24,300 $ 24,300 $ 11,300 $ 27,300 $ 51,600
Supplemental disclosure of
non-cash transactions:
Equipment acquisitions under
capital lease................. $ -- $ 136,000 $ 136,000 $ 136,000 $ 52,100 $ 188,100
Warrants issued in connection
with debt..................... $ -- $ 7,000 $ 7,000 $ -- $ 94,500 $ 101,500
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
(1) NATURE OF OPERATIONS
Ontro, Inc. ("Ontro" or the "Company"), (formerly Self-Heating Container
Corporation of California), was incorporated on November 8, 1994 under the
laws of the state of California.
Through a license agreement with Insta-Heat, Inc. (Note 8), Ontro has
exclusive worldwide rights to produce, market, and distribute a self-heating
container.
The Company is a development stage enterprise. Accordingly, the Company's
operations have been directed primarily toward raising capital, developing
business strategies, research and development, establishing sources of
supply, acquiring operating assets, initial production, and recruiting
personnel. The Company commenced operations during 1994. Operations prior to
January 1, 1995 were not significant.
Ontro has been unprofitable and has not generated revenue from the sale of
products or other sources since inception. The Company expects to incur
losses as it expands its development activities and pursues
commercialization of its technologies. The future success of the Company is
dependent upon its ability to obtain additional working capital to develop,
manufacture and market its products and, ultimately, upon its ability to
attain future profitable operations.
The Company has suffered recurring operating losses and has net capital and
working capital deficiencies. These conditions 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 this uncertainty.
In order to provide financing to continue its development activities and
commercialization of its technologies as planned, the Company will pursue
financing in both public and private markets, while continuing its licensing
efforts.
(2) SIGNIFICANT ACCOUNTING POLICIES
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost with depreciation provided using
the straight-line method over the estimated useful lives of such assets,
which range from three to five years. Equipment held under capital leases
and leasehold improvements are amortized over the shorter of the lease term
or estimated useful life of the asset.
INTANGIBLE ASSETS
Intangible assets consist of patents, trademark, and organization costs, and
are carried at cost less accumulated amortization. Costs are amortized on a
straight-line basis over an estimated useful life of 5 years. Accumulated
amortization at December 31, 1996 was $2,700.
STOCK-BASED COMPENSATION
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS
No. 123"), which permits entities to recognize as expense over the vesting
period, the fair value of all stock-based awards on the date of
F-7
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
grant. Alternatively, SFAS No. 123 also allows entities to apply the
provisions of Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES ("APB Opinion No. 25"). Under APB Opinion No.
25, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. If
the provisions of APB Opinion No. 25 are applied, pro forma net loss
disclosures for employee stock option grants made in 1996 and future years
must be provided as if the fair-value-based method defined in SFAS No. 123
had been applied (Note 7). The Company has elected to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed in the period incurred.
INCOME TAXES
Until September 1996, the Company's shareholders elected to have the Company
be treated as an S Corporation in which all income, losses and credits pass
through to the shareholders to be reported on their personal tax returns.
Thus, no deferred federal taxes were provided since the Company was not
liable for federal income taxes, and state deferred taxes were immaterial.
In September 1996, the Company became a C corporation.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating losses. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
On January 1, 1996, the Company adopted the provisions of SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO
BE DISPOSED OF. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amounts of the assets exceed the fair values of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Adoption of this Statement did not have a
material impact on the Company's financial position, results of operations,
or liquidity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,"
requires that fair values be disclosed for the Company's financial
instruments. The carrying amounts of cash, prepaid expenses and other
current assets, accrued consulting fees, and other accrued expenses
approximate fair values due to the short-term nature of these instruments.
F-8
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
The carrying amount of the note payable is a reasonable estimate of fair
value as terms of the note payable are substantially similar to terms which
could be obtained by the Company from similar parties.
NET LOSS PER COMMON SHARE
Net loss per common share is computed based upon the weighted average number
of common shares and common equivalent shares (using the treasury stock
method) outstanding. Common equivalent shares are not included in the
per-share calculations where the effect of their inclusion would be anti-
dilutive, except that, in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 83, all common and common equivalent shares
issued during the twelve-month period prior to the initial filing of the
initial public offering have been included in the calculation as if they
were outstanding for all periods using the treasury stock method at the
anticipated initial public offering price of common stock.
The weighted average common and common equivalent shares outstanding used in
the calculation of net loss per common share are 2,423,800, and 3,024,100,
for the years ended December 31, 1995 and 1996, respectively, and 2,733,700,
and 3,864,600, for the nine month periods ended September 30, 1996 and 1997,
respectively.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amount of expenses during the reporting period to prepare
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying interim financial information as of September 30, 1997, and
for the nine month periods ended September 30, 1996 and 1997, is unaudited
and, in the opinion of management, reflects all adjustments that are
necessary for a fair presentation of the Company's financial position,
results of operations and cash flows for the periods then ended. All such
adjustments are of a normal and recurring nature.
F-9
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
DECEMBER 31, -------------
1996
------------ (UNAUDITED)
<S> <C> <C>
Machinery and equipment......................................... $ 205,000 $ 354,300
Molds........................................................... 56,500 93,200
Office equipment................................................ 20,400 32,900
Leasehold improvements.......................................... 30,200 30,200
------------ -------------
312,100 510,600
Less accumulated depreciation and amortization.................. (24,900) (70,700)
------------ -------------
$ 287,200 $ 439,900
------------ -------------
------------ -------------
</TABLE>
(4) INCOME TAXES
The Company has no significant taxable temporary differences which would
require recognition of deferred tax liabilities and, due to the uncertainty
of future realizability, has not recognized any deferred tax assets for
deductible temporary differences and tax operating loss carry forwards. At
December 31, 1996, the Company's net deferred tax asset, which principally
relates to the tax operating loss carry forwards, was approximately $214,000
which was offset by a valuation allowance in the same amount. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers
the scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based upon
the historical losses incurred to date and uncertainty of projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is not more likely than not that the
Company will realize the benefits of these deductible differences.
At December 31, 1996, the Company had available net operating loss carry
forwards of approximately $548,000 for federal income tax reporting purposes
which expire in 2011. The net operating loss carry forwards for state
purposes, which expire in 2001, are approximately 50% of federal amounts.
In accordance with Internal Revenue Code Section 382, the annual utilization
of net operating loss carry forwards and credits existing prior to a change
in control may be limited upon a change in control.
(5) LEASES
The Company leases office and plant facilities in Poway, California and
office and plant equipment under noncancelable operating lease agreements
that expire on various dates through October 1999. The Company also
maintains capital leases on equipment. Assets recorded under capital leases
had a total cost of $136,000 less accumulated amortization of $6,600 as of
December 31, 1996, and are included in property and equipment in the
accompanying balance sheet.
F-10
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
Future minimum lease payments under capital and noncancelable operating
leases as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASE LEASE
- ---------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
1997.................................................................. $ 57,000 $ 26,100
1998.................................................................. 57,000 3,500
1999.................................................................. 53,600 2,000
2000.................................................................. 27,400 --
---------- -----------
Total minimum lease commitments....................................... 195,000 $ 31,600
-----------
-----------
Less amount representing interest (at rates ranging from 12.0% to
28.1%).............................................................. (68,100)
----------
Present value of future minimum capital lease obligations............. 126,900
Less current portion of capital lease obligations..................... (26,800)
----------
Capital lease obligations, excluding current portion.................. $ 100,100
----------
----------
</TABLE>
Rent expense was $8,600 and $25,500 for the years ended December 31, 1995 and
1996, respectively.
(6) NOTE PAYABLE
The Board of Directors authorized the Company to borrow up to $1,320,000 in
bridge loan financing. The general terms of this financing are two year
notes at a 10% interest rate, and provide for the granting of warrants to
purchase 20,000 shares of common stock for every $110,000 borrowed by the
Company (Note 7). Payment of principal and interest are due at the earlier
of two years or the completion of an Initial Public Offering ("IPO"). In
addition, this financing imposes restrictions on dividend payments during
the term of such indebtedness. At December 31, 1996 and September 30, 1997,
the Company had $110,000 and $1,245,000 outstanding on the bridge loan
financing, respectively. (Note 7)
(7) SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company has 5,000,000 shares of preferred stock authorized for issuance
with no par value. No shares have been issued.
STOCK OPTIONS
During the year ended December 31, 1996, the Board of Directors adopted an
incentive stock option plan for executives and key employees (the "Plan").
The Plan authorizes the granting of options to purchase shares of the
Company's common stock. Options generally vest evenly over four years from
the date of grant. Options expire ten years after the date of grant, or at
the employee's termination date, if earlier. The number of shares authorized
for the Plan is 357,400. On October 27, 1997, the number of shares
authorized was increased to 545,400.
F-11
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
At December 31, 1996, there were 237,400 shares available for grant under the
Plan. Using the Black Scholes pricing model, the Company determined, that the
per share weighted average fair value of stock options granted during 1996
was $0.38 on the date of grant. The following weighted average assumptions
were included in this method for 1996: no expected dividend yield, volatility
rate of 37.5%, risk-free interest rate of 6.0%, and an expected life of five
years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized in the financial
statements for its stock options issued to employees or directors of the
Company. Had the Company determined compensation cost for its stock options
based on the fair value at the grant date under SFAS No. 123, the Company's
net loss in 1996 would have been increased to the pro forma amount indicated
below:
<TABLE>
<S> <C>
Net loss, as reported........................................... $1,468,400
Pro forma net loss.............................................. 1,489,200
Pro forma net loss per common share............................. (0.47)
</TABLE>
Pro forma net loss reflects only options granted in 1996. Pro forma net loss
stated in accordance with SFAS No. 123 may not be representative of the
effects on reported net loss in future years.
The following is a summary of option activity for the period of January 1,
1996 through September 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at January 1, 1996..................................... -- --
Granted............................................................ 120,000 $1.00
---------
Outstanding at December 31, 1996................................... 120,000 $1.00
Exercised.......................................................... (12,000) $1.00
Granted............................................................ 5,000 $3.00
---------
Outstanding at September 30, 1997.................................. 113,000 $1.00 - $3.00
---------
---------
Exercisable at September 30, 1997.................................. 12,000 $1.00
---------
---------
</TABLE>
The weighted average remaining contractual life for options outstanding as of
December 31, 1996 was approximately 10 years.
During 1996, the Board of Directors granted and the shareholders approved
1,216,506 stock options outside the Plan at a price range of $0.001 to $3.00
to non-employees. The Company recognized $379,300 of compensation expense to
non-employees relating to these options during 1996 and deferred $405,700 of
compensation expense for options that had not vested as of December 31, 1996
using the prescribed valuation methods of SFAS No. 123. Using the Black
Scholes option pricing model, the Company determined that the per share
weighted average fair value of stock options granted during 1996 was $0.67 on
the date of grant. The following weighted average assumptions were included
in this method for 1996: no expected dividend yield, volatility rate of
37.5%, risk-free interest rate of 6.0%, and an expected life of five years.
F-12
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
During the nine months ended September 30, 1997, the Board of Directors
granted and the shareholders approved 45,000 stock options outside the Plan
at a price range of $2.50 to $3.00 to non-employees. The Company recognized
$26,400 of compensation expense to non-employees relating to these options
during the nine months ended September 30, 1997 and deferred $40,800 of
compensation expense for options that had not vested as of September 30, 1997
using the Black Scholes option pricing model. The Company determined that the
per share weighted average fair value of stock options granted during the
nine months ended September 30, 1997 ranged from $1.25 to $2.00 on the date
of grant. The following weighted average assumptions were included in this
method for 1997: no expected dividend yield, volatility rate of 37.5%,
risk-free interest rate of 6.0%, and an expected life ranging from three to
five years.
At December 31, 1996, there were 542,665 options to non-employees fully
vested, 543,841 which vest upon completion of an IPO, and 80,000 options to
non-employees which vest over four years and expire after five years.
WARRANTS
In conjunction with obtaining bridge loan financing in December 1996 (Notes 6
and 11), the Company granted warrants to purchase 20,000 shares of common
stock at an exercise price of $1.00 per share. Using a prescribed valuation
method of SFAS 123, the Company determined, based upon an independent
appraisal, that the per share weighted average value of these warrants was
$0.35 on the date of grant and these warrants were deemed to have an
aggregate fair value of $7,000. The Black Scholes option pricing model used
to value these warants assumed the following: no expected dividend yield,
volatility rate of 37.5%, risk-free interest rate of 6.0%, and an expected
life of two years. The Company has recorded the value ascribed to the
warrants of $7,000 as deferred financing costs and is amortizing the amount
over the life of the related debt.
In conjunction with obtaining bridge loan financing in January 1997 through
May 1997 (Notes 6 and 11), the Company granted warrants to purchase 210,000
shares of common stock at an exercise price of $1.00 per share. Using a
prescribed valuation method of SFAS 123, the Company determined that the per
share weighted average value of these warrants was $0.45 on the date of grant
and these warrants were deemed to have an aggregate fair value of $94,500.
The Black Scholes option pricing used to value these warrants assumed the
following: no expected dividend yield, volatility rate of 37.5%, risk-free
interest rate of 6.0%, and an expected life of two years. The Company has
recorded the value ascribed to the warrants of $94,500 as deferred financing
costs and is amortizing the amount over the life of the related debt.
Amortization of such costs for the nine months ended September 30, 1997 was
$27,800.
STOCK SPLIT
On December 31, 1996, the Company completed a 28.12-for-1 stock split in the
form of a stock dividend payable to all existing shareholders. All references
in the accompanying financial statements to average number of shares
outstanding and related prices, per share amounts, stock option plan, and
warrant data have been restated to reflect the split.
F-13
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
(8) LICENSE AGREEMENT
The Company is party to a license agreement with Insta-Heat, Inc. ("IHI"),
an affiliated company through common ownership. This agreement grants the
Company an exclusive worldwide license in perpetuity with respect to the
patents and technology developed by IHI. The Company is obligated to
prosecute infringement claims regarding the IHI technology and to defend any
infringement claims brought against IHI or the Company. The license
agreement requires the Company to make annual continuing royalty payments to
IHI based on a percentage of sales but not less than a minimum annual
royalty of $25,000. In March 1997, the license agreement was amended to
increase the minimum annual royalty for future periods to $50,000 and also
requires additional royalty payments from the Company on the sale of
products utilizing IHI technology subject to the Company achieving minimum
annual net operating income after payment of all taxes of no less than $4
million. Upon achieving the minimum net operating income, the IHI license
requires royalty payments equal to the greater of (i) 2% of the gross sales
of integrated thermal container and products developed in connection with
it, or (ii) $.015 per unit sold up to the first $30 million in sales by the
Company. For sales in excess of $30 million the IHI License requires royalty
payments (subject to the same minimum income levels) equal to the greater of
(i) 3% of the gross annual sales in excess of $30 million, or (ii) $.015 per
unit sold.
The Company recognized the minimum royalty liability to IHI of $25,000
during 1996.
The IHI license provides an option to the Company to purchase all of the IHI
technology and terminate the IHI license. However this option requires the
Company to pay IHI $3 million and is only available through December 31,
2000 including a one year right to extend upon the payment of $100,000.
(9) RELATED PARTY TRANSACTIONS
During 1996, IHI advanced money to the Company to be used for working
capital purposes. These balances were repaid and there was no balance
outstanding at December 31, 1996.
The Company paid accrued consulting fees to its founding shareholders during
1995 and 1996. At December 31, 1996, the Company owed $16,500 in accrued
consulting fees to one of those shareholders, which was repaid in 1997.
The Company has entered into various consulting agreements with members of
its Advisory Board resulting in current monthly commitments of approximately
$20,000 with terms expiring on various dates between August 1997 and
December 1999.
During 1996, various shareholders made loans to the Company. These loans
were payable on demand at 8% annual interest. There were no amounts owed to
shareholders at December 31, 1996.
The Company entered into various equipment lease arrangements during 1996
which were guaranteed by the Company's two officers.
On July 15, 1996, the Company entered into a consulting agreement with
Manhattan West, Inc, a stockholder of the Company. Pursuant to the
consulting agreement, Manhattan West, Inc. is to assist the Company in
locating and arranging distributor agreements. The consulting agreement is
for a
F-14
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
term of 30 months, and requires Manhattan West, Inc. be paid $15,000 per
month from July 15, 1996, through April 15, 1997 and $5,000 per month for
the remainder of the term. Manhattan West, Inc. has agreed to defer
collection of a portion of its consulting fees until after completion of the
initial public offering of the Company's securities.
(10) EMPLOYEE BENEFIT PLAN
Effective January 1, 1996, the Company sponsored a salary reduction
simplified employee pension plan. Employees who have completed one year of
service and are 21 years of age or older are eligible to participate.
Eligible employees may elect to defer up to 15% of annual compensation,
subject to limitations. The Company may make discretionary contributions to
the plan. The Company made no contributions to the plan during 1996.
(11) SUBSEQUENT EVENTS (UNAUDITED)
From January through May 1997, the Company borrowed $1,135,000 through
bridge loan financing. These loans included an interest rate of 10% per
annum with accrued principal and interest due at the earlier of an IPO by
the Company or 24 months. Attached to these loans are warrants to purchase
210,000 shares of common stock of the Company at a price of $1.00 per share.
One loan for $55,000, from a related party, also includes a provision which
allows the Company, at its discretion, to convert the amount of principal
and interest owed to common stock in the event of an IPO, based on a price
per share which is 50% of the IPO price.
During February through October 1997, the Board of Directors authorized the
issuance of and granted to members of its Advisory Board and Board of
Directors 55,000 non-qualified stock options (outside the Plan) at prices
ranging from $2.50 to $5.00.
In March 1997, the Company issued 12,000 shares of common stock to Kevin A.
Hainley, Chief Financial Officer, for total consideration of $12,000, or
$1.00 per share, upon exercise of an outstanding incentive stock option.
In April 1997, the Company entered into a distribution agreement with L.L.
Knickerbocker Company, Inc. ("Knickerbocker"), a shareholder of the Company,
to develop certain specialty lines of beverages which would utilize the
Company's integrated thermal containers and be marketed by Knickerbocker.
In May 1997, the Company issued 222,222 shares of common stock and warrants
to purchase 100,000 shares of common stock for $3.00 per share, for total
consideration of $500,000.
In June 1997, the Company issued 4,000 shares of common stock to Mr. Hainley
in lieu of accrued salary of $8,000 ($2.00 per share).
In July 1997, the Company issued 5,000 shares of common stock to an Advisory
Board member for total consideration of $5.00, or $0.001 per share, upon
exercise of an outstanding non-qualified stock option.
In August 1997, the Company issued 4,000 shares of common stock to Mr.
Hainley in lieu of accrued salary of $8,000 ($2.00 per share).
F-15
<PAGE>
ONTRO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
In September 1997, the Company issued 31,949 shares of common stock, for
total consideration of $100,000 ($3.13 per share).
In October 1997, the Company issued 12,820 shares of common stock, for total
consideration of $40,000 ($3.13 per share).
Also in October 1997, the Company issued 70,587 units consisting of one
share of common stock and a warrant to purchase one share of common stock
for total consideration of $300,000. The warrants expire in four years and
the exercise price is 150% of the Company's IPO price in the event of an
IPO.
In December 1997, the Company borrowed a total of $150,000 from two
investors. The loans bear interest at 12% per annum and are due and payable
upon the earlier to occur of 5 business days after the completion of the
Offering, or 120 days.
(12) COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with certain officers which provide
such officers, at their discretion, severance payments equal to 299% of
their average annual base salary and bonuses during the preceding five-year
period in the event of a change of control as defined in their employment
agreements.
F-16
<PAGE>
INSIDE REAR COVER--DIAGRAMS AND ARTWORK
DESCRIPTIONS AND CAPTIONS
1. Background: Brown
2. Top Center Text: "The Ontro self-heating container is designed to provide a
hot beverage anytime, anywhere...at the push of a button."
3. Center of Page: Diagram from label of container.
<TABLE>
<CAPTION>
HEATING INSTRUCTIONS
- ---------------------------------------------------
<S> <C>
1. Diagram of hand opening foil cover of bottom of Place can on flat surface and peel
can off foil.
Using your thumb push plastic center
2. Diagram of thumb pushing bottom of can inward approximately 1/2 inch
3. Diagram of top of can with "30 SEC." Above WAIT A FULL 30 SECONDS
4. Diagram of Self Heating Can upside down and After 30 seconds Turn can over
turned right side up. (right side up)
In 5 minutes, open top and enjoy a
Diagram of top of open can with steam emitting from hot beverage! (Note: It takes 3
opening "5 min." above minutes until can feels warm.)
</TABLE>
4. Bottom Right: Company logo
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST BE NOT
RELIED UPON AS HAVING BEEN AUTHORIZED THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES, OR
AN OFFER OR SOLICITATION TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 24
Dividend Policy........................................................... 25
Dilution.................................................................. 26
Capitalization............................................................ 27
Selected Financial Data................................................... 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 29
Business.................................................................. 32
Management................................................................ 44
Principal Shareholders.................................................... 52
Concurrent Offering by Selling Security Holders........................... 53
Certain Transactions...................................................... 55
Bridge Loans.............................................................. 57
Related Party Transactions................................................ 58
Description of Securities................................................. 60
Shares Eligible for Future Sale........................................... 66
Underwriting.............................................................. 68
Legal Matters............................................................. 70
Experts................................................................... 70
Additional Information.................................................... 71
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 1998, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
2,900,000 UNITS
EACH UNIT CONSISTS OF
ONE SHARE OF COMMON STOCK AND
ONE COMMON STOCK PURCHASE WARRANT
---------------------
PROSPECTUS
---------------------
JOSEPH CHARLES & ASSOCIATES, INC.
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The statutes, charter provisions, Bylaws, Indemnification Agreements, or
other arrangements under which any controlling person, director, or officer of
the Registrant is insured or indemnified in any manner against any liability
which he or she may incur in his or her capacity as such, are as follows:
(a) Section 317 of the California General Corporation Law provides for
the indemnification of officers and directors of the Company against
expenses, judgments, fines, and amounts paid in settlement under certain
conditions and subject to certain limitations.
(b) Article V of the Bylaws of the Company provides that the Company
shall have power to indemnify any person who is or was an agent of the
Company as defined in Section 317 of the California General Corporation Law
through Bylaw provisions, agreements with agents, vote of the stockholders
or disinterested directors, or otherwise, in excess of the indemnification
otherwise permitted by Section 317 of the California General Corporation
Law, subject to applicable limits set forth in Section 204 of the California
General Corporation Law with respect to actions for breach of duty to the
corporation and its shareholders.
(c) Article IV of the Company's Articles of Incorporation provides that
the liability of the directors of the Company for monetary damages shall be
eliminated to the fullest extent permissible under California law.
Accordingly, a director will not be liable for monetary damages for breach
of duty to the Company or its shareholders in any action brought by or in
the right of the Company. However, a director remains liable to the extent
required by California law. The provisions will not alter the liability of
directors under federal securities laws.
(d) Pursuant to authorization provided under the Articles of
Incorporation, the Company has entered into Indemnification Agreements with
each of its directors and officers. Generally, the Indemnification
Agreements attempt to provide the maximum protection permitted by California
law as it may be amended from time to time. However, an individual will not
receive indemnification for judgments, settlements or expenses if he or she
is found liable to the Company, except to the extent the court determines he
or she is fairly and reasonably entitled to indemnity for expenses, for
settlements not approved by the Company or for settlements and expenses if
the settlement is not approved by the court. The Indemnification Agreements
provide for the Company to advance to the individual any and all reasonable
expenses, including legal fees and expenses, incurred in investigating or
defending any such action, suit or proceeding. In order to receive an
advance of expenses, the individual must submit to the Company copies of
invoices presented to him or her for such expenses. Also, the individual
must repay such advances upon a final judicial decision that he or she is
not entitled to indemnification.
(e) There is directors and officers liability insurance now in effect
which insures directors and officers of the Company. Such policy expires on
December 31, 1997 and provides limits of $2,000,000 per policy year and does
not provide coverage with respect to this filing. Under the policy, the
directors and officers are insured against loss arising from claims made
against them due to wrongful acts while acting in their individual and
collective capacities as directors and officers, subject to certain
exclusions. The policy insures the Company against loss as to which its
directors and officers are entitled to indemnification. Upon completion of
this Offering, the Company intends to obtain a policy that will provide
limits of $5,000,000 per policy year and will provide coverage with respect
to this filing.
(f) The Underwriting Agreement (Exhibit 1.1 hereto) contains provisions
by which the Underwriters have agreed to indemnify the Company, each person,
if any, who controls the Company within
II-1
<PAGE>
the meaning of Section 15 of the Securities Act of 1933 (the "Act"), each
director of the Company, and each officer of the Company who signs this
Registration Statement, with respect to information furnished in writing by
or on behalf of the Underwriters for use in the Registration Statement.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors of the Company pursuant to the foregoing
provision, or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the securities
being registered hereby, other than underwriting discounts and commissions. All
amounts are estimated except the Securities and Exchange Commission registration
fee and the AMEX filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee................... $ 16,900
AMEX listing fee................................................ $ 42,500
NASD filing fee................................................. $ 5,300
Blue Sky fees and expenses...................................... $ *
Non-Accountable Expense Allowance to the Representative......... $ 319,000
Printing and engraving expenses................................. $ 100,000
Accounting fees and expenses.................................... $ 90,000
Legal fees and expenses......................................... $ 200,000
Transfer Agent and Registrar fees............................... $ 5,000
Miscellaneous fees.............................................. $ 221,300
---------
Total....................................................... $1,000,000
---------
---------
</TABLE>
- ------------------------
* to be filed by amendment
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since incorporation in November, 1994, the Company has sold and issued the
unregistered securities shown below, all of which reflect the fact the Company's
Common Stock was split 28.12 shares for each one share outstanding on December
31, 1996.
(1) On December 29, 1994, the Company issued 652,947 and 435,298 shares of
Common Stock to Messrs. Scudder and Berntsen, respectively, for a total
consideration of $35,000, or $.03 per share.
(2) On May 18, 1995, the Company issued 177,157 shares of Common Stock to
Harvey Ruben, Daniel Gibbs, Kevin Mineo, Dennis Webb, the McKay Trust, the
Siebert Trust, and the Christopher Trust, for a total consideration of $5,695.20
or $.03 per share.
(3) On June 26, 1995, the Company issued 28,120 shares of Common Stock to
Alan Ligi for a total consideration of $25,000, or $.89 per share.
(4) On August 24, 1995, the Company issued a total of 28,120 shares of
Common Stock to Yale Fowler and Curtis Colt for a total consideration of
$25,000, or $.89 per share.
(5) On November 22, 1995, the Company issued 28,120 shares of Common Stock
to James Hopper and Dennis Huston for a total consideration of $25,000, or $.89
per share.
(6) On December 1, 1995, the Company issued 14,060 shares of Common Stock to
Edward Villanueva for a total consideration of $12,500, or $.89 per share.
II-2
<PAGE>
(7) On January 31, 1996, the Company issued 22,496 shares of Common Stock to
James Hopper, Dennis Huston, and Richard Johnson for a total consideration of
$20,000, or $.89 per share, and issued 2,813 shares of Common Stock to the McKay
Trust for services rendered.
(8) On February 14, 1996, the Company issued 14,060 shares of Common Stock
to Fernando Fregoso and Frank Barone for services rendered, and 2,812 shares of
Common Stock to the McKay Trust for a total consideration of $2,500, or $.89 per
share.
(9) On May 15, 1996, the Company issued 29,526 shares of Common Stock to the
Kadane Trust, Alan Ligi, and Richard Johnson for a total consideration of
$26,250, or $.89 per share.
(10) On June 7, 1996, the Company issued 140,600 shares of Common Stock
(28,120 shares each) to James Hopper, Dennis Huston, Edward Villanueva, and
Messrs. Scudder and Berntsen, in exchange for their personal guarantees on
equipment leases to the Company.
(11) On June 18, 1996, the Company issued 19,684 shares of Common Stock to
James Hopper, John Caldwell, and the Christopher Trust for a total consideration
of $17,500, or $.89 per share.
(12) On June 26, 1996, the Company issued 2,812 shares of Common Stock to the
Kadane Trust for a total consideration of $2,500, or $.89 per share.
(13) On June 28, 1996, the Company issued 28,120 shares of Common Stock to
Andre Bell and William Winston for a total consideration of $25,000, or $.89 per
share.
(14) On July 1, 1996, the Company issued 42,180 shares of Common Stock each
to Jerine Rosato and Ann Davern for services rendered.
(15) On July 15, 1996, the Company issued 143,103 shares of Common Stock to
Manhattan West, Inc. for a total consideration of $100,000, or $.70 per share.
(16) On July 15, 1996, the Company issued 14,060 shares of Common Stock to
Dennis Huston for a total consideration of $12,500, or $.89 per share.
(17) On September 20, 1996, the Company issued 858,673 shares of Common Stock
to the L.L. Knickerbocker Company, Inc. for a total consideration of $600,000,
or $.70 per share.
(18) On October 1, 1996, the Company issued 42,180 shares of Common Stock to
L. Kevin Mineo for services rendered.
(19) On March 22, 1997, the Company issued 12,000 shares of Common Stock to
Kevin A. Hainley, its Chief Financial Officer, for a total consideration of
$12,000, or $1.00 per share, upon exercise of an outstanding incentive stock
option.
(20) On May 5, 1997, the Company issued 222,222 shares of Common Stock to the
Danna Trust, Salvador La Barbera, Trustee, for a total consideration of $500,000
or approximately $2.25 per share and a warrant to purchase 100,000 shares of
Common Stock for $3.00 per share.
(21) On June 1, 1997, the Company issued 4,000 shares of Common Stock to
Kevin A. Hainley, its Chief Financial Officer, in exchange for services rendered
(waiver of $8,000 in salary due or $2.00 per share).
(22) On July 24, 1997, the Company issued 5,000 shares of Common Stock to L.
Lawrence Potomac, one of its advisory board members, for a total consideration
of $5.00, or approximately $.001 per share, upon exercise of an outstanding
non-qualified stock option.
(23) On August 1, 1997, the Company issued 4,000 shares of Common Stock to
Kevin A. Hainley, its Chief Financial Officer, in exchange for services rendered
(waiver of $8,000 in salary due or $2.00 per share).
II-3
<PAGE>
(24) On September 23, 1997, the Company issued 20,000 shares of Common Stock
to C. James Moore for a total consideration of $62,600, or $3.13 per share.
(25) On September 24, 1997, the Company issued 11,949 shares of Common Stock
to Scott and Susan Moore for a total consideration of $37,400, or $3.13 per
share.
(26) On October 27, 1997, the Company issued 7,987 shares of Common Stock to
Tony Orlina and 4,833 shares of Common Stock to Stephen A. Shields for a total
consideration of $40,000, or $3.13 per share.
(27) On October 27, 1997, the Company issued to Henri B. Schkud, Grant King,
and Francesca Daniels, an aggregate of 70,587 units consisting of one share of
Common Stock and a warrant to purchase one share of Common Stock on terms
substantially similar to the Warrants for a total consideration of $300,000 or
$4.25 per unit.
The sale and issuance of securities in each of the transactions numbered 1
through 27 were deemed to be exempt under the Act by virtue of section 4(2) as
transactions by an issuer not involving any public offering. Each of the
transactions numbered 1 through 27 were also deemed to be exempt under Section
4(2) of the Act by reason of their compliance with 17 CFR 230.506. In connection
with each transaction numbered 1 through 27, the Company took such actions, and
obtained from the purchaser written representations and warranties sufficient to
provide the Company with reasonable grounds to believe: (i) all offers and sales
satisfied the terms of 17 CFR 230.501 and 17 CFR 230.502; (ii) there were no
more than 35 purchasers calculated pursuant to 17 CFR 230.501(e); (iii) each
purchaser alone or with a purchaser representative had such knowledge and
experience in financial and business matters to be capable of evaluating the
merits and risks of the investment prior to making the purchase; (iv) the
purchasers in each of the transactions numbered 15, 16 and 19 through 27 were
accredited investors as defined in 17 CFR 230.501(a); and (v) each of the
purchasers in each of transactions numbered 1 through 27 had adequate access
through employment or other relationships with the Company or its management, or
information about the Company which was supplied to them to allow them to make
an informed investment decision. In each of the transactions numbered 1 through
27, the purchasers had a previous existing personal or business relationship
with the officers and directors of the Company. Each of the transactions
numbered 1 through 27 was also deemed to be exempt pursuant to section 3(b) of
the Act as a result of being in compliance with and satisfying all of the
conditions of 17 CFR 230.505. In each of the transactions, appropriate legends
were affixed to the certificates issued in each transaction.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENTS
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement. (2)
1.2 Form of Selected Dealers Agreement. (2)
3.1 Restated Articles of Incorporation filed with the California Secretary of State on March 10, 1997. (1)
3.2 Bylaws of the Registrant as amended. (1)
3.3 Form of Indemnification Agreement for Officers and Directors, and certain advisors. (1)
4.1 Form of Warrant Certificate. (2)
4.2 Form of Representative's Option. (2)
4.3 Warrant Agreement between the Company and ChaseMellon Shareholder Services. (2)
4.4 Form of Common Stock Certificate. (2)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENTS
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
5.1 Opinion of Fisher Thurber LLP regarding the legality of the securities being registered. (2)
9.1 Voting Trust Agreement between the Company, James Scudder as Trustee, and Manhattan West, Inc. (1)
10.1 Consulting Agreement effective August 22, 1996 as amended, between the Company and Rowland Hanson. (1)
10.2 Consulting Agreement dated July 15, 1996, between the Company and Manhattan West, Inc. (1)
10.3 Consulting Agreement dated August 5, 1996, between the Company and L. Lawrence Potomac. (1)
10.4 Consulting Agreement effective October 15, 1996, between the Company and Tor Petterson & Associates. (1)
10.5 Consulting Agreement dated August 11, 1997, between the Company and D. Scott Thorogood. (1)
10.6 Stock Purchase Agreement, dated July 15, 1996 between the Company and Manhattan West, Inc. (1)
10.7 Option Agreement with Manhattan West, Inc., dated July 15, 1996. (1)
10.8 Agreement of Purchase and Sale between the Company and the L.L. Knickerbocker Company, Inc., dated
September 17, 1996. (1)
10.9 Form of Loan Agreement between the Company and the lenders identified on the attached schedule. (1)
10.10 Loan Agreement between the Company and 4D Enterprises, Inc., dated February 24, 1997. (1)
10.11 Employment Agreement between the Company and Allan C. Mayer, Jr., dated January 1, 1997. (1)
10.12 Employment Agreement between the Company and James A. Scudder, dated September 1, 1996. (1)
10.13 Employment Agreement between the Company and James L. Berntsen, dated September 1, 1996. (1)
10.14 Employment Agreement between the Company and Kevin A. Hainley, dated January 1, 1997. (1)
10.15 Distributorship Agreement with the L.L. Knickerbocker Company, Inc., dated April 4, 1997. (1)
10.16 Amended and Restated License Agreement with Insta-Heat, Inc, effective September 30, 1995. (1)
10.17 The Company's 1996 Omnibus Stock Plan. (1)
10.18 1996 Omnibus Stock Plan Form of Incentive Stock Option Agreement. (1)
10.19 1996 Omnibus Stock Plan Form of Nonqualified Stock Option Agreement. (1)
10.20 1996 Omnibus Stock Plan Form of Restricted Stock Purchase Agreement. (1)
10.21 Form of Option Agreement with Advisory Board Members listed on attached schedule. (1)
10.22 Option Agreement with David A. Fisher, dated January 6, 1997. (1)
10.23 Form of Warrant between the Company and the lenders identified on the attached schedule. (1)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENTS
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
10.25 Stock Purchase Agreement dated May 30, 1997 between the Company and the Danna Trust. (1)
10.26 Stock Purchase Agreement dated September 23, 1997 between the Company and C. James Moore. (1)
10.27 Stock Purchase Agreement dated September 24, 1997 between the Company and Scott and Susan Moore. (1)
10.28 Evaluation Agreement dated May 23, 1997 between the Company and Nestle USA, Inc. (1)
10.29 Leases for the Company's facilities at 12625 and 12675 Danielson Court, Suites 110 and 401, dated
February 8, 1996, as amended. (2)
10.30 Lease for the Company's proposed facility to be constructed dated August 7, 1997. (1)
10.31 Stock Purchase Agreement dated October 27, 1997, between the Company and Tony Orlina. (1)
10.32 Stock Purchase Agreement dated October 27, 1997, between the Company and Stephen A. Shields. (1)
10.33 Form of Stock Purchase Agreement dated October 27, 1997 between the Company and the Selling Security
Holders. (1)
10.34 Form of Warrant between the Company and the Selling Security Holders. (1)
10.35 Form of Loan Agreement between the Company and the lenders identified on the attached schedule. (1)
11.1 Computation of net loss per share. (1)
23.1 Consent of Fisher Thurber LLP (contained in their opinion filed as Exhibit 5). (2)
23.2 Consent of KPMG Peat Marwick LLP, Independent Public Accountants. (2)
24.1 Form of Power of Attorney. (1)
27 Financial Data Schedule. (1)
</TABLE>
- ------------------------
(1) Previously filed
(2) Filed herewith
(B) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted, as the required information is inapplicable
or the information is presented in the Financial Statements or the notes
thereto.
ITEM 28. UNDERTAKINGS
Insofar as indemnification of liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such
II-6
<PAGE>
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the Offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) The Registrant will provide to the underwriters at the closing(s)
specified in the underwriting agreement certificates in such denominations
and registered in such names as required by the underwriters to permit
prompt delivery to each purchaser.
(4) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(5) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(6) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amendment No. 3
to the Registration Statement to be signed on its behalf by the undersigned, in
the City of Poway, State of California, on December 12, 1997.
<TABLE>
<S> <C> <C>
ONTRO, INC.
By: JAMES A. SCUDDER
-----------------------------------------
James A. Scudder,
CHIEF EXECUTIVE OFFICER
</TABLE>
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES
- --------------------------------------------------------------
JAMES A. SCUDDER LOUIS L. KNICKERBOCKER
- ------------------------------ ------------------------------
James A. Scudder Louis L. Knickerbocker
President, Chief Executive Director
Officer, By: James A. Scudder
and Director Attorney-in-Fact
December 12, 1997 December 12, 1997
JAMES L. BERNTSEN ROBERT F. COSTON
- ------------------------------ ------------------------------
James L. Berntsen Robert F. Coston
Executive Vice President, Director
Secretary By: James A. Scudder
and Director Attorney-in-Fact
December 12, 1997 December 12, 1997
KEVIN A. HAINLEY
- ------------------------------
Kevin A. Hainley
Chief Financial Officer
December 12, 1997
II-8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
AMENDMENT NO. 3
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ONTRO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ONTRO, INC.
INDEX TO EXHIBITS
TO FORM SB-2
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENTS
- --------- ---------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement. (2)
1.2 Form of Selected Dealers Agreement. (2)
3.1 Restated Articles of Incorporation filed with the California Secretary of State on March 10, 1997. (1)
3.2 Bylaws of the Registrant as amended. (1)
3.3 Form of Indemnification Agreement for Officers and Directors, and certain advisors. (1)
4.1 Form of Warrant Certificate. (2)
4.2 Form of Representative's Option. (2)
4.3 Warrant Agreement between the Company and ChaseMellon Shareholder Services. (2)
4.4 Form of Common Stock Certificate. (2)
5.1 Opinion of Fisher Thurber LLP regarding the legality of the securities being registered. (2)
9.1 Voting Trust Agreement between the Company, James Scudder as Trustee, and Manhattan West, Inc. (1)
10.1 Consulting Agreement effective August 22, 1996 as amended, between the Company and Rowland Hanson. (1)
10.2 Consulting Agreement dated July 15, 1996, between the Company and Manhattan West, Inc. (1)
10.3 Consulting Agreement dated August 5, 1996, between the Company and L. Lawrence Potomac. (1)
10.4 Consulting Agreement effective October 15, 1996, between the Company and Tor Petterson & Associates. (1)
10.5 Consulting Agreement dated August 11, 1997, between the Company and D. Scott Thorogood. (1)
10.6 Stock Purchase Agreement, dated July 15, 1996 between the Company and Manhattan West, Inc. (1)
10.7 Option Agreement with Manhattan West, Inc., dated July 15, 1996. (1)
10.8 Agreement of Purchase and Sale between the Company and the L.L. Knickerbocker Company, Inc., dated
September 17, 1996. (1)
10.9 Form of Loan Agreement between the Company and the lenders identified on the attached schedule. (1)
10.10 Loan Agreement between the Company and 4D Enterprises, Inc., dated February 24, 1997. (1)
10.11 Employment Agreement between the Company and Allan C. Mayer, Jr., dated January 1, 1997. (1)
10.12 Employment Agreement between the Company and James A. Scudder, dated September 1, 1996. (1)
10.13 Employment Agreement between the Company and James L. Berntsen, dated September 1, 1996. (1)
10.14 Employment Agreement between the Company and Kevin A. Hainley, dated January 1, 1997. (1)
10.15 Distributorship Agreement with the L.L. Knickerbocker Company, Inc., dated April 4, 1997. (1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENTS
- --------- ---------------------------------------------------------------------------------------------------------
10.16 Amended and Restated License Agreement with Insta-Heat, Inc, effective September 30, 1995. (1)
<S> <C>
10.17 The Company's 1996 Omnibus Stock Plan. (1)
10.18 1996 Omnibus Stock Plan Form of Incentive Stock Option Agreement. (1)
10.19 1996 Omnibus Stock Plan Form of Nonqualified Stock Option Agreement. (1)
10.20 1996 Omnibus Stock Plan Form of Restricted Stock Purchase Agreement. (1)
10.21 Form of Option Agreement with Advisory Board Members listed on attached schedule. (1)
10.22 Option Agreement with David A. Fisher, dated January 6, 1997. (1)
10.23 Form of Warrant between the Company and the lenders identified on the attached schedule. (1)
10.25 Stock Purchase Agreement dated May 30, 1997 between the Company and the Danna Trust. (1)
10.26 Stock Purchase Agreement dated September 23, 1997 between the Company and C. James Moore. (1)
10.27 Stock Purchase Agreement dated September 24, 1997 between the Company and Scott and Susan Moore. (1)
10.28 Evaluation Agreement dated May 23, 1997 between the Company and Nestle USA, Inc. (1)
10.29 Leases for the Company's facilities at 12625 and 12675 Danielson Court, Suites 110 and 401, dated
February 8, 1996, as amended. (2)
10.30 Lease for the Company's proposed facility to be constructed dated August 7, 1997. (1)
10.31 Stock Purchase Agreement dated October 27, 1997, between the Company and Tony Orlina. (1)
10.32 Stock Purchase Agreement dated October 27, 1997, between the Company and Stephen A. Shields. (1)
10.33 Form of Stock Purchase Agreement dated October 27, 1997 between the Company and the Selling Security
Holders. (1)
10.34 Form of Warrant between the Company and the Selling Security Holders. (1)
10.35 Form of Loan Agreement between the Company and the lenders identified on the attached schedule. (1)
11.1 Computation of net loss per share. (1)
23.1 Consent of Fisher Thurber LLP (contained in their opinion filed as Exhibit 5). (2)
23.2 Consent of KPMG Peat Marwick LLP, Independent Public Accountants. (2)
24.1 Form of Power of Attorney. (1)
27 Financial Data Schedule. (1)
</TABLE>
- ------------------------
(1) Previously filed
(2) Filed herewith
<PAGE>
ONTRO, INC.
12675 Danielson Court, Suite 401
Poway, California 92064
UNDERWRITING AGREEMENT
____________, 1997
Joseph Charles & Associates, Inc.
As Representative of the Several Underwriters
Named in Schedule I hereto
9701 Wilshire Boulevard, Ninth Floor
Beverly Hills, CA 90212
Ladies and Gentlemen:
ONTRO, INC., a California corporation (the "Company"), proposes to issue
and sell to the Underwriters named in Schedule I hereto (the "Underwriters")
pursuant to this Underwriting Agreement (the "Agreement"), an aggregate of
2,900,000 Units, each Unit consisting of one (1) share of Common Stock, no par
value per share (the "Shares"), and one (1) Redeemable Common Stock Purchase
Warrant (the "Warrants"), each exercisable to purchase one (1) share of Common
Stock at any time commencing on the effective date of the Registration Statement
(the "Effective Date") and ending on the third anniversary of the Effective
Date. The Warrant exercise price, subject to adjustment described below, will
be $_______ (150% of the initial public offering price of the Units). The
Warrants are subject to redemption at $.05 per Warrant on thirty (30) days'
prior written notice if the closing bid price of the Common Stock as reported on
AMEX exceeds 200% of the initial public offering price of the Units for a
period of twenty (20) consecutive trading days ending within thirty (30) days of
the notice of redemption. The Shares and the Warrants will be separately
transferable immediately upon issuance. In addition, the Company and L. L.
Knickerbocker Company, Inc. ("LLK") propose to grant to the Underwriters the
option referred to in Section 2(b) to purchase all or any part of an aggregate
of 435,000 additional Units. The shares of Common Stock included in such
additional Units will be offered by LLK and the Warrants included in such
additional units will be offered by the Company. Unless the context otherwise
indicates, the term "Units" shall include the additional Units referred to
above.
The aggregate of 2,900,000 Units, together with all or any part of the
435,000 Units which the Underwriters have the option to purchase, and the Shares
and the Warrants comprising such Units, are herein called the "Units". The
Common Stock of the Company to be outstanding after giving effect to the sale of
the Shares is herein called the "Common Stock." The Units, and the Shares and
Warrants included in the Units (including the 435,000 Units which the
Underwriters have the option to purchase) are herein collectively called the
"Securities."
You have advised the Company and LLK that you desire to purchase the Units,
and that you have been authorized to execute this Agreement as representative of
the Underwriters (the
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"Representative"). The Company and LLK confirm the agreements made by it
with respect to the purchase of the Units by you, as follows:
1. REPRESENTATIONS AND WARRANTIES.
A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to, and agrees with, each
Underwriter that:
(a) A registration statement (File No. 333-39253) on Form SB-2
relating to the public offering of the Units, including a preliminary form of
prospectus, copies of which have heretofore been delivered to you, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act") and the rules and regulations (the "Rules
and Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission under the Act. "Preliminary
Prospectus" shall mean each prospectus filed pursuant to Rule 430 of the Rules
and Regulations. The registration statement (including all financial schedules
and exhibits) as amended at the time it becomes effective and the final
prospectus included therein are respectively referred to as the "Registration
Statement" and the "Prospectus", except that (i) if the prospectus first filed
by the Company pursuant to Rule 424(b) or Rule 430A of the Rules and Regulations
or otherwise utilized and not required to be so filed shall differ from said
prospectus as then amended, the term "Prospectus" shall mean the prospectus
first filed pursuant to Rule 424(b) or Rule 430A or so utilized from and after
the date on which it shall have been filed or utilized, and (ii) if such
registration statement or prospectus is amended or such prospectus is
supplemented, after the effective date of such registration statement and prior
to the Option Closing Date (as defined in Section 2(b)), the term "Registration
Statement" shall include such registration statement as so amended, and the term
"Prospectus" shall include the prospectus as so amended or supplemented, or
both, as the case may be.
(b) At the time the Registration Statement becomes effective and at
all times subsequent thereto up to the Option Closing Date (hereinafter
defined), (i) the Registration Statement and Prospectus will in all material
respects conform to the requirements of the Act and the Rules and Regulations;
and (ii) neither the Registration Statement nor the Prospectus will include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances under which they were made; provided, however,
that the Company does not make representations, warranties or agreements as to
information contained in or omitted from the Registration Statement or
Prospectus in reliance upon, and in conformity with, written information
furnished to the Company by you or on behalf of any Underwriter through you
specifically for use in the preparation thereof. It is understood that the
statements set forth in the Prospectus with respect to stabilization, the
material set forth under the heading "Underwriting" and the identity of counsel
to the Underwriters under the heading "Legal Matters" constitute the only
information furnished in writing by you, or by any Underwriter through you, for
inclusion in the Registration Statement and Prospectus, as the case may be.
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(c) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation, with full power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus and is duly
qualified to do business as a foreign corporation and is in good standing in all
other jurisdictions in which the nature of its business or the character or
location of its properties requires such qualification, except where failure to
so qualify is not reasonably likely to materially adversely affect the Company's
business, properties or financial condition.
