U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. (FEE REQUIRED).
For the fiscal year ended September 30, 1996
----------------------------------------
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. (NO FEE REQUIRED).
For the transition period from to
---------------------- ------------
Commission file number 0-14210
----------------------------------------------------------------------
COMPUMED, INC.
---------------------------------------------
(Name of Small Business Issuer in Its Charter)
Delaware 95-2860434
-------------------------------------- --------------------
(State of Incorporation or Organization) (I.R.S. Employer
Identification No.)
1230 Rosecrans Avenue, Suite 1000,
Manhattan Beach, California 90266
----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(310) 643-5106
----------------------------------------------------------------------
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
COMMON STOCK PURCHASE WARRANTS
----------------------------------------------------------------------
Title of Class
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
Check if there is no disclosure of delinquent filers in response to
item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
As of December 19. 1996, 8,949,786 common shares were outstanding and
the aggregate market value of the common shares (based upon the
average bid and asked prices on such date) of the Registrant held by
nonaffiliates was approximately $11,396,000.
Revenues for the fiscal year ended September 30, 1996 totaled
$2,573,000.
Documents incorporated by reference: Certain responses to Part III
are incorporated herein by reference to information contained in the
Company's definitive proxy statement for its 1997 annual meeting of
stockholders to be filed with the Securities and Exchange Commission
on or before January 29,1997.
<PAGE>
PART I
-------
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
CompuMed, Inc. (the "Company" or CompuMed) is a medical
information technology and service company focused on the diagnosis,
monitoring and management of costly, high incidence diseases,
including cardiovascular disease and osteoporosis. The primary focus
of the Company's business is (i) the ongoing development and licensing
of its proprietary technology in the OsteoGram(R), a bone density test
that was developed by the Company as a means of aiding physicians in
diagnosing and monitoring osteoporosis, (ii) the computer
interpretation of electrocardiograms ("ECGs"), (iii) TeleCor Services
Division ("TeleCor"), which is engaged in transtelephonic cardiac
event monitoring, and (iv) the development of Detoxahol(TM), a
substance and delivery technology intended to facilitate the rapid
lowering of blood alcohol levels of people who have consumed alcohol.
The Company was incorporated in the State of Delaware on July 21,
1986.
Significant business developments that have occurred during the
past twelve months include the formation of a development team for the
second-generation OsteoSystem, which includes a research and licensing
agreement with the University of Massachusetts Medical Center, a
development agreement with Varian Associates, Inc. and other
consulting arrangements which contribute to this project. In
addition, the Company has entered into a Memorandum of Understanding
to confirm the material terms of an agreement in principle to settle
certain securities class action and derivative litigation brought
against the Company and certain of its officers and directors, subject
to execution and court approval of a stipulation of settlement, and
certain litigation relating to MB Neutraceuticals, Inc. and the
acquisition of rights to Detoxahol(TM) has been settled. See Item 3 -
LEGAL PROCEEDINGS.
The Company applies advanced computing, medical imaging,
telecommunications and networking technologies to provide medical
professionals, managed care organizations and patients with
affordable, point-of-care solutions for disease risk assessment and
decision support.
THE OSTEOGRAM(R)
The OsteoGram(R) is a bone density test developed by the Company,
presently licensed to Merck & Co., Inc. ("Merck"), which involves
taking a standard hand X-ray with an aluminum alloy calibration wedge
in the field of view utilizing existing and widely available standard
X-ray equipment. Physicians utilizing the OsteoGram(R) X-ray the
patient's hand and then the developed film is analyzed by Merck with
proprietary software to accurately determine bone density, using the
calibration wedge to adjust for any differences among X-ray equipment,
exposures, types of film and development. An OsteoGram(R) report is
then delivered to the patient's physician.
The scientific name for the testing technique utilized by the
OsteoGram(R) is radiographic absorptiometry ("RA"). RA was developed
by Skeletal Assessment Services Co. ("SASCO"), who sold the RA
technology to the Company in 1991. The Company made enhancements in
image digitalization and processing speed and named the bone density
test the OsteoGram(R). The OsteoGram(R) is capable of detecting
changes in bone mineral density as small as approximately 1.5%. Since
1985, the OsteoGram(R) has been cleared for reimbursement by Medicare.
To the best of the Company's knowledge, the OsteoGram(R) is the only
bone density test that can be performed without any specialized
medical equipment. The OsteoGram(R) can be taken using an
OsteoGram(R) Starter Kit with standard X-ray equipment which could be
found at any of an estimated 100,000 locations in the U.S., including
hospitals, clinics and doctors' offices. The OsteoGram(R) Starter Kit
includes a proprietary aluminum alloy calibration wedge, instructions,
billing information, and pre-addressed envelopes for mailing developed
X-rays of the hand to a Merck facility for scanning and computer
analysis. See "Merck License Agreement".
The Company's primary research and development activities are
focused on the development of the second-generation of the Company's
OsteoGram(R) test. The second-generation test is expected to allow
the performance of OsteoGram(R) tests directly from digital X-ray
images without the need for film. A development team has been
assembled which includes the University of Massachusetts Medical
Center ("UMMC") and specialized high technology vendors for certain
aspects of this project. The Company coordinates and funds the
development performed by project members and will retain primary
rights to the completed product.
On May 1, 1996, the Company entered into an Exclusive License
Agreement and a Sponsored Research Agreement with UMMC in connection
with the development of its second-generation OsteoSystem. Under the
terms of the license agreement, the Company will receive from UMMC
worldwide rights, in the field of bone densitometry, to develop and
market devices and services, subject to U.S. Food and Drug
Administration ("FDA") clearance, which employ the licensed technology
of certain US patents owned by UMMC. UMMC licensed the technology to
two other companies. For the license agreement, the Company paid a
$25,000 license initiation fee and is obligated to pay UMMC an annual
license maintenance fee in the amount of $10,000 for the first five
years that the agreement is in effect. The Company will also pay
additional amounts totaling $175,000 upon the completion of certain
milestones and will remit royalty payments of 5% of the net revenues
generated from product sales, with a minimum annual royalty of
$15,000.
Under the terms of the research agreement with UMMC, the Company
is sponsoring research during a two-year period which focuses on
digital bone densitometry measurement techniques integrating the
Company's proprietary software. The Company will reimburse UMMC for
its costs in the amount of $100,000 during the first year and $50,000
during the second year of the agreement.
In December 1996, the Company entered into a technology
development agreement with Varian Imaging Products (Varian). The
Company will receive Varian s amorphous silicon sensor x-ray imaging
system for testing and for potential integration into its second-
generation OsteoSystem. Varian will also grant exclusive marketing
rights to the Company for the use of its amorphous silicon technology
in the assessment of appendicular bone mineral density and arthritis
detection for a period of three years, providing certain sales targets
are met. The Company agreed to make an initial payment to Varian of
$65,000 for the imaging system and will purchase silicon panel
assemblies at prices determined in the agreement. Varian will supply
technical and engineering assistance for incorporating its silicon
detectors into CompuMed s products.
MERCK LICENSE AGREEMENT
Effective September 22, 1995, the Company entered into a
Technology License Agreement with Merck (the "Merck License
Agreement") pursuant to which Merck has been granted a perpetual,
exclusive license of the OsteoSystem. Merck offers the OsteoGram(R)
and related services to physicians on a per-test basis. The Company
receives a royalty payment from Merck for each OsteoGram(R) test sold
by Merck to a physician during the years 1996 through 2000 at which
time royalties shall cease. The royalties will escalate from $2 to $4
per test over that period. The royalty payments are not capped for
years 1996 through 1998, but they are subject to a cap in 1999 equal
to the lesser of 10% of Merck's total collected revenues for that year
or $3 million and a cap in year 2000 equal to the lesser of 10% of
Merck's total collected revenues for that year or $4 million. The
Company is not entitled to a minimum royalty payment. Through
September 1996, the Company has earned royalties on approximately
18,500 OsteoGram(R) tests amounting to gross proceeds of $37,000.
Since the Merck License Agreement provides Merck with full control
over the operation of, marketing and sales for, the OsteoSystem, the
Company does not have a basis to adequately estimate the amount of
revenues that it will receive as royalties over the term of the Merck
License Agreement. Merck has the right to terminate the Merck License
Agreement at any time without cause. In connection with entering into
the Merck License Agreement, the Company agreed to pay SASCO, among
other things, as partial consideration for the modification of amounts
owed to SASCO, 8% of all royalties paid by Merck to the Company under
the Merck License Agreement.
The Company has retained the right to develop and market a
second-generation OsteoSystem test, subject to a right of first
refusal by Merck, which requires the Company to notify Merck of any
second-generation prototypes that are in the developmental stage and
any completed second-generation products. Merck has the exclusive
right over a period of sixty days to negotiate the terms under which
Merck would fund the development stage prototype or the terms under
which Merck would acquire an exclusive license to the completed
second-generation product. As noted above, the Company's primary
research and development activities are focused on a filmless second-
generation OsteoGram(R) test and the Company has entered into research
and license agreements with UMMC in furtherance of such goal.
OTHER OSTEOPOROSIS DETECTION AIDS
The only present methods used to assist physicians in detecting
osteoporosis other than the OsteoSystem are bone mineral density
measurement and bone biopsy. Because of patient risk, pain and cost,
the latter method is rarely used. Bone mineral density is measured by
passing ultrasound or X-ray beams through bone and determining how
much energy is absorbed by the bone. In classical techniques a
carefully calibrated source enables determination of how much energy
is absorbed by the bone before reaching the detector. The use of a
calibrated source necessitates the purchase of costly special
equipment for bone density measurement.
TREATING OSTEOPOROSIS
Osteoporosis treatment alternatives include estrogen replacement
therapy, calcitonin, bisphosphonates, diet, calcium supplements and
weight-bearing exercises. In addition, many new medication
alternatives such as Merck's Fosamax are being offered as alternative
treatments for osteoporosis.
Pharmaceutical companies have estimated that only about 5% of
patients requiring medical treatment for osteoporosis receive
prescriptions today. They ascribe this low treatment level to a lack
of knowledge about osteoporosis by the primary care physician and the
patient, limited availability of convenient affordable tests for
osteoporosis, limited amount of FDA cleared medications and poor
patient compliance when medication is prescribed. The OsteoGram(R)
overcomes at least one of these obstacles by providing a convenient
affordable bone density test which may aid physicians in detecting
osteoporosis.
Current FDA cleared medications for osteoporosis include Fosamax,
recently introduced by Merck, the female hormone estrogen, in pill and
patch forms, and the bone metabolism hormone, calcitonin, administered
by injection or through a nasal spray. The estrogen pill market is
dominated by Premarin (American Home Products) and also includes
Estrace (Bristol Myers Squibb Company), Ogen (The Upjohn Company) and
Ortho-EST (Johnson & Johnson). The estrogen transdermal patch is
produced by Estaderm (CIBA-Geigy Limited Group). Approved calcitonin
medications are Calcimar (Rhone Poulenc Rorer Pharmaceuticals, Inc.)
and Miacalcin (Sandoz Pharmaceutical Corporation). Estrogen
medication is also approved for problems associated with menopause,
such as hot flashes.
COMPETITION - OSTEOGRAM(R)
The OsteoGram's primary competition includes bone densitometry
devices that use X-rays or ultrasound to obtain relative measures of
bone mass and density. At the present time, specialized bone
densitometry software and biochemical assay tests represent only minor
and indirect competition for the OsteoGram(R).
The most common X-ray-based techniques for performing bone
densitometry include dual-energy X-ray absorptiometry (DEXA), single-
energy X-ray aborptiometry (SXA), quantitative computed tomography
(QCT), and radiographic absorptiometry (RA; synonymous with the
OsteoGram(R)). All radiographic techniques in use today have been
validated through extensive clinical studies, and are currently
approved in the U.S. for Medicare reimbursement. Quantitative
ultrasound (QUS) is not approved for sale in the U.S., but is
available overseas.
DEXA is currently the mostly widely used technology, with a
-----
worldwide installed base of approximately 7,000 machines. The DEXA
market may be divided into so-called whole-body machines, which are
designed to measure bone mass and density at a variety of skeletal
sites (primarily the hip and spine), and peripheral machines, which
only measure bone mass and density at the appendages (primarily the
forearm or heal). Whole-body DEXA machines cost an average of
$85,000 (range $55,000 to over $130,000) and require both dedicated
facilities and specialized training to operate. Peripheral DEXA
machines, with an average price of $25,000, are less costly, but are
also believed to be less effective than whole-body DEXA, or than RA,
in predicting fracture risk. Approximately 5,000 peripheral DEXA
machines have been installed worldwide.
The leading manufacturers of whole-body DEXA scanners include
Lunar Corp. (U.S.A.) and Hologic, Inc. (U.S.A.), which each command
approximately 40% of the worldwide DEXA market. Other manufacturers
of whole-body machines include Norland Medical Systems, Inc. (U.S.A.)
and Ostech, Inc. Norland is the leading manufacturer of peripheral
DEXA machines, but competition at the "low-end" is more crowded, with
a variety of international and regional manufacturers, including
Osteometer, s.a. (Denmark), Aloka (Japan) and IGEA (Italy).
QCT utilizes existing computed tomography (CT) scanners that have
---
been upgraded with specialized software. QCT is expensive to perform,
requires a high degree of expertise and shows limited potential for
widespread use outside of research settings.
QUS bone densitometers were introduced in the early 1990s, but
---
their rate of market penetration has been slowed by a lack of
validation data and long-term clinical efficacy studies. Lunar and
Hologic are leaders in the ultrasound market segment, but the market
also includes numerous regional manufacturers such as Myriad (Israel)
and IGEA. Norland is also developing an ultrasound machine. To date,
no ultrasound device has been approved by the FDA for marketing in the
U.S.for bone densitometry. The current worldwide installed base of
QUS machines approximates 2,000 machines.
Biochemical marker tests that measure the level of bone metabolic
------------------------
substances present in the blood or urine have been introduced. These
biochemical marker tests are still costly and difficult to control.
Although their role as a tool to monitor the impact of or compliance
with drug therapy may grow, their use at the present time is limited.
Makers of biochemical marker tests include Metra Biosystems, Inc.
(U.S.A.), Ostex, Inc. (U.S.) and Hybritech, Inc. (U.S.A.).
The OsteoGram(R): Competitive Factors
--------------------------------------
Management believes that the OsteoGram(R) offers certain
competitive advantages over its DEXA and ultrasound competitors. The
OsteoGram(R) employs radiographic absorptiometry (RA), a highly
accurate and precise bone mineral density testing technique that can
be performed using the very large installed base of standard X-ray
equipment. This factor alone makes the OsteoGram(R) available to
large segments of the population who cannot, or will not, go to
hospitals, osteoporosis clinics or radiology centers that have
specialized equipment to perform bone densitometry. The OsteoGram(R)
also provides an affordable and reliable way for primary care
physicians, who are the initial "point of care" for patients at risk
of osteoporosis, to initiate the first steps to test for and treat the
disease. Most DEXA tests require referral by the primary care
physician to a specialist. The per-test cost for an OsteoGram(R)
procedures is approximately one-third that of DEXA procedures.
Management also believes that the accessibility of standard X-ray
equipment, ease-of-use and low cost make the OsteoGram(R) an
attractive testing modality for the evolving healthcare market place,
which is increasingly responsive to cost pressures, managed care, and
women s care issues. As drug treatment options for osteoporosis grow
and more women enter their post-menopausal years, management believes
that there will be an increased market demand for testing services and
its second-generation digital OsteoSystem currently under development.
Furthermore, the OsteoGram(R) is the only testing modality
promoted directly to physicians in the U.S. by the sales force of a
leading pharmaceutical company.
Recognizing that many physicians may prefer an OsteoGram(R) test
that could be performed entirely as an in-office procedure, without
the need for an outside imaging lab service, CompuMed is now
developing a stand-alone, desktop-sized hand x-ray device that will be
specifically designed to acquire images for OsteoGram(R) analysis.
This device will generate digital x-ray images of the hand without the
need for film, and will be unique in terms of its small size, ease of
use, image quality and networkability. Management believes that this
next-generation OsteoGram(R) technology will be particularly well
suited for primary care physicians and radiologists who wish to link
their bone densitometry systems and osteoporosis patient databases
electronically with managed care patient record management systems.
There is no assurance that other companies, some of which are
better known and financed than CompuMed, will not develop tests
similar to the OsteoGram(R) which also use X-ray equipment or some
other widely-available devices or equipment to test bone density.
Furthermore, Merck is free to enter into licensing or collaborative
arrangements with CompuMed s competitors and has done so. Such
arrangements could affect sales by Merck of the OsteoGram(R).
ECG SERVICES
GENERAL
Through its ECG computer diagnostic services, the Company
currently serves approximately 1,500 health care providers nationwide.
The Company provides primary care physicians, correctional facilities,
surgery center, clinics, institutions, small hospitals and industrial
health care facilities with fully-automated, solid-state
microprocessor terminals, which access the Company's centralized
computers and custom software to produce on-line ECG's and computer
interpretations in less than three minutes. The Company also offers a
full range of ECG supplies including electrodes, recording paper, gel,
patient cables and related supplies. The Company's ECG terminals are
connected by direct telephone lines to its ECG analysis computer
center in the Los Angeles area. Physicians, nurses or technicians can
apply ECG electrodes on a patient at their office, transmit the ECG by
telephone to the Company, and receive a printed computer
interpretation within three minutes. The principal ECG terminals
currently available are the System 107 and System 307, both designed
and manufactured by the Company. The System 107 produces a single-
channel trace printout and is used mostly by accounts with low to
moderate volume applications. The System 307 adds a thermal graphics
printer which generates an 8.5 x 11-inch printout preferred by higher
volume accounts. The System 307 offers a Pulmonary Function Analysis
option for performing pulmonary tests as well as ECGs. Both units are
available for either rental or sale.
The Company provides physicians with what it believes to be the
most up-to-date electrocardiography interpretation software programs
available. The software is customized and periodically updated by the
Company, with the advice of its Cardiology Advisory Board. The
Company has no formal agreements with the members of its Cardiology
Advisory Board and such members are not contractually obligated to
spend any time on the affairs of the Company.
ECG analysis services are available to users by telephone 24
hours a day, seven days a week. The computer center located on site
at the Company, which is staffed at all times, currently includes five
on-line computers, with a sixth used for backup and off-line research
and development. Arrangements have also been made with Sisters of
Providence Medical Center of Seattle, Washington, to provide
processing and to interpret ECG's for certain ECG accounts. Pursuant
to its understanding with Sisters of Providence Medical Center, the
medical center provides computerized ECG analysis to subscribers on a
continuous 24 hours a day basis at a specified rate and emergency
overread and routine overread services to subscribers at rates
published by the Company. No formal agreement presently exists
between the Company and Sisters of Providence Medical Center. In
addition to basic ECG analysis, the Company offers its customers a
range of optional services, including ECG overreads (reviews by a
cardiologist), network transmission (to a local cardiologist with a
special remote printer), Federal Aviation Administration ("FAA")
transmission (for FAA examiners performing pilot physicals), and long-
term storage of ECGs on laser optical disk.
Upon the request of a physician, the Company provides the
services of a cardiologist to assist the attending or examining
physician in overreading the ECG interpretation for a fee, which is
billed by the Company directly to the physician. The Company
periodically retains cardiologists for advice regarding its ECG
interpretation software programs and to perform overreads of certain
ECG readings. Presently, two cardiologists perform ECG overreads for
the Company. No formal consulting agreements exist between the
Company and such cardiologists.
The Company's current liability insurance policy does not cover
losses due to misinterpreted overreads performed by physicians
retained by the Company. Medical professional liability claims which
may be brought against the Company for misinterpreted overreads, which
are not covered by or exceed the coverage amount of a medical
professional liability insurance policy held by the physician
performing the overread, could have a material adverse effect on the
Company's business, financial condition or operating results. Since
commencing ECG services, no medical professional liability claims have
been made against either physicians who perform overreads for the
Company or the Company with respect to misinterpreted overreads.
MARKETING - ECG SERVICES
The Company's sales efforts for its ECG products and services are
aimed principally at primary care physicians, correctional facilities,
surgery centers, clinics, institutions, small hospitals and industrial
health care facilities. The Company maintains a long-standing
customer base with contracts for services extending between one to
three years.
New customers are generated mostly by the Company's direct sales
efforts. The Company markets products to the health care facilities
of large national companies such as Ingersoll-Rand Corporation, Ethyl
Corporation, General Motors Corporation, Abbott Laboratories and other
multi-installation users such as major governmental institutions and
agencies, including prisons. The Company attends national and
regional medical conventions to generate leads for its services,
equipment and supplies.
The System 107 and the System 307 cardiographs are sold directly
to the Company's clients at a cost of approximately $3,500 or $5,000,
respectively, or leased on a fee-for-use basis to medical users. A
user who leases commits to a minimum monthly payment of $100 or $200
for the System 107 and the System 307, respectively, for a minimum
period of one year. The Company does not require the payment of a
security deposit upon leasing the System 107 or the System 307.
Maintenance of the leased ECG system is provided by the Company at no
additional cost as part of the leasing arrangement. The charge for
ECGs in excess of those included in the monthly fee varies with the
volume of usage.
COMPETITION - ECG SERVICES
The computer interpreted ECG business is made up of a number of
domestic and foreign companies. Most are offering ECG terminals and
systems that perform computer-assisted ECG analysis on site from the
cardiograph itself. Most of these competitors market their products
primarily to hospitals, whereas the Company markets primarily to
physicians' offices and government and industrial health care
facilities. The Company estimates that its form of business,
centralized computerized ECG analyses via a service bureau,
constitutes only 1.5% of the total number of ECGs taken each year in
the United States. The Company estimates that it has approximately
30% of this service bureau market. Its major competitor, Merx
Diagnostics, Inc. has about 30% and a number of smaller companies
share the balance of the market. The principal methods under which the
Company competes are service, product and software performance, ease
of use and price.
ASSEMBLY, REPAIR AND CUSTOMER SERVICE
Assembly operations conducted by the Company are typical of the
electronics industry and require no extraordinary methods, procedures
or equipment. The Company's systems consist primarily of a number of
electronic component parts assembled on Company-designed printed
circuit boards, as well as printer and recorder components. The bare
circuit boards, which are modified by the Company prior to use, are
manufactured for the Company by different manufacturers, including
Century Circuit Corp. and Abaca Manufacturing Contractor. The Company
has never experienced any problems with the quality of the bare
circuit boards manufactured for it and the manufacturers have been
able to maintain a readily available supply of bare circuit boards
that meets the Company's demand for such product. The component
parts, except for the finished circuit boards, sheet metal chassis and
equipment cases are standard items. After assembly, the Company's
systems undergo testing by personnel skilled in the electronics
industry before they are sold or leased. The Company has developed
specialized tests to facilitate this process and does limited internal
engineering for continuing support and new product development. All
assembly operations are conducted at the Company's headquarters in the
Los Angeles area. Quality control procedures used in testing the
products have been approved by the FDA and are subject to yearly
inspections by the FDA.
The Company provides a one year warranty on its ECG systems. All
of the equipment is repaired at the Company's facility. Loaner
equipment is available under the Company's maintenance programs and
leasing arrangements.
The Company uses a "hot line" and a customer service staff to
handle most customer equipment and training problems. Initial
installation and set up is handled by outside ECG specialty companies
on a contract basis or directly by the Company's customer service
department. The Company's customer support services are an important
aspect of the ultimate successful installation and operation of its
products, which are sold with a warranty covering both parts and
labor.
TELECOR
TeleCor is a division of the Company which offers physicians
nationwide transtelephonic cardiac event monitoring equipment and
services for their patients. The Company provides physicians with a
pocket-sized cardiac event recorder, which is a device that monitors
the patients' heart rate and rhythms to detect arrhythmias and other
cardiac abnormalities. The physician prescribes the cardiac event
recorder and he or his technician instructs the patient on its use.
The Company's technicians transtelephonically monitor signals received
from the cardiac event recorder. The telemetry technicians all have
backgrounds in ECG monitoring and many of the technicians have
attended two-year training programs in ECG monitoring.
In February 1995, the Company entered into an Assignment of
Exclusive Marketing Rights Agreement with Jacob Meller, the holder of
the exclusive marketing rights in the United States for TeleCor
products pursuant to a Licensing Agreement (the "TeleCor Licensing
Agreement") with Aerotel Ltd., a medical device and telecommunications
company based in Holon, Israel ("Aerotel"). The TeleCor Licensing
Agreement was terminated as of January 1996 because the Company failed
to meet certain minimum sales amounts in 1995. However, pursuant to
an oral understanding between Aerotel and the Company, the Company has
a non-exclusive right to use Aerotel software and to distribute
Aerotel event recorders. No formal agreement exists between the
Company and Aerotel. Furthermore, the Company's arrangement with
Aerotel is terminable at any time by Aerotel, however, other event
recorder devices may be purchased and other software may be licensed
in lieu of Aerotel event recorders and software.
The Company does not currently provide ECG overread services for
TeleCor customers, however, this service may be offered in the future.
TeleCor analysis services are available to users by telephone 24
hours a day, seven days a week. The computer center is staffed at all
times. The Company provides physicians who subscribe to TeleCor, free
of charge, a full range of disposable cardiopulmonary supplies,
including electrodes, and other miscellaneous supplies.
MARKETING - TELECOR
The Company's sales efforts for TeleCor are aimed principally at
primary care physicians and home health agencies. In addition to
internal marketing efforts, the Company may use consultants to market
its services and coordinate the activities of the field technicians
who hook up patients and initiate services. As with its ECG Services,
the Company attends national and regional medical conventions to
generate leads for its services and to attract additional technicians.
COMPETITION - TELECOR
The TeleCor business, like the ECG services, is made up of a
number of companies, domestic and foreign. The Company's major
competitors in the field of cardiac event monitoring include
Instromedix, Inc. and Raytel Medical Corp., which have approximately
75% of the market, with approximately 20 other companies having the
remaining 25% of the market.
DETOXAHOL(TM)
In March 1994, the Company acquired the rights to a potential new
pharmaceutical product called Detoxahol(TM) through the acquisition of
MB Nutraceuticals, Inc. ("MB"). In June 1995, a patent application
was filed on behalf of the Company covering the technology underlying
Detoxahol(TM). Detoxahol(TM) is a substance intended to facilitate
the rapid lowering of blood alcohol of people who have been drinking
alcohol. Detoxahol(TM) is currently under development at the
University of Georgia, with the Company funding the research and
development. Detoxahol(TM) is intended to augment the liver's natural
function of removing alcohol from the blood by creating an "auxiliary
liver function" in the small intestine. Its efficacy would depend on
the amount of Detoxahol(TM) taken compared to the amount of alcohol
consumed; since large doses of Detoxahol(TM) can be taken, alcohol
detoxification would occur quickly.
There is no assurance that the Company will continue to develop
Detoxahol(TM) technology or that if any Detoxahol(TM) product is
ultimately developed by the Company such product will be cleared by
the appropriate regulatory agencies.
Management expects that the initial market for Detoxahol(TM)
would be for emergency rooms and ambulances. In addition,
Detoxahol(TM) might be initially marketed to certain niche markets in
the Far East, where there is presently a demand for over-the-counter
beverages and tonics or herbal treatments which people consume to
alleviate the symptoms of the overindulgence of alcohol. The active
enzyme ingredients of Detoxahol(TM) might be marketed as additives to
these existing Far East products. Management does not know of any
other current method or existing drug or product that would rapidly
remove alcohol from the blood. However, there is no assurance that
other universities and/or pharmaceutical companies are not currently
working on a similar drug or product. The Detoxahol(TM) compound is
currently in the development phase.
Before commencing marketing and sales efforts for Detoxahol(TM)
or any Detoxahol(TM) product that is eventually developed by the
Company, the Company must obtain FDA clearance of Detoxahol(TM). The
FDA and corresponding regulatory bodies in other countries require
that the drug for which clearance is sought be shown to be safe and
effective in adequately controlled clinical trials. Prior to
initiation of clinical trials, extensive basic research and
development information must be submitted to the FDA in an
Investigational New Drug Application ("IND"). If clearance is
obtained to proceed to clinical trials based on the IND, Phases 1
through 3 clinical trials are performed. If Phases 1 through 3 are
successfully completed, the data from these trials is collected into a
New Drug Application ("NDA"), which is filed with the FDA in an effort
to obtain marketing clearance. The FDA reported industry average for
intervals between filing of an IND and submission of an NDA is about
five years and about two years between NDA filing and FDA clearance.
If a drug is designated for fast track clearance the process can be
shorter. Since pre-clinical testing of Detoxahol(TM) has not yet
commenced, it is premature to estimate when the Company will file an
IND with respect to Detoxahol(TM), assuming the Company decides to
continue to develop Detoxahol(TM) and funding is available for such
development.
Pursuant to a one-year Research Agreement with the University of
Georgia, through February 28, 1997, the Company will fund
approximately $110,000 for the research and development of
Detoxahol(TM) and has paid expenses associated with the filing of a
patent application for Detoxahol(TM). Upon material breach or default
of the Research Agreement by the Company, the University of Georgia
has the right upon notice to terminate the Research Agreement and all
of the rights and privileges of the Company thereunder, including the
Company's licensing rights, unless the Company cures the breach within
a specified period. Upon the termination of the Research Agreement,
the Company plans to enter into a new arrangement with the University
of Georgia in order to maintain its rights to Detoxahol(TM). Pursuant
to the terms of the Research Agreement, the University of Georgia
retains all right and title to any Detoxahol(TM) product developed by
it, subject to the terms and conditions of an Exclusive License
Agreement, dated as of January 3, 1994 (the "Detoxahol License
Agreement"), between the parties. Pursuant to the Detoxahol License
Agreement, the Company has received an exclusive, perpetual, worldwide
license to use, make and sell any Detoxahol(TM) products developed by
the University of Georgia and the University of Georgia is entitled to
royalty payments based on the annual net sales resulting from each
sale of a licensed Detoxahol(TM) product of 5% of the first $1
million, 4% of the second $1 million, 3% of the third $1 million and
2% of all additional net sales up to an aggregate royalty amount of $1
million. Thereafter, the Company must pay the University of Georgia
2% of all net sales. In addition to the royalties payable under the
Detoxahol License Agreement, the Company must also bear all expenses
incidental to the filing and upkeep of a Detoxahol(TM) patent.
INDUSTRIAL PROPERTY IRSCO DEVELOPMENT COMPANY, INC.
In August 1994, the Company acquired IRSCO Development Company,
Inc. ("IRSCO"), whose principal asset was a 6.3 acre industrial park,
consisting of 9 buildings comprising a total of 118,270 sq. ft. plus
parking (the "IRSCO Property"), located in Irwindale, California in
exchange for 52,333 shares of the Company's Class B Preferred Stock.
As of April 30, 1996, the IRSCO Property was sold in
foreclosure as mortgages were in default. Neither the Company nor
IRSCO received any cash or other proceeds as a result of such sale.
As a result of the sale, the net fixed assets of IRSCO, in the amount
of $3,587,000 were written off against the total mortgages payable in
the amount of $3,633,000, with the net balance recorded as a liability
for remaining expenses.
GOVERNMENT REGULATION
The Health Care Finance Administration approves diagnostic tests
for reimbursement by Medicare. The OsteoGram(R) and the Company's
TeleCor Services have been approved for reimbursement by Medicare.
Government regulations may change at any time and Medicare
reimbursement for the OsteoGram(R) or the Company's TeleCor services
may be withdrawn or reduced. Furthermore, other forms of testing for
bone mineral density as an indicator of osteoporosis and/or services
similar to the Company's TeleCor and ECG Services may be approved for
reimbursement which may reduce the market share or profit margins for
such services.
The FDA registers medical devices used for diagnostic testing and
pharmaceutical products for safety and efficacy. In December 1993,
the FDA issued a "Warning Letter" to the Company relating to, among
other things, the OsteoGram(R) (the "Warning Letter"). The FDA
claimed that the Company failed to file documentation with the FDA
relating to an exemption from the FDA's 510(k) filing requirements.
The Company responded by asserting that the OsteoGram(R) was in use
prior to 1976 when the 510(k) regulations were established and thus
the Company is "grandfathered" in without having to file under 510(k).
In April 1996, the Company received an FDA response letter through
Merck consultants CL. L. McIntosh and Associates. The letter
confirmed that a form 510(k) does not need to be filed with the
current labeling. The FDA also concluded that the OsteoGram(R) is a
device subject to GMP's. Pursuant to the Merck Licensing Agreement,
Merck is responsible for regulatory compliance.
The Company has no present plans for the development of
specific Detoxahol(TM) products. The core technology behind
Detoxahol(TM) must be further developed before the specifics of any
Detoxahol(TM) product can be more concretely defined. Prior to
marketing, any Detoxahol(TM) products that are eventually developed,
the Company must undergo an extensive regulatory clearance process
conducted by the FDA and comparable agencies in other countries. This
process, which generally includes a review of preclinical and clinical
testing and confirmation by the FDA that Good Laboratory Practices
established by the FDA and Good Clinical Practices were maintained
during testing, can take many years and require the expenditure of
substantial resources. The Company is dependent on the laboratory and
medical institutions that will conduct its preclinical and clinical
testing to maintain both Good Laboratory Practices and Good Clinical
Practices. Data obtained from preclinical and clinical testing are
subject to varying interpretations that can result in delays in the
regulatory clearance process or limitations on, or even prevention of,
regulatory clearance. In addition, delays or rejections may be
encountered as a result of changes in regulatory review policies
during the period of development and regulatory review of an IND.
Each potential Detoxahol(TM) product that is produced by the Company
must go through separate clinical trials. The clearance of any
particular potential Detoxahol(TM) product by the FDA will not
necessarily facilitate the clearance of other potential Detoxahol(TM)
products.
There can be no assurance that regulatory clearance will be
obtained for any potential Detoxahol(TM) products ultimately developed
by the Company. In the pharmaceutical industry, only a small
percentage of the new products for which INDs are submitted to the FDA
to commence human testing ultimately are cleared for marketing.
Moreover, regulatory clearance may be conditioned upon the imposition
of restrictions on the indicated uses for which a product may be
marketed. Any significant delays in obtaining regulatory clearances
or limitations imposed on indicated uses could result in the Company
incurring substantial additional expenditures or in diminishing any
competitive advantage that the Company's products might otherwise
enjoy.
Even if regulatory marketing clearance is obtained, a marketed
product and its manufacturer are subject to continual review.
Subsequent discovery of previously unknown problems with a product or
its manufacture may result in restrictions on such product or
manufacture, including withdrawal of such products from the market.
Every manufacturing or labeling change made by the Company to any
product cleared for marketing also would be subject to regulatory
review.
PATENTS AND PROPRIETARY RIGHTS
The Company does not have any patents for the OsteoGram(R) as it
was determined that it would be to the Company's competitive advantage
to maintain such information proprietary by keeping it as a trade
secret. The Company does have proprietary rights to the algorithms
and software which have been developed and refined over a 10 year
period. Such proprietary rights are licensed to Merck under the Merck
License Agreement. The OsteoGram(R) trade mark, which is also
licensed to Merck, is a registered trade mark.
As a part of the research and license agreement with UMMC (see
THE OSTEOGRAM(R)), the Company, along with two others, received
worldwide rights to two patents that utilize charge-coupled device
(CCD) camera technology in bone densitometry. The two patents deal
specifically with the use of CCD cameras in radiography systems.
The Company believes that others may attempt to develop X-ray
scanning and computer analysis systems similar to the OsteoGram(R).
This will take time and money for development, clinical studies and
government clearance. Meanwhile the Company expects to develop,
patent and/or copyright a second generation OsteoSystem. The second
generation OsteoSystem would incorporate new technology both in
software and hardware including possible in-licensing of existing
relevant patents. The Company's right to license a second generation
OsteoSystem is subject to a right of first refusal held by Merck,
which requires the Company to notify Merck of any second generation
prototypes that are in the developmental stage and any completed
second generation products and gives Merck the right to negotiate with
the Company on an exclusive basis over a period of sixty days the
terms under which Merck would fund the development stage prototype or
the terms under which Merck shall acquire an exclusive license to the
completed second generation product.
In June 1995, a patent application was filed on behalf of the
Company covering the technology underlying Detoxahol(TM). There can
be no assurance that such patent application will be approved, that
the Company can develop or acquire Detoxahol(TM) products or methods
of use that are patentable, or even if patents are issued that they
will afford the Company's potential Detoxahol(TM) products any
competitive advantage or will not be challenged by third parties, or
that patents issued to others will not adversely affect the
development or commercialization of the Company's products. In the
event that a patent for Detoxahol(TM) is not granted, the proprietary
information relating to Detoxahol(TM) could be protected to a certain
extent by putting procedures into effect which are designed to
maintain the key enzymes, delivery systems and manufacturing process
of Detoxahol(TM) as a trade secret. In addition, to the extent that
the Company develops uses of Detoxahol(TM) in combination with other
products, if such products are covered by third-party patents, the
Company could be required to obtain licenses from the owners of such
patents in order to market such combination products. In the event
that the Company does have to obtain such licenses, the overall
profitability of any Detoxahol(TM) product that is eventually
developed by the Company would be diminished by the cost of obtaining
such licenses and any royalties payable by the Company in connection
therewith.
RESEARCH AND DEVELOPMENT
The Company funded research and development of the OsteoSystem,
Detoxahol(TM) and ECG Services, in the aggregate amount of $613,000 in
1996, and $250,000 in 1995 with approximately 50%, 45% and 5% of such
amounts, respectively, attributable to research and development in
connection with each of the aforementioned services during 1996. None
of such amount is attributable to research and development of TeleCor.
Amounts to be funded on research and development in 1997 will vary
depending upon the amount of working capital available to the Company.
EMPLOYEES
At September 30, 1996, the Company had 28 full-time and 6 part-
time employees. None of the Company's employees is represented by a
labor union and the Company has experienced no work stoppages. The
Company considers its relations with its employees to be good. The
Company also retains consultants from time to time when necessary.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's only facilities are located in 16,440 square feet
in a modern office building located at 1230 Rosecrans Avenue,
Manhattan Beach, California 90266. This facility is leased through
August 1999 at a monthly rental of $18,906, plus certain future
increases in common area expenses. The Company intends to renew the
lease at the expiration of its term. This is a full service lease
including utilities, maintenance and taxes on the property, janitorial
and security service.
ITEM 3. LEGAL PROCEEDINGS
As previously reported by the Company in its Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1996, the Company entered
into a Memorandum of Understanding on August 5, 1996 to confirm the
material terms of an agreement in principle to settle the securities
class action and derivative litigation filed in the United States
District Court for the Central District of California (the "Court") on
behalf of persons who purchased Common Stock during various time
periods spanning from August 11, 1995 to October 17, 1995, inclusive
and derivatively on behalf of the Company. The Company's outside
counsel is working with plaintiffs' counsel to finalize the
stipulation of settlement. The Company expects the settlement to be
submitted to the Court by the second quarter of 1997. The
consummation of the proposed settlement is subject to significant
conditions, including negotiation of definitive settlement agreements
and obtaining court approval after notice to the class members has
been given. See NOTE G--CONTINGENCIES to the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS OF COMPUMED, INC. AND SUBSIDIARIES for additional
disclosure relating to this litigation and concerning other pending
legal proceedings to which the Company a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to stockholders during the fourth
quarter of the fiscal year ended September 30, 1996.
<PAGE>
PART II
--------
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
The Common Stock and Common Stock Purchase Warrants (the
"Warrants") are listed on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") Small Cap Market under
the symbols "CMPD" and "CPMDW", respectively. The following table
sets forth the range of high and low bid prices for the Common Stock
and the Warrants during the periods indicated, and represents inter-
dealer prices, which do not include retail mark-ups and mark-downs, or
any commission to the broker-dealer, and may not necessarily represent
actual transactions.
Common Stock Warrants
------------ --------
High Low High Low
---- --- ---- ---
Year ended
September 30, 1995:
Quarter Ended:
-------------
December 31, 1994 2 1/4 1 1/16 1/32
March 31, 1995 1 3/4 7/8 3/64 3/64
June 30, 1995 6 9/16 15/16 N/A N/A
September 30, 1995 13 1/8 3 15/16 15/16 1/8
Year ended
September 30, 1996
Quarter Ended:
--------------
December 31, 1995 19 1/8 3 1 1/2 5/32
March 31, 1996 5 1/16 2 5/16 11/32 1/8
June 30, 1996 3 3/4 2 1/4 1/4 1/8
September 30, 1996 2 5/8 15/16 3/32 1/32
As of December 20, 1996, there were approximately 846 record
holders of Common Stock and 25 record holders of Warrants. Such
amounts do not include Common Stock or Warrants held in "nominee" or
"street" name.
The Company has not paid cash dividends on its Common Stock since
its inception. At the present time, the Company's anticipated working
capital requirements are such that it intends to follow a policy of
retaining any earnings in order to finance the development of its
business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This analysis should be read in conjunction with the consolidated
financial statements and notes thereto. See "ITEMS 7 and 13 Financial
Statements, and Exhibits and Reports on Form 8-K".
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1996 AS COMPARED TO 1995
--------------------------------------------------------
Revenues for fiscal 1996 decreased overall by $437,000, or 15%,
from fiscal 1995. This decrease is due to the elimination of the
IRSCO property and the associated rental income ($332,000 reduction)
and the transition of the OsteoGram(R) test processing to Merck
($327,000 reduction). These decreases were offset by increases in
operating revenues from the Company s ECG business ($365,000 increase)
and increases in other income from investments ($193,000 increase,
representing primarily interest income). The Company s ECG business
has been growing steadily, primarily from the increases in cardiac
event monitoring services (TeleCor). Standard ECG service revenues
are approximately the same as those of the prior year. Royalties from
Merck testing using the OsteoGram(R) were $37,000 during the first
three quarters of the Agreement.
Costs of services and sales decreased during fiscal 1996 from
those in fiscal 1995 by $224,000 and $192,000 respectively, primarily
as a result of the termination of operations described above.
Research and development costs increased by $363,000 during fiscal
1996 primarily as a result of increased development efforts on the
second-generation OsteoGram(R) test and Detoxahol(TM) research.
General and administrative expenses increased during fiscal 1996 by
$299,000 primarily due to increases in insurance coverage costs,
recruitment fees and consulting services.
The Company provided $2,786,000 in expenses relating to the
securities litigation (see Item 3. Legal Proceedings). These expenses
result primarily from the value of the securities which are to be
issued in relation to the settlement of this litigation, to consist of
Common Stock with a value of $575,000 and Warrants with a value of
$1,524,000. Additionally, the Company paid $300,000 and incurred
approximately $387,000 in legal costs associated with the defense of
this matter.
The net loss of $4,647,000 is largely associated with the
provision for securities litigation described above and due to the
research and development activities of the Company. Further losses
are anticipated in the future from research and development in
connection with the second-generation OsteoSystem, ECG Systems and
Detoxahol(TM).
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------
At September 30, 1996, the Company had approximately $2,644,000
in cash and marketable securities, as compared to a balance of
$5,022,000 at September 30, 1995. The decrease in cash and marketable
securities during fiscal 1996 of $2,378,000 is primarily due to losses
from operations, as described above, and to reductions in accounts
payable. The ratio of current assets to current liabilities improved
as of September 30, 1996 to 3.45 to 1.0 as compared to 2.7 to 1.0 at
September 30, 1995. This improvement is due to the elimination of the
current liabilities of IRSCO as described below.
As of April 30, 1996, the IRSCO Property was sold in foreclosure.
Neither the Company nor IRSCO received any cash or other proceeds as a
result of such sale. The net fixed assets of IRSCO, in the amount of
$3,587,000 were written off against the total mortgages payable in the
amount of $3,633,000, with the net balance recorded as a liability for
remaining expenses.
The Company s primary capital resource commitments at September
30, 1996 consist of the remaining lease commitments, primarily for
computer equipment, and sponsored research and development contracts.
For the last few years, the Company has financed its operations
primarily through private and public sales of securities, and revenues
from sales of its services. Since August 1991 the Company received
net proceeds of approximately $10,400,000 from the private and public
sale of equity securities. The Company believes that the remaining
proceeds from such sales of securities, along with revenues provided
from operations, provide adequate capital for at least the next 12
months. The Company may, however, raise additional capital through
the sale of its securities. There can be no assurance that the
Company will be able to raise additional capital in the future through
the sale of its securities or that if the Company is successful in
raising additional capital through the sale of its securities that
such a sale of securities would not dilute the ownership interest of
the present stockholders of the Company.
The Company's ongoing research and development activities
associated with Detoxahol(TM) and the second-generation OsteoSystem
technology and the current manufacture of its ECG terminals are all
subject to federal, state, local and in some instances, foreign
regulations. In June 1995, the Company filed patent applications on
Detoxahol(TM). Subject to obtaining such patents, the Company would
seek strategic partners to help fund the research and development of
Detoxahol(TM) at the University of Georgia. The regulatory approval
process for Detoxahol(TM) can take years and require expenditure of
substantial resources.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
------------------------------------------
The Company is including the following cautionary statement in
this Annual Report on Form 10-KSB to make applicable and take
advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 for any forward-looking statements made
by, or on behalf of, the Company. Forward-looking statements include
statements concerning plans, objectives, goals, strategies, future
events or performance and underlying assumptions and other statements
which are other than statements of historical facts. From time to
time, the Company may publish or otherwise make available forward-
looking statements of this nature. All such subsequent forward-
looking statements, whether written or oral, and whether made by or on
behalf of the Company, are also expressly qualified by these
cautionary statements. Certain statements contained herein are
forward-looking statements and accordingly involve risks and
uncertainties which could cause actual results or outcomes to differ
materially form those expressed in the forward-looking statements.
The forward-looking statements contained herein include (i) statements
made in Item 1 under the caption "THE OSTEOGRAM(R)" relating to the
expectation that the second-generation OsteoSystem will allow the
performance of OsteoGram(R) tests directly from digital X-ray without
the need for film and (ii) statements made in Item 6 under the caption
"FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES" relating to
management's projection that present working capital amounts will be
sufficient for at least the next 12 months and that the Company would
be able to raise additional capital through the sale of its
securities. The forward-looking statements contained herein are based
on various assumptions, many of which are based, in turn, upon further
assumptions. The Company's expectations, beliefs and projections are
expressed in good faith and are believed by the Company to have a
reasonable basis, including without limitation, management's
examination of historical operating trends, data contained in the
Company's records and other data available from third parties, but
there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished. In addition
to other factors and matters discussed elsewhere herein, the following
are important factors that, in the view of the Company, could cause
actual results to differ materially from those discussed in the
forward-looking statements: technological advances by the Company's
competitors, changes in health care reform, including reimbursement
programs, capital needs to fund any delays or extensions of research
programs and the availability of capital on terms satisfactory to the
Company. The Company disclaims any obligation to update any forward-
looking statements to reflect events or circumstances after the date
hereof.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are included as a separate
section following the signature page to this Form 10-KSB:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors for the years ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet as of
September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the years
ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . F-8 to F-17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
PART III
--------
The information called for by Part III (Items 9, 10, 11 and 12)
of Form 10-KSB is hereby incorporated by reference from the Company's
definitive Proxy Statement to be filed with the Securities and
Exchange Commission by not later than January 29, 1997 in connection
with the election of directors at the 1996 Annual Meeting of
Stockholders of the Company.
PART IV
-------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------------------------
3.1 Certificate of Incorporation of the Company [Incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement of Form S-1 (File No. 33-46061), effective May 7,
1992]
3.2 Certificate of Amendment of Certificate of Incorporation
[Incorporated by reference to Exhibit 3.1a to Amendment No.
1 to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-2 (File No. 33-48437),
filed June 28, 1994]
3.3 Certificate of Amendment of Certificate of Incorporation
[Incorporated by reference to Exhibit 3.1b to Amendment No.
2 to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-2 (File No. 33-48437),
filed November 7, 1994]
3.4 Certificate of Correction of Certificate of Amendment
[Incorporated by reference to Exhibit 3.1c to Amendment No.
2 to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-2 (File No. 33-48437),
filed November 7, 1995]
3.5 By-Laws of the Company, as currently in effect [Incorporated
by reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (File No. 33-46061), effective May 7,
1992]
4.1 Form of Underwriter's Warrant Agreement [Incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-2 (File No. 33-48437), effective August
3, 1992]
4.2 Form of Warrant Agreement and Warrant [Incorporated by
reference to Exhibit 4.5 to the Company's Registration
Statement on Form S-2 (File No. 33-48437), effective August
3, 1992]
4.3 Specimen Common Stock Certificate [Incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (File No. 33-46061), effective May 7, 1992]
4.4 Form of Preferred Stock Certificate [Incorporated by
reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-1 (File No. 33-46061), effective May 7,
1992]
4.5 Certificate of Designation of Class A Preferred Stock
[Incorporated by reference to Exhibit 4.5 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1995 (File No. 0-14210)]
4.6 Certificate of Designation of Class B Preferred Stock
[Incorporated by reference to Exhibit 4.6 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1995 (File No. 0-14210)]
10.1 Agreement, dated May 23, 1991 (the "SASCO Agreement"), for
the purchase by the Company of substantially all of the
assets of Skeletal Assessment Services Company ("SASCO")
[Incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (File No. 33-46061),
effective May 7, 1992]
10.2 Amendment to the SASCO Agreement, dated August 11, 1995,
between the Company and SASCO [Incorporated by reference to
Exhibit 10.3 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended September 30, 1995 (File No. 0-
14210)]
10.3 First Amendment to Warrant to Purchase Common Stock, dated
as of June 1, 1995, between the Company and SASCO
[Incorporated by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1995 (File No. 0-14210)]
10.4 1992 Stock Option Plan [Incorporated by reference to Exhibit
10.12 to the Company's Registration Statement on Form S-1
(File No. 33-46061), effective May 7, 1992]
10.5 Form of Non-Qualified Stock Option Agreement [Incorporated
by reference to Exhibit 10 to the Company's Registration
Statement on Form S-8 (File No. 33-63435), filed October 14,
1995]
10.6 Agreement and Amendment, dated October 26, 1992 and June 10,
1993, respectively, between the Company and Rhone-Poulenc
Rorer Pharmaceuticals, Inc. ("RPR") [Incorporated by
reference to Exhibit 10.16 to Amendment No. 1 to Post-
Effective Amendment No. 1 to the Company's Registration
Statement on Form S-2 (File No. 33-48437), filed June 28,
1994]
10.7 Termination Agreement, dated August 16, 1995, between the
Company and RPR [Incorporated by reference to Exhibit 10.9
to the Company's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1995 (File No. 0-14210)]
10.8 Agreement, dated April 27, 1993 between the Company and OCG
Technology, Inc. [Incorporated by reference to Exhibit 10.18
to Amendment No. 1 to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-2 (File No. 33-
48437), filed June 28, 1994]
10.9 Agreement and Plan of Reorganization and Amendment Number
One and Specific Release Agreement, dated March 18, 1994 and
June 15, 1994, respectively, between the Company, MB
Nutraceuticals, Inc., Howard Mark and Mark Branigan
[Incorporated by reference to Exhibit 10.19 to Amendment No.
1 to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-2 (File No. 33-48437),
filed June 28, 1994]
10.10 Research Agreement, dated January 3, 1994, between the
Company and the University of Georgia Research Foundation,
Inc. [Incorporated by reference to Exhibit 10.20 to the
Company's Annual Report on Form 10-KSB for fiscal year 1994]
10.11 Exclusive License Agreement, dated January 3, 1994, between
the Company and the University of Georgia Research
Foundation, Inc. [Incorporated by reference to Exhibit 10.21
to the Company's Annual Report on Form 10-KSB for fiscal
year 1994]
10.12 Employment Agreement, dated October 14, 1994, between the
Company and Rod N. Raynovich [Incorporated by reference to
Exhibit 10.22 to Amendment No. 2 to Post-Effective Amendment
No. 1 to the Company's Registration Statement on Form S-2
(File No. 33-48437), filed November 7, 1994]
10.13 Agreement, dated August 12, 1994, for the acquisition of
Irsco. [Incorporated by reference to Exhibit 10.15 to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended September 30, 1995 (File No. 0-14210)]
10.14 Technology License Agreement, dated September 22, 1995,
between the Company and Merck & Co., Inc. [Incorporated by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K for an event of September 27, 1995]
10.15 Assignment of Exclusive Marketing Rights, dated February 9,
1995, between the Company and Jacob Meller. [Incorporated by
reference to Exhibit 10.17 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended September 30, 1995
(File No. 0-14210)]
10.16 Stock Purchase Agreement, dated as of August 9, 1995,
relating to the Company's private placement of $5.1 million
worth of Common Stock [Incorporated by reference to Exhibit
10 to the Company's Current Report on Form 8-K for an event
of August 9, 1995]
10.17* Sponsored Research Agreement, effective as of May 1, 1996,
between UMMC and the Company.
10.18* Exclusive License Agreement, effective as of May 1, 1996,
between UMMC and the Company.
10.19* Evaluation and Development Agreement between Varian
Associates and the Company dated December 10, 1996.
10.20* Agreement of Settlement and Mutual General Release dated
April 23, 1996 among the Company, Robert Stuckelman, William
Barnett, Allan Gelbard and Barry Silverton.
10.21* Settlement Agreement and General Release, effective
September 15, 1996, between the Company and Howard L. Mark,
M.D.
10.22* Settlement Agreement and General Release, effective August
1, 19896, between the Company and Mack C. Branigann.
10.23* Commercial Office Lease, dated August 30, 1996, between the
Company and USAA Income Properties III Limited Partnership.
21* Subsidiaries of the Company
23* Consent of Ernst & Young LLP
____________________________________
* Filed herewith.
<PAGE>
B. REPORTS ON FORM 8-K
None.
<PAGE>
COMPUMED, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Auditors for the years ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet as of
September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity for
the years ended September 30, 1996 and 1995 . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the years
ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . F-8 to F-17
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
CompuMed, Inc.
We have audited the accompanying consolidated balance sheet of
CompuMed, Inc. and subsidiaries as of September 30, 1996, and the
related consolidated statements of operations, stockholders' equity,
and cash flows for each of the two years in the period ended September
30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of CompuMed, Inc. and subsidiaries at September 30,
1996, and the consolidated results of their operations and their cash
flows for each of the two years in the period ended September 30,
1996, in conformity with generally accepted accounting principles.
Los Angeles, California
November 19, 1996
/s/Ernst & Young LLP
<PAGE>
CONSOLIDATED BALANCE SHEET
COMPUMED, INC. AND SUBSIDIARIES
ASSETS
September 30,
1996
--------------
CURRENT ASSETS
Cash $ 155,000
Marketable securities 2,489,000
Accounts receivable, less allowance of $280,000 435,000
Other receivables 48,000
Inventory 86,000
Prepaid expenses and other current assets 41,000
------------
TOTAL CURRENT ASSETS 3,254,000
PROPERTY AND EQUIPMENT - Notes A and B
Machinery and equipment 3,090,000
Furniture, fixtures and leasehold
improvements 201,000
Equipment under capital leases 611,000
-----------
3,902,000
Less allowance for depreciation and
amortization 3,415,000
-----------
487,000
OTHER ASSETS
Reacquired franchises, net of accumulated
amortization of $162,000 165,000
Other assets 72,000
-----------
$3,978,000
==========
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED BALANCE SHEET
COMPUMED, INC. AND SUBSIDIARIES
LIABILITIES AND STOCKHOLDERS' EQUITY September 30,
1996
----------------
CURRENT LIABILITIES
Accounts payable $ 252,000
Deferred revenue 80,000
Other accrued liabilities 579,000
Current portion of capital lease
obligations-Note B 31,000
------------
TOTAL CURRENT LIABILITIES 942,000
CAPITAL LEASE OBLIGATIONS, less current
portion-Note B 78,000
COMMITMENTS AND CONTINGENCIES-Note B and Note G
STOCKHOLDERS' EQUITY-Note D
Preferred stock, $.10 par value--authorized
1,000,000 shares
Class A $3.50 cumulative convertible voting
preferred stock, issued and outstanding --
8,400 shares 1,000
Class B $3.50 convertible voting preferred
stock, issued and outstanding 2,333 shares 1,000
Common stock, $.01 par value--authorized
50,000,000 shares, issued and outstanding--
8,949,786 89,000
Additional paid in capital 27,036,000
Retained deficit (24,169,000)
----------------
STOCKHOLDERS' EQUITY 2,958,000
----------------
$ 3,978,000
================
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
COMPUMED, INC. AND SUBSIDIARIES
Year Ended September 30,
1996 1995
REVENUES ------ -------
ECG services $ 2,008,000 1,643,000
Osteo services, net -0- 327,000
Osteo royalty revenues 37,000 -0-
Product sales 200,000 573,000
Rental property Note E 99,000 431,000
Other income 229,000 36,000
----------- ---------
2,573,000 3,010,000
COST AND EXPENSES
Cost of services 1,192,000 1,416,000
Cost of sales 92,000 284,000
Selling expenses 426,000 418,000
Research and development 613,000 250,000
Cost of rights - Note D -0 228,000
General and administrative expenses 1,691,000 1,392,000
Depreciation and amortization 323,000 538,000
Interest expense 97,000 374,000
Loss on impairment of asset - Note E -0- 1,500,000
Provision for securities litigation 2,786,000 -0-
--------------- ---------
7,220,000 6,400,000
NET LOSS $(4,647,000) $(3,390,000)
=========== ==========
NET LOSS PER SHARE $ (.54) $ (.55)
=========== =========
Weighted average number of common
shares outstanding 8,534,276 6,150,500
=========== =========
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMPUMED, INC. AND SUBSIDIARIES
Additional
Preferred Common Paid in
Stock Stock Capital
-------- -------- ----------
Balance at September
30, 1994: $ 6,000 $ 46,000 $17,988,000
Proceeds from issuance of
1,735,029 shares of Common
Stock in a Regulation "S"
offering 17,000 962,000
Issuance of 400,000 shares
of Common Stock for
acquisition of TeleCor 4,000 224,000
marketing rights
Proceeds from issuance of
1,236,000 shares of Common
Stock in a Regulation "D"
offering 12,000 5,066,000
Proceeds from issuance of
66,010 shares of Common
Stock upon exercise of
warrants 1,000 166,000
Proceeds from issuance of
156,405 of common stock
upon exercise of stock
options 2,000 227,000
Dividends paid on Class A
Preferred Stock
Net Loss
---------- ---------- --------
Balance at September
30, 1995: $ 6,000 $ 82,000 $24,633,000
Costs associated with
Regulation "D" offering (88,000)
Convert 50,000 shares of
Class B Preferred Stock
to 500,000 shares of
Common Stock (4,000) 4,000
Proceeds from issuance of
66,820 shares of Common
Stock upon exercise of
warrants 1,000 250,000
Proceeds from issuance
of 141,091 of Common
Stock upon exercise of
stock options 2,000 142,000
Securities reserved for
issuance relating to
securities litigation 2,099,000
Dividends paid on Class
A Preferred Stock
Net Loss
---------- ----------- ----------
Balances at
September 30, 1996: $ 2,000 $ 89,000 $27,036,000
=========== =========== ==========
Retained
(Deficit) Total
-------- ----------
Balance at September
30, 1994: $ (16,127,000) $1,193,000
Proceeds from issuance of
1,735,029 shares of Common
Stock in a Regulation "S"
offering 979,000
Issuance of 400,000 shares
of Common Stock for
acquisition of TeleCor 228,000
marketing rights
Proceeds from issuance of
1,236,000 shares of Common
Stock in a Regulation "D"
offering 5,078,000
Proceeds from issuance of
66,010 shares of Common
Stock upon exercise of
warrants 167,000
Proceeds from issuance of
156,405 of common stock
upon exercise of stock
options 229,000
Dividends paid on Class A (3,000) (3,000)
Preferred Stock
Net Loss (3,390,000) (3,390,000)
---------- --------
Balance at September
30, 1995: $(19,520,000) $5,201,000
Costs associated with
Regulation "D" offering (88,000)
Convert 50,000 shares of
Class B Preferred Stock
to 500,000 shares of
Common Stock
Proceeds from issuance of
66,820 shares of Common
Stock upon exercise of
warrants 251,000
Proceeds from issuance
of 141,091 of Common
Stock upon exercise of
stock options 144,000
Securities reserved for
issuance relating to
securities litigation 2,099,000
Dividends paid on Class (2,000) (2,000)
A Preferred Stock
Net Loss (4,647,000) (4,647,000)
----------- ----------
Balances at
September 30, 1996: $(24,169,000) $2,958,000
=========== ==========
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMPUMED, INC. AND SUBSIDIARIES
Year Ended September 30,
1996 1995
-------- ------
OPERATING ACTIVITIES:
Net Loss $(4,647,000) (3,390,000)
Net adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 323,000 538,000
Cost of rights 228,000
Loss on impairment of asset 1,500,000
Stock reserved for securities
litigation settlement 2,099,000
Changes in operating assets and liabilities:
Accounts receivable 14,000 (45,000)
Other receivables 385,000 (371,000)
Inventories and prepaid expenses 39,000 88,000
Accounts payable and other liabilities (675,000) 270,000
Other assets 38,000 116,000
----------- ----------
NET CASH USED IN OPERATING ACTIVITIES (2,424,000) (1,066,000)
------------ ----------
INVESTING ACTIVITIES:
Purchase of marketable securities (4,823,000)
Sale of marketable securities 2,234,000 100,000
Purchases of property, plant and equipment (229,000) (270,000)
------------- ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 2,005,000 (4,993,000)
FINANCING ACTIVITIES:
Net proceeds (costs) from sale of stock (88,000) 6,057,000
Dividends on Class A preferred stock (2,000) (3,000)
Proceeds from short term borrowings 100,000
Payments on short term borrowings (100,000)
Principal payments on capital
lease obligations (30,000) (25,000)
Principal payments on trust deeds
and notes payable (83,000)
Exercise of stock options and warrants 395,000 396,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 275,000 6,342,000
------------ -----------
(DECREASE) INCREASE IN CASH (144,000) 283,000
Cash at beginning of year 299,000 16,000
------------ -----------
CASH AT END OF YEAR $ 155,000 $299,000
========= =========
Cash paid for interest $ 97,000 $374,000
======== ========
During 1996 and 1995 computer and office equipment were acquired under
capital lease obligation for $48,000 and $32,000, respectively.
See notes to consolidated financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPUMED, INC. AND SUBSIDIARIES
NOTE A-BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles of Consolidation: The consolidated financial statements
---------------------------
include the accounts of CompuMed, Inc. and its wholly-owned subsidiaries
(the Company). All material intercompany transactions and accounts have
been eliminated.
Description of Business: The Company is engaged in the processing and
-----------------------
interpretation of ECG tests and in the rental and sale of equipment and
supplies relating to these tests. The Company maintains a central
processing center where services are provided on a 24-hour basis, located
in Manhattan Beach, California. Customers of the Company are located
throughout the country. In addition to the ECG operations, the Company
is involved in the research, development and the licensing of rights to
the OsteoGram(R) , a bone density test for the diagnosis and treatment of
osteoporosis. The Company earns royalties from a division of Merck & Co.
for the processing of OsteoGram(R) tests. Active development is being
conducted by the Company of a second-generation OsteoGram(R) test.
Inventory: Inventory consists of ECG terminals, component parts and ECG
---------
medical supplies. Inventory is stated at cost (weighted average or
first-in first-out method) which is not in excess of market.
Property and Equipment: Property and Equipment are stated at cost.
----------------------
Depreciation and amortization are computed on the straight-line basis
over the following useful lives:
Furniture, fixtures and leasehold improvements 3 to 5 years
Equipment 5 to 7 years
Reacquired Franchises: The reacquired franchises are being amortized
----------------------
over a seven year period.
Revenue Recognition: Standard ECG and services are recorded when billed
-------------------
to the customer in conjunction with services performed. Product sales
are recorded upon shipment of product and passage of title to the
customer. ECG event monitoring services are recorded when processing is
completed and claims are submitted to the third party payors. Other
income is recorded when accrued or received.
Income Taxes: The Company utilizes the liability method to determine the
------------
provision for income taxes, whereby deferred tax assets and liabilities
are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected
to reverse.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE A-BASIS OF PRESENTATION SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Marketable Securities: Marketable securities consist of short-term money
----------------------
market investments, invested in a Merrill Lynch Institutional Fund which
invests in short-term government and other debt securities, and
investments in U.S. Treasury securities (t-bills). The marketable
securities are carried at cost, which approximates the market value as of
September 30, 1996. Interest and dividends on marketable securities are
included in other income.
Per Share Data: Per share data is based on the weighted average of the
--------------
number of common shares outstanding during each year. Options and
warrants are excluded as they are antidilutive.
Use of Estimates: The preparation of financial statements in conformity
----------------
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Stock Based Compensation: The Company accounts for its stock
------------------------
compensation arrangements under the provision of APB 25, Accounting for
Stock Issued to Employees, and intends to continue to do so. In October
1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("FAS 123"). FAS 123 established a fair value-based method
of accounting for compensation cost related to stock options and other
stock-based compensation awards. However, FAS 123 allows an entity to
cotinue to measure compensation costs using the principles of APB 25 if
certain pro forma disclosures are made. FAS 123 is effective for fiscal
years beginning after December 15, 1995 (the Company s 1997 fiscal year).
The Company intends to disclose the information required by FAS 123
beginning with its 1997 fiscal year.
Concentration of Credit Risk: The Company sells its products throughout
----------------------------
the United States. The Company performs periodic credit evaluations of
its customers financial condition and generally does not require
collateral. Credit losses have been within management s expectations.
For the years ended September 30, 1996 and 1995, no single customer
accounted for more than 10% of the Company s net revenues.
NOTE B COMMITMENTS
Capital leases cover computer and office equipment and expire through
2000. The Company has a noncancelable facility lease accounted for as an
operating lease expiring in August 1999 which is included in the
operating lease amounts below.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE B-COMMITMENTS (CONTINUED)
The following is a summary as of September 30, 1996 of future minimum
lease payments together with the present value of the net minimum lease
payments on capital leases:
Capital Operating
Year ending September 30 Leases Leases
---------- ------------
1997 $42,000 $233,000
1998 39,000 233,000
1999 33,000 212,000
2000 11,000 -0
----------- ------------
Total minimum lease payments 125,000 $678,000
========
Less amount representing interest 16,000
-------
Net minimum lease payments 109,000
Less current portion 31,000
-------
Present value of net minimum
payments, less current portion $78,000
=======
Included in accumulated depreciation and amortization at September 30,
1996 is $500,000 related to capital leases. Amortization of capital
leases is included in depreciation and amortization expense. Rental
expense under operating leases was $245,000 (1996) and $245,000 (1995).
During the fiscal year ended September 30, 1996 the Company has expensed
approximately $172,000 for research and development related to
Detoxahol(TM) rights. Pursuant to a one-year research agreement with the
University of Georgia, through February 28, 1997, the Company will fund
approximately $110,000 for the research and development of Detoxahol(TM).
On May 1, 1996, the Company entered into a research and license agreement
with the University of Massachusetts Medical Center (UMMC) in connection
with the development of its second-generation OsteoSystem. Under the
terms of the license agreement, the Company will receive from UMMC
worldwide rights, in the field of bone densitometry, to develop and
market devices and services, subject to FDA regulation, which employ the
licensed technology of certain US patents owned by UMMC. UMMC has
reserved the right to license the technology to two other companies. For
the license agreement, the Company paid a $25,000 license initiation fee.
The Company will also pay additional amounts totaling $175,000 upon the
completion of certain milestones and will remit royalty payments of 3% of
the revenues generated from product sales.
Under the terms of the research agreement with UMMC, the Company is
sponsoring research during a two-year period which focuses on digital
bone densitometry measurement techniques integrating the Company s
proprietary software. The Company will reimburse UMMC for their costs in
the amount of $100,000 during the first year and $50,000 during the
second year of the agreement.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE C-INCOME TAXES
At September 30, 1996, the Company has available for federal income tax
purposes, net operating loss carryforwards of approximately $12,910,000
which expire between 1998 and 2012. The utilization of the above net
operating loss carryforwards are subject to significant limitations under
the tax codes due to changes in ownership and portions may expire prior
to utilization.
Significant components of the Company's deferred tax liabilities and
assets as of September 30, 1996 and 1995 are as follows:
Deferred tax liabilities: 1996 1995
----------- -------
Property and Equipment $( 41,000) $(913,000)
Deferred tax assets:
Account receivable allowance 113,000 94,000
Accrued expenses 20,000 59,000
Other 41,000
Net operating loss
carryforwards 4,955,000 5,380,000
------------- ---------
Total deferred tax assets 5,088,000 5,574,000
Valuation allowance for
deferred tax assets (5,047,000) (4,661,000)
Net deferred tax assets 41,000 913,000
------------- -----------
Total $ 0 $ 0
============ ========
NOTE D-STOCKHOLDERS' EQUITY
Common Stock: On August 13, 1992, the Company issued 8,000,000 units,
------------
each unit consisting of one share of Common Stock and one warrant to
purchase one share of Common Stock. This offering was sold at $.25 per
unit for net proceeds of $1,505,000. On September 17, 1992, the
8,000,000 shares of Common Stock became separately tradeable.
After the one for ten reverse stock split of October 17, 1994, the
8,000,000 warrants were exercisable to purchase 800,000 shares of Common
Stock until August 3, 1997. This entitles a holder of 10 warrants to
purchase one share of the Company's Common Stock at $3.75 per share. The
outstanding warrants were callable by the Company at any time after
August 3, 1994, at a price of $.05 per warrant. A total of 1,528,300 of
the warrants were exercised as of September 30, 1996.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE D-STOCKHOLDERS' EQUITY (CONTINUED)
The Company issued to the underwriter 800,000 units, each unit consisting
of the right to purchase one share of Common Stock at a price of $.30 per
share and one warrant to purchase one share of Common Stock for $.375 per
share. The units and underlying warrants are exercisable until August 2,
1997. After the one for ten reverse stock split of October 17, 1994, the
800,000 units were exercisable into 80,000 shares of Common Stock at
$3.00 per share and warrants to purchase 80,000 shares of Common Stock at
$3.75 per share.
Pursuant to an Agreement and Plan of Reorganization entered into on March
18, 1994, the Company acquired all of the issued and outstanding common
stock of MB Neutraceuticals, Inc. ("MB") in exchange for 635,380 shares
of the Company's Common Stock. MB had only two shareholders of which its
President and principal shareholder was Dr. Howard Mark, a Director and
Medical Director of the Company. The MB shareholders also received
102,532 shares of Common Stock for their assistance in raising, prior to
June 15, 1994, $200,000 for the Company through a Regulation S offering.
Independent appraisers valued the acquisition of MB and its rights to
Detoxahol(TM) at $1,696,000; however, in accordance with industry
practices regarding research and development expenses, the Company
immediately expensed this amount.
In 1994, the Company sold 571,289 shares of Common Stock pursuant to
Regulation "S" under the Securities Act. Net proceeds of $1,452,000 were
used for the funding of research and development, prepayment of debt and
payment of operating expenses
From December 1994 through June 1995 the Company sold 1,735,029 shares of
Common Stock at $.60 per share pursuant to Regulation "S" under the
Securities Act. In addition, warrants to purchase 142,000 shares of
Common Stock at an exercise price of $1.10 were issued as a finders fee
in the transaction. Net proceeds of $979,000 were used for the funding
of research and development and payment of operating expenses.
In February 1995 the Company issued 400,000 shares of Common Stock for
the acquisition of certain exclusive rights for the marketing of certain
new products of Aerotel Ltd., a medical device and telecommunications
company based in Israel. The original term of the license has expired as
a result of the Company's failure to meet certain minimum sales amounts
in 1995.
In August 1995 the Company sold 1,236,000 shares of Common Stock pursuant
to Regulation "D" under the Securities Act. Net proceeds of $4,990,000
will be used for research and development and operating expenses.
Class A $3.50 Cumulative Convertible Voting Preferred Stock: The holders
-----------------------------------------------------------
of Class A Preferred Stock are entitled to receive, when and as declared
by the Board of Directors of the Company, dividends at an annual rate of
$.35 per share, payable quarterly. Dividends are cumulative from the
date of issuance. Every two shares of the Class A Preferred Stock are
presently convertible, subject to adjustment, into one share of Common
Stock. In the event of any liquidation, the holders of the Class A
Preferred Stock are entitled to receive $2.00 in cash per share plus
accumulated and unpaid dividends out of assets available for distribution
to stockholders, prior to any distribution to holders of Common Stock or
any other stock ranking junior to the Class A Preferred Stock. The Class
A Preferred Stock may be redeemed by the Company, upon 30-days' written
notice, at a redemption price of $3.85 per share. Class A Preferred
Stock stockholders have the right to convert their shares into Common
Stock during such 30-day period.
Shares of Class A Preferred Stock have one vote each. Shares of Class A
Preferred Stock vote along with shares of Common Stock and shares of
Class B Preferred Stock as a single class on all matters presented to the
stockholders for action except as follows: Without the affirmative vote
of the holder of a majority of the Class A Preferred Stock then
outstanding, voting as a separate class, the Company may not (i) amend,
alter or repeal any of the preferences or rights of the Class A Preferred
Stock, (ii) authorize any reclassification of the Class A Preferred
Stock, (iii) increase the authorized number of shares of Class A
Preferred Stock or (iv) create any class or series of shares ranking
prior to the Class A Preferred Stock as to dividends or upon liquidation.
Of the 437,500 shares of Class A Preferred Stock issued on September 30,
1991, a total of 429,100 were converted into 429,100 shares of Common
Stock. A total of 4,200 shares of Common Stock are currently issuable
upon conversion of the remaining 8,400 shares of the Class A Preferred
Stock.
Class B $3.50 Convertible Voting Preferred Stock: In August, 1994, the
------------------------------------------------
Company issued 52,333 shares of Class B $3.50 Convertible Preferred Stock
("Class B Preferred Stock") in connection with the acquisition of Irsco
(See Note E). The holders of Class B Preferred Stock are entitled to
receive dividends only, when and as declared by the Board of Directors of
the Company. Each share of Class B Preferred Stock is convertible,
subject to adjustment, into ten shares of Common Stock. In the event of
any liquidation, the holders of the Class B Preferred Stock are entitled
to receive $3.50 in cash per share plus accumulated and unpaid dividends
out of assets available for distribution to stockholders, prior to any
distribution to holders of Common Stock or any other stock ranking junior
to the Class B Preferred Stock. Each share of Class B Preferred Stock
may be redeemed by the Company, upon 30-days' written notice, at a
redemption price of $3.85 per share. Class B Preferred Stock
stockholders have the right to convert their shares into Common Stock
during this 30-day period.
Shares of Class B Preferred Stock are entitled to one vote each. Shares
of Class B Preferred Stock vote as a single class on all matters
presented to the stockholders for action except as follows: Without the
affirmative vote of the holder of a majority of the Class B Preferred
Stock then outstanding, voting as a separate class, the Company may not
(i) amend, alter or repeal any of the preferences or rights of the Class
B Preferred Stock, (ii) authorize any reclassification of the Class B
Preferred Stock, (iii) increase the authorized number of shares of Class
B Preferred Stock or (iv) create any class or series of shares ranking
prior to the Class B Preferred Stock as to dividends or upon liquidation.
During the fiscal year ended September 30, 1996, 50,000 shares of Class B
stock were converted to 500,000 shares of Common Stock. A total of
23,330 shares of Common Stock are currently issuable upon conversion of
the remaining 2,333 shares of Class B Preferred Stock.
Stock Options and Warrants: Pursuant to the 1992 Stock Option Plan, the
--------------------------
Company may grant qualified or non-qualified options for the purchase of
880,000 shares of Common Stock. The number of shares available upon the
exercise of options granted under the Plan were increased from 480,000 to
880,000 shares. Such increase was approved by the Company's stockholders
at its Annual Meeting in March 1996. Options are granted at prices equal
to the fair market value of the stock on the date the options are
granted. The options generally are exercisable in three equal annual
installments commencing one year from date of grant and expire 10 years
after the date of grant. At the year ended September 30, 1996, there
were 474,975 shares reserved for exercise of options granted, of which
331,463 were exercisable subject to vesting, and 405,025 were available
for grant under such plan.
In addition to options issued pursuant to the Plan, in March 1996, the
board approved the grant of 50,000 non-qualified stock options that vest
over three years to members of the Board and an officer. All of the
options were granted at an exercise price equal to the current market
value. A total of 672,085 options were exercisable at September 30,
1996, subject to vesting restrictions.
The following table summarizes the activity related to the Company's
qualified and nonqualified stock options and warrants issued. The
Company has reserved shares of Common Stock for all options and warrants
outstanding.
Year Ended September 30,
1996 1995
---- ----
Options and warrants outstanding
at beginning of year
($1.00 to $3.75 per share) 2,543,100 1,695,400
Options and warrants granted
($.39 to $2.75 per share) 242,500 694,200
Warrants issued
($.50 to $3.75 per share) 375,900
Options and warrants exercised (207,911) (222,400)
Options and warrants
canceled and expired (270,309)
--------------- --------
2,307,380 2,543,100
============== =========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUMED, INC. AND SUBSIDIARIES
NOTE E-RENTAL PROPERTY (IRSCO)
In August 1994, the Company acquired IRSCO Development Company, Inc.
("IRSCO") whose principal asset was a 6.3 acre industrial park,
consisting of nine buildings comprising a total of 118,270 sq. ft. plus
parking (the "IRSCO Property") located in Irwindale, California,
approximately 18 miles from downtown Los Angeles.
As of April 30, 1996, the IRSCO Property was sold in foreclosure as
mortgages were in default. Neither the Company nor IRSCO received any
cash or other proceeds as a result of such sale. The net fixed assets of
IRSCO, in the amount of $3,587,000 were written off against the total
mortgages payable in the amount of $3,633,000, with the net balance
recorded as a part of the total liability for remaining expenses of
$225,000.
The total costs associated with owning and operating the IRSCO Property,
including debt service, were $128,000 in 1996 and $616,000 in 1995 with
rental proceeds of $99,000 in 1996 and $431,000 in 1995. The
depreciation taken by IRSCO on the IRSCO Property was $49,000 in 1996 and
$197,000 in 1995. At the end of fiscal year 1995, based on impairment
indicators, the Company recorded a write down on the IRSCO Property of
$1.5 million to reduce the carrying value of such property to net
realizable value.
NOTE F-OTHER INFORMATION
Savings and Retirement Plans The Company has a Savings and Retirement
---------------------------
Plan (the "Plan") under which every full-time salaried employee who is 18
years of age or older may contribute up to 15 percent of his or her
annual salary to the Company's Plan. For an employee contribution of up
to but not exceeding 6 percent of the employee's annual salary the
Company will make a matching contribution of $.25 for every $1.00 of the
employee's contribution. The Company's contributions are 100% vested
after 60 months of contributions to the Plan. Benefits are payable under
the Plan upon termination of a participant's employment with the Company
or at retirement. The Plan meets the requirements of Section 401(k) of
the Internal Revenue Code. The Company's matching contribution which was
charged to expense was $8,000 and $7,000 in fiscal 1996 and 1995,
respectively.
NOTE G-CONTINGENCIES
On August 5, 1996, the Company entered into a Memorandum of Understanding
to confirm the material terms of an agreement in principle to settle the
securities class action and derivative litigation filed in the United
States District Court for the Central District of California on behalf of
persons who purchased Common Stock during various time periods spanning
from August 11, 1995 through October 17, 1995, inclusive and derivatively
on behalf of the Company (the "Securities Litigation"). The Securities
Litigation alleged violations of federal and state securities laws by the
Company and certain of its officers and directors. The terms of the
Memorandum of Understanding included cash payments in the total amount of
$1,300,000. Of this amount, $1,000,000 was paid by proceeds from the
Company s insurance coverage. The cash payment has been made into an
escrow account for their benefit. Additionally, the Company will issue
warrants to purchase shares of common stock of the Company having a total
value of $1,524,000, valued under the Black Scholes option pricing
methodology, with an exercise period between three and seven years, and
common stock with a total value of $575,000. The consummation of the
proposed settlement is subject to significant conditions, including
negotiation of definitive settlement agreements and obtaining court
approval after notice to the class members has been given. The Company
will additionally issue warrants to the insurance company to purchase
50,000 shares of common stock of the Company at an exercise price of
$3.00 per share for a period of five years. The Company recorded a
$12,786,000 expense in 1996 related to the proposed settlement. Shares of
Common Stock and Warrants have been reserved for the settlement.
In July 1994, an alleged former associate of the principals of MB, a
company acquired by the Company in March 1994, filed an action against
the Company, its officers and directors and the former principals of MB.
The action was filed in the Los Angeles County Superior Court, seeking
unspecified damages and injunctive relief based on numerous alleged
causes of action, including intentional interference with contract,
intentional interference with prospective economic advantages, and aiding
and abetting breach of fiduciary duties. The Company denied the
allegations, contending that the lawsuit had no merit, however, it was
determined that it was in the Company s interests to settle this matter.
An agreement was reached with the plaintiff whereby the actions have been
dismissed in exchange for a 120-day option to invest in the Detoxahol(TM)
project with a payment to the Company of $650,000. This option was not
exercised and has subsequently expired. The former principals have
agreed to reimburse the Company $115,000 as indemnification for costs
associated with this matter. Additionally, the Company s insurance
carrier has reimbursed the Company $50,000 for such costs. The former
principals of MB have also settled the claims against them and they have
transferred to the plaintiff shares of Common Stock of the Company which
they obtained in March 1994 when the Company acquired MB. The principals
of MB have also asserted antidilution rights under the original
Agreement. They claim they have a right to approximately 65,000 shares
of Common Stock. The Company disputes their claim.
NOTE H-MERCK LICENSE ("Merck")
On September 22, 1995, the Company entered into an agreement with Merck &
Co. (Merck) whereby Merck was granted a perpetual, exclusive license of
the Company's OsteoGram(R) technology and was assigned the Company's
software copyright and OsteoGram(R) trade name. The Company retains the
right to make major enhancements to the technology and to use or license
such enhancements, subject to Merck approval.
Under the license agreement for the first-generation OsteoGram(R), Merck
will pay the Company royalties for each revenue-producing test using the
OsteoGram(R) technology during the years 1996 through 2000. The
royalties will escalate from $2 to $4 per test over that period. These
royalty payments have no maximum amount during 1996 through 1998, but
they are subject to a maximum in the year 1999 equal to the lesser of 10
percent of Merck's total collected revenues in that year or $3 million
and a maximum in the year 2000 equal to the lesser of 10 percent of
Merck's total collected revenues in that year or $4 million. There are
no minimum royalties under the agreement. During the fiscal year ended
September 30, 1996, Merck paid $37,000 for the 18,500 tests performed.