(d) The authorized capital stock of the Company as of the Effective
Date was as set forth under "Capitalization" in the Prospectus. The shares of
issued and outstanding capital stock of the Company set forth thereunder have
been duly authorized, validly issued and are fully paid and non-assessable;
except as set forth in the Prospectus, no options, warrants or other rights to
purchase, agreements or other obligations to issue, or agreements or other
rights to convert any obligation into, any shares of capital stock of the
Company have been granted or entered into by the Company. The Units, Shares,
Warrants and Representative's Option (as that term is defined in Section 12
herein, the "Representative's Option") conform in all material respects to all
statements relating thereto contained in the Registration Statement and
Prospectus.
(e) The Units and Shares are duly authorized and, when issued,
delivered and paid for pursuant to this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable and free of preemptive rights of
any security holder of the Company. The certificates evidencing the Shares are
in valid and proper legal form. The Warrants and the Representative's Option
will be exercisable for shares of Common Stock of the Company in accordance with
the terms of the Warrants and the Representative's Option and at the prices
therein provided for. The shares of Common Stock have been duly authorized and
reserved for issuance upon such exercise, and such shares, when issued upon such
exercise in accordance with the terms of the Warrants and the Representative's
Option and when the price is paid, shall be fully paid and non-assessable.
Neither the filing of the Registration Statement nor the offering or sale of the
Units or any of the Securities as contemplated in this Agreement gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the registration of any securities of the Company, except as
described in the Registration Statement.
(f) This Agreement, the Warrant Agreement and the Representative's
Option have been duly and validly authorized, executed and delivered by the
Company, and assuming due execution by the other party or parties hereto and
thereto, constitute valid and binding obligations of the Company enforceable
against the Company in accordance with their respective terms, except as rights
to indemnity and contribution hereunder may be limited by applicable law and
except as enforceability may be limited by bankruptcy, insolvency or other laws
affecting the rights of creditors generally or by general equitable principles.
The Company has full power and lawful authority to authorize, issue and sell the
Securities to be sold by it hereunder on the terms and conditions set forth
herein, and no consent, approval, authorization or other order of any
governmental authority is required in connection with such authorization,
execution and delivery or with the authorization, issue and sale of the
Securities or the Representative's Option, except such as may be required under
the Act or state securities laws.
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(g) Except as described in the Prospectus, the Company is not in
material violation, breach or default of or under, and consummation of the
transactions herein contemplated and the fulfillment of the terms of this
Agreement, the Warrant Agreement and the Representative's Option will not
conflict with, or result in a breach of, any of the terms or provisions of, or
constitute a default under, or result in the creation or imposition of any lien,
charge or encumbrance pursuant to the terms of, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company is a
party or by which the Company may be bound or to which any of the property or
assets of the Company are subject, which would have a material adverse effect on
the business, properties or financial condition of the Company, nor will such
action result in any violation of the provisions of the certificate of
incorporation or the by-laws of the Company, as amended, or any statute or any
order, rule or regulation applicable to the Company of any court or of any
regulatory authority or other governmental body having jurisdiction over the
Company, which would have a material adverse effect on the business, properties
or financial condition of the Company.
(h) The Company owns no real property and, subject to the
qualifications stated in the Prospectus, the Company has good and marketable
title to all properties and assets described in the Prospectus as owned by it,
free and clear of all liens, charges, encumbrances or restrictions, except such
as are not materially significant or important in relation to its business; all
of the leases and subleases under which the Company is the lessor or sublessor
of properties or assets or under which the Company holds properties or assets as
lessee or sublessee as described in the Prospectus are in full force and effect,
and, except as described in the Prospectus, the Company is not in default in any
respect with respect to any of the terms or provisions of any of such leases or
subleases which would have a material adverse effect on the business, properties
or financial condition of the Company, and no claim has been asserted by anyone
adverse to rights of the Company as lessor, sublessor, lessee or sublessee under
any of the leases or subleases mentioned above, or affecting or questioning the
right of the Company to continued possession of the leased or subleased premises
or assets under any such lease or sublease except as described or referred to in
the Prospectus, which would have a material adverse effect on the business
properties or financial condition of the Company; and the Company owns or leases
all such properties described in the Prospectus as are necessary to its
operations as now conducted and, except as otherwise stated in the Prospectus,
as proposed to be conducted as set forth in the Prospectus.
(i) KPMG Peat Marwick LLP, who have given their report on certain
financial statements filed and to be filed with the Commission as a part of the
Registration Statement, which are included in the Prospectus, are with respect
to the Company independent public accountants as required by the Act and the
Rules and Regulations.
(j) The financial statements and schedules, together with related
notes, set forth in the Prospectus or the Registration Statement present fairly
the financial position and results of operations and changes in financial
position of the Company on the basis stated in the Registration Statement, at
the respective dates and for the respective periods to which they apply. Said
statements and schedules and related notes have been prepared in accordance with
generally accepted accounting principles applied on a basis which is consistent
during the periods involved.
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(k) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, the Company has not incurred
any liabilities or obligations, direct or contingent, not in the ordinary course
of business, or entered into any transaction not in the ordinary course of
business, which is material to the business of the Company, and there has not
been any change in the capital stock of, or any incurrence of long-term debt by,
the Company or any issuance of options, warrants or other rights to purchase the
capital stock of the Company or any adverse change or any development involving,
so far as the Company can now reasonably foresee, a prospective adverse change
in the condition (financial or other), net worth, results of operations,
business, key personnel or properties of it which would be material to the
business or financial condition of the Company, and the Company has not become
party to, and neither the business nor the property of the Company has become
the subject of, any material litigation whether or not in the ordinary course of
business.
(l) Except as set forth in the Prospectus, there is not now pending
nor, to the knowledge of the Company, threatened, any action, suit or proceeding
(including those related to environmental matters or discrimination on the basis
of age, sex, religion or race) to which the Company is a party before or by any
court or governmental agency or body, which, if adversely determined, would
result in any material adverse change in the condition (financial or other),
business prospects, net worth or properties of the Company; and, except as set
forth in the Prospectus, no labor disputes involving the employees of the
Company exist which, if adversely determined, would result in any material
adverse change in the condition (financial or otherwise), business prospects,
net worth or property of the Company.
(m) Except as disclosed in the Prospectus, the Company has filed all
necessary federal, state and foreign income and franchise tax returns and has
paid all taxes shown as due thereon; and there is no tax deficiency which has
been or to the knowledge of the Company might be asserted against the Company
which has not been adequately reserved for on the Company's balance sheet.
(n) The Company has sufficient licenses, permits and other
governmental authorizations currently required for the conduct of its business
or the ownership of its property as described in the Prospectus and is in all
material respects complying therewith and owns or possesses adequate rights to
use all material patents, patent applications, trademarks, mark registrations,
copyrights and licenses necessary for the conduct of such business and has not
received any notice of conflict with the asserted rights of others in respect
thereof. To the best knowledge of the Company, none of the activities or
business of the Company is in violation of, or causes the Company to violate,
any law, rule, regulation or order of the United States, any state, county or
locality, or of any agency or locality, the violation of which would have a
material adverse effect upon the condition (financial or otherwise), business
prospects, net worth or properties of the Company.
(o) The Company has not, directly or indirectly, at any time (i) made
any contributions to any candidate for foreign political office, or if made,
failed to disclose fully any such contribution made in violation of law, or (ii)
made any payment to any state, federal or foreign governmental officer or
official, or other person charged with similar public or quasi-
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public duties, other than payments or contributions required or allowed by
applicable law. The Company's internal accounting controls and procedures
are sufficient to cause the Company to comply in all material respects with
the Foreign Corrupt Practices Act of 1977, as amended.
(p) On the Closing Dates (as defined in Section 2(c)), all transfer
or other taxes (including franchise, capital stock or other tax, other than
income taxes imposed by any jurisdiction), if any, which are required to be paid
in connection with the sale and transfer of the Units to the Underwriters
hereunder will have been fully paid or provided for by the Company or LLK, as
applicable, and all laws imposing such taxes will have been fully complied with.
(q) All contracts and other documents of the Company which are, under
the Rules and Regulations, required to be filed as exhibits to the Registration
Statement have been so filed.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the Units, Shares or Warrants or to facilitate the
sale or resale of the Securities.
(s) The Company has no subsidiaries.
(t) Except for this Agreement and other agreements with the
Representative, the Company has not entered into any agreement pursuant to which
any person is entitled either directly or indirectly to compensation from the
Company for services as a finder in connection with the proposed public
offering.
(u) The Shares and Warrants have been approved for listing on the
American Stock Exchange.
(v) Except for such rights which have been waived or satisfied, no
holder of securities of the Company has any rights to the registration of
securities of the Company because of the filing of the Registration Statement or
otherwise in connection with the sale of the Units contemplated hereby.
(w) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940.
(x) The Company (i) is in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii)
has received all permits, licenses or other approvals required of it under
applicable Environmental Laws to conduct its respective business and (iii) is in
compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance, failure to receive required permits,
licenses or other approvals or failure to
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comply with the terms and conditions of such permits, licenses or approvals
will not in the aggregate have a material adverse effect on the Company.
(y) Each employee benefit plan, within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), that
is maintained, administered or contributed to by the Company for employees or
former employees of the Company has been maintained in compliance with its
respective terms and the requirements of any applicable statutes, orders, rules
and regulations, including but not limited to ERISA and the Internal Revenue
Code of 1986, as amended (the "Code"). No prohibited transaction, within the
meaning of Section 406 of ERISA or Section 4975 of the Code, has occurred with
respect to any such plan, excluding transactions effected pursuant to a
statutory or administrative exemption. For each such plan that is subject to
the funding rules of Section 412 of the Code or Section 302 of ERISA, no
"accumulated funding deficiency", as defined in Section 412 of the Code, has
been incurred, whether or not waived, and the fair market value of the assets of
each such plan (excluding for these purposes accrued but unpaid contributions)
exceeded the present value of all benefits accrued under such plan determined
using reasonable actuarial assumptions.
(z) The Company maintains a system of internal accounting controls
that, taken as a whole, are sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(aa) The Company maintains insurance of the types and in the amounts
generally deemed adequate for its respective business, including, without
limitation, insurance covering real and personal property owned or leased by it
against theft, damage, destruction, acts of vandalism and all other material
risks customarily insured against, all of which insurance is in full force and
effect. The Company has no reason to believe that it will not be able to renew
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
respective business.
(bb) The Company has owns or possesses exclusive rights to use all
material patents, patent applications, trademarks, mark registrations,
copyrights and licenses held by Insta-Heat, Inc. ("IHI") and otherwise necessary
for the conduct of its business and has not received any notice of conflict with
the asserted rights of others in respect thereof.
B. REPRESENTATIONS AND WARRANTIES OF LLK.
(a) LLK is the lawful owner of the Shares of Common Stock to be sold
by it pursuant to this Agreement and has, and on the Option Closing Date will
have, good and clear title to such Shares, free of all restrictions on transfer,
liens, encumbrances, security interests and claims whatsoever.
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(b) Upon delivery of and payment for such Shares pursuant to this
Agreement, good and clear title to such Shares will pass to the Underwriters,
free of all restrictions on transfer, liens, encumbrances, security interests
and claims whatsoever.
(c) LLK has, and on the Option Closing Date will have, full legal
right, power and authority to enter into this Agreement and the Custody
Agreement between LLK and Chase Mellon Shareholder Services, Custodian (the
"Custody Agreement") and to sell, assign, transfer and deliver such Shares in
the manner provided herein and therein, and this Agreement and the Custody
Agreement have been duly authorized, executed and delivered by or on behalf of
LLK and each of this Agreement and the Custody Agreement is a valid and binding
agreement of LLK enforceable against LLK in accordance with its terms, except as
rights to indemnity and contribution hereunder may be limited by applicable law
and except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles.
(d) All information furnished by or on behalf of LLK relating to LLK
and LLK's Shares that is set forth in the Registration Statement and the
Prospectus is, and at the time the Registration Statement became or becomes, as
the case may be, effective and at all times subsequent thereto up to and on the
Closing Date (hereinafter defined) was or will be, true, correct and complete,
and does not, and at the time the Registration Statement became or becomes, as
the case may be, effective and at all times subsequent thereto up to and on the
Closing Date, will not, contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make such
information not misleading.
(e) Neither LLK nor any of LLK's affiliates directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with, or had any other association with (within the meaning of
Article I of the Bylaws of the National Association of Securities Dealers, Inc.
(the "NASD")), any member firm of the NASD.
(f) This Agreement has been duly and validly authorized, executed and
delivered by LLK, and assuming due execution by the other party or parties
hereto and thereto, constitutes valid and binding obligations of LLK enforceable
against LLK in accordance with their respective terms, except as rights to
indemnity and contribution hereunder may be limited by applicable law and except
as enforceability may be limited by bankruptcy, insolvency or other laws
affecting the rights of creditors generally or by general equitable principles.
LLK has full power and lawful authority to authorize, issue and sell the
Securities to be sold by it hereunder on the terms and conditions set forth
herein, and no consent, approval, authorization or other order of any
governmental authority is required in connection with such authorization,
execution and delivery or with the authorization, issue and sale of the
Securities, except such as may be required under the Act or state securities
laws.
(g) Except as described in the Prospectus, LLK is in material
violation, breach or default of or under, and consummation of the transactions
herein contemplated and the fulfillment of the terms of this Agreement, will not
conflict with, or result in a breach of, any of the terms or provisions of, or
constitute a default under, or result in the creation or imposition of any lien,
charge or encumbrance pursuant to the terms of, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which LLK is a party
or by which LLK may
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be bound or to which any of the property or assets of LLK are subject, which
would have a material adverse effect on the business, properties or financial
condition of LLK, nor will such action result in any violation of the
provisions of the certificate of incorporation or the by-laws of LLK, as
amended, or any statute or any order, rule or regulation applicable to LLK of
any court or of any regulatory authority or other governmental body having
jurisdiction over LLK, which would have a material adverse effect on the
business, properties or financial condition of LLK.
(h) LLK has not taken and will not take, directly or indirectly, any
action designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the Units, Shares or Warrants or to facilitate the sale or resale of
the Securities.
(i) LLK has not entered into any agreement pursuant to which any
person is entitled either directly or indirectly to compensation from the
Company for services as a finder in connection with the proposed public
offering.
2. PURCHASE, DELIVERY AND SALE OF THE UNITS.
(a) Subject to the terms and conditions of this Agreement, and upon
the basis of the representations, warranties and agreements herein contained,
the Company agrees to issue and sell to the Underwriters, and the Underwriters
agree, severally and not jointly, to buy from the Company at $_____ per Unit at
the place and time hereinafter specified, the number of Units set forth opposite
each Underwriter's name in Schedule I hereto (the "Firm Units").
Delivery of the Firm Units against payment therefor shall take place
at the offices of Joseph Charles & Associates, Inc., 9701 Wilshire Boulevard,
Ninth Floor, Beverly Hills, California 90212 (or at such other place as may be
designated by agreement between you and the Company) at 10:00 a.m. New York time
on __________________, 1997, or at such other time and date, not later than 5
business days thereafter, as you may designate, such time and date of payment
and delivery for the Firm Units being herein called the "First Closing Date."
Time shall be of the essence and delivery at the time and place specified in
this subsection (a) is a further condition to the obligations of the
Underwriters hereunder.
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, the Company and LLK hereby grant the Underwriters an option to
purchase all or any part of an aggregate of 435,000 additional Units at the same
price per Unit as the Underwriters pay for the Firm Units being sold pursuant to
the provisions of subsection (a) of this Section 2 (such additional Units being
referred to herein as the "Option Units"). The shares of Common Stock included
in such Option Units will be offered by LLK and the Warrants included in such
Option Units will be offered by the Company. The purchase price for each
Warrant will be $.10. This option may be exercised on one occasion within 60
days after the Effective Date upon notice by you to the Company and LLK advising
each of them as to the amount of Option Units as to which the option is being
exercised, the names and denominations in which the certificates for such Option
Units are to be registered and the time and date when such certificates are to
be delivered. Such time and date shall be determined by you but shall not be
earlier than four and not later than five
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full business days after the exercise of said option, nor in any event prior
to the First Closing Date, and such time and date is referred to herein as
the "Option Closing Date." Delivery of the Option Units against payment
therefor shall take place at the offices of Joseph Charles & Associates,
Inc., 9701 Wilshire Boulevard, Ninth Floor, Beverly Hills, California 90212.
Time shall be of the essence and delivery at the time and place specified in
this subsection (b) is a further condition to the obligations of the
Underwriters hereunder.
The Option granted hereunder may be exercised only to cover
over-allotments in the sale by the Underwriters of Firm Units referred to in
subsection (a) above.
(c) The Company and LLK, as applicable, will make the certificates
for the Securities comprising the Units to be purchased by the Underwriters
hereunder available to you for checking at least two full business days prior to
the First Closing Date or the Option Closing Date (which are collectively
referred to herein as the "Closing Dates" and individually as a "Closing Date"),
as the case may be. The certificates shall be in such names and denominations
as you may request, at least two full business days prior to the relevant
Closing Dates. Time shall be of the essence and the availability of the
certificates at the time and place specified in this Agreement is a further
condition to the obligations of the Underwriters.
Definitive certificates in negotiable form for the Securities to be
purchased by the Underwriters hereunder will be delivered by the Company and
LLK, as applicable, to you for the several accounts of the Underwriters against
payment of the purchase price by you, at your option, by certified or bank
cashier's checks in New York Clearing House funds or by wire transfer, payable
to the order of the Company.
In addition, in the event the Underwriters exercise the option to
purchase from the Company and LLK all or any portion of the Option Units
pursuant to the provisions of subsection (b) above, payment for such Option
Units shall be made to or upon the order of the Company and LLK by you, for the
several accounts of the Underwriters at your option, by certified or bank
cashier's checks payable in New York Clearing House funds or by wire transfer,
at the offices of Joseph Charles & Associates, Inc. at the time and date of
delivery of such Option Units as required by the provisions of subsection (b)
above, against receipt of the certificates for such Option Units by you, for the
several accounts of the Underwriters registered in such names and in such
denominations as you may request. The shares of Common Stock included in such
Option Units will be offered by LLK and the Warrants included in such Option
Units will be offered by the Company. The purchase price for each Warrant will
be $.10.
It is understood that the Underwriters propose to offer the Units to
be purchased hereunder to the public upon the terms and conditions set forth in
the Registration Statement, after the Registration Statement becomes effective.
3. COVENANTS OF THE COMPANY.
The Company covenants and agrees with the Underwriters that:
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(a) Company will use its best efforts to cause the Registration
Statement to become effective and, upon notification from the Commission that
the Registration Statement has become effective, will so advise you and will not
at any time, whether before or after the Effective Date, file any amendment to
the Registration Statement or supplement to the Prospectus of which you shall
not previously have been advised and furnished with a copy or to which you or
your counsel shall have reasonably objected in writing or which is not in
compliance with the Act and the Rules and Regulations. At any time prior to the
later of (A) the completion by you of the distribution of the Units contemplated
hereby (but in no event more than nine months after the Effective Date) and (B)
25 days after the Effective Date, the Company will prepare and file with the
Commission, promptly upon your request, any amendments or supplements to the
Registration Statement or Prospectus which, in your reasonable opinion, may be
necessary or advisable in connection with the distribution of the Units.
Promptly after you or the Company is advised thereof, you will advise the
Company or the Company will advise you, as the case may be, and confirm the
advice in writing, of the receipt of any comments of the Commission, of the
effectiveness of any post-effective amendment to the Registration Statement, of
the filing of any supplement to the Prospectus or any amended Prospectus, of any
request made by the Commission for amendment of the Registration Statement or
for supplementing of the Prospectus or for additional information with respect
thereto, of the issuance by the Commission or any state or regulatory body of
any stop orders or other order suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of any preliminary
prospectus or the Prospectus, or of the suspension of the qualification of the
Units for offering in any jurisdiction, or the institution of any proceedings
for any of such purposes, and will use its best efforts to prevent the issuance
of any such order and, if issued, to obtain as soon as possible the lifting
thereof.
The Company has caused to be delivered to you copies of each Preliminary
Prospectus, and the Company has consented and hereby consents to the use of such
copies for the purposes permitted by the Act. The Company authorizes the
Underwriters and selected dealers to use the Prospectus, as amended in
connection with the sale of the Units for such period not to exceed nine months
from the Effective Date as in the reasonable opinion of counsel for you the use
thereof is required to comply with the applicable provisions of the Act and the
Rules and Regulations. In case of the happening, at any time within such period
as a Prospectus is required under the Act to be delivered in connection with
sales by an underwriter or dealer, of any event of which the Company has
knowledge and which materially affects the Company or the Securities, or which
in the opinion of counsel for the Company or counsel for the Underwriters should
be set forth in an amendment to the Registration Statement or a supplement to
the Prospectus in order to make the statements therein not then misleading, in
light of the circumstances existing at the time the Prospectus is required to be
delivered to a purchaser of the Units, or in case it shall be necessary to amend
or supplement the Prospectus to comply with the Act or with the Rules and
Regulations, the Company will notify you promptly and forthwith prepare and
furnish to you copies of such amended Prospectus or of such supplement to be
attached to the Prospectus, in such quantities as you may reasonably request, in
order that the Prospectus, as so amended or supplemented, will not contain any
untrue statement of a material fact or omit to state any material facts
necessary in order to make the statements in the Prospectus, in the light of the
circumstances under which they are made, not misleading. The
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preparation and furnishing of any such amendment or supplement to the
Registration Statement or amended Prospectus or supplement to be attached to
the Prospectus shall be without expense to the Underwriters, except that in
case the Underwriters are required, in connection with the sale of the Units,
to deliver a Prospectus nine months or more after the Effective Date, the
Company will upon request of and at your expense, amend or supplement the
Registration Statement and Prospectus and furnish the Underwriters with
reasonable quantities of prospectuses complying with Section 10(a)(3) of the
Act.
(b) The Company will comply with the Act, the Rules and Regulations
and the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the
rules and regulations thereunder in connection with the offering and issuance of
the Units.
The Company will use its best efforts to qualify or register the Securities
for sale under the securities or "blue sky" laws of such jurisdictions as you
may have designated in writing prior to the execution hereof and will make such
applications and furnish such information to counsel for the Underwriters as may
be required for that purpose and to comply with such laws, provided that the
Company shall not be required to qualify as a foreign corporation or a dealer in
securities or to execute a general consent to service process in any
jurisdiction. The Company will, from time to time, prepare and file such
statements and reports as are or may be required to continue such qualification
in effect for so long a period as you may reasonably request. Legal fees for
such qualifications shall be itemized based on the time expended and costs
incurred, shall be reasonable and shall not in any event exceed $30,000.00,
exclusive of filing fees.
(c) The Company will instruct its transfer agent to provide you with
copies of the Depository Trust Company stock transfer sheets on a weekly basis
for a period of six months from the First Closing Date and on a monthly basis
thereafter for six additional months.
(d) The Company will use its best efforts to cause a Registration
Statement under the Exchange Act to be declared effective on the Effective Date.
(e) For so long as the Company is a reporting company under either
Section 12(g), 13 or 15(d) of the Exchange Act, the Company, at its expense,
will furnish to its stockholders an annual report (including financial
statements audited by independent public accountants), in reasonable detail and
at its expense, will furnish to you during the period ending five years from the
date hereof, (i) as soon as practicable after the end of each fiscal year, a
balance sheet of the Company and any subsidiaries as at the end of such fiscal
year, together with statements of income, stockholders' equity and cash flows of
the Company and any subsidiaries as at the end of such fiscal year, all in
reasonable detail and accompanied by a copy of the certificate or report thereon
of independent accountants; (ii) as soon as they are available, a copy of all
reports (financial or other) mailed to security holders; (iii) as soon as they
are available, a copy of all non-confidential reports and financial statements
furnished to or filed with the Commission; and (iv) such other information of a
public nature as you may from time to time reasonably request.
(f) In the event the Company has an active subsidiary or
subsidiaries, such financial statements referred to in subsection (e) above will
be on a consolidated basis to the
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extent the accounts of the Company and its subsidiary or subsidiaries are
consolidated in reports furnished to its stockholders generally.
(g) The Company will deliver to you at or before the First Closing
Date one signed copy of the Registration Statement including all financial
statements and exhibits filed therewith, and of all amendments thereto. The
Company will deliver to or upon your order, from time to time until the
Effective Date as many copies of any Preliminary Prospectus filed with the
Commission prior to the Effective Date as the Underwriters may reasonably
request. The Company will deliver to you on the Effective Date and thereafter
for so long as a Prospectus is required to be delivered under the Act, from time
to time, as many copies of the Prospectus, in final form, or as thereafter
amended or supplemented, as the Underwriters may from time to time reasonably
request.
(h) The Company will make generally available to its security holders
and deliver to you as soon as it is practicable to do so, but in no event later
than 90 days after the end of 12 months after its current fiscal quarter, an
earnings statement (which need not be audited) covering a period of at least 12
consecutive months beginning after the Effective Date which shall satisfy the
requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of the
Units substantially for the purposes set forth under "Use of Proceeds" in the
Prospectus, and will file such reports with the Commission with respect to the
sale of the Units and the application of the proceeds therefrom as may be
required pursuant to Rule 463 of the Rules and Regulations.
(j) The Company will, promptly upon your request, prepare and file
with the Commission any amendments or supplements to the Registration Statement,
preliminary Prospectus or Prospectus and take any other action, which in the
opinion of Freshman, Marantz, Orlanski, Cooper & Klein, counsel to you may be
reasonably necessary or advisable in connection with the distribution of the
Units and will use its best efforts to cause the same to become effective as
promptly as possible.
(k) Prior to the Effective Date, the Company will cause LLK and all
of the Company's directors, executive officers and shareholders to enter into a
written agreement with the Representative, which, among other things, shall
provide that for a period of 12 months following the closing date of the
Offering, such persons will not sell, assign, hypothecate or pledge any of the
shares of Common Stock of the Company owned by them on the Effective Date, or
subsequently acquired by the exercise of any options or warrants or conversion
of any convertible security of the Company held by them on the Effective Date
directly or indirectly, except with your prior written consent, which consent
may be unreasonably withheld and such shareholders will permit all certificates
evidencing those shares to be stamped with an appropriate restrictive legend,
and will cause the transfer agent for the Company to note such restrictions on
the transfer books and records of the Company.
(l) The Company shall, upon the initial filing of the Registration
Statement, make all filings required to obtain approval for the quotation of the
Shares and Warrants on the American Stock Exchange and will use its best efforts
to effect and maintain the aforesaid
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approval, or similar approval from the New York Stock Exchange or Nasdaq
National Market for at least five (5) years from the date of this Agreement.
Within ten (10) days after the Effective Date, the Company shall cause the
Company to be listed in the Moody's OTC Industrial Manual or in Standard and
Poor=s corporation reports and cause such listing to be maintained for five
years from the date of this Agreement.
(m) The Company represents that it has not taken, and agrees that it
will not take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Units, Shares or Warrants or
to facilitate the sale or resale of the Securities.
(n) During the period of the offering, and for a period of eighteen
(18) months from the Effective Date, the Company will not sell or otherwise
dispose of any securities of the Company (except for up to 545,400 shares
reserved for issuance under the Company's Stock Option Plan) without your prior
written consent, which consent may be withheld in your reasonable discretion.
For a period of twenty-four (24) months from the Effective Date, the Company
will not issue, sell or otherwise dispose of any securities of the Company
pursuant to Regulation S under the Act without your prior written consent, which
consent will not be unreasonably withheld.
(o) The Company shall retain a public relations firm acceptable to
you, and shall continue to retain such firm, or any alternate firm acceptable to
you, for a minimum period of one (1) year.
(p) The Company will reserve and keep available that maximum number
of its authorized but unissued securities which are issuable upon exercise of
the Warrants and the Representative=s Option outstanding from time to time.
(q) So long as any Warrants are outstanding, the Company will cause
the amendments to the Registration Statement, which may be on Form SB-2, S-1,
S-2 or S-3, to become effective in compliance with the Act and without any
lapse of time between the effectiveness of any such post-effective
amendments, and cause a copy of each Prospectus, as then amended, to be
delivered to each holder of record of a Warrant and to furnish to each
Underwriter and each dealer as many copies of each such Prospectus as such
Underwriters or dealers may reasonably request. In addition, for so long as
any Warrant is outstanding, the Company will provide you with copies of all
filings made by the Company pursuant to the provisions of the Act and the
Securities Exchange Act of 1934, as amended.
(r) The Company shall deliver to you, at the Company's expense, three
(3) bound volumes in form and content acceptable to you, containing the
Registration Statement and all exhibits filed therewith, and all amendments
thereto, and all other material correspondence, filings, certificates and other
documents filed and/or delivered in connection with this offering. The Company
shall use its best efforts to deliver such volumes with one hundred eighty (180)
days of the First Closing Date.
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(s) The Company shall deliver to you an executed financial consulting
agreement in form and substance acceptable to you whereby you agree to act as a
financial consultant for a period of two years from the effective date for a fee
of $3,000 per month payable in full upon the First Closing Date.
(t) For a period of forty-eight (48) months from the First Closing
Date, the Representative shall have the right to designate one member of the
Board of Directors provided that the designee is acceptable to the Company and
each of James A. Scudder, James L. Berntsen and LLK shall vote the shares of the
Company held by them in favor of electing such designee to the Board of
Directors of the Company. If notified by the Representative of its election to
designate said member, the Company will cause such election to occur within 30
days of the date of election. If the Representative requests said inclusion of
designee, this request shall be satisfied by a resolution of the Board of
Directors increasing the authorized number of directors to accommodate the
designee and then electing such designee to fill the newly-created vacancy. In
addition, the Company shall cause such designee to be on the slate of directors
presented to the Company=s stockholders for election at any annual or special
meeting of stockholders where directors of the Company are elected and the
Company and each of James A Scudder, James L. Berntsen and LLK shall cause such
designee to be included in any of their respective proxy material prepared for
use at such meeting. Such members shall be entitled to the same compensation,
reimbursements and indemnification as other members of the Company=s Board of
Directors. In the event that the Company is unable to obtain the Directors= and
Officers= Liability Insurance described in subparagraph (v) below, the
Representative shall have the right for such forty-eight (48) month period to
designate a consultant to the Board of Directors of the Company, which
consultant shall have the right to attend all Board and Board committee meetings
and shall be compensated on the same basis as outside members of the Board.
(u) The Company shall have acquired reasonable amount of Director and
Officer Liability Insurance (provided that such insurance can be obtained at a
reasonable cost as determined by the Company and the Representative) from a
responsible insurer, all satisfactory to the Representative and the Company.
(v) The Company will not solicit Warrant exercises other than through
the Representative. Upon exercise of any Warrants, the Company will pay the
Representative a fee of 2% of the aggregate exercise price, if (i) the market
price of the Company Common Shares on the date the Warrant is exercised is
greater than the then exercise price of the Warrant; (ii) the exercise of the
Warrant was solicited by a member of the National Association of Securities
Dealers, Inc. who is so designated in writing by the holder exercising the
Warrant; (iii) the Warrant is not held in a discretionary account except where
prior specific written approval for the exercise has been received; (iv)
disclosure of compensation arrangements was made both at the time of the
offering and at the time of exercise of the Warrant; (v) the solicitation of the
exercise of the Warrant was not in violation of the Exchange Act; and (vi) the
Representative provides bona fide services in connection with the solicitation
of the Warrant. No solicitation fee will be paid to the Representative on
Warrants exercised within one year of the Effective Date or on Warrants
voluntarily exercised at any time without solicitation.
(w) The Company=s monthly burn rate after the Offering will not
exceed $185,000 without the prior written consent of the Representative, for a
period of eighteen (18)
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months after the Offering, such limitation shall be exclusive of amounts
expended for equipment, facilities and research and development.
4. CONDITIONS OF OBLIGATIONS OF JOSEPH CHARLES & ASSOCIATES, INC.
The obligations of the Underwriters to purchase and pay for the Units which
they have agreed to purchase hereunder are subject to the accuracy (as of the
date hereof, and as of the Closing Dates) of and compliance with the
representations and warranties of the Company herein, to the performance by the
Company of its obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective and you
shall have received notice thereof not later than 5:00 p.m., New York time, on
the date of this Agreement, or at such later time or on such later date as to
which you may agree in writing; on the Closing Dates, no stop order suspending
the effectiveness of the Registration Statement shall have been issued and no
proceedings for that or any similar purpose shall have been instituted or shall
be pending or, to the knowledge of any Underwriter or to the knowledge of the
Company, shall be contemplated by the Commission; any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of Freshman, Marantz, Orlanski, Cooper & Klein, counsel
to you; and no stop order shall be in effect denying or suspending effectiveness
of the Registration Statement nor shall any stop order proceedings with respect
thereto be instituted or pending or threatened under the Act.
(b) At the First Closing Date, you shall have received the opinion,
dated as of the First Closing Date, of:
(i) Fisher Thurber LLP, counsel for the Company and William R.
Black, Esq., counsel for LLK, in form and substance reasonably satisfactory
to counsel for you, to the effect that:
(A) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of California and is duly qualified or licensed to do business as a
foreign corporation in good standing in each other jurisdiction in
which the ownership or leasing of its properties or the conduct of its
business requires such qualification, except where (other than the
State of California) failure to so qualify will not have a material
adverse effect on the business, properties or financial condition of
the Company. The Company has the corporate power to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under this
Agreement, the Warrant Agreement and the Representative Warrants;
(B) the authorized capitalization of the Company as of the date
of the Prospectus was as set forth in the Prospectus; all of the
shares of the Company's outstanding stock requiring authorization for
issuance by the Company's Board of Directors have been duly authorized
and validly issued, are fully paid and non-
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assessable and conform to the description thereof contained in the
Prospectus; the outstanding shares of Common Stock of the Company have
not been issued in violation of the preemptive rights of any
stockholder and the stockholders of the Company do not have any
preemptive rights or other rights to subscribe for or to purchase;
there are no restrictions upon the voting or transfer of, any of the
Shares, except as otherwise set forth in the Registration Statement;
the Common Stock, the Warrants, the Underwriter's Warrant and the
Warrant Agreement dated as of December 5, 1997 between and among the
Company and Chase Mellon Shareholder Services (the "Warrant Agreement")
conform in all material respects to the respective descriptions thereof
contained in the Prospectus; the Shares and Warrants to be issued as
contemplated in the Registration Statement and this Agreement have been
duly authorized and, when paid, will be validly issued, fully paid and
non-assessable and free of preemptive rights contained in the Company's
certificate of incorporation or By-laws, or any other document,
instrument or agreement known to counsel; a sufficient number of
shares of Common Stock has been reserved for issuance upon exercise of
the Warrants and the Representative's Option; neither the filing of
the Registration Statement nor the offering or sale of the Securities
as contemplated by this Agreement gives rise to any registration
rights, or other rights, known to counsel, other than those
contemplated by the Representative's Option or which have been waived
or satisfied, for or relating to the registration of the Securities.
The Company has no subsidiaries;
(C) this Agreement, the Warrant Agreement and the
Representative's Option (sometimes hereinafter collectively referred
to as the "Representative Agreements") have been duly and validly
authorized, executed and delivered by the Company, and assuming due
execution and delivery of this Agreement by you, and of the Warrant
Agreement by you and the Warrant Agent, all of such agreements are, or
when duly executed will be, the valid and legally binding obligations
of the Company except as enforceability may be limited by bankruptcy,
insolvency, moratorium or other laws affecting the rights of
creditors, or by general equitable principles; provided that no
opinion need be expressed as to the enforceability of the indemnity
provisions contained in Section 6 or the contribution provisions
contained in Section 7 of this Agreement;
(D) the certificates evidencing the Shares and Warrants are in
valid and proper legal form; the Warrants and the Representative's
Option will be exercisable for shares of Common Stock of the Company
in accordance with the terms of the Warrants and the Representative's
Option and at the prices therein provided for; the shares of Common
Stock of the Company issuable upon exercise of the Warrants and the
Underwriter's Warrants have been duly authorized and reserved for
issuance upon such exercise, and such shares, when issued upon such
exercise in accordance with the terms of the Warrants and the
Representative=s Option and when the price is paid shall be fully paid
and non-assessable;
(E) Such counsel knows of no pending or threatened legal or
governmental proceedings to which the Company is a party which are
required to
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be described or referred to in the Registration Statement which are
not so described or referred to;
(F) The execution and delivery of this Agreement, the Warrant
Agreement and the Representative's Option and the incurrence of the
obligations herein and therein set forth and the consummation of the
transactions herein or therein contemplated will not result in a
violation of, or constitute a default under, the certificate or
articles of incorporation or by-laws of the Company, or in a violation
of or default under any obligation, agreement, covenant or condition
contained in any bond, debenture, note or other evidence of
indebtedness or in any of the contracts, indentures, mortgages, loan
agreements, leases, joint ventures or other agreements or instruments
to which the Company is a party that are filed as Exhibits to the
Registration Statement or otherwise known to counsel;
(G) The Registration Statement has become effective under the
Act, and to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement is in effect, no
proceedings for that purpose have been instituted or are pending
before, or threatened by, the Commission and the Registration
Statement and the Prospectus (except, in the case of both the
Registration Statement and any Amendment thereto, and the Prospectus
and any supplement thereto for the financial statements and notes and
schedules thereto, and other financial information or statistical data
contained therein, or omitted therefrom, as to which such counsel need
express no opinion) comply as to form in all material respects with
the applicable requirements of the Act and the Rules and Regulations;
(H) All descriptions in the Registration Statement and the
Prospectus, and any amendment or supplement thereto, of contracts,
plans, options and other documents are accurate and fairly present the
information required to be shown, and such counsel is familiar with
all contracts and other documents referred to in the Registration
Statement and the Prospectus and any such amendment or supplement, or
filed as exhibits to the Registration Statement, and such counsel does
not know of any contracts or documents of a character required to be
summarized or described therein or to be filed as exhibits thereto
which are not so summarized, described or filed;
(I) No authorization, approval, consent or license of any
governmental or regulatory authority or agency is necessary in
connection with the authorization, issuance, transfer, sale or
delivery of the Securities by the Company, in connection with the
execution, delivery and performance of this Agreement, the Warrant
Agreement or the Underwriter's Warrant by the Company or in connection
with the taking of any action contemplated herein or therein, or the
issuance of the Underwriter's Warrant or the Securities underlying the
Warrants and Underwriter's Warrant, other than registration or
qualification of the Securities under applicable state or foreign
securities or blue sky laws (as to which such counsel need express no
opinion) and registration under the Act; and
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(J) The statements in the Registration Statement under the
caption "Description of Securities," to the extent that such
statements constitute a matter of law or legal conclusion have been
reviewed by such counsel and are correct in all material respects; and
(K) The Common Stock and Warrants have been approved for listing
on the American Stock Exchange.
(L) The Company is not, and after receipt of payment for the
Common Stock and Warrants will not be an "investment company" within
the meaning of Investment Company Act.
(M) Except as disclosed in the Prospectus under the caption
"Shares Eligible for Future Sale", to the best knowledge of such
counsel, there are no persons with registration or other similar
rights to have any equity or debt securities registered for sale under
the Registration Statement or included in the offering contemplated by
this Agreement.
(N) To the best of their counsel's knowledge, neither the
Company nor LLK is in violation of its charter or by-laws or any law,
administrative regulation or administrative or court decree applicable
to the Company or is in default in the performance and observance of
any obligation, agreement, covenant or condition contained in any
existing instrument.
Such counsel has participated in the preparation of the
Registration Statement and the Prospectus and although such counsel
has not reviewed the accuracy or completeness of the statements
contained in the Registration Statement or Prospectus nothing has come
to the attention of such counsel that caused such counsel to believe
that the Registration Statement or any amendment thereto at the time
it became effective contained any untrue statement of a material fact
or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus or any supplement thereto contains any untrue statement of
a material fact or omits to state a material fact necessary in order
to make statements therein in light of the circumstances under which
they were made not misleading (except, in the case of both the
Registration Statement and any amendment thereto and the Prospectus
and any supplement thereto, for the financial statements, notes and
schedules thereto and other financial information and statistical data
contained therein, as to which such counsel need express no opinion);
In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or LLK or public officials
as to matters of fact; and in rendering such opinion may rely as to
all matters of law other than the law of the United States or of the
State of California upon opinions of counsel satisfactory to
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you, in which case the opinion shall state that they have no reason to
believe that you and they are not entitled to so rely.
(ii) Brown Martin Haller & McClain LLP, special intellectual property
counsel for the Company , in form and substance reasonably satisfactory to
counsel for you, to the effect that:
(A) IHI is listed in the records of the Patent and Trademark
Office as the holder of record of each of the patents listed on
Schedule II hereof (the "Patents") and each of the patent applications
listed on Schedule II hereof (the "Applications"). Such counsel knows
of no claims of third parties to any ownership interest or lien with
respect to any of the Patents or Applications. To such counsel's
knowledge, none of the Applications has been rejected.
(B) To such counsel's knowledge, IHI is listed in the records of
the appropriate foreign office as the sole holder of record of each of
the foreign applications listed on Schedule III. Such counsel knows
of no claims of third parties to any of such foreign applications. To
such counsel=s knowledge, none of the foreign applications has been
rejected.
(C) The statements under the Prospectus captions "Risk Factors --
IHI License and --Patents and Proprietary Rights" (collectively,
the "Intellectual Property Portion") in the Effective Prospectus and
Final Prospectus insofar as such statements constitute summaries of
the Company=s rights to the Patents and Applications are in all
material respects accurate summaries and fairly summarize in all
material respects the legal matters, documents and proceedings
relating to such Patents and Applications described therein; to the
best knowledge of such counsel, the Company owns the rights to [ ]
issued U.S. patents and [ ] pending U.S. Applications.
(D) Such counsel is not aware of any facts that would lead such
counsel to conclude that any of the Patents are invalid or that any
patent issued in respect of an Application would be invalid.
(E) Except as disclosed in the Intellectual Property Portion,
such counsel is not aware that any valid patent is infringed by the
activities of the Company described in the Effective Prospectus or
Final Prospectus or by the manufacture, use or sale of any product,
device, instrument, drug or other material made and used according to
the Applications or the Patents.
(F) Such counsel is not aware of any material defects of form in
the preparation or filing of the Applications on behalf of IHI. The
Applications are being diligently pursued by IHI.
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(G) Such counsel knows of no pending or threatened action, suit,
proceeding or claim by others that the Company is infringing or
otherwise violating any patents, copyrights or trade secrets.
(H) Such counsel is not aware of any pending or threatened
actions, suits proceedings or claim by others challenging the validity
or scope of the Applications or the Patents.
(I) Such counsel is not aware of any infringement on the part of
any third party of the Patents, Applications, trade secrets, know-how
or other proprietary rights of either IHI or the Company.
(J) Nothing has come to the attention of such counsel which
causes such counsel to believe that the information contained in the
Intellectual Property Portion of the Registration Statement, at the
time the Registration Statement became effective, contained an untrue
statement of a material fact or omitted or omits to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or that, at the Closing Date, the information contained in
the Intellectual Property Portion of the Effective Prospectus and
Final Prospectus or any amendment or supplement to the Regulatory
Portion thereof contained any untrue statement of a material fact or
omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading.
(c) All corporate proceedings and other legal matters relating to
this Agreement, the Registration Statement, the Prospectus, and other related
matters shall be reasonably satisfactory to or approved by Freshman, Marantz,
Orlanski, Cooper & Klein, counsel to the Underwriters, and you shall have
received from such counsel a signed opinion, dated as of the First Closing Date,
with respect to the validity of the issuance of the Units, the form of the
Registration Statement and Prospectus (other than the financial statements and
other financial data contained therein), the execution of this Agreement and
other related matters as you may reasonably require. The Company shall have
furnished to counsel for the Underwriters such documents as they may reasonably
request for the purpose of enabling them to render such opinion.
(d) You shall have received a letter on and as of the Effective Date
and again on and as of the First Closing Date, in each instance describing
procedures carried out to a date within five (5) days of the date of the letter,
from KPMG Peat Marwick LLP, independent public accountants for the Company,
substantially in the form approved by you.
(e) At each of the Closing Dates, (i) the representations and
warranties of the Company and LLK contained in this Agreement shall be true and
correct with the same effect as if made on and as of such Closing Date, and each
of the Company and LLK shall have performed all of its obligations hereunder and
satisfied all the conditions on its part to be satisfied at or prior to such
Closing Date; (ii) the Registration Statement and the Prospectus and any
amendments or
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supplements thereto shall contain all statements which are required to be
stated therein in accordance with the Act and the Rules and Regulations, and
shall in all material respects conform to the requirements thereof, and
neither the Registration Statement nor the Prospectus nor any amendment or
supplement thereto shall contain any untrue statements of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances
under which they were made; (iii) there shall have been, since the respective
dates as of which information is given, no material adverse change in the
business, properties, condition (financial or otherwise), results of
operations, capital stock, long-term or short-term debt or general affairs of
the Company from that set forth in the Registration Statement and the
Prospectus, except changes which the Registration Statement and Prospectus
indicate might occur after the Effective Date and the Company shall not have
incurred any material liabilities nor entered into any agreement not in the
ordinary course of business other than as referred to in the Registration
Statement and Prospectus; and (iv) except as set forth in the Prospectus, no
action, suit or proceeding at law shall be pending or threatened against the
Company which would be required to be disclosed in the Registration
Statement, and no proceedings shall be pending or threatened against the
Company before or by any commission, board or administrative agency in the
United States or elsewhere, wherein an unfavorable decision, ruling or
finding would materially and adversely affect the business, property,
condition (financial or otherwise), results of operations or general affairs
of the Company. In addition, you shall have received, at the First Closing
Date, a certificate signed by the President and the principal financial or
accounting officer of each of the Company and LLK, dated as of the First
Closing Date, evidencing compliance with the provisions of this subsection
(e).
(f) Upon exercise of the option provided for in Section 2(b) hereof,
the obligations of the several Underwriters to purchase and pay for the Option
Units referred to therein will be subject (as of the date hereof and as of the
Option Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at the Option
Closing Date, no stop order suspending the effectiveness thereof shall have
been issued, and no proceedings for that purpose shall have been instituted
or shall be pending, or, to your knowledge or the knowledge of the Company,
shall be contemplated by the Commission, and any reasonable request on the
part of the Commission for additional information shall have been complied
with to the reasonable satisfaction of Freshman, Marantz, Orlanski,
Cooper & Klein, counsel to the Underwriters.
(ii) At the Option Closing Date there shall have been delivered to you
the signed opinion of Fisher Thurber LLP, counsel for the Company, dated as
of the Option Closing Date, in form and substance reasonably satisfactory
to Freshman, Marantz, Orlanski, Cooper & Klein, counsel to the
Underwriters, which opinion shall be substantially the same in scope and
substance as the opinion furnished to you at the First Closing Date
pursuant to Section 4(b) hereof, except that such opinion, where
appropriate, shall cover the Option Units rather than the Firm Units. If
the First Closing Date is the same as the Option Closing Date, such
opinions may be combined. In addition, at the Option Closing Date, you
shall have received the additional opinion,
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dated as of the Option Date, of Fisher Thurber LLP, counsel for the Company
and William R. Black, Esq., counsel for LLK, in form and substance
reasonably satisfactory to counsel for you, to the effect that:
(a) The Underwriting Agreement has been duly authorized,
executed and delivered by or on behalf of, and is a valid and binding
agreement of LLK, enforceable in accordance with its terms, except as
rights to indemnification thereunder may be limited by applicable law
and except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally or by general equitable
principles.
(b) The execution and delivery by LLK of, and the performance by
LLK of its obligations under, this Agreement and its Custody Agreement
will not contravene or conflict with, result in a breach of, or
constitute a default under, the charter or by-laws, partnership
agreement, trust agreement or other organizational documents, as the
case may be, of LLK, or to the best of such counsel's knowledge,
violate or contravene any provision of applicable law or regulation,
or violate, result in a breach of or constitute a default under the
terms of any other agreement or instrument to which LLK is a party or
by which it is bound or any judgment, order or decree applicable to
any court, regulatory body, administrative agency, governmental body
or arbitrator having jurisdiction over such Selling Shareholder.
(c) LLK has good and valid title to all of the Common Stock
which may be sold by LLK under the Underwriting Agreement and has the
legal right and power, and all authorizations and approvals required
under its charter and bylaws or other organizational documents, as the
case may be, to enter into this Agreement and its Custody Agreement,
to sell, transfer and deliver all of the Common Stock which may be
sold by LLK under the Underwriting Agreement and to comply with its
other obligations under the Underwriting Agreement and the Custody
Agreement of LLK has been duly authorized, executed and delivered by
LLK and is a valid and binding agreement of LLK, enforceable in
accordance with its terms, except as rights to indemnification
thereunder may be limited by applicable law and except as the
enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles.
(d) Assuming that the Underwriters purchase the Common Stock
which is sold by LLK pursuant to the Underwriting Agreement for value,
in good faith and without notice of any adverse claim, the delivery of
such Common Stock pursuant to the Underwriting Agreement will pass
good and valid title to such Common Stock, free and clear of any
security interest, mortgage, pledge, lieu encumbrance or other claim.
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(e) No consent, approval, authorization or other order of, or
registration or filing with, any court or governmental authority or
agency, is required for the consummation by LLK of the transactions
contemplated in the Underwriting Agreement, except as required under
the Securities Act, applicable state securities or blue sky laws, and
from the NASD.
(iii) At the Option Closing Date, there shall have been delivered
to you a certificate of the President and the Chairman of the Board of each
of the Company and LLK dated the Option Closing Date, in form and substance
reasonably satisfactory to Freshman, Marantz, Orlanski, Cooper & Klein,
counsel to the Underwriters, substantially the same in scope and substance
as the certificates furnished to you at the First Closing Date pursuant to
Section 4(e) hereof.
(iv) At the Option Closing Date, there shall have been delivered to
you a letter in form and substance satisfactory to you from KPMG Peat
Marwick LLP, dated the Option Closing Date and addressed to you, confirming
the information in their letter referred to in Section 4(d) hereof as of
the date thereof and stating that, without any additional investigation
required, nothing has come to their attention during the period from the
ending date of their review referred to in said letter to a date not more
than five (5) days prior to the Option Closing Date which would require any
change in said letter if it were required to be dated the Option Closing
Date.
(v) All proceedings taken at or prior to the Option Closing Date in
connection with the sale and issuance of the Option Units shall be
reasonably satisfactory in form and substance to you, and you and Freshman,
Marantz, Orlanski, Cooper & Klein, counsel to the Underwriters, shall have
been furnished with all such documents and certificates as you may request
in connection with this transaction in order to evidence the accuracy and
completeness of any of the representations, warranties or statements of
each of the Company and LLK or either of their compliance with any of the
covenants or conditions contained therein.
(g) If any of the conditions herein provided for in this Section
shall not have been completely fulfilled as of the date indicated, this
Agreement and all obligations of the Underwriters under this Agreement may be
canceled at, or at any time prior to, each Closing Date by your notifying the
Company of such cancellation in writing or by telegram at or prior to the
applicable Closing Date. Any such cancellation shall be without liability of
any Underwriter to the Company and LLK, as applicable, except as otherwise
provided herein.
5 CONDITIONS OF THE OBLIGATIONS OF THE COMPANY AND LLK.
The obligation of the Company and LLK, as applicable, to sell and deliver
the Units is subject to the following conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 p.m. New York time, on the date of this Agreement, or on such later
date or time as you and the Company may agree in writing.
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(b) On the Closing Dates, no stop order suspending the effectiveness
of the Registration Statement shall have been issued under the Act or any
proceedings therefor initiated or threatened by the Commission.
If the conditions to the obligations of the Company and LLK, provided for
in this Section have been fulfilled on the First Closing Date but are not
fulfilled after the First Closing Date and prior to the Option Closing Date,
then only the obligation of the Company and LLK to sell and deliver the Option
Units on exercise of the option provided for in Section 2(b) hereof shall be
affected.
6 INDEMNIFICATION.
(a) INDEMNIFICATION OF THE UNDERWRITERS BY THE COMPANY. The Company
agrees to indemnify and hold harmless each Underwriter, its officers and
employees, and each person, if any, who controls any Underwriter within the
meaning of the Securities Act and the Exchange Act against any loss, claim,
damage, liability or expense, as incurred, to which such Underwriter or such
controlling person may become subject, under the Securities Act, the Exchange
Act or other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of the Company), insofar as such loss, claim,
damage, liability or expense (or actions in respect thereof as contemplated
below) arises out of or is based (i) upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, or any
amendment thereto, including any information deemed to be a part thereof
pursuant to Rule 430A or Rule 434 under the Securities Act, or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading; or (ii) upon any untrue
statements or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; or (iii) in whole or
in part upon any inaccuracy in the representations and warranties of the Company
contained herein, or (iv) in whole or in part upon any failure of the Company to
perform its obligations hereunder or under law, or (v) any act or failure to act
or any alleged act or failure to act by any Underwriter in connection with, or
relating in any manner to, the Common Stock or Warrants or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon any matter
covered by clause (i) or (ii) above, PROVIDED that the Company shall not be
liable under this clause (v) to the extent that a court of competent
jurisdiction shall have determined by a final judgment that such loss, claim,
damage, liability or action resulted directly from any such acts or failures to
act undertaken or omitted to be taken by such Underwriter through its bad faith
or willful misconduct; and to reimburse each Underwriter and each such
controlling person for any and all reasonable expenses (including the fees and
disbursements of counsel chosen by Joseph Charles & Associates, Inc.) as such
expenses are reasonably incurred by such Underwriter or such controlling person
in connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action; PROVIDED, HOWEVER,
that the foregoing indemnity agreement shall not apply to any loss, claim,
damage, liability or expense to the extent, but only to the extent, arising out
of or based upon any untrue statement or alleged
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<PAGE>
untrue statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company by the
Representative expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); AND PROVIDED, FURTHER, that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the benefit
of any Underwriter from whom the person asserting any loss, claim, damage,
liability or expense purchased units, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to the provision hereunder and a copy of the Prospectus
(as then amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) was not sent or given by or on behalf of
such Underwriter to such person, if required by law so to have been
delivered, at or prior to the written confirmation of the sale of the Units
to such person, and if the Prospectus (as so amended or supplemented) would
have cured the defect giving rise to such loss, claim, damage, liability or
expense. The indemnity agreement set forth in this Section 6(a) shall be in
addition to any liabilities that the Company may otherwise have.
(b) INDEMNIFICATION OF THE UNDERWRITERS BY LLK. LLK agrees to
indemnify and hold harmless each Underwriter, its officers and employees, and
each person, if any, who controls any Underwriter within the meaning of the
Securities Act and the Exchange Act against any loss, claim, damage, liability
or expense, as incurred, to which such Underwriter or such controlling person
may become subject, under the Securities Act, the Exchange Act or other federal
or state statutory law or regulation, or at common law or otherwise (including
in settlement of any litigation, if such settlement is effected with the written
consent of the Company), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or
is based (i) upon any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto, or arises out of or is based
upon the omission or alleged omission to state therein a material fact required
to be stated thereon or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in the
Registration Statement, any preliminary prospectus, the Prospectus (or any
amendment or supplement thereto), in reliance upon and in conformity with
written information furnished to the Company by LLK expressly for use therein,
or (ii) in whole or in part upon any inaccuracy in the representations and
warranties of LLK contained herein, or (iii) in whole or in part upon any
failure of LLK to perform its obligations hereunder or under law, or (iv) any
act or failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Common Stock or Warrants or
the offering contemplated hereby, and which is included as part of or referred
to in any loss, claim, damage, liability or action arising out of or based upon
any matter covered by clause (i) above, PROVIDED that LLK shall not be liable
under this clause (iv) to the extent that a court of competent jurisdiction
shall have determined by a final judgment that such loss, claim, damage,
liability or action resulted directly from any such acts or failures to act
undertaken or omitted to be taken by such Underwriter through its bad faith or
willful misconduct; and to reimburse each Underwriter and each such controlling
person for any and all expenses (including the fees and disbursements of counsel
chosen by Joseph Charles & Associates, Inc.) As such expenses are reasonably
incurred by such Underwriter or such controlling person in connection with
investigating, defending, settling, compromising or paying any such loss, claim,
damage, liability, expense or action; PROVIDED,
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HOWEVER, that the foregoing indemnity agreement shall not apply to any loss,
claim, damage, liability or expense to the extent, but only to the extent,
arising out of or based upon any untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by the Representative expressly
for use in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto); AND PROVIDED, FURTHER,
that with respect to any preliminary prospectus, the foregoing indemnity
agreement shall not inure to the benefit of any Underwriter from whom the
person asserting any loss, claim, damage, liability or expense purchased
units, or any person controlling such Underwriter, if copies of the
Prospectus were timely delivered to the Underwriter pursuant to the provision
hereunder and a copy of the Prospectus (as then amended or supplemented if
the Company shall have furnished any amendments or supplements thereto) was
not sent or given by or on behalf of such Underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Units to such person, and if the Prospectus
(as so amended or supplemented) would have cured the defect giving rise to
such loss, claim, damage, liability or expense. The indemnity agreement set
forth in this Section 6(a) shall be in addition to any liabilities that LLK
may otherwise have.
(c) INDEMNIFICATION OF THE COMPANY, LLK AND EACH OF THEIR DIRECTORS
AND OFFICERS. Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, each of its directors, officers and employees,
LLK and each of its directors, officers and employees, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act, against any loss, claim, damage, liability or expense, as incurred to which
the Company, LLK or any such director, officer, employee or controlling person
may become subject, under the Securities Act, the Exchange Act, or other federal
or state statutory law or regulation, or at common law or otherwise (including
in settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or
is based upon any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto, or arises out of or is based
upon the omission or alleged omission to state therein a material fact required
to be stated thereon or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in the
Registration Statement, any preliminary prospectus, the Prospectus (or any
amendment or supplement thereto), in reliance upon and in conformity with
written information furnished to the Company or LLK by the Representative
expressly for use therein; and to reimburse the Company, LLK, or any such
director, officer, employee or controlling person for any legal and other
expense reasonably incurred by the Company, LLK, or any such director, officer,
employee or controlling person in connection with investigating, defending,
settling, compromising or paying any such loss, claim, damage, liability,
expense or action. Each of the Company and LLK hereby acknowledges that the
only information that the Underwriters have furnished to the Company and LLK
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto) are the statements set
forth (A) as the last paragraph on the inside front cover page of the Prospectus
concerning stabilization by the Underwriters and (B) in the table in the first
paragraph, and information under the caption
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"Underwriting" in the Prospectus; and the Underwriters confirm that such
statements are correct. The indemnity agreement set forth in this Section
6(b) shall be in addition to any liabilities that each Underwriter may
otherwise have.
(d) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES. Promptly
after receipt by an indemnified party under this Section 6 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 6, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 6 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; PROVIDED, HOWEVER, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 6 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the provisions to the next preceding sentence (it being
understood, however, that the indemnifying party shall not be liable for the
expenses of more than one separate counsel (together with local counsel),
approved by the indemnifying party (Joseph Charles & Associates. In the case of
Section 6(c) and Section 7), representing the indemnified parties who are
parties to such action) or (ii) the indemnifying party shall not have employed
counsel satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after notice of commencement of the action, in each of
which cases the fees and expenses of counsel shall be at the expense of the
indemnifying party.
(e) SETTLEMENTS. The indemnifying party under this Section 6 shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by Section
6(d) hereof, the indemnifying party
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agrees that it shall be liable for any settlement of any proceeding effected
without its written consent if (i) such settlement is entered into more than
30 days after receipt by such indemnifying party of the aforesaid request and
(ii) such indemnifying party shall not have reimbursed the indemnified party
in accordance with such request prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement, compromise or consent to the entry
of judgment in any pending or threatened action, suit or proceeding in
respect of which any indemnified party is or could have been a party and
indemnity was or could have been sought hereunder by such indemnified party,
unless such settlement, compromise or consent includes an unconditional
release of such indemnified party from all liability on claims that are the
subject matter of such action, suit or proceeding.
7 CONTRIBUTION.
If the indemnification provided for in Section 6 is for any reason held to
be unavailable to or otherwise insufficient to hold harmless an indemnified
party of any losses, claims, damages, liabilities or expenses referred to
therein, then each indemnifying party shall contribute to the aggregate amount
paid or payable by such indemnified party, as incurred, as a result of any
losses, claims, damages, liabilities or expenses referred to therein (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and LLK, on the one hand, and the Underwriters, on the other hand, from
the offering of the Units pursuant to this Agreement or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company, and LLK, on
the one hand, and the Underwriters, on the other hand, in connection with the
statements or omissions or inaccuracies in the representations and warranties
herein which resulted in such losses, claims, damages, liabilities or expenses,
as well as any other relevant equitable considerations. The relative benefits
received by the Company, and LLK, on the one hand, and the Underwriters, on the
other hand, in connection with the offering of the Units pursuant to this
Agreement shall be deemed to be in the same respective proportions as the total
net proceeds from the offering of the Units pursuant to this Agreement (before
deducting expenses) received by the Company, and LLK, and the total underwriting
discount received by the Underwriters, in each case as set forth on the front
cover page of the Prospectus bear to the aggregate initial public offering price
of the Units as set forth on such cover. The relative fault of the Company, and
LLK, on the one hand, and the Underwriters, on the other hand, shall be
determined by reference to, among other things, whether any such untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact or any such inaccurate or alleged inaccurate
representation or warranty relates to information supplied by the Company, or
LLK, on the one hand, or the Underwriters, on the other hand, and the parties=
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 6(d), any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in Section 6(d) with
respect to notice of commencement of any action shall apply if a claim for
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contribution is to be made under this Section 7; PROVIDED, HOWEVER, that no
additional notice shall be required with respect to any action for which notice
has been given under Section 6(c) for purposes of indemnification.
The Company, LLK and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 7.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Units underwritten by it and
distributed to the public. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters= obligations to contribute pursuant to this
Section 9 are several, and not joint, in proportion to their respective
underwriting commitments as set forth opposite their names in SCHEDULE I. For
purposes of this Section 7, each officer and employee of an Underwriter and each
person, if any, who controls an Underwriter within the meaning of the Securities
Act and the Exchange Act shall have the same rights to contribution as such
Underwriter, and each director, officer and employee of the Company, and each
person, if any, who controls the Company with the meaning of the Securities Act
and the Exchange Act shall have the same rights to contribution as the Company.
8 COSTS AND EXPENSES.
(a) Whether or not this Agreement becomes effective or the sale of
the Units to the Underwriters is consummated, the Company will pay all costs and
expenses incident to the performance of this Agreement by the Company, including
but not limited to the fees and expenses of counsel to the Company and of the
Company's accountants; the costs and expenses incident to the preparation,
printing, filing and distribution under the Act of the Registration Statement
(including the financial statements therein and all amendments and exhibits
thereto), each Preliminary Prospectus and the Prospectus, as amended or
supplemented, the fee of the National Association of Securities Dealers, Inc.
("NASD") in connection with the filing required by the NASD relating to the
offering of the Units contemplated hereby; all expenses, including reasonable
fees (but not in excess of the amount set forth in Section 3(b)) and
disbursements of counsel to the Underwriters, in connection with the
qualification of the Units under the State Securities or Blue Sky Laws which you
shall designate; the cost of printing and furnishing to you copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus, this
Agreement, the Warrant Agreement and the Blue Sky Memorandum; the cost of
printing the certificates representing the Securities, the expenses of Company
due diligence meetings and presentations, (but not of any Underwriter or
Underwriter's counsel in connection therewith) and the expense of placing one or
more "tombstone" advertisements as directed by you. The Company shall pay any
and all taxes (including any transfer, franchise, capital stock or other tax
imposed by any jurisdiction) on sales to the Underwriters hereunder. The
Company will also pay all costs and expenses incident to the furnishing of any
amended Prospectus or of any
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supplement to be attached to the Prospectus as called for in Section 3(a) of
this Agreement except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses, the Company shall at the
First Closing Date pay to you the balance of a non-accountable expense allowance
of 3.0% of the gross proceeds of the offering. In the event the over-allotment
option is exercised in part or in full, the Company shall pay to you at the
Option Closing Date an additional amount equal to 3.0% of the gross proceeds
received upon exercise of the overallotment option. In the event the
transactions contemplated hereby are not consummated for any reason, the Company
shall be liable for your actual accountable out-of-pocket expenses, including
legal fees. If the contemplated transactions are not consummated by reason of
breach by the Company of this Agreement or of any representation, warranty,
covenant or condition contained herein, the Company shall be liable for your
accountable out-of-pocket expenses.
(c) No person is entitled either directly or indirectly to
compensation from the Company, from any Underwriter or from any other person for
services as a finder in connection with the proposed offering, and the Company
agrees to indemnify and hold harmless each Underwriter, and the Underwriters
agree to indemnify and hold harmless, severally and not jointly, the Company
from and against any losses, claims, damages or liabilities, joint or several
(which shall, for all purposes of this Agreement, include, but not be limited
to, all reasonable costs of defense and investigation and all reasonable
attorneys' fees), to which the indemnified party may become subject insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon the claim of any person (other than an employee
of the party claiming indemnity) or entity that he or it is entitled to a
finder's fee in connection with the proposed offering by reason of such person's
or entity's influence or prior contact with the indemnifying party.
9 DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS.
If, on the First Closing Date or the Option Closing Date, as the case may
be, any one or more of the several Underwriters fail or refuse to purchase Units
that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Units which such defaulting Underwriters agreed but failed
or refused to purchase does not exceed 10% of the aggregate number of the Units
to be purchased on such date, the other Underwriters shall be obligated,
severally, in the proportions that the number of Firm Units set forth opposite
their respective names on SCHEDULE A bears to the aggregate number of Firm Units
set forth opposite the names of all such non-defaulting Underwriters, or in such
other proportions as may be specified by the Representatives with the consent of
the non-defaulting Underwriters, to purchase the Units which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date. If, on the First Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Units
and the aggregate number of Units with respect to which such default occurs
exceeds 10% of the aggregate number of Units to be purchased on such date, and
arrangements satisfactory to the Representative and the Company for the purchase
of such Units are not made within 48 hours after such default, this Agreement
shall terminate without liability of any party to any other party except that
the provisions of Section 6, Section 7 and Section 8 shall at all times be
effective and shall survive such
31
<PAGE>
termination. In any such case either the Representative or the Company shall
have the right to postpone the First Closing Date or the Option Closing Date,
as the case may be, but in no event for longer than seven days in order that
the required changes, if any, to the Registration Statement and the
Prospectus or any other document or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
9. Any action taken under this Section 9 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
10 EFFECTIVE DATE.
The Agreement shall become effective upon its execution, except that you
may, at your option, delay its effectiveness until the earlier to occur of 10:00
A.M., New York time on the first full business day following the Effective Date
as you in your discretion shall first commence the initial public offering by
you of any of the Units. The time of the initial public offering shall mean the
time of release by you of the first newspaper advertisement with respect to the
Units, or the time when the Units are first generally offered by you to dealers
by letter or telecopier, whichever shall first occur. This Agreement may be
terminated by you at any time before it becomes effective as provided above,
except that Sections 6, 7, 8, 13, 14, 15 and 16 shall remain in effect
notwithstanding such termination.
11 TERMINATION.
(a) This Agreement, except for Sections 6, 7, 8, 13, 14, 15 and 16,
may be terminated at any time prior to the First Closing Date, and the option
referred to in Section 2(b), if exercised, may be canceled, at any time prior to
the Option Closing Date, by you if in your judgment it is impracticable to offer
for sale or to enforce contracts made by you for the resale of the Units agreed
to be purchased hereunder, by reason of (i) the Company having sustained a
material loss, whether or not insured, by reason of fire, earthquake, flood,
accident or other calamity, or from any labor dispute or court or government
action, order or decree, (ii) trading in securities on the New York Stock
Exchange or the American Stock Exchange having been suspended or limited, (iii)
material governmental restrictions having been imposed on trading in securities
generally which are not in force and effect on the date hereof, (iv) a banking
moratorium having been declared by federal or New York State authorities, (v) an
outbreak of major international hostilities or other national or international
calamity having occurred, (vi) the passage by the Congress of the United States
or by any state legislative body of similar impact, of any act or measure, or
the adoption of any orders, rules or regulations by any governmental body or any
authoritative accounting institute or board, or any governmental executive,
which is reasonably believed likely by you to have a material adverse impact on
the business, financial condition or financial statements of the Company, (vii)
any material adverse change in the financial or securities markets beyond normal
fluctuations in the United States having occurred since the date of this
Agreement, or (viii) any material adverse change having occurred, since the
respective dates for which information is given in the Registration Statement
and Prospectus, in the earnings, business, prospects or general condition of the
Company, financial or otherwise, whether or not arising in the ordinary course
of business.
32
<PAGE>
(b If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section 10 or in Section 9, the
Company shall be promptly notified by you, by telephone or facsimile
transmission, confirmed by letter.
12. REPRESENTATIVE'S OPTION.
On the First Closing Date, the Company will issue to you, for a
consideration of $290.00 and upon the terms and conditions set forth in the form
of Representative's Option annexed as an exhibit to the Registration Statement,
the Representative's Option to purchase 290,000 Units. In the event of conflict
in the terms of this Agreement and the Representative's Option, the language of
the Representative's Option shall control.
13. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
The respective indemnities, agreements, representations, warranties and
other statements of the Company or its Existing Shareholders, where appropriate,
and you, set forth in or made pursuant to this Agreement will remain in full
force and effect regardless of any investigation made by or on behalf of the
Underwriters, the Company or any of its officers or directors or any controlling
persons and will survive delivery of and payment for the Units and the
termination of this Agreement.
14. NOTICE.
All communications hereunder will be in writing and, except as otherwise
expressly provided herein, if sent to any Underwriter, will be mailed, delivered
or telecopied and confirmed to it at Joseph Charles & Associates, Inc., 9701
Wilshire Boulevard, Ninth Floor, Beverly Hills, California 90212, with a copy
sent to Thomas J. Poletti, Esq. at Freshman, Marantz, Orlanski, Cooper & Klein,
9100 Wilshire Boulevard, 8th Floor East, Beverly Hills, California 90212-3480,
or if sent to the Company, will be mailed, delivered, or facsimiled and
confirmed to Ontro, Inc., 12675 Danielson Court, Suite 401, Poway, California
92064, with a copy sent to David A. Fisher, Esq. at Fisher Thurber LLP, 4225
Executive Square, Suite 1600, La Jolla, California 92037-1483, or if sent to
LLK, will be mailed, delivered, or facsimiled and confirmed to L.L.
Knickerbocker Company, Inc, 25800 Commerce Center Drive, Lake Forest 92630, with
a copy to William R. Black, Esq. at Law Offices of Wiliam R. Black, 29
Summitcrest, Dove Canyon, California 92679.
15. PARTIES IN INTEREST.
The Agreement herein set forth is made solely for the benefit of the
Underwriters, the Company and, to the extent expressed, LLK, any person
controlling the Company, LLK or any Underwriter, and directors of the Company,
nominees for directors of the Company (if any) named in the Prospectus, the
officers of the Company who have signed the Registration Statement, and their
respective executors, administrators, successors and assigns, and no other
person shall acquire for have any right under or by virtue of this Agreement.
The term
33
<PAGE>
"successors and assigns" shall not include any purchaser, as such purchaser,
from any Underwriter of the Units.
16. APPLICABLE LAW.
This Agreement will be governed by, and construed in accordance with, the
laws of the State of California applicable to agreements made and to be entirely
performed within California.
34
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return this Underwriting Agreement, whereupon it will become a
binding agreement between the Company and the Underwriters in accordance with
its terms.
Very truly yours,
Ontro, Inc.
Dated: , 1997 By:
----------- -----------------------------------------------
James A. Scudder
President and Chief Executive Officer
L.L. Knickerbocker Company, Inc.
By:
----------------------------------------------
Name:
Its:
The foregoing Underwriting Agreement is hereby confirmed and accepted as of
the date first above written.
Joseph Charles & Associates, Inc.
As Representative of the several Underwriters
named in Schedule I hereto
Date: , 1997 By:
----------- -----------------------------------------------
Name:
Its:
Authorized Officer
35
<PAGE>
SCHEDULE I
Underwriting Agreement dated , 1997
------------
Number of Firm Units
Underwriter to be Purchased
- ----------- ----------------
Joseph Charles & Associates, Inc.
2,900,000
---------
---------
36
<PAGE>
SCHEDULE II
UNITED STATES PATENTS AND PATENT APPLICATIONS
U.S. Patent Applications
Docket No. Title Serial No. Filing Date
- ---------- ----- ---------- -----------
Issued U.S. Patents
Docket No. Title Serial No. Filing Date
- ---------- ----- ---------- -----------
37
<PAGE>
SCHEDULE III
FOREIGN PATENT APPLICATIONS
Registration or
Docket No. Country Title Application No. Status
- ---------- ------- ----- --------------- ------
38
<PAGE>
___________________, 1997
SELECTED DEALER AGREEMENT
Dear Sirs:
In connection with the public offering of securities of Ontro, Inc.
underwritten by us, or by a group of underwriters, including us (the
"Underwriters"), represented by us, you are being offered, as principal, a
portion of such securities at a discount from the offering price representing
a selling concession or reallowance granted as consideration for services
rendered by you in the sale of such securities. We request that you agree to
the following terms and provisions, and make the following representations,
which, together with any additional terms and provisions set forth in any
wire or letter sent to you in connection with a particular offering, will
govern all such purchases of securities and the reoffering thereof by you.
YOUR SUBSCRIPTION TO, OR PURCHASE OF, SUCH SECURITIES WILL CONSTITUTE
YOUR REAFFIRMATION OF THIS AGREEMENT.
1. When we are acting as representative (the "Representative") of the
Underwriters in offering securities to you, it should be understood that all
offers are made subject to prior sale of the subject securities, when, as and
if such securities are delivered to and accepted by the Underwriters and
subject to the approval of legal matters by their counsel. In such cases,
any order from you for securities will be strictly subject to confirmation
and we reserve the right in our uncontrolled discretion to reject any order
in whole or in part. Upon release by us, you may reoffer such securities at
the offering price fixed by us. With our consent, you may allow a discount,
not in excess of the reallowance fixed by us, in selling such securities to
other dealers, provided that in doing so you comply with the Conduct Rules of
the National Association of Securities Dealers, Inc. (the "NASD"). Upon our
request, you will advise us of the identity of any dealer to whom you allow
such a discount and any Underwriter or dealer from whom you receive such a
discount. After the securities are released for sale to the public, we may
vary the offering price and other selling terms.
2. You represent that you are a dealer actually engaged in the
investment banking or securities business and that you are either (i) a
member in good standing of the NASD or (ii) a dealer with its principal place
of business located outside the United States, its territories or possessions
and not registered under the Securities Exchange Act of 1934 (a "non-member
foreign dealer") or (iii) a bank not eligible for membership in NASD. If you
are a non-member foreign dealer, you agree to make no sales of securities
within the United States, its territories or its possessions or to persons
who are nationals thereof or residents therein. If you are a non-member
foreign dealer or bank, you agree, in making any sales, to comply with the
NASD's interpretation with respect to free-riding and withholding. In
accepting a reallowance from us whether or not we are acting as such
1
<PAGE>
Representative of the Underwriters, and in allowing a discount to any other
person, you agree to comply with the provision of Rule 2740 of the NASD
Conduct Rules, and, in addition, if you are a non-member foreign dealer or
bank, you agree to comply, as though you were a member of the NASD, with the
provisions of Rules 2730 and 2750 of the NASD Conduct Rules and to comply
with Rule 2420 thereof as that Rule applies to a non-member foreign dealer or
bank. You represent that you are fully familiar with the above provisions of
the Conduct Rules of the NASD.
3. If the securities have been registered under the Securities Act of
1933, as amended (the "1933 Act"), in offering and selling such securities,
you are not authorized to give any information or make any representation not
contained in the prospectus relating thereto. You confirm that you are
familiar with the rules and policies of the Securities and Exchange
Commission relating to the distribution of preliminary and final
prospectuses, including but not limited to Rule 15c2-8 under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and you agree that you
will comply therewith in any offering covered by this Agreement. If we are
acting as Representative of the Underwriters, we will make available to you,
to the extent made available to use by the issuer of the securities, such
number of copies of the prospectus (or offering documents for securities not
registered under the 1933 Act) as you may reasonably request for the purposes
contemplated by the 1933 Act or the 1934 Act, or the rules and regulations
thereunder.
4. If we are acting as Representative of the Underwriters of securities
of an issuer that is not required to file reports under the 1934 Act, you
agree that you will not sell any of the securities to any account over which
you have discretionary authority.
5. Payment for securities purchased by you is to be made at our office,
9701 Wilshire Boulevard, 9th Floor, Beverly Hills, California 90212 (or at
such other place as we may advise), at the offering price less the concession
allowed to you, on such date as we may advise, by certified or official bank
check in New York Clearing House funds (or such other funds as we may
advise), payable to our order, against delivery of the securities to be
purchased by you. We shall have authority to make appropriate arrangements
for payment for and/or delivery through the facility of The Depository Trust
Company or any such other depository or similar facility for the securities.
6. In the event that, prior to the completion of the distribution of
securities covered by this Agreement, we purchase in the open market or
otherwise any securities delivered to you, if we are acting as
Representatives of the Underwriters, you agree to repay to us for the
accounts of the Underwriters the amount of the concession allowed to you plus
brokerage commissions and any transfer taxes paid in connection with such
purchase.
7. At any time prior to the completion of the distribution of
securities covered by this Agreement you will, upon our request as
Representative of the Underwriters, report to us the amount of securities
purchased by you which then remains unsold and will, upon our request, sell
to us for the account of one or more of the Underwriters such amount of such
unsold securities as we may designate, at the offering price less an amount
to be determined by us not in excess of the concession allowed to you.
2
<PAGE>
8. If we are acting as Representative for the Underwriters, upon
application to us, we will inform you of the states and other jurisdictions
of the United States in which it is believed that the securities offered are
qualified for sale under, or are exempt responsibility with respect to your
right to sell securities in any jurisdiction. We shall have authority to
file with the Department of State of the State of New York a Further State
Notice with respect to the securities, if necessary.
9. You agree, that in connection with any offering of securities
covered by this Agreement you will comply with the applicable provisions of
the 1933 Act and the 1934 Act and the applicable rules and regulations of the
Securities and Exchange Commission thereunder the applicable rules and
regulations of the NASD, and the applicable rules of any securities exchange
having jurisdiction over the offering.
10. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to any offering covered by
this Agreement. We shall be under no liability to you except for our lack of
good faith and for obligations assumed by us in this Agreement, except that
you do not waive any rights that you may have under the 1933 Act or the rules
and regulations thereunder.
11. Any notice from us shall be deemed to have been duly given if mailed
or transmitted by any standard form of written telecommunications to you at
such address as you shall specify to us in writing.
12. With respect to any offering of securities covered by this
Agreement, the price restrictions contained in Paragraph 1 hereof and the
provisions of Paragraphs 6 and 7 hereof shall terminate as to such offering
at the close of business on the 45th day after the securities are released
for sale or, as to any or all such provisions, at such earlier time as we may
advise. All other provisions of this Agreement shall remain operative and in
full force and effect with respect to such offering.
13. This Agreement shall be governed by the laws of the State of
California applicable to agreements made and to be performed entirely within
such State.
3
<PAGE>
Please confirm your agreement hereto by signing the enclosed duplicate
copy hereof in the place provided below and returning such signed duplicate
copy to us at 9701 Wilshire Boulevard, 9th Floor, Beverly Hills, California
90212, Attention: Syndicate Department (310) 274-4402. Upon receipt
thereof, this instrument and such signed duplicate copy will evidence the
agreement between us.
Very truly yours,
JOSEPH CHARLES & ASSOCIATES, INC.
By:
----------------------------
Richard A. Rappaport
Managing Director
Confirmed and accepted as of the
____ day of ___________, 199__
- ------------------------------
Name of Dealer
- --------------------------------
Authorized Officer or Partner
(if not Officer or Partner, attach
copy of Instrument of Authorization)
4
<PAGE>
Please complete and return with one executed copy of the Selected Dealer
Agreement.
Firm Name:
----------------------------------------------------------
Address: Street:
--------------------------------------
City:
--------------------------------------
State:
--------------------------------------
Zip Code:
--------------------------------------
Phone Number:
----------------------------------------------------------
Fax Number:
----------------------------------------------------------
Contact Person:
---------------------------------------------------------
Tax I.D. #:
---------------------------------------------------------
DTC #
---------------------------------------------------------
ABA #
---------------------------------------------------------
Corporate Delivery Instructions:
--------------------------------------
--------------------------------------
Government Deliver Instructions:
--------------------------------------
--------------------------------------
5
<PAGE>
EXHIBIT 4.1
FORM OF WARRANT CERTIFICATE
<PAGE>
[FRONT SIDE]
CERTIFICATE FOR
PURCHASE OF COMMON STOCK
EXPIRATION DATE: , 2000
------------------------
ONTRO, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
No. W Warrants
-------------------- --------------
THIS WARRANT CERTIFICATE CERTIFIES THAT
__________________________________or registered assigns ("the Warrant Holder"),
is the registered owner of a Warrant to purchase from Ontro, Inc., a California
corporation (the "Company") the above indicated number of shares of its common
stock, no par value, ("Share" or Shares"). The Warrant expires on
________________, 2000 (the "Expiration Date"). The Warrant entitles the
Warrant Holder to purchase each one Share at the purchase price of $____________
(the "Exercise Price"), commencing _____________________, 1997 and terminating
on ____________________, 2000 (the "Exercise Period"). The Warrant may be
exercised only upon surrender of this Warrant Certificate with the exercise form
hereon duly completed and executed, along with payment of the Exercise Price, at
the office of ChaseMellon Shareholder Services, L.L.C. (the "Warrant Agent"),
subject only to the conditions set forth herein and in the Warrant Agreement
dated as of ____________________________, 1997 by and between the Company and
the Warrant Agent (the "Warrant Agreement").
The Exercise Price, the number of Shares purchasable upon exercise, and the
Expiration Date are subject to adjustments upon the occurrence of certain
events. The Warrant Holder may exercise the Warrant to purchase all or any
number of the Shares underlying the Warrant. Reference hereby is made to the
provisions on the reverse side of this Warrant Certificate, and to the
provisions of the Warrant Agreement, all of which are incorporated by reference
and made a part of this Warrant Certificate as though set forth in full herein.
In the event any provision of this Warrant Certificate is inconsistent with the
Warrant Agreement, the provisions of the Warrant Agreement shall be controlling.
The Warrants are redeemable by the Company, at its option, for $0.05 per
Warrant following at least 30 days prior notice by the Company to Warrant
Holders if the closing price of the Shares equals or exceeds $_________________
for 20 consecutive trading days ending within the 30 days prior to the date the
notice of redemption is given, and at such time there is a current effective
registration statement covering the Shares underlying the Warrants, and the
expiration of the 30 day notice period is within the exercise period.
<PAGE>
[FRONT SIDE CONTINUED]
Upon due presentment for transfer of this Warrant Certificate at the office
of the Warrant Agent, along with payment of any tax or governmental charge(s)
imposed in connection with such transfer, a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a Warrant or Warrants
to purchase a like number of Shares, subject to any adjustments made in
accordance with the provisions of the Warrant Agreement, shall be issued to the
transferee(s) in exchange for this Warrant Certificate, subject to the
limitations provided in the Warrant Agreement.
The Warrant Holder may exercise the Warrant to purchase all or any whole
number of the Shares underlying the Warrant, during the period, and in the
manner stated hereon, provided there is: (i) a current prospectus under the
Securities Act relating to the Shares, and (ii) such securities are qualified
for sale or exempt from qualification under the law in the state of residence of
the Warrant Holder. The Exercise Price shall be payable in lawful money of the
United States of America, in cash or by certified or bank cashier's check or
bank draft payable to the order of the Company. If upon exercise of the Warrant
evidenced by this Warrant Certificate the number of Shares purchased shall be
less than the total number so evidenced, there shall be issued to the Warrant
Holder a new Warrant Certificate evidencing a Warrant to purchase the Shares not
so purchased.
Subject to the following paragraph, no Warrant may be exercised after 5:00
p.m. Pacific Standard Time on the Expiration Date and any Warrant not exercised
by such time shall become void, unless otherwise extended by the Company
pursuant to written notice thereof delivered to the Warrant Agent.
The Company may, at its option, modify the Expiration Date of the Warrant
or reduce the Exercise Price upon not less than 30 days prior notice to the
Warrant Holder in the event that there exists a current Prospectus relating to
the Common Stock issuable upon exercise of the Warrant under an effective
registration statement filed with the SEC, and qualified for sale, or exempt
from qualification under applicable state securities laws. The Warrant Holder
will automatically forfeit the right to purchase the Shares issuable upon
exercise of the Warrant unless the Warrant is exercised before the close of
business on the Expiration Date.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent.
Warrant Holders may obtain from the offices of the Warrant Agent at 400
South Hope Street, Fourth Floor, Los Angeles, California 90071, upon request and
without charge, a statement of the rights, preferences, privileges and
restrictions granted to or imposed upon each class or series of shares
authorized to be issued and upon the holders thereof.
<PAGE>
[FRONT SIDE CONTINUED]
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
signed by its President and by its Secretary, each by a facsimile of his/her
signature, and has caused a facsimile of its corporate seal to be imprinted
hereon.
Dated: ONTRO, INC.
---------------------
[SEAL] By: By:
-------------- ---------------
President Secretary
Countersigned:
ChaseMellon Shareholder Services, L.L.C.
as Warrant Agent
By:
----------------------------
Authorized Officer
<PAGE>
[BACK SIDE]
ELECTION TO PURCHASE
(To be executed upon your exercise of Warrants)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase
- -------------------------------------------------------------------------------.
Shares and herewith tenders payment for such shares in cash or a certified or
official bank check payable to the order of the Company in the amount of
$_________ and in accordance with the terms hereof. The undersigned represents
that a certificate for such shares be registered in the name of
- -------------------------------------------------------------------------------.
whose address is
---------------------------------------------------------------.
and that such certificate be delivered to
--------------------------------.
whose address is
---------------------------------------------------------------.
If said number of shares is less than all the Shares purchasable hereunder, the
undersigned requests that a new Warrant Certificate representing Warrants to
purchase the remaining balance of the Shares be registered in the
name of
-----------------------------------------------------------------------.
whose address is
---------------------------------------------------------------.
and that such certificate be delivered to
--------------------------------.
whose address is
---------------------------------------------------------------.
Dated: Signature:
------------------- ------------------------------------
(Signature must conform in all respects to name
of Holder as it appears on the face of the
Warrant Certificate.)
(Insert Social Security or other identifying number of assignee.)
/s/
Signature Guaranteed:
ASSIGNMENT
(To be executed by the registered Holder if such Holder desires to transfer
the Warrant Certificate)
FOR VALUE RECEIVED hereby sells, assigns and transfers unto
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address of undersigned)
of the Warrants evidenced by this Warrant Certificate, together with all right,
title and interest therein, and does hereby irrevocably constitute and
appoint_________________________________________________________________________
_______ Attorney, to transfer the within Warrant Certificate on the books of
the within-named Company, with full power of substitution.
Dated: Signature:
------------------- ------------------------------------
(Signature must conform in all respects to name
of Holder as it appears on the face of the
Warrant Certificate.)
(Insert Social Security or other identifying number of assignee.)
/s/
Signature Guaranteed:
<PAGE>
Option to Purchase 290,000
Units, consisting of one
Share of Common Stock and
one Common Stock
Purchase Warrant
REPRESENTATIVE'S OPTION
Dated: , 1997
THIS CERTIFIES THAT JOSEPH CHARLES & ASSOCIATES, INC. (herein sometimes
called the "Holder" or the "Representative") is entitled to purchase from
ONTRO, INC., a California corporation (the "Company"), at the price and
during the period as hereinafter specified, up to Two Hundred Ninety Thousand
(290,000) Units (the "Units"), each Unit consisting of one (1) share of
common stock, no par value per share (the "Common Stock") and one (1) Common
Stock Purchase Warrant (the "Warrants") to purchase one (1) share of Common
Stock at a purchase price of $_____ per share subject to adjustment as
described below, at any time during the four-year period commencing one (1)
year from the effective date of the Registration Statement (the "Effective
Date").
This Representative's Option (the "Representative's Option") is issued
pursuant to an Underwriting Agreement between the Company, L.L.
Knickerbocker, Inc. ("LLK") and Joseph Charles & Associates, Inc., as
Representative of the several Underwriters set forth in Schedule I to said
Underwriting Agreement, in connection with a public offering, through the
Representative, of 2,900,000 Units as therein described (and up to 435,000
additional Units covered by an over-allotment option granted by the Company
and LLK to the Underwriters; the shares of Common Stock included in such
additional Units will be offered by LLK and the Warrants included in such
additional Units will be offered by the Company), and in consideration of
$250 received by the Company for the Representative's Option. Except as
specifically otherwise provided herein, the Common Stock and the Warrants
issued pursuant to the Representative's Option shall bear the same terms and
conditions as described under the caption "Description of the Units" in the
Registration Statement on Form SB-2, File No. 333-39253 (the "Registration
Statement") except that (i) the Holder shall have registration rights under
the Securities Act of 1933, as amended (the "Act"), for the Representative's
Option, the Common Stock and the Warrants issuable pursuant thereto and the
Common Stock issuable pursuant to such Warrants as more fully described in
paragraph 6 herein; and (ii) the Warrants will be exercisable only during the
period commencing upon such date as the Representative's Option is exercised
and expiring five (5) years from the Effective Date.
1. The rights represented by the Representative's Option shall be
exercised at the price, subject to adjustment in accordance with Section 8
hereof (the "Exercise Price"), and during the periods as follows:
1
<PAGE>
(a) During the period from the Effective Date to and
through _____________, 1998 (the "First
Anniversary Date"), inclusive, the Holder shall
have no right to purchase any Units hereunder,
except that in the event of any merger,
consolidation or sale of substantially all the
assets of the Company as an entirety prior to the
First Anniversary Date (other than (i) a merger or
consolidation in which the Company is the
continuing corporation and which does not result
in any reclassification or reorganization of any
outstanding shares of Common Stock or (ii) any
sale/leaseback, mortgage or other financing
transaction), the Holder shall have the right to
exercise the Representative's Option concurrently
with such event and into the kind and amount of
shares of stock and other securities and property
(including cash) receivable by a holder of the
number of shares of Common Stock into which the
Representative's Option and the Warrants
underlying the Representative's Option were
exercisable immediately prior thereto.
(b) Between ____________, 1998 and 2002, (five (5)
years from the Effective Date, i.e. the
"Expiration Date") inclusive, the Holder shall
have the option to purchase Units hereunder at a
price of $______ per Unit (140% of public offering
price per Unit).
(c) After the Expiration Date, the Holder shall have
no right to purchase any Units hereunder.
2. (a) The rights represented by the Representative's Option may be
exercised at any time within the periods above specified, in whole or in
part, by (i) the surrender of the Representative's Option (with the purchase
form at the end hereof properly executed) at the principal executive office
of the Company (or such other office or agency of the Company as it may
designate by notice in writing to the Holder at the address of the Holder
appearing on the books of the Company); (ii) payment to the Company of the
exercise price then in effect for the number of Units specified in the
above-mentioned purchase form together with applicable stock transfer taxes,
if any; and (iii) delivery to the Company of a duly executed agreement signed
by the person(s) designated in the purchase form to the effect that such
person(s) agree(s) to be bound by the provisions of paragraph 6 and
subparagraphs (b), (c) and (d) of paragraph 7 hereof. The Representative's
Option shall be deemed to have been exercised, in whole or in part to the
extent specified, immediately prior to the close of business on the date the
Representative's Option is surrendered and payment is made in accordance with
the foregoing provisions of this paragraph 2, and the person or persons in
whose name or names the certificates for shares of Common Stock and Warrants
shall be issuable upon such exercise shall become the holder or holders of
record of such Common Stock and Warrants at that time and date. The Common
Stock and Warrants and the certificates for the Common Stock and Warrants so
purchased shall be delivered to the Holder within a reasonable time, not
exceeding ten (10) business days, after the rights represented by this
Representative's Option shall have been so exercised.
2
<PAGE>
(b) Notwithstanding anything to the contrary contained in
paragraph 2(a), the Holder may elect to exercise this Representative's Option
in whole or in part by receiving shares of Common Stock equal to the value
(as determined below) of this Representative's Option, or any part hereof,
upon surrender of the Representative's Option at the principal office of the
Company together with notice of such election in which event the Company
shall issue to the Holder a number of shares of Common Stock computed using
the following formula:
X ' Y(A-B) + Z(A-C)
------ ------
A A
Where X ' the number of Shares of Common Stock to be
issued to the Holder;
Y ' the number of Shares of Common Stock
underlying the Units (exclusive of any shares
issuable upon exercise of any Warrants
underlying the Units) to be exercised under
this Representative's Option (the "Shares");
A ' the current fair market value of one share of
Common Stock;
B ' the Exercise Price of the Representative's
Option;
Z ' the number of shares of Common Stock issuable
upon exercise of the Warrants included in the
Units underlying this Representative's
Option; and
C ' the exercise price of the Warrants included
in the Units underlying this Representative's
Option.
As used herein, current fair market value of
Common Stock shall mean with respect to each share
of Common Stock the average of the closing prices
of the Company's Common Stock sold on the
principal national securities exchanges on which
the Common Stock is at the time admitted to
trading or listed, or, if there have been no sales
of any such exchange on such day, the average of
the highest bid and lowest ask price on such day
as reported by NASDAQ, or any similar organization
if NASDAQ is no longer reporting such information,
either (i) on the date which the form of election
is deemed to have been sent to the Company (the
"Notice Date") or (ii) over a period of five (5)
trading days preceding the Notice Date, whichever
of (i) or (ii) is greater. If on the date for
which current fair market value is to be
determined the Common Stock is not listed on any
securities exchange or quoted in the NASDAQ System
or the over-the-counter market, the current fair
market value of Common Stock shall be the highest
price per share which the Company could then
obtain
3
<PAGE>
from a willing buyer (not a current employee
or director) for shares of Common Stock sold
by the Company, from authorized but unissued
shares, as determined in good faith by the Board
of Directors of the Company, unless prior to such
date the Company has become subject to a binding
agreement for a merger, acquisition or other
consolidation pursuant to which the Company is not
the surviving party, in which case the current
fair market value of the Common Stock shall be
deemed to be the value to be received by the
holders of the Company's Common Stock for each
share thereof pursuant to the Company's
acquisition.
3. The Representative's Option shall not be sold, transferred,
assigned, or hypothecated for a period of one year commencing on the
Effective Date except that it may be transferred to successors of the Holder,
and may be assigned in whole or in part to any person who is an officer of
the Holder to any members of the selling group and/or the officers or
partners thereof during such period. This Representative's Option must be
executed immediately upon its transfer at any time after one year from the
Effective Date, and if not so executed, shall lapse. Any such assignment
shall be effected by the Holder by (i) executing the form of assignment at
the end hereof and (ii) surrendering the Representative's Option for
cancellation at the office or agency of the Company referred to in paragraph
2 hereof, accompanied by a certificate (signed by an officer of the Holder if
the Holder is a corporation) stating that each transferee is a permitted
transferee under this paragraph 3; whereupon the Company shall issue, in the
name or names specified by the Holder (including the Holder), a new
Representative's Option or Warrants of like tenor and representing in the
aggregate rights to purchase the same number of Units as are purchasable
hereunder at such time.
4. The Company covenants and agrees that all shares of Common Stock
which may be issued as part of the Units purchased hereunder will, upon
issuance and delivery against payment therefor of the requisite purchase
price, be duly and validly issued, fully paid and nonassessable. The Company
further covenants and agrees that, during the periods within which the
Representative's Option may be exercised, the Company will at all times have
authorized and reserved a sufficient number of shares of its Common Stock to
provide for the exercise of the Representative's Option and that it will have
authorized and reserved a sufficient number of shares of Common Stock for
issuance upon exercise of the Warrants included in the Units issuable upon
exercise of the Representative's Option.
5. The Representative's Option shall not entitle the Holder to any
voting rights or other rights, including without limitation notice of
meetings of other actions or receipt of dividends, as a shareholder of the
Company.