In connection with entering into the Merck License Agreement, the Company
paid $100,000 and issued five year warrants for the purchase of 83,000
shares of the Company's Common Stock at an exercise price of $2.50 per
share to Skeletal Assessment Services Co. ("SASCO") and forgave $30,000
of indebtedness owed to it by SASCO as a modification of payments due to
SASCO for assets the Company purchased from SASCO in 1991 in connection
with the development of the OsteoSystem. In addition, the Company agreed
to pay SASCO, as additional consideration for such modification, eight
percent (8%) of all royalties paid by Merck to the Company under the
Merck License Agreement and extended by five years the term of warrants
to purchase 64,000 shares of the Company's Common Stock at an exercise
price of $2.50 issued to SASCO under the Company's original agreement
with SASCO. Amounts paid were expensed in 1995.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMPUMED, INC.
----------------------------
Registrant
By: /s/ ROD N. RAYNOVICH
---------------------------
Rod N. Raynovich, President
Date: December 18, 1996
-------------------------
In accordance with Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
/s/ ROD N. RAYNOVICH President, Chief Executive December 18, 1996
-----------------------
Rod N. Raynovich Officer and Director
/s/ JAMES LINESCH Vice President,
------------------------ Chief Financial Officer December 18, 1996
James Linesch
Chairman of the Board December , 1996
-----------------------
Robert G. Funari
Director December , 1996
----------------------
Robert B. Goldberg
/s/ JOHN D. MINNICK Director December 18, 1996
----------------------
John D. Minnick
/s/ ROBERT STUCKELMAN Director December 18, 1996
----------------------
Robert Stuckelman
/s/ RUSSELL WALKER Director December 18, 1996
---------------------
Russell Walker
<PAGE>
EXHIBIT INDEX
------------------------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------- --------------------------------------
10.17 Sponsored Research Agreement, effective as of May 1, 1996,
between UMMC and the Company.
10.18 Exclusive License Agreement, effective as of May 1, 1996,
between UMMC and the Company.
10.19 Evaluation and Development Agreement between Varian Associates
and the Company dated December 10, 1996.
10.20 Agreement of Settlement and Mutual General Release dated April
23, 1996 among the Company, Robert Stuckelman, William Barnett,
Allan Gelbard and Barry Silverton.
10.21 Settlement Agreement and General Release, effective September
15, 1996, between the Company and Howard L. Mark, M.D.
10.22 Settlement Agreement and General Release, effective August 1,
19896, between the Company and Mack C. Branigann.
10.23 Commercial Office Lease, dated August 30, 1996, between the
Company and USAA Income Properties III Limited Partnership.
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP
SPONSORED RESEARCH AGREEMENT
----------------------------
This Agreement, effective as of May 1, 1996 (the "Effective Date"), is
between the University of Massachusetts ("Institution"), a public
institution of higher education of the Commonwealth of Massachusetts, and
CompuMed, Inc. ("Sponsor"), a Delaware corporation.
RECITALS
--------
WHEREAS, as of the Effective Date, Sponsor and Institution have
entered into an Exclusive License Agreement (the "License Agreement") with
respect to certain Dual Energy CCD Technology that was invented by Dr.
Andrew Karellas, a faculty member at Institution;
WHEREAS, in connection with the execution of the License Agreement,
Sponsor agreed to fund research with Dr. Andrew Karellas, in the further
development of the licensed CCD Technology; and
WHEREAS, Institution desires to receive such research funds for use by
Dr. Karellas at Institution, on the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, Institution and Sponsor hereby agree as follows:
1. Definitions.
-----------
1.1 "Confidential Information" shall mean any confidential or
------------------------
proprietary information furnished by one party (the "Disclosing Party") to
the other party (the "Receiving Party") in connection with the performance
of the Research Project, provided that such information is specifically
designated as confidential. Such Confidential Information may include,
without limitation, trade secrets, know-how, inventions, technical data or
specifications, testing methods, and research and development activities.
Confidential Information does not include Research Results.
1.2 "Field" shall mean the area of bone densitometry.
-----
1.3 "Inventions" shall mean any potentially patentable invention bad
----------
on the Research Results which is (i) conceived during the Term by employees
of Institution or Sponsor, or both, and (ii) reduced to practice either
during the Term or within a period of six (6) months after the conclusion
of the Term.
1.4 "Patent Rights" shall mean all United States and foreign patent
-------------
applications claiming an Invention, including any divisional, continuation,
continuation-in-part (to the extent that the claims are directed to an
Invention), and foreign equivalents thereof, as well as any patents issued
thereon or reissues thereof "Institution Patent Rights" shall mean Patent
-------------------------
Rights claiming Inventions that are conceived and reduced to practice
solely by employees of Institution, as determined under the patent laws of
the United States, and assigned to Institution. "Joint Patent Rights" shall
-------------------
mean Patent Rights claiming Inventions that are conceived or reduced to
practice jointly by employees of Institution and employees or consultants
of Sponsor, as determined under the patent laws of the United States, and
assigned to Institution or Sponsor.
1.5 "License Agreement" means the Exclusive License Agreement dated
-----------------
as of the date hereof between Sponsor and Institution.
1.6 "Materials" shall mean any tangible biological, chemical, or
---------
physical materials (including prototypes). In the case of biological
materials, the term "Materials" shall also include tangible materials that
are routinely produced through use of the original materials, including,
for example, any progeny derived from a cell line, monoclononal antibodies
produced by hybridoma cells, DNA or RNA replicated from isolated DNA or
RNA, recombinant proteins produced through use of isolated DNA or RNA, and
recombinant proteins isolated from a cell extract or supernatant by
non-proprietary affinity purification methods.
1.7 "Principal Investigator" shall mean an employee of Institution
----------------------
who has primary responsibility for the performance of the Research Project.
The Principal Investigator is identified in Section 2.1. below.
1.8 "Project Materials" shall mean Materials that are discovered or
-----------------
developed in the performance of the Research Project.
1.9 "Proprietary Materials" shall mean any proprietary Materials
---------------------
other than Project Materials that are furnished by one party (the
"Supplier") to the other party (the "Recipient") in connection with the
performance of the Research Project.
1.10 "Research Project" shall mean the research project described on
----------------
Exhibit A ("Description of Research Project"), which Institution agrees to
---------
perform under the terms and conditions of this Agreement.
1.11 "Research Results" shall mean all data, test results, laboratory
----------------
notes, techniques, know-how, and any other research results that are
obtained in the performance of the Research Project. The term "Research
Results" shall not include any Project Materials, patentable inventions,
copyrighted or copyrightable works, trademarks or service marks, or other
intellectual property based on the Research Results. As a matter of policy,
Institution ordinarily will not assert trade secret protection for Research
Results.
1.12 "Technical Representative" shall mean an individual designated by
------------------------
Sponsor as its principal technical representative for consultation and
communications with Institution and the Principal Investigator. The
Technical Representative is identified in Section 2.1. below.
1.13 "Term" shall mean the term of this Agreement as further defined
----
in Section 6.1. below.
2. Performance of Research Project.
-------------------------------
2.1 Principal Investigator and Technical Representative. The
---------------------------------------------------
Principal Investigator shall be Dr. Andrew Karellas. If Dr. Karellas ceases
to serve as Principal Investigator for any reason, Institution will
promptly notify Sponsor, and Institution and Sponsor shall use good faith
efforts to identify a mutually acceptable replacement within sixty (60)
days. If a suitable replacement Principal Investigator cannot be identified
within the sixty-day period, Sponsor shall have right to terminate this
Agreement as provided in Section 6.2. Sponsor shall identify its Technical
Representative within sixty (60) days after the Effective Date. Sponsor may
change its Technical Representative upon thirty (30) days written notice to
Institution.
2.2 Performance of Research Project. Institution shall use reasonable
-------------------------------
efforts to complete the Research Project in accordance with Exhibit A;
---------
however, Institution makes no warranties regarding the completion of the
Research Project or the achievement of any particular results. The
Principal Investigator shall direct the Research Project and shall control
the manner of its performance. The Technical Representative may consult
informally with the Principal Investigator, both in person and by
telephone, regarding the performance of the Research Project. The Technical
Representative shall have reasonable access to Institution facilities where
the Research Project is being conducted, but the exact time and manner of
such access shall be determined by the Principal Investigator.
2.3 Records, Materials, and Reports. The Principal Investigator will
-------------------------------
prepare and maintain records containing all Research Results, including
laboratory notebooks maintained in accordance with customary academic
practice. During the term of this Agreement, and at the convenience of the
Principal Investigator, the Technical Representative shall have reasonable
access to such research records, and the Principal Investigator agrees to
furnish Sponsor, upon request, with reasonable amounts of any Project
Materials, subject to availability. Within ninety (90) days after the
expiration or termination of this Agreement, the Principal Investigator
shall deliver to Sponsor a final report describing all significant Research
Results in reasonable detail; provided, however, that the Principal
Investigator may extend this ninety-day deadline with the consent of
Sponsor, which consent shall not be unreasonably withheld.
3. Contributions of Sponsor.
------------------------
3.1 Contributions to Research Project. Sponsor shall contribute to
---------------------------------
the Research Project the financial support, equipment, personnel,
technology, and other resources listed on Exhibit B ("Sponsor
---------
Contributions"). Sponsor may also furnish Institution and the Principal
Investigator with certain Confidential Information and Proprietary
Materials, which shall remain the property of Sponsor. Institution and the
Principal Investigator reserve the right to refuse to accept any
Confidential Information or Proprietary Materials offered by Sponsor.
3.2 Payments to Institution. In consideration of the performance of
-----------------------
the Research Project, Sponsor shall make advance quarterly payments to
Institution in the amounts listed on Exhibit B ("Sponsor Contributions").
---------
Payments should be made in the name of the "University of Massachusetts"
and sent to the Bursars Office at the Medical Center, with reference to the
Karellas research. If this Agreement is terminated prior to the expiration
of the Term for any reason other than a material breach by Institution (as
described in Section 6.3.) or loss of the Principal Investigator (as
described in Section 6.2), then on the effective date of such termination,
Sponsor shall pay Institution the entire amount of any uncancellable
financial commitments that Institution intended to pay through Sponsor
Contributions, including without limitation (i) salaries for appointed
employees for the remainder of their term of appointment (e.g.,
postdoctoral fellows) and stipends for graduate students and (ii)
Institution expenses previously incurred for equipment, travel, and
associated indirect costs. At the request of Sponsor, within a reasonable
time after the expiration or termination of this Agreement, Institution
shall furnish Sponsor with a final accounting of all expenses incurred in
connection with the Research Project and all funds received from Sponsor
pursuant to this Section 3.2., together with a check payable to Sponsor in
the amount of ally unexpended and uncommitted funds.
3.3 Use of Funds. Institution shall monitor expenditures, in
------------
accordance with its institutional policies, to ensure that the funds
provided by Sponsor are spent in connection with the performance of the
Research Project.
3.4 Ownership of Equipment. Upon termination or expiration of this
----------------------
Agreement, Institution shall retain title to all equipment purchased or
fabricated by Institution with funds provided by Sponsor; provided,
however, that Company shall have title to any prototypes that are listed as
deliverables under Exhibit A. In addition, Sponsor shall retain title to
---------
proprietary equipment and software that Sponsor provides to Institution for
use in the Research Project, which equipment and software will initially be
identified on Exhibit B or later identified in a transmittal letter or
---------
other document that accompanies such equipment and software when delivered
to Institution.
4. Confidential Information; ProPrietary Materials; Publications.
-------------------------------------------------------------
4.1 Confidential Information.
------------------------
(a) Designation. Confidential Information that is disclosed in
-----------
writing shall be marked with a legend indicating its confidential status
(such as "Confidential" or "Proprietary"). Confidential Information that is
disclosed orally or visually shall be documented in a written notice
prepared by the Disclosing Party and delivered to the Receiving Party
within thirty (30) days of the date of disclosure; such notice shall
summarize the Confidential Information disclosed to the Receiving Party and
reference the time and place of disclosure.
(b) Obligations. During the Term and thereafter for a period of
-----------
three (3) years, the Receiving Party shall (i) maintain all Confidential
Information in strict confidence, except that the Receiving Party may
disclose or permit the disclosure of any Confidential information to its
directors, officers, employees, consultants, and advisors who are obligated
to maintain the confidential nature of such Confidential Information and
who need to know such Confidential information for the performance of the
Research Project; (ii) use all Confidential Information solely for the
performance of the Research Project; and (iii) allow its directors,
officers, employees, consultants, and advisors to reproduce the
Confidential Information only to the extent necessary for the performance
of the Research Project, with all such reproductions being considered
Confidential Information.
(c) Exceptions. The obligations of the Receiving Party under
----------
Section 4.1.(b) above shall not apply to the extent that the Receiving
Party can demonstrate that certain Confidential Information (i) was in the
public domain prior to the time of its disclosure under this Agreement;
(ii) entered the public domain after the time of its disclosure under this
Agreement through means other than an unauthorized disclosure resulting
from an act or omission by the Receiving Party; (iii) was independently
developed or discovered by the Receiving Party without use of the
Confidential Information; (iv) is or was disclosed to the Receiving Party
at any time, whether prior to or after the time of its disclosure under
this Agreement, by a third party having no fiduciary relationship with the
Disclosing Party and having no obligation of confidentiality with respect
to such Confidential Information; or (v) is required to be disclosed to
comply with applicable laws or regulations, or with a court or
administrative order, provided that the Disclosing Party receives
reasonable prior written notice of such disclosure.
(d) Ownership and Return. The Receiving Party acknowledges that
--------------------
the Disclosing Party (or any third party entrusting its own information to
the Disclosing Party) claims ownership of its Confidential Information in
the possession of the Receiving Party. Upon the expiration or termination
of this Agreement, and at the request of the Disclosing Party, the
Receiving Party shall return to the Disclosing Party all originals, copies,
and summaries of documents, materials, and other tangible manifestations of
Confidential Information in the possession or control of the Receiving
Party, except that the Receiving Party may retain one copy of the
Confidential Information in the possession of its legal counsel solely for
the purpose of monitoring its obligations under this Agreement.
4.2 Proprietary Materials.
---------------------
(a) Limited Use and Transfer. The Recipient shall use
------------------------
Proprietary Materials only for the performance of the Research Project. The
Recipient shall use the Proprietary Materials only in compliance with all
applicable federal, state, and local laws and regulations. The Recipient
shall not use the Materials in any in vivo experiments on human subjects.
-------
The Recipient shall not transfer any Proprietary Materials to any third
party without the prior written consent of the Supplier.
(b) Warranty Disclaimer. Any Proprietary Materials that are
-------------------
furnished to a party pursuant to this Agreement are provided for
experimental purposes and may have hazardous properties. THE SUPPLIER MAKES
NO REPRESENTATIONS, AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS
OR IMPLIED, With RESPECT TO ANY PROPRIETARY MATERIALS. THERE ARE NO EXPRESS
OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, OR THAT THE USE OF PROPRIETARY MATERIALS WILL NOT INFRINGE ANY
PATENT RIGHTS OR OTHER PROPRIETARY RIGHTS OF A THIRD PARTY.
(c) Ownership and Return. The Recipient acknowledges that the
--------------------
Supplier (or any third party entrusting its Materials to the Supplier)
claims ownership of its Proprietary Materials in the possession of the
Recipient. The Recipient agrees to cause its employees to execute and
deliver any documents of assignment or conveyance to effectuate the
ownership rights of the Supplier in Proprietary Materials. Upon the
expiration or termination of this Agreement, the Recipient shall at the
instruction of Supplier either destroy or return any unused Proprietary
Materials.
4.3 Publications. Institution and its employees will be free to
------------
publicly disclose (through journals, lectures, or otherwise) the Research
Results, provided that the Principal Investigator shall have provided a
copy of the proposed disclosure to Sponsor at least sixty (60) days prior
to the submission of any written or electronic (including LAN, WAN and
Internet) publication (or manuscript for consideration for publication) and
at least thirty (30) days prior to any oral public disclosure (the "Review
Period") to allow Sponsor to determine whether any Invention or its
Confidential Information would be disclosed. The parties expressly agree
that research grant proposals submitted to federal, state, or local
agencies or non-profit organizations shall not be considered a public
disclosure under this Section; however, the University shall use reasonable
efforts to instruct its researchers to avoid disclosing Inventions in such
grant proposals. If Sponsor reasonably determines that the proposed
disclosure would reveal an Invention or Sponsor Confidential Information,
then Sponsor shall notify Institution and the Principal Investigator of
such determination and its basis prior to the expiration of the Review
Period. With respect to disclosure of an Invention, upon receipt of timely
notice by Sponsor, the Principal Investigator agrees to delay submission of
the written publication or presentation of the oral public disclosure until
one of the following events occurs: (i) Sponsor and Institution agree that
no patentable Invention exists; (ii) Institution or Sponsor files a patent
application claiming the relevant Invention pursuant to Article 5; (iii)
Sponsor, Institution, and Principal Investigator jointly agree upon
deletions that prevent disclosure of any Invention; or (iv) a period of
sixty (60) days elapses commencing with the effective date of notice to
Institution. With respect to disclosure of Sponsor Confidential
Information, upon receipt of timely notice by Sponsor, the Principal
Investigator agrees to delete such information from any proposed
disclosure.
5. Intellectual Property.
---------------------
5.1 Assignment of Rights in Inventions and Project Materials. The
--------------------------------------------------------
Principal Investigator agrees to assign all rights in any Invention and all
commercial rights in any Project Material to Institution. The Principal
Investigator shall cause every person who may be involved in the Research
Project to sign the University Participation Agreement, which assigns all
rights in Inventions to Institution. Sponsor represents and warrants that
all of its employees and consultants who may be involved in the Research
Project shall have agreed to assign to Sponsor all rights in Inventions and
all commercial rights in Project Materials.
5.2 Ownership of Patent Rights and Project Materials. In accordance
------------------------------------------------
with United States patent law, Institution shall have sole ownership of all
Institution Patent Rights and Institution and Sponsor shall have joint,
undivided ownership of all Joint Patent Rights. Institution shall have sole
ownership of commercial rights in all Project Materials not claimed in the
Patent Rights; however, if a Project Material incorporates one or more
Sponsor Proprietary Materials, University may not exploit commercial rights
in that Project Material without the written consent of Sponsor.
5.3 Notice of Inventions and Project Materials. The Principal
------------------------------------------
Investigator shall promptly disclose to Institution the conception or
reduction to practice of any Invention and the development or discovery of
any commercially valuable Project Material that is not otherwise disclosed
as an Invention. Institution and Sponsor shall provide prompt written
notice to the other of the internal disclosure by its employees of any
Invention. Institution and Sponsor shall discuss whether to obtain Patent
Rights for the Invention and whether such Patent Rights would constitute
Institution Patent Rights or Joint Patent Rights. Institution shall provide
prompt written notice to Sponsor of the internal disclosure of any
commercially valuable Project Material that is not otherwise disclosed as
an Invention.
5.4 Responsibility for Patent Rights.
--------------------------------
(a) Primary Responsibility with Institution. Institution shall
---------------------------------------
have primary responsibility, at the expense of Sponsor, for the
preparation, filing, prosecution, and maintenance of all Institution Patent
Rights and Joint Patent Rights, using patent counsel reasonably acceptable
to Sponsor. Institution shall consult with Sponsor as to the preparation,
filing, prosecution, and maintenance of all such Patent Rights reasonably
prior to any deadline or action with the U.S. Patent & Trademark Office or
any foreign patent office and shall furnish Sponsor with copies of all
relevant documents reasonably in advance of such consultation. Institution
shall use reasonable efforts to ensure that patent applications filed under
this Subsection are prepared in a manner that, assuming the exercise of the
Option Right and subsequent execution of a license agreement, gives Sponsor
the greatest possible degree of exclusivity in the Field.
(b) Abandonment. In the event that Institution desires to
-----------
abandon any patent or patent application within the Patent Rights, or if
Institution declines to assume responsibility for obtaining patent
protection for any Invention, Institution shall provide Sponsor with
reasonable prior written notice of such intended abandonment or decline of
responsibility, and Sponsor shall have the right, at its expense, to
prepare, file, prosecute, and maintain the relevant Patent Rights.
(c) Cooperation. Institution and Sponsor shall cooperate fully
-----------
in the preparation, filing, prosecution, and maintenance of all Institution
Patent Rights and Joint Patent Rights. Such cooperation includes, without
limitation, (i) promptly executing all papers and instruments or requiring
employees of institution or Sponsor to execute such papers and instruments
as reasonable and appropriate so as to enable Institution or Sponsor to
file, prosecute, and maintain such Patent Rights in any country; and (ii)
promptly informing the other party of matters that may affect the
preparation, filing, prosecution, or maintenance of any such Patent Rights.
(d) Payment of Expenses. Within thirty (30) days after
-------------------
Institution invoices Sponsor, Sponsor shall reimburse Institution for all
reasonable patent-related expenses incurred by Institution pursuant to
Section 5.4.(a). Institution shall have no obligation to reimburse Sponsor
for expenses incurred by Sponsor pursuant to Section 5.4.(b). Sponsor may
elect, upon sixty (60) days written notice to Institution, to cease payment
of the expenses associated with obtaining or maintaining patent protection
for one or more Patent Rights in one or more countries. In such event,
Sponsor shall lose all rights under this Agreement with respect to such
Patent Rights in such countries.
5.5 Option for Exclusive License. Subject to the rights previously
----------------------------
granted by University to Sponsor, Lunar Corporation, and Hologic, Inc.
pursuant to the tri-exclusive license arrangement set forth in the License
Agreement, as such rights relate to U.S. Patents No. 5,465,284 and
5,150,394 entitled "System for Quantitative Radiographic Imaging" and any
divisional, continuation, continuation-in-party, reissue, extension, or
foreign counterpart of either such patent, Institution hereby grants
Sponsor a first option to obtain a worldwide, royalty-bearing, exclusive
license (with the right to sublicense) under its commercial rights in any
Institution Patent Rights, Joint Patent Rights, and commercially valuable
Project Materials in the Field (the "Option Right"). Sponsor may exercise
the Option Right with respect to a particular Patent Right or Project
Material by written notice to Institution which is received not later than
sixty (60) days after the disclosure to Sponsor of the relevant Invention
or Project Material (the "Option Period"). If Sponsor elects not to
exercise the Option Right, or fails to exercise the Option Right during the
Option Period, Institution shall be free to license its commercial rights
under the relevant Patent Right or Project Material to any third party. If
Sponsor does elect to exercise the Option Right, Institution and Sponsor
shall negotiate in good faith a license agreement containing commercially
reasonable terms and conditions, including a royalty rate in the range of
three percent (3%) to six percent (6%). If Institution and Sponsor are
unable to reach agreement within six (6) months after Sponsor exercised the
Option Right (the "Negotiation Period"), Institution may offer its
commercial rights in the relevant Patent Right or Project Material to any
third parties; provided, however, that for a period of one (1) year after
the Negotiation Period expires, Institution may only offer such rights to
third parties on terms and conditions that are not more favorable than the
last offer made by Institution to Sponsor, unless Institution first
provides Sponsor with written notice of the more favorable offer and
Sponsor either (i) declines in writing to accept the offer or (ii) fails to
respond to the offer within thirty (30) days after receiving such notice.
5.6 Use of Research Results and Project Materials. Each party shall
---------------------------------------------
have the unrestricted right to use Research Results for any purpose and to
use Project Materials for internal research (but not in a commercial
product or in connection with a commercial service); provided, however,
that in the case of Sponsor, such use does not infringe any claim of a
patent application or an issued patent included in the Institution Patent
Rights for which Sponsor has failed to obtain a license as provided in
Section 5.5. above.
5.7 Copyrightable Works. Institution or its employees shall have sole
-------------------
ownership of any copyrighted or copyrightable words (including reports and
publications) that are created by Institution employees in the performance
of the Research Project. Institution and the Principal Investigator hereby
grant Sponsor an irrevocable, royalty-free, nontransferable, non-exclusive
right to copy and distribute any research reports furnished to Sponsor
under this Agreement and to prepare, copy, and distribute derivative works
based on these research reports.
6. Term and Termination.
--------------------
6.1 Term. This Agreement shall commence on the Effective Date and
----
shall remain in effect for a period of two (2) years, unless earlier
terminated in accordance with the provisions of this Agreement.
6.2 Loss of Principal Investigator. If the Principal Investigator
------------------------------
leaves Institution or otherwise terminates his involvement in the Research
Project, and if Institution and Sponsor fail to identify a mutually
acceptable substitute as provided in Section 2.1., Sponsor may terminate
this Agreement upon sixty (60) days prior written notice to Institution
with no further obligation to Institution.
6.3 Termination for Default. In the event that either party commits a
-----------------------
material breach of its obligations under this Agreement and fails to cure
that breach within sixty (60) days after receiving written notice thereof,
the other party may terminate this Agreement immediately upon written
notice to the party in breach. If an alleged breach involves nonpayment of
any amounts due Institution under this Agreement, the sixty-day notice
period shall be reduced to a fifteen-day notice period after the first such
breach.
6.4 Force Majeure. Neither party will be responsible for delays
-------------
resulting from causes beyond the reasonable control of such party,
including without limitation fire, explosion, flood, war, strike, or riot,
provided that the nonperforming party uses commercially reasonable efforts
to avoid or remove such causes of nonperformance and continues performance
under this Agreement with reasonable dispatch whenever such causes are
removed.
6.5 Effect of Termination. The following provisions shall survive the
---------------------
expiration or termination of this Agreement: Articles 1, 4, and 7; Sections
2.3. (obligation to deliver final report), 3.2. (obligation to deliver
final accounting), 6.5., 8.2., 8.3., 8.5., 8.14., and 8.15. In addition,
the provisions of Article 5 shall survive termination of this Agreement, as
necessary to effectuate the rights of Sponsor, unless University has
terminated this Agreement because of a material breach by Sponsor pursuant
to Section 6.3.
7. Dispute Resolution.
------------------
7.1 Procedures Mandatory. The parties agree that any dispute arising
--------------------
out of or relating to this Agreement shall be resolved solely by means of
the procedures set forth in this Article, and that such procedures
constitute legally binding obligations that are an essential provision of
this Agreement; provided, however, that all procedures and deadlines
specified in this Article may be modified by written agreement of the
parties. If either party fails to observe the procedures of this Article,
as modified by their written agreement, the other party may bring an action
for specific performance in any court of competent jurisdiction.
7.2 Dispute Resolution Procedures.
-----------------------------
(a) Negotiation. In the event of any dispute arising out of or
-----------
relating to this Agreement, the affected party shall notify the other
party, and the parties shall attempt in good faith to resolve the matter
within ten (10) days after the date such notice is received by the other
party (the "Notice Date"). Any disputes not resolved by good faith
discussions shall be referred to senior executives of each party, who shall
meet at a mutually acceptable time and location within thirty (30) days
after the Notice Date and attempt to negotiate a settlement.
(b) Mediation. If the matter remains unresolved within sixty
---------
(60) days after the Notice Date, or if the senior executives fail to meet
within thirty (30) days after the Notice Date, either party may initiate
mediation upon written notice to the other party, whereupon both parties
shall be obligated to engage in a mediation proceeding under the then
current Center for Public Resources ("CPR") Model Procedure for Mediation
of Business Disputes, except that specific provisions of this Section shall
override inconsistent provisions of the CPR Model Procedure. The mediator
will be selected from the CPR Panels of Neutrals. If the parties cannot
agree upon the selection of a mediator within ninety (90) days after the
Notice Date, then upon the request of either party, the CPR shall appoint
the mediator. The parties shall attempt to resolve the dispute through
mediation until one of the following occurs: (i) the parties reach a
written settlement; (ii) the mediator notifies the parties in writing that
they have reached an impasse; (iii) the parties agree in writing that they
have reached an impasse; or (iv) the parties have not reached a settlement
within one hundred and twenty (120) days after the Notice Date.
(c) Trial Without Jury. If the parties fail to resolve the
------------------
dispute through mediation, or if neither party elects to initiate
mediation, each party shall have the right to pursue any other remedies
legally available to resolve the dispute, provided, however, that the
parties expressly waive any right to a jury trial in any legal proceeding
under this Section.
7.3 Preservation of Rights Pending Resolution.
-----------------------------------------
(a) Performance to Continue. Each party shall continue to
-----------------------
perform its obligations under this Agreement pending final resolution of
any dispute arising out or relating to this Agreement; provided, however,
that a party may suspend performance of its obligations during any period
in which the other party fails or refuses to perform its obligations.
(b) Provisional Remedies. Although the procedures specified in
--------------------
this Article are the sole and exclusive procedures for the resolution of
disputes arising out of relating to this Agreement, either party may seek a
preliminary injunction or other provisional equitable relief if, in its
reasonable judgment, such action is necessary to avoid irreparable harm to
itself or to preserve its rights under this Agreement.
(c) Statute of Limitations. The parties agree that all
----------------------
applicable statutes of limitation and time-based defenses (such as estoppel
and laches) shall be tolled while the procedures set forth in Subsections
7.2.(a) and 7.2(b) are pending. The parties shall take any actions
necessary to effectuate this result.
8. Miscellaneous.
-------------
8.1 Compliance with Law and Policies. Sponsor agrees to comply with
--------------------------------
applicable law and the policies of Institution in the area of technology
transfer, including the Policy on Conflicts of Interest Relating to
Intellectual Property and Commercial Ventures, the Intellectual Property
Policy, and the Policy on Faculty Consulting and Outside Activities, and
shall promptly notify Institution of any violation that Sponsor knows or
has reason to believe has occurred or is likely to occur.
8.2 Indemnification.
---------------
(a) Indemnity. Sponsor shall indemnify, defend, and hold
---------
harmless Institution and its trustees, officers, faculty, students,
employees, and agents and their respective successors, heirs and assigns
(the "Indemnitees"), against any liability, damage, loss, or expense
(including reasonable attorneys fees and expenses of litigation) incurred
by or imposed upon any of the Indemnitee in connection with any claims,
suits, actions, demands or judgments arising out of any theory of liability
(including without limitation actions in the form of tort, warranty, or
strict liability and regardless of whether such action has any factual
basis) arising out of the negligence or willful misconduct of Sponsor in
the performance of its Agreement or concerning any product, process, or
service that is made, used, or sold pursuant to any right or license
granted under this Agreement; provided, however, that such indemnification
shall not apply to any liability, damage, loss, or expense to the extent
directly attributable to (i) the negligent activities or intentional
misconduct of the Indemnitee or (ii) the settlement of a claim, suit,
action, or demand by Indemnitee without the prior written approval of
Sponsor.
(b) Procedures. The Indemnitee agree to provide Sponsor with
----------
prompt written notice of any claim, suit, action, demand, or judgment for
which indemnification is sought under this Agreement. Sponsor agrees, at
its own expense, to provide attorneys reasonably acceptable to Institution
to defend against any such claim. The Indemnitee shall cooperate fully with
Sponsor in such defense and will permit Sponsor to conduct and control such
defense and the disposition of such claim, suit, or action (including all
decisions relative to litigation, appeal, and settlement); provided,
however, that any Indemnitee shall have the right to retain its own
counsel, at the expense of Sponsor, if representation of such Indemnitee by
the counsel retained by Sponsor would be inappropriate because of actual or
potential differences in the interests of such Indemnitee and any other
party represented by such counsel. Sponsor agrees to keep Institution
informed of the progress in the defense and disposition of such claim and
to consult with Institution with regard to any proposed settlement.
8.3 Publicity Restrictions. Sponsor shall not us,e the name of
----------------------
Institution or any of its trustees, officers, faculty, students, employees.
or agents, or any adaptation of such names, or any terms of this Agreement
in any promotional material or other public announcement or disclosure
without the prior written consent of Institution. The foregoing
notwithstanding, Sponsor shall have the right to disclose such information
without the consent of Institution (i) in any prospectus, offering
memorandum, or other document or filing required by applicable securities
laws or other applicable law or regulation, provided that Sponsor shall
have given Institution at least ten (10) days prior written notice of the
proposed text for the purpose of giving University the opportunity to
comment on such text, and (ii) to potential investors under a
non-disclosure obligation.
8.4 Representations and Warranties.
------------------------------
(a) Institution hereby represents that:
(i) It has the full legal power, authority and right to
grant the option to license contained in this Agreement and to
perform its obligations under this Agreement and upon execution
and delivery by Sponsor, this Agreement will constitute valid and
binding agreements of Institution enforceable against it in
accordance with its terms.
(ii) Except as provided in the License Agreement, no other
person or organization presently has any assignment, option or
license of the Inventions in the U.S. or anywhere in the world.
(iii) Execution, delivery and consummation of this
Agreement will not result in the breach of or give rise to cause
for termination of any agreement or contract to which Institution
may be a party. After the date hereof, Institution shall not
enter into any agreement or take or fail to take any action which
shall restrict its legal right to grant to Sponsor the rights and
benefits contemplated under this Agreement.
(b) Sponsor hereby represents that:
(i) It has the full legal power, authority and right to
grant the option to license contained in this Agreement and to
perform its obligations under this Agreement and upon execution
and delivery by Institution, this Agreement will constitute valid
and binding agreements of Sponsor enforceable against it in
accordance with its terms.
(ii) Execution, delivery and consummation of this Agreement
will not result in the breach of or give rise to cause for
termination of any agreement or contract to which Sponsor or its
Affiliates may be a party. Neither Sponsor nor any of its
Affiliates after the date hereof shall enter into any agreement
or take or fail to take any action which shall restrict its legal
right to grant to Institution the rights and benefits
contemplated under this Agreement.
8.5 Warranty Disclaimer. Institution makes no express warranties and
-------------------
disclaims any implied warranties as to any matter relating to this
Agreement, including without limitation the performance or result of the
Research Project; the availability of legal protection for any Research
Results; Project Materials, Inventions, copyrightable works, or any other
work product of the Research Project; or the validity or enforceability of
any Patent Right that may be obtained pursuant to this Agreement. THERE ARE
NO EXPRESS OR IMPLIED WARRANTS OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE FOR ANY PROJECT MATERIALS OR RESEARCH RESULTS, OR THAT
THE USE OF PROJECT MATERIALS OR RESEARCH RESULTS WILL NOT ~FRINGE ANY
PATENT RIGHTS OR OTHER PROPRIETARY RIGHTS OF A THIRD PARTY. Institution
hereby represents and warrants that its employees are required to assign
their rights in any Inventions to Institution.
8.6 Notice to Other Investigators. The Principal Investigator shall
-----------------------------
furnish all investigators involved in the Research Project, including
faculty, staff, students, and post-doctoral fellows, with written notice of
their obligations under Articles 4 and 5 of this Agreement.
8.7 Research Partially Funded by Grants.
-----------------------------------
(a) Federal Government. To the extent that any Invention has
------------------
been partially funded by the federal government, this Agreement and the
grant of any rights in such Invention is subject to and governed by federal
law as set forth in 35 U.S.C. Sections 201-211, and the regulations
promulgated thereunder, as amended, or any successor statutes or
regulations. If any term of this Agreement fails to conform with such
laws and regulations, the relevant term shall be deemed an invalid
provision and modified by the parties pursuant to Section 8.16.
(b) Other Organizations. To the extent that any Invention has
-------------------
been partially funded by a non-profit organization or state or local
agency, this Agreement and the grant of any rights in such Invention is
subject to and governed by the terms and conditions of the applicable
research grant. If any term of this Agreement fails to conform with such
terms and conditions, the relevant term shall be deemed an invalid
provision and modified by the parties pursuant to Section 8.16. At the
request of Sponsor, Institution shall make available to Sponsor the terms
and conditions of any research grants that will partially fund the Research
Project.
(c) Notification. University shall notify Sponsor prior to
------------
accepting such third party funding. If Sponsor objects to use of such funds
in the Research Agreement, Sponsor may either (i) amend Exhibit B to
---------
substitute Sponsor funds for the proposed third-party funding, in. which
case Institution will decline to accept the third-party funding, or (ii)
terminate this Agreement effective as of the date the University receives
such third-party funding.
8.8 Tax-Exempt Status. Sponsor acknowledges that Institution, as a
-----------------
public institution of the Commonwealth of Massachusetts, holds the status
of an exempt organization under the United States Internal Revenue Code.
Sponsor also acknowledges that certain facilities in which the Research
Project may be performed were financed through offerings of tax-exempt
bonds. If the Internal Revenue Service determines, of if counsel to
Institution reasonably determines, that any term of this Agreement
jeopardizes the tax-exempt status of Institution or the bonds used to
finance Institution facilities, the relevant term shall be deemed an
invalid provision and modified by the parties pursuant to Section 8.16.
8.9 Relationship of Parties. For the purposes of this Agreement,
-----------------------
each party is an independent contractor and not an agent or employee of the
other party. Neither party shall have authority to make any statements,
representations, or commitments of any kind, or to take any action which
shall be binding on the other party, except as may be explicitly provided
for in this Agreement or authorized in writing by the other party.
8.10 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, and all of which
together shall be deemed to be one and the same instrument.
8.11 Headings. All headings are for convenience only and shall not
--------
affect the meaning of any provision of this Agreement.
8.12 Binding Effect. This Agreement shall be binding upon and inure to
--------------
the benefit of the parties and their respective permitted successors and
assigns.
8.13 Assignment. This Agreement may not be assigned by either party
----------
without the prior written consent of the other party, except that Sponsor
may assign this Agreement to an affiliate or to a successor in connection
with the merger, consolidation, or sale of all or substantially all of its
assets or that portion of its business to which this Agreement relates.
8.14 Amendment and Waiver. This Agreement may be amended,
--------------------
supplemented, or otherwise modified only by means of a written instrument
signed by both parties. Any waiver of any rights or failure to act in a
specific instance shall relate only to such instance and shall not be
construed as an agreement to waive any rights or fail to act in any other
instance, whether or not similar.
8.15 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the Commonwealth of Massachusetts
irrespective of any conflicts of law principles.
8.16 Notice. Any notices required or permitted under this Agreement
------
shall be in writing, shall specifically refer to this Agreement, and shall
be sent by hand, recognized national overnight courier, confirmed facsimile
transmission, confirmed electronic mail, or registered or certified mail,
postage prepaid, return receipt requested, to the following addresses or
facsimile numbers of the parties:
If to Institution:
Office of Commercial Ventures and Intellectual Property
University of Massachusetts
55 Lake Avenue North
Worcester, MA 01605
Attention: Joseph F.X. McGuirl
Executive Director
Tel: (508) 856-1626
Fax: (508) 856-5004
If to Sponsor:
CompuMed Inc.
1230 Rosecrans Avenue, Suite 1000
Manhattan Beach, CA 90266
Attention: President
Tel: (310) 643-5106
Fax: (310) 536-6128
All notices under this Agreement shall be deemed effective upon receipt. A
party may change its contact information immediately upon written notice to
the other party in the manner provided in this Section.
8.17 Severability. In the event that any provision of this Agreement
------------
shall be held invalid or unenforceable for any reason, such invalidity or
unenforceability shall not affect any other provision of this Agreement,
and the parties shall negotiate in good faith to modify the Agreement to
preserve (to the extent possible) their original intent If the parties fail
to reach a modified agreement within sixty (60) days after the relevant
provision is held invalid or unenforceable, then the dispute shall be
resolved in accordance with the procedures set forth in Article 7. While
the dispute is pending resolution, this Agreement shall be construed as if
such provision were deleted by agreement of the parties.
8.18 Entire Agreement. Except for the License Agreement, this
----------------
Agreement constitutes the entire agreement between the parties with respect
to its subject matter and supersedes all prior agreements or understandings
between the parties relating to its subject matter.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives as of the date first
written above.
UNIVERSITY OF MASSACHUSETTS COMPUMED INC.
By:/s/ Joseph F.X. McGuirl By: /s/ Rod N. Raynovich
------------------------- -----------------------
Joseph F.X. McGuirl Rod N. Raynovich
Executive Director, CVIP President and Chief
Executive Officer
I hereby acknowledge and agree to the terms of Articles 4 and 5 and
Sections 2.2., 2.3., and 8.5. of this Agreement, and I reaffirm that I will
assign to Institution all of my right, title, and interest in any
Inventions.
ACKNOWLEDGED AND AGREED:
/s/ Dr. Andrew Karellas
------------------------
Dr. Andrew Karellas
Principal Investigator
<PAGE>
EXHIBIT A
Description of Research Project
-------------------------------
The objective of the sponsored research agreement with Dr. Andrew Karellas
is to conceptualize and develop a prototype device which will perform,
through digital radiography, a bone density measurement on the hands or
feet. Initially, this will require a review of the literature and the
capabilities provided by various component vendors in order to optimize the
performance and ensure that state-of-the-art technology is being utilized
in the final decision. After consideration of these technological
alternatives, including their cost-effectiveness, accuracy, and patient
radiation exposure levels, and establishment of design goals and
specifications for the device, a suitable tested or prototype will be
constructed jointly.
The potential application of two designs will be carefully considered. The
first and most preferred approach will be the use of a fiberoptic element
with a CCD. Careful calculations will be conducted in order to arrive at
the proper field of view coverage and adequate spatial resolution and
contrast. Several types of fiberoptic elements and CCDs will be carefully
considered before proceeding to specify a prototype. The potential of using
a lens-coupled system will also be considered, and the final decision on
lens versus fiberoptic coupling will be made jointly with CompuMed. This
design will take into account the following:
Characterization of the CCD under bone densitometry conditions.
Consultation with CompuMed about optimal x-ray spectrum and
infiltration.
Selection of the appropriate x-ray phosphor.
Measurement of the radiation dose required for adequate signal levels
and comparison with the current technique now used by CompuMed.
Evaluation of the relative merits between lens-based versus
fiberoptically-coupled CCD.
Alternatives to CCD, such as amorphous selenium and other digital
detectors.
Characterization of the response of the CCD as a function of x-ray
exposure.
Assessment of spatial resolution and decision on the optimal
resolution.
Measurement of the reproducibility in phantoms.