6. (a) The Company shall advise the Holder or its permitted
transferee, whether the Holder holds the Representative's Option or has
exercised the Representative's Option and holds Units or any of the
securities underlying the Units, by written notice at least four weeks prior
to the filing of any new registration statement thereto under the Act, or the
filing of a
4
<PAGE>
notification on Form 1-A under the Act for a public offering of securities,
covering any securities of the Company, for its own account or for the
account of others, except for any registration statement filed on Form S-4 or
S-8 (or other comparable form), and will, during the five (5) year period
from the Effective Date, upon the request of the Holder, include in any such
new registration statement (or notification as the case may be) such
information as may be required to permit a public offering of, all or any of
the Units underlying the Representative's Option, the Common Stock or
Warrants included in the Units or the Common Stock issuable upon the exercise
of the Warrants (the "Registrable Securities"). For so long as the Warrants
remain outstanding and as long as required by the Securities Act (so long as
the Holder's ability to exercise any Warrant is not adversely affected), the
Company currently intends to file post-effective amendments to the
Registration Statement (or any new registration statement filed by the
Company) setting forth or otherwise incorporating certain information
contained in the then most recent quarterly report on Form 10-Q or annual
report on Form 10-K filed by the Company (each such post-effective amendment,
a "Quarterly Amendment"). The parties hereby agree that if at any time
during such five (5) year period the Company receives written notice from the
Holder at least two weeks prior to the filing of any such Quarterly Amendment
indicating such Holder's intention to offer Registrable Securities in such
Quarterly Amendment, the Company will include in such Quarterly Amendment
such information as may be required to permit a public offering of such
Registrable Securities. The delivery by the Holder of any such notice shall
not constitute a demand made pursuant to Section 6(b). The Company shall
supply prospectuses and such other documents as the Holder may reasonably
request in order to facilitate the public sale or other disposition of the
Registrable Securities, use its best efforts to register and qualify any of
the Registrable Securities for sale in such states (i) as such Holder
designates and (ii) with respect to which the Company obtained a
qualification in connection with its initial public offering; and do any and
all other acts and things which may be necessary or desirable to enable such
Holder to consummate the public sale or other disposition of the Registrable
Securities, all at no expense to the Holder or the Representative (other than
sales commissions, underwriting discounts or commissions, or other expenses
of such sale), and furnish indemnification in the manner provided in
paragraph 7 hereof. The Holder shall furnish information and indemnification
as set forth in paragraph 7.
(b) At any time during the four (4) year period beginning one (1)
year after the Effective Date, a 50% Holder (as defined below) may request,
on one occasion, that the Company register under the Act any and all of the
Registrable Securities held by such 50% Holder. Upon the receipt of any such
notice, the Company will promptly, but no later than four weeks after receipt
of such notice, file a post-effective amendment to the current Registration
Statement or a new registration statement pursuant to the Act, so that such
designated Registrable Securities may be publicly sold under the Act as
promptly as practicable thereafter and the Company will use reasonable
efforts to cause such registration to become and remain effective (including
the taking of such reasonable steps as are necessary to obtain the removal of
any stop order) within 120 days after the receipt of such notice, provided,
that such Holder shall furnish the Company with appropriate information in
connection therewith as the Company may reasonably request in writing. The
50% Holder may, at its option, request the registration of any
5
<PAGE>
of the securities underlying the Representative's Option in a registration
statement made by the Company as contemplated by Section 6(a) or in
connection with a request made pursuant to this Section 6(b) prior to
acquisition of the Units issuable upon exercise of the Representative's
Option. The 50% Holder may, at its option, request such post-effective
amendment or new registration statement during the described period with
respect to the Representative's Option, the Units as units, or separately as
to the Common Stock and/or Warrants included in the Units and/or the Common
Stock issuable upon the exercise of the Warrants, and such registration
rights may be exercised by the 50% Holder prior to or subsequent to the
exercise of the Representative's Option. Within ten days after receiving any
such notice pursuant to this subsection (b) of paragraph 6, the Company shall
give notice to any other Holders of the Representative's Option, advising
that the Company is proceeding with such post-effective amendment or
registration statement and offering to include therein the securities
underlying that part of the Warrant held by the other Holders, provided that
they shall furnish the Company with such appropriate information (relating to
the intentions of such Holders) in connection therewith as the Company shall
reasonably request in writing. All costs and expenses of the post-effective
amendment or new registration statement shall be borne by the Company, except
that the Holder(s) shall bear the fees of their own counsel and any other
advisors retained by them and any underwriting discounts or commissions
applicable to any of the securities sold by them. The Company will use its
best efforts to maintain such registration statement or post-effective
amendment current under the Act for a period of at least 180 days from the
effective date thereof. The Company shall supply prospectuses, and such
other documents as the Holder(s) may reasonably request in order to
facilitate the public sale or other disposition of the Registrable
Securities, use its best efforts to register and qualify any of the
Registrable Securities for sale in such states (i) as such Holder(s)
designate and (ii) with respect to which the Company obtained a qualification
in connection with its initial public offering and furnish indemnification in
the manner provided in paragraph 7 hereof. Notwithstanding the foregoing set
forth in this paragraph 6(b), the Company shall not be required to include in
any registration statement any Registrable Securities which in the opinion of
counsel to the Company (which opinion is reasonably acceptable to counsel to
the Representative) would be saleable immediately without restriction under
Rule 144 (or its successor) if the Representative's Option was exercised
pursuant to paragraph 2(b) herein.
(c) The term "50% Holder" as used in this paragraph 6 shall mean
the Holder(s) of at least 50% of the Representative's Option and/or the
Units, other Common Stock and the Warrants underlying the Representative's
Option (considered in the aggregate).
7. (a) Whenever pursuant to paragraph 6 a registration statement
relating to any Units, Common Stock or Warrants issued upon exercise of (or
issuable upon the exercise of any Warrants purchasable under) the
Representative's Option is filed under the Act, amended or supplemented, the
Company will indemnify and hold harmless each Holder of the securities
covered by such registration statement, amendment or supplement (such Holder
being hereinafter called the "Distributing Holder"), and each person, if any,
who controls (within the meaning of the Act) the Distributing Holder, and
each underwriter (within the meaning of the Act) of such
6
<PAGE>
securities and each person, if any, who controls (within the meaning of the
Act) any such underwriter, against any losses, claims, damages or
liabilities, joint or several, to which the Distributing Holder, any such
controlling person or any such underwriter may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities, or
actions in respect thereof, arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
such registration statement as declared effective or any final prospectus
constituting a part thereof or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading and will reimburse the Distributing
Holder or such controlling person or underwriter for any legal or other
expense reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,
however, that the Company will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged
omission made in said registration statement, said preliminary prospectus,
said final prospectus or said amendment or supplement in reliance upon and in
conformity with written information furnished by such Distributing Holder or
any other Distributing Holder for use in the preparation thereof and provided
further, that the indemnity agreement provided in this Section 7(a) with
respect to any preliminary prospectus shall not inure to the benefit of any
Distributing Holder, controlling person of such Distributing Holder,
underwriter or controlling person of such underwriter from whom the person
asserting any losses, claims, charges, liabilities or litigation based upon
any untrue statement or alleged untrue statement of a material fact or
omission or alleged omission to state therein a material fact, received such
preliminary prospectus, if a copy of the prospectus in which such untrue
statement or alleged untrue statement or omission or alleged omission was
corrected has not been sent or given to such person within the time required
by the Act and the Rules and Regulations thereunder.
(b) The Distributing Holder will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed said
registration statement and such amendments and supplements thereto, and each
person, if any, who controls the Company (within the meaning of the Act)
against any losses, claims, damages or liabilities, joint or several, to
which the Company or any such director, officer or controlling person may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities, or actions in respect thereof, arise out of or are
based upon any untrue or alleged untrue statement of any material fact
contained in said registration statement, said preliminary prospectus, said
final prospectus, or said amendment or supplement, or arise out of or are
based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent,
that such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in said registration statement, said preliminary prospectus, said final
prospectus or said amendment or supplement in reliance upon and in conformity
with written information furnished by such Distributing Holder for use in the
preparation thereof; and will reimburse the Company or any such director,
officer or controlling
7
<PAGE>
person for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action.
(c) Promptly after receipt by an indemnified party under this
paragraph 7 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against any
indemnifying party, give the indemnifying party notice of the commencement
thereof, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party
otherwise than under this paragraph 7.
(d) In case any such action is brought against any indemnified
party, and it notifies an indemnifying party of the commencement hereof, the
indemnifying party will be entitled to participate in and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
paragraph 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than
reasonable costs of investigation.
8. The Exercise Price in effect at the time and the number and kind of
securities purchasable upon the exercise of the Warrant shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock (other than issuance of Common Stock pursuant to antidilution
provisions set forth in the Registration Statement), (ii) subdivide or
reclassify its outstanding shares of Common Stock into a greater number of
shares, (iii) combine or reclassify its outstanding shares of Common Stock
into a smaller number of shares, or (iv) enter into any transaction whereby
the Warrants or outstanding shares of Common Stock of the Company are at any
time changed into or exchanged for a different number or kind of shares or
other security of the Company or of another corporation through
reorganization, merger, consolidation, liquidation or recapitalization, then
appropriate adjustments in the number of Shares (or other securities for
which such Shares have previously been exchanged or converted) subject to
this Representative's Option shall be made and the Exercise Price in effect
at the time of the record date for such dividend or distribution or of the
effective date of such subdivision, combination, reclassification,
reorganization, merger, consolidation, liquidation or recapitalization shall
be proportionately adjusted so that the Holder of this Representative's
Option exercised after such date shall be entitled to receive the aggregate
number and kind of shares of Common Stock which, if this Representative's
Option had been exercised by such Holder immediately prior to such date, he
would have been entitled to receive upon such dividend, distribution,
subdivision, combination, reclassification, reorganization, merger,
consolidation, liquidation or recapitalization. For example, if the Company
declares a 2
8
<PAGE>
for 1 stock distribution and the Exercise Price hereof immediately prior to
such event was $____ per Unit and the number of Shares comprising the Units
issuable upon exercise of this Representative's Option was 290,000, the
adjusted Exercise Price immediately after such event would be $_____ per Unit
(giving no value to the Warrants included in the Units) and the adjusted
number of Shares comprising the Units issuable upon exercise of this
Representative's Option would be 580,000. Such adjustment shall be made
successively whenever any event listed above shall occur. Any adjustments in
the number and exercise price of the Warrants included in the Units shall be
made in accordance with the provisions of the Warrant Agreement dated as of
December 5, 1997, between and among the Company and ChaseMellon Shareholder
Services LLC and shall be made irrespective of whether such Warrants are
outstanding or not.
(b) In case the Company shall fix a record date for the issuance
of rights or warrants to all holders of its Common Stock entitling them to
subscribe for or purchase shares of Common Stock (or securities convertible
into Common Stock) at a price (the "Subscription Price") (or having a
conversion price per share) less than the Exercise Price on a per share basis
giving no value to the Warrants included in the Units (the "Per Share
Exercise Price") on such record date, the Exercise Price shall be adjusted so
that the same shall equal the price determined by multiplying the number of
shares of Common Stock then comprising a Unit by the Per Share Exercise Price
in effect immediately prior to the date of issuance by a fraction, the
numerator of which shall be the sum of the number of shares of Common Stock
then outstanding on the record date mentioned below and the number of
additional shares of Common Stock which the aggregate offering price of the
total number of shares of Common Stock so offered (or the aggregate
conversion price of the convertible securities so offered) would purchase at
the Per Share Exercise Price in effect immediately prior to the date of such
issuance, and the denominator of which shall be the sum of the number of
shares of Common Stock outstanding on the record date mentioned below and the
number of additional shares of Common Stock offered for subscription or
purchase (or into which the convertible securities so offered are
convertible). Such adjustment shall be made successively whenever such
rights or warrants are issued and shall become effective immediately after
the record date for the determination of shareholders entitled to receive
such rights or warrants; and to the extent that shares of Common Stock are
not delivered (or securities convertible into Common Stock are not delivered)
after the expiration of such rights or warrants the Exercise Price shall be
readjusted to the Exercise Price which would then be in effect had the
adjustments made upon the issuance of such rights or warrants been made upon
the basis of deliver of only the number of shares of Common Stock (or
securities convertible into Common Stock) actually delivered.
(c) In case the Company shall hereafter distribute to all holders
of its Common Stock evidences of its indebtedness or assets (excluding cash
dividends or distributions and dividends or distributions referred to in
Subsection (a) above) or subscription rights or warrants (excluding those
referred to in Subsection (b) above, then in each such case the Exercise
Price in effect thereafter shall be determined by multiplying the number of
shares then comprising a Unit by the Per Share Exercise Price in effect
immediately prior thereto, multiplied by a fraction, the numerator of which
shall be the total number of shares of Common Stock then
9
<PAGE>
outstanding multiplied by the current market price per share of Common Stock
(as defined in Subsection (e) below), less the fair market value (as
determined by the Company's Board of Directors) of said assets, or evidences
of indebtedness so distributed or of such rights or warrants, and the
denominator of which shall be the total number of shares of Common Stock
outstanding multiplied by such current market price per share of Common
Stock. Such adjustment shall be made whenever any such distribution is made
and shall become effective immediately after the record date for the
determination of shareholders entitled to receive such distribution.
(d) Whenever the Exercise Price payable upon exercise of the
Representative's Option is adjusted pursuant to Subsections (a), (b) or (c)
above, the number of Units purchasable upon exercise of this Representative's
Option shall simultaneously be adjusted by multiplying the number of Units
issuable upon exercise of this Representative's Option by the Exercise Price
in effect on the date hereof and dividing the product so obtained by the
Exercise Price, as adjusted.
(e) For the purpose of any computation under Subsection (c) above,
the current market price per share of Common Stock at any date shall be
deemed to be the average of the daily closing prices of the Common Stock for
30 consecutive business days before such date. The closing price for each
day shall be the last sale price regular way or, in case no such reported
sale takes place on such day, the average of the last reported bid and asked
prices regular way, in either case on the principal national securities
exchange on which the Common Stock is admitted to trading or listed, or, if
not listed or admitted to trading on such exchange, the average of the
highest reported bid and lowest reported asked prices as reported by NASDAQ,
or other similar organization if NASDAQ is no longer reporting such
information, or if not so available, the fair market price as determined by
the Board of Directors as set forth in Section 2(b) herein.
(f) No adjustment in the Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least five cents
($0.05) in such price; provided, however, that any adjustments which may by
reason of this Subsection (f) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment required to be
made hereunder. All calculations under this Section 8 shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may be.
Anything in this Section 8 to the contrary notwithstanding, the Company shall
be entitled, but shall not be required, to make such changes in the Exercise
Price, in addition to those required by this Section 8, as it shall
determine, in its sole discretion, to be advisable in order that any dividend
or distribution in shares of Common Stock, or any subdivision,
reclassification or combination of Common Stock, hereafter made by the
Company shall not result in any Federal income tax liability to the holders
of the Common Stock or securities convertible into Common Stock (including
Warrants issuable upon exercise of the Representative's Option).
(g) Whenever the Exercise Price is adjusted, as herein provided,
the Company shall promptly cause a notice setting forth the adjusted Exercise
Price and adjusted number of
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<PAGE>
Units issuable upon exercise of the Representative's Option to be mailed to
the Holder, at its address set forth herein, and shall cause a certified copy
thereof to be mailed to the Company's transfer agent, if any. The Company
may retain a firm of independent certified public accountants selected by the
Board of Directors (who may be the regular accountants employed by the
Company) to make any computation required by this Section 8, and a
certificate signed by such firm shall be conclusive evidence of the
correctness of such adjustment.
(h) In the event that at any time, as a result of an adjustment
made pursuant to the provisions of this Section 8, the Holder of the
Representative's Option thereafter shall become entitled to receive any
shares of the Company other than Common Stock, thereafter the number of such
other shares so receivable upon exercise of the Representative's Option shall
be subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common Stock
contained in Subsections (a) to (f), inclusive, above.
9. This Agreement shall be governed by and in accordance with the laws
of the State of California without regard to conflict of laws provision.
IN WITNESS WHEREOF, ONTRO, INC. has caused this Representative's Option
to be signed by its duly authorized officers under its corporate seal, and
this Representative's Option to be dated _____________, 1997.
ONTRO, INC.
By:
--------------------------------
James A. Scudder,
Chief Executive Officer and President
Attest:
- ---------------------------
James L. Berntsen
its Executive Vice President and Secretary
11
<PAGE>
PURCHASE FORM
(To be signed only upon exercise of Option)
The undersigned, the holder of the foregoing Representative's Option,
hereby irrevocably elects to exercise the purchase rights represented by such
Option for, and to purchase thereunder, _______________ Units of ONTRO, INC.,
each Unit consisting of one (1) share of no par value Common Stock and one
(1) Warrant to purchase one (1) share of Common Stock, and herewith makes
payment of $_______ therefor, and requests that the Warrants and certificates
for shares of Common Stock be issued in the name(s) of, and delivered to
________________________, whose address(es) is (are):
Dated:
-------------, ----
By:
--------------------------------
-----------------------------------
-----------------------------------
Address
<PAGE>
TRANSFER FORM
(To be signed only upon transfer of Option)
For value received, the undersigned hereby sells, assigns,
and transfers unto ______________________________ the right to
purchase Units represented by the foregoing Representative's
Option to the extent of __________ Units, and appoints
_________________________ attorney to transfer such rights on the
books of _____________________________, with full power of
substitution in the premises.
Dated:
--------------, ----
By:--------------------------------
-----------------------------------
-----------------------------------
Address
In the presence of:
<PAGE>
EXHIBIT 4.3
WARRANT AGREEMENT BETWEEN COMPANY AND
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
<PAGE>
WARRANT AGREEMENT
Agreement made as of December 5, 1997, between Ontro, Inc., a
California corporation with offices at 12675 Danielson Court, Suite 401, Poway,
California 92064 ("Company"), and ChaseMellon Shareholder Services, L.L.C., a
New Jersey limited liability company, with offices at 400 South Hope Street, 4th
Floor, Los Angeles, California 90071 (herein called the "Warrant Agent").
WHEREAS, the Company has determined to issue and deliver up to
2,900,000 warrants ("Offering Warrants") evidencing the right of the holders
thereof to purchase an aggregate of 2,900,000 shares of common stock, no par
value, of the Company ("Common Stock") which warrants are to be issued and
delivered pursuant to an initial public offering of the securities of the
Company, such warrants to be issued as part of units ("Units") consisting of one
share of Common Stock and one Offering Warrant; and
WHEREAS, the Company has agreed pursuant to an agreement (the
"Underwriting Agreement") with Joseph Charles & Associates, Inc., as
representative of the various underwriters (the "Underwriters"), to issue
435,000 additional Units to the various Underwriters containing warrants (the
"Over-Allotment Warrants") with identical terms and conditions as the Offering
Warrants (the "Underwriters' Over-Allotment Option"); and
WHEREAS, the Company has also granted to Joseph Charles & Associates,
Inc. (the "Representative") a purchase option (the "Representative's Option") to
purchase 290,000 additional Units containing 290,000 warrants with identical
terms and conditions as the Offering Warrants, (the "Representative's
Warrants"); and
WHEREAS, unless otherwise noted, the Offering Warrants, Over-Allotment
Warrants and the Representative's Warrants are referred to herein as the
"Warrants" and each as a "Warrant"; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and exercise of the Warrants; and
WHEREAS, the Company desires to provide for the form and provisions of
the Warrants, the terms upon which they shall be issued and exercised, and the
respective rights, limitation of rights, and immunities of the Company, the
Warrant Agent, and the holders of the Warrants; and
WHEREAS, all acts and things have been done and performed which are
necessary to make the Warrants, when executed on behalf of the Company and
countersigned by or on behalf
1
<PAGE>
of the Warrant Agent, as provided herein, the valid, binding and legal
obligations of the Company, and to authorize the execution and delivery of this
Agreement.
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto agree as follows:
1. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints the Warrant
Agent to act as agent for the Company in connection with the Offering Warrants,
Over-Allotment Warrants and Representative's Warrants and the Warrant Agent
hereby accepts such appointment and agrees to perform as such in accordance with
the terms and conditions set forth in this Agreement.
2. WARRANTS.
2.1 FORM OF WARRANTS. Each Warrant shall be issued in registered form
only, shall be signed by, or bear the facsimile signature of, the Chairman or
Chief Executive Officer and Secretary or Assistant Secretary of the Company and
shall bear a facsimile of the Company's seal. In the event the person whose
facsimile signature has been placed upon any Warrant shall have ceased to serve
in his designated office of the Company before such Warrant is issued, it may be
issued with the same effect as if he had not ceased to serve in that capacity at
the date of issuance. No Warrant may be exercised until it has been
countersigned by the Warrant Agent as provided in Section 2.3 hereof. Warrant
Certificates shall be in substantially the form attached as Exhibit A hereto.
2.2 EFFECT OF COUNTERSIGNATURE. Unless and until countersigned by the
Warrant Agent pursuant to this Agreement, a Warrant shall be invalid and of no
effect.
2.3 EVENTS FOR COUNTERSIGNATURE. The Warrant Agent shall countersign a
Warrant only in either of the following circumstances:
(i) if the Warrant is to be issued in exchange or substitution for
one or more previously countersigned Warrants, as hereinafter provided; or
(ii) if the Company instructs the Warrant Agent to do so.
2.4 ISSUANCE.
2.4.1 OFFERING WARRANTS. Warrant Certificates representing the
Offering Warrants shall be executed by the proper officers of the Company and
delivered to the Warrant Agent for countersignature upon the closing of the
public offering. Certificates representing the Offering Warrants to be
delivered to the Warrant Agent shall be in direct relation to the number of
Units sold in the Company's public offering and shall be attached to the
certificates representing an equal number of shares of Common Stock. The
Offering Warrant Certificates will be issued and delivered on written order of
the Company signed by an authorized officer. The Warrant Agent shall deliver
Offering Warrant Certificates in required whole number denominations to the
persons entitled
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thereto in connection with any transfer or exchange permitted under this
Agreement.
2.4.2 OVER-ALLOTMENT WARRANTS. The Over-Allotment Warrants to be
issued, if any, will be executed by the proper officers of the Company and
delivered to the Warrant Agent for countersignature on exercise of the option to
purchase Units containing the Over-Allotment Warrants by the several
Underwriters in accordance with the Underwriting Agreement. Certificates
representing the Over-Allotment Warrants to be delivered to the Warrant Agent
shall be in direct relation to the number of Units sold to the Underwriters
pursuant to the exercise of the Over-Allotment Option and shall be attached to
the certificates representing an equal number of shares of Common Stock. The
Over-Allotment Warrant Certificates will be issued and delivered on written
order of the Company signed by an authorized officer.
2.4.3 REPRESENTATIVE'S WARRANTS. The Representative's Warrants to be
issued, if any, will be executed by the proper officers of the Company and
delivered to the Warrant Agent for countersignature on exercise of the
Representative's Option, which Option may not be exercised prior to one year
following the effective date of the registration statement relating to the
public offering. Certificates representing the Representative's Warrants to be
delivered to the Warrant Agent shall be in direct relation to the number of
Units sold in connection with the exercise by the Representative of the
Representatives's Option and shall be attached to the certificates representing
an equal number of shares of Common Stock. The Representative's Warrant
Certificates will be issued and delivered on written order of the Company signed
by an authorized officer.
2.5 REGISTER.
2.5.1 WARRANT REGISTER. The Warrant Agent shall maintain books (the
"Warrant Register"), for the registration of the original issuance and the
registration of any transfer of the Warrants. Upon the initial issuance of the
Warrants, the Warrant Agent shall issue and register the Warrants in the names
of the respective holders thereof in such denominations and otherwise in
accordance with instructions delivered to the Warrant Agent by the Company.
2.5.2 REGISTERED HOLDER. Prior to due presentment for registration
of transfer of any Warrant, the Company and the Warrant Agent may deem and treat
the person in whose name such Warrant shall be registered upon the Warrant
Register (the "registered holder"), as the absolute owner of such Warrant and of
each Warrant represented thereby (notwithstanding any notation of ownership or
other writing on the Warrant Certificate made by anyone other than the Company
or the Warrant Agent), for the purpose of any exercise thereof, and for all
other purposes, and neither the Company nor the Warrant Agent shall be affected
by any notice to the contrary.
2.6 DETACHABILITY OF WARRANTS. The Warrant Agent understands that the
Warrants are being issued as part of Units together with shares of the Company's
Common Stock. Each Warrant Certificate shall be initially issued only when
attached to a certificate representing the same number of shares of Common Stock
as Warrants and shall be separately transferable from the certificate
representing shares of Common Stock immediately upon issuance.
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3. TERMS AND EXERCISE OF WARRANTS.
3.1 WARRANT PRICE. Each Warrant, when countersigned by the Warrant Agent,
shall entitle the registered holder thereof, subject to the provisions of such
Warrant and of this Warrant Agreement, to purchase from the Company the number
of shares of Common Stock stated therein, at the price of 150% of the price of
the Units issued in the initial public offering of the Company's securities
("Offering price") per whole share, subject to the adjustments provided in
Section 4 hereof. The term "Warrant Price" as used in this Warrant Agreement
refers to the price per share at which Common Stock may be purchased at the time
a Warrant is exercised and applies to all Warrants governed hereby. The
Company, in its sole discretion, may reduce the Warrant Price relating to any
Warrant.
3.2 DURATION OF WARRANTS. A Warrant may be exercised only during the
period ("Exercise Period") commencing on the date of issuance, and terminating
at 5:00 p.m. Pacific Standard Time three years from the effective date of the
registration statement of the Company (the "Expiration Date"). Each Warrant not
exercised on or before the Expiration Date shall become void, and all rights
thereunder and all rights in respect thereof under this Agreement shall cease on
the Expiration Date. The Exercise Period for the Representative's Option shall
be the period commencing one year after the effective date of the registration
statement covering the initial public offering of the Units, and expiring at
5:00 p.m. Pacific Standard Time four years thereafter (Representative's
Expiration Date"). The Company in its sole discretion may extend the duration
of the Warrants by delaying the Expiration Date or the Representative's
Expiration Date.
3.3 EXERCISE OF WARRANTS.
3.3.1 PAYMENT. A Warrant, when countersigned by the Warrant Agent,
may be exercised by the registered holder thereof at any time during the
applicable Exercise Period and prior to redemption by surrendering it, at the
office of the Warrant Agent, or at the office of its successor as Warrant Agent
with the subscription form, as set forth on the reverse side of the Warrant,
duly executed, and by paying in full, in lawful money of the United States, in
cash, certified or bank check payable to the order of the Company, the Warrant
Price for each full share of Common Stock as to which the Warrant is exercised
and any and all applicable taxes due in connection with the exercise of the
Warrant, the exchange of the Warrant for the Common Stock, and the issuance of
the Common Stock.
3.3.2 ISSUANCE OF CERTIFICATES. As soon as practicable after the
exercise of any Warrant and in any event within thirty days after such exercise,
the Warrant Agent shall issue to the registered holder of such Warrant a
certificate or certificates for the number of full shares of Common Stock to
which he is entitled, registered in such name or names as may be directed by
him, and, if the Warrant shall not have been exercised in full, a new
countersigned Warrant for the number of shares as to which such Warrant shall
not have been exercised.
3.3.3 VALID ISSUANCE. All shares of Common Stock issued upon the
proper exercise
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of a Warrant in conformity with this Agreement shall be duly authorized, validly
issued and outstanding, fully paid and nonassessable.
3.3.4 DATE OF ISSUANCE. Each person in whose name any such
certificate for shares of Common Stock is issued shall for all purposes be
deemed to have become the holder of record of such shares on the date on which
the Warrant was surrendered and payment of the Warrant Price was made,
irrespective of the date of delivery of such certificate, except that, if the
date of such surrender and payment is a date when the stock transfer books of
the Company are closed, such person shall be deemed to have become the holder of
such shares at the opening of business on the next succeeding date on which the
stock transfer books are open.
3.3.5 NOTIFICATION AND PAYMENT. The Warrant Agent shall promptly
notify the Company in writing of any exercise and of the number of Warrant
Shares caused to be delivered and shall cause payment of an amount in cash equal
to the Exercise Price to be made promptly to the order of the Company. The
parties contemplate such payments will be made by the Warrant Agent to the
Company on a weekly basis and will consist of collected funds only. The Warrant
Agent shall hold any proceeds collected and not yet paid to the Company in a
federally insured escrow account at a commercial bank selected by agreement of
the Company and the Warrant Agent, at all times relevant hereto. Following a
determination by the Warrant Agent that collected funds have been received, the
Warrant Agent shall cause the issuance of share certificates representing the
number of Warrant Shares purchased by the registered owner of the exercised
Warrants.
3.3.6 ACCOUNTING. A detailed accounting statement setting forth the
number of Warrants exercised, the number of Warrant Shares issued and the names
and addresses of the holders of such Warrant Shares, the net amount of funds
from the exercise of the Warrants and all expenses incurred by the Warrant Agent
shall be transmitted to the Company on payment of each exercise amount. Such
accounting statement shall serve as an interim accounting issued, for the
Company during the Exercise Period. The Warrant Agent shall render to the
Company, at the completion of the Exercise Period, a complete accounting setting
forth the number of Warrants exercised, the identity of the persons exercising
such Warrants, the number of the Warrant Shares issued and the names and
addresses of the holders of such Warrant Shares, the amounts distributed to the
Company, and all expenses incurred by the Warrant Agent.
3.3.7 PROSPECTUS DELIVERY. Under certain circumstances, the Company
may be required to deliver a prospectus that satisfies the requirements of
Section 10 of the Securities Act of 1933, as amended (the "1933 Act") with
delivery of the Warrant Shares and must have a registration statement (or a
post-effective amendment to an existing registration statement) effective under
such Act in order for the Company to comply with any such prospectus delivery
requirements. The Company will advise the Warrant Agent of the status of any
such registration statement under the 1933 Act and of the effectiveness of the
Company's registration statement or lapse of effectiveness. No issuance of
Warrant Shares shall be made unless there is an effective registration statement
under the 1933 Act (or an exemption therefrom) and registration or qualification
of the Warrant Shares (or an exemption therefrom) has been obtained from state
or other regulatory authorities in the
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jurisdiction in which such Warrant Shares are sold. The company will provide to
the Warrant Agent written confirmation of all such registration or
qualification, or an exemption therefrom, when requested by the Warrant Agent.
4. ADJUSTMENTS. The Exercise Price and the number of shares of Common Stock
covered by each Warrant and the number of Warrants outstanding are subject to
adjustment from time to time upon the occurrence of the events enumerated in
this Section 4.
4.1 STOCK DIVIDENDS -- SPLIT-UPS. If, after the date hereof, prior to
redemption and subject to the provisions of Section 4.6 below, the number of
outstanding shares of Common Stock is increased by a stock dividend payable in
shares of Common Stock or by a split-up of shares of Common Stock or other
similar event, then, on the day following the date fixed for the determination
of holders of Common Stock entitled to receive such stock dividend or split-up,
the number of shares issuable on exercise of each Warrant shall be increased in
proportion to such increase in outstanding shares and the then applicable
Warrant Price shall be correspondingly decreased.
4.2 AGGREGATION OF SHARES. If, after the date hereof, prior to redemption
and subject to the provisions of Section 4.5, the number of outstanding shares
of Common Stock is decreased by a consolidation, combination or reclassification
of shares of Common Stock or other similar event, then, after the effective date
of such consolidation, combination or reclassification, the number of shares
issuable on exercise of each Warrant shall be decreased in proportion to such
decrease in outstanding shares and the then applicable Warrant Price shall be
correspondingly increased.
4.3 REORGANIZATION, ETC. If, after the date hereof, and prior to
redemption any capital reorganization or reclassification of the Common Stock of
the Company, or consolidation or merger of the Company with another corporation,
or the sale of all or substantially all of its assets to another corporation or
other similar event shall be effected, then, as a condition of such
reorganization, reclassification, consolidation, merger, or sale, lawful and
fair provision shall be made whereby the Warrant holders shall thereafter have
the right to purchase and receive, upon the basis and upon the terms and
conditions specified in the Warrants and in lieu of the shares of Common Stock
of the Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented thereby, such shares of stock, securities, or
assets as may be issued or payable with respect to or in exchange for the number
of outstanding shares of such Common Stock equal to the number of shares of such
stock immediately theretofore purchasable and receivable upon the exercise of
the rights represented by the Warrants, had such reorganization,
reclassification, consolidation, merger, or sale not taken place and in such
event appropriate provision shall be made with respect to the rights and
interests of the Warrant holders to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Warrant Price
and of the number of shares purchasable upon the exercise of the Warrants) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities, or assets thereafter deliverable upon the exercise hereof.
The Company shall not effect any such consolidation, merger, or sale unless
prior to the consummation thereof the successor corporation (if other than the
Company) resulting from such consolidation or merger, or the corporation
purchasing such assets, shall assume by written
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instrument executed and delivered to the Warrant Agent the obligation to deliver
to the Warrant holders such shares of stock, securities, or assets as, in
accordance with the foregoing provisions, such holders may be entitled to
purchase.
4.4 RIGHTS ISSUE. In case the Company, prior to redemption, shall issue
rights, options, warrants or convertible securities to all holders of the Common
Stock entitling them to subscribe for or purchase Common Stock or securities
convertible into Common Stock at a price per share less than the current value
of the Common Stock (as determined in accordance with Section 4.6 below) on the
record date for the issuance of such securities, instruments or rights or the
granting of such securities, options or warrants, as the case may be, the
Warrant Price to be in effect after the record date for the issuance of such
rights or the granting of such options or warrants shall be determined by
multiplying the Warrant Price in effect immediately prior to such record date by
a fraction, the numerator of which shall be (i) the sum of (a) the number of
shares of Common Stock outstanding immediately prior to such sale and (b) the
number of shares of Common Stock which could be purchased at the current value
of the Common Stock (as determined in accordance with Section 4.6 below) with
the consideration received by the Company upon such sale, and the denominator of
which shall be the total number of shares of Common Stock that would be
outstanding immediately after such sale if the full amount of convertible
securities, options, rights, or warrants were exercised immediately after the
sale. Additionally, the number of shares of Common Stock purchasable upon
exercise of each Warrant shall simultaneously be adjusted by multiplying the
number of shares of Common Stock issuable upon exercise of each Warrant by the
Warrant Price in effect immediately prior to the adjustment made and under this
Section 4.4 and dividing the product so obtained by the Warrant Price in effect
immediately after the adjustment. In the event such securities, instruments or
rights shall change or expire, or such convertible securities shall not be
converted, any adjustment previously made hereunder shall be readjusted to such
as would have obtained on the basis of the rights as modified by such change or
expiration.
4.5 NOTICES OF CHANGES IN WARRANT. Upon every adjustment of the Warrant
Price or the number of shares issuable on exercise of a Warrant, the Company
shall give written notice thereof to the Warrant Agent, which notice shall state
the Warrant Price resulting from such adjustment and the increase or decrease,
if any, in the number of shares purchasable at such price upon the exercise of a
Warrant, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Upon the occurrence of any event
specified in Sections 4.1, 4.2, 4.3 or 4.4, then, in any such event, the Company
shall give written notice in the manner set forth above of the record date for
such dividend, distribution, or subscription rights, or the effective date of
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding up or issuance. Such notice shall also specify the date as
of which the holders of Common Stock of record shall participate in such
dividend, distribution, or subscription rights, or shall be entitled to exchange
their Common Stock for stock, securities, or other assets deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding up or issuance. Failure to give such notice, or any defect
therein, shall not affect the legality or validity of such event.
4.6 NO FRACTIONAL SHARES. Notwithstanding any provision contained in this
Warrant
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Agreement to the contrary, the Company shall not issue fractional shares upon
exercise of Warrants. If, by reason of any adjustment made pursuant to this
Section 4, the holder of any Warrant would be entitled, upon the exercise of
such Warrant, to receive a fractional interest in a share, the Company shall,
upon such exercise, purchase such fractional interest, at a price determined as
follows:
(i) If the Common Stock is listed on a national securities exchange
or admitted to unlisted trading privileges on such exchange or listed for
trading on the National Association of Securities Dealers Automated Quotation
System, the current value shall be the last reported sale price of the Common
Stock on such exchange on the last business day prior to the date of exercise of
the Warrant or if no such sale is made or reported on such day, the average of
the highest closing bid and lowest asked prices for such day on such exchange or
system; or
(ii) If the Common Stock is not listed or admitted to unlisted trading
privileges, the current value shall be the average of the last reported highest
bid and lowest asked prices reported by the National Quotations Bureau, Inc., on
the last business day prior to the date of the exercise of this Warrant; or
(iii) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the current
value shall be an amount determined in such good faith reasonable manner as may
be prescribed by the Board of Directors of the Company.
4.7 FORM OF WARRANT. The form of Warrant need not be changed because of
any adjustment pursuant to this Section 4, and Warrants issued after such
adjustment may state the same Warrant Price and the same number of shares as is
stated in the Warrants initially issued pursuant to this Agreement. However,
the Company may at any time in its sole discretion make any change in the form
of Warrant that the Company may deem appropriate and that does not affect the
substance thereof, and any Warrant thereafter issued or countersigned, whether
in exchange or substitution for an outstanding Warrant or otherwise, may be in
the form as so changed.
5. TRANSFER AND EXCHANGE OF WARRANTS.
5.1 REGISTRATION OF TRANSFER. The Warrant Agent shall register the
transfer, from time to time, of any outstanding Warrant upon the Warrant
Register, upon surrender of such Warrant for transfer, properly endorsed with
signatures properly guaranteed and accompanied by appropriate instructions for
transfer. Upon any such transfer, a new Warrant Certificate representing an
equal aggregate number of Warrants shall be issued to the transferee and the
Warrant Certificate surrendered shall be canceled by the Warrant Agent. The
Warrant Certificates so canceled shall be delivered by the Warrant Agent to the
Company from time to time upon request.
5.2 PROCEDURE FOR SURRENDER OF WARRANTS. Warrant Certificates may be
surrendered to the Warrant Agent, together with a written request for exchange,
and thereupon the Warrant Agent shall issue in exchange therefor one or more new
Warrant Certificates as requested by the registered holder of the Warrant
Certificates so surrendered, representing an equal aggregate number of
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Warrants; provided, however, in the event a Warrant Certificate surrendered for
transfer bears a restrictive legend, the Warrant Agent shall not cancel such
Warrant Certificate and issue new Warrant Certificates in exchange therefor
until the Warrant Agent has received an opinion of counsel for the Company
stating that such transfer may be made and indicating whether the new Warrant
Certificates must also bear a restrictive legend.
5.3 FRACTIONAL WARRANTS. The Warrant Agent shall not effect any
registration or transfer or exchange which will result in the issuance of a
Warrant Certificate for a fraction of a Warrant.
5.4 SERVICE CHARGES. No service charge shall be made for any exchange or
registration or transfer of Warrants.
5.5 WARRANT EXECUTION AND COUNTERSIGNATURE. The Warrant Agent is hereby
authorized to countersign and to deliver, in accordance with the terms of this
Agreement, the Warrants required to be issued pursuant to the provisions hereof,
and the Company, whenever required by the Warrant Agent, will supply the Warrant
Agent with Warrants duly executed on behalf of the Company for such purpose.
6. REDEMPTION BY COMPANY.
6.1 REDEMPTION. The Offering Warrants and the Over-Allotment Warrants are
redeemable at the option of the Company at $0.05 per Warrant following at least
30 days prior written notice to the registered owners thereof. The right to
redeem the Warrants may be exercised by the Company only in the event (a) the
closing price of the Common Stock equals or exceeds 200% of the Offering Price
for 20 consecutive trading days ending within the 30 days prior to the date the
notice of redemption is given, (b) the Company has a currently effective
registration statement (including a post-effective amendment to an existing
registration statement) covering the Common Shares underlying the Warrants, and
(c) the expiration of the 30 day notice period is within the Exercise Period.
6.2 DATE FIXED FOR, AND NOTICE OF, REDEMPTION. In the event the Company
shall elect to redeem the Offering Warrants and Over-Allotment Warrants, the
Company shall fix a date for the redemption date. Notice of redemption and of
the redemption date shall be mailed by first class mail, postage prepaid, by the
Company not less then 30 days prior to the redemption date to the registered
holders of the Offering Warrants and Over-Allotment Warrants at their last
address as it shall appear on the Warrant Register. Any notice mailed in the
manner herein provided shall be conclusively presumed to have been duly given
regardless whether the registered holder receives such notice.
6.3 EXERCISE AFTER NOTICE OF REDEMPTION. The Warrants may be exercised in
accordance with Section 3 of this Agreement at any time after notice of
acceleration shall have been given by the Company pursuant to Section 6.2 hereof
and prior to the redemption date fixed in the notice. If any Warrant called for
redemption is not exercised by such time, it will cease to be
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exercisable and the registered owner thereof will be entitled only to the
redemption price of $0.05 per Warrant.
7. OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANTS.
7.1 NO RIGHTS AS SHAREHOLDER. A Warrant does not entitle the registered
holder thereof to any of the rights of a shareholder of the Company, including,
without limitation, the right to receive dividends, or other distributions,
exercise any preemptive rights to vote or to consent or to receive notice as
shareholders in respect of the meetings of shareholders or the election of
directors of the Company or any other matter.
7.2 LOST, STOLEN, MUTILATED, OR DESTROYED WARRANTS. If any Warrant is
lost, stolen, mutilated, or destroyed, the Company and the Warrant Agent may, on
such terms as to indemnify each of them, or otherwise as they may in their
discretion impose (which shall, in the case of a mutilated Warrant, include the
surrender thereof), issue a new Warrant of like denomination, tenor, and date as
the Warrant so lost, stolen, mutilated, or destroyed. Any such new Warrant
shall constitute an original contractual obligation of the Company, regardless
of whether the allegedly lost, stolen, mutilated, or destroyed Warrant shall be
at any time enforceable by anyone.
7.3 RESERVATION OF COMMON STOCK. The Company shall at all times reserve
and keep available a number of its authorized but unissued shares of Common
Stock that will be sufficient to permit the exercise in full of all outstanding
Warrants issued pursuant to this Agreement. The Company will supply the Warrant
Agent with blank Warrant Certificates so as to maintain an inventory
satisfactory to the Warrant Agent.
7.4 REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission Registration Statement No. 333-39253 (herein referred to as
the "Registration Statement") on Form SB-2 for the registration, under the
Securities Act of 1933, of the Warrants and the Common Stock issuable upon
exercise of the Warrants, among other securities.
7.5 REGISTRATION OF COMMON STOCK. The Company agrees it will use its best
efforts to cause the Registration Statement to become effective and to maintain
such Registration Statement as currently effective until the expiration of the
Warrants in accordance with the provisions of this Agreement, whether by filing
an appropriate post-effective amendment thereto or otherwise.
8. CONCERNING THE WARRANT AGENT AND OTHER MATTERS.
8.1 PAYMENT OF TAXES. The Company will from time to time promptly pay all
taxes and charges that may be imposed upon the Company or the Warrant Agent in
respect of the issuance or delivery of shares of Common Stock upon the exercise
of Warrants, but the Company shall not be obligated to pay any transfer taxes in
respect of the Warrants or such shares.
8.2 RESIGNATION, CONSOLIDATION, OR MERGER OF WARRANT AGENT.
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8.2.1 APPOINTMENT OF SUCCESSOR WARRANT AGENT. The Warrant Agent, or
any successor to it hereafter appointed, may resign its duties and be discharged
from all further duties and liabilities hereunder after giving sixty (60) days'
notice in writing to the Company. If the office of the Warrant Agent becomes
vacant by resignation or incapacity to act or otherwise, the Company shall
appoint in writing a successor Warrant Agent in place of the Warrant Agent. If
the Company shall fail to make such appointment within a period of 30 days after
it has been notified in writing of such resignation or incapacity by the Warrant
Agent or by the holder of a Warrant (who shall, with such notice, submit his
Warrant for inspection by the Company), then the holder of any Warrant may
petition any court of competent jurisdiction for the appointment of a successor
Warrant Agent. Any successor Warrant Agent, whether appointed by the Company or
by such court, shall be a corporation authorized under applicable law to
exercise corporate trust powers and subject to supervision or examination by
federal or state authority. After appointment, any successor Warrant Agent
shall be vested with all the authority, powers, rights, immunities, duties, and
obligations of its predecessor Warrant Agent with like effect as if originally
named as Warrant Agent hereunder, without any further act or deed; but if for
any reason it becomes necessary or appropriate, the predecessor Warrant Agent
shall execute and deliver, at the expense of the Company, an instrument
transferring to such successor Warrant Agent all the authority, powers, and
rights of such predecessor Warrant Agent hereunder; and upon request of any
successor Warrant Agent the Company shall make, execute, acknowledge, and
deliver any and all instruments in writing for more fully and effectually
vesting in and confirming to such successor Warrant Agent all such authority,
powers, rights, immunities, duties, and obligations.
8.2.2 NOTICE OF SUCCESSOR WARRANT AGENT. In the event a successor
Warrant Agent shall be appointed, the Company shall give notice thereof to the
predecessor Warrant Agent and the transfer agent for the Common Stock not later
than the effective date of any such appointment.
8.2.3 MERGER OR CONSOLIDATION OF WARRANT AGENT. Any corporation into
which the Warrant Agent may be merged or with which it may be consolidated or
any corporation resulting from any merger or consolidation to which the Warrant
Agent shall be a party shall be the successor Warrant Agent under this Agreement
without any further act.
8.3 FEES AND EXPENSES OF WARRANT AGENT.
8.3.1 REMUNERATION. The Company agrees to pay the Warrant Agent
reasonable remuneration for its services as such Warrant Agent hereunder and
will reimburse the Warrant Agent upon demand for all expenditures that the
Warrant Agent may reasonably incur in the execution of its duties hereunder.
8.3.2 FURTHER ASSURANCES. The Company agrees to perform, execute,
acknowledge, and deliver or cause to be performed, executed, acknowledged, and
delivered all such further and other acts, instruments, and assurances as may
reasonably be required by the Warrant Agent for the carrying out or performing
of the provisions of this Agreement.
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8.4 LIABILITY OF WARRANT AGENT.
8.4.1 RELIANCE ON COMPANY STATEMENT. Whenever in the performance of
its duties under this Warrant Agreement, the Warrant Agent shall deem it
necessary or desirable that any fact or matter be proved or established by the
Company prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed) may
be deemed to be conclusively proved and established by a statement signed by the
Chief Executive Officer or Secretary of the Company and delivered to the Warrant
Agent. The Warrant Agent may rely upon such statement for any action taken or
suffered in good faith by it pursuant to the provisions of this Agreement.
8.4.2 INDEMNITY. The Warrant Agent shall be liable hereunder only for
its own negligence or willful misconduct. The Company agrees to indemnify the
Warrant Agent and save it harmless against any and all liabilities, including
judgments, costs and reasonable counsel fees, for anything done or omitted by
the Warrant Agent in the execution of this Agreement except as a result of the
Warrant Agent's negligence, willful misconduct, or bad faith.
8.4.3 EXCLUSIONS. The Warrant Agent shall have no responsibility with
respect to the validity of this Agreement or with respect to the validity or
execution of any Warrant (except its countersignature thereof); nor shall it be
responsible for any breach by the Company of any covenant or condition contained
in this Agreement or in any Warrant; nor shall it be responsible to make any
adjustments required under the provisions of Section 4 hereof or responsible for
the manner, method, or amount of any such adjustment or the ascertaining of the
existence of facts that would require any such adjustment; nor shall it by any
act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Common Stock to be issued pursuant
to this Agreement or any Warrant or as to whether any shares of Common Stock
will when issued be valid and fully paid and nonassessable.
8.5 ACCEPTANCE OF AGENCY. The Warrant Agent hereby accepts the agency
established by this Agreement and agrees to perform the same upon the terms and
conditions herein set forth and, among other things, shall account promptly to
the Company with respect to Warrants exercised and concurrently account for, and
pay to the Company, all moneys received by the Warrant Agent for the purchase of
shares of the Company's Common Stock through the exercise of Warrants.