Other measurement as requested by CompuMed provided they are within
our capabilities.
<PAGE>
EXHIBIT B
Sponsor Contributions
---------------------
Financial Contributions
-----------------------
Year One: $100,000
Year Two: $50,000
These amounts shall be paid in equal quarterly installments in each year.
These amounts include indirect costs at 57% of direct costs.
These amounts will be spent in accordance with budgets agreed upon from
time to time between the Principal Investigator and Company.
Initial Equipment and Software on Loan
--------------------------------------
"Osteogram" software that was developed by, and is proprietary to, Sponsor
No equipment is loaned as of the Effective Date.
EXCLUSIVE LICENSE AGREEMENT
---------------------------
This Agreement, effective as of May 1, 1996 (the "Effective
Date"), is between the University of Massachusetts
("University"), a public institution of higher education of the
Commonwealth of Massachusetts, and CompuMed, Inc. ("Company"), a
Delaware corporation.
R E C I T A L S
----------------
WHEREAS, University is the owner by assignment of certain
issued United States patents claiming an invention in the field
of quantitative radiographic imaging which was developed by Dr.
Andrew Karellas, a faculty member at the University;
WHEREAS, Company desires to obtain a license under this
invention, together with up to two additional licensees; and
WHEREAS, University is willing to grant such a license on
the terms and conditions set forth in this Agreement.
NOW, THEREFORE, University and Company hereby agree as
follows:
1. Definitions.
-----------
1.1 "Affiliate" shall mean any legal entity (such as a
---------
corporation, partnership, or limited liability company) that is
controlled by Company. For the purposes of this definition, the
term "control" means (i) beneficial ownership of at least fifty
percent (50%) of the voting securities of a corporation or other
business organization with voting securities or (ii) a fifty
percent (50%) or greater interest in the net assets or profits of
a partnership or other business organization without voting
securities.
1.2 "Confidential Information" shall mean any confidential
------------------------
or proprietary information furnished by one party (the
"Disclosing Party") to the other party (the "Receiving Party") in
connection with this Agreement, provided that such information is
specifically designated as confidential. Such Confidential
Information shall include, without limitation, any diligence
reports furnished to University under Section 3.1. and royalty
reports furnished to University under Section 5.2.
1.3 "Field" shall mean the area of bone densitometry.
-----
1.4 "Licensed Product" shall mean the osteosystems device
----------------
component of any product, but only if such component cannot be
developed, manufactured, used, or sold without infringing one or
more Valid Claims under the Patent Rights.
<PAGE>
1.5 "Licensed Service" shall mean any service that cannot
----------------
be developed or performed without using at least one process that
infringes one or more Valid Claims under the Patent Rights.
1.6 "Net Sales" shall mean the gross amount billed or
---------
invoiced on sales by Company and its Affiliates and Sublicensees
of Licensed Products and Licensed Services, less the following:
(i) customary trade, quantity, or cash discounts and commissions
to non-affiliated brokers or agents to the extent actually
allowed and taken; (ii) amounts repaid or credited by reason of
rejection or return, recalls, or retroactive price reductions for
any amounts not collected; (iii) any taxes or other governmental
charges levied on the production, sale, transportation, delivery,
or use of a Licensed Product or Licensed Service which is paid by
or on behalf of Company; and (iv) outbound transportation costs
prepaid or allowed and costs of insurance in transit.
In any transfers of Licensed Products between Company and an
Affiliate or Sublicensee, Net Sales shall be calculated based on
the final sale of the Licensed Product to an independent third
party. In the event that Company or an Affiliate or Sublicensee
receives non-monetary consideration for any Licensed Products or
Licensed Services, Net Sales shall be calculated based on the
fair market value of such consideration. In the event that
Company or its Affiliates or Sublicensees use or dispose of a
Licensed Product in the provision of a commercial service other
than a Licensed Service, the Licensed Product shall be considered
sold and the Net Sales shall be calculated based on the sales
price of the Licensed Product to an independent third party
during the same Royalty Period or, in the absence of such sales,
on the fair market value of the Licensed Product as determined by
the parties in good faith.
1.7 "Patent Rights" shall mean the U.S. patent applications
-------------
listed on Exhibit A, and any divisional, continuation, or
---------
continuation-in-part of such patent applications to the extent
the claims are directed to subject matter specifically described
therein, as well as any patent issued thereon and any reissue or
extension of such patent, and any foreign counterparts to such
patents and patent applications. Exhibit A shall be periodically
---------
amended to include any additional Patent Rights that may arise.
1.8 "Royalty Period" shall mean the partial calendar
--------------
quarter commencing on the date on which the first Licensed
Product is sold or used or the first Licensed Service is
performed and every complete or partial calendar quarter
thereafter during which either (i) this Agreement remains in
effect or (ii) Company has the right to complete and sell
work-in-progress and inventory of Licensed Products pursuant to
Section 8.5.
1.9 "Sublicensee" shall mean any permitted sublicensee of
-----------
the rights granted Company under this Agreement, as further
described in Section 2.2.
1.10 "Term" shall mean the term of this Agreement as further
----
defined in Section 8.1. below.
1.11 "Sponsored Research Agreement" shall mean the Sponsored
----------------------------
Research Agreement dated the date hereof between Company and
University.
1.12 "Technical Information" shall mean University's
---------------------
proprietary, technical information pertinent to the manufacture,
use or sale of Licensed Products under Patent Rights including
trade secrets, know-how, techniques, specifications and
procedures now in existence.
1.13 "Valid Claim" shall mean any claim that has not been
-----------
held invalid or unenforceable by a court of competent
jurisdiction.
2. Grant of Rights.
---------------
2.1 License Grant.
-------------
(a) Tri-Exclusive License. Subject to the terms of
---------------------
this Agreement, University hereby grants to Company and its
Affiliates a worldwide, royalty-bearing license (with the right
to sublicense) under its rights in the Patent Rights to develop,
make, have made, use, and sell Licensed Products and to develop
and perform Licensed Services in the Field. University shall
have the right at any time within sixty (60) days of the
Effective Date, to grant licenses under the Patent Rights to two
(2) additional companies University shall notify Company of the
grant of such licenses and shall identify the licensees, but
shall not be required to disclose any terms of such licenses.
Subject only to the possible grant of license rights to two
additional companies hereunder, the license granted hereunder is
and shall remain exclusive.
(b) Exclusive License. In the event that University
-----------------
fails to grant any additional licenses under the Patent Rights
within sixty (60) days after the Effective Date, the license
grant set forth in this Section 2.1. shall be exclusive to
Company, and certain terms of this Agreement shall be modified as
follows: (i) the license initiation fee set forth in Section
4.1. below shall be increased to sixty thousand dollars ($60,000)
and (ii) the royalty rate set forth in Section 4.4. below shall
be increased to six percent (6%) of Net Sales.
(c) Non-Exclusive License Option. University hereby
----------------------------
grants Company a right to negotiate a worldwide, royalty-bearing,
non-exclusive license (without the right to sublicense) under the
Patent Rights to develop, make, have made, use, and sell products
and services for applications with tissues other than bone (the
"Negotiation Right"). The Negotiation Right shall expire if not
exercised within five (5) years after the Effective Date. If
Company elects to exercise the Negotiation Right, University and
Company shall negotiate in good faith a license agreement
containing commercially reasonable terms and conditions. If
University and Company are unable to reach agreement within six
(6) months after Company exercised the Negotiation Right,
University shall have no further obligation under this Section
2.1(c).
2.2 Sublicenses. Company shall have the right to grant
-----------
sublicenses of its rights under Section 2.1. with the consent of
University, which consent shall not be unreasonably withheld or
delayed. All sublicense agreements executed by Company pursuant
to this Article 2 shall expressly bind the Sublicensee to the
terms of this Agreement and shall provide for the automatic
assignment of such agreement to University if this Agreement is
terminated as described in Article 8 below. Company shall
promptly furnish University with a fully executed copy of any
such sublicense agreement.
2.3 Retained Rights.
---------------
(a) University. University retains the right to make
----------
and use Licensed Products and to perform Licensed Services for
academic research and patient care, without payment of
compensation to Company. University may license its retained
rights under this Section to research collaborators of University
faculty members, post-doctoral fellows, and students.
(b) Federal Government. To the extent that any
------------------
invention claimed in the Patent Rights has been partially funded
by the federal government, this Agreement and the grant of any
rights in such Patent Rights are subject to and governed by
federal law as set forth in 35 U.S.C. Sections 201-211, and the
regulations promulgated thereunder, as amended, or any successor
statutes or regulations. Company acknowledges that these
statutes and regulations reserve to the federal government a
royalty-free, non-exclusive, nontransferable license to practice
any government-funded invention claimed in any Patent Rights. If
any term of this Agreement fails to conform with such laws and
regulations, the relevant term shall be deemed an invalid
provision and modified in accordance with Section 10.10.
3. Obligations Relating to Commercialization.
-----------------------------------------
3.1 Diligence Requirements. Company shall use diligent
----------------------
efforts, or shall cause its Affiliates or Sublicensees to use
diligent efforts, to develop Licensed Products or Licensed
Services and to introduce Licensed Products or Licensed Services
into the commercial market; thereafter, Company or its Affiliates
or Sublicensees shall make Licensed Products or Licensed Services
reasonably available to the public. Company shall have
conclusively satisfied its obligations under this Section 3.1. if
Company or an Affiliate or Sublicensee fulfills the following
obligations:
(1) Within six (6) months after the Effective Date,
Company shall furnish University with a written research and
development plan under which Company intends to develop
Licensed Products or Licensed Services.
(2) Within sixty (60) days after each anniversary of
the Effective Date, Company shall furnish University with a
written report on the progress of its efforts during the
prior year to develop and commercialize Licensed Products or
Licensed Services, including without limitation research and
development efforts, efforts to obtain regulatory approval,
marketing efforts, and sales figures. Once a beta prototype
has been produced, the report shall also contain a
discussion of intended efforts and sales projections for the
current year.
(3) Develop prototype bone density system and
demonstrate feasibility by December 31, 1997.
(4) File a 510(k) application for a Licensed Product
with the United States FDA by December 31, 1998.
In the event that University determines that Company (or an
Affiliate or Sublicensee) has not fulfilled its obligations under
this Section 3.1., University shall furnish Company with written
notice of such determination. Within sixty (60) days after
receipt of such notice, Company shall either (i) fulfill the
relevant obligation, (ii) in the case of an obligation that is
not susceptible of prompt fulfillment, commence and continuously
prosecute such fulfillment, or (iii) negotiate with University a
mutually acceptable schedule of revised diligence obligations,
failing which University shall have the right, immediately upon
written notice to Company, to terminate this Agreement or to
render non-exclusive the license granted under this Agreement.
3.2 Indemnification.
---------------
(a) Indemnity. Company shall indemnify, defend, and
---------
hold harmless University and its trustees, officers, faculty,
students, employees, and agents and their respective successors,
heirs and assigns ( the "Indemnitees"), against any liability,
damage, loss, or expense (including reasonable attorneys' fees
and expenses of litigation) incurred by or imposed upon any of
the Indemnitees in connection with any claims, suits, actions,
demands or judgments arising out of any negligence, willful
misconduct, or sale of a defective product or service by the
University under any theory of liability (including without
limitation actions in the form of tort, warranty, or strict
liability and regardless of whether such action has any factual
basis) concerning any product, process, or service that is made,
used, or sold pursuant to any right or license granted under this
Agreement; provided, however, that such indemnification shall not
apply to any liability, damage, loss, or expense to the extent
directly attributable to (i) the negligent activities or
intentional misconduct of the Indemnitees or (ii) the settlement
of a claim, suit, action, or demand by Indemnitees without the
prior written approval of Company.
(b) Procedures. The Indemnitees agree to provide
----------
Company with prompt written notice of any claim, suit, action,
demand, or judgment for which indemnification is sought under
this Agreement. Company agrees, at its own expense, to provide
attorneys reasonably acceptable to University to defend against
any such claim. The Indemnitees shall cooperate fully with
Company in such defense and will permit Indemnitor to conduct and
control such defense and the disposition of such claim, suit, or
action (including all decisions relative to litigation, appeal,
and settlement); provided, however, that any Indemnitee shall
have the right to retain its own counsel, at the expense of
Company, if representation of such Indemnitee by the counsel
retained by Company would be inappropriate because of actual or
potential differences in the interests of such Indemnitee and any
other party represented by such counsel. Company agrees to keep
University informed of the progress in the defense and
disposition of such claim and to consult with University with
regard to any proposed settlement.
(c) Insurance. Company shall, from and after the
---------
first sale of a Licensed Product or a Licensed Service, maintain
insurance or self-insurance that is reasonably adequate to
fulfill any potential obligation to the Indemnitees, but in any
event not less than one million dollars ($1,000,000) for injuries
to any one person arising out of a single occurrence and three
million dollars ($3,000,000) for injuries to all persons arising
out of a single occurrence. Company shall provide University,
upon request, with written evidence of such insurance or
self-insurance. Company shall continue to maintain such
insurance or self-insurance after the expiration or termination
of this Agreement during any period in which Company or any
Affiliate or Sublicensee continues (i) to make, use, or sell a
product that was a Licensed Product under this Agreement or (ii)
to perform a service that was a Licensed Service under this
Agreement, and thereafter for a period of five (5) years.
3.3 Use of University Name. In accordance with Section
----------------------
7.3., Company and its Affiliates and Sublicensees shall not use
the name "University of Massachusetts" or any variation of that
name in connection with the marketing or sale of any Licensed
Products or Licensed Services.
3.4 Marking of Licensed Products. To the extent
----------------------------
commercially feasible and consistent with prevailing business
practices, Company shall mark, and shall cause its Affiliates and
Sublicensees to mark, all Licensed Products that are manufactured
or sold under this Agreement with the number of each issued
patent under the Patent Rights that applies to such Licensed
Product.
3.5 Compliance with Law. Company shall comply with, and
-------------------
shall ensure that its Affiliates and Sublicensees comply with,
all local, state, federal, and international laws and regulations
relating to the development, manufacture, use, and sale of
Licensed Products and Licensed Services. Company expressly
agrees to comply with the following:
(i) Company or its Affiliates or Sublicensees shall
obtain all necessary approvals from the United States Food &
Drug Administration and any similar governmental authorities
of any foreign jurisdiction in which Company or an Affiliate
or Sublicensee intends to make, use, or sell Licensed
Products or to perform Licensed Services.
(ii) Company and its Affiliates and Sublicensees shall
comply with all United States laws and regulations
controlling the export of certain commodities and technical
data, including without limitation all Export Administration
Regulations of the United States Department of Commerce.
Among other things, these laws and regulations prohibit, or
require a license for, the export of certain types of
commodities and technical data to specified countries.
Company hereby gives written assurance that it will comply
with, and will cause its Affiliates and Sublicensees to
comply with, all United States export control laws and
regulations, that it bears sole responsibility for any
violation of such laws and regulations by itself or its
Affiliates or Sublicensees, and that it will indemnify,
defend, and hold University harmless (in accordance with
Section 3.2.) for the consequences of any such violation.
(iii) To the extent that any invention claimed in
the Patent Rights has been partially funded by the United
States government, and only to the extent required by
applicable laws and regulations, Company agrees that any
Licensed Products used or sold in the United States will be
manufactured substantially in the United States or its
territories. Current law provides that if domestic
manufacture is not commercially feasible under the
circumstances, University may seek a waiver of this
requirement from the relevant federal agency on behalf of
Company.
3.6 Cooperation. University shall provide reasonable
-----------
technical cooperation in assisting Company in its
commercialization efforts, including without limitation by making
its Technical Information available to Company from time to time
upon Company's request.
4. Consideration for Grant of Rights.
---------------------------------
4.1 License Fee. In partial consideration of the rights
-----------
granted Company under this Agreement, Company shall pay to
University, within thirty (30) days after the Effective Date, the
following license fee payments: (i) a license initiation fee of
twenty-five thousand dollars ($25,000) and (ii) a payment
reimbursing University for patent-related expenses incurred as of
the Effective Date, which amount shall be pro-rated among each
licensee of the Patent Rights. These license fee payments are
nonrefundable and are not creditable against any other payments
due to University under this Agreement.
4.2 License Maintenance Fee. Company shall pay to
-----------------------
University an annual license maintenance fee in the amount of ten
thousand dollars ($10,000) on the second, third, fourth, and
fifth anniversaries of the Effective Date. This annual license
maintenance fee is nonrefundable and is not creditable against
any other payments due to University under this Agreement.
4.3 Milestone Payments. Company shall pay University the
------------------
following milestone payments within thirty (30) days after the
occurrence of each event:
$75,000 installation of a beta test site
$100,000 first commercial sale of FDA-approved product
These milestone payments are nonrefundable and are not creditable
against any other payments due to University under this
Agreement.
4.4 Royalties.
----------
(a) Base Royalty. In partial consideration of the
------------
rights granted Company under this Agreement, Company shall pay to
University a royalty of five percent (5%) of Net Sales of
Licensed Products and Licensed Services by Company and its
Affiliates and Sublicensees. In the event that Company is
legally required to make royalty payments to one or more third
parties in order to make, use, or sell Licensed Products or to
perform Licensed Services, the royalty rate set forth above shall
be reduced to three percent (3%) on Net Sales of such Licensed
Products and Licensed Services.
(b) No Multiple Royalties. No multiple royalties
---------------------
shall be payable because a particular Licensed Product or its
manufacture, use, or sale are or shall be covered by more than
one patent application or patent included within the Patent
Rights; however, a separate royalty shall be payable on the
performance of a Licensed Service and on the sale of a Licensed
Product which is used to perform that Licensed Service.
4.5 Minimum Royalty. In each calendar year during the
---------------
Term, commencing with the fourth anniversary of the Effective
Date, University shall receive a minimum royalty payment in the
amount of fifteen thousand dollars ($15,000) per year. If the
actual royalty payments to University in any calendar year are
less than the minimum royalty payment required for that year,
Company shall have the right to pay University the difference
between the actual royalty payment and the minimum royalty
payment in full satisfaction of its obligations under this
Section, and shall pay this amount to University within sixty
(60) days after the conclusion of the calendar year. Waiver of
any minimum royalty payment by University shall not be construed
as a waiver of any subsequent minimum royalty payment. If
Company fails to make any minimum royalty payment within the
sixty-day period, such failure shall constitute a material breach
of its obligations under this Agreement, and University shall
have the right to terminate this Agreement in accordance with
Section 8.3.
5. Royalty Reports; Payments; Records.
----------------------------------
5.1 First Sale. Company shall report to University the
----------
date of first commercial sale of each Licensed Product and the
date of first commercial performance of each Licensed Service
within thirty (30) days of occurrence in each country.
5.2 Reports and Payments. Within sixty (60) days after the
--------------------
conclusion of each Royalty Period, Company shall deliver to
University a report containing the following information:
(i) the number of Licensed Products sold to
independent third parties in each country, and the number of
Licensed Products used by Company and its Affiliates and
Subleases in the provision of Licensed Services and other
services in each country;
(ii) the number of Licensed Services provided by
Company and its Affiliates and Sublicensees in each country;
(iii) the gross sales price for each Licensed
Product and the gross charge for each Licensed Service by
Company and its Affiliates and Sublicensees during the
applicable Royalty Period in each country;
(iv) calculation of Net Sales for the applicable
Royalty Period in each country, including a listing of
applicable deductions;
(v) total royalty payable on Net Sales in U.S.
dollars, together with the exchange rates used for
conversion; and
(vi) withholding taxes, if any, required by law to be
deducted as a payment by University in respect of such Net
Sales.
All such reports shall be considered Company Confidential
Information. If no royalties are due to University for any
Royalty Period, the report shall so state. Concurrent with this
report, Company shall remit to University any payment due for the
applicable Royalty Period. University shall instruct Company as
to the method of payment.
5.3 Payments in U.S. Dollars. Except as otherwise provided
------------------------
in section 5.4, all payments due under this Agreement shall be
payable in United States dollars. Conversion of foreign currency
to U.S. dollars shall be made at the conversion rate existing in
the United States (as reported in the Wall Street Journal) on the
-------------------
last working day of the calendar quarter preceding the applicable
Royalty Period. Such payments shall be without deduction of
exchange, collection, or other charges.
5.4 Payments in Other Currencies. If by law, regulation,
----------------------------
or fiscal policy of a particular country, conversion into United
States dollars or transfer of funds of a convertible currency to
the United States is restricted or forbidden, Company shall give
University prompt written notice of such restriction, which
notice shall satisfy the sixty-day payment deadline described in
Section 5.2. Company shall pay any amounts due University
through whatever lawful methods University reasonably designates;
provided, however, that if University fails to designate such
payment method within thirty (30) days after University is
notified of the restriction, Company may deposit such payment in
local currency to the credit of University in a recognized
banking institution selected by Company and identified by written
notice to University, and such deposit shall fulfill all
obligations of Company to University with respect to such
payment.
5.5 Records. Company shall maintain, and shall cause its
-------
Affiliates and Sublicensees to maintain, complete and accurate
records of Licensed Products and Licensed Services that are made,
used, sold, or performed under this Agreement and any amounts
payable to University in relation to such Licensed Products and
Licensed Services, which records shall contain sufficient
information to permit University to confirm the accuracy of any
reports delivered to University under Section 2. The relevant
party shall retain such records relating to a given Royalty
Period for at least three (3) years after the conclusion of that
Royalty Period, during which time University shall have the
right, at its expense, to cause its internal accountants or an
independent, certified public accountant to inspect such records
during normal business hours for the sole purpose of verifying
any reports and payments delivered under this Agreement. Such
accountant shall not disclose to University any information other
than information relating to accuracy of reports and payments
delivered under this Agreement. The parties shall reconcile any
underpayment or overpayment within thirty (30) days after the
accountant delivers the results of the audit. In the event that
any audit performed under this Section reveals an underpayment in
excess of ten percent (10%) in any Royalty Period, Company shall
bear the full cost of such audit. University may exercise its
rights under this Section only once every year and only with
reasonable prior notice to Company.
5.6 Late Payments. Any payments by Company that are not
-------------
paid on or before the date such payments are due under this
Agreement shall bear interest, to the extent permitted by law, at
two percentage points above the Prime Rate of interest as
reported in the Wall Street Journal on the date payment is due,
---- --------------
with interest calculated based on the number of days that payment
is delinquent.
6. Patents and Infringement.
------------------------
6.1 Responsibility for Patent Rights. University shall
--------------------------------
have primary responsibility for the preparation, filing,
prosecution, and maintenance of all Patent Rights, using patent
counsel reasonably acceptable to Company. University shall
consult with Company as to the preparation, filing, prosecution,
and maintenance of all such Patent Rights reasonably prior to any
deadline or action with the U.S. Patent & Trademark Office or any
foreign patent office and shall furnish Company with copies of
all relevant documents reasonably in advance of such
consultation.
6.2 Payment of Expenses. Within thirty (30) days after
-------------------
University invoices Company, Company shall reimburse University
for its pro-rata share (determined by the number of licenses of
the Patent Rights) of all reasonable patent-related expenses
incurred by University pursuant to Section 6.1. Company may
credit any such patent-related expenses in excess of twenty-five
thousand dollars ($25,000) per calendar year against royalties
due to University under Section 4.4., provided that in no event
shall the effective royalty rate set forth in Section 4.4. be
reduced below three percent (3%). Unused credits may be carried
over for use in future Royalty Periods. Company may elect, upon
sixty (60) days' written notice to University, to cease payment
of the expenses associated with obtaining or maintaining patent
protection for one or more Patent Rights in one or more
countries. In such event, Company shall lose all rights under
this Agreement with respect to such Patent Rights in such
countries.
6.3 Abandonment. In the event that University desires to
-----------
abandon any patent or patent application within the Patent
Rights, University shall provide each licensee of the relevant
Patents Right with reasonable prior written notice of such
intended abandonment, and such licensees shall have the right, as
they mutually agree and at their own expense, to prepare, file,
prosecute, and maintain the relevant Patent Right.
6.4 Infringement.
------------
(a) Notification of Infringement. Each party agrees
----------------------------
to provide written notice to the other party promptly after
becoming aware of any infringement of the Patent Rights.
(b) Company Right to Prosecute. Company shall have
--------------------------
the right, together with other licensees of the Patent Rights, as
they mutually agree and at their own expense, to prosecute any
third party infringement of the Patent Rights or to defend the
Patent Rights in any declaratory judgment action brought by a
third party which alleges invalidity, unenforceability, or
non-infringement of the Patent Rights. Prior to commencing any
such action, Company shall consult with University and shall
consider the views of University regarding the advisability of
the proposed action and its effect on the public interest.
Company shall not enter into any settlement, consent judgment, or
other voluntary final disposition of any infringement action
under this Subsection without the prior written consent of
University, which consent shall not be unreasonably withheld,
conditioned or delayed. Any recovery obtained in an action under
this Subsection shall be distributed as follows: (i) each party
shall be reimbursed for any expenses incurred in the action, (ii)
as to ordinary damages, Company shall receive an amount equal to
its lost profits or a reasonable royalty on the infringing sales
(whichever measure of damages the court shall have applied), less
a reasonable approximation of the royalties that Company would
have paid to University if Company had sold the infringing
products and services rather than the infringer, and (iii) as to
special or punitive damages, the parties shall share equally in
any award.
(c) University as Indispensable Party. University
---------------------------------
shall permit any action under this Section to be brought in its
name if required by law, provided that Company shall hold
University harmless from, and if necessary indemnify University
against, any costs, expenses, or liability that University may
incur in connection with such action.
(d) University Right to Prosecute. In the event that
-----------------------------
Company fails to initiate an infringement action within a
reasonable time after it first becomes aware of the basis for
such action, or to answer a declaratory judgment action within a
reasonable time after such action is filed, University shall have
the right to prosecute such infringement or answer such
declaratory judgment action, under its sole control and at its
sole expense, and any recovery obtained shall be given to
University.
(e) Cooperation. Each party agrees to cooperate fully
-----------
in any action under this Section 6.4. which is controlled by the
other party, provided that the controlling party reimburses the
cooperating party promptly for any costs and expenses incurred by
the cooperating party in connection with providing such
assistance.
7. Confidential Information; Publications; Publicity.
-------------------------------------------------
7.1 Confidential Information.
------------------------
(a) Destination. Confidential Information that is
-----------
disclosed in writing shall be marked with a legend indicating its
confidential status (such as "Confidential" or "Proprietary").
Confidential Information that is disclosed orally or visually
shall be documented in a written notice prepared by the
Disclosing Party and delivered to the Receiving Party within
thirty (30) days of the date of disclosure; such notice shall
summarize the Confidential Information disclosed to the Receiving
Party and reference the time and place of disclosure.
(b) Obligations. For a period of five (5) years after
-----------
disclosure of any portion of Confidential Information, the
Receiving Party shall (i) maintain such Confidential Information
in strict confidence, except that the Receiving Party may
disclose or permit the disclosure of any Confidential Information
to its directors, officers, employees, consultants, and advisors
who are obligated to maintain the confidential nature of such
Confidential Information and who need to know such Confidential
Information for the purposes of this Agreement; (ii) use such
Confidential Information solely for the purposes of this
Agreement; and (iii) allow its trustees or directors, officers,
employees, consultants, and advisors to reproduce the
Confidential Information only to the extent necessary for the
purposes of this Agreement, with all such reproductions being
considered Confidential Information.
(c) Exceptions. The obligations of the Receiving
----------
Party under Subsection 7.1.(b) above shall not apply to the
extent that the Receiving Party can demonstrate that certain
Confidential Information (i) was in the public domain prior to
the time of its disclosure under this Agreement; (ii) entered the
public domain after the time of its disclosure under this
Agreement through means other than an unauthorized disclosure
resulting from an act or omission by the Receiving Party; (iii)
was independently developed or discovered by the Receiving Party
without use of the Confidential Information; (iv) is or was
disclosed to the Receiving Party at any time, whether prior to or
after the time of its disclosure under this Agreement, by a third
party having no fiduciary relationship with the Disclosing Party
and having no obligation of confidentiality with respect to such
Confidential Information; or (v) is required to be disclosed to
comply with applicable laws or regulations, or with a court or
administrative order, provided that the Disclosing Party receives
reasonable prior written notice of such disclosure.
(d) Ownership and Return. The Receiving Party
--------------------
acknowledges that the Disclosing Party (or any third party
entrusting its own information to the Disclosing Party) claims
ownership of its Confidential Information in the possession of
the Receiving Party. Upon the expiration or termination of this
Agreement, and at the request of the Disclosing Party, the
Receiving Party shall retum to the Disclosing Party all
originals, copies, and summaries of documents, materials, and
other tangible manifestations of Confidential Information in the
possession or control of the Receiving Party, except that the
Receiving Party may retain one copy of the Confidential
Information in the possession of its legal counsel solely for the
purpose of monitoring its obligations under this Agreement
7.2 Publications. University and its employees will be
------------
free to publicly disclose (through journals, lectures, or
otherwise) the results of any research relating to the subject
matter of the Patent Rights, except as otherwise provided by
written agreement between University and Company (such as in a
separate sponsored research agreement).
7.3 Publicity Restrictions. Company shall not use the name
----------------------
of University or any of its trustees, officers, faculty,
students, employees, or agents, or any adaptation of such names,
or any terms of this Agreement, in any promotional material or
other public announcement or disclosure without the prior written
consent of University. The foregoing notwithstanding, Company
shall have the right to disclose such information without the
consent of University (i) in any prospectus, offering memorandum,
or other document or filing required by applicable securities
laws or other applicable law or regulation, provided that Company
shall have given University at least ten (10) days' prior written
notice of the proposed text for the purpose of giving University
the opportunity to comment on such text, and (ii) to potential
investors under a non-disclosure obligation. To the extent
permitted by applicable law, University will not publicly
disclose the terms of this Agreement without the prior written
consent of Company.
8. Term and Termination.
--------------------
8.1 Term. This Agreement shall commence on the Effective
----
Date and shall remain in effect until the expiration of all
issued patents within the Patent Rights, unless earlier
terminated in accordance with the provisions of this Agreement.
8.2 Voluntary Termination by Company. Company shall have
--------------------------------
the right to terminate this Agreement, for any reason, upon
ninety (90) days' prior written notice to University.
8.3 Termination for Default. In the event that either
-----------------------
party commits a material breach of its obligations under this
Agreement and fails to cure that breach within sixty (60) days
after receiving written notice thereof, the other party may
terminate this Agreement immediately upon written notice to the
party in breach. If an alleged breach involves nonpayment of any
amounts due Institution under this Agreement, the sixty-day
notice period shall be reduced to a fifteen-day notice period
after the first such breach.
8.4 Force Majeure. Neither party will be responsible for
-------------
delays resulting from causes beyond the reasonable control of
such party, including without limitation fire, explosion, flood,
war, strike, or riot, provided that the nonperforming party uses
commercially reasonable efforts to avoid or remove such causes of
nonperformance and continues performance under this Agreement
with reasonable dispatch whenever such causes are removed.
8.5 Effect of Termination. The following provisions shall
---------------------
survive the expiration or termination of this Agreement: Articles
1 and 9; Sections 3.2., 3.5., 5.2. (obligation to provide final
report and payment), 5.3., 5.4., 5.5., 5.6., 6.2. (solely with
respect to expenses incurred prior to the expiration or
termination of this Agreement), 7.1., 7.2., 7.3., 8.5., 10.8.,
and 10.9. Upon the early termination of this Agreement, Company
and its Affiliates and Sublicensees may complete and sell any
work-in-progress and inventory of Licensed Products that exist as
of the effective date of termination, provided that (i) Company
is current in payment of all amounts due University under this
Agreement, (ii) Company pays University the applicable royalty on
such sales of Licensed Products in accordance with the terms and
conditions of this Agreement, and (iii) Company and its
Affiliates and Sublicensees shall complete and sell all
work-in-progress and inventory of Licensed Products within twelve
(12) months after the effective date of termination.
9. Dispute Resolution.
------------------
9.1 Procedures Mandatory. The parties agree that any
--------------------
dispute arising out of or relating to this Agreement shall be
resolved solely by means of the procedures set forth in this
Article, and that such procedures constitute legally binding
obligations that are an essential provision of this Agreement;
provided, however, that all procedures and deadlines specified in
this Article may be modified by written agreement of the parties.
If either party fails to observe the procedures of this Article,
as modified by their written agreement, the other party may bring
an action for specific performance in any court of competent
jurisdiction
9.2 Dispute Resolution Procedures.
-----------------------------
(a) Negotiation. In the event of any dispute arising
-----------
out of or relating to this Agreement, the affected party shall
notify the other party, and the parties shall attempt in good
faith to resolve the matter within ten (10) days after the date
of such notice (the "Notice Date"). Any disputes not resolved by
good faith discussions shall be referred to senior executives of
each party, who shall meet at a mutually acceptable time and
location within thirty (30) days after the Notice Date and
attempt to negotiate a settlement.
(b) Mediation. If the matter remains unresolved
---------
within sixty (60) days after the Notice Date, or if the senior
executives fail to meet within thirty (30) days after the Notice
Date, either party may initiate mediation upon written notice to
the other party, whereupon both parties shall be obligated to
engage in a mediation proceeding under the then current Center
for Public Resources ("CPR") Model Procedure for Mediation of
Business Disputes, except that specific provisions of this
Section shall override inconsistent provisions of the CPR Model
Procedure. The mediator will be selected from the CPR Panels of
Neutrals. If the parties cannot agree upon the selection of a
mediator within ninety (90) days after the Notice Date, then upon
the request of either party, the CPR shall appoint the mediator.
The parties shall attempt to resolve the dispute through
mediation until one of the following occurs: (i) the parties
reach a written settlement; (ii) the mediator notifies the
parties in writing that they have reached an impasse; (iii) the
parties agree in writing that they have reached an impasse; or
(iv) the parties have not reached a settlement within one hundred
and twenty (120) days after the Notice Date.
(c) Trial Without Jury. If the parties fail to
------------------
resolve the dispute through mediation, or if neither party elects
to initiate mediation, each party shall have the right to pursue
any other remedies legally available to resolve the dispute,
provided, however, that the parties expressly waive any right to
a jury trial in any legal proceeding under this Section.
9.3 Preservation of Rights Pending Resolution.
-----------------------------------------
(a) Performance to Continue. Each party shall
-----------------------
continue to perform its obligations under this Agreement pending
final resolution of any dispute arising out of or relating to
this Agreement; provided, however, that a party may suspend
performance of its obligations during any period in which the
other party fails or refuses to perform its obligations.
(b) Provisional Remedies. Although the procedures
--------------------
specified in this Article are the sole and exclusive procedures
for the resolution of disputes arising out of or relating to this
Agreement, either party may seek a preliminary injunction or
other provisional equitable relief if, in its reasonable
judgment, such action is necessary to avoid irreparable harm to
itself or to preserve its rights under this Agreement.
(c) Statute of Limitations. The parties agree that
----------------------
all applicable statutes of limitation and time-based defenses
(such as estoppel and laches) shall be tolled while the
procedures set forth in Subsections 9.2.(a) and 9.2(b) are
pending. The parties shall take any actions necessary to
effectuate this result.
10. Miscellaneous.
-------------
10.1 Representations and Warranties of University.
--------------------------------------------
University hereby represents and warrants as follows:
(i) It has the full legal power, authority and right
to grant the license under the Patent Rights contained in
this Agreement and to perform its obligations under this
Agreement and upon execution and delivery by Company, this
Agreement will constitute valid and binding agreements of
University enforceable against it in accordance with its
terms.
(ii) It is the sole owner by assignment of all right,
title and interest in and to the Patent Rights.
(iii) Except for the two other licenses referred to
elsewhere herein, no other person or organization presently
has any assignment, option, or license under the Patent
Rights with respect to the manufacture, use or sale of
Licensed Products or Licensed Services in the Field in the
U.S. or anywhere in the world.
(iv) Execution, delivery and consummation of this
Agreement will not result in the breach of or give rise to
cause for termination of any agreement or contract to which
University may be a party. After the date hereof,
University shall not enter into any agreement or take or
fail to take any action which shall restrict its legal night
to grant to Company the rights and benefits contemplated
under this Agreement. UNIVERSITY MAKES NO OTHER WARRANTIES
CONCERNING THE PATENT RIGHTS, INCLUDING WITHOUT LIMITATION
ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE. Specifically, University
makes no warranty or representation (i) regarding the
validity or scope of the Patent Rights, (ii) that the
exportation of the Patent Rights or any Licensed product or
Licensed Service will not infringe any patents or other
intellectual property rights of a third party, and (iii)
that any third party is not currently infringing or will not
infringe the Patent Rights.
10.2 Representations and Warranties of Company. Company
-----------------------------------------
hereby represents and warrants as follows:
(i) It has the full legal power, authority and right
to grant the upon to license contained in this Agreement and
to perform its obligations under this Agreement and upon
execution and delivery by University, this Agreement will
constitute valid and binding agreements of Company
enforceable against it in accordance with its terms.
(ii) Execution, delivery and consummation of this
Agreement will not result in the breach of or give rise to
cause for termination of any agreement or contract to which
Company or its Affiliates may be a party. Neither Company
nor any of its Affiliates after the date hereof shall enter
into any agreement or take or fail to take any action which
shall restrict its legal right to grant to Institution the
rights and benefits contemplated under this Agreement.
10.3 Tax-exempt Status. Company acknowledges that
-----------------
University, as a public institution of the Commonwealth of
Massachusetts, holds the status of an exempt organization under
the United States Internal Revenue Code. Company also
acknowledges that certain facilities in which the licensed
inventions were developed may have been financed through
offerings of tax exempt bonds. If the Internal Revenue Service
determines, or if counsel to University reasonably determines,
that any term of this Agreement jeopardizes the tax-exempt status
of University or the bonds used to finance University facilities,
the relevant term shall be deemed an invalid provision and
modified in accordance with Section 10.10.
10.4 Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall be deemed an original, and
all of which together shall be deemed to be one and the same
instrument.
10.5 Headings. All headings are for convenience only and
--------
shall not affect the meaning of any provision of this Agreement.
10.6 Binding Effect. This Agreement shall be binding upon
--------------
and inure to the benefit of the parties and their respective
permitted successors and assigns.
10.7 Assignment. This Agreement may not be assigned by
----------
either party without the prior written consent of the other
party, except that Company may assign this Agreement to an
affiliate or to a successor in connection with the merger,
consolidation, or sale of all or substantially all of its assets
or that portion of its business to which this Agreement relates.
10.8 Amendment and Waiver. This Agreement may be amended,
--------------------
supplemented, or otherwise modified only by means of a written
instrument signed by both parties. Any waiver of any rights or
failure to act in a specific instance shall relate only to such
instance and shall not be construed as an agreement to waive any
nights or fail to act in any other instance, whether or not
similar.
10.9 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the Commonwealth of
Massachusetts irrespective of any conflicts of law principles.
10.10 Notice. Any notices required or permitted under
------
this Agreement shall be in writing, shall specifically refer to
this Agreement, and shall be sent by hand, recognized national
overnight courier, confirmed facsimile transmission, confirmed
electronic mail, or registered or certified mail, postage
prepaid, return receipt requested, to the following addresses or
facsimile numbers of the companies:
If to University:
Office of Commercial Ventures and Intellectual Property
University of Massachusetts
55 Lake Avenue North
Worcester, MA 01605
Attention: Joseph F.X. McGuirl
Executive Director
Tel: (508) 856-1626
Fax: (508) 856-5004
If to Company:
CompuMed Inc.
1230 Rosecrans Avenue, Suite 1000
Manhattan Beach, CA 90266
Attention: President
Tel: (301) 643-5106
Fax: (301) 536-6128
All notices under this Agreement shall be deemed effective upon
receipt. A party may change its contact information immediately
upon written notice to the other party in the manner provided in
this Section.
10.11 Severability. In the event that any provision of
------------
this Agreement shall be held invalid or unenforceable for any
reason, such invalidity or unenforceability shall not affect any
other provision of this Agreement, and the parties shall
negotiate in good faith to modify the Agreement to preserve (to
the extent possible) their original intent. If the parties fail
to reach a modified agreement within sixty (60) days after the
relevant provision is held invalid or unenforceable, then the
dispute shall be resolved in accordance with the procedures set
forth in Article 9. While the dispute is pending resolution,
this Agreement shall be construed as if such provision were
deleted by agreement of the parties.
10.12 Entire Agreement. This Agreement constitutes the
----------------
entire agreement between the parties with respect to its subject
matter and supersedes all prior agreements or understandings
between the parties relating to its subject matter.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement
to be executed by their duly authorized representatives as of the
date first written above.
UNIVERSITY OF MASSACHUSETTS COMPUMED, INC.
By:/s/ Joseph F.X. McGuirl By: /s/ Rod N. Raynovich
------------------------- ----------------------------
Joseph F.X. McGuirl Rod N. Raynovich
Executive Director, CVIP President and Chief
Executive Officer
<PAGE>
EXHIBIT A
List of Patent Rights
---------------------
Patent Rights
-------------
U.S. Patents No. 5,465,284 and 5,150,394 entitled "System for
Quantitative Radiographic Imaging"
VARIAN ASSOCIATES, INC.
EVALUATION AND DEVELOPMENT AGREEMENT WITH
COMPUMED, INC.
FOR THE AMORPHOUS SILICON IMAGING DEVELOPMENT SYSTEM
This Evaluation and Development Agreement ("Agreement") is entered into on
November 21, 1996 ("Effective Date"), between Varian Associates, Inc.,
through its Imaging Products business, located at 3075 Hansen Way, Palo
Alto, California 94304 (collectively "VARIAN") and CompuMed, Inc. having
its principal place of business at 1230 Rosecrans Avenue, Suite 1000,
Manhattan Beach, CA 90266 ("COMPANY").