9. MISCELLANEOUS PROVISIONS.
9.1 SUCCESSORS. All the covenants and provisions of this Agreement by or
for the benefit of the Company or the Warrant Agent shall bind and inure to the
benefit of their respective successors and assigns.
9.2 NOTICES. Any notice, statement or demand authorized by this Warrant
Agreement to be given or made by the Warrant Agent or by the holder of any
Warrant to or on the Company shall be sufficiently given or made if sent by
certified mail, or private courier service, postage prepaid,
12
<PAGE>
addressed (until another address is filed in writing by the Company with the
Warrant Agent), as follows:
Ontro, Inc.
12675 Danielson Court, Suite 401
Poway, CA 92064
Attention: Secretary
Any notice, statement or demand authorized by this Agreement to be given or made
by the holder of any Warrant or by the Company to or on the Warrant Agent shall
be sufficiently given or made if sent by certified mail, or private courier
service, postage prepaid, addressed (until another address is filed in writing
by the Warrant Agent with the Company), as follows:
ChaseMellon Shareholder Services, L.L.C.
400 South Hope Street, 4th Floor
Los Angeles, CA 90071
9.3 APPLICABLE LAW. The validity, interpretation, and performance of this
Agreement and of the Warrants shall be governed in all respects by the laws of
the State of California, without giving effect to conflict of laws.
9.4 PERSONS HAVING RIGHTS UNDER THIS AGREEMENT. Nothing in this Agreement
expressed and nothing that may be implied from any of the provisions hereof is
intended, or shall be construed, to confer upon, or give to, any person or
corporation other than the parties hereto and the registered holders of the
Warrants, any right, remedy, or claim under or by reason of this Warrant
Agreement or of any covenant, condition, stipulation, promise, or agreement
hereof. All covenants, conditions, stipulations, promises, and agreements
contained in this Warrant Agreement shall be for the sole and exclusive benefit
of the parties hereto and their successors and assigns and of the registered
holders of the Warrants.
9.5 EXAMINATION OF THE WARRANT AGREEMENT. A copy of this Agreement shall
be available at all reasonable times at the office of the Warrant Agent in the
State of California, for inspection by the registered holder of any Warrant.
The Warrant Agent may require any such holder to submit his Warrant for
inspection by it.
9.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
9.7 EFFECT OF HEADINGS. The Section headings herein are for convenience
only and are not part of this Warrant Agreement and shall not affect the
interpretation thereof.
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties
13
<PAGE>
hereto under their respective corporate seals as of the day and year first above
written.
Attest: ONTRO, INC.
/s/ David A. Fisher By: /s/ James A. Scudder
- -------------------------------- -------------------------------------
James A. Scudder, President
Corporate Seal CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
Attest:
/s/ By: /s/ Ray Torres
- -------------------------------- -------------------------------------
14
<PAGE>
EXHIBIT A
Form of Warrant Certificate
<PAGE>
EXHIBIT 4.4
FORM OF COMMON STOCK CERTIFICATE
<PAGE>
[FRONT SIDE]
ONTRO, INC.
NATURAL THERMIC TECHNOLOGIES
Incorporated Under the Laws of the State of California
See Reverse for Statements Relating to Rights,
Preferences, Privileges and Restrictions, If Any
No. OI Shares
---------------- --------------
THIS CERTIFIES THAT ____________________________________ is the record
holder of ______________________________ fully paid and non-assessable shares of
common stock, without par value, of ONTRO, INC. transferable only on the books
of the Corporation by the holder hereof in person or by duly authorized Attorney
upon surrender of this certificate properly endorsed. This certificate is not
valid until countersigned by the Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
DATED: ONTRO, INC.
------------------------
By:
------------------------------------------
James A. Scudder, President
By:
------------------------------------------
James L. Berntsen, Secretary
Countersigned and registered:
ChaseMellon Shareholder Services, L.L.C.
Transfer Agent and Registrar
By:
-------------------------------
Authorized Signature
<PAGE>
[BACK SIDE]
The Corporation is authorized to issue two classes of stock, Common Stock
and Preferred Stock. The Board of Directors of the Corporation has the
authority to fix the number of shares and the designation of any series of
Preferred Stock and to determine or alter the rights, preferences, privileges
and restrictions granted to or imposed upon any unissued series of Preferred
Stock.
A statement of the rights, preferences, privileges and restrictions granted
to or imposed upon the respective classes or series of shares and upon the
holders thereof as established by the Articles of Incorporation of the
Corporation and by any certificate of determination, and the number of shares
constituting each class or series and the designations thereof, may be obtained
by any shareholder of the Corporation upon written request and without charge
from the Secretary of the Corporation at its corporate headquarters.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - _____________ Custodian _____________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act _______________________________
in common (State)
UNIF TRF MIN ACT - _____________ Custodian (until age ______)
(Cust)
_______________under Uniform Transfers
to Minors Act _______________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________________ hereby sell, assign and
transfer unto
Please insert social security or other Please print or typewrite name
identifying number of assignee and address, including zip
code of assignee
- ------------------------------------------- ------------------------------
------------------------------
------------------------------
________________ Shares of the capital stock represented by the within
Certificate, and do hereby irrevocably constitute and appoint
_________________________________ Attorney to transfer the said stock on the
books of the within named Corporation with full power of substitution in the
premises.
<PAGE>
[BACK SIDE CONTINUED]
DATED:
---------------------------- ----------------------------------------
----------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed
By:
------------------------------------
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
membership in an approved signature guarantee medallion program), pursuant to
S.E.C. Rule 17Ad-15.
<PAGE>
EXHIBIT 5.1
OPINION OF FISHER THURBER LLP
REGARDING THE LEGALITY OF THE SECURITIES
BEING REGISTERED
<PAGE>
December 11, 1997
Board of Directors
Ontro, Inc.
12675 Danielson Court, Suite 401
Poway, CA 92064
Re: Form SB-2 Registration Statement
Gentlemen:
We have acted as special counsel for Ontro, Inc. (the "Company") in
connection with the preparation and filing of a Registration Statement on Form
SB-2 Registration No. 333-39253 (the "Registration Statement"), and the
Prospectus to be included therein (the "Prospectus") pursuant to which it is
proposed to offer up to 3,335,000 Units and the underlying securities as stated
on the facing page of the Registration Statement. Capitalized terms used herein
have the meanings ascribed to them in the Registration Statement unless
otherwise noted.
We are familiar with the proceedings by which the Units and the underlying
shares of Common Stock and Warrants have been authorized and have reviewed and
are familiar with the Restated Articles of Incorporation, and the Bylaws of the
Company and such other corporate records and documents as we have deemed
necessary to express the opinion herein stated. We have assumed the genuineness
of all signatures and the authenticity of all documents submitted to us as
originals, the conformity to original documents and all documents submitted to
us as certified or photostatic copies, and the authenticity of the originals of
such latter documents.
Based upon the foregoing, and representations and information provided by
the Company, and having regard to legal considerations we deem relevant, we are
of the opinion that:
1. The Units and the underlying shares of capital stock of the Company to
be issued pursuant to the Underwriting Agreement are validly
authorized and, when: (a) the pertinent provisions of the Securities
Act of 1933, and such "blue-sky" and securities laws as may be
applicable have been complied with; and (b) such Units and the
underlying shares have been duly delivered against payment therefor as
contemplated by the Underwriting Agreement, such shares will be
validly issued, fully paid, and nonassessable.
<PAGE>
Ontro, Inc.
December 11, 1997
Page 2
2. The Warrants, including the Representative's Option (the
"Representative's Option") and the Representative's Warrants (the
"Representative's Warrants") included therein, have been duly
authorized; and when: (a) the pertinent provisions of the Securities
Act of 1933, and such "blue-sky" and securities laws as may be
applicable have been compiled with; (b) the Warrants, the
Representative's Option and the Representative's Warrants have been
executed and authenticated in the manner set forth in the Warrant
Agreement and the Representative's Option; and (c) the Warrants, the
Representative's Option and the Representative's Warrants have been
issued and delivered in the manner set forth in the Prospectus under
the Securities Act of 1933 against payment therefor, the Warrants,
the Representative's Option and the Representative's Warrants will
have been validly executed, authenticated, issued, and delivered,
and will constitute the legal, valid, and binding obligations of
the Company.
3. The shares of common stock of the Company to be issued upon the
exercise of the Warrants, the Representative's Option and the
Representative's Warrants, are validly authorized; and assuming: (a)
the shares of common stock so issuable will be validly authorized on
the dates of exercise; (b) on the dates of exercise, the Warrants will
have been duly executed, authenticated, issued, and delivered, and
will constitute the legal, valid, and binding obligations of the
Company; and (c) no change occurs in the applicable law or the
pertinent facts; when (i) the pertinent provisions of such "blue-sky"
and securities laws as may be applicable have been complied with; (ii)
the applicable rules of the American Stock Exchange have been complied
with; and (iii) the Warrants, the Representative's Option and the
Representative's Warrants are exercised in accordance with their terms
and the terms of the Warrant Agreement and the Representative's
Option, the shares of common stock so issuable will be validly issued,
fully paid, and nonassessable.
In rendering the opinions expressed in Paragraphs 1, 2, and 3 with respect
to the authorization of the Units, the Warrants, the Representative's Option and
the Representative's Warrants, we have assumed without investigation: the due
execution, authentication, offer, issuance, and delivery of the Units, Warrants,
the Representative's Option and the Representative's Warrants, the due
execution, delivery, and performance of the Warrant Agreement, the
Representative's Option and the Representative's Warrants and other matters
contained in Paragraphs 1, 2, and 3; and with respect to each offer, issuance,
sale, and delivery by the Company of shares of common stock of the Company upon
exercise of the Warrants, the Representative's Option and the Representative's
Warrants, and each purchase of such shares of common stock by the purchaser
thereof we have further assumed:
(a) except for the corporation law (but not the "blue-sky" laws or
securities laws of the State of California), as applicable to the
Company, at the time thereof, and at all
<PAGE>
Ontro, Inc.
December 11, 1997
Page 3
times subsequent thereto, such offer, issuance, sale, delivery, and
purchase, the execution, delivery, and performance of the Warrant
Agreement, pursuant to which the Warrants are to be exercised, and the
other documents relating thereto or delivered in connection therewith,
the performance of the oral agreements relating thereto, and the
consummation of the transactions contemplated by any thereof, as to
the Company or any other party thereto, did not violate, result in a
breach of, or conflict with any law, rule, regulation, order,
judgment, or decree, in each case whether then or subsequently in
effect;
(b) at the time thereof and at all times subsequent thereto, the persons
authorizing each such offer, issuance, sale, delivery, purchase,
execution, performance, or transaction for the Company or for any such
other party did not violate any fiduciary or other duty owed by them;
(c) no event has taken place subsequent to any such offer, issuance, sale,
delivery, purchase, execution, performance, or transaction or will
take place which would cause any such offer, issuance, sale, delivery,
purchase, execution, performance, or transaction not to comply with
any such law, rule, regulation, order, judgment, decree, or duty, or
which would permit the Company or any such other party at any time
thereafter to cancel, rescind, or otherwise avoid any such offer,
issuance, sale, delivery, purchase, execution, performance,
transaction, document, or oral agreement;
(d) there was no misrepresentation, omission, or deceit by the Company,
any such other party, or any other person or entity in connection with
any such offer, issuance, sale, delivery, purchase, execution,
performance, or transaction;
(e) each such offer, issuance, sale, delivery, purchase, execution,
performance, and transaction is governed by the laws of the State of
California without giving effect to conflict of laws; and
(f) each other party to the Warrant Agreement or to such offer, issuance,
sale, delivery, purchase, execution, performance, or transaction (i)
had the power, authority, and capacity to consummate such purchase, to
execute, deliver, and perform the Warrant Agreement and each such
other document, to perform each such oral agreement, and to consummate
each such transaction; (ii) duly authorized such purchase, duly
authorized, executed, and delivered the Warrant Agreement and each
such other document, and duly authorized each such oral agreement and
each such transaction, and the Warrant Agreement, all such other
documents, and all such oral agreements constitute the legal, valid,
and binding obligations of such
<PAGE>
Ontro, Inc.
December 11, 1997
Page 4
other party and are enforceable as to such other party in accordance
with their terms; and (iii) has duly and validly taken all necessary
corporate or other proceedings of the directors (or a committee of
directors), stockholders, and all other bodies to authorize the
exercise of the Warrants, the execution, delivery, and performance of
the Warrant Agreement and of each such other document, the performance
of each such oral agreement, and the consummation of each such
transaction; and (iv) does not violate or result in a breach of any
term of its articles of incorporation, bylaws, or other governing
document by any such purchase, execution, delivery, or performance.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement, and to the reference to our firm under the caption
"Legal Matters" included in the Registration Statement and the related
Prospectus.
Sincerely,
FISHER THURBER LLP
By: David A. Fisher
--------------------------------
David A. Fisher
<PAGE>
EXHIBIT 10.29
LEASES FOR THE COMPANY'S FACILITIES AT 12625 AND 12675 DANIELSON COURT,
SUITES 110 AND 401, DATED FEBRUARY 8, 1996, AS AMENDED
<PAGE>
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO]
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
February 8, 1996, is made by and between DWCG, Inc., a California Corporation
dba Poway Business Park ("LESSOR") and Self-Heating Container Corporation of
California, a California Corporation ("LESSEE"), (collectively the "PARTIES,"
or individually a "PARTY").
1.2(a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this
Lease, commonly known by the street address of 12625 Danielson Court, Suite
110, located in the City of Poway, County of San Diego, State of California,
with zip code 92064, as outlined on Exhibit A attached hereto ("PREMISES").
The "BUILDING" is that certain building containing the Premises and generally
described as (describe briefly the nature of the Building): Poway Business
Park Building 1, Suite 110, an industrial suite of approximately 1,936 square
feet. In addition to Lessee's rights to use and occupy the Premises as
hereinafter specified, Lessee shall have non-exclusive rights to the Common
Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall
not have any rights to the roof, exterior walls or utility raceways of the
Building or to any other buildings in the Industrial Center. The Premises,
the Building, the Common Areas, the land upon which they are located, along
with all other buildings and improvements thereon, are herein collectively
referred to as the "INDUSTRIAL CENTER." (Also see Paragraph 2.)
1.2(b) PARKING: eight (8) unreserved vehicle parking spaces ("UNRESERVED
PARKING SPACES"); and --0-- reserved vehicle parking spaces ("RESERVED
PARKING SPACES"). (Also see Paragraph 2.6.)
1.3 TERM: one years and five months ("ORIGINAL TERM") commencing April 1,
1996 ("COMMENCEMENT DATE") and ending August 31, 1997 ("EXPIRATION DATE").
(Also see Paragraph 3.)
1.4 EARLY POSSESSION: _______________________________ ("EARLY POSSESSION
DATE"). (Also see Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $1,084.00 per month ("BASE RENT"), payable on the first
day of each month commencing April 1, 1996 (Also see Paragraph 4.)
[X] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum 49, attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $1,084.00 as Base Rent for the
period April 1 through April 30, 1996.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: 2.76 percent
( %)("LESSEE'S SHARE") as determined by [ ] prorata square footage of the
Premises as compared to the total square footage of the Building or [ ] other
criteria as described in Addendum _____.
1.7 SECURITY DEPOSIT: $1,084.00 ("SECURITY DEPOSIT"). (Also see
Paragraph 5.)
1.8 PERMITTED USE: Design and manufacture of self-heating beverage
containers ("PERMITTED USE") (Also see Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY." (Also see Paragraph 8.)
1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
There are no brokers involved in this transaction
[ ] _____________ represents Lessor exclusively ("LESSOR'S BROKER");
[ ] _____________ represents Lessee exclusively ("LESSEE'S BROKER"); or
[ ] _____________ represents both Lessor and Lessee ("DUAL AGENCY").
(Also see Paragraph 15.)
1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate
shares as they may mutually designate in writing, a fee as set forth in a
separate written agreement between Lessor and said Broker(s) (or in the event
there is no separate written agreement between Lessor and said Broker(s), the
sum of $ ) for brokerage services rendered by said Broker(s) in connection
with this transaction.
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by James A Scudder and James L. Berntsen ("GUARANTOR"). (Also see
Paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 53, and Exhibits A through B, all of
which constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree is reasonable and
the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon
is not subject to revision whether or not the actual square footage is more
or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the
existing plumbing, electrical systems, fire sprinkler system, lighting, air
conditioning and heating systems and loading doors, if any, in the Premises,
other than those constructed by Lessee, shall be in good operating condition
on the Commencement Date. If a non-compliance with said warranty exists as of
the Commencement Date, Lessor shall, except as otherwise provided in this
Lease, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify same
at Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within thirty (30) days after the
Commencement Date, correction of that non-compliance shall be the obligation
of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement
Date. Lessor further warrants to Lessee that Lessor has no knowledge of any
claim having been made by any governmental agency that a violation or
violations of applicable building codes, regulations, or ordinances exist
with regard to the Premises as of the Commencement Date. Said warranties
shall not apply to any Alterations or Utility Installations (defined in
Paragraph 7.3(a)), made or to be made by Lessee. If the Premises do not
comply with said warranties, Lessor shall, except as otherwise provided in
this Lease, promptly after receipt of written notice from Lessee given within
six (6) months following the Commencement Date and setting forth with
specificity the nature and extent of such non-compliance, take such action,
at Lessor's expense, as may be reasonable or appropriate to rectify the
non-compliance. Lessor makes no warranty that the Permitted Use in Paragraph
1.8 is permitted for the Premises under Applicable Laws (as defined in
Paragraph 2.4).
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Broker(s) to satisfy itself with respect to the condition
of the Premises (including but not limited to the electrical and fire
sprinkler systems, security, environmental aspects, seismic and earthquake
requirements, and compliance with the Americans with Disabilities Act and
applicable zoning, municipal, county, state and federal laws, ordinances and
regulations and any covenants or restrictions of record (collectively,
"APPLICABLE LAWS") and the present and future suitability of the Premises for
Lessee's intended use; (b) that Lessee has made such investigation as it
deems necessary with reference to such matters, is satisfied with reference
thereto, and assumes all responsibility therefore as the same relate to
Lessee's occupancy of the Premises and/or the terms of this Lease; and (c)
that neither Lessor, nor any of Lessor's agents, has made any oral or written
representations or warranties with respect to said matters other than as set
forth in this Lease.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect if immediately prior to the
date set forth in Paragraph 1.1 Lessee was the owner or occupant of the
Premises. In such event, Lessee shall, at Lessee's sole cost and expense,
correct any non-compliance of the Premises with said warranties.
<PAGE>
2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said
number. Said parking spaces shall be used for parking by vehicles no larger
than full-size passenger automobiles or pick-up trucks, herein called
"PERMITTED SIZE VEHICLES." Vehicles other than Permitted Size Vehicles shall
be parked and loaded or unloaded as directed by Lessor in the Rules and
Regulations (as defined in Paragraph 40) issued by Lessor. (Also see
Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to or
are controlled by Lessee or Lessee's employees, suppliers, shippers,
customers, contracts or invitees to be loaded, unloaded or parked in areas
other than those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide the
parking facilities required by Applicable Law.
2.7 COMMON AREAS--DEFINITION. The term "COMMON AREAS" is defined as all
areas and facilities outside the Premises and within the exterior boundary
line of the Industrial Center and interior utility raceways within the
Premises that are provided and designated by the Lessor from time to time for
the general non-exclusive use of Lessor, Lessee and other lessees of the
Industrial Center and their respective employees, suppliers, shippers,
customers, contractors and invitees, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways and landscaped areas.
2.8 COMMON AREAS--LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for
the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive
right to use, in common with others entitled to such use, the Common Areas as
they exist from time to time, subject to any rights, powers, and privileges
reserved by Lessor under the terms hereof or under the terms of any rules
and regulations or restrictions governing the use of the Industrial Center.
Under no circumstances shall the right herein granted to use the Common Areas
be deemed to include the right to store any property, temporarily or
permanently, in the Common Areas. Any such storage shall be permitted only by
the prior written consent of Lessor or Lessor's designated agent, which
consent may be revoked at any time. In the event that any unauthorized storage
shall occur then Lessor shall have the right, without notice, in addition to
such other rights and remedies that it may have, to remove the property and
charge the cost to Lessee, which cost shall be immediately payable upon
demand by Lessor.
2.9 COMMON AREA--RULES AND REGULATIONS. Lessor or such other person(s) as
Lessor may appoint shall have the exclusive control and management of the
Common Areas and shall have the right, from time to time, to establish,
modify, amend and enforce reasonable Rules and Regulations with respect
thereto in accordance with Paragraph 40. Lessee agrees to abide by and
conform to all such Rules and Regulations, and to cause its employees,
suppliers, shippers, customers, contractors and invitees to so abide and
conform. Lessor shall not be responsible to Lessee for the non-compliance
with said rules and regulations by other lessees of the Industrial Center.
2.10 COMMON AREAS--CHANGES. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas,
ingress, egress, direction of traffic, landscaped areas, walkways and utility
raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the Industrial
Center to be part of the Common Areas;
(d) To add additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and Industrial Center as Lessor may,
in the exercise of sound business judgment, deem to be appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after
the Early Possession Date but prior to the Commencement Date, the obligation
to pay Base Rent shall be abated for the period of such early occupancy. All
other terms of this Lease, however, (including but not limited to the
obligations to pay Lessee's Share of Common Area Operating Expenses and to
carry the insurance required by Paragraph 8) shall be in effect during such
period. Any such early possession shall not affect nor advance the Expiration
Date of the Original Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by
the Commencement Date, Lessor shall not be subject to any liability therefor,
nor shall such failure affect the validity of this Lease, or the obligations
of Lessee hereunder, or extend the term hereof, but in such case, Lessee
shall not, except as otherwise provided herein, be obligated to pay rent or
perform any other obligation of Lessee under the terms of this Lease until
Lessor delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to Lessor
within ten (10) days after the end of said sixty (60) day period, cancel this
Lease, in which event the parties shall be discharged from all obligations
hereunder; provided further, however, that if such written notice of Lessee
is not received by Lessor within said ten (10) day period, Lessee's right to
cancel this Lease hereunder shall terminate and be of no further force or
effect. Except as may be otherwise provided, and regardless of when the
Original Term actually commences, if possession is not tendered to Lessee when
required by this Lease and Lessee does not terminate this Lease, as
aforesaid, the period free of the obligation to pay Base Rent, if any, that
Lessee would otherwise have enjoyed shall run from the date of delivery of
possession and continue for a period equal to the period during which the
Lessee would have otherwise enjoyed under the terms hereof, but minus any
days of delay caused by the acts, changes or omissions of Lessee.
4. RENT.
4.1. BASE RENT. Lessee shall pay Base Rent and other rent or charges, as
the same may be adjusted from time to time, to Lessor in lawful money of the
United States, without offset or deduction, on or before the day on which it
is due under the terms of this Lease. Base Rent and all other rent and
charges for any period during the term hereof which is for less than one full
month shall be prorated based upon the actual number of days of the month
involved. Payment of Base Rent and other charges shall be made to Lessor at
its address stated herein or to such other persons or at such other addresses
as Lessor may from time to time designate in writing to Lessee.
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during the
term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter
defined, during each calendar year of the term of this Lease, in accordance
with the following provisions:
(a) "COMMON AREA OPERATING EXPENSES" are defined, for purposes of
this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat, clean,
good order and condition, of the following:
(aa) The Common Areas, including parking areas, loading
and unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways, landscaped areas, striping, bumpers, irrigation systems, Common
Area lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to
service the Common Areas.
(iii) Trash disposal, property management and security services
and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair of Common
Areas.
(v) Any increase above the Base Real Property Taxes (as defined
in Paragraph 10.2(b)) for the Building and the Common Areas.
(vi) Any "Insurance Cost Increase" (as defined in Paragraph 8.1).
(vii) The cost of insurance carried by Lessor with respect to the
Common Areas.
(viii) Any deductible portion of an insured loss concerning the
Building or the Common Areas.
(ix) Any other services to be provided by Lessor that are
stated elsewhere in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes that
are specifically attributable to the Building or to any other building in the
Industrial Center or to the operation, repair and maintenance thereof, shall
be allocated entirely to the Building or to such other building. However, any
Common Area Operating Expenses and Real Property Taxes that are not
specifically attributable to the Building or to any other building or to the
operation, repair and maintenance thereof, shall be equitably allocated by
Lessor to all buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon
Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to
provide the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be
payable by Lessee within ten (10) days after a reasonably detailed statement
of actual expenses is presented to Lessee by Lessor. At Lessor's option,
however, an amount may be estimated by Lessor from time to time of Lessee's
Share of annual Common Area Operating Expenses and the same shall be
payable monthly or quarterly, as Lessor shall designate, during each 12-month
period of the Lease term, on the same day as the Base Rent is due hereunder.
Lessor shall deliver to Lessee within ninety (90) days, after the expiration
of each calendar year a reasonably detailed statement showing Lessee's Share
of the actual Common Area Operating Expenses incurred during the preceding
year. If Lessee's payments under this Paragraph 4.2(d) during said preceding
year exceed Lessee's Share as indicated on said statement, Lessor shall be
credited the amount of such over-
INITIALS: ILLEGIBLE
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payment against Lessee's Share of Common Area Operating Expenses next becoming
due. If Lessee's payments under this Paragraph 4.2(d) during said preceding
year were less than Lessee's Share as indicated on said statement, Lessee
shall pay to Lessor the amount of the deficiency within ten (10) days after
delivery by Lessor to Lessee of said statement.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's
execution hereof the Security Deposit set forth in Paragraph 1.7 as security
for Lessee's faithful performance of Lessee's obligations under this Lease.
If Lessee fails to pay Base Rent or other rent or charges due hereunder, or
otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may
use, apply or retain all or any portion of said Security Deposit for
the payment of any amount due Lessor or to reimburse or compensate Lessor for
any liability, cost, expense, loss or damage (including attorneys' fees)
which Lessor may suffer or incur by reason thereof. If Lessor uses or applies
all or any portion of said Security Deposit, Lessee shall within ten (10)
days after written request therefore deposit monies with Lessor sufficient to
restore said Security Deposit to the full amount required by this Lease. Any
time the Base Rent increases during the term of this Lease, Lessee shall,
upon written request from Lessor, deposit additional monies with Lessor as an
addition to the Security Deposit so that the total amount of the Security
Deposit shall at all times bear the same proportion to the then current Base
Rent as the initial Security Deposit bears to the Initial Base Rent set forth
in Paragraph 1.5. Lessor shall not be required to keep all or any part of the
Security Deposit separate from its general accounts. Lessor shall, at the
expiration or earlier termination of the term hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest herein), that portion of the Security
Deposit not used or applied by Lessor. Unless otherwise expressly agreed in
writing by Lessor, no part of the Security Deposit shall be considered to be
held in trust, to bear interest or other increment for its use, or to be
prepayment for any monies to be paid by Lessee under this Lease.
6. USE.
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for the Permitted
Use set forth in Paragraph 1.8, or any other legal use which is reasonably
comparable thereto, and for no other purpose. Lessee shall not use or permit
the use of the Premises in a manner that is unlawful, creates waste or a
nuisance, or that disturbs owners and/or occupants of, or causes damage to
the Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessee's assignees or subtenants,
and by prospective assignees and subtenants of Lessee, its assignees and
subtenants, for a modification of said Permitted Use, so long as the same
will not impair the structural integrity of the improvements on the Premises
or in the Building or the mechanical or electrical systems therein, does not
conflict with uses by other lessees, is not significantly more burdensome to
the Premises or the Building and the improvements thereon, and is otherwise
permissible pursuant to this Paragraph 6. If Lessor elects to withhold such
consent, Lessor shall within five (5) business days after such request give a
written notification of same, which notice shall include an explanation of
Lessor's reasonable objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE"
as used in this Lease shall mean any product, substance, chemical, material
or waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises,
is either: (i) potentially injurious to the public health, safety or welfare,
the environment, or the Premises; (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of Lessor to
any governmental agency or third party under any applicable statute or common
law theory. Hazardous Substance shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products or by-products
thereof. Lessee shall not engage in any activity in or about the Premises
which constitutes a Reportable Use (as hereinafter defined) of Hazardous
Substances without the express prior written consent of Lessor and compliance
in a timely manner (at Lessee's sole cost and expense) with all Applicable
Requirements (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i)
the installation or use of any above or below ground storage tank, (ii) the
generation, possession, storage, use, transportation, or disposal of a
Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with,
any governmental authority, and (iii) the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Laws
require that a notice be given to persons entering or occupying the Premises
or neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, but upon notice to Lessor and in compliance with all
Applicable Requirements, use any ordinary and customary materials reasonably
required to be used by Lessee in the normal course of the Permitted Use, so
long as such use is not a Reportable Use and does not expose the Premises or
neighboring properties to any meaningful risk of contamination or damage or
expose Lessor to any liability therefor. In addition, Lessor may (but without
any obligation to do so) condition its consent to any Reportable Use of any
Hazardous Substance by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to
protect itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefor, including but not limited
to the installation (and, at Lessor's option, removal on or before Lease
expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasements) and/or the
deposit of any additional Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under
or about the Premises or the Building, other than as previously consented to
by Lessor, Lessee shall immediately give Lessor written notice thereof,
together with a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding
given to, or received from, any governmental authority or private party
concerning the presence, spill, release, discharge of, or exposure to, such
Hazardous Substance including but not limited to all such documents as may be
involved in any Reportable Use involving the Premises. Lessee shall not cause
or permit any Hazardous Substance to be spilled or released in, on, under or
about the Premises (including, without limitation, through the plumbing or
sanitary sewer system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities,
judgments, costs, claims, liens, expenses, penalties, loss of permits and
attorneys' and consultants' fees arising out of or involving any Hazardous
Substance brought onto the Premises by or for Lessee or by anyone under
Lessee's control. Lessee's obligations under this Paragraph 6.2(c) shall
include, but not be limited to, the effects of any contamination or injury to
person, property or the environment created or suffered by Lessee, and the
cost of investigation (including consultants' and attorneys' fees and
testing), removal, remediation, restoration and/or abatement thereof, or of
any contamination therein involved, and shall survive the expiration or earlier
termination of this Lease. No termination, cancellation or release agreement
entered into by Lessor and Lessee shall release Lessee from its obligations
under this Lease with respect to Hazardous Substances, unless specifically so
agreed by Lessor in writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at Lessee's
sole cost and expense, fully, diligently and in a timely manner, comply with
all "APPLICABLE REQUIREMENTS," which term is used in this Lease to mean all
laws, rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises
(including but not limited to matters pertaining to (i) industrial hygiene,
(ii) environmental conditions on, in, under or about the Premises, including
soil and groundwater conditions, and (iii) the use, generation, manufacture,
production, installation, maintenance, removal, transportation, storage,
spill, or release of any Hazardous Substance), now in effect or which may
hereafter come into effect. Lessee shall, within five (5) days after receipt
of Lessor's written request, provide Lessor with copies of all documents and
information, including but not limited to permits, registrations, manifests,
applications, reports and certificates, evidencing Lessee's compliance with
any Applicable Requirements specified by Lessor, and shall immediately upon
receipt, notify Lessor in writing (with copies of any documents involved) of
any threatened or actual claim, notice, citation, warning, complaint or
report pertaining to or involving failure by Lessee or the Premises to comply
with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("LENDERS") shall have the
right to enter the Premises at any time in the case of an emergency, and
otherwise at reasonable times, for the purpose of inspecting the condition of
the Premises and for verifying compliance by Lessee with this Lease and all
Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be
entitled to employ experts and/or consultants in connection therewith to
advise Lessor with respect to Lessee's activities, including but not limited
to Lessee's installation, operation, use, monitoring, maintenance, or removal
of any Hazardous Substance on or from the Premises. The costs and expenses of
any such inspections shall be paid by the party requesting same, unless a
Default or Breach of this Lease by Lessee or a violation of Applicable
Requirements or a contamination, caused or materially contributed to by
Lessee, is found to exist or to be imminent, or unless the inspection is
requested or ordered by a governmental authority as the result of any such
existing or imminent violation or contamination. In such case, Lessee shall
upon request reimburse Lessor or Lessor's Lender, as the case may be, for the
costs and expenses of such inspections.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall,
at Lessee's sole cost and expense and at all times, keep the Premises and
every part thereof in good order, condition and repair (whether or not such
portion of the Premises requiring repair, or the means of repairing the same,
are reasonably or readily accessible to Lessee, and whether or not the need
for such repairs occurs as a result of Lessee's use, any prior use, the
elements or the age of such portion of the Premises), including, without
limiting the generality of the foregoing, all equipment or facilities
specifically serving the Premises, such as plumbing, heating, air
conditioning, ventilating, electrical, lighting facilities, boilers, fired or
unfired pressure vessels, fire hose connections if within the Premises,
fixtures, interior walls, interior surfaces of exterior walls, ceilings,
floors, windows, doors, plate glass, and skylights, but excluding any items
which are the responsibility of Lessor pursuant to Paragraph 7.2 below.
Lessee, in keeping the Premises in good order, condition and repair, shall
exercise and perform good maintenance practices. Lessee's obligations shall
include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order,
condition and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance
for and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation
system for the Premises. However, Lessor reserves the right, upon notice to
Lessee, to procure and maintain the contract for the heating, air conditioning
and ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case
no notice shall be required), perform such obligations on Lessee's behalf,
and put the Premises in good order, condition and repair, in accordance with
Paragraph 13.2 below.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to
reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition
and repair the foundations, exterior walls, structural condition of interior
bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (if
located in the Common Areas) or other automatic fire extinguishing system
including fire alarm and/or smoke detection
Initials: ILLEGIBLE
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systems and equipment, fire hydrants, parking lots, walkways, parkways,
driveways, landscaping, fences, signs and utility system serving the Common
Areas and all parts thereof, as well as providing the services for which
there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor
shall not be obligated to paint the exterior or interior surfaces of exterior
walls nor shall Lessor be obligated to maintain, repair or replace windows,
doors or plate glass of the Premises. Lessee expressly waives the benefit of
any statute now or hereafter in effect which would otherwise afford Lessee
the right to make repairs at Lessor's expense or to terminate this Lease
because of Lessor's failure to keep the Building, Industrial Center or Common
Areas in good order, condition and repair.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS"
is used in this Lease to refer to all air lines, power panels, electrical
distribution, security, fire protection systems, communications systems,
lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES"
shall mean Lessee's machinery and equipment which can be removed without
doing material damage to the Premises. The term "ALTERATIONS" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are
defined as Alterations and/or Utility Installations made by Lessee that are
not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make
nor cause to be made any Alterations or Utility Installations in, on, under
or about the Premises without Lessor's prior written consent. Lessee may,
however, make non-structural Utility Installations to the interior of the
Premises (excluding the roof) without Lessor's consent but upon notice to
Lessor, so long as they are not visible from the outside of the Premises, do
not involve puncturing, relocating or removing the roof or any existing
walls, or changing or interfering with the fire sprinkler or fire detection
systems and the cumulative cost thereof during the term of this Lease as
extended does not exceed $2,500.00.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. All consents given
by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent, shall be deemed conditioned upon: (i) Lessee's acquiring all
applicable permits required by governmental authorities; (ii) the furnishing
of copies of such permits together with a copy of the plans and specifications
for the Alteration or Utility Installation to Lessor prior to commencement of
the work thereon; and (iii) the compliance by Lessee with all conditions of
said permits in a prompt and expeditious manner. Any Alterations or Utility
Installations by Lessee during the term of this Lease shall be done in a
good and workmanlike manner, with good and sufficient materials, and be in
compliance with all Applicable Requirements. Lessee shall promptly upon
completion thereof furnish Lessor with as-built plans and specifications
therefor. Lessor may, (but without obligation to do so) condition its consent
to any requested Alteration or Utility Installation that costs $2,500.00 or
more upon Lessee's providing Lessor with a lien and completion bond in an
amount equal to one and one-half times the estimated cost of such Alteration
or Utility Installation.
(c) LIEN PROTECTION. Lessee shall pay when due all claims for labor
or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises for any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in, on, or about the Premises, and Lessor
shall have the right to post notices of non-responsibility in or on the
Premises as provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense, defend and protect itself, Lessor and the Premises against the same
and shall pay and satisfy any such adverse judgment that may be rendered
thereon before the enforcement thereof against the Lessor or the Premises. If
Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to one and one-half times the
amount of such contested lien claim or demand, indemnifying Lessor against
liability for the same, as required by law for the holding of the Premises
free from the effect of such lien or claim. In addition, Lessor may require
Lessee to pay Lessor's attorneys' fees and costs in participating in such
action if Lessor shall decide it is to its best interest to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal
and to cause Lessee to become the owner thereof as hereinafter provided in
this Paragraph 7.4, all Alterations and Utility Installations made to the
Premises by Lessee shall be the property of and owned by Lessee, but
considered a part of the Premises. Lessor may, at any time and at its option,
elect in writing to Lessee to be the owner of all or any specified part of
the Lessee-Owned Alterations and Utility Installations. Unless otherwise
instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and
Utility Installations shall, at the expiration or earlier termination of this
Lease, become the property of Lessor and remain upon the Premises and be
surrendered with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee-Owned Alterations or Utility Installations be removed
by the expiration or earlier termination of this Lease, notwithstanding that
their installation may have been consented to by Lessor. Lessor may require
that removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date,
clean and free of debris and in good operating order, condition and state of
repair, ordinary wear and tear excepted. Ordinary wear and tear shall not
include any damage or deterioration that would have been prevented by good
maintenance practice or by Lessee performing all of its obligations under
this Lease. Except as otherwise agreed or specified herein, the Premises, as
surrendered, shall include the Alterations and Utility Installations. The
obligation of Lessee shall include the repair of any damage occasioned by the
installation, maintenance or removal of Lessee's Trade Fixtures, furnishings,
equipment, and Lessee-Owned Alterations and Utility Installations, as well
as the removal of any storage tank installed by or for Lessee, and the
removal, replacement, or remediation of any soil, material or ground water
contaminated by Lessee, all as may then be required by Applicable
Requirements and/or good practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation
to repair and restore the Premises per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT OF PREMIUM INCREASES.
(a) As used herein, the term "INSURANCE COST INCREASE" is defined as
any increase in the actual cost of the insurance applicable to the Building
and required to be carried by Lessor pursuant to Paragraphs 8.2(b), 8.3(a)
and 8.3(b). ("REQUIRED INSURANCE"), over and above the Base Premium, as
hereinafter defined, calculated on an annual basis. "Insurance Cost
Increase" shall include, but not be limited to, requirements of the holder of
a mortgage or deed of trust covering the Premises, increased valuation of
the Premises, and/or a general premium rate increase. The term "Insurance Cost
Increase" shall not, however, include any premium increases resulting from
the nature of the occupancy of any other lessee of the Building. If the
parties insert a dollar amount in Paragraph 1.9, such amount shall be
considered the "BASE PREMIUM." If a dollar amount has not been inserted in
Paragraph 1.9 and if the Building has been previously occupied during the
the twelve (12) month period immediately preceding the Commencement Date, the
"Base Premium" shall be the annual premium applicable to such twelve (12)
month period. If the Building was not fully occupied during such twelve (12)
month period, the "Base Premium" shall be the lowest annual premium
reasonably obtainable for the Required Insurance as of the Commencement Date,
assuming the most nominal use possible of the Building. In no event,
however, shall Lessee be responsible for any portion of the premium cost
attributable to liability insurance coverage in excess of $1,000,000 procured
under Paragraph 8.2(b).
(b) Lessee shall pay any Insurance Cost increase to Lessor pursuant
to Paragraph 4.2. Premiums for policy periods commencing prior to, or
extending beyond, the term of this Lease shall be prorated to coincide with
the corresponding Commencement Date or Expiration Date.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee, Lessor and any Lender(s) whose names have been provided
to Lessee in writing (as additional insureds) against claims for bodily
injury, personal injury and property damage based upon, involving or arising
out of the ownership, use, occupancy or maintenance of the Premises and all
areas appurtenant thereto. Such Insurance shall be on an occurrence basis
providing single limit coverage in an amount not less than $1,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises"
endorsement and contain the "Amendment of the Pollution Exclusion"
endorsement for damage caused by heat, smoke or fumes from a hostile fire.
The policy shall not contain any intra-insured exclusions as between insured
persons or organizations, but shall include coverage for liability assumed
under this Lease as an "INSURED CONTRACT" for the performance of Lessee's
indemnity obligations under this Lease. The limits of said insurance required
by this Lease or as carried by Lessee shall not, however, limit the liability
of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be
carried by Lessee shall be primary to and not contributory with any similar
insurance carried by Lessor, whose insurance shall be considered excess
insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be
named as an additional insured therein.
8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and to any Lender(s), insuring against loss or
damage to the Premises. Such insurance shall be for full replacement cost, as
the same shall exist from time to time, or the amount required by any
Lender(s), but in no event more than the commercially reasonable and
available insurable value thereof if, by reason of the unique nature or age
of the improvements involved, such latter amount is less than full
replacement cost. Lessee-Owned Alterations and Utility Installations, Trade
Fixtures and Lessee's personal property shall be insured by Lessee pursuant to
Paragraph 8.4. If the coverage is available and commercially appropriate,
Lessor's policy or policies shall insure against all risks of direct physical
loss or damage (except the perils of flood and/or earthquake unless
required by a Lender or included in the Base Premium), including coverage for
any additional costs resulting from debris removal and reasonable amounts
of coverage for the enforcement of any ordinance or law regulating the
reconstruction or replacement of any undamaged sections of the Building required
to be demolished or removed by reason of the enforcement of any building,
zoning, safety or land use laws as the result of a covered loss, but not
including plate glass insurance. Said policy or policies shall also contain an
agreed valuation provision in lieu of any co-insurance clause, waiver of
subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for
the city nearest to where the Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep in force during
the term of this Lease a policy or policies in the name of Lessor, with loss
payable to Lessor and any Lender(s), insuring the loss of the full rental
and other charges payable by all lessees of the Building to Lessor for one
year (including all Real Property Taxes, Insurance costs, all Common Area
Operating Expenses and any scheduled rental increases). Said insurance may
provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide
for one full years' loss of rental revenues from the date of any such loss.
Said insurance shall contain an agreed valuation provision in lieu of any
co-insurance clause, and the amount of coverage shall be adjusted annually to
reflect the projected rental income, Real Property Taxes, insurance premium
costs and other expenses, if any, otherwise payable, for the next 12-month
period. Common Area Operating Expenses shall include any deductible amount in
the event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas
or other buildings in the Industrial Center if said increase is caused by
Lessee's acts, omissions, use or occupancy of the Premises.
INITIALS: [ILLEGIBLE]
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[ILLEGIBLE]
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<PAGE>
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring Party,
Lessor shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain
insurance coverage on all of Lessee's personal property, Trade Fixtures and
Lessee-Owned Alterations and Utility Installations in, on, or about the
Premises similar in coverage to that carried by Lessor as the Insuring Party
under Paragraph 8.3(a). Such insurance shall be full replacement cost
coverage with a deductible not to exceed $1,000 per occurrence. The proceeds
from any such insurance shall be used by Lessee for the replacement of personal
property and the restoration of Trade Fixtures and Lessee-Owned Alterations
and Utility Installations. Upon request from Lessor, Lessee shall provide
Lessor with written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, or such other rating as may be required by a
Lender, as set forth in the most current issue of "Best's Insurance Guide."
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies referred to in this Paragraph 8. Lessee shall cause to be
delivered to Lessor, within seven (7) days after the earlier of the Early
Possession Date or the Commencement Date, certified copies of, or
certificates evidencing the existence and amounts of, the insurance required
under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject
to modification except after thirty (30) days' prior written notice to
Lessor. Lessee shall at least thirty (30) days prior to the expiration of
such policies, furnish Lessor with evidence of renewals or "insurance
binders" evidencing renewal thereof, or Lessor may order such insurance and
charge the cost thereof to Lessee, which amount shall be payable by Lessee to
Lessor upon demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages (whether in contract or in tort) against
the other, for loss or damage to their property arising out of or incident to
the perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liabilities arising out of, involving, or in connection
with, the occupancy of the Premises by Lessee, the conduct of Lessee's business,
any act, omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and whether
or not (in the case of claims made against Lessor) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by reason
of any of the foregoing matters, Lessee upon notice from Lessor shall defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid
any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property
of Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by
or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from
any other cause, whether said injury or damage results from conditions
arising upon the Premises or upon other portions of the Building of which the
Premises are a part, from other sources or places, and regardless of whether
the cause of such damage or injury or the means of repairing the same is
accessible or not. Lessor shall not be liable for any damages arising from
any act or neglect of any other lessee of Lessor nor from the failure by
Lessor to enforce the provisions of any other lease in the Industrial Center.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall
under no circumstances be liable for injury to Lessee's business or for any
loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is less than fifty percent (50%) of
the then Replacement Cost (as defined in Paragraph 9.1(d) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost of the Premises (excluding
Lessee-Owned Alterations and Utility Installations and Trade Fixtures)
immediately prior to such damage or destruction. In addition, damage or
destruction to the Building, other than Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building, the cost of
which damage or destruction is fifty percent (50%) or more of the then
Replacement Cost (excluding Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building) of the
Building shall, at the option of Lessor, be deemed to be Premises Total
Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible
amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PREMISES PARTIAL DAMAGE--INSURED LOSS. If Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect. In the event, however, that there is a
shortage of insurance proceeds and such shortage is due to the fact that, by
reason of the unique nature of the Improvements in the Premises, full
replacement cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance thereof
within said ten (10) day period, Lessor shall complete them as soon as
reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. If Lessor does not receive such funds or assurance within
such ten (10) day period, and if Lessor does not so elect to restore and repair,
than this Lease shall terminate sixty (60) days following the occurrence of the
damage or destruction. Unless otherwise agreed, Lessee shall in no event have
any right to reimbursement from Lessor for any funds contributed by Lessee to
repair any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2,
notwithstanding that there may be some insurance coverage, but the net proceeds
of any such insurance shall be made available for the repairs if made by either
Party.
9.3 PARTIAL DAMAGE--UNINSURED LOSS. If Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the repair of such damage totally at Lessee's expense and without
reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following such
commitment from Lessee. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any shortage
in insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expires. If Lessee duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during such period, then this
Lease shall terminate as of the date set forth in the first sentence of this
Paragraph 9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which Lessee is not legally responsible, the Base Rent
Common Area Operating Expenses and other charges, if any, payable by Lessee
hereunder for the period during which such damage or condition, its repair,
remediation or restoration continues, shall be abated in proportion to the
degree to which Lessee's use of the Premises is impaired, but not in excess of
proceeds for insurance required to be carried under paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses and other charges, if
any, as aforesaid, all other obligations of Lessee hereunder shall be performed
by Lessee, and Lessee shall have no claim against Lessor for any damage suffered
by reason of any such damage, destruction, repair, remediation or restoration.
<PAGE>
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises
within ninety (90) days after such obligation shall accrue, Lessee may, at
any time prior to the commencement of such repair or restoration, give
written notice to Lessor and to any Lenders of which Lessee has actual notice
of Lessee's election to terminate this Lease on a date not less than sixty
(60) days following the giving of such notice. If Lessee gives such notice to
Lessor and such Lenders and such repair or restoration is not commenced
within thirty (30) days after receipt of such notice, this Lease shall
terminate as of the date specified in said notice. If Lessor or a Lender
commences the repair or restoration of the Premises within thirty (30) days
after the receipt of such notice, this Lease shall continue in full force and
effect. "COMMENCE" as used in this Paragraph 9.6 shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever occurs first.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but
subject to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor
may at Lessor's option either (i) investigate and remediate such Hazardous
Substance Condition, if required, as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect,
or (ii) if the estimated cost to investigate and remediate such condition
exceeds twelve (12) times the then monthly Base Rent or $100,000 whichever is
greater, give written notice to Lessee within thirty (30) days after receipt
by Lessor of knowledge of the occurrence of such Hazardous Substance
Condition of Lessor's desire to terminate this Lease as of the date sixty
(60) days following the date of such notice. In the event Lessor elects to
give such notice of Lessor's intention to terminate this Lease, Lessee shall
have the right within ten (10) days after the receipt of such notice to give
written notice to Lessor of Lessee's commitment to pay for the excess costs
of (a) investigation and remediation of such Hazardous Substance Condition to
the extent required by Applicable Requirements, over (b) an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater. Lessee shall provide Lessor with the funds required of Lessee or
satisfactory assurance thereof within thirty (30) days following said
commitment by Lessee. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds
or assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance
payment made by Lessee to Lessor and so much of Lessee's Security Deposit as
has not been, or is not then required to be, used by Lessor under the terms
of this Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby
waive the provisions of any present or future statute to the extent it is
inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2(a), applicable to the Industrial Center, and except
as otherwise provided in Paragraph 10.3, any increases in such amounts over
the Base Real Property Taxes shall be included in the calculation of Common
Area Operating Expenses in accordance with the provisions of Paragraph 4.2.
10.2 REAL PROPERTY TAX DEFINITIONS.
(a) As used herein, the term "REAL PROPERTY TAXES" shall
include any form of real estate tax or assessment, general, special, ordinary
or extraordinary, and any license fee, commercial rental tax, improvement
bond or bonds, levy or tax (other than inheritance, personal income or estate
taxes) imposed upon the Industrial Center by any authority having the direct
or indirect power to tax, including any city, state or federal government, or
any school, agricultural, sanitary, fire, street, drainage, or other
improvement district thereof, levied against any legal or equitable interest
of Lessor in the Industrial Center or any portion thereof, Lessor's right to
rent or other income therefrom, and/or Lessor's business of leasing the
Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee,
levy, assessment or charge, or any increase therein, imposed by reason of
events occurring, or changes in Applicable Law taking effect, during the term
of this Lease, including but not limited to a change in the ownership of the
Industrial Center or in the improvements thereon, the execution of this
Lease, or any modification, amendment or transfer thereof, and whether or not
contemplated by the Parties.
(b) As used herein, the term "BASE REAL PROPERTY TAXES" shall
be the amount of Real Property Taxes, which are assessed against the
Premises, Building or Common Areas in the calendar year during which the
Lease is executed. In calculating Real Property Taxes for any calendar year,
the Real Property Taxes for any real estate tax year shall be included in the
calculation of Real Property Taxes for such calendar year based upon the
number of days which such calendar year and tax year have in common.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such
other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however,
pay to Lessor at the time Common Area Operating Expenses are payable under
Paragraph 4.2, the entirety of any increase in Real Property Taxes if
assessed solely by reason of Alterations, Trade Fixtures or Utility
Installations placed upon the Premises by Lessee or at Lessee's request.
10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of
the Real Property Taxes for all of the land and improvements included within
the tax parcel assessed, such proportion to be determined by Lessor from the
respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available. Lessor's reasonable determination
thereof, in good faith, shall be conclusive.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal
property of Lessee contained in the Premises or stored within the Industrial
Center. When possible, Lessee shall cause its Lessee-Owned Alterations and
Utility Installations, Trade Fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property
of Lessor. If any of Lessee's said property shall be assessed with Lessor's
real property, Lessee shall pay Lessor the taxes attributable to Lessee's
property within ten (10) days after receipt of a written statement setting
forth the taxes applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity,
telephone, security, gas and cleaning of the Premises, together with any
taxes thereon. If any such utilities or services are not separately metered
to the Premises or separately billed to the Premises, Lessee shall pay to
Lessor a reasonable proportion to be determined by Lessor of all such charges
jointly metered or billed with other premises in the Building, in the manner
and within the time periods set forth in Paragraph 4.2(d).
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign")
or sublet all or any part of Lessee's interest in this Lease or in the
Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a
formal assignment or hypothecation of this Lease or Lessee's assets occurs,
which results or will result in a reduction of the Net Worth of Lessee, as
hereinafter defined, by an amount equal to or greater than twenty-five
percent (25%) of such Net Worth of Lessee as it was represented to Lessor at
the time of full execution and delivery of this Lease or at the time of the
most recent assignment to which Lessor has consented, or as it exists
immediately prior to said transaction or transactions constituting such
reduction, at whichever time said Net Worth of Lessee was or is greater,
shall be considered an assignment of this Lease by Lessee to which Lessor may
reasonably withhold its consent. "NET WORTH OF LESSEE" for purposes of this
Lease shall be the net worth of Lessee (excluding any Guarantors) established
under generally accepted accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be
a Default curable after notice per Paragraph 13.1, or a non-curable Breach
without the necessity of any notice and grace period. If Lessor elects to
treat such unconsented to assignment or subletting as a non-curable Breach,
Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon
thirty (30) days' written notice ("LESSOR'S NOTICE"), increase the monthly
Base Rent for the Premises to the greater of the then fair market rental
value of the Premises, as reasonably determined by Lessor, or one hundred ten
percent (110%) of the Base Rent then in effect, Pending determination of the
new fair market rental value, if disputed by Lessee, Lessee shall pay the
amount set forth in Lessor's Notice, with any overpayment credited against
the next installment(s) of Base Rent coming due, and any underpayment for the
period retroactively to the effective date of the adjustment being due and
payable immediately upon the determination thereof. Further, in the event of
such Breach and rental adjustment, (i) the purchase price of any option to
purchase the Premises held by Lessee shall be subject to similar adjustment
to the then fair market value as reasonably determined by Lessor (without the
Lease being considered an encumbrance or any deduction for depreciation or
obsolescence, and considering the Premises at its highest and best use and in
good condition) or one hundred ten percent (110%) of the price previously in
effect, (ii) any index-oriented rental or price adjustment formulas contained
in this Lease shall be adjusted to require that the base index be determined
with reference to the index applicable to the time of such adjustment, and
(iii) any fixed rental adjustments scheduled during the remainder of the
Lease term shall be increased in the same ratio as the new rental bears to
the Base Rent in effect immediately prior to the adjustment specified in
Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of such
assignment nor the acceptance of any rent for performance shall constitute a
waiver or estoppel of Lessor's right to exercise its remedies for the Default
or Breach by Lessee of any of the terms, covenants or conditions of this
Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and
assignments of the sublease or any amendments or modifications thereto
without notifying Lessee or anyone else liable under this Lease or the
sublease and without obtaining their consent, and such action shall not
relieve such persons from liability under this Lease or the sublease.
Initials: /s/ [ILLEGIBLE]
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/s/ [ILLEGIBLE]
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<PAGE>
(d) In the event of any Default or Breach of Lessee's obligation
under this Lease, Lessor may proceed directly against Lessee, any Guarantors
or anyone else responsible for the performance of the Lessee's obligations
under this Lease, including any sublessee, without first exhausting Lessor's
remedies against any other person or entity responsible therefor to Lessor,
or any security held by Lessor.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination
as to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $1,000 or ten percent (10%) of the monthly Base
Rent applicable to the portion of the Premises which is the subject of the
proposed assignment or sublease, whichever is greater, as reasonable
consideration for Lessor's considering and processing the request for
consent. Lessee agrees to provide Lessor with such other or additional
information and/or documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be
deemed, for the benefit of Lessor, to have assumed and agreed to conform and
comply with each and every term, covenant, condition and obligation herein to
be observed or performed by Lessee during the term of said assignment or
sublease, other than such obligations as are contrary to or inconsistent with
provisions of an assignment or sublease to which Lessor has specifically
consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.2(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment
or subletting, may require that the amount and adjustment schedule of the
rent payable under this Lease be adjusted to what is then the market value
and/or adjustment schedule for property similar to the Premises as then
constituted, as determined by Lessor.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases
under this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a
portion of the Premises heretofore or hereafter made by Lessee, and Lessor may
collect such rent and income and apply same toward Lessee's obligations under
this Lease; provided, however, that until a Breach (as defined in Paragraph
13.1) shall occur in the performance of Lessee's obligations under this
Lease, Lessee may, except as otherwise provided in this Lease, receive,
collect and enjoy the rents accruing under such sublease. Lessor shall not by
reason of the foregoing provision or any other assignment of such sublease to
Lessor, nor by reason of the collection of the rents from a sublessee, be
deemed liable to the sublessee for any failure of Lessee to perform and
comply with any of Lessee's obligations to such sublessee under such
Sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and
shall pay such rents and other charges to Lessor without any obligation or
right to inquire as to whether such Breach exists and notwithstanding any
notice from or claim from Lessee to the contrary. Lessee shall have no right
or claim against such sublessee, or, until the Breach has been cured, against
Lessor, for any such rents and other charges so paid by said sublessee to
Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of
such sublease; provided, however, Lessor shall not be liable for any prepaid
rents or security deposit paid by such sublessee to such sublessor or for any
other prior defaults or breaches of such sublessor under such sublease.
<PAGE>
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior
written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in
said notice as rent due and payable to cure said default. A "DEFAULT" by
Lessee is defined as a failure by Lessee to observe, comply with or perform
any of the terms, covenants, conditions or rules applicable to Lessee under
this Lease. A "BREACH" by Lessee is defined as the occurrence of any one or
more of the following Defaults, and, where a grace period for cure after
notice is specified herein, the failure by Lessee to cure such Default prior
to the expiration of the applicable grace period, and shall entitle Lessor to
pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent, Lessee's Share of Common
Area Operating Expenses, or any other monetary payment required to be made by
Lessee hereunder as and when due, the failure by Lessee to provide Lessor
with reasonable evidence of insurance or surety bond required under this
Lease, or the failure of Lessee to fulfill any obligation under this Lease
which endangers or threatens life or property, where such failure continues
for a period of three (3) days following written notice thereof by or on
behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1(b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination
of this Lease per Paragraph 30, (vi) the guaranty of the performance of
Lessee's obligations under this Lease if required under Paragraphs 1.11 and
37, (vii) the execution of any document requested under Paragraph 42
(easements), or (viii) any other documentation or information which Lessor
may reasonably require of Lessee under the terms of this lease, where any
such failure continues for a period of ten (10) days following written notice
by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof
that are to be observed, complied with or performed by Lessee, other than
those described in Subparagraphs 13.1(a), (b) or (c), above, where such
Default continues for a period of thirty (30) days after written notice
thereof by or on behalf of Lessor to Lessee; provided, however, that if the
nature of Lessee's Default is such that more than thirty (30) days are
reasonably required for its cure, then it shall not be deemed to be a Breach
of this Lease by Lessee if Lessee commences such cure within said thirty (30)
day period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making
by Lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code
Section 101 or any successor statute thereto (unless, in the case of a
petition filed against Lessee, the same is dismissed within sixty (60) days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within
thirty (30) days; or (iv) the attachment, execution or other judicial seizure
of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within
thirty (30) days; provided, however, in the event that any provision of this
Subparagraph 13.1(e) is contrary to any applicable law, such provision shall
be of no force or effect, and shall not affect the validity of the remaining
provisions.
(f) The discovery by Lessor that any financial statement of Lessee
or of any Guarantor, given to Lessor by Lessee or any Guarantor, was
materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance
with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or
the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such
event, to provide Lessor with written alternative assurances of security,
which, when coupled with the then existing resources of Lessee, equals or
exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may at
its option (but without obligation to do so), perform such duty or obligation
on Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee to Lessor upon invoice therefor, if any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its own option, may require all future payments to be made under
this Lease by Lessee to be made only by cashier's check. In the event of a
Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or
without further notice or demand, and without limiting Lessor in the exercise
of any right or remedy which Lessor may have by reason of such Breach, Lessor
may:
(a) Terminate Leessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor.
In such event Lessor shall be entitled to recover from Lessee: (i) the worth
at the time of the award of the unpaid rent which had been earned at the time
of termination; (ii) the worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time
of award exceeds the amount of such rental loss that the Lessee proves could
have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor
for all the detriment proximately caused by the Lessee's failure to perform
its obligations under this Lease or which in the ordinary course of things
would be likely to result therefrom, including but not limited to the cost of
recovering possession of the Premises, expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorney's
fees, and that portion of any leasing commission paid by Lessor in connection
with this Lease applicable to the unexpired term of this Lease. The worth at
the time of award of the amount referred to in provision (iii) of the
immediately preceding sentence shall be computed by discounting such amount
at the discount rate of the Federal Reserve Bank of San Francisco or the
Federal Reserve Bank District in which the Premises are located at the time
of award plus one percent (1%). Efforts by Lessor to mitigate damages caused
by Lessee's Default or Breach of this Lease shall not waive Lessor's right to
recover damages under this Paragraph 13.2. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall
have the right to recover in such pro-
Initials: [illegible]
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[illegible]
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<PAGE>
ceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve the right to recover all or any part thereof in a separate suit for such
rent and/or damages. If a notice and grace period required under Subparagraph
13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or
to perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also constitute
the applicable notice for grace period purposes required by Subparagraph
13.1(b), (c) or (d). In such case, the applicable grace period under the
unlawful detainer statute shall run concurrently after the one such statutory
notice, and the failure of Lessee to cure the Default within the greater of the
two (2) such grace periods shall constitute both an unlawful detainer and a
Breach of this Lease entitling Lessor to the remedies provided for in this Lease
and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
recover the rent as it becomes due, provided Lessee has the right to sublet or
assign, subject only to reasonable limitations. Lessor and Lessee agree that the
limitations on assignment and subletting in this Lease are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the appointment
of a receiver to protect the Lessor's interest under this Lease, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "INDUCEMENT PROVISIONS" shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
as additional rent due under this Lease, notwithstanding any subsequent cure of
said Breach by Lessee. The acceptance by Lessor of rent or the cure of the
Breach which initiated the operation of this Paragraph 13.3 shall not be deemed
a waiver by Lessor of the provisions of this Paragraph 13.3 unless specifically
so stated in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or deed of trust covering the Premises.
Accordingly, if any installment of rent or other sum due from Lessee shall not
be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and by any Lender(s) whose name and address shall have been
furnished to Lessee in writing for such purpose, of written notice specifying
wherein such obligation of Lessor has not been performed; provided, however,
that if the nature of Lessor's obligation is such that more than thirty (30)
days after such notice are reasonably required for its performance, then
Lessor shall not be in breach of this Lease if performance is commenced
within such thirty (30) day period and thereafter diligently pursued to
completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"),this Lease shall terminate as to
the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the portion of
the Common Areas designated for Lessee's parking, is taken by condemnation,
Lessee may, at Lessee's option, to be exercised in writing ten (10) days after
Lessor shall have given Lessee written notice of such taking (or in the absence
of such notice, within ten (10) days after the condemning authority shall have
taken possession) terminate this Lease as of the date the condemning authority
takes such possession. If Lessee does not terminate this Lease in accordance
with the foregoing, this Lease shall remain in full force and effect as to the
portion of the Premises remaining, except that the Base Rent shall be reduced in
the same proportion as the rentable floor area of the Premises taken bears to
the total rentable floor area of the Premises. No reduction of Base Rent shall
occur if the condemnation does not apply to any portion of the Premises. Any
award for the taking of all or any part of the Premises under the power of
eminent domain or any payment made under threat of the exercise of such power
shall be the property of Lessor, whether such award shall be made as
compensation for diminution of value of the leasehold of for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any compensation, separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is
not terminated by reason of such condemnation, Lessor shall to the extent of its
not severance damages received, over and above Lessee's Share of the legal and
other expenses incurred by Lessor in the condemnation matter, repair any damage
to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. BROKER'S FEES.
15.1 PROCURING CAUSE. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.2 ADDITIONAL TERMS. Unless Lessor and Broker(s) have otherwise agreed
in writing, Lessor agrees that: (a) if Lessee exercises any Option (as
defined in Paragraph 39.1) granted under this Lease or any Option
subsequently granted, or (b) if Lessee acquires any rights to the Premises or
other premises in which Lessor has an interest, or (c) if Lessee remains in
possession of the Premises with the consent of Lessor after the expiration of
the term of this Lease after having failed to exercise an Option, or (d) if
said Brokers are the procuring cause of any other lease or sale entered into
between the Parties pertaining to the Premises and/or any adjacent property
in which Lessor has an interest, or (e) if Base Rent is increased, whether by
agreement or operation of an escalation clause herein, than as to any of said
transactions, Lessor shall pay said Broker(s) a fee in accordance with the
schedule of said Broker(s) in effect at the time of the execution of this
Lease.
15.3 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease, whether such transfer is by agreement or by operation
of law, shall be deemed to have assumed Lessor's obligation under this
Paragraph 15. Each Broker shall be an intended third party beneficiary of
the provisions of Paragraph 1.10 and of this Paragraph 15 to the extent of
its interest in any commission arising from this Lease and may enforce that
right directly against Lessor and its successors.
15.4 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each represent and
warrant to the other that it has had no dealings with any person, firm, broker
or finder other than as named in Paragraph 1.10(a) in connection with the
negotiating of this Lease and/or the consummation of the transaction
contemplated hereby and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the Indemnifying Party who, including any costs, expenses, and/or attorneys'
fees reasonably incurred with respect thereto.
16. TENANCY AND FINANCIAL STATEMENTS
16.1 TENANCY STATEMENT. Each Party (as "RESPONDING PARTY") shall within ten
(10) days after written notice from the other Party (the "REQUESTING PARTY")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in a form similar to the then most current "TENANCY STATEMENT" form published by
the American Industrial Real Estate Association, plus such additional
information, confirmation and/or statements as may be reasonably requested by
the Requesting Party.
16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance, or
sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated by
Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser
in confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises. In the event
of a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10)
days following the date on which it was due, shall bear interest from the
date due at the prime rate charged by the largest state chartered bank in the
state in which the Premises are located plus four percent (4%) per annum, but
not exceeding the maximum rate allowed by law, in addition to the potential
late charge provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein,
and no other prior or contemporaneous agreement or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that
it has made, and is relying solely upon, its own investigation as to the
nature, quality, character and financial responsibility of the other Party to
this Lease and as to the nature, quality and character of the Premises.
Brokers have no responsibility with respect thereto or with respect to any
default or breach hereof by either Party. Each Broker shall be an intended
third party beneficiary of the provisions of this Paragraph 22.
<PAGE>
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by messenger
or courier service) or may be sent by regular, certified or registered mail
or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile
transmission during normal business hours, and shall be deemed sufficiently
given if served in a manner specified in this Paragraph 23. The addresses
noted adjacent to a Party's signature on this Lease shall be that Party's
address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises
shall constitute Lessee's address for the purpose of mailing or delivering
notices to Lessee. A copy of all notices required or permitted to be given to
Lessor hereunder shall be concurrently transmitted to such party or parties
at such addresses as Lessor may from time to time hereafter designate by
written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown
on the receipt card, or if no delivery date is shown, the postmark thereon.
If sent by regular mail, the notice shall be deemed given forty-eight (48)
hours after the same is addressed as required herein and mailed with postage
prepaid. Notices delivered by United States Express Mail or overnight courier
that guarantees next day delivery shall be deemed given twenty-four (24)
hours after delivery of the same to the United States Postal Service or
courier. If any notice is transmitted by facsimile transmission or similar
means, the same shall be deemed served or delivered upon telephone or
facsimile confirmation of receipt of the transmission thereof, provided a
copy is also delivered via delivery or mail. If notice is received on a
Saturday or a Sunday or a legal holiday, it shall be deemed received on the
next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any such act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. Regardless of Lessor's knowledge of a Default or Breach at the time
of accepting rent, the acceptance of rent by Lessor shall not be a waiver of
any Default or Breach by Lessee of any provision hereof. Any payment given
Lessor by Lessee may be accepted by Lessor on account of moneys or damages
due Lessor, notwithstanding any qualifying statements or conditions made by
Lessee in connection therewith, which such statements and/or conditions shall
be of no force or effect whatsoever unless specifically agreed to in writing
by Lessor at or before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this
Paragraph 26 then the Base Rent payable from and after the time of the
expiration or earlier termination of this Lease shall be increased to two
hundred percent (200%) of the Base Rent applicable during the month
immediately preceding such expiration or earlier termination. Nothing
contained herein shall be construed as a consent by Lessor to any holding
over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be
governed by the laws of the State in which the Premises are located. Any
litigation between the Parties hereto concerning this Lease shall be initiated
in the county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. The Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "SECURITY DEVICE"), now
or hereafter placed by Lessor upon the real property of which the Premises
are a part, to any and all advances made on the security thereof, and all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessee agrees that the Lenders holding any such Security Device shall have no
duty, liability or obligation to perform any of the obligations of Lessor
under this Lease, but that in the event of Lessor's default with respect to
any such obligation, Lessee will give any Lender whose name and address have
been furnished Lessee in writing for such purpose notice of Lessor's default
pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease
and/or any Option granted hereby superior to the lien of its Security Device
and shall give written notice thereof to Lessee, this Lease and such Options
shall be deemed prior to such Security Device, notwithstanding the relative
dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device,
and that in the event of such foreclosure, such new owner shall not: (i) be
liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership, (ii) be subject to any offsets
or defenses which Lessee might have against any prior lessor, or (iii) be
bound by prepayment of more than one month's rent.
30.3 NON-DISTURBANCE. WIth respect to Security Devices entered into by
Lessor after the execution of this lease, Lessee's subordination of this
Lease shall be subject to receiving assurance (a "non-disturbance agreement")
from the Lender that Lessee's possession and this Lease, including any
options to extend the term hereof, will not be disturbed so long as Lessee is
not in Breach hereof and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection
with a sale, financing or refinancing of Premises, Lessee and Lessor shall
execute such further writings as may be reasonably required to separately
document any such subordination or non-subordination, attornment and/or
non-disturbance agreement as is provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party
(as hereafter defined) in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorneys' fees. Such fees may be awarded in
the same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term "PREVAILING PARTY"
shall include, without limitation, a Party or Broker who substantially
obtains or defeats the relief sought, as the case may be, whether by
compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fee award shall not be
computed in accordance with any court fee schedule, but shall be such as to
fully reimburse all attorneys' fees reasonably incurred. Lessor shall be
entitled to attorneys' fees, costs and expenses incurred in preparation and
service of notices of Default and consultations in connection therewith,
whether or not a legal action is subsequently commenced in connection with
such Default or resulting Breach. Broker(s) shall be intended third party
beneficiaries of this Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
Building, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or Building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred eighty (180) days of the
term hereof place on or about the Premises any ordinary "For Lease" signs.
All such activities of Lessor shall be without abatement of rent or liability
to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to
the contrary in this Lease, Lessor shall not be obligated to exercise any
standard of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises
or the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to
advertise Lessee's own business so long as such signs are in a location
designated by Lessor and comply with Applicable Requirements and the signage
criteria established for the Industrial Center by Lessor. The installation of
any sign on the Premises by or for Lessee shall be subject to the provisions
of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures
and Alterations). Unless otherwise expressly agreed herein, Lessor reserves
all rights to the use of the roof of the Building, and the right to install
advertising signs on the Building, including the roof, which do not
unreasonably interfere with the conduct of Lessee's business; Lessor shall be
entitled to all revenues from such advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate
in the Premises; provided, however, Lessor shall, in the event of any such
surrender, termination or cancellation, have the option to continue any one
or all of any existing subtenancies. Lessor's failure within ten (10) days
following any such event to make a written election to the contrary by written
notice to the holder of any such lesser interest, shall constitute Lessor's
election to have such event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to
an act by or for the other Party, such consent shall not be unreasonably
withheld or delayed. Lessor's actual reasonable costs and expenses (including
but not limited to architects', attorneys', engineers' and other consultants'
fees) incurred in the consideration of, or response to, a request by Lessee
for any Lessor consent pertaining to this Lease or the Premises, including
but not limited to consents to an assignment a subletting or the presence or
use of a Hazardous Substance, shall be paid by Lessee to Lessor upon receipt
of an invoice and supporting documentation therefor. In addition to the
deposit described in Paragraph 12.2(e), Lessor may, as a condition to
considering any such request by Lessee, require that Lessee deposit with
Lessor an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor
will incur in considering and responding to Lessee's request. Any unused
portion of said deposit shall be refunded to Lessee without interest.
Lessor's consent to any act, assignment of this Lease or subletting of the
Premises by Lessee shall not constitute an acknowledgment that no Default or
Breach by Lessee of this Lease exists, nor shall such consent to be deemed a
waiver of any then existing Default or Breach, except as may be otherwise
specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions
by Lessor at the time of consent of such further or other conditions as are
then reasonable with reference to the particular matter for which consent is
being given.
37. GUARANTOR.
37.1 FORM OF GUARANTY. If there are to be any Guarantors of this Lease
per Paragraph 1.11, the form of the guaranty to be executed by each such
Guarantor shall be in the form most recently published by the American
Industrial Real Estate Association, and each such Guarantor shall have the
same obligations as Lessee under this lease, including but not limited to the
obligation to provide the Tenancy Statement and information required in
Paragraph 16.
<PAGE>
37.2 ADDITIONAL OBLIGATIONS OF GUARANTOR. It shall constitute a Default
of the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of
the guaranty called for by this Lease, including the authority of the
Guarantor (and of the party signing on Guarantor's behalf) to obligate such
Guarantor on said guaranty, and resolution of its board of directors
authorizing the making of such guaranty, together with a certificate of
incumbency showing the signatures of the persons authorized to sign on its
behalf, (b) current financial statements of Guarantor as may from time to
time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises
and the performance of all of the covenants, conditions and provisions on
Lessee's part to be observed and performed under this Lease, Lessee shall
have quiet possession of the Premises for the entire term hereof subject to
all of the provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Lease, the word "OPTION" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property
of Lessor; (b) the right of first refusal to lease the Premises or the right
of first offer to lease the Premises or the right of first refusal to lease
other property of Lessor or the right of first offer to lease other property
of Lessor; (c) the right to purchase the Premises, or the right of first
refusal to purchase the Premises, or the right of first offer to purchase the
Premises, or the right to purchase other property of Lessor, or the right of
first refusal to purchase other property of Lessor, or the right of first
offer to purchase other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee
in this Lease is personal to the original Lessee named in Paragraph 1.1
hereof, and cannot be voluntarily or involuntarily assigned or exercised by
any person or entity other than said original Lessee while the original
Lessee is in full and actual possession of the Premises and without the
intention of thereafter assigning or subletting. The Options, if any, herein
granted to Lessee are not assignable, either as a part of an assignment of
this Lease or separately or apart therefrom, and no Option may be separated
from this Lease in any manner, by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of
time any monetary obligation due Lessor from Lessee is unpaid (without regard
to whether notice thereof is given Lessee), or (iii) during the time Lessee
is in Breach of this Lease, or (iv) in the event that Lessor has given to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during the twelve (12) month period immediately preceding the exercise of the
Option, whether or not the Defaults are cured.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due
and timely exercise of the Option, if, after such exercise and during the
term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation
of Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or (ii)
Lessor gives to Lessee three (3) or more notices of separate Defaults under
Paragraph 13.1 during any twelve (12) month period, whether or not the
Defaults are cured, or (iii) if Lessee commits a Breach of this Lease.
40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep
and observe all reasonable rules and regulations ("Rules and Regulations")
which Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants
or tenants of the Building and the Industrial Center and their invitees.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other
security measures, and that Lessor shall have no obligation whatsoever to
provide same. Lessee assumes all responsibility for the protection of the
Premises, Lessee, its agents and invitees and their property from the acts of
third parties.
42. RESERVATIONS. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way,
utility raceways, and dedications that Lessor deems necessary, and to cause
the recordation of parcel maps and restrictions, so long as such easements,
rights of way, utility raceways, dedications, maps and restrictions do not
reasonably interfere with the use of the Premises by Lessee. Lessee agrees to
sign any documents reasonably requested by Lessor to effectuate any such
easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment and there shall survive
the right on the part of said Party to institute suit for recovery of such
sum. If it shall be adjudged that there was no legal obligation on the part
of said Party to pay such sum or any part thereof, said Party shall be
entitled to recover such sum or so much thereof as it was not legally
required to pay under the provisions of this Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general
or limited partnership, each individual executing this Lease on behalf of
such entity represents and warrants that he or she is duly authorized to
execute and deliver this Lease on its behalf. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty (30) days after request by
Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not
be deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the
property of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if
more than one person or entity is named herein as either Lessor or Lessee,
the obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or
Lessee.
<PAGE>
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN
PREPARED FOR YOUR ATTORNEY'S REVIEW AND APPROVAL. FURTHER,
EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE
PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND
STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR
CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY
SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL
AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY
IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE
STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
<TABLE>
<CAPTION>
<S> <C>
Executed at: San Diego, California Executed at: Poway, California
--------------------------- -------------------------------
on: 3-11-96 on:
------------------------------------ ----------------------------------------
By LESSOR: By LESSEE:
DWCG, Inc., dba Poway Business Park Self-Heating Container Corporation of
- ---------------------------------------- --------------------------------------------
California, a California Corporation
- ---------------------------------------- --------------------------------------------
By: /s/ Daniel M. Whitaker By: /s/ James A. Scudder
------------------------------------- -----------------------------------------
Name Printed: Daniel M. Whitaker Name Printed: James A. Scudder
-------------------------- ------------------------------
Title: President Title: President
---------------------------------- -------------------------------------
By: By: /s/ James L. Berntsen
------------------------------------- ----------------------------------------
Name Printed: Name Printed: James L. Berntsen
-------------------------- ------------------------------
Title: Title: Vice President
---------------------------------- --------------------------------------
Address: 350 W. Ash Street, Suite 100 Address: 12675 Danielson Court, Suite 401
------------------------------- ------------------------------------
San Diego, Ca 92101 Poway, Ca 92064
------------------------------- ------------------------------------
Telephone: (619) 238-1834 Telephone: (619) 486-7200
------------------------ ----------------------------
Facsimile: (619) 531-1783 Facsimile: (619) 486-7204
------------------------ ----------------------------
BROKER: BROKER:
Executed at: Executed at:
--------------------------- -------------------------------
on: on:
------------------------------------ ----------------------------------------
By: By:
------------------------------------- ----------------------------------------
Name Printed: Name Printed:
-------------------------- ------------------------------
Title: Title:
---------------------------------- --------------------------------------
Address: Address:
------------------------------- ------------------------------------
------------------------------- ------------------------------------
Telephone: ( ) Telephone: ( )
------------------------ ----------------------------
Facsimile: ( ) Facsimile: ( )
------------------------ ----------------------------
</TABLE>
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are
utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION, 345 So. Figueroa St., M-1, Los Angeles, CA 90071,
(213) 687-8777.
INITIALS:
----------
----------
COPYRIGHT 1993 BY AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION. ALL RIGHTS
RESERVED. NO PART OF THESE WORDS MAY BE REPRODUCED IN ANY FORM WITHOUT
PERMISSION IN WRITING.
<PAGE>
ADDENDUM TO LEASE
ADDENDUM TO LEASE DATED FEBRUARY 8, 1996 BY AND BETWEEN DWCG, INC., A
CALIFORNIA CORPORATION, AS LESSOR, AND SELF HEATING CONTAINER CORPORATION OF
CALIFORNIA, A CALIFORNIA CORPORATION, AS LESSEE, FOR THE PROPERTY LOCATED AT
12625 DANIELSON COURT, SUITE 110, POWAY, CA 92064.
49. BASE RENT
The base rent shall be as follows:
April 1, 1996 - March 31, 1997: $1,084.00 per month
April 1, 1997 - August 31, 1997: $1,128.00 per month
50. COMMON AREA OPERATING EXPENSES.
Pursuant to Paragraph 4.2 of the Lease, the Lessee shall pay to the
Lessor its pro-rata share of the Common Area Operating Expenses which is
estimated to be 8.6 cents ($.086) per square foot per month for the year
1995.
51. IMPROVEMENTS TO PREMISES.
The Lessor, at the Lessor's cost and expense, shall paint the warehouse
walls with building standard paint. Other than the forgoing, the Lessee
shall accept the Leased Premises in an "as is" condition. Any other
improvements to the Leased premises shall be at the Lessees sole cost
and expense. Where required by the City of Poway, the Lessee shall obtain
the necessary permits from the City of Poway for any tenant improvement
work.
52. OPTION TO RENEW.
Provided that at no time throughout this Lease Lessee is in default
thereof, Lessee shall be granted one (1) option to renew this lease for
a term of one (1) year. A four percent (4%) cost-of-living increase will
be assessed at the commencement of the option period. In order to
exercise this option to renew, Lessee must give Lessor written notice
not more than six (6) months nor less than two (2) months prior to
expiration of this Lease.
53. COVENANT OF NON-DISCLOSURE.
Lessee and Lessor acknowledge this Lease is a confidential business
agreement. Lessee and Lessor herein covenant to the other that neither
party shall disclose any of its terms and conditions to any third party
other than Lessee's accountant, attorney or other such consultants of
Lessee who require such information. Should Lessee breach this covenant,
then Lessor shall be entitled to renegotiate the terms and conditions of
this Lease and may hold Lessee liable for any damages suffered by Lessor
as a result of breach.
INITIAL [ILLEGIBLE]
-----------
<PAGE>
GUARANTY OF LEASE [LOGO]
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
WHEREAS, DWCG, Inc., a California Corporation, hereinafter
referred to as "Lessor", and Self-Heating Container Corporation of Calif.,
a California Corp., hereinafter referred to as "Lessee", are about to execute
a document entitled "Lease" dated February 8, 1996 concerning the premises
commonly known as 12625 Danielson Court, Suite 110, Poway, Ca 92064 wherein
Lessor will lease the premises to Lessee, and
WHEREAS, James A. Scudder and James L. Berntsen
hereinafter referred to as "Guarantors" have a financial interest in
Lessee, and
WHEREAS, Lessor would not execute the Lease if Guarantors did not
execute and deliver to Lessor this Guarantee of Lease.
NOW THEREFORE, for and in consideration of the execution of the
foregoing Lease by Lessor and as a material inducement to Lessor to execute
said Lease, Guarantors hereby jointly, severally, unconditionally and
irrevocably guarantee the prompt payment by Lessee of all rentals and all
other sums payable by Lessee under said Lease and the faithful and prompt
performance by Lessee of each and every one of the terms, conditions and
covenants of said Lease to be kept and performed by Lessee.
It is specifically agreed and understood that the terms of the foregoing
Lease may be altered, affected, modified or changed by agreement between
Lessor and Lessee, or by a course of conduct, and said Lease may be assigned
by Lessor or any assignee of Lessor without consent or notice to Guarantors
and that this Guaranty shall thereupon and thereafter guarantee the
performance of said Lease as so changed, modified, altered or assigned.
This Guaranty shall not be released, modified or affected by failure or
delay on the part of Lessor to enforce any of the rights or remedies of the
Lessor under said Lease, whether pursuant to the terms thereof or at law or
in equity.
No notice of default need be given to Guarantors, it being specifically
agreed and understood that the guarantee of the undersigned is a continuing
guarantee under which Lessor may proceed forthwith and immediately against
Lessee or against Guarantors following any breach or default by Lessee or for
the enforcement of any rights which Lessor may have as against Lessee
pursuant to or under the terms of the within Lease or at law or in equity.
Lessor shall have the right to proceed against Guarantors hereunder
following any breach or default by Lessee without first proceeding against
Lessee and without previous notice to or demand upon either Lessee or
Guarantors.
Guarantors hereby waive (a) notice of acceptance of this Guaranty, (b)
demand of payment, presentation and protest, (c) all right to assert or plead
any statute of limitations as to or relating to this Guaranty and the
Lease, (d) any right to require the Lessor to proceed against the Lessee or
any other Guarantor or any other person or entity liable to Lessor, (e) any
right to require Lessor to apply to any default any security deposit or other
security it may hold under the Lease, (f) any right to require Lessor to
proceed under any other remedy Lessor may have before proceeding against
Guarantors, (g) any right of subrogation.
Guarantors do hereby subrogate all existing or future indebtedness of
Lessee to Guarantors to the obligations owed to Lessor under the Lease and
this Guaranty.
Any married woman who signs this Guaranty expressly agrees that recourse
may be had against her separate property for all of her obligations hereunder.
The obligations of Lessee under the Lease to execute and deliver
estoppel statements and financial statements, as therein provided, shall be
deemed to also require the Guarantors hereunder to do and provide the same
relative to Guarantors.
The term "Lessor" whenever hereinabove used refers to and means the
Lessor in the foregoing Lease specifically named and also any assignee of
said Lessor, whether by outright assignment or by assignment for security,
and also any successor to the interest of said Lessor or of any assignee in
such Lease or any part thereof, whether by assignment or otherwise. So long
as the Lessor's interest in or to the leased premises or the rents, issues
and profits therefrom, or in, to or under said Lease, are subject to any
mortgage or deed of trust or assignment for security, no acquisition by
Guarantors of the Lessor's interest in the leased premises or under said
Lease shall affect the continuing obligation of Guarantors under this
Guaranty which shall nevertheless continue in full force and effect for the
benefit of the mortgagee, beneficiary, trustee or assignee under such
mortgage, deed of trust or assignment, of any purchase at sale by judicial
foreclosure or under private power of sale, and of the successors and assigns
of any such mortgagee, beneficiary, trustee, assignee or purchaser.
The term "Lessee" whenever hereinabove used refers to and means the
Lessee in the foregoing Lease specifically named and also any assignee or
sublessee of said Lease and also any successor to the interests of said
Lessee, assignee or sublessee of such Lease or any part thereof, whether by
assignment, sublease or otherwise.
In the event any action be brought by said Lessor against Guarantors
hereunder to enforce the obligation of Guarantors hereunder, the unsuccessful
party in such action shall pay to the prevailing party therein a reasonable
attorney's fee which shall be fixed by the court.
IF THIS FORM HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS
MADE BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS FORM OR THE
TRANSACTION RELATING THERETO.
<TABLE>
<S> <C>
Executed at Poway, California /s/ James A. Scudder
----------------------------- ---------------------------------
on 3-11-96 James A. Scudder
------------------------------------- ---------------------------------
Address 12675 Danielson Court, Suite 401 /s/ James L. Berntsen
--------------------------------- ---------------------------------
Poway, Ca 92064 James L. Berntsen
- ------------------------------------------
"GUARANTORS"
</TABLE>
COPYRIGHT 1977--AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION.
ALL RIGHTS RESERVED. NO PART OF THESE WORKS MAY BE REPRODUCED IN ANY FORM
WITHOUT PERMISSION IN WRITING.
<PAGE>
EXHIBIT A
[MAP]
------------
NOT TO SCALE
------------
INITIAL [ILLEGIBLE]
-------------------
<PAGE>
EXHIBIT B
POWAY BUSINESS PARK
PROJECT RULES AND REGULATIONS
These Rules and Regulations ("Rules") are adopted by the Lessor pursuant to the
Lease to which the rules are annexed. The Rules supplement the Lease and in the
event of any conflict or inconsistency between the Lease and the Rules, the
Lease will control. The Rules may be changed from time to time by Lessor,
subject to any restrictions set forth in the Lease, and any such changes shall
be effective immediately upon delivery to Lessee. Accordingly, the Lessor
adopts the following Rules:
GENERAL RULES
1. No sign, placard, picture, advertisement, name or notice shall be
installed or displayed on any part of the outside, or inside if visible from the
exterior, of any building without the prior written consent of Lessor. Lessor
shall have the right to remove, at Lessee's expense and without notice, any item
installed or displayed in violation of the Rule. All approved signs or
lettering on doors and walls shall be printed, painted, affixed or inscribed at
the expense of Lessee and in a configuration and style approved by Lessor, in
its sole discretion.
2. If Lessor objects in writing to any curtains, blinds, shades, screens
or hanging plants or other similar objects attached to or used in connection
with any window or door of the Premises, or placed on any windowsill, which is
visible from the exterior of the Premises, Lessee shall immediately discontinue
such use. Lessee shall not place anything against or near glass partitions,
doors or windows which is visible from outside the Premises without Lessor's
consent.
3. Concurrently with Lessee's occupancy of the Premises, Lessee shall
furnish Lessor, free of charge, one set of keys to each door lock on the
Premises. Lessee shall be entitled to make or have made additional keys as
Lessee desires. Lessee shall not alter any lock or install a new additional
lock or bolt on any door of its Premises without furnishing Lessor, without
charge, a new set of keys. Lessee, upon the termination of its Lease, shall
deliver to Lessor the keys to all doors within the Premises.
4. If Lessee requires telegraphic, telephonic, burglar alarm or similar
services, it shall first obtain, and comply with, Lessor's installation
instructions for any such equipment.
5. Deliveries of equipment, materials, furniture, packages, supplies,
merchandise or other property will be received at the Project in a manner and
method which does not impede or interfere with other tenants or the operation of
any portion of the Project. Lessee shall be responsible for all repairs and
replacements to the Project required on account of damage or injury caused by
deliveries to Lessee's Premises.
6. Lessee shall not place a load upon any floor of the Premises which
exceeds the load per square foot which such floor was designed to carry and
which is allowed by law. Lessor shall have the right to prescribe the weight,
size and position of all equipment, materials, furniture or other property
brought into the Project. Heavy objects shall, if considered necessary by
Lessor, stand on such platforms as determined by Lessor to be necessary to
properly distribute the weight, which platforms shall be provided at Lessee's
expense. Business machines and mechanical equipment belonging to Lessee, which
cause noise or vibration that may be transmitted to any structure of the Project
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or to any space therein to such a degree as to be placed and maintained by
Lessee, at Lessee's expense, on vibration eliminators or other devices
sufficient to eliminate noise or vibration. Lessor will not be responsible for
loss of, or damage to, any such equipment or other property from any cause, and
all damage done to the Project by maintaining or moving such equipment or other
property shall be repaired at the expense of Lessee.
7. Lessee shall not use or keep in the Premises or about the Project any
kerosene, gasoline or inflammable or combustible fluid or materials other than
those limited quantities necessary for the operation or maintenance of office
equipment. Lessee shall not use or permit to be used in the Premises any foul
or noxious gas or substance, or permit or allow the Premises to be occupied or
used in a manner offensive or objectionable to Landlord or other occupants of
the Project by reason of noise, odor or vibrations.
8. Lessee shall not use any method of heating or air-conditioning other
than that approved by Lessor, in its reasonable discretion.
9. Lessee shall not waste electricity, water or air-conditioning and
agrees to cooperate fully with Lessor to assure the most effective operation of
the Project's heating and air-conditioning and to comply with any governmental
energy-saving rules, laws or regulations of which Lessee has actual notice, and
shall refrain from attempting to adjust controls. Lessee shall keep corridor
doors closed, and shall close window coverings at the end of each business day.
10. Lessee shall close and lock the doors of its Premises and entirely
shut off all water faucets or other water apparatus, and electricity, gas or air
outlets before Lessee and its employees leave the Premises. Lessee shall be
responsible for any damage or injuries sustained by other tenants or occupants
of the Project or by Lessor arising from Lessee's noncompliance with this Rule.
11. The toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein. The expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the Lessee who, or whose employees or
invitee's, shall have caused it.
12. Lessee shall not install any radio or television antenna, loudspeaker
or other devices on the roof or exterior walls of any building, except with
Lessor's consent. Lessee shall not interfere with radio or television
broadcasting or reception from or in the Project or elsewhere.
13. All Lessee's installations, improvements and alterations shall be
carried out in a manner and method designed to minimize any damage to the
Premises on account of the installation or removal of such items. Lessee shall
repair any damage resulting from Lessee's installations, improvements and
alterations and the removal thereof upon termination of the Lease.
14. Canvassing, soliciting and distribution of handbills or any other
written materials, and peddling upon the Project are prohibited and Lessee shall
cooperate to prevent such activities.
15. Lessor reserves the right to exclude or expel from the Project any
person who, in Lessor's judgement, is intoxicated or under the influence or
liquor or drugs or who is in violations of
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any of the Rules, provided Lessor shall be under no obligation to do so nor have
any liability to Lessee on account of Lessor's failure to exclude any person.
16. Lessee shall store all its trash and garbage within its Premises or in
other facilities provided by Lessor. Lessee shall not place in any trash box or
receptacle any material which cannot be disposed of in the ordinary and
customary manner of trash and garbage disposal. All garbage and refuse disposal
shall be made in accordance with directions issued from time to time by Lessor.
All trash placed in the trash box or receptacle shall be generated within the
Poway Business Park. Lessee shall not import any trash or waste, generated in
the conduct of the Lessee's business, in to the Poway Business Park nor shall
Lessee use the trash box or receptacle to dispose of this trash or waste.
Lessee will instruct Lessee's employees, agents, clients or invitees to dispose
all trash or waste in a clean, orderly manner, to break down all cardboard
containers and to place all trash IN the trash box or receptacle and not on or
about the trash box or receptacle.
17. Equipment Storage - No material, equipment, supplies, or products
shall be stored or permitted to remain on the property outside a permanent
structure unless prior approval is obtained from the Lessor. Approval of
outside storage will be granted only where storage is visually screened from all
approaches.
18. Pets or Animals - No pets or animals are allowed on the property or
within Lessee's Premises.
19. Without the written consent of Lessor, Lessee shall not use the name
of the Project in connection with or in promoting or advertising the business of
Lessee except as Lessee's address.
20. Lessee shall comply with all safety, fire protection and evacuation
procedures and regulations established by Lessor or any governmental agency.
21. Lessee assumes any and all responsibility for protecting its Premises
from theft, robbery and pilferage, which includes keeping doors locked and other
means of entry to the Premises closed.
22. Lessor may waive any one or more of these Rules for the benefit of
Lessee or any other tenant, but no such waiver by Lessor shall be construed as a
waiver of any other Rule in favor of Lessee or any other tenant, nor prevent
Lessor from thereafter enforcing any such Rules against any or all of the
tenants of the Project.
23. The Rules are in addition to, and shall not be construed to in any way
modify or amend, in whole or in part, the terms, covenants, agreements and
conditions of Lessee's Lease of its Premises in the Project.
24. Lessee shall be responsible for the observance of all of the Rules by
Lessee's employees, agents, clients, customers, invitee's and guests.
PARKING RULES
25. Lessor shall not be responsible for loss, injury or damage to any
vehicle arising from the use of parking areas in the Project. In the event the
general exclusion of liability set forth in the preceding sentence is determined
not to apply to any particular claim, specific limitations on liability set
forth below shall apply to any claim against Lessor arising in
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connection with the use of parking areas in the Project. All claimed damage
or loss must be reported and itemized in writing, delivered to the Lessor
within two (2) business days after any claimed damage or loss occurs. Any
claim not so made is waived. Lessor has the option to make repairs, at its
expense, of any claimed damage within two (2) business days after filing of
any claim. In all court actions the burden of proof to establish a claim
remains with the Lessee. Court actions by Lessee for any claim must be filed
within ninety (90) days from date of parking when a claimed loss occurred.
Lessor is not responsible for damage by water, fire or defective brakes, or
part, or for the act of omissions of others, or for articles left in the car.
The total liability of Lessor is limited to $250.00 for all damages or loss
to any vehicle. Lessor is not responsible for loss of use.
26. Lessee shall not park or permit the parking of any vehicle under
Lessee's reasonable control in any parking areas designated by Lessor as areas
for parking by visitors to the Project or for deliveries or assigned to other
tenants or occupants of the Project. Lessee shall not leave vehicles in the
parking area overnight nor park any vehicles in the parking areas other than
automobiles, motorcycles, motor driven or non-motor driven bicycles.
27. In the event Lessor reasonably determines that a system of parking
registration is required to provide for the orderly use of the parking areas
within the Project, Lessor may institute a system of requiring decals or
stickers. Parking stickers or any other device or form of identification
supplied by Lessor as a condition of use of the parking areas shall remain
the property of Lessor. Such parking identification device must be displayed
as requested and may not be mutilated in any manner. The serial number of the
parking identification device may not be obliterated. Devices are not
transferable and any device in the possession of an unauthorized holder will
be void.
28. Vehicles must be parked entirely with the painted stall lines of a
single parking stall. All directional signs and arrows must be observed. The
speed limit within all parking areas shall be five (5) miles per hour.
29. Parking is prohibited: (a) in areas not striped for parking; (b) in
aisles; (c) where "no parking" signs are posted; (d) on ramps; (e) in cross
hatched areas; and (f) in such other areas as may be designated by Lessor.
30. Every vehicle owner is required to park and lock his own vehicle.
All responsibility for damage to a vehicle or theft of property from a
vehicle is assumed by the vehicle owner.
31. Parking areas are for the temporary parking of vehicles only. No
storage of vehicles or other items will be permitted. Washing, waxing,
cleaning or servicing of any vehicle is prohibited.
32. Lessee shall acquaint all employees, customers and guests of these
rules.
33. Lessor reserves the right to modify and/or adopt such other
reasonable and non-discriminatory rules and regulations for the parking
facilities as it deems necessary for the operation of the parking facilities.