WHEREAS, VARIAN is in the business of developing and manufacturing x-ray
imaging systems incorporating a large-area amorphous silicon sensor array
for use primarily in the medical field and has developed an evaluation and
demonstration system currently designated as VIP-540X/ARM;
WHEREAS, COMPANY is a medical systems company and has technical knowledge
and expertise that is valuable in evaluating and testing the performance of
x-ray imaging systems; and
WHEREAS, VARIAN and COMPANY desire to enter into an agreement to evaluate
and test the performance characteristics of the VIP-540X/ARM to further its
development by VARIAN, as well as to allow for interface development by
COMPANY.
NOW, THEREFORE, in consideration of the mutual covenants set forth in this
Agreement, VARIAN and COMPANY agree as follows:
SECTION 1 - DEFINITIONS
-----------------------
1.1 "Imaging System" means VARIAN's prototype large-area amorphous silicon
sensor x-ray imaging development system designated as the VIP-540X/ARM.
1.2 "Clinical Use" means use involving: (i) the direct observation of
patients; (ii) the diagnoses of disease or other conditions in humans or
other animals; or (iii) the cure, mitigation, therapy, treatment, treatment
planning, or prevention of disease in humans or other animals to affect the
structure or function thereof.
1.3 "Non-Commercial Use" means activities by a Party that are unrelated to
the marketing or sale of products or services.
1.4 "Party" and "Parties" mean VARIAN and/or COMPANY, singly or
collectively.
1.5 "Test(s)" and "Testing" means all activities performed by COMPANY, its
agents or third parties, in cooperation with VARIAN under this Agreement
relating to the evaluation, characterization, testing and/or development of
the Imaging System. The Test to be tentatively performed are described in
Exhibit B.
1.6 "Test Results" means all data and information, including, without
limitation, any notes, records, logs, designs, drawings,
methods,procedures, apparatus, hardware and any modification and/or
improvement thereof resulting from or related to the Tests.
SECTION 2 - TERMS AND CONDITIONS
--------------------------------
2.1 Evaluation and Testing
----------------------
VARIAN shall transfer and deliver to COMPANY a total of 1 Imaging System,
as describe in Exhibit A, for the purpose of conducting Tests during the
term of this Agreement. COMPANY will notify VARIAN as to the location(s)
where the Testing of the Imaging System is to be conducted. COMPANY shall
not transfer and/or deliver the Imaging System to a third party without the
prior written approval of VARIAN, and any such transfer must be accompanied
by a written agreement obligating such third party to terms that are
substantially similar to those set forth herein.
VARIAN agrees to maintain the Imaging System in an operable condition by
providing service as needed, to COMPANY during the term of this Agreement
and to support the Testing and evaluation activities being conducted by
COMPANY.
COMPANY shall Test all functions and features of the Imaging System at no
cost to VARIAN, and shall provide the personnel, technical equipment and
resources necessary to generate the Test Results. COMPANY shall not permit
any third party to participate in conducting any of the Tests without the
prior written approval of VARIAN.
COMPANY agrees to provide VARIAN a written report describing the Tests and
summarizing the Test Results, as well as provide evaluations and
conclusions on at least a quarterly calendar basis, and to make
recommendations to modify or improve the Imaging System as it deems
appropriate. VARIAN will review all reports submitted by COMPANY relating
to the Tests and, at its sole discretion, will provide comments thereon.
COMPANY agrees to cooperate with VARIAN in carrying out and evaluating the
Tests and shall comply fully with the terms of this Agreement. VARIAN and
COMPANY will meet on a "as needed" basis.
SECTION 3 - CONFIDENTIALITY
---------------------------
3.1 Confidentiality
---------------
The Imaging System and Test Results shall be considered the confidential
and proprietary property of VARIAN. COMPANY agrees to treat the Imaging
System and Test Results as confidential under this Agreement and to protect
the Imaging System and Test Results against public disclosure to the same
extent that it protects its own proprietary information of like nature.
COMPANY may use Test Results only for purposes of analyzing and processing
the performance characteristics of the Imaging System, and shall not
publish, sell, or make available the Test Results, or any portion thereof,
without first obtaining the express written permission of VARIAN. Any
transfer of the Imaging System by Company to a third party shall require
the express assumption of the obligations of this Section 3 by such third
party.
3.2 Exclusions
----------
The provisions of confidentiality of this Section shall not apply to any
portion of the Test Results which: (a) corresponds in substance to that
developed by COMPANY prior to its receipt of or access to the same,
directly or indirectly, from VARIAN; (b) at the time of disclosure is, or
thereafter becomes, through no act or failure to act on COMPANY'S part,
generally known on a non-confidential basis in the x-ray tube industry; or
(c) which corresponds in substance to information heretofore or hereafter
furnished to COMPANY by others as a matter of right without restriction on
disclosure.
3.3 Public Announcements/News Releases. Neither Party shall issue any news
----------------------------------
release, public announcement, advertisement, or any other form of publicity
concerning the Imaging System or this Agreement without obtaining the prior
written approval from the other Party.
SECTION 4 - PATENT AND TECHNOLOGY RIGHTS
----------------------------------------
COMPANY agrees that VARIAN shall own and retain exclusive title and all
rights to all technology, inventions, processes, systems, methods
copyrights, and other intellectual property, whether patentable or
unpatentable, which is: (a) a modification, improvement, additions or
derivative work of the Imaging System: and/or (b) developed solely or
jointly from the conception or efforts of VARIAN employees or obligated
agents.
SECTION 5 - WARRANTY AND DISCLAIMER
-----------------------------------
VARIAN warrants that it has the right to transfer title to the Imaging
System. VARIAN makes no other warranty of any kind with respect to the
Imaging System, and disclaims any implied warranties of merchantability or
fitness for any particular purpose. THE IMAGING SYSTEM IS PROVIDED "AS
IS."
SECTION 6 - LIABILITY
---------------------
6.1 Indemnification
---------------
Each Party (the "Indemnifying Party") shall indemnify and hold harmless the
other Party (the "Indemnified Party"), and its officers, directors, agents
and employees, from any and all liabilities, claims, demands, damages,
settlements, losses and expenses (including attorneys' fees and costs)
incurred in connection with any claim against the Indemnified Party based
on any action or omission of the Indemnifying Party or its officers,
directors, agents or employees related to the obligations of the
Indemnifying Party under this Agreement.
6.2 Consequential Damages
---------------------
NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, UNDER NO
CIRCUMSTANCES SHALL EITHER PARTY, OR ANY PARENT, AFFILIATE, AGENTS OR
EMPLOYEES THEREOF, BE LIABLE TO THE OTHER FOR ANY LOSS RESULTING FROM
CONSEQUENTIAL, SPECIAL OR INDIRECT DAMAGES, INCLUDING LOSS OF PROFITS OR
REVENUES, LOSS OF BUSINESS OPPORTUNITY, COST OF CAPITAL OR LOSS OF
GOODWILL.
SECTION 7 - TERM AND TERMINATION
--------------------------------
This Agreement shall have a term of one (1) year commencing on the
Effective Date as set forth above, and the Parties may extend the term for
an additional six (6) months by written agreement. This Agreement may be
terminated by either Party only for cause after providing at least thirty
(30) days prior written notice to the breaching Party. Such breaching
Party shall be given an opportunity to cure the breach within said thirty
(30) day period before the termination is effective.
In the event of termination due to breach by COMPANY: (i) the Tests and
related activities shall be promptly discontinued; (ii) COMPANY shall
discontinue using the Imaging System for the remaining term of the
Agreement; (iii) all Test Results and related proprietary information,
including any copies thereof, shall be promptly delivered to VARIAN; and
(iv) no refund shall be owed to COMPANY.
In the event of termination due to breach by VARIAN: (i) the Tests and all
related activities shall be promptly discontinued; (ii) the Imaging System
shall be returned to VARIAN; and (iii) VARIAN will refund the fee paid by
COMPANY pursuant to Paragraph 2.2.
Each Party may retain a single copy of the Test Results completed prior to
termination, subject to the confidentiality provisions of Section 3.
Neither Party shall be responsible nor liable to the other Party for any
costs associated with termination. Upon completion of the Test and/or
expiration of the Agreement, the obligations of the Parties shall cease and
COMPANY may freely dispose of the Imaging System, subject to the surviving
terms of this Agreement. The provisions of Sections 3, 4, 5, 6 and 10
shall survive the termination of the Agreement.
SECTION 8 - NOTICES AND INSTRUCTIONS
------------------------------------
All notices and instructions given by either Party under this Agreement to
the other shall be writing through each Party's authorized
representative(s). Any such notice or instruction shall be delivered in
person, by courier, overnight mail or facsimile to the address of the
representative designated by the Party. The date of service of notice or
instruction shall be that date on which the said notice or instruction is
received.
For VARIAN: For CompuMed, Inc.:
Varian Associates, Inc. CompuMed, Inc.
Imaging Products 1230 Rosecrans Ave., Suite 1000
3075 Hansen Way, M/S K-313 Manhattan Beach, CA 90266
Palo Alto, CA 94304 Attn.: Rod Raynovich
Fax: (415) 855-7336 Fax: (310) 536-6128
SECTION 9 - RELATIONSHIP OF THE PARTIES
---------------------------------------
COMPANY shall perform the Tests hereunder as in independent contractor,
retaining complete control over its personnel and operations, and
conforming to all statutory requirements with respect to said employees, as
well as providing all appropriate employee benefits.
SECTION 10 - GOVERNING LAW
--------------------------
The terms and conditions of this Agreement shall be construed and governed
by the substantive and procedural laws of the State of California.
SECTION 11 - ENTIRE AGREEMENT
-----------------------------
This Agreement and the other instruments and agreements referred to in this
Agreement constitute the entire understanding of the Parties and supersede
all other agreements and understandings between them relating to the
subject matter of this Agreement. All Exhibits to this Agreement shall be
considered incorporated into and a part of this Agreement. In the event of
any conflict between the terms of an Exhibit and the terms of the
provisions of this Agreement, the terms of the provision of this Agreement
shall prevail.
<PAGE>
This Agreement has been executed by duly authorized representatives of the
Parties and has an Effective Date as indicated above.
VARIAN ASSOCIATES, INC. COMPUMED, INC.
Varian Imaging Products
By: /s/ David L. Gilblom By: /s/ James Linesch
----------------------------- ----------------------------
Name: David L. Gilblom Name: James Linesch
Title: General Manager Title: V.P., Chief Financial
Officer
Date: 12/10/96 Date: 11/21/96
<PAGE>
ADDENDUM TO A.R.M. AGREEMENT
1. Varian will grant exclusive worldwide marketing rights
to CompuMed for the use of Varian amorphous silicon
technology in the assessment of appendicular* bone
mineral density, and computer-assisted arthritis
detection, for a period of 3 years from the date of
this agreement, with an option for a 2 year extension
based on mutually satisfactory sales targets. CompuMed
must have placed combined total orders with Varian for
at least $250,000 in amorphous silicon panels on or
before December 31,1998 to maintain these exclusive
rights.
2. Varian will make available to CompuMed a second
amorphous silicon panel (w/electronics) at no
additional charge for use at CompuMed's UMASS Medical
Center testing facility.
3. Varian agrees to provide CompuMed with 4x5" amorphous
silicon panel assemblies and display circuitry (not to
include correction circuitry) at a price not to exceed
$3,000-$4,000 each, and 8x10" with similar electronics
not to exceed $9,000 to $13,000 each. Due to custom
development and low volumes, pricing for the first 50
panels will be as follows: up to $5,500 each for the
4x5" amorphous silicon panel assemblies and display
circuitry (not to include correction circuitry), and
8x10" with similar electronics up to $15,000 each. The
order must consist of 75% or greater 4x5" panels for
the first 50.
4. To maintain the exclusive marketing rights described
above (in paragraph #1), CompuMed must place an order
for 100 panels committing to a delivery schedule of 25
panels per quarter, with delivery starting by 2nd
quarter 1998, 200 panels per year with quarterly
shipments starting 2nd quarter 1999, and 300 panels per
year with quarterly shipments starting 2nd quarter
2000.
5. This agreement is based on CompuMed being able to
arrange satisfactory lease financing for the A.R.M.
equipment.
6. CompuMed and Varian will work together to create
mutually satisfactory press releases that describe the
strategic relationship of CompuMed and Varian in
developing what are hoped to be the first amorphous
silicon detector-based bone densitometers, and
automated arthritis detection devices.
* "Appendicular" is defined for this agreement as legs, ankles and
feet, and arms, wrists and hands.
/s/ David L. Gilblom 12/10/96 /s/ James Linesch 11/21/96
----------------------------------- ---------------------------------
For Varian Imaging Products Date: For CompuMed, Inc. Date:
AGREEMENT OF SETTLEMENT AND MUTUAL GENERAL RELEASE
--------------------------------------------------
THIS AGREEMENT OF SETTLEMENT AND MUTUAL GENERAL RELEASE (the
"Agreement") is made and entered into as of April 23, 1996, by and among
COMPUMED, INC., a Delaware corporation (the "Company"), ROBERT STUCKELMAN,
an individual ("Stuckelman") and WILLIAM B. BARNETT, an individual
("Barnett") (the Company, Stuckelman and Barnett are hereinafter the
"CompuMed Parties"), on the one hand, and ALLEN GELBARD, an individual
("Gelbard"), and BARRY SILVERTON, an individual ("Silverton"), on the other
hand (all of the foregoing are referred to herein individually as a "Party"
and collectively as the "Parties"), with respect to the following facts:
RECITALS
A. WHEREAS, Gelbard was the plaintiff in an action filed in the
Superior Court of the State of California, County of Los Angeles, Case
No. BC 108036, against numerous defendants including, among others, the
CompuMed Parties (the "Lawsuit");
B. WHEREAS, the Lawsuit concerned, in part, a drug in development known
as Rapid Ethanol Lowering drug ("Detoxahol");
C. WHEREAS, the Company and the University of Georgia Research
Foundation, Inc. are parties to a Research Agreement and an Exclusive
License Agreement, both dated January 3, 1994 (the "GRFI Agreements"), with
respect to Detoxahol;
D. WHEREAS, the Parties desire to compromise and settle all claims
asserted in the complaint filed in the Lawsuit and, in connection
therewith, to provide mutual general releases among the Parties to this
Agreement and to enter into other covenants and agreements, all as set
forth specifically herein; and
E. WHEREAS, the Parties deny each and every cause of action, claim,
allegation of fact, and assertion of wrongdoing or liability asserted
charged against them, and neither this Agreement nor any action taken
pursuant hereto nor the consideration provided for herein is or may be
construed as an admission by the Parties in any respect whatsoever.
NOW, THEREFORE, in consideration of the foregoing facts and mutual
covenants and agreements contained in this Agreement, the Parties agree as
follows:
1. Incorporation of Recitals. The recitals contained in
-------------------------
Paragraphs A, B, C, D and E above are incorporated by reference as though
fully set forth herein.
2. Covenants and agreements between Silverton and the Company.
----------------------------------------------------------
(a) Transfer of Rights to Detoxahol.
-------------------------------
(1) No later than June 25, 1996 (the "Option Termination
Date"), Silverton, at his option, but subject to compliance by
Silverton with all the provisions of this Agreement (including
without limitation this Section 2) and satisfaction of the
conditions set forth below, may require the Company to assign and
convey all rights of the Company under the GRFI Agreements (the
"Detoxahol Transfer") to the company to be formed as a California
limited liability company, to be named, if possible, CompuMed, LLC
("LLC"). The form of the Operating Agreement used for purposes of
forming the LLC is attached hereto as Exhibit A (the "Operating
Agreement"). Silverton shall exercise such option (the "Detoxahol
Option") by providing written notice of exercise thereof to the
Company (the "Detoxahol Transfer Notice"). Silverton's failure to
timely provide the Detoxahol Transfer Notice shall relieve the
Company of its obligations to consummate the Detoxahol Transfer.
(2) The Detoxahol Transfer shall occur as soon as
reasonably possible after receipt of the Detoxahol Transfer Notice,
but subject to the receipt of all consents from any necessary
party. Simultaneously with the exercise of the Detoxahol Option,
Silverton shall pay to LLC, or to the Company to be held in
escrow, in immediately available funds by certified check or wire
transfer, the sum of Six Hundred Fifty Thousand Dollars
($650,000.00). In the event Silverton fails to make such
payment, the exercise of the Detoxahol Option shall be deemed
to have immediately expired without any further obligation on
the part of the Company whatsoever (including without limitation
any obligation to consummate the Detoxahol Transfer), and
Silverton shall reimburse the Company and LLC for all costs
and expenses incurred by them in connection with the
exercise of the Detoxahol Option.
(3) Beginning February 26, 1996, Silverton became
entitled to commence a 120 day due diligence period (the "Due
Diligence Period") with respect to Detoxahol. During the Due
Diligence Period, the Company has and shall make available to
Silverton, upon written request, all information in its possession
and/or control regarding Detoxahol including, without limitation,
research reports, patent application, licenses, option agreements,
invention statements, employment contracts, internal reports and
opinions relating to Detoxahol. Further, the Company shall
authorize University of Georgia researchers and personnel, outside
consultants and others involved in the development, research and/or
evaluation of Detoxahol to disclose any and all information in their
possession and control relating to Detoxahol to Silverton and/or his
representatives. For purposes of this Agreement, any written or
oral information provided to Silverton by CompuMed, its
representatives and agents and the University of Georgia researchers
and personnel, outside consultants and others involved in Detoxahol
shall be considered "Confidential Information" unless it became
available to Silverton on a non-confidential basis from someone who,
to Silverton's knowledge, had lawful access to such information.
Silverton hereby agrees for himself and shall cause his affiliates,
employees, agents, attorneys and representatives to hold the
Confidential Information in strictest confidence and shall only use
it solely for the purposes of evaluating Detoxahol for purposes of
exercising the option hereunder. In the event that Silverton does
not exercise the option, Silverton shall within ten (10) days after
the Transfer Termination Date return to CompuMed all copies of all
Confidential Information received pursuant to this Agreement,
maintain as Confidential Information any notes Silverton may have
created, not make any other use of such Confidential Information,
and not provide such Confidential Information to any other person or
entity for any purpose. This obligation shall survive in
perpetuity.
(b) The Operating Agreement. The LLC, and the Parties
-----------------------
obligations and duties in connection therewith, shall be governed by the
Operating Agreement which will be executed immediately prior to or
concurrently with the Detoxahol Transfer, and is incorporated as though
fully set forth herein.
(c) Silverton's Right of First Refusal. During the first
----------------------------------
sixty (60) days of the Due Diligence Period, the Company is prohibited from
licensing, optioning, assigning or otherwise alienating any right to
Detoxahol or derivative products without written consent from Silverton.
During the second sixty (60) days of the Due Diligence Period, in the event
any third party offers to license, option or otherwise obtain any right in
Detoxahol or derivative products, Silverton may, at his discretion,
accelerate and exercise the Detoxahol Option as described in
Paragraph 2(a)(1), above, within five (5) business days of written notice
of the offer. In the event Silverton elects not to so exercise the
Detoxahol Option, CompuMed may accept the third party offer to license,
option or otherwise obtain rights in Detoxahol. Any such agreement, and
any benefit or rights ensuing therefrom, will be assigned and conveyed to
the LLC to be formed by the Company and Silverton in the event the
Detoxahol Option is exercised.
3. Mutual General Releases: For good and valuable consideration
-----------------------
as set forth herein, and except with respect to the obligations of the
Parties hereto as set forth herein and in the Operating Agreement, which is
incorporated as though fully set forth herein:
(a) Dismissal of Lawsuit. Gelbard represents and warrants
--------------------
that the Lawsuit has been dismissed without prejudice as to the CompuMed
Parties. Gelbard hereby agrees that pursuant to this Agreement neither
he nor any of his affiliates, successors, assigns, employees, agents,
attorneys or representatives will reinstitute the case.
(b) Release of CompuMed Parties. Gelbard and Silverton, on
---------------------------
their own behalf and on behalf of their respective directors, officers,
shareholders, affiliates, subsidiaries, divisions, assigns, transferees,
employees, servants, successors, agents, attorneys and representatives,
hereby release, remise and forever discharge CompuMed, Stuckelman and
Barnett and their respective officers, directors, shareholders,
affiliates, subsidiaries, divisions, assignees, transferees, employees,
servants, successors, agents, attorneys and representatives, except
------
Howard Mark, of and from any and all claims, demands, damages, debts,
-----------
liabilities, actions, causes of action, suits, contracts, controversies,
agreements, accounts, reckonings, obligations and judgments, whether in
law or equity ("Claims"), which Gelbard and/or Silverton now have, own or
hold, or at any time previously ever have, owned or held, or could,
shall, or may later have, own or hold, directly or indirectly,
individually, through others or other entities, derivatively or in any
other manner, based upon, related to or by reason of any action, contract
(express, implied in fact, implied in statute, law or otherwise), lien,
liability, law, matter, cause, action, lawsuit, fact, act or omission of
any kind whatsoever occurring or existing at any time prior to the
execution of this Agreement, including, without limitation, those set
forth in the Lawsuit. Specifically excluded from this Release are the
obligations of the Parties under this Agreement and the Operating
Agreement.
(c) Release of Gelbard and Silverton. CompuMed, Stuckelman
--------------------------------
and Barnett, on their own behalf and on behalf of their respective
officers, directors, shareholders, affiliates, subsidiaries, divisions,
assigns, transferees, employees, servants, successors, agents, attorneys
and representatives, hereby release, remise and forever discharge Gelbard
and Silverton and their respective officers, directors, shareholders,
affiliates, subsidiaries, divisions, assigns, transferees, employees,
servants, successors, agents, attorneys and representatives (except
Howard Mark or Mark Branigan, if applicable), of and from any and all
Claims, which CompuMed, Stuckelman and Barnett now have, own or hold, or
at any time previously ever have, owned or held, or could, shall, or may
later have, own or hold, directly or indirectly, individually, through
others or other entities, derivatively or in any other manner, based
upon, related to or by reason of any action, contract (express, implied
in fact, implied in statute, law or otherwise), lien, liability, law,
matter, cause, action, lawsuit, fact, act or omission of any kind
whatsoever occurring or existing at any time prior to the execution of
this Agreement, including, without limitation, those set forth in the
Lawsuit. Specifically excluded from this Release are the obligations of
the Parties under this Agreement and the Operating Agreement.
(d) It is the intention of the Parties in executing this
Agreement that it shall be effective as a full and final accord and
satisfactory release of each and every matter herein specifically or
generally referred to. In furtherance of this intention, each Party
acknowledges that he or it is familiar with Section 1542 of the Civil
Code of the State of California, which provides as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST
HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
The Parties waive and relinquish any rights and benefits which they have
or may have under Section 1542 of the Civil Code of the State of
California to the full extent that they may lawfully waive all such
rights and benefits pertaining to the subject matter of this Agreement.
The Parties, and each of them, acknowledge that they are aware that they
may later discover facts in addition to or different from those which
they now know or believe to be true with respect to the subject matter of
this Agreement, but it is their intention (except with respect to the
obligations set forth herein) to fully and finally forever settle and
release any and all matters, disputes and differences, known and unknown,
suspected and unsuspected, which now exist, may later exist or may
previously have existed between them, in any manner or any capacity, and
that in furtherance of this intention, the release given in this
Agreement shall be and remain in effect as a full and complete general
release notwithstanding discovery or existence of any such additional or
different facts.
4. Confidentiality.
---------------
(a) The Parties and any person acting by, through, under or in
concert with any of them, agree not to disclose this Agreement or its
terms to any person except (a) immediate family members of the respective
Parties, or (b) the Parties' respective financial, business or legal
advisors; except as may be required by law or regulation, or by the rules
of the National Association of Securities Dealers, Inc., or for tax
reporting or tax dispute resolution purposes. In the event that any
judicial process, whether by subpoena or discovery demand, shall be
asserted against any party hereto seeking disclosure of this Agreement or
its terms, then the party so subpoenaed or against whom the discovery
demand is made shall give the other parties hereto prompt notice of such
subpoena or discovery demand, and shall reasonably cooperate with any
effort by the other parties to quash such subpoena or discovery demand or
to obtain a confidentiality agreement or order.
(b) [All documents or interrogatory responses produced
pursuant to discovery demands in the Lawsuit, and deposition transcripts
in the Lawsuit, shall be treated as confidential. Each Party hereto
represents and covenants that it will use its best efforts not to
disclose any documents or information obtained by it from any other Party
through discovery in the Lawsuit except to the extent permitted in
Paragraph 4(a) with regard to this Agreement or its terms. No party
hereto shall object to the sealing of the record of the Lawsuit, or any
portion thereof.]
5. Nonsolicitation. None of the Parties will either directly or
---------------
indirectly, on their own behalf or in the service of others, disrupt,
damage, impair or interfere with the business of the other Parties and/or
their respective affiliates, whether by way of interfering with or raiding
their respective officers, employees, agents and/or independent contractors
or in any manner attempting to persuade any such person to discontinue any
relationship with the relevant Party and/or their respective affiliates, or
otherwise.
6. Notice. All notices given hereunder shall be in writing and
------
shall be deemed to be properly given only when personally delivered or when
deposited in the United States mail, postage prepaid, using only certified
or registered mail, and addressed to:
If to the Company:
COMPUMED, INC.
1230 Rosecrans Avenue, Suite 1000
Post Office Box 10037
Manhattan Beach, CA 90266
Attention: President
If to Stuckelman:
Mr. Robert Stuckelman
3624 Westfall Drive
Encino, CA 91436
If to Barnett:
William B. Barnett, Esquire
Transworld Bank Plaza
15233 Ventura Boulevard, Suite 1110
Sherman Oaks, CA 91403
As to CompuMed, Stuckelman and Barnett,
with a copy to:
Sheppard, Mullin, Richter & Hampton
333 South Hope Street, 48th Floor
Los Angeles, CA 90071
Attention: Joseph F. Coyne, Jr., Esquire
If to Gelbard:
Mr. Allen Gelbard
c/o Ellyn S. Garofalo, Esquire
O'Neill, Lysaght & Sun
100 Wilshire Boulevard, Suite 700
Santa Monica, CA 90401-1142
If to Silverton:
Mr. Barry Silverton
116 Tigertail
Brentwood, CA 94513
As to Silverton and Gelbard,
with a copy to:
O'Neill, Lysaght & Sun
100 Wilshire Boulevard, Suite 700
Santa Monica, CA 90401-1142
Attention: Ellyn S. Garofalo, Esquire
The above addresses may be changed only by proper
notice given hereunder. Notice given as herein provided shall
be deemed to be given, received and effective either upon
personal delivery thereof or upon three (3) days after the
proper mailing thereof.
7. Entire Agreement. This Agreement, and the
----------------
Operating Agreement contain the entire understanding of the
Parties with respect to the subject matter hereof and
supersedes all prior and contemporaneous oral and written
agreements and discussions. There are no representations,
covenants, or undertakings other than those expressly set forth
in this Agreement and the Operating Agreement. Each Party
acknowledges that no other Party or any agent or attorney of
any other Party has made any promise, representation or
warranty whatsoever, express, implied or statutory, not
contained in this Agreement, concerning its subject matter to
induce them to execute this Agreement. The Parties acknowledge
that they have not executed this Agreement in reliance upon any
such promise, representation or warranty not specifically
contained in this Agreement. Gelbard and Silverton acknowledge
that the CompuMed Parties have made no representation or
warranty upon which Gelbard or Silverton are relying with
respect to Detoxahol or the GRFI Agreements and any projections
or statements with respect thereto. The CompuMed Parties
specifically disclaim any warranty as to the accuracy of any
such projections or statements, if any.
8. Binding on Successors; No Prior Assignment.
------------------------------------------
(a) This Agreement and the covenants and
conditions contained in it shall apply to, be binding upon
and inure to the benefit of the Parties hereto and their
respective agents, employees, attorneys, representatives,
officers, partners, directors, divisions, subsidiaries,
affiliates, assigns, heirs, successors and predecessors in
interest and shareholders. Each Party represents and
warrants that it has not assigned or in any way conveyed,
transferred or encumbered all or any portion of the claims
or rights covered by this Agreement. Each Party does
hereby represent and warrant to each and every other Party
hereto that it has the full and complete right and
authority to enter into this Agreement and perform the
terms and conditions hereof, all necessary action has been
undertaken to make this Agreement legal, binding and
enforceable against them and each Party signing below is
fully authorized to execute this Agreement.
(b) Silverton hereby recognizes and agrees that
he shall not be entitled to transfer any of his rights
with respect to the Detoxahol Option under any
circumstances to Allen Gelbard or any of Allen Gelbard's
affiliates or relatives. As to any other person or entity
in which Allen Gelbard does not have an interest,
Silverton may transfer such rights subject to the
Company's prior written reasonable approval. Subject to
the foregoing, should Silverton desire to transfer the
Detoxahol Option to any person or entity, prior to doing
so, in a notice delivered to the Company, Silverton shall
in writing offer to the Company the right to purchase the
Detoxahol Option on the price and terms specified in the
notice. The notice shall specify the price, terms and
identity of the proposed bona fide transferee. Within
thirty (30) days after the Company receives the written
notice upon which a right to purchase arises, the Company
shall give written notice to Silverton of its decision.
If the Company exercises its right, the purchase price
shall be paid by the Company to Silverton in the same
manner as in the notice provided by Silverton within
sixty (60) days of the Company giving its notice of
exercise. If the Company fails to exercise its right
pursuant to these provisions, Silverton may sell the
Detoxahol Option to the named transferee, if reasonably
approved by the Company, on the price and terms set forth
in the notice within sixty (60) days after expiration of
the period within which the Company must give a notice of
the exercise of its right. If the price or terms then are
changed or Silverton fails to complete his transaction
within the applicable period, the foregoing provision
shall continue to govern any proposed transfer.
9. Governing Law. This Agreement shall be deemed
-------------
to have been executed and delivered within the State of
California, and the rights and obligations of the parties
hereunder shall be construed and enforced in accordance with,
and governed by, the substantive and procedural laws of the
State of California. The Parties agree that any dispute
relating to this Agreement, or to its negotiation and
execution, shall be adjudicated in the State of California.
10. Representation and Joint Preparation. Each
------------------------------------
Party acknowledges and agrees that it has been represented
throughout all of the negotiations which preceded the execution
of this Agreement by counsel of its own free choice. Each
Party further acknowledges and agrees that it has made such
investigation of the facts pertaining to this Agreement and all
the matters pertaining to this Agreement and all the matters
pertaining thereto as it deems appropriate. Each Party has
cooperated in the drafting of this Agreement. Hence, in any
construction to be made of this Agreement, the same shall not
be construed against any Party by reason of its having drafted
the same.
11. Attorneys' Fees and Costs. In the event that
-------------------------
any Party hereto shall institute any action, proceeding or
arbitration to enforce any rights granted hereunder, the
prevailing party in such action or proceeding shall be
entitled, in addition to any other relief granted by the court
or other applicable judicial or arbitration body, to reasonable
attorneys' fees and costs.
12. No Waiver. Failure to insist on compliance with
---------
any term, covenant or condition contained in this Agreement
shall not be deemed a waiver of that term, covenant or
condition, nor shall any waiver or relinquishment of any right
or power contained in this Agreement at any one time or more
times be deemed a waiver or relinquishment of any right or
power at any other time or times.
13. Counterparts. This Agreement may be executed in
------------
one or more counterparts, including by telecopy, each of which
shall be deemed an original, but all of which together shall
constitute one of the same Agreement.
14. Further Assurances. Each Party agrees to
------------------
execute such additional documentation and to take such further
action as reasonably necessary to effectuate the purpose of
this Agreement.
15. Binding Agreement. In entering into this
-----------------
Agreement each Party assumes the risk of any misrepresentation,
concealment or mistake. If any Party should subsequently
discover that any fact relied upon by it in entering into this
Agreement was untrue or that any fact was concealed from it, or
that its understanding of the facts or of the law was
incorrect, such Party shall not be entitled to any relief in
connection therewith, including without limitation on the
generality of the foregoing, any alleged right or claim to set
aside or rescind this Agreement. This Agreement is intended to
be and is binding between the Parties, regardless of any claims
of misrepresentation, promises made without the intention to
perform, concealment of fact, non-performance of this
Agreement, mistake of fact or law, or of any other
circumstances whatsoever.
16. No Admissions. This Agreement effects the
-------------
settlement of disputes which are denied and contested and
nothing contained herein should be construed as an admission by
any Party of any liability of any kind with respect thereto.
All such liability is expressly denied.
17. Amendment. This Agreement may be amended or
---------
modified only by a writing signed by all of the Parties.
18. Fees and Expenses. Except as specifically
-----------------
otherwise provided in this Agreement, each Party agrees to be
responsible for the expenses incurred by it during the course
of the Lawsuit and its settlement, including, without
limitation, attorneys' fees and court costs.
19. Headings. The headings contained in this
--------
Agreement are set forth herein for convenience only and shall
not have any effect on the meaning or interpretation hereof.
IN WITNESS WHEREOF, the parties have executed this
Agreement on the date first above written.
"COMPUMED"
COMPUMED, INC.
a Delaware corporation
By: /s/ Rod N. Raynovich
-----------------------------------
Name: Rod N. Raynovich
Title: Pres. & CEO
"STUCKELMAN"
/s/ Robert Stuckelman
-------------------------------------
ROBERT STUCKELMAN
"BARNETT
/s/ William B. Barnett
----------------------------
WILLIAM B. BARNETT
APPROVED AS TO FORM:
SHEPPARD, MULLIN, RICHTER & HAMPTON
counsel to CompuMed, Stuckelman and
Barnett
By:/s/ Joseph F. Coyne
-----------------------------------
JOSEPH F. COYNE, JR., ESQ.
"SILVERTON"
/s/ Barry Silverton
-------------------------------
BARRY SILVERTON
"GELBARD"
/s/ Allen Gelbard
--------------------------------
ALLEN GELBARD
APPROVED AS TO FORM:
O'NEILL, LYSAGHT & SUN
Counsel for Silverton and Gelbard
/s/ Ellyn S. Garofalo
-----------------------------------
ELLYN S. GAROFALO
SETTLEMENT AGREEMENT AND GENERAL RELEASE
----------------------------------------
1. PARTIES: The parties to this Settlement Agreement and General
-------
Release ("Agreement") are CompuMed, Inc., a corporation, and Howard L.
Mark, M.D., an individual. The Agreement is effective September 15, 1996.
2. RECITALS: This Agreement is made with reference to the following
--------
facts:
2.1 Certain disputes and controversies have arisen between the
parties hereto.
2.2 Those disputes include without limitation indemnification
claims relating to an action originally entitled Allen Gelbard, an
-----------------
individual, v. Howard Mark, an individual; Mark C. Branigan, an individual;
---------------------------------------------------------------------------
CompuMed, Inc. a Delaware corporation; Robert Stuckelman, an individual;
-------------------------------------------------------------------------
William B. Barnett, an individual; DeVere B. Pollom, an individual; Ronald
--------------------------------------------------------------------------
Pitre, an individual; John D. Minnick, an individual; Russell Walker, an
-------------------------------------------------------------------------
individual; and Does 1-100, inclusive ("The Lawsuit").
-------------------------------------
2.3 Except as hereinafter set forth, it is the intention of the
parties hereto to settle and dispose of, fully and completely, any and all
claims, demands and causes of action heretofore or hereafter arising out
of, connected with or incidental to the dealings between the parties hereto
prior to the effective date hereof.
3. GENERAL RELEASES AND PROMISES: In consideration of the mutual
-----------------------------
general releases contained herein, and for other good and valuable
consideration, the receipt of which is acknowledged by each party hereto,
the parties promise, agree and generally release as follows:
3.1 Except as to such rights or claims as may be excepted in
paragraph 3.2 below or created by this Agreement, each party hereby
releases, remises and forever discharges each other party hereto from any
and all claims, demands, and causes of action, known or unknown, heretofore
or hereafter arising out of, connected with or incidental to the dealings
between the parties hereto prior to the effective date hereof, including,
without limitation on the generality of the foregoing, any and all claims
and demands and cause or causes of action arising out of or related in any
way to the Lawsuit.
3.2 Howard L. Mark, M.D. shall retain the anti-dilution rights
which inure to his benefit under the Agreement and Plan of Reorganization
among CompuMed Inc. and Shareholders of MB Nutraceuticals dated March 14,
1994 (the "Anti-Dilution Rights"). Nothing herein releases or is intended
to release, the Anti-Dilution Rights or CompuMed's defenses, if any, to
Howard Mark's asserting those rights. Similarly, nothing herein releases
those stock option rights referred to in Robert G. Funari's February 2,
1996 letter to Howard L. Mark, M.D. and said stock option rights shall be
deemed fully vested as of March, 1996.
3.3 Each party to this General Release specifically waives the
benefit of the provisions of Section 1542 of the Civil Code of the State of
California, as follows:
"A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor."
3.4 Howard L. Mark, M.D. shall, within 30 days of receiving the
reissued stock certificate referred to in paragraph 4.1 below, pay $57,500
to CompuMed.
4. MISCELLANEOUS: The parties also agree as follows:
-------------
4.1 Howard L. Mark, M.D. represents to CompuMed that he has lost
the stock certificate representing 3,494,590 pre-split shares of CompuMed
stock. At Howard L. Mark, M.D.'s request, CompuMed will reissue the
shares, adjusted for a subsequent reverse split without any requirement for
posting a bond. Fifty thousand shares will be held by CompuMed to secure
payment under 3.4 above. Howard L. Mark, M.D. will submit an affidavit to
CompuMed memorializing his loss of the stock certificate. Howard L. Mark,
M.D. hereby agrees to indemnify and hold CompuMed harmless from any claim,
damages or loss resulting from the loss, reissuance and transfer of the
lost shares. Howard L. Mark, M.D. represents that he has not pledged,
assigned, sold or otherwise transferred any interest in the lost shares and
that he owns all of the unencumbered shares free of any liens or claims of
any kind.
4.2 This Agreement shall be deemed to have been executed and
delivered within the State of California, and the rights and obligations of
the parties hereunder shall be construed an enforced in accordance with,
and governed by, the laws of the State of California.
4.3 This Agreement is the entire agreement between the parties
with respect to the subject matter hereof and supersedes all prior and
contemporaneous oral and written agreements and discussions. This Release
may be amended only by an agreement in writing.
4.4 This General Release is binding upon and shall inure to the
benefit of the parties hereto, their respective agents, attorneys,
employees, representatives, officers, directors, divisions, subsidiaries,
affiliates, assigns, heirs, successors in interest and shareholders.
4.5 Each party has cooperated in the drafting and preparation of
this Release. Hence, in any construction to be made of this Release, the
same shall not be construed against any party.
<PAGE>
4.6 In the event of litigation relating to this General Release,
the prevailing party shall be entitled to reasonable attorneys' fees and
costs.
COMPUMED, INC.
--------------
September 25, 1996 By: /s/ Rod Raynovich
---------------------------
Rod Raynovich
President
September 16, 1996 /s/ Howard L. Mark
---------------------------
Howard L. Mark
SETTLEMENT AGREEMENT AND GENERAL RELEASE
----------------------------------------
1. PARTIES: The parties to this Settlement Agreement and
-------
General Release ("Agreement") are CompuMed, Inc. ("CompuMed"), a
corporation, and Mr. Mark C. Branigan ("Mr. Branigan"), an
individual. The Agreement is effective as of August 1, 1996.
2. RECITALS: This Agreement is made with reference to the
--------
following facts:
2.1 Certain disputes and controversies have arisen
between the parties hereto.
2.2 Those disputes include without limitation
indemnification claims relating to an action originally entitled
Allen Gelbard, an individual v. Howard Mark, an individual; Mark
C. Branigan, an individual; Compumed, Inc. a Delaware
corporation; Robert Stuckelman, an individual; William B.
Barnett, an individual; DeVere B. Pollom, an individual; Ronald
Pitre, an individual; John D. Minnick, an individual; Russell
Walker, an individual; and Docs 1-100, inclusive ("The Lawsuit").
2.3 It is the intention of the parties hereto to
settle and dispose of, fully and completely, any and all claims,
demands and causes of action heretofore or hereafter arising out
of, connected with or incidental to the dealings or any other
matters between the parties hereto prior to the effective date
hereof.
3. GENERAL RELEASES AND PROMISES: In consideration of the
------------------------------
mutual general releases contained herein, and for other good and
valuable consideration, the receipt of which is acknowledged by
each party hereto, the parties promise, agree and generally
release as follows:
3.1 Except as to such rights or claims as may be
created or preserved by this Agreement, each party hereby
releases, remises and forever discharges each other party hereto
from any and all claims, demands, and causes of action
(collectively, "Claims"), known or unknown, heretofore or
hereafter arising out of, connected with or incidental to the
dealings or any other matters between the parties hereto prior to
the effective date hereof, including, without limitation on the
generality of the foregoing, any and all claims and demands and
cause or causes of action reflected in or arising out of the
Lawsuit.
3.2 Mark Branigan shall retain whatever antidilution
rights, if any, which inure to his benefit under the Agreement
and Plan or Reorganization among CompuMed Inc. and Shareholders
of MB Nutraceuticals dated March 14, 1994 (the "Anti-Dilution
Rights"). Nothing herein releases, or is intended to release,
the Antidilution Rights or compuMed's defenses, if any, to Mark
Branigan's asserting those rights.
3.3 Each party to this General Release specifically
waives the benefit of the provisions of Section 1542 of the Civil
Code of the State of California, as follows:
"A general release does not extend to claims
which the creditor does not know or suspect
to exist in his favor at the time of
executing the release, which if known by him
must have materially affected his settlement
with the debtor."