Lessor may refuse to permit any person who violates these rules to park in
the parking facilities, and any violation of the rules shall subject the
vehicle to removal.
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Poway Business Park
12625-12675 Danielson Court
Poway, Ca 92064
State of California
SALE/LEASE AMERICANS WITH DISABILITIES ACT
AND HAZARDOUS MATERIALS DISCLOSURE
The United States Congress has enacted the Americans With Disabilities Act.
Among other things, this act is intended to make business establishments
equally accessible to persons with a variety of disabilities; modifications
to real property may be required. State and local laws also may mandate
changes. The Lessor, Whitaker Investment Corporation and the real estate
brokers, if any, in this transaction are not qualified to advise you as to
what, if any, changes may be required now, or in the future. Lessees should
consult the attorneys and qualified design professionals of their choice for
information regarding these matters. The Lessor, Whitaker Investment
Corporation and real estate brokers cannot determine which attorneys or
design professionals have the appropriate expertise in this area.
Various construction materials may contain items that have been or may in the
future be determined to be hazardous (toxic) or undesirable and may need to
be specifically treated/handled or removed. For example, some transformers
and other electrical components contain PCB's, and asbestos has been used in
components such as fire-proofing, heating and cooling systems, air duct
insulation, spray-on and tile acoustical materials, linoleum, floor tiles,
roofing, dry wall and plaster. Due to prior or current uses of the Property
or in the area, the Property may have hazardous or undesirable metals,
minerals, chemicals, hydrocarbons, or biological or radioactive items
(including electric and magnetic fields) in soils, water, building
components, above or below-ground containers or elsewhere in areas that may
or may not be accessible or noticeable. Such items may leak or otherwise be
released. Expert inspections are necessary. Current or future laws may
require clean up by past, present and/or future owners and/or operators. It
is the responsibility of the Lessee to retain qualified experts to detect and
correct such matters and to consult with legal counsel of their choice to
determine what provisions, if any, they may wish to include in transaction
documents regarding the Property.
To the best of Lessor's knowledge, Lessor has attached to this Disclosure
copies of all existing surveys and reports known to Lessor regarding asbestos
and the hazardous materials and undesirable substances related to the
Property. Lessor is required under California Health and Safety Code Section
25915 et seq. to disclose reports and surveys regarding asbestos to certain
persons, including their employees, contractors, co-owners, purchasers and
tenants. Lessees have similar disclosure obligations. Lessors and Lessees
have additional hazardous materials disclosure responsibilities to each other
under California Health and Safety Code Section 25359.7 and other California
laws. Consult your attorney regarding this matter. The Lessor, Whitaker
Investment Corporation and real estate brokers, if any, are not qualified to
assist you in this matter or provide you with other legal or tax advice.
LESSOR LESSEE
DWCG, Inc.
By: /s/ Daniel M. Whitaker By: /s/ James A. Scudder
------------------------------- ---------------------------------
Daniel M. Whitaker James A. Scudder, President
Title: President By: /s/ James L. Berntsen
---------------------------- ---------------------------------
James L. Berntsen, Vice President
Date: 3-11-96 Date: 3/11/96
----------------------------- -------------------------------
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FIRST AMENDMENT TO LEASE
This First Amendment to Lease in entered into on September 19, 1997 by DWCG,
Inc., a California Corporation, ("Lessor"), and Self-Heating Container
Corporation of America, a California Corporation, ("Lessee"), with respect to
the following facts:
A. Lessor and Lessee entered into that certain industrial lease dated February
8, 1996 ("Lease") whereby Lessee leased from Lessor approximately 1,936
square feet ("Original Space") located at 12625 Danielson Court, Suite 110,
Poway, CA 92064.
B. The Lessee wishes to extend the Lease dated February 8, 1996.
WHEREFORE, the parties agree to amend the Lease as follows:
1. Lease Term - The Lease Term for Suite 110 shall be extended for eight
(8) months to commence September 1, 1997 and expire April 30, 1998.
2. Base Rent - Pursuant to Paragraph 4.1 of the Lease, the base rent of
this extended period shall be $1,142.00 per month. The foregoing
notwithstanding, the Lessee shall pay to the Lessor its pro-rata share
of the Common Area Operating Expenses pursuant to Paragraph 4.2 of the
Lease.
3. Premises - The Lessee shall accept Suite 401 in an "as is" condition.
EXCEPT AS AMENDED HEREIN, all terms and conditions of the Lease dated February
8, 1996 shall remain in full force and effect.
Executed in San Diego, CA Executed in Poway, CA
LESSOR: LESSEE:
DWCG, Inc., a California ONTRO, Inc. a California
Corporation Corporation
by /s/ Daniel M. Whitaker by /s/ James A. Scudder
--------------------------- -----------------------------
Daniel M. Whitaker James A. Scudder, President
Date 9/30/97 by /s/ James L. Berntsen
------------------------- -----------------------------
James Bernsten, Vice President
Date 9/26/97
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STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[AIR LOGO]
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes
only, August 18, 1995, is made by and between DWCG INC., a California
Corporation dba Poway Business Park ("LESSOR") and Self-Heating Container
Corporation of California, a California Corporation ("LESSEE"), (collectively
the "PARTIES," or individually a "PARTY").
1.2(a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this
Lease, commonly known by the street address of 12675 Danielson Ct., Suite
401, located in the City of Poway, County of San Diego, State of California,
with zip code 92064, as outlined on Exhibit A attached hereto ("PREMISES").
The "BUILDING" is that certain building containing the Premises and generally
described as (describe briefly the nature of the Building): Poway Business
Park Building 4, Suite 401, an industrial suite of approximately 1,664 square
feet.
In addition to Lessee's rights to use and occupy the Premises as hereinafter
specified, Lessee shall have non-exclusive rights to the Common Areas (as
defined in Paragraph 2.7 below) as hereinafter specified, but shall not have
any rights to the roof, exterior walls or utility raceways of the Building or
to any other buildings in the Industrial Center. The Premises, the Building,
the Common Areas, the land upon which they are located, along with all other
buildings and improvements thereon, are herein collectively referred to as
the "INDUSTRIAL CENTER." (Also see Paragraph 2.)
1.2(b) PARKING: six (6) unreserved vehicle parking spaces ("UNRESERVED
PARKING SPACES"); and --0-- reserved vehicle parking spaces ("RESERVED
PARKING SPACES"). (Also see Paragraph 2.6.)
1.3 TERM: One years and 0 months ("ORIGINAL TERM") commencing
September 1, 1995 ("COMMENCEMENT DATE") and ending August 31, 1996
("EXPIRATION DATE"). (Also see Paragraph 3.)
1.4 EARLY POSSESSION: August 21, 1995 ("EARLY POSSESSION DATE").
(Also see Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $965.00 per month ("BASE RENT"), payable on the
first day of each month commencing September 1995 (Also see Paragraph 4.)
[ ] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum______, attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $965.00 as Base Rent for the
period September 1 through September 30, 1995.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: 2.37 percent
(2.37%)("LESSEE'S SHARE") as determined by [X] pro rata square footage of the
Premises as compared to the total square footage of the Building or [ ] other
criteria as described in Addendum_____.
1.7 SECURITY DEPOSIT: $965.00 ("SECURITY DEPOSIT"). (Also see
Paragraph 5.)
1.8 PERMITTED USE: Design and manufacture of self-heating beverage
containers ("PERMITTED USE")(Also see Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY." (Also see
Paragraph 8.)
1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[ ] ____________ represents Lessor exclusively ("LESSOR'S BROKER");
[ ] ____________ represents Lessee exclusively ("LESSEE'S BROKER"); or
[X] Business Real Estate Brokerage Co. represents both Lessor and Lessee
("DUAL AGENCY"). (Also see Paragraph 15.)
1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate
shares as they may mutually designate in writing, a fee as set forth in a
separate written agreement between Lessor and said Broker(s) (or in the event
there is no separate written agreement between Lessor and said Broker(s), the
sum of $_____) for brokerage services rendered by said Broker(s) in
connection with this transaction.
1.11 GUARANTOR. The obligations of the Lessee under this Lease are
to be guaranteed by James A. Scudder and James L. Berntsen ("GUARANTOR").
(Also see paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 51, and Exhibits A through B, all of
which constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree is reasonable and
the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon
is not subject to revision whether or not the actual square footage is more
or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the
existing plumbing, electrical systems, fire sprinkler system, lighting, air
conditioning and heating systems and loading doors, if any, in the Premises,
other than those constructed by Lessee, shall be in good operating condition
on the Commencement Date. If a non-compliance with said warranty exists as of
the Commencement Date, Lessor shall, except as otherwise provided in this
Lease, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify same
at Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within thirty (30) days after the
Commencement Date, correction of that non-compliance shall be the obligation
of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement
Date. Lessor further warrants to Lessee that Lessor has no knowledge of any
claim having been made by any governmental agency that a violation or
violations of applicable building codes, regulations, or ordinances exist
with regard to the Premises as of the Commencement Date. Said warranties
shall not apply to any Alterations or Utility Installations (defined in
Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply
with said warranties, Lessor shall, except as otherwise provided in this
Lease, promptly after receipt of written notice form Lessee given within six
(6) months following the Commencement Date and setting forth with specificity
the nature and extent of such non-compliance, take such action, at Lessor's
expense, as may be reasonable or appropriate to rectify the non-compliance.
Lessor makes no warranty that the Permitted Use in Paragraph 1.8 is permitted
for the Premises under Applicable Laws (as defined in Paragraph 2.4).
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it
has been advised by the Broker(s) to satisfy itself with respect to the
condition of the Premises (including by not limited to the electrical and
fire sprinkler systems, security, environmental aspects, seismic and
earthquake requirements, and compliance with the Americans with Disabilities
Act and applicable zoning, municipal, county, state and federal laws,
ordinances and regulations and any covenants or restrictions of record
(collectively, "APPLICABLE LAWS") and the present and future suitability of
the Premises for Lessee's intended use; (b) that Lessee has made such
investigation as it deems necessary with reference to such matters, is
satisfied with reference thereto, and assumes all responsibility therefore as
the same relate to Lessee's occupancy of the Premises and/or the terms of
this Lease; and (c) that neither Lessor, nor any of Lessor's agents, has made
any oral or written representations or warranties with respect to said
matters other than as set forth in this Lease.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect if immediately prior to the
date set forth in Paragraph 1.1 Lessee was the owner or occupant of the
Premises. In such event, Lessee shall, at Lessee's sole cost and expense,
correct any non-compliance of the Premises with said warranties.
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2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaced specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than
full-size passenger automobiles or pick-up trucks, herein called "PERMITTED SIZE
VEHICLES." Vehicles other than Permitted Size Vehicles shall be parked and
loaded or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to or
are controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
contractors or invitees to be loaded, unloaded, or parked in areas other than
those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide the
parking facilities required by Applicable Law.
2.7 COMMON AREAS--DEFINITION. The term "COMMON AREAS" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Industrial Center and interior utility raceways within the Premises that
are provided and designated by the Lessor from time to time for the general
non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center
and their respective employees, suppliers, shippers, customers, contractors or
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 COMMON AREAS--LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for the
benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common Areas as they
exist from time to time, subject to any rights, powers, and privileges reserved
by Lessor under the terms hereof or under the terms of any rules and regulations
or restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas be deemed
to include the right to store any property, temporarily or permanently, in the
Common Areas. Any such storage shall be permitted only by the prior written
consent of Lessor or Lessor's designated agent, which consent may be revoked at
any time. In the event that any unauthorized storage shall occur then Lessor
shall have the right, without notice, in addition to such other rights and
remedies that it may have, to remove the property and charge the cost to Lessee,
which cost shall be immediately payable upon demand by Lessor.
2.9 COMMON AREAS--RULES AND REGULATIONS. Lessor or such other person(s)
as Lessor may appoint shall have the exclusive control and management of the
Common Areas and shall have the right, from time to time, to establish, modify,
amend and enforce reasonable Rules and Regulations with respect thereto in
accordance with Paragraph 40. Lessee agrees to abide by and conform to all such
Rules and Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor shall not
be responsible to Lessee for the non-compliance with said rules and regulations
by other lessees of the Industrial Center.
2.10 COMMON AREAS--CHANGES. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the Industrial
Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and Industrial Center as lessor may, in
the exercise of sound business judgment, deem to be appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the premises after the
Early Possession Date but prior to the Commencement Date, the obligation to pay
Base Rent shall be abated for the period of such early occupancy. All other
terms of this Lease, however, (including but not limited to the obligations to
pay Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by
the Commencement Date, Lessor shall not be subject to any liability therefor,
nor shall such failure affect the validity of this Lease, or the obligations
of Lessee hereunder, or extend the term hereof, but in such case, Lessee
shall not, except as otherwise provided herein, be obligated to pay rent or
perform any other obligation of Lessee under the terms of this Lease until
Lessor delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to Lessor
within ten (10) days after the end of said sixty (60) day period, cancel this
Lease, in which event the parties shall be discharged from all obligations
hereunder; provided further, however, that if such written notice of Lessee
is not received by Lessor within said ten (10) day period, Lessee's right to
cancel this Lease hereunder shall terminate and be of no further force or
effect. Except as may be otherwise provided, and regardless of when the
Original Term actually commences, if possession is not tendered to Lessee
when required by this Lease and Lessee does not terminate this Lease, as
aforesaid, the period free of the obligation to pay Base Rent, if any, that
Lessee would otherwise have enjoyed shall run from the date of delivery of
possession and continue for a period equal to the period during which the
Lessee would have otherwise enjoyed under the terms hereof, but minus any
days of delay caused by the acts, changes or omissions of Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or charges, as
the same may be adjusted from time to time, to Lessor in lawful money of the
United States, without offset or deduction, on or before the day on which it is
due under the terms of this Lease. Base Rent and all other rent and charges for
any period during the term hereof which is for less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated herein
or such other persons or at such other addresses as Lessor may from time to time
designate in writing to Lessee.
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during the
term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "COMMON AREA OPERATING EXPENSES" are defined, for purposes of
this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat, clean,
good order and condition, of the following:
(aa) The Common Areas, including parking areas, loading
and unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways, landscaped areas, striping, bumpers, irrigation systems, Common
Area lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to
service the Common Areas.
(iii) Trash disposal, property management and security
services and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair of Common
Areas.
(v) Any increase above the Base Real Property Taxes (as
defined in Paragraph 10.2(b)) for the Building and the Common Areas.
(vi) Any "Insurance Cost Increase" (as defined in Paragraph
8.1).
(vii) The cost of insurance carried by Lessor with respect to
the Common Areas.
(viii) Any deductible portion of an insured loss concerning the
Building or the Common Areas.
(ix) Any other services to be provided by Lessor that are stated
elsewhere in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes that
are specifically attributable to the Building or to any other building in the
Industrial Center or to the operation, repair and maintenance thereof, shall be
allocated entirely to the Building or to such other building. However, any
Common Area Operating Expenses and Real Property Taxes that are not specifically
attributable to the Building or to any other building or to the operation,
repair and maintenance thereof, shall be equitably allocated by Lessor to all
buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon
Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to provide
the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be payable
by Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time of Lessee's Share of annual
Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, during each 12-month period of the Lease
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver
to Lessee within ninety (90) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement, Lessor shall be credited the amount of such over-
INITIALS [ILLEGIBLE]
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[ILLEGIBLE]
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payment against Lessee's Share of Common Area Operating expenses next
becoming due. If Lessee's payments under this Paragraph 4.2(d) during said
preceding year were less than Lessee's Share as indicated on said statement,
Lessee shall pay to Lessor the amount of the deficiency within ten (10) days
after delivery by Lessor to Lessee of said statement.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's
execution hereof the Security Deposit set forth in Paragraph 1.7 as security
for Lessee's faithful performance of Lessee's obligations under this Lease,
if Lessee fails to pay Base Rent or other rent or charges due hereunder, or
otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor
may use, apply or retain all or any portion of said Security Deposit for the
payment of any amount due Lessor or to reimburse or compensate Lessor for any
liability, cost, expense, loss or damage (including attorneys' fees) which
Lessor may suffer or incur by reason thereof. If Lessor uses or applies all
or any portion of said Security Deposit, Lessee shall within ten (10) days
after written request therefore deposit monies with Lessor sufficient to
restore said Security Deposit to the full amount required by this Lease. Any
time the Base Rent increases during the term of this Lease, Lessee shall,
upon written request from Lessor, deposit additional monies with Lessor as
an addition to the Security Deposit so that the total amount of the Security
Deposit shall at all times bear the same proportion to the then current Base
Rent as the initial Security Deposit bears to the initial Base Rent set forth
in Paragraph 1.5. Lessor shall not be required to keep all or any part of
the Security Deposit separate from its general accounts. Lessor shall, at
the expiration or earlier termination of the term hereof and after Lessee
has vacated the Premises, return to Lessee (or, at Lessor's option, to the
last assignee, if any, of Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no part of the Security Deposit shall be
considered to be held in trust, to bear interest or other increment for its
use, or to be prepayment for any monies to be paid by Lessee under this Lease.
6. USE.
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for the Permitted
Use set forth in Paragraph 1.8, or any other legal use which is reasonably
comparable thereto, and for no other purpose. Lessee shall not use or permit
the use of the Premises in a manner that is unlawful, creates waste or a
nuisance, or that disturbs owners and/or occupants of, or causes damage to
the Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessee's assignees or subtenants,
and by prospective assignees and subtenants of Lessee, its assignees and
subtenants, for a modification of said Permitted Use, so long as the same
will not impair the structural integrity of the improvements on the Premises
or in the Building or the mechanical or electrical systems therein, does not
conflict with uses by other lessees, is not significantly more burdensome to
the Premises or the Building and the improvements thereon, and is otherwise
permissible pursuant to this Paragraph 6. If Lessor elects to withhold such
consent, Lessor shall within five (5) business days after such request give a
written notification of same, which notice shall include an explanation of
Lessor's reasonable objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE"
as used in this Lease shall mean any product, substance, chemical, material
or waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises,
is either: (i) potentially injurious to the public health, safety or welfare,
the environment, or the Premises; (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of Lessor to
any governmental agency or third party under any applicable statute or common
law theory. Hazardous Substance shall include, by not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products or by-products
thereof. Lessee shall not engage in any activity in or about the Premises
which constitutes a Reportable Use (as hereinafter defined) of Hazardous
Substances without the express prior written consent of Lessor and compliance
in a timely manner (at Lessee's sole cost and expense) with all Applicable
Requirements (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i)
the installation or use of any above or below ground storage tank, (ii) the
generation, possession, storage, use, transportation, or disposal of a
Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with,
any governmental authority, and (iii) the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Laws
require that a notice be given to persons entering or occupying the Premises
or neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, but upon notice to Lessor and in compliance with all
Applicable Requirements, use any ordinary and customary materials reasonably
required to be used by Lessee in the normal course of the Permitted Use, so
long as such use is not a Reportable Use and does not expose the Premises or
neighboring properties to any meaningful risk of contamination or damage or
expose Lessor to any liability therefor. In addition, Lessor may (but without
any obligation to do so) condition its consent to any Reportable Use of any
Hazardous Substance by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to
protect itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefor, including but not limited
to the installation (and, at Lessor's option, removal on or before Lease
expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasements) and/or the
deposit of an additional Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises or the Building, other than as previously
consented to by Lessor, Lessee shall immediately give Lessor written notice
thereof, together with a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding
given to, or received from, any governmental authority or private party
concerning the presence, spill, release, discharge of, or exposure to, such
Hazardous Substance including but not limited to all such documents as may be
involved in any Reportable Use involving the Premises. Lessee shall not cause
or permit any Hazardous Substance to be spilled or released in, on, under or
about the Premises (including, without limitation, through the plumbing or
sanitary sewer system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and
the Premises, harmless from and against any and all damages, liabilities,
judgments, costs, claims, liens, expenses, penalties, loss of permits and
attorneys' and consultants' fees arising out of or involving any Hazardous
Substance brought onto the Premises by or for Lessee or by anyone under
Lessee's control. Lessee's obligations under this Paragraph 6.2(c) shall
include, but not be limited to, the effects of any contamination or injury to
person, property or the environment created or suffered by Lessee, and the
cost of investigation (including consultants' and attorneys' fees and
testing), removal, remediation, restoration and/or abatement thereof, or of
any contamination therein involved, and shall survive the expiration or
earlier termination of this Lease. No termination, cancellation or release
agreement entered into by Lessor and Lessee shall release Lessee from its
obligations under this Lease with respect to Hazardous Substances, unless
specifically so agreed by Lessor in writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at Lessee's sole
cost and expense, fully, diligently and in a timely manner, comply with all
"APPLICABLE REQUIREMENTS," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises
(including but not limited to matters pertaining to (i) industrial hygiene,
(ii) environmental conditions on, in, under or about the Premises, including
soil and groundwater conditions, and (iii) the use, generation, manufacture,
production, installation, maintenance, removal, transportation, storage,
spill, or release of any Hazardous Substance), now in effect or which may
hereafter come into effect. Lessee shall, within five (5) days after receipt
of Lessor's written request, provide Lessor with copies of all documents and
information, including but not limited to permits, registrations, manifests,
applications, reports and certificates, evidencing Lessee's compliance with
any Applicable Requirements specified by Lessor, and shall immediately upon
receipt, notify Lessor in writing (with copies of any documents involved) of
any threatened or actual claim, notice, citation, warning, complaint or
report pertaining to or involving failure by Lessee or the Premises to comply
with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("LENDERS") shall have the
right to enter the Premises at any time in the case of an emergency, and
otherwise at reasonable times, for the purpose of inspecting the condition of
the Premises and for verifying compliance by Lessee with this Lease and all
Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be
entitled to employ experts and/or consultants in connection therewith to
advise Lessor with respect to Lessee's activities, including but not limited
to Lessee's installation, operation, use, monitoring, maintenance, or removal
of any Hazardous Substance on or from the Premises. The costs and expenses of
any such inspections shall be paid by the party requesting same, unless a
Default or Breach of this Lease by Lessee or a violation of Applicable
Requirements or a contamination, caused or materially contributed to by
Lessee, is found to exist or to be imminent, or unless the inspection is
requested or ordered by a governmental authority as the result of any such
existing or imminent violation or contamination. In such case, Lessee shall
upon request reimburse Lessor or Lessor's Lender, as the case may be, for the
costs and expenses of such inspections.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall,
at Lessee's sole cost and expense and at all times, keep the Premises and
every part thereof in good order, condition and repair (whether or not such
portion of the Premises requiring repair, or the means of repairing the
same, are reasonably or readily accessible to Lessee, and whether or not the
need for such repairs occurs as a result of Lessee's use, any prior use, the
elements or the age of such portion of the Premises), including, without
limiting the generality of the foregoing, all equipment or facilities
specifically serving the Premises, such as plumbing, heating, air
conditioning, ventilating, electrical, lighting facilities, boilers, fired
or unfired pressure vessels, fire hose connections if within the Premises,
fixtures, interior walls, interior surfaces of exterior walls, ceilings,
floors, windows, doors, plate glass, and skylights, but excluding any items
which are the responsibility of Lessor pursuant to Paragraph 7.2 below.
Lessee, in keeping the Premises in good order, condition and repair, shall
exercise and perform good maintenance practices. Lessee's obligations shall
include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order,
condition and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance
for and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation
system for the Premises. However, Lessor reserves the right, upon notice to
Lessee, to procure and maintain the contract for the heating, air
conditioning and ventilating systems, and if Lessor so elects, Lessee shall
reimburse Lessor, upon demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case
no notice shall be required), perform such obligations on Lessee's behalf,
and put the Premises in good order, condition and repair, in accordance with
Paragraph 13.2 below.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to
reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition
and repair the foundations, exterior walls, structural condition of interior
bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (if
located in the Common Areas) or other automatic fire extinguishing system
including fire alarm and/or smoke detection
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<PAGE>
systems and equipment, fire hydrants, parking lots, walkways, parkways,
driveways, landscaping, fences, signs and utility systems serving the Common
Areas and all parts thereof, as well as providing the services for which
there is a Common Area Operating Expense pursuant to Paragraph 4.2 Lessor
shall not be obligated to paint the exterior or interior surfaces of exterior
walls nor shall Lessor be obligated to maintain, repair or replace windows,
doors or plate glass of the Premises. Lessee expressly waives the benefit of
any statute now or hereafter in effect which would otherwise afford Lessee
the right to make repairs at Lessor's expense or to terminate this Lease
because of Lessor's failure to keep the Building, Industrial Center or Common
Areas in good order, condition and repair.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS"
is used in this Lease to refer to all air lines, power panels, electrical
distribution, security, fire protection systems, communications systems,
lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES"
shall mean Lessee's machinery and equipment which can be removed without
doing material damage to the Premises. The term "ALTERATIONS" shall mean any
modification of the Improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined
as Alterations and/or Utility Installations made by Lessee that are not yet
owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause
to be made any Alterations or Utility Installations in, on, under or about
the Premises without Lessor's prior written consent. Lessee may, however,
make non-structural Utility Installations to the interior of the Premises
(excluding the roof) without Lessor's consent but upon notice to Lessor, so
long as they are not visible from the outside of the Premises, do not involve
puncturing, relocating or removing the roof or any existing walls, or
changing or interfering with the fire sprinkler or fire detection systems and
the cumulative cost thereof during the term of this Lease as extended does
not exceed $2,500.00.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. All consents given
by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent, shall be deemed conditioned upon: (i) Lessee's acquiring all
applicable permits required by governmental authorities; (ii) the furnishing
of copies of such permits together with a copy of the plans and
specifications for the Alteration or Utility Installation to Lessor prior to
commencement of the work thereon; and (iii) the compliance by Lessee with all
conditions of said permits in a prompt and expeditious manner. Any
Alterations or Utility Installations by Lessee during the term of this Lease
shall be done in a good workmanlike manner, with good and sufficient
materials, and be in compliance with all Applicable Requirements. Lessee
shall promptly upon completion thereof furnish Lessor with as-built plans and
specifications therefor. Lessor may, (but without obligation to do so)
condition its consent to any requested Alteration or Utility Installation
that costs $2,500.00 or more upon Lessee's providing Lessor with a lien and
completion bond in an amount equal to one and one-half times the estimated
cost of such Alteration or Utility Installation.
(c) LIEN PROTECTION. Lessee shall pay when due all claims for labor
or materials furnished or alleged to have been furnished to or for Lessee at
or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in, on, or about the Premises, and Lessor
shall have the right to post notices of non-responsibility in or on the
Premises as provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense, defend and protect itself, Lessor and the Premises against the same
and shall pay and satisfy any such adverse judgment that may be rendered
thereon before the enforcement thereof against the Lessor or the Premises. If
Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to one and one-half times the
amount of such contested lien claim or demand, indemnifying Lessor against
liability for the same, as required by law for the holding of the Premises
free from the effect of such lien or claim. In addition, Lessor may require
Lessee to pay Lessor's attorneys' fees and costs in participating in such
action if Lessor shall decide it is to its best interest to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal
and to cause Lessee to become the owner thereof as hereinafter provided in
this Paragraph 7.4, all Alterations and Utility Installations made to the
Premises by Lessee shall be the property of and owned by Lessee, but
considered a part of the Premises. Lessor may, at any time and at its option,
elect in writing to Lessee to be the owner of all or any specified part of
the Lessee-Owned Alterations and Utility Installations. Unless otherwise
instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and
Utility Installations shall, at the expiration or earlier termination of this
Lease, become the property of Lessor and remain upon the Premises and be
surrendered with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee-Owned Alterations or Utility Installations be removed
by the expiration or earlier termination of this Lease, notwithstanding that
their installation may have been consented to by Lessor. Lessor may require
the removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date, clean
and free of debris and in good operating order, condition and state of
repair, ordinary wear and tear expected. Ordinary wear and tear shall not
include any damage or deterioration that would have been prevented by good
maintenance practice or by Lessee performing all of its obligations under
this Lease. Except as otherwise agreed or specified herein, the Premises, as
surrendered, shall include the Alterations and Utility Installations. The
obligation of Lessee shall include the repair of any damage occasioned by the
installation, maintenance or removal of Lessee's Trade Fixtures, furnishings,
equipment, and Lessee-Owned Alterations and Utility Installations, as well
as the removal of any storage tank installed by or for Lessee, and the
removal, replacement or remediation of any soil, material or ground water
contaminated by Lessee, all as may then be required by Applicable
Requirements and/or good practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation
to repair and restore the Premises per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT OF PREMIUM INCREASES.
(a) As used herein, the term "INSURANCE COST INCREASE" is defined as
any increase in the actual cost of the insurance applicable to the Building
and required to be carried by Lessor pursuant to Paragraphs 8.2(b), 8.3(a)
and 8.3(b), ("REQUIRED INSURANCE"), over and above the Base Premium, as
hereinafter defined, calculated on an annual basis. "Insurance Cost Increase"
shall include, but not be limited to, requirements of the holder of a
mortgage or deed of trust covering the Premises, increased valuation of the
Premises, and/or a general premium rate increase. The term "Insurance Cost
Increase" shall not, however, include any premium increases resulting from
the nature of the occupancy of any other lessee of the Building. If the
parties insert a dollar amount in Paragraph 1.9, such amount shall be
considered the "BASE PREMIUM." If a dollar amount has not been inserted in
Paragraph 1.9 and if the Building has been previously occupied during the
twelve (12) month period immediately preceding the Commencement Date, the
"Base Premium" shall be the annual premium applicable to such twelve (12)
month period. If the Building was not fully occupied during such twelve (12)
month period, the "Base Premium" shall be the lowest annual premium
reasonably obtainable for the Required Insurance as of the Commencement Date,
assuming the most nominal use possible of the Building. In no event, however,
shall Lessee be responsible for any portion of the premium cost attributable
to liability insurance coverage in excess of $1,000,000 procured under
Paragraph 8.2(b).
(b) Lessee shall pay any Insurance Cost Increase to Lessor pursuant
to Paragraph 4.2. Premiums for policy periods commencing prior to, or
extending beyond, the term of this Lease shall be prorated to coincide with
the corresponding Commencement Date of Expiration Date.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee, Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of
the ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence
with an "Additional Insured-Managers of Lessors of Premises" endorsement and
contain the "Amendment of the Pollution Exclusion" endorsement for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not
contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this
Lease as an "INSURED CONTRACT" for the performance of Lessee's indemnity
obligations under this Lease. The limits of said insurance required by this
Lease or as carried by Lessee shall not, however, limit the liability of
Lessee nor relieve Lessee of any obligation hereunder. All insurance to be
carried by Lessee shall be primary to and not contributory with any similar
insurance carried by Lessor, whose insurance shall be considered excess
insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability insurance
described in Paragraph 8.2(a) above, in addition to and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as
an additional insured therein.
8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and to any Lender(s), insuring against loss or
damage to the Premises. Such insurance shall be for full replacement cost, as
the same shall exist from time to time, or the amount required by any
Lender(s), but in not event more than the commercially reasonable and
available insurance value thereof if, by reason of the unique nature or age
of the improvements involved, such latter amount is less than full
replacement cost. Lessee-Owned Alterations and Utility Installations, Trade
Fixtures and Lessee's personal property shall be insured by Lessee pursuant
to Paragraph 8.4. If the coverage is available and commercially appropriate,
Lessor's policy or policies shall insure against all risks of direct physical
loss or damage (except the perils of flood and/or earthquake unless required
by a Lender or included in the Base Premium), including coverage for any
additional costs resulting from debris removal and reasonable amounts of
coverage for the enforcement of any ordinance or law regulating the
reconstruction or replacement of any undamaged sections of the Building
required to be demolished or removed by reason of the enforcement of any
building, zoning, safety or land use laws as the result of a covered loss,
but not including plate glass insurance. Said policy or policies shall also
contain an agreed valuation provision in lieu of any co-insurance clause,
waiver of subrogation, and inflation guard protection causing an increase in
the annual property insurance coverage amount by a factor of not less than
the adjusted U.S. Department of Labor Consumer Price Index for All Urban
Consumers for the city nearest to where the Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep in force during
the term of this Lease a policy or policies in the name of Lessor, with loss
payable to Lessor and any Lender(s), insuring the loss of the full rental and
other charges payable by all lessees of the Building to Lessor for one year
(including Real Property Taxes, insurance costs, all Common Area Operating
Expenses and any scheduled rental increases). Said insurance may provide that
in the event the Lease is terminated by reason of an insured loss, the period
of indemnity for such coverage shall be extended beyond the date of the
completion of repairs or replacement of the Premises, to provide for one full
year's loss of rental revenues from the date of any such loss. Said insurance
shall contain an agreed valuation provision in lieu of any co-insurance
clause, and the amount of coverage shall be adjusted annually to reflect the
projected rental income, Real Property Taxes, insurance premium costs and
other expenses, if any, otherwise payable, for the next 12-month period.
Common Area Operating Expenses shall include any deductible amount in the
event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas
or other buildings in the Industrial Center is said increase is caused by
Lessee's acts, omissions, use or occupancy of the Premises.
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(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring Party,
Lessor shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's
option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures and
Lessee-Owned Alterations and Utility Installations in, on, or about the
Premises similar in coverage to that carried by Lessor as the Insuring Party
under Paragraph 8.3(a). Such insurance shall be full replacement cost
coverage with a deductible not to exceed $1,000 per occurrence. The proceeds
from any such insurance shall be used by Lessee for the replacement of
personal property and the restoration of Trade Fixtures and Lessee-Owned
Alterations and Utility Installations. Upon request from Lessor, Lessee shall
provide Lessor with written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policy
Rating" of at least B+, V, or such other rating as may be required by a
Lender, as set forth in the most current issue of "Best's Insurance Guide."
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies referred to in this Paragraph 8. Lessee shall cause to be
delivered to Lessor, within seven (7) days after the earlier of the Early
Possession Date or the Commencement Date, certified copies of or certificates
evidencing the existence and amounts of, the insurance required under
Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject to
modification except after thirty (30) days' prior written notice to Lessor.
Lessee shall at least thirty (30) days prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor
upon demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and
waive their entire right to recover damages (whether in contract or in tort)
against the other, for loss or damage to their property arising out of or
incident to the perils required to be insured against under Paragraph 8. The
effect of such releases and waivers of the right to recover damages shall not
be limited by the amount of insurance carried or required, or by any
deductibles applicable thereto. Lessor and Lessee agree to have their
respective insurance companies issuing property damage insurance waive any
right to subrogation that such companies may have against Lessor or Lessee,
as the case may be, so long as the insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or
damages, costs, liens, judgments, penalties, loss of permits, attorneys' and
consultants' fees, expenses and/or liabilities arising out of, involving, or
in connection with, the occupancy of the Premises by Lessee, the conduct of
Lessee's business, any act, omission or neglect of Lessee, its agents,
contractors, employees or invitees, and out of any Default or Breach by
Lessee in the performance in a timely manner of any obligation on Lessee's
part to be performed under this Lease. The foregoing shall include, but not
be limited to, the defense or pursuit of any claim or any action or
proceeding involved therein, and whether or not (in the case of claims made
against Lessor) litigated and/or reduced to judgment. In case any action or
proceeding be brought against Lessor by reason of any of the foregoing
matters, Lessee upon notice from Lessor shall defend the same at Lessee's
expense by counsel reasonably satisfactory to Lessor and Lessor shall
cooperate with Lessee in such defense. Lessor need not have first paid
any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property
of Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by
or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from
any other cause, whether said injury or damage results from conditions
arising upon the Premises or upon other portions of the Building of which the
Premises are a part, from other sources or places, and regardless of whether
the cause of such damage or injury or the means of repairing the same is
accessible or not. Lessor shall not be liable for any damages arising from
any act or neglect of any other lessee of Lessor nor from the failure by
Lessor to enforce the provisions of any other lease in the Industrial Center.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall
under no circumstances be liable for injury to Lessee's business or for any
loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations,
the repair cost of which damage or destruction is less than fifty percent
(50%) of the then Replacement Cost (as defined in Paragraph 9.1 (d)) of the
Premises (excluding Lessee-Owned Alterations and Utility Installations and
Trade Fixtures) immediately prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost of the Premises (excluding
Lessee-Owned Alterations and Utility Installations and Trade Fixtures)
immediately prior to such damage or destruction. In addition, damage or
destruction to the Building, other than Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building, the cost of
which damage or destruction is fifty percent (50%) or more of the then
Replacement Cost (excluding Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building) of the
Building shall, at the option of Lessor, be deemed to be Premises Total
Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to the Premises,
other than Lessee-Owned Alterations and Utility Installations and Trade
Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible
amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PREMISES PARTIAL DAMAGE--INSURED LOSS. If Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense,
repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned
Alterations and Utility Installations) as soon as reasonably possible and
this Lease shall continue in full force and effect. In the event, however,
that there is a shortage of insurance proceeds and such shortage is due to
the fact that, by reason of the unique nature of the improvements in the
Premises, full replacement cost insurance coverage was not commercially
reasonable and available, Lessor shall have no obligation to pay for the
shortage in insurance proceeds or to fully restore the unique aspects of the
Premises unless Lessee provides Lessor with the funds to cover same, or
adequate assurance thereof, within ten (10) days following receipt of written
notice of such shortage and request therefor. If Lessor receives said funds
or adequate assurance thereof within said ten (10) day period, Lessor shall
complete then as soon as reasonably possible and this Lease shall remain in
full force and effect. If Lessor does not receive such funds or assurance
within said period, Lessor may nevertheless elect by written notice to Lessee
within ten (10) days thereafter to make such restoration and repair as is
commercially reasonable with Lessor paying any shortage in proceeds, in which
case this Lease shall remain in full force and effect. If Lessor does not
receive such funds or assurance within such ten (10) day period, and if
Lessor does not so elect to restore and repair, then this Lease shall
terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right
to reimbursement from Lessor for any funds contributed by Lessee to repair
any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2,
notwithstanding that there may be some insurance coverage, but the net
proceeds of any such insurance shall be made available for the repairs if
made by either Party.
9.3 PARTIAL DAMAGE--UNINSURED LOSS. If Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) give written notice to Lessee within thirty (30) days after
receipt by Lessor of knowledge of the occurrence of such damage of Lessor's
desire to terminate this Lease as of the date sixty (60) days following the
date of such notice. In the event Lessor elects to give such notice of
Lessor's intention to terminate this Lease, Lessee shall have the right
within ten (10) days after the receipt of such notice to give written notice
to Lessor of Lessee's commitment to pay for the repair of such damage totally
at Lessee's expense and without reimbursement from Lessor. Lessee shall
provide Lessor with the required funds or satisfactory assurance thereof
within thirty (30) days following such commitment from Lessee. In such event
this Lease shall continue in full force and effect, and Lessor shall proceed
to make such repairs as soon as reasonably possible after the required funds
are available. If Lessee does not give such notice and provide the funds or
assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the
damage or destruction is an Insured Loss or was caused by a negligent or
willful act of Lessee. In the event, however, that the damage or destruction
was caused by Lessee, Lessor shall have the right to recover Lessor's damages
from Lessee except as released and waived in Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within thirty (30) days after the date of
occurrence of such damage. Provided, however, if Lessee at that time has an
exercisable option to extend this Lease or to purchase the Premises, then
Lessee may preserve this Lease by (a) exercising such option, and (b)
providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten (10) days after Lessee's receipt of Lessor's written
notice purporting to terminate this Lease, or (ii) the day prior to the date
upon which such option expires. If Lessee duly exercises such option during
such period and provides Lessor with funds (or adequate assurance thereof) to
cover any shortage insurance proceeds, Lessor shall, at Lessor's expense
repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option
and provide such funds or assurance during such period, then this Lease shall
terminate as of the date set forth in the first sentence of this Paragraph 9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which Lessee is not legally responsible, the Base
Rent, Common Area Operating Expenses and other charges, if any, payable by
Lessee hereunder for the period during which such damage or condition, its
repair, remediation or restoration continues, shall be abated in proportion
to the degree to which Lessee's use of the Premises is impaired, but not in
excess of proceeds from insurance required to be carried under Paragraph
8.3(b). Except for abatement of Base Rent, Common Area Operating Expenses and
other charges, if any, as aforesaid, all other obligations of Lessee
hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such damage,
destruction, repair, remediation or restoration.
INITIALS : [ILLEGIBLE]
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(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises
within ninety (90) days after such obligation shall accrue, Lessee may, at
any time prior to the commencement of such repair or restoration, give
written notice to Lessor and to any Lenders of which Lessee has actual notice
of Lessee's election to terminate this Lease on a date not less than sixty
(60) days following the giving of such notice. If Lessee gives such notice to
Lessor and such Lenders and such repair or restoration is not commenced
within thirty (30) days after receipt of such notice, this Lease shall
terminate as of the date specified in said notice. If Lessor or a Lender
commences the repair or restoration of the Premises within thirty (30) days
after the receipt of such notice, this Lease shall continue in full force and
effect. "COMMENCE" as used in this Paragraph 9.6 shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever occurs first.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but
subject to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor
may at Lessor's option either (i) investigate and remediate such Hazardous
Substance Condition, if required, as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect,
or (ii) if the estimated cost to investigate and remediate such condition
exceeds twelve (12) times the then monthly Base Rent or $100,000 whichever is
greater, give written notice to Lessee within thirty (30) days after receipt
by Lessor of knowledge of the occurrence of such Hazardous Substance
Condition of Lessor's desire to terminate this Lease as of the date sixty
(60) days following the date of such notice. In the event Lessor elects to
give such notice of Lessor's intention to terminate this Lease, Lessee shall
have the right within ten (10) days after the receipt of such notice to give
written notice to Lessor of Lessee's commitment to pay for the excess costs
of (a) investigation and remediation of such Hazardous Substance Condition to
the extent required by Applicable Requirements, over (b) an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater. Lessee shall provide Lessor with the funds required of Lessee or
satisfactory assurance thereof within thirty (30) days following said
commitment by Lessee. In such event this Lease shall continue in full force
and effect, the Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds
or assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance
payment made by Lessee to Lessor and so much of Lessee's Security Deposit as
has not been, or is not then required to be, used by Lessor under the terms
of this Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby
waive the provisions of any present or future statute to the extent it is
inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2(a), applicable to the Industrial Center, and except
as otherwise provided in Paragraph 10.3, any increases in such amounts over
the Base Real Property Taxes shall be included in the calculation of Common
Area Operating Expenses in accordance with the provisions of a Paragraph 4.2.
10.2 REAL PROPERTY TAX DEFINITIONS.
(a) As used herein, the term "REAL PROPERTY TAXES" shall include any
form of real estate tax or assessment, general, special, ordinary or
extraordinary, and any license fee, commercial rental tax, improvement bond
or bonds, levy or tax (other than inheritance, personal income or estate
taxes) imposed upon the Industrial Center by any authority having the direct
or indirect power to tax, including any city, state or federal government, or
any school, agricultural, sanitary, fire, street, drainage, or other
improvement district thereof, levied against any legal or equitable interest
of Lessor in the Industrial Center or any portion thereof, Lessor's right to
rent or other income therefrom, and/or Lessor's business of leasing the
Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee,
levy, assessment or charge, or any increase therein, imposed by reason of
events occurring, or changes in Applicable Law taking effect, during the term
of this Lease, including but not limited to a change in the ownership of the
Industrial Center or in the improvements thereon, the execution of this
Lease, or any modification, amendment or transfer thereof, and whether or not
contemplated by the Parties.
(b) As used herein, the term "BASE REAL PROPERTY TAXES" shall be the
amount of Real Property Taxes, which are assessed against the Premises,
Building or Common Areas in the calendar year during which the Lease is
executed. In calculating Real Property Taxes for any calendar year, the Real
Property Taxes for any real estate tax year shall be included in the
calculation of Real Property Taxes for such calendar year based upon the
number of days which such calendar year and tax year have in common.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such
other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however,
pay to Lessor at the time Common Area Operating Expenses are payable under
Paragraph 4.2, the entirety of any increase in Real Property Taxes if
assessed solely by reason of Alterations, Trade Fixtures or Utility
Installations placed upon the Premises by Lessee or at Lessee's request.
10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of
the Real Property Taxes for all of the land and improvements included within
the tax parcel assessed, such proportion to be determined by Lessor from the
respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available. Lessor's reasonable determination
thereof, in good faith, shall be conclusive.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal
property of Lessee contained in the Premises or stored within the Industrial
Center. When possible, Lessee shall cause its Lessee-Owned Alterations and
Utility Installations, Trade Fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property
of Lessor. If any of Lessee's said property shall be assessed with Lessor's
real property, Lessee shall pay Lessor the taxes attributable to Lessee's
property within ten (10) days after receipt of a written statement setting
forth the taxes applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity,
telephone, security, gas and cleaning of the Premises, together with any
taxes thereon. If any such utilities or services are not separately metered
to the Premises or separately billed to the Premises, Lessee shall pay to
Lessor a reasonable proportion to be determined by Lessor of all such charges
jointly metered or billed with other premises in the Building, in the manner
and within the time periods set forth in Paragraph 4.2(d).
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign")
or sublet all or any part of Lessee's interest in this Lease or in the
Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a
formal assignment or hypothecation of this Lease or Lessee's assets occurs,
which results or will result in a reduction of the Net Worth of Lessee, as
hereinafter defined, by an amount equal to or greater than twenty-five
percent (25%) of such Net Worth of Lessee as it was represented to Lessor at
the time of full execution and delivery of this Lease or at the time of the
most recent assignment to which Lessor has consented, or as it exists
immediately prior to said transaction or transactions constituting such
reduction, at whichever time said Net Worth of Lessee was or is greater,
shall be considered an assignment of this Lease by Lessee to which Lessor may
reasonably withhold its consent. "NET WORTH OF LESSEE" for purposes of this
Lease shall be the net worth of Lessee (excluding any Guarantors) established
under generally accepted accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be
a Default curable after notice per Paragraph 13.1, or a non-curable Breach
without the necessity of any notice and grace period. If Lessor elects to
treat such unconsented to assignment or subletting as a non-curable Breach,
Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon
thirty (30) days' written notice ("LESSOR'S NOTICE"), increase the monthly
Base Rent for the Premises to the greater of the then fair market rental
value of the Premises, as reasonably determined by Lessor, or one hundred ten
percent (110%) of the Base Rent then in effect. Pending determination of the
new fair market rental value, if disputed by Lessee, Lessee shall pay the
amount set forth in Lessor's Notice, with any overpayment credited against the
next installment(s) of Base Rent coming due, and any underpayment for the
period retroactively to the effective date of the adjustment being due and
payable immediately upon the determination thereof. Further, in the event of
such Breach and rental adjustment, (i) the purchase price of any option to
purchase the Premises held by Lessee shall be subject to similar adjustment
to the then fair market value as reasonably determined by Lessor (without the
Lease being considered an encumbrance or any deduction for depreciation or
obsolescence, and considering the Premises at its highest and best use and in
good condition) or one hundred ten percent (110%) of the price previously in
effect, (ii) any index-oriented rental or price adjustment formulas contained
in this Lease shall be adjusted to require that the base index be determined
with reference to the index applicable to the time of such adjustment, and
(iii) any fixed rental adjustments scheduled during the remainder of the
Lease term shall be increased in the same ratio as the new rental bears to
the Base Rent in effect immediately prior to the adjustment specified in
Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of such
assignment nor the acceptance of any rent for performance shall constitute a
waiver or estoppel of Lessor's right to exercise is remedies for the Default
or Breach by Lessee of any of the terms, covenants or conditions of this
Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and
assignments of the sublease or any amendments or modifications thereto
without notifying Lessee or anyone else liable under this Lease or the
sublease and without obtaining their consent, and such action shall not
relieve such persons from liability under this Lease or the sublease.