3.4 Mr. Branigan shall pay $57,500 to Compumed within
two (2) business days after receiving written notice from
CompuMed that (a) Dr. Howard Mark ("Dr. Mark") has paid $57,500
to CompuMed pursuant to Dr. Mark's separate Settlement Agreement
and General Release with CompuMed, or (b) CompuMed has received
from Dr. Mark collateral in that amount.
4. TRANSFER OF SHARES:
-------------------
4.1 Concurrently with the execution hereof, compuMed
shall direct and instruct the transfer agent for CompuMed's stock
to honor and carry out requests and instructions by Mr. Branigan
to transfer to other persons CompuMed stock owned by Mr. Branigan
or held in mr. Branigan's name, and shall execute all documents
and instruments and take all actions required or desirable to
effect the requested transfers.
5. MISCELLANEOUS:
-------------
5.1 This Agreement shall be deemed to have been
executed and delivered within the State of California, and the
rights and obligations of the parties hereunder shall be
construed and enforced in accordance with, and governed by, the
laws of the State of California.
5.2 This Agreement is the entire agreement between the
parties with respect to the subject matter hereof and supersedes
all prior and contemporaneous oral and written agreements and
discussions. This Release may be amended only by an agreement in
writing.
5.3 This General Release is binding upon and shall
inure to the benefit of the parties hereto, their respective
agents, attorneys, employees, representatives, officers,
insurers, directors, divisions, subsidiaries, affiliates,
assigns, heirs, successors in interest and shareholders;
provided, however, that nothing in this Agreement releases any
claims of any nature that Mr. Branigan may have against Howard
Mark, M.D.
<PAGE>
5.4 Each party has cooperated in the drafting and
preparation of this Release. Hence, in any construction to be
made of this Release, the same shall not be construed against any
party.
5.5 In the event of litigation relating to this
General Release, the prevailing party shall be entitled to
reasonable attorneys' fees and costs.
COMPUMED, INC.
--------------
By: /s/ Rod Raynovich
--------------------------
Mr. Rod Raynovich
President
/s/ Mark Branigan
-----------------------------
Mr. Mark Branigan
COMMERCIAL OFFICE LEASE
BETWEEN
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
AS LANDLORD
AND
COMPUMED, INC.
AS TENANT
DATED: AUGUST 30, 1996
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
BASIC LEASE PROVISIONS . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II
THE PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE III
TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE IV
RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE V
SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE VI
OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE VII
IMPOSITIONS RENTAL . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE VIII
PARKING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE IX
USE AND REQUIREMENTS OF LAW . . . . . . . . . . . . . . . . . . . 12
ARTICLE X
ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . 13
ARTICLE XI
MAINTENANCE AND REPAIR . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE XII
INITIAL CONSTRUCTION; ALTERATIONS . . . . . . . . . . . . . . . . 17
ARTICLE XIII
SIGNS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE XIV
TENANT'S EQUIPMENT AND PROPERTY . . . . . . . . . . . . . . . . . 19
ARTICLE XV
RIGHT OF ENTRY . . . . . . . . . . . . . . . . . . . . . . . . . . 20
<PAGE>
ARTICLE XVI
INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE XVII
LANDLORD SERVICES AND UTILITIES . . . . . . . . . . . . . . . . . 22
ARTICLE XVIII
LIABILITY OF LANDLORD . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE XIX
RULES AND REGULATIONS . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE XX
DAMAGE; CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE XXI
DEFAULT OF TENANT . . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE XXII
MORTGAGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE XXIII
SURRENDER; HOLDING OVER . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE XXIV
QUIET ENJOYMENT . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE XXV
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE XXVI
OPTION TO RENEW . . . . . . . . . . . . . . . . . . . . . . . . . 34
LIST OF EXHIBITS
---------------------
Exhibit A-1 Plan Showing Premises
Exhibit A-2 Legal Description of Land
Exhibit B-1 (Intentionally Deleted)
Exhibit B-2 (Intentionally Deleted)
Exhibit C Rules and Regulations
Exhibit D Secretary's Certificate
Exhibit E Agreement of Subordination, Non-Disturbance and Attornment
Exhibit F Space Plan
<PAGE>
COMMERCIAL OFFICE LEASE
--------------------------
THIS COMMERCIAL OFFICE LEASE (hereinafter the "Lease") is made as of
the 30 day of August, 1996 ("Date of Lease"), by and between USAA INCOME
PROPERTIES III LIMITED PARTNERSHIP, a Delaware limited partnership
("Landlord"), and COMPUMED, INC., a Delaware corporation ("Tenant").
Landlord and Tenant, intending legally to be bound, agree as set forth
below.
ARTICLE I
BASIC LEASE PROVISIONS
In addition to the terms which are defined elsewhere in this Lease,
the following defined terms are used in this Lease:
1.1 Building. The building located at the address
--------
indicated below which is on the Land (as hereinafter defined), and all
alterations, additions, improvements, restorations or replacements now or
hereafter made thereto.
1.2 Building Address: 1230 Rosecrans Avenue
---------------- Manhattan Beach, California 90266
1.3 Premises. Rentable 16,440 Square Feet (as hereinafter
--------
defined) known as Suite 110 and located on the first floor of the Building
as outlined on EXHIBIT A-1 attached hereto and made a
-----------
part hereof.
1.4 Land. The piece or parcel of land which comprises the
----
Project (as hereinafter defined), as more particularly described on EXHIBIT
-------
A-2 attached hereto and made a part hereof, and all rights, easements
--
and appurtenances thereunto belonging or pertaining, or such portion
thereof as shall be allocated by Landlord to the Project.
1.5 Project. The development known as Parkview Plaza
-------
consisting of the real property and all improvements built thereon
including without limitation the Land, Building, Common Area (as
hereinafter defined), Parking Facilities (as hereinafter defined), and any
other buildings, walkways, driveways, fences and landscaping, containing
approximately 302,984 Rentable Square Feet (as hereinafter defined).
1.6 Rentable Square Feet (Foot) or Rentable Area. The
--------------------------------------------
rentable area within the Premises or the Building or any other building
within the Project, as the case may be, calculated as follows: (i) in the
case of a single tenancy floor, all floor area within the inside surface of
the exterior walls of the building excluding only the areas ("Service
Areas") used for building stairs, fire towers, elevator shafts, flues,
vents, stacks, pipe shafts, and vertical ducts, but including any Service
Areas which are for the specific use of the particular tenant, such as
special stairs or elevators, plus an allocation of the square footage of
the building's elevator equipment room, central mechanical room, ground
floor lobbies, and all the Common Area on each such floor, and (ii) in the
case of a floor to be occupied by more than one tenant, all floor areas
within the inside surface of the exterior walls enclosing the Premises on
such floor and measured to the mid-point of the walls separating areas
leased by or held for lease to other tenants or from the Common Area, but
including a proportionate part of the Common Area located on such floor
based upon the ratio which the Tenant's Rentable Area (determined by
excluding the Common Area) on such floor bears to the aggregate Rentable
Area (determined by excluding the Common Areas) on such floor plus an
allocation of the square footage of the building's elevator equipment room,
central mechanical room, and ground floor lobbies. No deductions from
Rentable Area shall be made for columns or projections necessary to the
building.
1.7 Permitted Use. The Premises shall be used solely for
-------------
general business office purposes, the repair of electronic equipment and
storage of parts inventory in connection therewith.
1.8 Commencement Date. September 1, 1996.
-----------------
1.9 Expiration Date. August 31, 1999.
---------------
1.10 Term. Thirty-six (36) months, beginning on the
----
Commencement Date and expiring on the Expiration Date.
1.11 Basic Rent. The amount set forth in the following
----------
schedule, subject to adjustment as specified in ARTICLE IV.
----------
Monthly
-------
Month(s) Basic Rent Annual Basic Rent
------- ---------- -----------------
1 36 $18,906.00 $226,872.00
1.12 Base Year. A period of twelve (12) months comprising
---------
calendar year 1997
1.13 Lease Year. Each consecutive twelve (12) month period
----------
elapsing after: (i) the Commencement Date if the Commencement Date occurs
on the first day of a month; or (ii) the first day of the month following
the Commencement Date if the Commencement Date does not occur on the first
day of a month. Notwithstanding the foregoing, the first Lease Year shall
include the additional days, if any, between the Commencement Date and the
first day of the month following the Commencement Date, in the event the
Commencement Date does not occur on the first day of a month.
1.14 Calendar Year. For the purpose of this Lease,
-------------
Calendar Year shall be a period of twelve ( 12) months commencing on each
January 1 during the Term, except that the first Calendar Year shall be
that period from and including the Commencement Date through December 31 of
that same year, and the last Calendar Year shall be that period from and
including the last January 1 of the Term through the earlier of the
Expiration Date or date of Lease termination.
1.15 Tenant's Proportionate Share. Tenant's Proportionate
----------------------------
Share of the Project is 5.43% determined by dividing the Rentable Square
Feet of the Premises by the Rentable Square Feet of the Project and
multiplying the resulting quotient by one hundred and rounding to the
second decimal place).
1.16 Parking Space Allocation. Tenant shall have the right
------------------------
to fifty-eight (58) unreserved parking spaces within the Parking
Facilities, thirteen (13) of which shall be unreserved surface parking
spaces in the parking lot adjacent to the Building and forty-five (45) of
which shall be unreserved covered parking spaces within the garage.
Tenant's Parking Space Allocation includes Tenant's Proportionate Share of
visitor and handicapped parking; as such handicapped parking is required by
applicable laws, regulations and ordinances.
1.17 Security Deposit. $18,906.00.
----------------
1.18 Broker (if any).
---------------
Landlord's: Quorum Real Estate Services Corporation
2201 Dupont Drive, Suite 360
Irvine, California 92715
Tenant's: Not applicable
1.19 Guarantor(s): Not applicable
-----------
1.20 Landlord's Notice USAA Real Estate Company
-----------------
Address: 8000 Robert F. McDermott Fwy., Suite 600
------- San Antonio, Texas 78230-3884
Attention: VP Portfolio Management
with a copy at USAA Real Estate Company
the same time to: 8000 Robert F. McDermott Fwy., Suite 600
San Antonio, Texas 78230-3884
Attention: VP Real Estate Counsel
USAA Realty Company
2201 Dupont Drive, Suite 360
Irvine, California 92715
Attention: AVP/Western Region
USAA Realty Company
2201 Dupont Drive, Suite 360
Irvine, California 92715
Attention: Property Manager
1.21 Tenant's Notice 1230 Rosecrans Avenue
---------------
Address: Suite 110
------- Manhattan Beach, California 90266
1.22 Guarantor(s)
------------
Notice Address: Not applicable.
--------------
1.23 Interest Rate: The per annum interest rate listed as the base
-------------
rate on corporate loans at large U.S. money center commercial banks as
published from time to time under "Money Rates" in the Wall Street Journal
plus three percent (3%), but in no event greater than the maximum rate
permitted by law. In the event the Wall Street Journal ceases to publish
such rates, Landlord shall choose, at Landlord's discretion, a similarly
published rate.
1.24 Common Area: All areas, improvements, facilities and equipment
-----------
from time to time designated by Landlord for the general and nonexclusive
common use or benefit of Tenant, other tenants of the Project, Landlord and
their respective Agents, including, without limitation, roadways, entrances
and exits, hallways, stairs, loading areas, landscaped areas, open areas,
park areas, exterior lighting, service drives, walkways, sidewalks,
atriums, courtyards, concourses, ramps, washrooms, maintenance and utility
rooms and closets, exterior utility lines, lobbies, elevators and their
housing and rooms, common window areas, common walls, common ceilings,
common trash areas, vending or mail areas, common pipes, conduits, ducts
and wires, and Parking Facilities.
1.25 Agents: Officers, partners, directors, employees, agents,
------
licensees, contractors, customers and invitees; to the extent customers and
invitees are under the principal's control or direction.
1.26 Parking Facilities: All parking areas now or hereafter
------------------
designated by Landlord for use by tenants of the Project and/or their
guests and invitees, including, without limitation, surface parking,
parking decks, parking structures and parking areas under or within the
Project whether reserved, exclusive, non-exclusive or otherwise.
ARTICLE II
THE PREMISES
2.1 Lease of Premises. In consideration of the agreements contained
-----------------
herein, Landlord hereby leases the Premises to Tenant, and Tenant hereby
leases the Premises from Landlord, for the Term and upon the terms and
conditions hereinafter provided. It is specifically understood that the
Rentable Square Feet of the Premises have been determined by Landlord's
architect and that, for the purpose of any calculations which are based on
the Rentable Square Feet of the Premises, the number of Rentable Square
Feet stated in ARTICLE I shall control. The Premises are leased subject to,
---------
and Tenant agrees not to violate, all present and future covenants,
conditions and restrictions of record which affect the Land, all of such
documents collectively referred to as the "Restrictions". As an
appurtenance to the Premises, Tenant shall have the general and
nonexclusive right, together with Landlord and the other tenants of the
Project and their respective Agents (as hereinafter defined), to use the
Common Area subject to the terms and conditions of this Lease.
2.2 Landlord's Reservations. Landlord shall retain absolute dominion
-----------------------
and control over the Common Area and shall operate and maintain the Common
Area in such manner as Landlord in its sole discretion, shall determine;
provided however, such exclusive right shall not operate to prohibit Tenant
from its material benefit and enjoyment of the Premises and the Common Area
(including the Parking Facilities) for the Permitted Use as defined in
Section 1.7. Tenant acknowledges that without advance notice to Tenant and
-----------
without any liability to Tenant in any respect, Landlord shall have the
right to (a) temporarily close any of the Common Area for maintenance,
alteration or improvement purposes; and (b) change, alter, add to,
temporarily close or otherwise affect the Parking Facilities or the Parking
Space Allocation in such manner as Landlord, in its sole discretion, deems
appropriate including, without limitation, the right to designate reserved
spaces available only for use by one or more tenants (however, in such
event, those parking spaces shall still be deemed Common Area for the
purpose of the definition of Operating Expenses), provided that, except in
emergency situations or situations beyond Landlord's control, Landlord
shall provide alternative Parking Facilities.
In addition to the other rights of Landlord under this Lease, Landlord
further reserves to itself and its respective successors and assigns the
right to use Tenant's name and the Rentable Square Feet of the Premises in
promotional materials relating to the Building or the Project; provided,
however, Landlord shall not use Tenant's name or the square footage of the
Premises in any media promotion without first obtaining the prior written
consent of Tenant, such consent not to be unreasonably withheld. Landlord
may exercise any or all of the foregoing rights without being deemed to be
guilty of an eviction, actual or constructive, or a disturbance or
interruption of the business of Tenant or Tenant's use or occupancy of the
Premises.
ARTICLE III
TERM
The Term shall commence on the Commencement Date and expire at
midnight on the Expiration Date.
ARTICLE IV
RENT
4.1 Basic Rent. Tenant shall pay to Landlord the Basic Rent as
----------
specified in SECTION 1.11.
------------
4.2 Payment of Basic Rent. Basic Rent shall be payable in monthly
---------------------
installments as specified in SECTION 1.11, in advance, without demand,
------------
notice, deduction, offset or counterclaim, on or before the first day of
each and every calendar month during the Term; provided, however, that the
installment of the Basic Rent payable for the first full calendar month of
the Term (and, if the Commencement Date occurs on a date other than on the
first day of a calendar month, Basic Rent prorated from such date until the
first day of the following month) shall be due and payable at the time of
execution and delivery of this Lease. Tenant shall pay the Basic Rent and
all Additional Rent as hereinafter defined, by good check or in lawful
currency of the United States of America, to Landlord at such address as
Landlord specifies to Tenant. Any payment made by Tenant to Landlord on
account of Basic Rent may be credited by Landlord to the payment of any
late charges then due and payable and to any Basic Rent or Additional Rent
then past due before being credited to Basic Rent currently due.
4.3 Additional Rent. All sums payable by Tenant under this Lease,
---------------
other than Basic Rent, shall be deemed "Additional Rent," and, unless
otherwise set forth herein, shall be payable in the same manner as set
forth above for Basic Rent.
4.4 Rent. Basic Rent as defined in SECTION 1.11 hereof and
---- ------------
Additional Rent as defined in SECTION 4.3 above shall jointly be referred
-----------
to as "Rent" within the meaning of California Civil Code Section 195 l(a),
the nonpayment of which shall entitle Landlord to exercise all rights and
remedies provided in Article 21 or by law.
4.5 Sales or Excise Taxes. Tenant shall pay to Landlord as
---------------------
Additional Rent, concurrently with payment of Basic Rent or Additional Rent
to Landlord all taxes (including, but not Limited to any and all sales,
rent or excise taxes) on Basic Rent or Additional Rent or other amounts
payable by Tenant to or otherwise benefitting Landlord, as levied or
assessed by any governmental or political body or subdivision thereof
against Landlord on account of such Basic Rent, Additional Rent or other
amounts payable by Tenant to or otherwise benefitting Landlord, or any
portion thereof.
ARTICLE V
SECURITY DEPOSIT
Simultaneously with the execution of this Lease, Tenant shall deposit
the Security Deposit (as defined in SECTION 1.17) with Landlord. The
------------
Security Deposit shall not bear interest to Tenant and shall be security
for Tenant's obligations under this Lease. Landlord shall be entitled to
commingle the Security Deposit with Landlord's other funds. Within ninety
(90) days after the Expiration Date or earlier termination of this Lease,
Landlord shall (provided an Event of Default does not then exist) return
the Security Deposit to Tenant, less such portion thereof as Landlord shall
have applied in accordance with this Article. If an Event of Default (as
defined in SECTION 21.1 hereof) shall occur or if Tenant fails to maintain
------------
the Premises in the condition required by this Lease, Landlord shall have
the right (but not the obligation), and without prejudice to any other
remedy which Landlord may have on account thereof, to apply all or any
portion of the Security Deposit to cure such default or to remedy the
condition of the Premises. If Landlord so applies the Security Deposit or
any portion thereof before the Expiration Date or earlier termination of
this Lease, Tenant shall deposit with Landlord, upon demand, the amount
necessary to restore the Security Deposit to its original amount. If
Landlord shall sell or transfer its interest in the Building, Landlord
shall have the right to transfer the Security Deposit to such purchaser or
transferee, in which event Tenant shall look solely to the new landlord for
the return of the Security Deposit, and Landlord thereupon shall be
released from all liability to Tenant for the return of the Security
Deposit.
ARTICLE VI
OPERATING EXPENSES
6.1 Operating Expense Rental. Commencing upon expiration of the Base
------------------------
Year, Tenant shall pay to Landlord throughout the remainder of the Term, as
Additional Rent, Tenant's Proportionate Share (as defined in SECTION 1.15)
------------
of the amount by which the Operating Expenses (as hereinafter defined)
during each Calendar Year exceed the Operating Expenses for the Base Year
(the "Operating Expense Rental"). In the event that the Expiration Date is
other than the last day of a Calendar Year, then the Operating Expenses for
the Base Year and applicable Calendar Year shall be appropriately prorated.
6.2 Operating Expenses Defined. As used herein, the term "Operating
--------------------------
Expenses" shall mean all expenses, costs and disbursements of every kind
and nature, except as specifically excluded otherwise herein, which
Landlord incurs because of or in connection with the ownership,
maintenance, management and operation of the Project, including, if the
Project is less than ninety-five percent (95%) occupied, all additional
costs and expenses of operation, management and maintenance of the Project
which Landlord determines that it would have paid or incurred during any
Calendar Year if the Project had been ninety-five percent (95%) occupied.
Operating Expenses may include, without limitation, all costs, expenses and
disbursements incurred or made in connection with the following:
(a) Wages and salaries of all employees, whether employed
by Landlord or the Project's management company, engaged in the operation
and maintenance of the Project, and all costs related to or associated with
such employees or the carrying out of their duties, including uniforms and
their cleaning, taxes, auto allowances and insurance and benefits
(including, without limitation, contributions to pension and/or profit
sharing plans and vacation or other paid absences);
(b) All supplies, tools, equipment and materials, including
janitorial and lighting supplies, used directly in the operation and
maintenance of the Project, including any lease payments therefor;
provided, however, any such equipment which under generally accepted
accounting principles should be classified as capital items shall be
amortized on a straight-line basis over their useful lives, not to exceed
the Project's useful life, together with interest on the unamortized
balance of such cost at the Interest Rate, or such higher rate as may have
been paid by Landlord on funds borrowed for the purposes of purchasing such
equipment;
(c) All utilities, including, without limitation,
electricity, telephone, water, sewer, power, gas, heating, lighting and air
conditioning for the Project, except to the extent such utilities are
charged directly to, or paid directly by, a tenant of the Project other
than as a part of the Operating Expenses;
(d) All maintenance, operation and service agreements for
the Project, and any equipment related thereto, including, without
limitation, service and/or maintenance agreements for the Parking
Facilities, energy management, HVAC, plumbing and electrical systems, and
for window cleaning, elevator maintenance, janitorial service,
groundskeeping, interior and exterior landscaping and plant maintenance;
(e) All insurance purchased by Landlord or the Project's
management company relating to the Project and any equipment or other
property contained therein or located thereon including, without
limitation, casualty, liability, earthquake, rental loss, sprinkler and
water damage insurance;
(f) All repairs to the Project (excluding to the extent
repairs are paid for by the proceeds of insurance or by Tenant or other
third parties other than as a part of the Operating Expenses), including
interior, exterior, structural or nonstructural repairs, and regardless of
whether foreseen or unforeseen; provided, however, any such repairs which
under generally accepted accounting principles should be classified as
capital improvements shall be amortized on a straight-line basis over their
useful lives, not to exceed the Project's useful life, together with
interest on the unamortized balance of such cost at the Interest Rate, or
such higher rate as may have been paid by Landlord on funds borrowed for
the purposes of constructing such capital improvements;
(g) All maintenance of the Project, including, without
limitation, repainting, replacement of wall coverings and window coverings,
replacement of carpeting, ice and snow removal, window washing,
landscaping, groundskeeping, trash removal and the patching, painting,
resealing and complete resurfacing of roads, driveways and parking lots;
provided, however, any such maintenance, repairs or replacements which
under generally accepted accounting principles should be classified as
capital improvements shall be amortized on a straight-line basis over their
useful lives, not to exceed the Projects useful life, together with
interest on the unamortized balance of such cost at the Interest Rate, or
such higher rate as may have been paid by Landlord on funds borrowed for
the purposes of constructing such capital improvements;
(h) A market rate management fee for management of
buildings of comparable size, age, location and quality in the El
Segundo/Manhattan Beach Area, payable to Landlord or the company or
companies managing the Project, if any;
(i) That part of office rent or rental value of space in
the Project used or furnished by Landlord to enhance, manage, operate and
maintain the Project; provided, however, such space shall not exceed 4,000
square feet;
(j) Accounting and legal fees incurred in connection with
the operation and maintenance of the Project, or related thereto;
(k) Any additional services not provided to the Project at
the Commencement Date but thereafter provided by Landlord which Landlord
reasonably deems necessary or desirable in connection with the management
or operation of the Project;
(l) Any capital improvements made to the Project for the
purpose of reducing Operating Expenses or which are required under any
governmental law or regulation that was not applicable to the Project as of
the Date of Lease (which are not a result of the nature of Tenant's
specific use of the Premises, which capital improvements shall be the
responsibility of Tenant), the cost of which shall be amortized on a
straight-line basis over the improvement's useful life, not to exceed the
Project's useful life, together with interest on the unamortized balance of
such cost at the Interest Rate, or such higher rate as may have been paid
by Landlord on funds borrowed for the purposes of constructing such capital
improvements; and
(m) Other expenses and costs reasonably necessary for
operating and maintaining the Project.
Notwithstanding the foregoing, Operating Expenses shall not include:
(i) ground rents, if any;
(ii) interest, principal, points and fees or amortization on any
mortgage or any other debt instrument encumbering the
Project;
(iii) capital items other than those referred to in subsections
(b), (f), (g) and (l) above;
(iv) expenditures incurred by Landlord for the repair of damage
to the Project resulting from fire or other casualty to the
extent Landlord is reimbursed by insurance proceeds;
(v) depreciation or amortization of the Project or any other
improvements, fixtures or equipment within the Project,
except as otherwise provided in subsections (b), (f), (g),
and (l) above;
(vi) Landlord's advertising and promotional expenses;
(vii) leasing commissions and finders' fees;
(viii) attorneys' fees incurred by Landlord in connection with
negotiations for leases with tenants or prospective tenants
of the Project and in connection with disputes with and/or
enforcement of any leases with tenants or prospective
tenants of the Project; provided, however, Operating
Expenses shall include those reasonable attorneys' fees and
other costs and expenses incurred in connection with
Landlord's successful negotiations of disputes or claims
related to items of Operating Expenses, enforcement of Rules
and Regulations for the Project and such other matters
relating to the maintenance of standards required by
Landlord under the Lease.
(ix) costs of tenant improvements, including architectural and
engineering costs, "tenant allowances" and "tenant concessions", permit,
license-and inspection fees, clean-up costs and other costs and expenses
incurred in renovating leased space for the exclusive use of a particular
tenant of the Project;
(x) items and services for which a tenant specifically
reimburses Landlord or for which a tenant pays third
persons;
(xi) wages, salaries, fees and benefits paid to administrative or
executive personnel of Landlord above the level of the
Project Manager and below such level for any personnel to
the extent not involved in the direct management of the
Project;
(xii) any cost representing an amount paid for services or
materials to a person, firm or entity related to Landlord or
any general partner of Landlord, to the extent such amount
exceeds the amount that would be paid for such services or
materials of comparable quality at the then existing market
rates to an unrelated person, firm or corporation;
(xiii) costs associated with the operation of the business of the
partnership which constitutes the Landlord, as the same are
distinguished from the cost of operation of the Project;
(xiv) costs incurred due to Landlord's violation of laws in effect
as of the Date of Lease;
(xv) all interest, late charges, penalties and attorneys' fees
incurred as a result of Landlord's violation of laws
(including environmental laws) promulgated after the Date of
Lease, except to the extent resulting from the failure of
Tenant to pay Rent in a timely manner;
(xvi) Landlord's charitable or political contributions;
(xvii) costs associated with the repair or correction of latent
defects in the initial design or construction of the
Project;
(xviii) costs of compliance with the ADA to the extent Landlord is
responsible for such costs pursuant to SECTION 9.4(a)
--------------
herein; and
(xix) Impositions (as defined in ARTICLE VII hereof);
-----------
6.3 Adjustments to Operating Expense Rental. Landlord shall submit
---------------------------------------
to Tenant, before the expiration of the Base Year and the beginning of each
Calendar Year thereafter or as soon thereafter as reasonably possible, a
statement of Landlord's estimate of Tenant's Proportionate Share of the
increase in Operating Expenses over Operating Expenses for the Base Year
payable by Tenant during such Calendar Year. Commencing upon expiration of
the Base Year and in addition to the Basic Rent, Tenant shall pay to
Landlord on or before the first day of each month during such Calendar Year
an amount equal to one-twelfth (1/12) of Tenant's Proportionate Share of
the estimated increase in Operating Expenses over Operating Expenses for
the Base Year payable by Tenant for such Calendar Year as set forth in
Landlord's statement. If Landlord fails to give Tenant notice of its
estimated payments due under this section for any Calendar Year, then
Tenant shall continue making monthly estimated payments in accordance with
the estimate for the previous Calendar Year until a new estimate is
provided. If Landlord determines that, because of unexpected increases in
Operating Expenses or other reasons, Landlord's estimate of the Operating
Expenses was too low, then Landlord shall have the right to give a new
statement of the estimated Operating Expenses due from Tenant for such
Calendar Year or the balance thereof and to bill Tenant for any deficiency
which may have accrued during such Calendar Year, and Tenant shall
thereafter pay monthly estimated payments based on such new statement.
Within ninety (90) days after the expiration of each Calendar Year
following expiration of the Base Year, or as soon thereafter as is
practicable, Landlord shall submit a statement to Tenant showing the actual
Operating Expenses for such Calendar Year and Tenant's Proportionate Share
of the amount by which such Operating Expenses exceed the Operating
Expenses for the Base Year. If for any Calendar Year, Tenant's estimated
monthly payments exceed Tenant's Proportionate Share of the amount by which
the actual Operating Expenses for such Calendar Year exceed the Operating
Expenses for the Base Year, then Landlord shall give Tenant a credit in the
amount of the overpayment toward Tenant's next monthly payments of
estimated Operating Expenses. If for any Calendar Year Tenant's estimated
monthly payments are less than Tenant's Proportionate Share of the amount
by which the actual Operating Expenses for such Calendar Year exceed the
Operating Expenses for the Base Year, then Tenant shall pay the total
amount of such deficiency to Landlord within fifteen (15) days after
receipt of the statement from Landlord. Landlord's and Tenant's obligations
with respect to any overpayment or underpayment of Operating Expenses shall
survive the expiration or termination of this Lease.
6.4 Right to Audit Operating Expense Rental Reconciliation. Provided
------------------------------------------------------
that no Event of Default shall exist under this Lease at the time Tenant
exercises any audit right hereunder, or would exist but for the pendency of
any cure periods provided for under SECTION 21.1. Tenant shall have one
------------
hundred and eighty (180) days after delivery of Landlord's Operating
Expense Rental reconciliation statement within which to complete an audit
of Landlord's books and records concerning the Project for such previous
Calendar Year, at Tenant's sole cost and expense. Tenant, or an independent
certified public accountant hired by Tenant, shall have the right to
inspect Landlord's books and records concerning the Project for such
previous Calendar Year during Landlord's normal business hours and at
Landlord's local office upon at least thirty (30) days prior written
notice. Tenant shall be entitled to only one audit per Calendar Year and in
no event shall any audit extend beyond thirty (30) days. In the event of an
assignment, Tenant and any assignee shall together be entitled to one audit
per Calendar Year. No subtenant shall have any right to conduct an audit
and no assignee shall conduct an audit for any period during which such
assignee was not in possession of the Premises. Tenant shall deliver to
Landlord a copy of the results of such audit within ten (10) days of
receipt by Tenant. In the event that Tenant's review of Landlord's books
and records results in a determination that Tenant's payment of Tenant's
Proportionate Share of Operating Expenses exceeded Tenant's Proportionate
Share of the actual Operating Expenses which should have been passed
through to Tenant, as substantiated, at Landlord's option, by an
independent certified public accountant hired by Landlord, then a credit in
the amount of the overpayment shall be applied towards Tenant's next
monthly payments of Operating Expenses. In the event that Tenant's review
of Landlord's books and records results in a determination that Tenant's
payment of Tenant's Proportionate Share of Operating Expenses was less than
Tenant's Proportionate Share of the actual Operating Expenses which should
have been passed through to Tenant, as substantiated at Landlord's option
by a certified public accountant hired by Landlord, then Tenant shall pay
the total amount of such deficiency to Landlord within thirty (30) days
after delivery of an invoice from Landlord.
ARTICLE VII
IMPOSITIONS RENTAL
7.1 Impositions Rental. Commencing upon expiration of the Base Year,
------------------
Tenant shall pay to Landlord, throughout the remainder of the Term as
Additional Rent, Tenant's Proportionate Share (as defined in SECTION 1.15)
------------
of the amount by which the Impositions (as hereinafter defined) during each
Calendar Year exceed the Impositions for the Base Year ("Impositions
Rental"). In the event that the Expiration Date is other than the last day
of a Calendar Year, then Impositions for the Base Year and applicable
Calendar Year shall be appropriately prorated.
7.2 Impositions Defined. Impositions shall be defined as all real
-------------------
property taxes and assessments levied against the Project and the various
estates therein and the underlying Land, all personal property taxes levied
on personal property of Landlord used in the management, operation,
maintenance and repair of the Project, all taxes, assessments and
reassessments of every kind and nature whatsoever levied or assessed in
lieu of or in substitution for existing or additional real or personal
property taxes and assessments on the Project or the sale, conveyance,
assignment, ground lease or other transfer thereof, service payments in
lieu of taxes, excises, transit charges and fees, housing, park and child
care assessments, development and other assessments, reassessments, levies,
fees or charges, general and special, ordinary and extraordinary,
unforeseen as well as foreseen, of any kind which are assessed, levied,
charged, confirmed or imposed by any public authority upon the Project, its
operations or the Rent provided for in this Lease, or amounts necessary to
be expended because of governmental orders, whether general or special,
ordinary or extraordinary, unforeseen as well as foreseen, of any kind and
nature for public improvements, services, benefits or any other purposes
which are assessed, levied, confirmed, imposed or become a lien upon the
Premises or Project or become payable during the Term. Further, for the
purposes of this Article, Impositions shall include the reasonable expenses
(including, without limitation, attorneys' fees) incurred by Landlord in
challenging or obtaining or attempting to obtain a reduction of such
Impositions, regardless of the outcome of such challenge. Notwithstanding
the foregoing, Landlord shall have no obligation to challenge Impositions.
If as a result of any such challenge, a tax refund is made to Landlord,
then provided no uncured Event of Default exists under this Lease, the
amount of such refund less the expenses of the challenge shall be deducted
from Impositions due in the Lease Year such refund is received. In the case
of any Impositions which may be evidenced by improvement or other bonds or
which may be paid in annual or other periodic installments, Landlord shall
elect to cause such bonds to be issued or cause such assessment to be paid
in installments over the maximum period permitted by law. Nothing contained
in this Lease shall require Tenant to pay any franchise, estate,
inheritance or succession transfer tax of Landlord, or any income, profits
or revenue tax or charge, upon the net income of Landlord from all sources;
provided, however, that if at any time during the Term under the laws of
the United States Government or the state, or any political subdivision
thereof, a tax (including, but not limited to any sales tax) or excise on
Rent or other amounts payable by Tenant to Landlord, or any other tax
however described, is levied or assessed by any such political body against
Landlord on account of Rent, or a portion thereof, Tenant shall pay one
hundred percent (100%) of any such tax or excise as Additional Rent as
provided in SECTION 4.5 above. Furthermore, Impositions shall specifically
-----------
exclude any increases in Impositions due during the initial Term as a
result of a reassessment of the Building or Project resulting from a
transfer of title or refinancing of the Building or Project pursuant to
California Constitution Article XIIIA (commonly known as Proposition 13).
7.3 Adjustments to Impositions Rental. Landlord shall submit to
---------------------------------
Tenant, before the expiration of the Base Year and the beginning of each
Calendar Year thereafter or as soon thereafter as reasonably possible, a
statement of Landlord's estimate of Tenant's Proportionate Share of the
increase in Impositions over Impositions for the Base Year payable by
Tenant during such Calendar Year. Commencing upon expiration of the Base
Year and in addition to the Basic Rent, Tenant shall pay to Landlord on or
before the first day of each month during such Calendar Year an amount
equal to one-twelfth (l/12) of Tenant's Proportionate Share of the
estimated increase in Impositions over Impositions for the Base Year
payable by Tenant for such Calendar Year as set forth in Landlord's
statement. If Landlord fails to give Tenant notice of its estimated
payments due under this section for any Calendar Year, then Tenant shall
continue making monthly estimated payments in accordance with the estimate
for the previous Calendar Year until a new estimate is provided. If
Landlord determines that, because of unexpected increases in Impositions or
other reasons, Landlord's estimate of the Impositions was too low, then
Landlord shall have the right to give a new statement of the Impositions
due from Tenant for such Calendar Year or the balance thereof and to bill
Tenant for any deficiency which may have accrued during such Calendar Year,
and Tenant shall thereafter pay monthly estimated payments based on such
new statement.
Within ninety (90) days after the expiration of each Calendar Year
following expiration of the Base Year, or as soon thereafter as is
practicable, Landlord shall submit a statement to Tenant showing the actual
Impositions for such Calendar Year and Tenant's Proportionate Share of the
amount by which such Impositions exceed the Impositions for the Base Year.
If for any Calendar Year, Tenant's estimated monthly payments exceed
Tenant's Proportionate Share of the amount by which the actual Impositions
for such Calendar Year exceed the Impositions for the Base Year, then
Landlord shall give Tenant a credit in the amount of the overpayment toward
Tenant's next monthly payments of estimated Impositions. If for any
Calendar Year Tenant's estimated monthly payments are less than Tenant's
Proportionate Share of the amount by which the actual Impositions for such
Calendar Year exceed the Impositions for the Base Year, then Tenant shall
pay the total amount of such deficiency to Landlord within fifteen (15)
days after receipt of the statement from Landlord. Landlord's and Tenant's
obligations with respect to any overpayment or underpayment of Impositions
shall survive the expiration or termination of this Lease.
ARTICLE VIII
PARKING
During the Term and subject to the Rules and Regulations (as defined
in ARTICLE XIX) promulgated by Landlord from time to time, Tenant shall
-----------
have the right to use the Parking Space Allocation (as defined in SECTION
-------
1.16). Notwithstanding the foregoing, Landlord reserves the right, from
----
time to time, to make reasonable changes in, additions to and deletions
from the Parking Facilities and the purposes to which the same may be
devoted and to relocate Tenant's parking spaces within the Parking
Facilities, provided that Landlord does not permanently reduce the number
of Tenant's parking spaces specified in Section 1.16.
------------
ARTICLE IX
USE AND REQUIREMENTS OF LAW
9.1 Use. The Premises will be used only for the Permitted Use (as
---
defined in SECTION 1.7). Tenant will not: (i) do or permit to be done in or
-----------
about the Premises, nor bring to, keep or permit to be brought or kept in
the Premises, anything which is prohibited by or will in any way conflict
with any law, statute, ordinance or governmental rule or regulation which
is now in force or which may be enacted or promulgated after the Date of
Lease; (ii) do or permit anything to be done in or about the Premises which
will in any way obstruct or interfere with the rights of other tenants of
the Building or Project, or injure or annoy them; (iii) use or allow the
Premises to be used for any improper, unlawful or objectionable purpose;
(iv) cause, maintain or permit any nuisance in, on or about the Premises or
commit or allow to be committed any waste in, on or about the Premises; or
(v) subject the Premises to any use which would increase the existing rate
of insurance on the Project or any portion thereof or cause any
cancellation of any insurance policy covering the Project or any portion
thereof.
9.2 Requirements of Law. At its sole cost and expense, Tenant will
-------------------
promptly comply with: (i) all laws, statutes, ordinances and governmental
rules, regulations or requirements now in force or in force after the
Commencement Date of the Lease; (ii) the requirements of any board of fire
underwriters or other similar body constituted now or after the
Commencement Date of the Lease; (iii) any direction or occupancy
certificate issued pursuant to any law by any public officer or officers;
and (iv) all Restrictions, insofar as (i) - (iv) above relate to the
condition, use or occupancy of the Premises, excluding requirements of
structural changes or changes outside the Premises unless related to (a)
Tenant's acts, (b) Tenant's business, (c) Tenant's use of the Premises, or
(d) improvements made by or for Tenant.
9.3 Hazardous Materials. (a) Tenant shall not bring or permit to
-------------------
remain on the Premises or the Project, or allow any of Tenant's Agents to
bring or permit to remain on the Premises or the Project, any asbestos,
petroleum or petroleum products, used oil, explosives, toxic materials or
substances defined as hazardous wastes, hazardous materials or hazardous
substances under any federal, state or local law or regulation ("Hazardous
Materials"), except for routine office and janitorial supplies used on the
Premises and stored in the usual and customary manner and quantities, and
in compliance with all applicable environmental laws and regulations.
Tenant shall not install or operate any underground storage tanks on or
under the Premises or the Project. Tenant's violation of the foregoing
prohibitions shall constitute a material breach and default hereunder and
Tenant shall indemnify, protect, hold harmless and defend (by counsel
acceptable to Landlord) Landlord, and its Agents and each of their
respective successors and assigns, from and against any and all claims,
damages, penalties, fines, liabilities and cost (including reasonable
attorneys' fees and court costs) caused by or arising out of (i) a
violation of the foregoing prohibition or (ii) the presence or release of
any Hazardous Materials on, from, under or about the Premises, the Project
or other properties as the direct or indirect result of Tenant's occupancy
of the Premises. Tenant, at its sole cost and expense, shall clean up,
remove, remediate and repair any soil or groundwater contamination or other
damage or contamination in conformance with the requirements of applicable
law caused by the presence or any release of any Hazardous Materials in,
on, from, under or about the Premises during the term of this Lease.
Neither the written consent of Landlord to the presence of the Hazardous
Materials, nor Tenant's compliance with all laws applicable to such
Hazardous Materials, shall relieve Tenant of its indemnification obligation
under this Lease. Tenant shall immediately give Landlord written notice (i)
of any suspected breach of this section, (ii) upon learning of the presence
or any release of any Hazardous Materials, or (iii) upon receiving any
notices from governmental agencies or other parties pertaining to Hazardous
Materials which may affect the Premises. Landlord shall have the right from
time to time, but not the obligation, to enter upon the Premises to conduct
such inspections and undertake such sampling and testing activities as
Landlord deems necessary or desirable to determine whether Tenant is in
compliance with this provision. The obligations of Tenant hereunder shall
survive the expiration or earlier termination, for any reason, of this
Lease.
(b) Landlord shall indemnify, defend and hold harmless
Tenant from and against any and all claims, damages, fines, judgments,
penalties, costs, liabilities, losses and attorneys' fees to the extent
caused by Landlord or its Agents and (i) arising out of or in connection
with the existence of Hazardous Materials on the Premises, Building or
Project; or (ii) relating to any clean up or remediation required under any
environmental laws. The obligations of Landlord hereunder shall survive the
expiration of earlier termination, for any reason, of this Lease.
9.4 ADA Compliance. Notwithstanding any other statement in this
--------------
Lease, the following provisions shall govern the parties' compliance with
the Americans With Disabilities Act of 1990, as amended from time to time,
Public Law 101-336; 42 U.S.C. Sections 2101, et seq. (the "ADA"):
(a) To the extent governmentally required as of the
Commencement Date of this Lease, Landlord shall be responsible for
compliance with Title III of the ADA, at its expense, and such expense
shall not be included as an Operating Expense of the Project, with respect
to any repairs, replacements or alterations to the Common Area of the
Project.
(b) To the extent governmentally required subsequent to the
Commencement Date of this Lease as a result of an amendment to Title III of
the ADA subsequent to the Commencement Date of this Lease, Landlord shall
be responsible for compliance with Title III of the ADA with respect to any
repairs, replacements or alterations to the Common Area of the Project, and
such expense shall be included as an Operating Expense of the Project.
(c) Landlord shall indemnify, defend and hold harmless
Tenant and its Agents from all fines, suits, procedures, penalties, claims,
liability, losses, expenses and actions of every kind, and all costs
associated therewith (including, without limitation, reasonable attorneys'
and consultants' fees) arising out of or in any way connected with
Landlord's failure to comply with Title III of the ADA as required above.
(d) To the extent governmentally required, Tenant shall be
responsible for compliance, at its expense, with Titles I and III of the
ADA with respect to the Premises.
(e) Tenant shall indemnify, defend and hold harmless
Landlord and its Agents from all fines, suits, procedures, penalties,
claims, liability, losses, expenses and actions of every kind, and all
costs associated therewith (including, without limitation, reasonable
attorneys' and consultants' fees) arising out of or in any way connected
with Tenant's failure to comply with Titles I and III of the ADA as
required above.
ARTICLE X
ASSIGNMENT AND SUBLETTING
10.1 Landlord's Consent.
------------------
(a) Tenant shall not assign, transfer, mortgage or
otherwise encumber this Lease or sublet or rent (or permit a third party to
occupy or use) the Premises, or any part thereof, nor shall any assignment
or transfer of this Lease or the right of occupancy hereunder be effected
by operation of law or otherwise, without the prior written consent of
Landlord, such consent not to be unreasonably withheld. A transfer at any
one time or from time to time of twenty percent (20%) or more of an
interest in Tenant (whether stock, partnership interest or other form of
ownership or control) by any person(s) or entity(ties) having an interest
in ownership or control of Tenant shall be deemed to be an assignment of
this Lease. Within thirty (30) days following Landlord's receipt of
Tenant's request for Landlord's consent to a proposed assignment, sublease,
or other encumbrance, together with all information required to be
delivered by Tenant pursuant to the provisions of SECTION 10.2 hereof,
------------
Landlord shall: (i) consent to such proposed transaction; (ii) refuse such
consent; or (iii) elect to terminate this Lease in the event of an
assignment, or in the case of a sublease, terminate this Lease as to the
portion of the Premises proposed to be sublet in accordance with the
provisions of SECTION 10.4 below. Any assignment, sublease or other
------------
encumbrance without Landlord's written consent shall be voidable by
Landlord and, at Landlord's election, constitute an Event of Default
hereunder.
(b) Without limiting other instances in which Landlord may
reasonably withhold consent to an assignment or sublease, Landlord and
Tenant acknowledge that Landlord may reasonably withhold consent in the
following instances:
(i) If the proposed use of the Premises by the assignee or
sublessee conflicts with Section 1.7, requires alterations that
-----------
would decrease the value of the leasehold improvements in the
Premises, requires substantially increased services by Landlord, or
would result in more than a reasonable number of occupants per floor,
(ii) If the proposed assignee or sublessee is: a governmental
entity; a person or entity with whom Landlord has negotiated for
space in the Project during the prior twelve (12) months; a present
tenant in the Project; a person or entity whose tenancy in the Project
would violate any exclusivity arrangement which Landlord has with any
other tenant; a person or entity of a character or reputation or
engaged in a business which is not consistent with the quality of the
Project; or not a party of reasonable financial worth and/or financial
stability in light of the responsibilities involved under this Lease
on the date consent is requested;
(iii) If the rent for the proposed assignee or sublessee is less
than eighty-five percent (85%) of the then prevailing market rental
rate for the Premises or comparable premises in the Project;
(iv) If an Event of Default has occurred under this Lease or if
an Event of Default would occur but for the pendency of any cure
periods provided under SECTION 21.1.
------------
(c) Notwithstanding that the prior express written permission of
Landlord to any of the aforesaid transactions may have been obtained, the
following shall apply:
(i) In the event of an assignment, contemporaneously with the
granting of Landlord's aforesaid consent, Tenant shall cause the assignee
to expressly assume in writing and agree to perform all of the covenants,
duties, and obligations of Tenant hereunder and such assignee shall be
jointly and severally liable therefore along with Tenant.
(ii) All terms and provisions of the Lease shall continue to
apply after any such transaction.
(iii) In any case where Landlord consents to an assignment,
transfer, encumbrance or subletting, the undersigned Tenant and any
Guarantor shall nevertheless remain directly and primarily liable for the
performance of all of the covenants, duties, and obligations of Tenant
hereunder (including, without limitation, the obligation to pay all Rent
and other sums herein provided to be paid), and Landlord shall be permitted
to enforce the provisions of this instrument against the undersigned
Tenant, any Guarantor and/or any assignee without demand upon or proceeding
in any way against any other person. Neither the consent by Landlord to any
assignment, transfer, encumbrance or subletting nor the collection or
acceptance by Landlord of rent from any assignee, subtenant or occupant
shall be construed as a waiver or release of the initial Tenant or any
Guarantor from the terms and conditions of this Lease or relieve Tenant or
any subtenant, assignee or other party from obtaining the consent in
writing of Landlord to any further assignment, transfer, encumbrance or
subletting.
(iv) Tenant hereby assigns to Landlord the rent and other sums
due from any subtenant, assignee or other occupant of the Premises and
hereby authorizes and directs each such subtenant, assignee or other
occupant to pay such rent or other sums directly to Landlord; provided
however, that until the occurrence of an Event of Default, Tenant shall
have the license to continue collecting such rent and other sums.
Notwithstanding the foregoing, in the event that the rent due and payable
by a sublessee under any such permitted sublease (or a combination of the
rent payable under such sublease plus any bonus or other consideration
therefor or incident thereto) exceeds the hereinabove provided Rent payable
under this Lease, or if with respect to a permitted assignment, permitted
license, or other transfer by Tenant permitted by Landlord, the
consideration payable to Tenant by the assignee, licensee, or other
transferee exceeds the Rent payable under this Lease, then Tenant shall be
bound and obligated to pay Landlord such excess rent and other excess
consideration within ten (10) days following receipt thereof by Tenant from
such sublessee, assignee, licensee, or other transferee, as the case may
be.
(v) Tenant shall pay Landlord a fee in the amount of ONE THOUSAND AND
NO/100 DOLLARS ($1,000.00) to reimburse Landlord for all its expenses
including, without limitation, reasonable attorney fees associated with
Tenant's request to assign, sublet or otherwise encumber the Premises under
the terms of the Lease.
10.2 Submission of Information. If Tenant requests Landlord's
-------------------------
consent to a specific assignment or subletting, Tenant will submit in
writing to Landlord: (i) the name and address of the proposed assignee or
subtenant; (ii) a counterpart of the proposed agreement of assignment or
sublease; (iii) reasonably satisfactory information as to the nature and
character of the business of the proposed assignee or subtenant, and as to
the nature of its proposed use of the space; (iv) banking, financial or
other credit information reasonably sufficient to enable Landlord to
determine the financial responsibility and character of the proposed
assignee or subtenant; (v) executed estoppel certificates from Tenant
containing such information as provided in SECTION 25.4 herein; and (vi)
------------
any other information reasonably requested by Landlord.
10.3 Consent of Mortgagee. Any transfer for which consent is
--------------------
required pursuant to any mortgage, deed of trust, security interest, or
title retention interest affecting the Land, Building or Project (the
"Mortgage") shall not be effective unless and until such consent is given
by the holder of any note or obligation secured by a Mortgage (the
"Mortgagee").
10.4 Landlord's Option to Recapture Premises. If Tenant proposes to
---------------------------------------
assign this Lease, Landlord may, at its option, upon written notice to
Tenant given within thirty (30) days after its receipt of Tenant's notice
of proposed assignment, together with all other necessary information,
elect to recapture the Premises and terminate this Lease. If Tenant
proposes to sublease all or part of the Premises for the remainder of the
Term, Landlord may, at its option upon written notice to Tenant given
within thirty (30) days after its receipt of Tenant's notice of proposed
subletting, together with all other necessary information, elect to
recapture such portion of the Premises as Tenant proposes to sublease and
upon such election by Landlord, this Lease shall terminate as to the
portion of the Premises recaptured. If a portion of the Premises is
recaptured, the Rent payable under this Lease shall be proportionately
reduced based on the square footage of the Rentable Square Feet retained by
Tenant and the square footage of the Rentable Square Feet leased by Tenant
immediately prior to such recapture and termination, and Landlord and
Tenant shall thereupon execute an amendment to this Lease in accordance
therewith. Landlord may thereafter, without limitation, lease the
recaptured portion of the Premises to the proposed assignee or subtenant
without liability to Tenant. Upon any such termination, Landlord and Tenant
shall have no further obligations or liabilities to each other under this
Lease with respect to the recaptured portion of the Premises, except with
respect to obligations or liabilities which accrue or have accrued
hereunder as of the date of such termination (in the same manner as if the
date of such termination were the date originally fixed for the expiration
of the term hereof). Notwithstanding the foregoing, Tenant may, within ten
(10) days after Landlord's notice to Tenant terminating this Lease with
respect to the assigned or sublet portion of the Premises, withdraw
Tenant's request for Landlord's consent to any assignment or subletting
under this ARTICLE X, in which event this Lease shall remain in full force
---------
and effect with respect to the entire Premises.
10.5 Transfers to Related Entities. Notwithstanding anything in this
-----------------------------
ARTICLE X to the contrary, provided no Event of Default exists under this
---------
Lease or would exist but for the pendency of any cure periods provided for
under SECTION 21.1, Tenant may, without Landlord's consent, but after
------------
providing written notice to Landlord, assign this Lease or sublet all or
any portion of the Premises to any Related Entity (as hereinafter defined)
provided that (i) in the event of an assignment, such Related Entity
assumes in full all of Tenant's obligations under this Lease; (ii) Landlord
is provided with a counterpart of the fully executed agreement of
assignment or sublease; (iii) Tenant remains liable under the terms of this
Lease; (iv) such Related Entity is not a governmental entity or agency; (v)
such Related Entity's use requirement does not differ from the permitted
use described in Section 1.7 hereof; (vi) such Related Entity does not
require additional services other than those agreed to be provided by
Landlord under the terms of this Lease; (vii) such Related Entity's use of
the Premises would not cause Landlord to be in violation of any exclusivity
agreement within the Project; and (viii) the net worth (computed in
accordance with generally accepted accounting principles) of any assignee
after such transfer is greater than or equal to the greater of (i) the net
worth of Tenant as of the Date of Lease; or (ii) net worth of Tenant
immediately prior to such transfer, and proof satisfactory to Landlord that
such net worth standards have been met shall have been delivered to
Landlord at least ten (10) days prior to the effective date of any such
transaction. SECTIONS 10.1(A), 10.1(B), 10.1(C)(IV), 10.1 (C)(V), 10.2 AND
-------------------------------------------------------------
10.4 shall not apply to any assignment or sublease pursuant to this SECTION
---- -------
10.5. "Related Entity" shall be defined as any parent company, subsidiary,
----
affiliate or related corporate entity of Tenant which controls, is
controlled by, or is under common control with Tenant.
ARTICLE XI
MAINTENANCE AND REPAIR
11.1 Landlord's Obligation. Landlord will maintain, repair and
---------------------
restore in reasonably good order and condition (i) the Common Area
(including lobbies, stairs, elevators, corridors, restrooms, walkways,
driveways, grounds and Parking Facilities); (ii) the mechanical, plumbing,
electrical, life, safety and HVAC (as hereinafter defined) equipment
serving the Building and the Premises (except to the extent such equipment
within the Premises constitutes Non-Building Standard Improvements, as
hereinafter defined); (iii) the structure of the Building (including roof,
exterior walls, foundation, windows and Building standard lighting); and
(iv) Building Standard Improvements located within the Premises (as
hereinafter defined). The cost of such maintenance and repairs to the
Building, the Common Area, the Premises and said equipment shall be
included in the Operating Expenses and paid by Tenant as provided in
ARTICLE VI herein; provided, however, Tenant shall bear the full cost [plus
----------
ten percent (10%) of such cost for Landlord's overhead] of any maintenance,
repair or restoration necessitated by the negligence or willful misconduct
of Tenant or its Agents. Tenant waives all rights to make repairs at the
expense of Landlord, to deduct the cost of such repairs from any payment
owed to Landlord under this Lease or to vacate the Premises. Tenant further
waives the provisions of California Civil Code Section 1941 and 1942 with
respect to Landlord's obligations under this Lease. Building Standard
Improvements shall be defined as all improvements within the Premises as of
the Date of Lease other than Non-Building Standard Improvements and
Tenant's equipment, personal property and trade fixtures. Non-Building
Standard Improvements shall be defined as including the following located
within the Premises: (i) supplemental HVAC system, and (ii) plumbing
systems and fixtures located within the kitchen.
11.2 Tenant's Obligation. Subject to Landlord's express obligations
-------------------
set forth in SECTION 11.1 above, Tenant, at its expense, shall maintain the
------------
Premises (including Tenant's equipment, personal property and trade
fixtures located in the Premises) in their condition at the time they were
delivered to Tenant, reasonable wear and tear excepted. Tenant's obligation
shall include without limitation the obligation to maintain and repair all
Non-Building Standard Improvements within the Premises,. Tenant will
immediately advise Landlord of any damage to the Premises or the Project.
Tenant and Tenant's telecommunications companies, including, but not
limited to, local exchange telecommunications companies and alternative
access vendor services companies shall have no right of access to the Land,
Building or the Project for the installation and operation of
telecommunications systems, including, but not limited to, voice, video,
data and any other telecommunications services provided over wire, fiber
optic, microwave, wireless and any other transmission systems, for part or
all of Tenant's telecommunications within the Building without Landlord's
prior written consent, such consent not to be unreasonably withheld.
11.3 Landlord's Right to Maintain or Repair. If Tenant fails to
--------------------------------------
maintain the Premises or if Landlord agrees to allow Tenant to repair,
restore or replace any damage or injury as provided in SECTION 11.2 and
------------
Tenant fails within five (5) days following notice to Tenant, to commence
to maintain or to repair, restore or replace any damage to the Premises or
Project caused by Tenant or its Agents and diligently pursue to completion
such maintenance or repair, restoration or replacement, Landlord may, at
its option, cause all required maintenance or repairs, restorations or
replacements to be made and Tenant shall pay Landlord pursuant to SECTION
-------
11.2.
----
ARTICLE XII
INITIAL CONSTRUCTION; ALTERATIONS
12.1 Initial Construction. Tenant and Landlord acknowledge that
--------------------
Tenant has occupied the Premises for the previous five year period under
the terms of that certain sublease dated December 31, 1990, by and between
Hughes Aircraft Company, as sublessor, and CompuMed, Inc., as sublessee.
THEREFORE, TENANT ACCEPTS THE PREMISES "AS IS", "WHERE IS" AND WITH ANY AND
ALL FAULTS, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS SECTION 12.1.
-------------
LANDLORD NEITHER MAKES NOR HAS MADE ANY REPRESENTATIONS OR WARRANTIES,
EXPRESS OR IMPLIED, WITH RESPECT TO THE QUALITY, SUITABILITY OR FITNESS OF
THE PREMISES, OR THE CONDITION OR REPAIR THEREOF. SUBJECT TO THE WORK TO BE
COMPLETED PURSUANT TO THIS SECTION 12.1, TENANT ACCEPTS THE PREMISES AS
------------
BEING IN GOOD ORDER AND SATISFACTORY CONDITION, AND IN A STATE AND
CONDITION SATISFACTORY, ACCEPTABLE AND SUITABLE FOR THE TENANTS USE
PURSUANT TO THIS LEASE. TENANT HEREBY WAIVES THE BENEFIT OF CALIFORNIA
CIVIL CODE SECTION 1941. LANDLORD SHALL CONSTRUCT, AT ITS SOLE COST AND
EXPENSE, CERTAIN IMPROVEMENTS ON THE FIRST FLOOR OF THE BUILDING IN
ACCORDANCE WITH THE SPACE PLAN ATTACHED HERETO AS EXHIBIT F AND
---------
INCORPORATED BY REFERENCE HEREIN. TENANT WILL PROVIDE LANDLORD ACCESS TO
ITS PREMISES FOR THE PURPOSE OF CONSTRUCTING SUCH IMPROVEMENTS.
12.2 Alterations. Tenant shall not make or permit any alterations,
-----------
decorations, additions or improvements of any kind or nature to the
Premises or the Project, whether structural or nonstructural, interior,
exterior or otherwise ("Alterations") without the prior written consent of
Landlord, said consent not to be unreasonably withheld. Landlord may impose
any reasonable conditions to its consent, including, without limitation:
(i) delivery to Landlord of written and unconditional waivers of mechanic's
and materialmen's liens as to the Project for all work, labor and services
to be performed and materials to be furnished, signed by all contractors,
subcontractors, materialmen and laborers participating in the Alterations;
(ii) prior approval of the plans and specifications and contractor(s) with
respect to the Alterations and any other documents and information
reasonably requested by Landlord; (iii) supervision by Landlord's
representative, at Tenant's expense, of the Alterations; (iv) delivery to
Landlord of payment and performance bonds naming Landlord and Mortgagee as
obligees as Landlord reasonably determines is necessary in view of the
nature and scope of the Alterations; and (v) proof of worker's compensation
insurance and commercial general liability insurance in such amounts and
meeting such requirements as requested by Landlord. The Alterations shall
conform to the requirements of Landlord's and Tenant's insurers and of the
federal, state and local governments having jurisdiction over the Premises
and shall be performed in accordance with the terms and provisions of this
Lease and in a good and workmanlike manner befitting a first class office
building. If the Alterations are not performed as herein required, Landlord
shall have the right, at Landlord's option, to halt any further
Alterations, or to require Tenant to perform the Alterations as herein
required or to require Tenant to return the Premises to its condition
before such Alterations. Subject to Section 12.4 herein, all Alterations
and fixtures, whether temporary or permanent in character, made in or upon
the Premises either by Tenant or Landlord, will immediately become
Landlord's property and, at the end of the Term will remain on the Premises
without compensation to Tenant.
12.3 Mechanics' Liens. Tenant will pay or cause to be paid all costs
----------------
and charges for: (i) work done by Tenant or caused to be done by Tenant, in
or to the Premises; and (ii) materials furnished for or in connection with
such work. Tenant will indemnify Landlord against and hold Landlord, the
Premises, and the Project free, clear and harmless of and from all
mechanics' liens and claims of liens, and all other liabilities, liens,
claims, and demands on account of such work by or on behalf of Tenant. If
any such lien, at any time, is filed against the Premises, or any part of
the Project, Tenant will cause such lien to be discharged of record within
ten (10) days after the filing of such lien, except that if Tenant desires
to contest such lien, it will furnish Landlord, within such 10-day period,
security reasonably satisfactory to Landlord of at least 150% of the amount
of the claim, plus estimated costs and interests. If a final judgment
establishing the validity or existence of a lien for any amount is entered,
Tenant will immediately pay and satisfy the same. If Tenant fails to pay
any charge for which a mechanic's lien has been filed, and has not given
Landlord security as described above, Landlord may, at its option, pay such
charge and related costs and interest, and the amount so paid, together
with attorneys' fees incurred in connection with such lien, will be
immediately due from Tenant to Landlord as Additional Rent. Nothing
contained in this Lease will be deemed the consent or agreement of Landlord
to subject Landlord's interest in all or any portion of the Project to
liability under any mechanics' lien or to other lien law. If Tenant
receives notice that a lien has been or is about to be filed against the
Premises or any part of the Project or any action affecting title to the
Project has been commenced on account of work done by or for or materials
furnished to or for Tenant, it will immediately give Landlord written
notice of such notice. At least fifteen (15) days prior to the commencement
of any work (including, but not limited to, any maintenance, repairs or
Alteration) in or to the Premises, by or for Tenant, Tenant will give
Landlord written notice of the proposed work and the names and addresses of
the persons supplying labor and materials for the proposed work. Landlord
will have the right to post notices of non-responsibility or similar
notices, if applicable, on the Premises or in the public records in order
to protect the Premises against such liens.
12.4 Removal of Alterations. All or any part of the Alterations
----------------------
(including, without limitation, wiring), whether made with or without the
consent of Landlord, shall, at the election of Landlord, either be removed
by Tenant at its expense before the expiration of the Term or shall remain
upon the Premises and be surrendered therewith at the Expiration Date or
earlier termination of this Lease as the property of Landlord without
disturbance, molestation or injury. If Landlord requires the removal of all
or part of the Alterations, Tenant, at its expense, shall repair any damage
to the Premises or the Project caused by such removal and restore the
Premises and the Project to its condition prior to the construction of such
Alterations. If Tenant fails to remove the Alterations upon Landlord's
request and repair and restore the Premises and Project, then Landlord may
(but shall not be obligated to) remove, repair and restore the same and the
cost of such removal, repair and restoration together with any and all
damages which Landlord may suffer and sustain by reason of the failure of
Tenant to remove, repair and restore the same, shall be charged to Tenant
and paid upon demand.
ARTICLE XIII
SIGNS
No sign, advertisement or notice shall be inscribed, painted, affixed,
placed or otherwise displayed by Tenant on any part of the Project or the
outside or the inside (including, without limitation, the windows) of the
Building or the Premises. Landlord shall provide, at Landlord's expense, a
directory in the lobby of the Building listing all Building tenants, but
shall have no obligation to list any assignees or subtenants. Landlord also
shall, at Landlord's expense, place a sign in the Building standard sign
material and lettering identifying the suite number and/or Tenant name on
or in the immediate vicinity of the entry door to the Premises. Landlord
shall have no obligation to provide any entry door signage for the benefit
of any assignee or subtenant and any such signage provided by another party
identifying the suite number and/or assignee or subtenant name in the
Building shall be consistent with Building standard sign material and
lettering and located on or in the immediate vicinity of the entry door to
the assigned or sublet portion of the Premises. If any prohibited sign,
advertisement or notice is nevertheless exhibited by Tenant, Landlord shall
have the right to remove the same, and Tenant shall pay upon demand any and
all expenses incurred by Landlord in such removal, together with interest
thereon at the Interest Rate from the demand date.
ARTICLE XIV
TENANT'S EQUIPMENT AND PROPERTY
14.1 Moving Tenant's Property. Any and all damage or injury to the
------------------------
Premises or the Project caused by moving the property of Tenant into or out
of the Premises, or due to the same being on the Premises, shall be
repaired by Landlord, at the expense of Tenant. No furniture, equipment or
other bulky matter of any description shall be received into the Building
or carried in the elevators except as may be approved in writing by
Landlord, and the same shall be delivered only through the designated
delivery entrance and freight elevator, if any, in the Building, at such
times as shall be designated by Landlord. All moving of furniture,
equipment, and other materials shall be subject to such rules and
regulations as Landlord may promulgate from time to time; provided however,
in no event shall Landlord be responsible for any damages to or charges for
moving the same. Tenant shall promptly remove from the Common Area any of
Tenant's furniture, equipment or other property there deposited.
14.2 Installing and Operating Tenant's Equipment. Without first
-------------------------------------------
obtaining the written consent of Landlord, Tenant shall not install or
operate in the Premises (i) any electrically operated equipment or other
machinery, other than standard office equipment that does not require
wiring, cooling or other service in excess of Building standards, (ii) any
equipment of any kind or nature whatsoever which will require any changes,
replacements or additions to, or changes in the use of, any water, heating,
plumbing, air conditioning or electrical system of the Premises or the
Project, or (iii) any equipment which exceeds the load capacity per square
foot for the Building. Landlord's consent to such installation or operation
may be conditioned upon the payment by Tenant of additional compensation
for any excess consumption of utilities and any additional power, wiring,
cooling or other service (as determined in the sole discretion of Landlord)
that may result from such equipment. Machines and equipment which cause
noise or vibration that may be transmitted to the structure of the Building
or to any space therein so as to be objectionable to Landlord or any other
Project tenant shall be installed and maintained by Tenant, at its expense,
on vibration eliminators or other devices sufficient to eliminate such
noise and vibration.
ARTICLE XV
RIGHT OF ENTRY
Tenant shall permit Landlord or its Agents, at any time and without
notice, to enter the Premises, without charge therefor to Landlord and
without diminution of Rent: (i) to examine, inspect and protect the
Premises and the Project; (ii) to make such alterations and repairs which
in the reasonable judgment of Landlord may be deemed necessary or
desirable; (iii) to exhibit the same to prospective purchaser(s) of the
Building or the Project or to present or future Mortgagees; or (iv) to
exhibit the same to prospective tenants during the last eighteen (18)
months of the Term.
ARTICLE XVI
INSURANCE
16.1 Certain Insurance Risks. Tenant will not do or permit to be
-----------------------
done any act or thing upon the Premises or the Project which would: (i)
jeopardize or be in conflict with fire insurance policies covering the
Project, and fixtures and property in the Project; or (ii) increase the
rate of fire insurance applicable to the Project to an amount higher than
it otherwise would be for general office use of the Project; or (iii)
subject Landlord to any liability or responsibility for injury to any
person or persons or to property by reason of any business or operation
being conducted upon the Premises.
16.2 Landlord's Insurance. At all times during the Term, Landlord
--------------------
will carry and maintain:
(a) fire and extended coverage insurance covering the Building,
its equipment and common area furnishings, and leasehold improvements in
the Premises to the extent of any initial build out of the Premises by the
Landlord;
(b) bodily injury and property damage insurance; and
(c) such other insurance as Landlord reasonably determines from
time to time.
The insurance coverages and amounts in this SECTION 16.2 will be determined
------------
by Landlord in an exercise of its reasonable discretion.
16.3 Tenant's Insurance. At all times during the Term, Tenant will
------------------
carry and maintain, at Tenant's expense, the following insurance, in the
amounts specified below or such other amounts as Landlord may from time to
time reasonably request, with insurance companies and on forms satisfactory
to Landlord:
(a) Bodily injury and property damage liability insurance, with
a combined single occurrence limit of not less than $1,000,000. All such
insurance will be on an occurrence commercial general liability form
including without limitation, personal injury and contractual liability
coverage for the performance by Tenant of the indemnity agreements set
forth in ARTICLE XVIII of this Lease. Such insurance shall include waiver
-------------
of subrogation rights in favor of Landlord and Landlord's management
company.
(b) Insurance covering all of Tenant's furniture and fixtures,
machinery, equipment, stock and any other personal property owned and used
in Tenant's business and found in, on or about the Project, and any
leasehold improvements to the Premises in excess of any initial buildout of
the Premises by the Landlord, in an amount not less than the full
replacement cost. Property forms will provide coverage on an open perils
basis insuring against "all risks of direct physical loss." All policy
proceeds will be used for the repair or replacement of the property damaged
or destroyed, however, if this Lease ceases under the provisions of ARTICLE
-------
XX, Tenant will be entitled to any proceeds resulting from damage to
--
Tenant's furniture and fixtures, machinery and equipment, stock and any
other personal property;
(c) Worker's compensation insurance insuring against and
satisfying Tenant's obligations and liabilities under the worker's
compensation laws of the state in which the Premises are located, including
employer's liability insurance in the limit of $1,000,000 aggregate. Such
insurance shall include waiver of subrogation rights in favor of Landlord
and Landlord's management company.
(d) If Tenant operates owned, hired, or nonowned vehicles on the
Project, comprehensive automobile liability will be carried at a limit of
liability not less than $1,000,000 combined bodily injury and property
damage;
(e) Umbrella liability insurance in excess of the underlying
coverage listed in paragraphs (a), (c) and (d) above, with limits of not
less than $2,000,000 per occurrence/$2,000,000 aggregate, and
(f) All insurance required under this ARTICLE XVI shall be
-----------
issued by such good and reputable insurance companies qualified to do and
doing business in the state in which the Premises are located and having a
rating not less than A:VIII as rated in the most current copy of Best's
Insurance Report in the form customary to this locality.
16.4 Forms of the Policies. Certificates of insurance together with
---------------------
copies of the policies and any endorsements naming Landlord, Landlord's
management company, and any others specified by Landlord as additional
insureds will be delivered to Landlord prior to Tenant's occupancy of the
Premises and from time to time at least sixty (60) days prior to the
expiration of the term or reduction in coverage of each such policy. All
commercial general liability and property policies maintained by Tenant
will be written as primary policies, not contributing with and not
supplemental to the coverage that Landlord may carry. Commercial general
liability insurance required to be maintained by Tenant by this ARTICLE XVI
-----------
will not be subject to a deductible. In the event Tenant fails to purchase
and maintain any of the insurance required hereunder, Landlord reserves the
right, but not the obligation, to purchase such insurance on behalf of
Tenant, and at Tenant's expense, with any expenses incurred by Landlord in
connection therewith being reimbursed to Landlord by Tenant within thirty
(30) days of written demand thereof.
16.5 Waiver of Subrogation. Tenant waives any and all rights to
---------------------
recover against Landlord and Landlord's management company or against the
Agents of Landlord, for any loss or damage to Tenant arising from any cause
covered by any property insurance required to be carried by Tenant pursuant
to this ARTICLE XVI or any other property insurance actually carried by
-----------
Tenant to the extent of the limits of such policy. Tenant, from time to
time, will cause its respective insurers to issue appropriate waiver of
subrogation rights endorsements to all property insurance policies carried
in connection with the Project or the Premises or the contents of the
Project or the Premises. Tenant agrees to cause all other occupants of the
Premises claiming by, under or through Tenant, to execute and deliver to
Landlord and Landlord's management company such a waiver of claims and to
obtain such waiver of subrogation rights endorsements.
16.6 Adequacy of Coverage. Landlord and its Agents make no
--------------------
representation that the limits of liability specified to be carried by
Tenant pursuant to this ARTICLE XVI are adequate to protect Tenant. If
-----------
Tenant believes that any of such insurance coverage is inadequate, Tenant
will obtain such additional insurance coverage as Tenant deems adequate, at
Tenant's sole expense. Furthermore, in no way does the insurance required
herein limit the liability of Tenant assumed elsewhere in the Lease.
ARTICLE XVII
LANDLORD SERVICES AND UTILITIES
17.1 Ordinary Services to the Premises. Landlord shall furnish to
---------------------------------
the Premises throughout the Term: (i) heating, ventilation, and air
conditioning ("HVAC") appropriate for the Permitted Use during Normal
Business Hours (as defined in the Rules and Regulations), except for legal
holidays observed by the federal government; (ii) reasonable janitorial
service, including trash removal from the Premises; (iii) reasonable use of
all existing basic intra-Building and/or Project telephone and network
cabling; (iv) hot and cold water from points of supply; (v) restrooms; (vi)
elevator service, provided that Landlord shall have the right to remove
such elevators from service as may be required for moving freight or for
servicing or maintaining the elevators or the Building; and (vii) proper
facilities to furnish sufficient electrical power for Building standard
lighting, typewriters, dictating equipment, calculating machines, personal
computers and other machines of similar low electrical consumption, but not
including electricity and air conditioning units required for equipment of
Tenant that is in excess of Building standard. The cost of all services
provided by Landlord hereunder shall be included within Operating Expenses,
unless charged directly (and not as a part of Operating Expenses) to Tenant
or another tenant of the Project. Landlord may establish reasonable
measures to conserve energy and water.
17.2 Additional Services. Should Tenant desire any additional
-------------------
services beyond those described in SECTION 17.1 hereof or a rendition of
------------
any of such services outside the normal times for providing such service,
Landlord may (at Landlord's option), upon reasonable advance notice from
Tenant to Landlord, furnish such services, and Tenant agrees to pay
Landlord upon demand Landlord's additional expenses resulting therefrom.
Should Landlord consent to a Tenant request for additional
telecommunications services to the Project or the Building, Tenant shall
pay as Additional Rent the actual installation, repair and maintenance
charges for such use, including the cost of installing any necessary
additional riser capacity, plus ten percent (10%) of such expense for
Landlord's overhead. Landlord may, from time to time during the Term, set a
per hour charge for after-hours service which shall include the cost of the
utility, service, labor costs, administrative costs and a cost for
depreciation of the equipment used to provide such after-hours service.
17.3 Interruption of Services. Landlord will not be liable to Tenant
------------------------
or any other person, for direct or consequential damage, or otherwise, and
Tenant shall not be entitled to any abatement or reduction of rent, for any
failure to supply any heat, air conditioning, elevator, cleaning, lighting
or security or for any surges or interruptions of electricity,
telecommunications or other service Landlord has agreed to supply during
any period when Landlord uses reasonable diligence to supply such services.
Landlord reserves the right temporarily to discontinue such services, or
any of them, at such times as may be necessary by reason of accident,
repairs, alterations or improvement, strikes, lockouts, riots, acts of God,
governmental preemption in connection with a national or local emergency,
any rule, order or regulation of any governmental agency, conditions of
supply and demand which make any product unavailable, Landlord's compliance
with any mandatory or voluntary governmental energy conservation or
environmental protection program, or any other happening beyond the control
of Landlord. Landlord will not be liable to Tenant or any other person or
entity for direct or consequential damages, and Tenant shall not be
entitled to any abatement or reduction of rent, resulting from the
admission to or exclusion from the Building or Project of any person. In
the event of invasion, mob, riot, public excitement or other circumstances
rendering such action advisable in Landlord's reasonable opinion, Landlord
will have the right to prevent access to the Building or Project during the
continuance of the same by such means as Landlord, in its reasonable
discretion, may deem appropriate, including, without limitation, locking
doors and closing Parking Facilities and the Common Area. Landlord will not
be liable for damages to persons or property or for injury to, or
interruption of, business for any discontinuance permitted under this
ARTICLE XVII, nor will such discontinuance in any way be construed as an
------------
eviction of Tenant or cause an abatement of rent or operate to release
Tenant from any of Tenant's obligations under this Lease. Notwithstanding
the foregoing, (i) if any interruption of utilities or services shall
continue for three (3) business days after oral or written notice from
Tenant to Landlord; (ii) such interruption of utilities or services shall
render any portion of the Premises unusable for the normal conduct of
Tenant's business and Tenant, in fact, ceases to use and occupy such
portion of the Premises for the normal conduct of its business; and (iii)
such interruption of utilities or services is due to the negligence of
Landlord; then all Rent payable hereunder with respect to such portion of
the Premises rendered unusable for the normal conduct of Tenant's business
in which Tenant, in fact, ceases to use and occupy, shall be abated after
the expiration of such three (3) business day period, in the event such
utilities or services are not restored, and continue until such time that
the utilities or services are restored.
17.4 Meters. Landlord reserves the right to separately meter or
------
monitor the utility services provided to the Premises and bill the charges
directly to Tenant or to separately meter any other tenant and bill the
charges directly to such tenant and to make appropriate adjustments to the
Operating Expenses based on the meter charges.
17.5 Utility Charges. All telephone, electricity, gas, heat and
---------------
other utility service used by Tenant in the Premises shall be paid for by
Tenant except to the extent the cost of same is included within Operating
Expenses.
17.6 After-Hours HVAC Service to the Premises. Notwithstanding the
----------------------------------------
provisions of SECTION 17.2 above, if Tenant requires or requests that the
------------
HVAC service furnished by Landlord to the Premises be provided to all or
any portion of the Premises during periods in addition to Normal Business
Hours, then Landlord shall furnish such service to Tenant provided that
Tenant shall notify Landlord twelve (12) hours in advance of such extra
service usage. Landlord's initial charge for after hours HVAC service shall
be $39.00 per hour, subject to increases based upon increased utility costs
and increased industry standard maintenance costs. Landlord shall bill all
charges in connection with such after hours HVAC usage directly to Tenant
on a monthly basis. Tenant shall reimburse Landlord in full within fifteen
(15) days of receipt of the bill. Tenant's obligations with respect to such
after hours HVAC shall be in addition to and not in lieu of its obligation
to pay its Proportionate Share of the HVAC costs for the Building in
accordance with ARTICLE VI hereof.
----------
17.7 Supplemental HVAC. Notwithstanding the provisions of SECTION
----------------- -------
17.2 above, supplemental heating, ventilation and air conditioning shall be
----
supplied to portions of the Premises throughout the Term during and after
Normal Business Hours in the form of a water source system located within
the Premises for the purpose of cooling Tenant's computer equipment
(collectively the "Supplemental HVAC"). Landlord shall, at Landlord's cost,
separately meter the Supplemental HVAC equipment. Landlord's initial charge
for Supplemental HVAC usage shall be $.45 per hour per ton capacity of the
Supplemental HVAC equipment, plus actual electrical utility charges in
connection with the operation of the fan coil and Liebert unit located
within the Premises, subject to increases based upon increased utility
costs and increased industry standard maintenance costs. Landlord shall
bill all charges in connection with such Supplemental HVAC usage directly
to Tenant on a monthly basis. Tenant shall reimburse Landlord in full
within fifteen (15) days of receipt of the bill. Tenant shall maintain and
repair the fan coil and Liebert unit located within the Premises in good
order and condition. Tenant's obligations with respect to such Supplemental
HVAC shall be in addition to and not in lieu of its obligation to pay its
Proportionate Share of the HVAC costs for the Building in accordance with
ARTICLE VI herein.
----------
ARTICLE XVIII
LIABILITY OF LANDLORD
18.1 Indemnification. Tenant will neither hold nor attempt to hold
---------------
Landlord or its respective Agents liable for, and Tenant will indemnify and
hold harmless Landlord, and its respective Agents, from and against, any
and all demands, claims, causes of action, fines, penalties, damages,
liabilities, judgments, and expenses (including, without limitation,
attorneys' fees) incurred in connection with or arising from:
(a) The use or occupancy or manner of use or occupancy of the
Premises by Tenant or any person claiming under Tenant or the Agents of
Tenant or any such person;
(b) Any activity, work or thing done, permitted or suffered by
Tenant, any person claiming under Tenant or the Agents of Tenant or any
such person in or about the Premises or the Project;
(c) Any acts, omissions or negligence of Tenant or any person
claiming under Tenant, or the Agents of Tenant or any such person;
(d) Any breach, violation or nonperformance by Tenant or any
person claiming under Tenant or the Agents of Tenant or any such person of
any term, covenant or provision of this Lease or any law, ordinance or
governmental requirement of any kind; and
(e) Any injury or damage to the person property or business of
Tenant, or any person claiming under Tenant or the Agents of Tenant or any
such person or any other person entering upon the Premises or the Project
under the express or implied invitation of Tenant.
except as to each of the indemnifications set forth above for any injury or
damage to persons or property on the Premises to the extent caused by the
negligence or willful misconduct of Landlord.
If any action or proceeding is brought against Landlord, or its
respective Agents by reason of any such claim for which Tenant has
indemnified Landlord, or its respective Agents, Tenant, upon notice from
Landlord, shall defend the same at Tenant's expense with counsel reasonably
satisfactory to Landlord, as appropriate.
18.2 Waiver and Release. Tenant, as a material part of the
------------------
consideration to Landlord for this Lease, by this SECTION 18.2 waives and
releases all claims against Landlord, and its Agents with respect to all
matters for which Landlord has disclaimed liability pursuant to the
provisions of this Lease. Except for any damage or injury to person or
property on the Premises to the extent caused by the negligence or willful
misconduct of Landlord, Tenant covenants and agrees that Landlord and its
Agents will not at any time or to any extent whatsoever be liable,
responsible or in any way accountable for any loss, injury, death or damage
(including consequential damages) to persons, property or Tenant's business
occasioned by any acts or omissions of any other tenant, occupant or
visitor of the Project, or from any cause, either ordinary or
extraordinary, beyond the control of Landlord.
ARTICLE XIX
RULES AND REGULATIONS
Tenant and its Agents shall at all times abide by and observe the
Rules and Regulations set forth in EXHIBIT C and any amendments thereto
---------
that may be promulgated from time to time by Landlord for the operation and
maintenance of the Project and the Rules and Regulations shall be deemed to
be covenants of the Lease to be performed and/or observed by Tenant.
Nothing contained in this Lease shall be construed to impose upon Landlord
any duty or obligation to enforce the Rules and Regulations, or the terms
or provisions contained in any other lease, against any other tenant of the
Project. Landlord shall not be liable to Tenant for any violation by any
party of the Rules and Regulations or the terms of any other Project lease.
If there is any inconsistency between this Lease (other than Exhibit C) and
---------
the then current Rules and Regulations, this Lease shall govern. Landlord
reserves the right to amend and modify the Rules and Regulations as is
reasonably necessary.