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(d) In the event of any Default or Breach of Lessee's obligation
under this Lease, Lessor may proceed directly against Lessee, any Guarantors
or anyone else responsible for the performance of the Lessee's obligations
under this Lease, including any subleases, without first exhausting Lessor's
remedies against any other person or entity responsible therefor to Lessor,
or any security held by Lessor.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination
as to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $1,000 or ten percent (10%) of the monthly Base
Rent applicable to the portion of the Premises which is the subject of the
proposed assignment or sublease, whichever is greater, as reasonable
consideration for Lessor's considering and processing the request for
consent. Lessee agrees to provide Lessor with such other or additional
information and/or documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be
deemed, for the benefit of Lessor, to have assumed and agreed to conform and
comply with each and every term, covenant, condition and obligation herein to
be observed or performed by Lessee during the term of said assignment or
sublease, other than such obligations as are contrary to or inconsistent with
provisions of an assignment or sublease to which Lessor has specifically
consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.2(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment
or subletting, may require that the amount and adjustment schedule of the
rent payable under this Lease be adjusted to what is then the market value
and/or adjustment schedule for property similar to the Premises as then
constituted, as determined by Lessor.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases
under this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a
portion of the Premises heretofore or hereafter made by Lessee, and Lessor
may collect such rent and income and apply same toward Lessee's obligations
under this Lease; provided, however, that until a Breach (as defined in
Paragraph 13.1) shall occur in the performance of Lessee's obligations under
this Lease, Lessee may, except as otherwise provided in this Lease, receive,
collect and enjoy the rents accruing under such sublease. Lessor shall not,
by reason of the foregoing provision or any other assignment of such sublease
to Lessor, nor by reason of the collection of the rents from a sublessee, be
deemed liable to the sublessee for any failure of Lessee to perform and
comply with any of Lessee's obligations to such sublessee under such
Sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and
shall pay such rents and other charges to Lessor without any obligation or
right to inquire as to whether such Breach exists and notwithstanding any
notice from or claim from Lessee to the contrary. Lessee shall have no right
or claim against such sublessee, or, until the Breach has been cured, against
Lessor, for any such rents and other charges so paid by said sublessee to
Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event
Lessor shall undertake the obligations of the sublessor under such sublease
from the time of the exercise of said option to the expiration of such
sublease; provided, however, Lessor shall not be liable for any prepaid rents
or security deposit paid by such sublessee to such sublessor or for any other
prior defaults or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of the Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior
written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in
said notice as rent due and payable to cure said default. A "DEFAULT" by
Lessee is defined as a failure by Lessee to observe, comply with or perform
any of the terms, covenants, conditions or rules applicable to Lessee under
this Lease. A "BREACH" by Lessee is defined as the occurrence of any one or
more of the following Defaults, and, where a grace period for cure after
notice is specified herein, the failure by Lessee to cure such Default prior
to the expiration of the applicable grace period, and shall entitle Lessor to
pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent, Lessee's Share of Common
Area Operating Expenses, or any other monetary payment required to be made by
Lessee hereunder as and when due, the failure by Lessee to provide Lessor
with reasonable evidence of insurance or surety bond required under this
Lease, or the failure of Lessee to fulfill any obligation under this Lease
which endangers or threatens life or property, where such failure continues
for a period of three (3) days following written notice thereof by or on
behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1(b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination
of this Lease per Paragraph 30, (vi) the guaranty of the performance of
Lessee's obligations under this Lease if required under Paragraphs 1.11 and
37, (vii) the execution of any document requested under Paragraph 42
(easements), or (viii) any other documentation or information which Lessor
may reasonably require of Lessee under the terms of this Lease, where any
such failure continues for a period of ten (10) days following written notice
by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof
that are to be observed, complied with or performed by Lessee, other than
those described in Subparagraphs 13.1(a), (b) or (c), above, where such
Default continues for a period of thirty (30) days after written notice
thereof by or on behalf of Lessor to Lessee; provided, however, that if the
nature of Lessee's Default is such that more than thirty (30) days are
reasonably required for its cure, then it shall not be deemed to be a Breach
of this Lease by Lessee if Lessee commences such cure within said thirty (30)
day period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making by
Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or
any successor statute thereto (unless, in the case of a petition filed
against Lessee, the same is dismissed within sixty (60) days); (iii) the
appointment of a trustee or receiver to take possession of substantially all
of Lessee's assets located at the Premises or of Lessee's interest in this
Lease, where possession is not restored to Lessee within thirty (30) days; or
(iv) the attachment, execution or other judicial seizure of substantially all
of Lessee's assets located at the Premises or of Lessee's interest in this
Lease, where such seizure is not discharged within thirty (30) days;
provided, however, in the event that any provision of this Subparagraph
13.1(e) is contrary to any applicable law, such provision shall be of no
force or effect, and shall not affect the validity of the remaining
provisions.
(f) The discovery by Lessor that any financial statement of Lessee
or of any Guarantor, given to Lessor by Lessee or any Guarantor, was
materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance
with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or
the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such
event, to provide Lessor with written alternative assurances of security,
which, when coupled with the then existing resources of Lessee, equals or
exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may at
its option (but without obligation to do so), perform such duty or obligation
on Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee to Lessor upon invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn.
Lessor, at its own option, may require all future payments to be made under
this Lease by Lessee to be made only by cashier's check. In the event of a
Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or
without further notice or demand, and without limiting Lessor in the exercise
of any right or remedy which Lessor may have by reason of such Breach, Lessor
may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor.
In such event Lessor shall be entitled to recover from Lessee: (i) the worth
at the time of the award of the unpaid rent which had been earned at the time
of termination; (ii) the worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time
of award exceeds the amount of such rental loss that the Lessee proves could
have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor
for all the detriment proximately caused by the Lessee's failure to perform
its obligations under this Lease or which in the ordinary course of things
would be likely to result therefrom, including but not limited to the cost of
recovering possession of the Premises, expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys'
fees, and that portion of any leasing commission paid by Lessor in connection
with this Lease applicable to the unexpired term of this Lease. The worth at
the time of award of the amount referred to in provision (iii) of the
immediately preceding sentence shall be computed by discounting such amount
at the discount rate of the Federal Reserve Bank of San Francisco or the
Federal Reserve Bank District in which the Premises are located at the time of
award plus one percent (1%). Efforts by Lessor to mitigate damages caused by
Lessee's Default or Breach of this Lease shall not waive Lessor's right to
recover damages under this Paragraph 13.2. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall
have the right to recover in such pro-
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ceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve the right to recover all or any part thereof in a separate suit for
such rent and/or damages. If a notice and grace period required under
Subparagraph 13.1(b), (c), or (d) was not previously given, a notice to pay
rent or quit, or to perform or quit, as the case may be, given to Lessee
under any statute authorizing the forfeiture of leases for unlawful detainer
shall also constitute the applicable notice for grace period purposes
required by Subparagraph 13.1(b), (c) or (d). In such case, the applicable
grace period under the unlawful detainer statute shall run concurrently after
the one such statutory notice, and the failure of Lessee to cure the Default
within the greater of the two (2) such grace periods shall constitute both an
unlawful detainer and a Breach of this Lease entitling Lessor to the remedies
provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's
Breach and recover the rent as it becomes due, provided Lessee has the right
to sublet or assign, subject only to reasonable limitations. Lessor and
Lessee agree that the limitations on assignment and subletting in this Lease
are reasonable. Acts of maintenance or preservation, efforts to relet the
Premises, or the appointment of a receiver to protect the Lessor's interest
under this Lease, shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters
occurring or accruing during the term hereof or by reason of Lessee's
occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, or for
the giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of
which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS"
shall be deemed conditioned upon Lessee's full and faithful performance of
all of the terms, covenants and conditions of this Lease to be performed or
observed by Lessee during the term hereof as the same may be extended. Upon
the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by
Lessee, any such Inducement Provision shall automatically be deemed deleted
from this Lease and of no further force or effect, and any rent, other
charge, bonus, inducement or consideration theretofore abated, given or paid
by Lessor under such an Inducement Provision shall be immediately due and
payable by Lessee to Lessor, and recoverable by Lessor, as additional rent
due under this Lease, notwithstanding any subsequent cure of said Breach by
Lessee. The acceptance by Lessor of rent or the cure of the Breach which
initiated the operation of this Paragraph 13.3 shall not be deemed a waiver
by Lessor of the provisions of this Paragraph 13.3. unless specifically so
stated in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed
upon Lessor by the terms of any ground lease, mortgage or deed of trust
covering the Premises. Accordingly, if any installment of rent or other sum
due from Lessee shall not be received by Lessor or Lessor's designee within
ten (10) days after such amount shall be due, then, without any requirement
for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six
percent (6%) of such overdue amount. The parties hereby agree that such late
charge represents a fair and reasonable estimate of the costs Lessor will
incur by reason of late payment by Lessee. Acceptance of such late charge by
Lessor shall in no event constitute a waiver of Lessee's Default or Breach
with respect to such overdue amount, nor prevent Lessor from exercising any
of the other rights and remedies granted hereunder. In the event that a late
charge is payable hereunder, whether or not collected, for three (3)
consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or
any other provision of this Lease to the contrary, Base Rent shall, at
Lessor's option, become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and by any Lender(s) whose name and address shall have been
furnished to Lessee in writing for such purpose, of written notice specifying
wherein such obligation of Lessor has not been performed; provided, however,
that if the nature of Lessor's obligation is such that more than thirty (30)
days after such notice are reasonably required for its performance, then
Lessor shall not be in breach of this Lease if performance is commenced
within such thirty (30) day period and thereafter diligently pursued to
completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority
takes title or possession, whichever first occurs. If more than ten percent
(10%) of the floor area of the Premises, or more than twenty-five percent
(25%) of the portion of the Common Areas designated for Lessee's parking, is
taken by condemnation, Lessee may, at Lessee's option, to be exercised in
writing within ten (10) days after Lessor shall have given Lessee written
notice of such taking (or in the absence of such notice, within ten (10) days
after the condemning authority shall have taken possession) terminate this
Lease as of the date the condemning authority takes such possession. If
Lessee does not terminate this Lease in accordance with the foregoing, this
Lease shall remain in full force and effect as to the portion of the Premises
remaining, except that the Base Rent shall be reduced in the same proportion
as the rentable floor area of the Premises taken bears to the total rentable
floor area of the Premises. No reduction of Base Rent shall occur if the
condemnation does not apply to any portion of the Premises. Any award for the
taking of all or any part of the Premises under the power of eminent domain
or any payment made under threat of the exercise of such power shall be the
property of Lessor, whether such award shall be made as compensation for
diminution of value of the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any
compensation, separately awarded to Lessee for Lessee's relocation expenses
and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above Lessee's Share of the legal
and other expenses incurred by Lessor in the condemnation matter, repair any
damage to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. BROKERS' FEES.
15.1 PROCURING CAUSE. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.2 ADDITIONAL TERMS. Unless Lessor and Broker(s) have otherwise
agreed in writing, Lessor agrees that: (a) if Lessee exercises any Option (as
defined in Paragraph 39.1) granted under this Lease or any Option
subsequently granted, or (b) if Lessee acquires any rights to the Premises or
other premises in which Lessor has an interest, or (c) if Lessee remains in
possession of the Premises with the consent of Lessor after the expiration of
the term of this Lease after having failed to exercise an Option, or (d) if
said Brokers are the procuring cause of any other lease or sale entered into
between the Parties pertaining to the Premises and/or any adjacent property
in which Lessor has an interest, or (e) if Base Rent is increased, whether by
agreement or operation of an escalation clause herein, then as to any of said
transaction, Lessor shall pay said Broker(s) a fee in accordance with the
schedule of said Broker(s) in effect at the time of the execution of this
Lease.
15.3 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease, whether such transfer is by agreement or by operation
of law, shall be deemed to have assumed Lessor's obligation under this
Paragraph 15. Each Broker shall be an intended third party beneficiary of the
provisions of Paragraph 1.10 and of this Paragraph 15 to the extent of its
interest in any commission arising from this Lease and may enforce that right
directly against Lessor and its successors.
15.4 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each represent
and warrant to the other that it has had no dealings with any person, firm,
broker or finder other than as named in Paragraph 1.10(a) in connection with
the negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such
unnamed broker, finder or other similar party by reason of any dealings or
actions of the indemnifying Party, including any costs, expenses, and/or
attorneys' fees reasonably incurred with respect thereto.
16. TENANCY AND FINANCIAL STATEMENTS.
16.1 TENANCY STATEMENT. Each Party (as "RESPONDING PARTY") shall within
ten (10) days after written notice from the other Party (the "REQUESTING
PARTY") execute, acknowledge and deliver to the Requesting Party a statement
in writing in a form similar to the then most current "TENANCY STATEMENT"
form published by the American Industrial Real Estate Association, plus such
additional information, confirmation and/or statements as may be reasonably
requested by the Requesting Party.
16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance, or
sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated by
Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser
in confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises. In the
event of a transfer of Lessor's title or interest in the Premises or in this
Lease, Lessor shall deliver to the transferee or assignee (in cash or by
credit) any unused Security Deposit held by Lessor at the time of such
transfer or assignment. Except as provided in Paragraph 15.3, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid,
the prior Lessor shall be relieved of all liability with respect to the
obligations and/or covenants under this Lease thereafter to be performed by
the Lessor. Subject to the foregoing, the obligations and/or covenants in
this Lease to be performed by the Lessor shall be binding only upon the
Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of
any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10)
days following the date on which it was due, shall bear interest from the
date due at the prime rate charged by the largest state chartered bank in the
state in which the Premises are located plus four percent (4%) per annum, but
not exceeding the maximum rate allowed by law, in addition to the potential
late charge provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this
Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein,
and no other prior or contemporaneous agreement or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that
it has made, and is relying solely upon, its own investigation as to the
nature, quality, character and financial responsibility of the other Party to
this Lease and as to the nature, quality and character of the Premises.
Brokers have no responsibility with respect thereto or with respect to any
default or breach hereof by either Party. Each Broker shall be an intended
third party beneficiary of the provisions of this Paragraph 22.
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23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by messenger
or courier service) or may be sent by regular, certified or registered mail
or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile
transmission during normal business hours, and shall be deemed sufficiently
given if served in a manner specified in this Paragraph 23. The addresses
noted adjacent to a Party's signature on this Lease shall be that Party's
address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises
shall constitute Lessee's address for the purpose of mailing or delivering
notices to Lessee. A copy of all notices required or permitted to be given
to Lessor hereunder shall be concurrently transmitted to such party or
parties at such addresses as Lessor may from time to time hereafter designate
by written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown
on the receipt card, or if no delivery date is shown, the postmark thereon.
If sent by regular mail, the notice shall be deemed given forty-eight (48)
hours after the same is addressed as required herein and mailed with postage
prepaid. Notices delivered by United States Express Mail or overnight courier
that guarantees next day delivery shall be deemed given twenty-four (24)
hours after delivery of the same to the United States Postal Service or
courier. If any notice is transmitted by facsimile transmission or similar
means, the same shall be deemed served or delivered upon telephone or
facsimile confirmation of receipt of the transmission thereof, provided a
copy is also delivered via delivery or mail. If notice is received on a
Saturday or a Sunday or a legal holiday, it shall be deemed received on the
next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any such act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. Regardless of Lessor's knowledge of a Default or Breach at the time
of accepting rent, the acceptance of rent by Lessor shall not be a waiver of
any Default or Breach by Lessee of any provision hereof. Any payment given
Lessor by Lessee may be accepted by Lessor on account of moneys or damages
due Lessor, notwithstanding any qualifying statements or conditions made by
Lessee in connection therewith, which such statements and/or conditions shall
be of no force or effect whatsoever unless specifically agreed to in writing
by Lessor at or before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to two hundred percent
(200%) of the Base Rent applicable during the month immediately preceding
such expiration or earlier termination. Nothing contained herein shall be
construed as a consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be
governed by the laws of the State in which the Premises are located. Any
litigation between the Parties hereto concerning this Lease shall be
initiated in the country in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "SECURITY DEVICE"), now
or hereafter placed by Lessor upon the real property of which the Premises
are a part, to any and all advances made on the security thereof, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessee agrees that the Lenders holding any such Security Device shall have no
duty, liability or obligation to perform any of the obligations of Lessor
under this Lease, but that in the event of Lessor's default with respect to
any such obligation, Lessee will give any Lender whose name and address have
been furnished Lessee in writing for such purpose notice of Lessor's default
pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease
and/or any Option granted hereby superior to the lien of its Security Device
and shall give written notice thereof to Lessee, this Lease and such Options
shall be deemed prior to such Security Device, notwithstanding the relative
dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, lessee agrees to attorn to a Lender or any party who acquires ownership
of the Premises by reason of a foreclosure of a Security Device, and that in
the event of such foreclosure, such new owner shall not: (i) be liable for
any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this lease, Lessee's subordination of this
Lease shall be subject to receiving assurance (a "non-disturbance agreement")
from the Lender that Lessee's possession and this Lease, including any
options to extend the term hereof, will not be disturbed so long as Lessee is
not in Breach hereof and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in the Paragraph 30 shall
be effective without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection
with a sale, financing or refinancing of Premises, Lessee and Lessor shall
execute such further writings as may be reasonably required to separately
document any such subordination or non-subordination, attornment and/or
non-disturbance agreement as is provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding
to enforce the terms hereof or declare rights hereunder, the Prevailing Party
(as hereafter defined) in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorneys' fees. Such fees may be awarded in
the same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgement. The term "PREVAILING PARTY"
shall include, without limitation, a Party or Broker who substantially
obtains or defeats the relief sought, as the case may be, whether by
compromise, settlement, judgement, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fee award shall not be
computed in accordance with any court fee schedule, but shall be such as to
fully reimburse all attorneys' fees reasonably incurred. Lessor shall be
entitled to attorneys' fees reasonably incurred. Lessor shall be entitled to
attorneys' fees, costs and expenses incurred in preparation and service of
notices of Default and consultations in connection therewith, whether or not
a legal action is subsequently commenced in connection with such Default or
resulting Breach. Broker(s) shall be intended third party beneficiaries of
this Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
Building, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or Building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred eighty (180) days of the
term hereof place on or about the Premises any ordinary "For Lease" signs.
All such activities of Lessor shall be without abatement of rent or liability
to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to
the contrary in this Lease. Lessor shall not be obligated to exercise any
standard of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises
or the Building, except that Lessee may, with Lessor's prior written
consent, install (but not on the roof) such signs as are reasonably required
to advertise Lessee's own business so long as such signs are in a location
designated by Lessor and comply with Applicable Requirements and the signage
criteria established for the Industrial Center by Lessor. The installation of
any sign on the Premises by or for Lessee shall be subject to the provisions
of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures
and Alterations). Unless otherwise expressly agreed herein, Lessor reserves
all rights to the use of the roof of the Building, and the right to install
advertising signs on the Building, including the roof, which do not
unreasonably interfere with the conduct of Lessee's business; Lessor shall be
entitled to all revenues from such advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination of cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate
in the Premises; provided, however, Lessor shall, in the event of any such
surrender, termination or cancellation, have the option to continue any one or
all of any existing subtenancies. Lessor's failure within ten (10) days
following any such event to make a written election to the contrary by
written notice to the holder of any such lesser interest, shall constitute
Lessor's election to have such event constitute the termination of such
interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act
by or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering
and responding to Lessee's request. Any unused portion of said deposit shall
be refunded to Lessee without interest. Lessor's consent to any act,
assignment of this Lease or subletting of the Premises by Lessee shall not
constitute an acknowledgment that no Default or Breach by Lessee of this
Lease exists, nor shall such consent be deemed a waiver of any then existing
Default or Breach, except as may be otherwise specifically stated in writing
by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions
by Lessor at the time of consent of such further or other conditions as are
then reasonable with reference to the particular matter for which consent is
being given.
37. GUARANTOR.
37.1 FORM OF GUARANTY. If there are to be any Guarantors of this Lease
per Paragraph 1.11, the form of the guaranty to be executed by each such
Guarantor shall be in the form most recently published by the American
Industrial Real Estate Association, and each such Guarantor shall have the
same obligations as Lessee under this lease, including but not limited to the
obligation to provide the Tenancy Statement and information required in
Paragraph 16.
Initials: [ILLEGIBLE]
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Copyright American Industrial Real Estate Association 1993
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37.2 ADDITIONAL OBLIGATIONS OF GUARANTOR. It shall constitute a Default
of the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the Guarantor (and
of the party signing on Guarantor's behalf) to obligate such Guarantor on said
guaranty, and resolution of its board of directors authorizing the making of
such guaranty, together with a certificate of incumbency showing the signatures
of the persons authorized to sign on its behalf, (b) current financial
statements of Guarantor as may from time to time be requested by Lessor, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Lease, the "OPTION" has the following
meaning: (a) the right to extend the term of this Lease or to renew this
Lease or to extend or renew any lease that Lessee has on other property of
Lessor, (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease
other property of Lessor or the right of first offer to lease other property
of Lessor; (c) the right to purchase the Premises, or the right of first
offer to purchase the Premises, or the right to purchase other property of
Lessor, or the right of first refusal to purchase other property of Lessor,
or the right of first offer to purchase other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee
in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof,
and cannot be voluntarily or involuntarily assigned or exercised by any person
or entity other than said original Lessee while the original Lessee is in full
and actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee
three (3) or more notices of separate Defaults under Paragraph 13.1 during the
twelve (12) month period immediately preceding the exercise of the Option,
whether or not the Defaults are cured.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices or separate Defaults under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way,
utility raceways, and dedications that Lessor deems necessary, and to cause
the recordation of parcel maps and restrictions, so long as such easements,
rights of way, utility raceways, dedications, maps and restrictions do not
reasonably interfere with the use of the Premises by Lessee. Lessee agrees
to sign any documents reasonably requested by Lessor to effectuate any such
easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the
property of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if
more than one person or entity is named herein as either Lessor or Lessee,
the obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or
Lessee.
10
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<PAGE>
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S
REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS,
UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS
TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE
OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON
THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF
THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA,
AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE
CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: San Diego, California Executed at: Poway, California
------------------------- --------------------------
on: 8/22/95 on: 8/21/95
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By LESSOR: By LESSEE:
DWCG INC., dba Poway Business Self-Heating Container Corporation of
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California, a California Corporation
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By: /s/ Daniel Whitaker By: /s/ James A. Scudder
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Name Printed: Daniel Whitaker Name Printed: James A. Scudder
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Title: President Title: President
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By: By: /s/ James L. Berntsen
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Name Printed: Name Printed: James L. Berntsen
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Title: Title: Vice-President
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Address: 350 W. Ash Street, Suite 100 Address: 14260 Garden Road, Suite 30-B
----------------------------- ------------------------------
San Diego, CA 92101 Poway, CA 92064
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Telephone: (619) 238-1832 Telephone: (619) 486-7200
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Facsimile: (619) 531-1783 Facsimile: (619) 486-7204
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BROKER: BROKER:
Executed at: Executed at:
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on: on:
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By: By:
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Name Printed: Name Printed:
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Title: Title:
------------------------------- --------------------------------
Address: Address:
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Telephone: ( ) Telephone: ( )
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Facsimile: ( ) Facsimile: ( )
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NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345 So. Figueroa
St., M-1, Los Angeles, CA 90071. (213) 687-8777.
Copyright 1993 by American Industrial Real Estate Association. All rights
reserved. No part of these words may be reproduced in any form without
permission in writing.
<PAGE>
ADDENDUM TO LEASE AGREEMENT DATED AUGUST 18, 1995 BETWEEN DWCG, INC. AS
LESSOR AND SELF-HEATING CONTAINER CORPORATION OF CALIFORNIA AS LESSEE FOR
12675 DANIELSON COURT, SUITE 401, POWAY, CALIFORNIA.
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49. RENT/CAM CHARGE/EARLY OCCUPANCY.
The Base Rent shall be fixed at $965 per month throughout the term of
this Lease. In addition to this Base Rent, Lessee shall also pay Common Area
Maintenance expenses pursuant to Paragraph 4.2 of the Lease.
From the date of lease signature or August 21, 1995, whichever is later,
until lease commencement, Lessee shall be granted early occupancy without Base
Rent or CAM charges, provided however that Lessee first furnished Lessor with
written proof of liability insurance required under this Lease.
50. IMPROVEMENTS TO PREMISES.
A. Lessor shall provide Lessee with a carpet allowance of $200, which Lessee
will apply toward the installation of building standard carpet, and Lessor
will provide Lessee with a space planning allowance of $250. If the actual
cost of carpet and space planning exceeds these allowances, then the overage
will be paid by Lessee.
B. Lessor will replace all stained or broken ceiling tiles with new tiles,
at Lessor's expense.
C. Lessor shall provide Lessee with the key to the electrical room adjacent
to the Premises, so that all persons requiring roof access shall coordinate
same with Lessee.
D. The Lessee, at Lessee's cost and expense, shall improve the Leased
Premises shown in Exhibit "A" and described as:
Add one conference room of approximately 11 feet by 14 feet.
Add two offices of approximately 10 feet by 13 feet, one office of
approximately 7 feet by 10 feet, and a hallway for access to same.
Lessee shall construct tenant improvements at Lessee's expense, which
shall be done in a professional and workmanlike manner with all work approved
and permitted through the City of Poway. Lessee shall submit plans for such
work to Lessor for prior approval. Lessee to keep Premises free from all
liens relating to such work. The completion of construction, or lack thereof,
shall in no way affect the lease commencement date.
51. OPTION TO RENEW.
Provided that at no time throughout this Lease Lessee is in default thereof,
Lessee shall be granted one (1) option to renew this lease for a term of one
(1) year. A four percent (4%) cost-of-living increase will be assessed at the
commencement of the option period. In order to exercise this option to renew,
Lessee must give Lessor written notice not more than six (6) months nor less
than two (2) months prior to expiration of this Lease.
52. COVENANT OF NON-DISCLOSURE.
Lessee and Lessor acknowledge that this Lease is a confidential business
agreement. Lessee and Lessor herein covenant to the other that neither party
shall disclose any of its terms and conditions to any third party other than
Lessee's accountant, attorney, or other such consultants of Lessee who
require such information. Should Lessee breach this covenant, then Lessor may
hold Lessee liable for any damages suffered by Lessor as a result of such
breach.
[ILLEGIBLE] [ILLEGIBLE]
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LESSEE'S LESSOR'S
INITIALS INITIALS
<PAGE>
GUARANTY OF LEASE [LOGO]
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
WHEREAS DWCG, INC., a California Corporation, hereinafter referred to as
"Lessor", and Self-Heating Container Corporation of Calif., a Calif. Corp.,
hereinafter referred to as "Lessee", are about to execute a document entitled
"Lease" dated August 18, 1995 concerning the premises commonly known as 12675
Danielson Court, Suite 401, Poway, CA 92064 wherein Lessor will lease the
premises to Lessee, and
WHEREAS, James A. Scudder and James L. Berntsen hereinafter referred to
as "Guarantors" have a financial interest in Lessee, and
WHEREAS, Lessor would not execute the Lease if Guarantors did not
execute and deliver to Lessor this Guarantee of Lease.
NOW, THEREFORE, for and in consideration of the execution of the
foregoing Lease by Lessor and as a material inducement to Lessor to execute
said Lease, Guarantors hereby jointly, severally, unconditionally and
irrevocably guarantee the prompt payment by Lessee of all rentals and all
other sums payable by Lessee under said Lease and the faithful and prompt
performance by Lessee of each and every one of the terms, conditions and
covenants of said Lease to be kept and performed by Lessee.
It is specifically agreed and understood that the terms of the foregoing
Lease may be altered, affected, modified or changed by agreement between
Lessor and Lessee, or by a course of conduct, and said Lease may be assigned
by Lessor or any assignee of Lessor without consent or notice to Guarantors
and that this Guaranty shall thereupon and thereafter guarantee the
performance of said Lease as so changed, modified, altered or assigned.
This Guaranty shall not be released, modified or affected by failure or
delay on the part of Lessor to enforce any of the rights or remedies of the
Lessor under said Lease, whether pursuant to the terms thereof or at law or
in equity.
No notice of default need be given to Guarantors, it being specifically
agreed and understood that the guarantee of the undersigned is a continuing
guarantee under which Lessor may proceed forthwith and immediately against
Lessee or against Guarantors following any breach or default by Lessee or for
the enforcement of any rights which Lessor may have as against Lessee
pursuant to or under the terms of the within Lease or at law or in equity.
Lessor shall have the right to proceed against Guarantors hereunder
following any breach or default by Lessee without first proceeding against
Lessee and without previous notice to or demand upon either Lessee or
Guarantors.
Guarantors hereby waive (a) notice of acceptance of this Guaranty,
(b) demand of payment, presentation and protest, (c) all right to assert or
plead any statute of limitations as to or relating to this Guaranty and the
Lease, (d) any right to require the Lessor to proceed against the Lessee or
any other Guarantor or any other person or entity liable to Lessor, (e) any
right to require Lessor to apply to any default any security deposit or other
security it may hold under the Lease, (f) any right to require Lessor to
proceed under any other remedy Lessor may have before proceeding against
Guarantors, (g) any right of subrogation.
Guarantors do hereby subrogate all existing or future indebtedness of
Lessee to Guarantors to the obligations owed to Lessor under the Lease and
this Guaranty.
Any married woman who signs this Guaranty expressly agrees that recourse
may be had against her separate property for all of her obligations hereunder.
The obligations of Lessee under the Lease to execute and deliver
estoppel statements and financial statements, as therein provided, shall be
deemed to also require the Guarantors hereunder to do and provide the same
relative to Guarantors.
The term "Lessor" whenever herinabove used refers to and means the
Lessor in the foregoing Lease specifically named and also any assignee of
said Lessor, whether by outright assignment or by assignment for security,
and also any successor to the interest of said Lessor or of any assignee in
such Lease or any part thereof, whether by assignment or otherwise. So long
as the Lessor's interest in or to the leased premises or the rents, issues
and profits therefrom, or in, to or under said Lease, are subject to any
mortgage or deed of trust or assignment for security, no acquisition by
Guarantors of the Lessor's interest in the leased premises or under said
Lease shall affect the continuing obligation of Guarantors under this
Guaranty which shall nevertheless continue in full force and effect for the
benefit of the mortgagee, beneficiary, trustee or assignee under such
mortgage, deed of trust or assignment, of any purchase at sale by judicial
foreclosure or under private power of sale, and of the successors and assigns
of any such mortgagee, beneficiary, trustee, assignee or purchaser.
The term "Lessee" whenever hereinabove used refers to and means the
Lessee in the foregoing Lease specifically names and also any assignee or
sublessee of said Lease and also any successor to the interests of said
Lessee, assignee or sublessee of such Lease or any part thereof, whether by
assignment, sublease or otherwise.
In the event any action be brought by said Lessor against Guarantors
hereunder to enforce the obligation of Guarantors hereunder, the unsuccessful
party in such action shall pay to the prevailing party therein a reasonable
attorney's fee which shall be fixed by the court.
If this Form has been filled in it has been prepared for submission to
your attorney for his approval. No representation or recommendation is
made by the real estate broker or its agents or employees as to the
legal sufficiency, legal effect, or tax consequences of this Form or
the transaction relating thereto.
Executed at Poway, California /s/ James A. Scudder
-------------------------- ------------------------------------
James A. Scudder
on August 18, 1995 /s/ James L. Berntsen
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James L. Berntsen
Address 14260 Garden Rd., #30-B
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Poway, CA 92064 "GUARANTORS"
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*1977--American Industrial Real Estate Association
All rights reserved. No part of these works may be reproduced in any form
without permission in writing.
<PAGE>
EXHIBIT "A"
[FLOOR PLAN]
[ILLEGIBLE] [ILLEGIBLE]
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LESSEE'S LESSOR'S
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EXHIBIT "B"
POWAY BUSINESS PARK
PROJECT RULES AND REGULATIONS
These Rules and Regulations ("Rules") are adopted by the Lessor pursuant to
the Lease to which the rules are annexed. The Rules supplement the Lease and
in the event of any conflict or inconsistency between the Lease and the
Rules, the Lease will control. The Rules may be changed from time to time by
Lessor, subject to any restrictions set forth in the Lease, and any such
changes shall be effective immediately upon delivery to Lessee. Accordingly,
the Lessor adopts the following Rules:
GENERAL RULES
1. No sign, placard, picture, advertisement, name or notice shall be
installed or displayed on any part of the outside, or inside if visible from
the exterior, of any building without the prior written consent of Lessor.
Lessor shall have the right to remove, at Lessee's expense and without
notice, any item installed or displayed in violation of the Rule. All
approved signs or lettering on doors and walls shall be printed, painted,
affixed or inscribed at the expense of Lessee and in a configuration and style
approved by Lessor, in its sole discretion.
2. If Lessor objects in writing to any curtains, blinds, shades, screens
or hanging plants or other similar objects attached to or used in connection
with any window or door of the Premises, or placed on any windowsill, which is
visible from the exterior of the Premises, Lessee shall immediately
discontinue such use. Lessee shall not place anything against or near glass
partitions, doors or windows which is visible from outside the Premises
without Lessor's consent.
3. Concurrently with Lessee's occupancy of the Premises, Lessee shall
furnish Lessor, free of charge, one set of keys to each door lock on the
Premises. Lessee shall be entitled to make or have made additional keys as
Lessee desires. Lessee shall not alter any lock or install a new additional
lock or bolt on any door of its Premises without furnishing Lessor, without
charge, a new set of keys. Lessee, upon the termination of its Lease, shall
deliver to Lessor the keys to all doors within the Premises.
4. If Lessee requires telegraphic, telephonic, burglar alarm or similar
services, it shall first obtain, and comply with, Lessor's installation
instructions for any such equipment.
5. Deliveries of equipment, materials, furniture, packages, supplies,
merchandise or other property will be received at the Project in a manner and
method which does not impede or interfere with other tenants or the operation
of any portion of the Project. Lessee shall be responsible for all repairs
and replacements to the Project required on account of damage or injury
caused by deliveries to Lessee's Premises.
6. Lessee shall not place a load upon any floor of the Premises which
exceeds the load per square foot which such floor was designed to carry and
which is allowed by law. Lessor shall have the right to prescribe the weight,
size and position of all equipment, materials, furniture or other property
brought into the Project. Heavy objects shall, if considered necessary by
Lessor, stand on such platforms as determined by Lessor to be necessary to
properly distribute the weight, which platforms shall be provided at Lessee's
expense. Business machines and mechanical equipment belonging to Lessee,
which cause noise or vibration that may be transmitted to any structure of
the Project
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or to any space therein to such a degree as to be placed and maintained by
Lessee, at Lessee's expense, on vibration eliminators or other devices
sufficient to eliminate noise or vibration. Lessor will not be responsible
for loss of, or damage to, any such equipment or other property from any
cause, and all damage done to the Project by maintaining or moving such
equipment or other property shall be repaired at the expense of Lessee.
7. Lessee shall not use or keep in the Premises or about the Project any
kerosene, gasoline or inflammable or combustible fluid or materials other
than those limited quantities necessary for the operation or maintenance of
office equipment. Lessee shall not use or permit to be used in the Premises
any foul or noxious gas or substance, or permit or allow the Premises to be
occupied or used in a manner offensive or objectionable to Landlord or other
occupants of the Project by reason of noise, odor or vibrations.
8. Lessee shall not use any method of heating of air-conditioning other
than that approved by Lessor, in its reasonable discretion.
9. Lessee shall not waste electricity, water or air-conditioning and
agrees to cooperate fully with Lessor to assure the most effective operation
of the Project's heating and air-conditioning and to comply with any
governmental energy-saving rules, laws or regulations of which Lessee has
actual notice, and shall refrain from attempting to adjust controls. Lessee
shall keep corridor doors closed, and shall close window coverings at the end
of each business day.
10. Lessee shall close and lock the doors of its Premises and entirely
shut off all water faucets or other water apparatus, and electricity, gas or
air outlets before Lessee and its employees leave the Premises. Lessee shall
be responsible for any damage or injuries sustained by other tenants or
occupants of the Project or by Lessor arising from Lessee's noncompliance
with this Rule.
11. The toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any other purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein. The expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the Lessee who, or whose employees
or invitee's, shall have caused it.
12. Lessee shall not install any radio or television antenna, loudspeaker
or other devices on the roof or exterior walls of any building, except with
Lessor's consent. Lessee shall not interfere with radio or television
broadcasting or reception from or in the Project or elsewhere.
13. All Lessee's installations, improvements and alterations shall be
carried out in a manner and method designed to minimize any damage to the
Premises on account of the installation or removal of such items. Lessee
shall repair any damage resulting from Lessee's installations, improvements
and alterations and the removal thereof upon termination of the Lease.
14. Canvassing, soliciting and distribution of handbills or any other
written materials, and peddling upon the Project are prohibited and Lessee
shall cooperate to prevent such activities.
15. Lessor reserves the right to exclude or expel from the Project any
person who, in Lessor's judgement, is intoxicated or under the influence of
liquor or drugs or who is in violations of
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any of the Rules, provided Lessor shall be under no obligation to do so nor
have any liability to Lessee on account of Lessor's failure to exclude any
person.
16. Lessee shall store all its trash and garbage within its Premises or in
other facilities provided by Lessor. Lessee shall not place in any trash box
or receptacle any material which cannot be disposed of in the ordinary and
customary manner of trash and garbage disposal. All garbage and refuse
disposal shall be made in accordance with directions issued from time to time
by Lessor. All trash placed in the trash box or receptacle shall be generated
within the Poway Business Park. Lessee shall not import any trash or waste,
generated in the conduct of the Lessee's business, into the Poway Business
Park nor shall Lessee use the trash box or receptacle to dispose of this
trash or waste. Lessee will instruct Lessee's employees, agents, clients or
invitees to dispose all trash or waste in a clean, orderly manner, to break
down all cardboard containers and to place all trash IN the trash box or
receptacle and not on or about the trash box or receptacle.
17. Equipment Storage - No material, equipment, supplies, or products
shall be stored or permitted to remain on the property outside a permanent
structure unless prior approval is obtained from the Lessor. Approval of
outside storage will be granted only where storage is visually screened from
all approaches.
18. Pets or Animals - No pets or animals are allowed on the property or
within Lessee's Premises.
19. Without the written consent of Lessor, Lessee shall not use the name
of the Project in connection with or in promoting or advertising the business
of Lessee except as Lessee's address.
20. Lessee shall comply with all safety, fire protection and evacuation
procedures and regulations established by Lessor or any governmental agency.
21. Lessee assumes any and all responsibility for protecting its Premises
from theft, robbery and pilferage, which includes keeping doors locked and
other means of entry to the Premises closed.
22. Lessor may waive any one or more of these Rules for the benefit of
Lessee or any other tenant, but no such waiver by Lessor shall be construed
as a waiver of any other Rule in favor of Lessee or any other tenant, nor
prevent Lessor from thereafter enforcing any such Rules against any or all of
the tenants of the Project.
23. The Rules are in addition to, and shall not be construed to in any way
modify or amend, in whole or in part, the terms, covenants, agreements and
conditions of Lessee's Lease of its Premises in the Project.
24. Lessee shall be responsible for the observance of all of the Rules by
Lessee's employees, agents, clients, customers, invitee's and guests.
PARKING RULES
25. Lessor shall not be responsible for loss, injury or damage to any
vehicle arising from the use of parking areas in the Project. In the event
the general exclusion of liability set forth in the preceding sentence is
determined not to apply to any particular claim, specific limitations on
liability set forth below shall apply to any claim against Lessor arising in
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connection with the use of parking areas in the Project. All claimed damage
or loss must be reported and itemized in writing, delivered to the Lessor
within two (2) business days after any claimed damage or loss occurs. Any
claim not so made is waived. Lessor has the option to make repairs, at its
expense, of any claimed damage within two (2) business days after filing of
any claim. In all court actions the burden of proof to establish a claim
remains with the Lessee. Court actions by Lessee for any claim must be filed
within ninety (90) days from date of parking when a claimed loss occurred.
Lessor is not responsible for damage by water, fire or defective brakes, or
part, or for the act of omissions of others, or for articles left in the car.
The total liability of Lessor is limited to $250.00 for all damages or loss
to any vehicle. Lessor is not responsible for loss of use.
26. Lessee shall not park or permit the parking of any vehicle under
Lessee's reasonable control in any parking areas designated by Lessor as
areas for parking by visitors to the Project or for deliveries or assigned to
other tenants or occupants of the Project. Lessee shall not leave vehicles in
the parking area overnight nor park any vehicles in the parking areas other
than automobiles, motorcycles, motor driven or non-motor driven bicycles.
27. In the event Lessor reasonably determines that a system of parking
registration is required to provide for the orderly use of the parking areas
with the Project, Lessor may institute a system of requiring decals or
stickers. Parking stickers or any other device or form of identification
supplied by Lessor as a condition of use of the parking areas shall remain
the property of Lessor. Such parking identification device must be displayed
as requested and may not be mutilated in any manner. The serial number of the
parking identification device may not be obliterated. Devices are not
transferable and any device in the possession of an unauthorized holder will
be void.
28. Vehicles must be parked entirely with the painted stall lines of a
single parking stall. All directional signs and arrows must be observed. The
speed limit within all parking areas shall be five (5) miles per hour.
29. Parking is prohibited: (a) in areas not striped for parking; (b) in
aisles; (c) where "no parking" signs are posted; (d) on ramps; (e) in cross
hatched areas; and (f) in such other areas as may be designated by Lessor.
30. Every vehicle owner is required to park and lock his own vehicle. All
responsibility for damage to a vehicle or theft of property from a vehicle is
assumed by the vehicle owner.
31. Parking areas are for the temporary parking of vehicles only. No
storage of vehicles or other items will be permitted. Washing, waxing,
cleaning or servicing of any vehicle is prohibited.
32. Lessee shall acquaint all employees, customers and guests of these
rules.
33. Lessor reserves the right to modify and/or adopt such other reasonable
and non-discriminatory rules and regulations for the parking facilities as it
deems necessary for the operation of the parking facilities. Lessor may
refuse to permit any person who violates these rules to park in the parking
facilities, and any violation of the rules shall subject the vehicle to
removal.
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Poway Business Park
12625-12675 Danielson Court
Poway, Ca 92064
State of California
SALE/LEASE AMERICANS WITH DISABILITIES ACT
AND HAZARDOUS MATERIALS DISCLOSURE
The United States Congress has enacted the Americans With Disabilities Act.
Among other things, this act is intended to make many business establishments
equally accessible to persons with a variety of disabilities; modifications
to real property may be required. State and local laws also may mandate
changes. The Owners of the Property, Whitaker Investment Corporation and the
real estate brokers, if any, in this transaction are not qualified to advise
you as to what, if any, changes may be required now, or in the future.
Buyer/Lessees should consult the attorneys and qualified design professionals
of their choice for information regarding these matters. The Owners of the
Property, Whitaker Investment Corporation and real estate brokers cannot
determine which attorneys or design professionals have the appropriate
expertise in this area.
Various construction materials may contain items that have been or may in the
future be determined to be hazardous (toxic) or undesirable and may need to
be specifically treated/handled or removed. For example, some transformers
and other electrical components contain PCB's, and asbestos has been used in
components such as fire-proofing, heating and cooling systems, air duct
insulation, spray-on and tile acoustical materials, linoleum, floor tiles,
roofing, dry wall and plaster. Due to prior or current uses of the Property
or in the area, the Property may have hazardous or undesirable metals,
minerals, chemicals, hydrocarbons, or biological or radioactive items
(including electric and magnetic fields) in soils, water, building
components, above or below-ground containers or elsewhere in areas that may
or may not be accessible or noticeable. Such items may leak or otherwise be
released. Expert inspections are necessary. Current or future laws may
require clean up by past, present and/or future owners and/or operators. It
is the responsibility of the Buyer/Lessee to retain qualified experts to
detect and correct such matters and to consult with legal counsel of their
choice to determine what provisions, if any, they may wish to include in
transaction documents regarding the Property.
To the best of Seller/Lessor's knowledge, Seller/Lessor has attached to this
Disclosure copies of all existing surveys and reports known to Seller/Lessor
regarding asbestos and the hazardous materials and undesirable substances
related to the Property. Seller/Lessor are required under California Health
and Safety Code Section 25915 et seq. to disclose reports and surveys
regarding asbestos to certain persons, including their employees,
contractors, co-owners, purchasers and tenants. Buyer/Lessees have similar
disclosure obligations. Seller/Lessors and Buyers/Lessees have additional
hazardous materials disclosure responsibilities to each other under
California Health and Safety Code Section 25359.7 and other California laws.
Consult your attorney regarding this matter. The Owners of the Property,
Whitaker Investment Corporation and real estate brokers, if any, are not
qualified to assist you in this matter or provide you with other legal or tax
advice.
LESSOR LESSEE
DWCG, Inc.
By: [ILLEGIBLE] By: [ILLEGIBLE]
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Title: President Title: President
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Date: 8/22/95 Date: 8/21/95
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FIRST AMENDMENT TO LEASE
This First Amendment to Lease in entered into on February 8, 1996 by DWCG, Inc.,
a California Corporation, ("Lessors"), and Self-Heating Container Corporation of
America, a California Corporation, ("Lessee"), with respect to the following
facts:
A. Lessor and Lessee entered into that certain industrial lease dated August
18, 1995 ("Lease") whereby Lessee leased from Lessor approximately 1,664
square feet ("Original Space") located at 12675 Danielson Court, Suite 401,
Poway, CA 92064.
B. The Lessee wishes to extend the Lease dated August 18, 1995.
WHEREFORE, the parties agree to amend the Lease as follows:
1. Lease Term - The Lease Term for Suite 401 shall be extended for one
(1) year to commence September 1, 1996 and expire August 31, 1997.
2. Base Rent - Pursuant to Paragraph 4.1 of the Lease, the base rent of
this extended period shall be $932.00 per month. The foregoing
notwithstanding, the Lessee shall pay to the Lessor its pro-rata share
of the Common Area Operating Expenses pursuant to Paragraph 4.2 of the
Lease.
3. Premises - The Lessee shall accept Suite 401 in an "as is" condition.
EXCEPT AS AMENDED HEREIN, all terms and conditions of the Lease dated August 18,
1995 shall remain in full force and effect.
Executed in San Diego, CA Executed in Poway, CA
LESSOR: LESSEE:
DWCG, Inc., a California Self-Heating Container Corp.
Corporation of California, a California
Corporation
by /s/ Daniel M. Whitaker by /s/ James A. Scudder
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Daniel M. Whitaker James A. Scudder, President
Date 3/11/96 by /s/ James L. Berntsen
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James Bernsten, Vice President
Date 3/11/96
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SECOND AMENDMENT TO LEASE
This SECOND Amendment to Lease in entered into on September 19, 1997 by DWCG,
Inc., a California Corporation, ("Lessors"), and Self-Heating Container
Corporation of America, a California Corporation, ("Lessee"), with respect to
the following facts:
A. Lessor and Lessee entered into that certain industrial lease dated August
18, 1995 ("Lease") and as amended February 8, 1996 ("First Amendment to
Lease") whereby Lessee leased from Lessor approximately 1,664 square feet
("Original Space") located at 12675 Danielson Court, Suite 401,
Poway, CA 92064.
B. Lessee changed Lessee's corporate name from Self Heating Container
Corporation of California, a California Corporation, to ONTRO,
Inc., a California corporation.
C. The Lessee wishes to extend the Lease.
WHEREFORE, the parties agree to amend the Lease as follows:
1. Lease Term - The Lease Term for Suite 401 shall be extended for eight
(8) months to commence September 1, 1997 and expire April 30, 1998.
2. Base Rent - Pursuant to Paragraph 4.1 of the Lease, the base rent of
this extended period shall be $982.00 per month. The foregoing
notwithstanding, the Lessee shall pay to the Lessor its pro-rata share
of the Common Area Operating Expenses pursuant to Paragraph 4.2 of the
Lease.
3. Premises - The Lessee shall accept Suite 401 in an "as is" condition.
EXCEPT AS AMENDED HEREIN, all terms and conditions of the Lease dated August 18,
1995 and as amended February 8, 1996 shall remain in full force and effect.
Executed in San Diego, CA Executed in Poway, CA
LESSOR: LESSEE:
DWCG, Inc., a California ONTRO, Inc. a California
Corporation Corporation
by /s/ Daniel M. Whitaker by /s/ James A. Scudder
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Daniel M. Whitaker James A. Scudder, President
Date 9/30/97 by /s/ James L. Berntsen
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James Bernsten, Vice President
Date 9/26/97
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[Letterhead]
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Ontro, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
Our report dated February 14, 1997, contains an explanatory paragraph that
states that the Company has suffered recurring losses from operations and has
a net capital deficiency that raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
San Diego, California
December 12, 1997