ARTICLE XX
DAMAGE; CONDEMNATION
20.1 Damage to the Premises. If the Premises or the Building shall
----------------------
be damaged by fire or other insured cause other than the willful misconduct
of Tenant or its Agents, Landlord shall diligently and as soon as
practicable after such damage occurs (taking into account the time
necessary to effect a satisfactory settlement with any insurance company
involved) repair such damage at the expense of Landlord; provided, however,
that Landlord's obligation to repair such damage shall not exceed the
proceeds of insurance available to Landlord (reduced by any proceeds
retained pursuant to the rights of Mortgagee). Notwithstanding the
foregoing, if the Premises or the Building are damaged by fire or other
insured cause to such an extent that, in Landlord's sole judgment, the
damage cannot be substantially repaired within two hundred seventy (270)
days after the date of such damage, or if the Premises are substantially
damaged during the last Lease Year, then: (i) Landlord may terminate this
Lease as of the date of such damage by written notice to Tenant; or (ii)
provided such damage or casualty is not the consequence of the fault or
negligence of Tenant or its Agents, Tenant may terminate this Lease as of
the date of such damage by written notice to Landlord within ten (10) days
after (a) Landlord's delivery of a notice that the repairs cannot be made
within such 270-day period (Landlord shall use reasonable efforts to
deliver to Tenant such notice within sixty (60) days of the date of such
damage or casualty); or (b) the date of damage, in the event the damage
occurs during the last year of the Lease. Rent shall be apportioned and
paid to the date of such termination.
During the period that Tenant is deprived of the use of the damaged
portion of the Premises, and provided such damage is not the consequence of
the fault or negligence of Tenant or its Agents, Basic Rent and Tenant's
Proportionate Share shall be reduced by the ratio that the Rentable Square
Footage of the Premises damaged bears to the total Rentable Square Footage
of the Premises before such damage. All injury or damage to the Premises or
the Project resulting from the willful misconduct of Tenant or its Agents
shall be repaired by Tenant, at Tenant's expense, and Rent shall not abate.
If Tenant shall fail to do so or if Landlord shall so elect, Landlord shall
have the right to make such repairs, and any expense so incurred by
Landlord, together with interest thereon at the Interest Rate from the
demand date, shall be paid by Tenant upon demand. Notwithstanding anything
herein to the contrary, Landlord shall not be required to rebuild, replace,
or repair any of the following: (i) specialized Tenant improvements as
reasonably determined by Landlord; (ii) Alterations; or (iii) any other
personal property of Tenant.
Tenant, as a material inducement to Landlord entering into this Lease,
irrevocably waives and releases Tenant's rights under California Civil Code
Sections 1932 (2) and 1933 (4) and agrees that in the event of any
casualty, the terms of this Lease shall govern.
20.2 Condemnation. If twenty percent (20%) or more of the Building
------------
or fifty percent (50%) or more of the Land shall be taken or condemned by
any governmental or quasi-governmental authority for any public or
quasi-public use or purpose (including, without limitation, sale under
threat of such a taking), then the Term shall cease and terminate as of the
date when title vests in such governmental or quasi-governmental authority,
and Rent shall be prorated to the date when title vests in such
governmental or quasi-governmental authority. If less than twenty percent
(20%) of the Building or fifty percent (50%) of the Land is taken or
condemned by any governmental or quasi-governmental authority for any
public or quasi-public use or purpose (including, without limitation, sale
under threat of such a taking). Basic Rent and Tenant's Proportionate Share
shall be reduced by the ratio that the Rentable Square Footage of the
portion of the Premises so taken bears to the Rentable Square Footage of
the Premises before such taking, effective as of the date when title vests
in such governmental or quasi-governmental authority, and this Lease shall
otherwise continue in full force and effect. Tenant shall have no claim
against Landlord (or otherwise) as a result of such taking, and Tenant
hereby agrees to make no claim against the condemning authority for any
portion of the amount that may be awarded as compensation or damages as a
result of such taking; provided, however, that Tenant may, to the extent
allowed by law, claim an award for moving expenses and for the taking of
any of Tenant's property (other than its leasehold interest in the
Premises) which does not, under the terms of this Lease, become the
property of Landlord at the termination hereof, as long as such claim is
separate and distinct from any claim of Landlord and does not diminish
Landlord's award. Tenant hereby assigns to Landlord any right and interest
it may have in any award for its leasehold interest in the Premises. This
SECTION 20.2 shall be Tenant's sole and exclusive remedy in the event of a
-------
taking or condemnation. Tenant hereby waives the benefit of California Code
of Civil Procedure Section 1265.130.
ARTICLE XXI
DEFAULT OF TENANT
21.1 Events of Default. Each of the following shall constitute an
-----------------
Event of Default: (i) Tenant fails to pay Rent within five (5) days after
notice from Landlord; provided that no such notice shall be required if at
least two such notices shall have been given during the previous twelve
(12) months; (ii) Tenant fails to observe or perform any other term,
condition or covenant herein binding upon or obligating Tenant within ten
(10) days after notice from Landlord; provided, however, that if Landlord
reasonably determines that such failure cannot be cured within said 10-day
period, then Landlord may in its reasonable discretion extend the period to
cure the default for up to an additional twenty (20) days provided Tenant
has commenced to cure the default within the 10-day period and diligently
pursues such cure to completion; (iii) Tenant abandons or vacates the
Premises or fails to take occupancy of the Premises within ten (10) days of
the Commencement Date; (iv) Tenant or any Guarantor makes or consents to a
general assignment for the benefit of creditors or a common law composition
of creditors, or a receiver of the Premises for all or substantially all of
Tenant's or Guarantor's assets is appointed; (v) Tenant or Guarantor files
a voluntary petition in any bankruptcy or insolvency proceeding, or an
involuntary petition in any bankruptcy or insolvency proceeding is filed
against Tenant or Guarantor and is not discharged by Tenant or Guarantor
within sixty (60) days or; (vi) Tenant fails to immediately remedy or
discontinue any hazardous conditions which Tenant has created or permitted
in violation of law or of this Lease. Any such notices required under this
SECTION 21.1 shall be in lieu of, and not in addition to, any notice
------------
required under Section 1161 of the California Code of Civil Procedure.
21.2 Landlord's Remedies. Upon the occurrence of an Event of
-------------------
Default, Landlord, at its option, without further notice or demand to
Tenant, may, in addition to all other rights and remedies provided in this
Lease, at law or in equity elect one or more of the following remedies:
(a) Terminate this Lease, in which event Tenant shall
immediately surrender possession of the Premises to Landlord, and Landlord
shall have all the rights and remedies of a landlord provided by California
Civil Code Section 1951.2, or any successor statute, and in addition to any
other rights and remedies Landlord may have, Landlord shall be entitled to
recover from Tenant:
(i) the worth at the time of award of the unpaid Rent which
had been earned at the time of such termination; plus
(ii) the worth at the time of award of the amount by which
the unpaid Rent which would have been earned after
termination until the time of award exceeds the amount
of such rental loss that Tenant proves could have been
reasonably avoided; plus
(iii) the worth at the time of award of the amount by which
the unpaid Rent for the balance of the Lease Term after
the time of award exceeds the amount of such rental
loss that Tenant proves could have been reasonably
avoided; plus
(iv) Any other amount necessary to compensate Landlord for
all detriment proximately caused by Tenant's failure to
perform its obligations under this Lease or-which in
the ordinary course of things would be likely to result
therefrom, including, but not limited to, the costs and
expenses (including attorneys' fees, whether in-house
or outside counsel) of recovering possession of the
property, expenses of reletting, including necessary
repair, renovation and alteration of the Premises and
brokerage commissions, and any other reasonable costs
and expenses.
As used in SECTION 21.2(A)(I) AND (II) above, the "worth at the time
---------------------------
of award" is computed by allowing interest at the prime rate per annum
announced by Wells Fargo Bank, N.A., San Francisco, California as its prime
rate. As used in SECTION 21.2(A)(III) ABOVE, the "worth at the time of
--------------------------
award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).
(b) Terminate Tenant's right of possession of the Premises
without terminating this Lease, in which event Landlord may, but shall not
be obligated to except to the extent otherwise required by law, relet the
Premises, or any part thereof, for the account of Tenant, for such rent and
term and upon such other conditions as are acceptable to Landlord. For
purposes of such reletting, Landlord is authorized to redecorate, repair,
alter and improve the Premises to the extent necessary in Landlord's
discretion. Until Landlord relets the Premises, Tenant shall remain
obligated to pay Rent to Landlord as provided in this Lease. If and when
the Premises are relet and if a sufficient sum is not realized from such
reletting after payment of all of Landlord's expenses of reletting
(including, without limitation, rental concessions to new tenants, repairs,
Alterations, legal fees and brokerage commissions) to satisfy the payment
of Rent due under this Lease for any month, Tenant shall pay Landlord any
such deficiency upon demand. Tenant agrees that Landlord may file suit to
recover any sums due Landlord under this Section from time to time and that
such suit or recovery of any amount due Landlord shall not be any defense
to any subsequent action brought for any amount not previously reduced to
judgment in favor of Landlord;
(c) In accordance with California Civil Code Section 1951.4 (or
any successor statute), Tenant acknowledges that in the event Tenant has
breached this Lease and abandoned the Premises, this Lease shall continue
in effect for so long as Landlord does not terminate Tenant's right to
possession, and Landlord may enforce all its rights and remedies under this
Lease, including the right to recover the Rent as it becomes due under this
Lease. Acts of maintenance or preservation efforts to relet the Premises,
or the appointment of a receiver upon initiative of Landlord to protect
Landlord's interest under this Lease shall not constitute a termination of
Tenant's right to possession.
21.3 Rights Upon Possession. If Landlord takes possession pursuant
----------------------
to this ARTICLE XXI, with or without terminating this Lease, Landlord may,
-----------
at its option, remove Tenant's Alterations, signs, personal property,
equipment and other evidences of tenancy, and store them at Tenant's risk
and expense or dispose of them as Landlord may see fit, and take and hold
possession of the Premises; provided, however, that if Landlord elects to
take possession only without terminating this Lease, such entry and
possession shall not terminate this Lease or release Tenant or any
Guarantor, in whole or in part, from the obligation to pay the Rent
reserved hereunder for the full Term or from any other obligation under
this Lease or any guaranty thereof.
21.4 No Waiver. If Landlord shall institute proceedings against
---------
Tenant and a compromise or settlement thereof shall be made, the same shall
not constitute a waiver of any other covenant, condition or agreement
herein contained, nor of any of Landlord's rights hereunder. No waiver by
Landlord of any breach shall operate as a waiver of such covenant,
condition or agreement itself, or of any subsequent breach thereof. No
payment of Rent by Tenant or acceptance of Rent by Landlord shall operate
as a waiver of any breach or default by Tenant under this Lease. No payment
by Tenant or receipt by Landlord of a lesser amount than the monthly
installment of Rent herein stipulated shall be deemed to be other than a
payment on account of the earliest unpaid Rent, nor shall any endorsement
or statement on any check or communication accompanying a check for the
payment of Rent be deemed an accord and satisfaction, and Landlord may
accept such check or payment without prejudice to Landlord's right to
recover the balance of such Rent or to pursue any other remedy provided in
this Lease. No re-entry by Landlord, and no acceptance by Landlord of keys
from Tenant, shall be considered an acceptance of a surrender of the Lease.
21.5 Right of Landlord to Cure Tenant's Default. If an Event of
------------------------------------------
Default shall occur, then Landlord may (but shall not be obligated to) make
such payment or do such act to cure the Event of Default, and charge the
amount of the expense thereof to Tenant. Such payment shall be due and
payable upon demand; however, the making of such payment or the taking of
such action by Landlord shall not be deemed to cure the Event of Default or
to stop Landlord from the pursuit of any remedy to which Landlord would
otherwise be entitled. Any such payment made by Landlord on Tenant's behalf
shall bear interest until paid at the Interest Rate.
21.6 Late Payment. If Tenant fails to pay any Rent within ten (10)
------------
days after such Rent becomes due and payable, Tenant shall pay to Landlord
a late charge of ten percent (10%) of the amount of such overdue Rent. In
addition, any such late Rent payment shall bear interest from the date such
Rent became due and payable to the date of payment thereof by Tenant at the
Interest Rate. Such late charge and interest shall be due and payable
within two (2) days after written demand from Landlord.
21.7 Waiver of Redemption. Tenant hereby waives, for itself and all
--------------------
persons claiming by and under Tenant, all rights and privileges which it
might have under any present or future law to redeem the Premises or to
continue this Lease after being dispossessed or ejected from the Premises.
ARTICLE XXII
MORTGAGES
22.1 Subordination. The form of Agreement of Subordination,
-------------
Non-Disturbance and Attornment to be executed by Tenant and Landlord's
current Mortgagee simultaneously with the execution of this Lease is
attached hereto as Exhibit F. and incorporated by reference herein. This
Lease is subject and subordinate to any Mortgage(s) which may now or
hereafter affect such leases or the Land and to all renewals,
modifications, consolidations, replacements and extensions thereof,
provided that, with respect to any future Mortgage, a subordination and
non-disturbance agreement shall be entered into between Tenant and any
Mortgagee in a form reasonably acceptable to Tenant and such Mortgagee.
22.2 Mortgagee Protection. Tenant agrees to give any Mortgagee by
--------------------
certified mail, return receipt requested, a copy of any notice of default
served upon Landlord, provided that before such notice Tenant has been
notified in writing of the address of such Mortgagee. Tenant further agrees
that if Landlord shall have failed to cure such default within the time
provided for in this Lease, then Mortgagee shall have an additional thirty
(30) days within which to cure such default; provided, however, that if
such default cannot be reasonably cured within that time, then such
Mortgagee shall have such additional time as may be necessary to cure such
default so long as Mortgagee has commenced and is diligently pursuing the
remedies necessary to cure such default (including, without limitation, the
commencement of foreclosure proceedings, if necessary), in which event this
Lease shall not be terminated or Rent abated while such remedies are being
so diligently pursued. In the event of the sale of the Land, the Building
or the Project by foreclosure or deed in lieu thereof, the Mortgagee or
purchaser at such sale shall be responsible for the return of the Security
Deposit only to the extent that such Mortgagee or purchaser actually
received the Security Deposit.
ARTICLE XXIII
SURRENDER; HOLDING OVER
23.1 Surrender of the Premises. Tenant shall peaceably surrender the
-------------------------
Premises to Landlord on the Expiration Date or earlier termination of this
Lease, in broom-clean condition and in as good condition as when Tenant
took possession, including, without limitation, the repair of any damage to
the Premises caused by the removal of any of Tenant's personal property or
trade fixtures from the Premises, except for reasonable wear and tear and
loss by fire or other casualty not caused by Tenant or its Agents. All
trade fixtures, equipment, furniture, inventory, effects, alterations,
additions and improvements left on or in the Premises or the Project after
the Expiration Date or earlier termination of this Lease will be deemed
conclusively to have been abandoned and may be appropriated, sold, stored,
destroyed or otherwise disposed of by Landlord without notice to Tenant or
any other person and without obligation to account for them; and Tenant
will pay Landlord for all expenses incurred in connection with the removal
of such property, including, but not limited to, the costs of repairing any
damage to the Premises or the Project caused by the removal of such
property. Tenant's obligation to observe and perform n this covenant will
survive the expiration or other termination of this Lease.
23.2 Holding Over. In the event that Tenant shall not immediately
------------
surrender the Premises to Landlord on the Expiration Date or earlier
termination of this Lease, Tenant shall be deemed to be a tenant-at-will
pursuant to the terms and provisions of this Lease, except (i) the daily
Basic Rent during the first thirty (30) days of such holding over shall be
one hundred fifty percent (150%) of the daily Basic Rent in effect on the
Expiration Date or earlier termination of this Lease (computed on the basis
of a thirty (30) day month); and (ii) thereafter, the daily Basic Rent
shall be twice the daily Basic Rent in effect on the Expiration Date or
earlier termination of this Lease (computed on the basis of a thirty (30)
day month). Notwithstanding the foregoing, if Tenant shall hold over after
the Expiration Date or earlier termination of this Lease, and Landlord
shall desire to regain possession of the Premises, then Landlord may
forthwith re-enter and take possession of the Premises without process, or
by any legal process provided under applicable state law. Tenant shall
indemnify Landlord against all liabilities and damages sustained by
Landlord by reason of such retention of possession.
ARTICLE XXIV
QUIET ENJOYMENT
Landlord covenants that if Tenant shall pay Rent and perform all of
the terms and conditions of this Lease to be performed by Tenant, Tenant
shall during the Term peaceably and quietly occupy and enjoy possession of
the Premises without molestation or hindrance by Landlord or any party
claiming through or under Landlord, subject to the provisions of this
Lease, the Restrictions and any Mortgage to which this Lease is
subordinate.
ARTICLE XXV
MISCELLANEOUS
25.1 No Representations by Landlord. Tenant acknowledges that
------------------------------
neither Landlord nor its Agents nor any broker has made any representation
or promise with respect to the Premises, the Project, the Land or the
Common Area, except as herein expressly set forth, and no rights,
privileges, easements or licenses are acquired by Tenant except as herein
expressly set forth.
25.2 No Partnership. Nothing contained in this Lease shall be deemed
--------------
or construed to create a partnership or joint venture of or between
Landlord and Tenant, or to create any other relationship between Landlord
and Tenant other than that of landlord and tenant.
25.3 Brokers. Landlord recognizes Broker(s) as the sole broker(s)
-------
procuring this Lease and shall pay Broker(s) a commission therefor pursuant
to a separate agreement between Broker(s) and Landlord. Landlord and Tenant
each represents and warrants to the other that it has dealt with no broker,
agent finder or other person other than Broker(s) relating to this Lease.
Landlord shall indemnify and hold Tenant harmless, and Tenant shall
indemnify and hold Landlord harmless, from and against any and all loss,
costs, damages or expenses (including, without limitation, all attorneys
fees and disbursements) by reason of any claim of liability to or from any
broker or person arising from or out of any breach of the indemnitor's
representation and warranty.
25.4 Estoppel Certificate. Tenant shall, without charge, at any time
--------------------
and from time to time, within ten (10) days after request therefor by
Landlord, Mortgagee, any purchaser of all or any portion of the Project or
any other interested person, execute, acknowledge and deliver to such
requesting party a written estoppel certificate certifying, as of the date
of such estoppel certificate, the following: (i) that this Lease is
unmodified and in full force and effect (or if modified, that the Lease is
in full force and effect as modified and setting forth such modifications);
(ii) that the Term has commenced (and setting forth the Commencement Date
and Expiration Date); (iii) that Tenant is presently occupying the
Premises; (iv) the amounts of Basic Rent and Additional Rent currently due
and payable by Tenant; (v) that any Alterations required by the Lease to
have been made by Landlord have been made to the satisfaction of Tenant;
(vi) that there are no existing set-offs, charges, liens, claims or
defenses against the enforcement of any right hereunder, including, without
limitation, Basic Rent or Additional Rent (or, if alleged, specifying the
same in detail); (vii) that no Basic Rent (except the first installment
thereof) has been paid more than thirty (30) days in advance of its due
date; (viii) that Tenant has no knowledge of any then uncured default by
Landlord of its obligations under this Lease (or, if Tenant has such
knowledge, specifying the same in detail); (ix) that Tenant is not in
default; (x) that the address to which notices to Tenant should be sent is
as set forth in the Lease (or, if not, specifying the correct address); and
(xi) any other certifications requested by Landlord.
25.5 Waiver of Jury Trial. LANDLORD AND TENANT EACH WAIVE TRIAL BY
--------------------
JURY IN CONNECTION WITH PROCEEDINGS OR COUNTERCLAIMS BROUGHT BY EITHER OF
THE PARTIES AGAINST THE OTHER WITH RESPECT TO ANY MATTER WHATSOEVER ARISING
OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF
LANDLORD AND TENANT HEREUNDER OR TENANT'S USE OR OCCUPANCY OF THE PREMISES.
25.6 Notices. All notices or other communications hereunder shall be
-------
in writing and shall be deemed duly given if addressed and delivered to the
respective parties' addresses, as set forth in Article I: (i) in person;
(ii) by Federal Express or similar overnight carrier service; or (iii)
mailed by certified or registered mail, return receipt requested, postage
prepaid. Such notices shall be deemed received upon the earlier of receipt
or, if mailed by certified or registered mail, three (3) days after such
mailing. Landlord and Tenant may from time to time by written notice to the
other designate another address for receipt of future notices.
25.7 Invalidity of Particular Provisions. If any provisions of this
-----------------------------------
Lease or the application thereof to any person or circumstances shall to
any extent be invalid or unenforceable, the remainder of this Lease, or the
application of such provision to persons or circumstances other than those
to which it is invalid or unenforceable, shall not be affected thereby, and
each provision of this Lease shall be valid and be enforced to the full
extent perMitted by law.
25.8 Gender and Number. All terms and words used in this Lease,
-----------------
regardless of the number or gender in which they are used, shall be deemed
to include any other number or gender as the context may require.
25.9 Benefit and Burden. Subject to the provisions of ARTICLE X and
------------------ ---------
except as otherwise expressly provided, the provisions of this Lease shall
be binding upon, and shall inure to the benefit of, the parties hereto and
each of their respective representatives, heirs, successors and assigns.
Landlord may freely and fully assign its interest hereunder.
25.10 Entire Agreement. This Lease (which includes the Exhibits
----------------
attached hereto) contains and embodies the entire agreement of the parties
hereto, and no representations, inducements or agreements, oral or
otherwise, between the parties not contained in this Lease shall be of any
force or effect. This Lease (other than the Rules and Regulations, which
may be changed from time to time as provided herein) may not be modified,
changed or terminated in whole or in part in any manner other than by an
agreement in writing duly signed by Landlord and Tenant.
25.11 Authority.
---------
(a) If Tenant signs as a corporation, the person executing this
Lease on behalf of Tenant hereby represents and warrants that Tenant is a
duly formed and validly existing corporation, in good standing, qualified
to do business in the district in which the Project is located, that the
corporation has full power and authority to enter into this Lease and that
he or she is authorized to execute this Lease on behalf of the corporation.
Tenant further agrees that it shall provide Landlord with a secretary's
certificate from the secretary of said corporation certifying as to the
above in the form of EXHIBIT D attached hereto and made a part hereof.
---------
(b) If Tenant signs as a partnership, the person executing this
Lease on behalf of Tenant hereby represents and warrants that Tenant is a
duly formed, validly existing partnership qualified to do business in the
applicable state, that the partnership has full power and authority to
enter into this Lease, and that he or she is authorized to execute this
Lease on behalf of the partnership. Tenant further agrees that it shall
provide Landlord with a partnership authorization certifying as to the
above in a form acceptable to Landlord.
25.12 Attorneys' Fees. If, as a result of any default of Tenant in
---------------
its performance of any of the provisions of this Lease, Landlord uses the
services of an attorney in order to secure compliance with such provisions
or recover damages therefor, or to terminate this Lease or evict Tenant,
Tenant shall reimburse Landlord upon demand for any and all attorneys' fees
and expenses so incurred by Landlord.
25.13 Interpretation. This Lease is governed by the laws of the
--------------
state in which the Project is located. Furthermore, this Lease shall not be
construed against either party more or less favorably by reason of
authorship or origin of language.
25.14 Landlord's Consent. Wherever and whenever in this Lease
------------------
Landlord's consent or agreement is required, unless otherwise provided,
Landlord may withhold its consent for any reason whatsoever.
25.15 No Personal Liability; Sale. Neither Landlord nor its Agents,
---------------------------
whether disclosed or undisclosed, shall have any personal liability under
any provision of this Lease. If Landlord defaults in the performance of any
of its obligations hereunder or otherwise, Tenant shall look solely to
Landlord's equity, interest and rights in the Building for satisfaction of
Tenant's remedies on account thereof. Landlord or any successor owner shall
have the right to transfer and assign to a third party, in whole or part,
all of its rights and obligations hereunder and in the Building and Land,
and in such event, all liabilities and obligations on the part of the
original Landlord, or such successor owner, under this Lease occurring
thereafter shall terminate as of the day of such sale, and thereupon all
such liabilities and obligations shall be binding on the new owner. Tenant
agrees to attorn to such new owner. In the event of such transfer or
assignment, Landlord shall transfer to such transferee or assignee the
balance of the Security Deposit, if any, remaining after lawful deductions
and, in accordance with California Civil Code Section 1950.7, after notice
to Tenant, and Landlord shall thereupon be relieved of all liability with
respect to the Security Deposit. Any successor to Landlord's interest shall
not be bound by: (i) any payment of Basic Rent or Additional Rent for more
than one (1) month in advance, except for the payment of the first
installment of first year Basic Rent; or (ii) as to any Mortgagee or any
purchaser at foreclosure, any amendment or modification of this Lease made
without the consent of such Mortgagee.
25.16 Time of the Essence. Time is of the essence as to Tenant's
-------------------
obligations contained in this Lease.
25.17 Force Majeure. Landlord and Tenant (except with respect to the
-------------
payment of Rent) shall not be chargeable with, liable for, or responsible
to the other for anything or in any amount for any failure to perform or
delay caused by: fire; earthquake; explosion; flood; hurricane; the
elements; acts of God or the public enemy; actions, restrictions,
governmental authorities (permitting or inspection), governmental
regulation of the sale of materials or supplies or the transportation
thereof; war; invasion; insurrection; rebellion; riots; strikes or
lockouts, inability to obtain necessary materials, goods, equipment,
services, utilities or labor; or any other cause whether similar or
dissimilar to the foregoing which is beyond the reasonable control of such
party (collectively, "Events of Force Majeure"); and any such failure or
delay due to said causes or any of them shall not be deemed to be a breach
of or default in the performance of this Lease.
25.18 Headings. Captions and headings are for convenience of
--------
reference only.
25.19 Memorandum of Lease. Tenant shall, at the request of Landlord,
-------------------
execute and deliver a memorandum of lease in recordable form. Tenant shall
not record such a memorandum or this Lease without Landlord's consent. The
party requesting recordation of a memorandum of this Lease shall be
obligated to pay all costs, fees and taxes, if any, associated with such
recordation.
25.20 Relocation of the Premises. At any time after the eighteenth
--------------------------
(1 8th) month of the Lease Tenn, Landlord shall have the option to relocate
Tenant at no direct cost to Tenant to space comparable to the Premises
elsewhere in the Building or the Project containing approximately the same
amount of Rentable Area as the Premises, provided Landlord gives Tenant
ninety (90) days prior written notice. Landlord shall bear all costs of
relocation, including, but not limited to (i) costs of altering the new
space making it comparable to the Premises; (ii) Tenant's out-of-pocket
moving costs, including phone and computer system relocation costs; and
(iii) Tenant's out-of-pocket costs of reprinting its stationery and
business cards. Upon relocation, such new space shall be deemed to be the
"Premises" hereunder, the building in which the new space is located, if
other than the Building, shall be deemed to be the "Building" hereunder
(and EXHIBIT A-1 shall be revised accordingly), the land upon which the new
-----------
Building is located, if other than the Land, shall be deemed to be the
"Land" hereunder (and EXHIBIT A-2 shall be revised accordingly) and
-----------
Tenant's Proportionate Share shall be recalculated by Landlord to equal
that fraction, the numerator of which is the Rentable Square Footage of the
new Premises and the denominator of which is the Rentable Square Footage of
the new Building (as reasonably determined by Landlord).
25.21 Financial Reports. Within fifteen (15) days after Landlord's
-----------------
request, Tenant will furnish Tenant's most recent audited financial
statements (including any notes to them) to Landlord, or, if no such
audited statements have been prepared, such other financial statements (and
notes to them) as may have been prepared by an independent certified public
accountant, or, failing those, Tenant's internally prepared financial
statements, certified by Tenant. Tenant will discuss its financial
statements with Landlord and will give Landlord access to Tenant's books
and records in order to enable Landlord to verify the financial statements.
Landlord will not disclose any aspect of Tenant's financial statements
which Tenant designates to Landlord as confidential except: (i) to
Landlord's lenders or prospective purchasers of the Project; (ii) in
litigation between Landlord and Tenant; and (iii) if required by court
order.
25.22 Landlord's Fees. Whenever Tenant requests Landlord to take any
---------------
action or give any consent required or permitted under this Lease, Tenant
will reimburse Landlord for all of Landlord's costs incurred in reviewing
the proposed action or consent, including, without limitation, attorneys',
engineers' or architects' fees, within ten (10) days - after Landlord's
delivery to Tenant of a statement of such costs. Tenant will be obligated
to make such reimbursement without regard to whether Landlord consents to
any such proposed action.
25.23 Attorney-in-Fact. If Tenant fails or refuses to execute and
----------------
deliver any instrument or certificate required to be delivered by Tenant
hereunder (including, without limitation, any instrument or certificate
required under ARTICLE XXII or SECTION 25.4 hereof) within the time periods
------------ ------------
required herein, then Tenant hereby appoints Landlord as its
attorney-in-fact with full power and authority to execute and deliver such
instrument or certificate for and in the name of Tenant.
25.24 Effectiveness. The furnishing of the form of this Lease shall
-------------
not constitute an offer and this Lease shall become effective upon and only
upon its execution by and delivery to each party hereto.
25.25 Light, Air or View Rights. Any diminution or shutting off of
-------------------------
light, air or view by any structure which may be erected on lands adjacent
to or in the vicinity of the Building and Project shall not affect this
Lease, abate any payment owed by Tenant hereunder or otherwise impose any
liability on Landlord.
25.26 Special Damages. Under no circumstances whatsoever shall
---------------
Landlord ever be liable hereunder for consequential damages or special
damages.
25.27 Remedies Cumulative. The remedies of Landlord hereunder shall
-------------------
be deemed cumulative and no remedy of Landlord, whether exercised by
Landlord or not, shall be deemed to be in exclusion of any other.
25.28 Independent Covenant. The obligation of Tenant to pay all Rent
--------------------
and other sums hereunder provided to be paid by Tenant and the obligation
of Tenant to perform Tenant's other covenants and duties hereunder
constitute independent, unconditional obligations to be performed at all
times provided for hereunder, save and except only when an abatement
thereof or reduction therein is hereinabove expressly provided for and not
otherwise. Tenant waives and relinquishes all rights which Tenant might
have to claim any nature of a prejudgment lien against or withhold, or
deduct from, or offset against any rent and other sums provided hereunder
to be paid Landlord by Tenant.
25.29 (Intentionally Deleted)
----------------------
ARTICLE XXVI
OPTION TO RENEW
26.1 Grant of Option and General Terms. Provided that (i) no material
---------------------------------
adverse change in Tenant's financial condition has occurred; and (ii) no
Event of Default shall exist under this Lease or would exist but for the
pendency of any cure periods provided for in SECTION 21.1 herein, either on
------------
the date Tenant exercises its Renewal Option (as hereinafter defined) or as
of the effective date of the Renewal Term (as hereinafter defined), Tenant
shall have the option to extend the Term of this Lease for one (1)
additional period (the "Renewal Option") of three (3) years (the "Renewal
Term"). The Renewal Option shall be subject to all of the terms and
conditions contained in the Lease except that (1) the renewal rent (as
hereinafter defined) shall be at the then prevailing Market Rate (as
hereinafter defined); and (ii) there shall be no further option to extend
the term of the Lease beyond the Renewal Term.
26.2 Market Rate. As used herein "Market Rate" shall mean the then
-----------
prevailing market rate for full service base rent (and with any charges for
parking only to the extent parking charges are then levied in market
leases, which parking charges shall be included within the determination of
Market Rate herein) for tenants of comparable quality for renewal leases
(excluding renewal subleases) in buildings of comparable size, use, and
location in the El Segundo/Manhattan Beach Area, taking into consideration
the extent of the availability of space as large as the Premises in the
marketplace and all other economic terms then customarily prevailing in
such renewal leases in said marketplace.
26.3 Determination of Market Rate. Tenant shall send Landlord a
----------------------------
preliminary expression of Tenant's willingness to renew this Lease no
earlier than two hundred seventy (270) days or later than one hundred
eighty (180) days prior to the expiration of the initial Term of this Lease
(the "Renewal Notice"). In the event Tenant timely provides Landlord with
Tenant's Renewal Notice, Landlord shall notify Tenant in writing
("Landlord's Response") on or before one hundred fifty (150) days prior to
the expiration of the initial Term of this Lease of the Market Rate to be
payable by Tenant during the Renewal Term. Upon receipt of Landlord's
Response, Tenant shall thereafter have the right, exercisable by written
notice to Landlord on or before one hundred twenty (120) days prior to the
expiration of the initial Term, to reject Landlord's Response, in which
event this ARTICLE XXVI shall be null and void in all respects and Tenant
shall vacate and surrender the Premises to Landlord in accordance with this
Lease upon expiration of the initial Term. In the event Tenant fails to
<PAGE>
reject Landlord's Response on or before one hundred twenty (120) days prior
to the expiration of the initial Term, then it shall be conclusively deemed
that Tenant shall have irrevocably exercised its Renewal Option under this
ARTICLE XXVI. In the event any date referenced in this ARTICLE XXVI falls
on a day other than a business day, such date shall be deemed to be the
next following business day.
26.4 Termination of Right. This Renewal Option is personal with
--------------------
respect to Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the Date of Lease.
LANDLORD:
--------
ATTEST/WITNESS: USAA INCOME PROPERTIES III LIMITED
PARTNERSHIP, a Delaware limited
partnership
/s/ C.M. Brittain By: USAA PROPERTIES III, INC.
------------------------- a Texas corporation, Its General
Name Partner
/s/ C.M. Brittain By: /s/ Stephen S. King
----------------- ----------------------------
Name Name: Stephen S. King
Title: Assistant Vice President
Date Executed by Landlord: 8/30/96
-----------
TENANT:
------
ATTEST/WITNESS: COMPUMED, INC. a Delaware corporation
By: /s/ James Linesch
----------------- ------------------
Name Name: James Linesch
Title: Secretary, Vice President
-----------------
Name Date Executed by Tenant: 8/30/96
---------
<PAGE>
EXHIBIT A-1
[THIS EXHIBIT DEPICTS
THE FLOOR PLAN OF THE FIRST FLOOR OF
MANHATTAN BEACH
1230 ROSECRANS AVE.
MANHATTAN BEACH, CALIFORNIA]
<PAGE>
EXHIBIT A-2
(Legal Description of Land)
PARKVIEW PLAZA
Parcel 1 as shown on Parcel Map No. 12010, in the City of Manhattan
Beach, as per map filed in Book 116, Pages 75 and 76 of Parcel Maps, in the
Office of the County Recorder of said county.
<PAGE>
EXHIBIT B-1
(Intentionally Deleted)
<PAGE>
EXHIBIT B-2
(Intentionally Deleted)
<PAGE>
EXHIBIT C
RULES AND REGULATIONS
1. No part or the whole of the sidewalks, plaza areas, entrances,
passages, courts, elevators, vestibules, stairways, corridors or halls of
the Project shall be obstructed or encumbered by Tenant or used for any
purpose other than ingress and egress to and from the Premises. Tenant
shall not have access to the roof of the Building, unless accompanied by a
representative of Landlord.
2. No equipment, furnishings, personal property or fixtures shall be
placed on any balcony of the Building without first obtaining Landlord's
written consent. No awnings or other projections shall be attached to the
exterior walls of the Building. No skylight, window, door or transom of the
Building shall be covered or obstructed by Tenant, and no window shade,
blind, curtain, screen, storm window, awning or other material shall be
installed or placed on any window or in any window of the Premises except
as approved in writing by Landlord. If Landlord has installed or hereafter
installs any shade, blind or curtain in the Premises, Tenant shall not
remove the same without first obtaining Landlord's written consent thereto.
3. No showcases or other articles shall be put in front of or affixed
to any part of the exterior of the Building, nor placed in the Common Area.
4. Tenant shall not place or permit its Agents to place any trash or
other objects anywhere within the Project (other than within the Premises)
without first obtaining Landlord's written consent.
5. The water and wash closets and other plumbing fixtures shall not be
used for any purposes other than those for which they were constructed, and
no sweepings, rubbish bags or other substances (including, without
limitation, coffee grounds) shall be thrown therein.
6. Tenant shall not mark, paint, drill into or in any way deface any
part of the Project or the Premises. No boring, cutting or stringing of
wires shall be permitted.
7. No cooking shall be done or permitted in the Building by Tenant or
its Agents except that Tenant may install and use microwave ovens. Tenant
shall not cause or permit any unusual or objectionable odors to emanate
from the Premises.
8. Except as otherwise permitted in SECTION 1.7 of the Lease, the
-----------
Premises shall not be used for the manufacturing or storage of merchandise.
9. Tenant shall not make or permit any unseemly or disturbing noises
or disturb or interfere with other tenants or occupants of the Project or
neighboring buildings or premises by the use of any musical instrument,
radio, television set, other audio device, unmusical noise, whistling,
singing or in any other way.
10. Nothing shall be thrown out of any doors, windows or skylights or
down any passageways.
11. No additional locks or bolts of any kind shall be placed upon any
of the doors or windows of the Premises, nor shall any changes be made in
locks or the mechanism thereof without prior notice to and the approval of
Landlord. Tenant shall, upon the termination of its Lease, return to
Landlord all keys to the Premises and other areas furnished to, or
otherwise procured by, Tenant. In the event of the loss of any such keys or
card keys, as applicable, Tenant shall pay Landlord the cost of replacement
keys.
12. Tenant shall not use or occupy or permit any portion of the
Premises to be used or occupied as an employment bureau or for the storage,
manufacture or sale of liquor, narcotics or drugs. Tenant shall not engage
or pay any employees in the Building except those actually working for
Tenant in the Building, and Tenant shall not advertise for non-clerical
employees giving the Building as an address. The Premises shall not be
used, or permitted to be used, for lodging or sleeping or for any immoral
or illegal purpose.
13. Landlord reserves the right to control and operate the Common Area
in such manner as it deems best for the benefit of the Project tenants.
Landlord may exclude from all or a part of the Common Area at all hours,
other than during Normal Business Hours, all unauthorized persons. "Normal
Business Hours" shall be deemed to be between the hours of 7:00 A.M. and
6:00 P.M. Monday through Friday and between the hours of 8:00 A.M. and 1:00
P.M. Saturday, but excluding Building holidays. Tenant shall be responsible
for all visitors, invitees, agents and employees of Tenant who enter the
Building and Project on Building holidays and during other than Normal
Business Hours and shall be liable to Landlord for all acts of such
persons.
14. Tenant shall have the responsibility for the security of the
Premises and, before closing and leaving the Premises at any time, Tenant
shall see that all entrance doors are locked and all lights and office
equipment within the Premises are turned off, and Landlord shall have no
responsibility relating thereto. Landlord will not be responsible for any
lost or stolen personal property, equipment, money or jewelry from Tenant's
area or Common Areas regardless of whether such loss occurs when the area
is locked against entry or not.
15. Requests and requirements of Tenant shall be attended to only upon
application at the office of Landlord. Project employees shall not be
required to perform any work outside of their regular duties unless under
specific instructions from Landlord.
16. Vending, canvassing, soliciting and peddling in the Building are
prohibited, and Tenant shall cooperate in seeking their prevention.
17. In connection with the delivery or receipt of merchandise, freight
or other matter, no hand trucks or other means of conveyance shall be
permitted, except those equipped with rubber tires, rubber side guards or
such other safeguards as Landlord may require.
18. No animals of any kind shall be brought into or kept about the
Building by Tenant or its Agents, except seeing eye dogs for the visually
impaired.
19. No vending machines shall be permitted to be placed or installed
in any part of the Project by Tenant without the permission of Landlord.
Landlord reserves the right to place or install vending machines in the
Project (other than in the Premises).
20. Tenant shall not allow in the Premises, on a regular basis, more
than one person for each two hundred (200) leasable square feet of the
Premises.
21. So that the Building may be kept in a good state of cleanliness,
Tenant shall permit only Landlord's employees and contractors to clean its
Premises unless prior thereto Landlord otherwise consents in writing.
Tenant shall provide adequate waste and rubbish receptacles, cabinets,
bookcases, map cases, etc. necessary to prevent unreasonable hardship to
Landlord in discharging its obligation regarding cleaning service.
22. Tenant shall keep the windows and doors of the Premises
(including, without limitation, those opening on corridors and all doors
between any room designed to receive heating or air conditioning service
and room(s) not designed to receive such service) closed while the heating
or air conditioning system is operating in order to minimize the energy
used by, and to conserve the effectiveness of, such systems.
23. The elevator designated for freight by Landlord will be available
for use by all tenants in the Building during the hours and pursuant to
such procedures as Landlord may determine from time to time. The persons
employed to move Tenant's equipment, material, furniture or other property
in or out of the Building must be acceptable to Landlord. The moving
company must be a locally recognized professional mover, whose primary
business is the performing of relocation services, and must be bonded and
fully insured. A certificate or other verification of such insurance must
be received and approved by Landlord prior to the start of any moving
operations. Insurance must be sufficient in Landlord's sole opinion, to
cover all personal liability, theft or damage to the Project, including,
but not limited to, floor coverings, doors, walls, elevators, stairs,
foliage and landscaping. Special care must be taken to prevent damage to
foliage and landscaping during adverse weather. All moving operations will
be conducted at such times and in such a manner as Landlord will direct,
and all moving will take place during non-business hours unless Landlord
agrees in writing otherwise. Tenant will be responsible for the provision
of Building security during all moving operations, and will be liable for
all losses and damages sustained by any party as a result of the failure to
supply adequate security. Landlord will have the right to prescribe the
weight, size and position of all equipment, materials, furniture or other
property brought into the Building. Heavy objects will, if considered
necessary by Landlord, stand on wood strips of such thickness as is
necessary properly to distribute the weight. Landlord will not be
responsible for loss of or damage to any such property from any cause, and
all damage done to the Building by moving or maintaining such property will
be repaired at the expense of Tenant. Landlord reserves the right to
inspect all such property to be brought into the Building and to exclude
from the Building all such property which violates any of these Rules and
Regulations or the Lease of which these Rules and Regulations are a part.
Supplies, goods, materials, packages, furniture and all other items of
every kind delivered to or taken from the Premises will be delivered or
removed through the entrance and route designated by Landlord, and Landlord
will not be responsible for the loss or damage of any such property unless
such loss or damage results from the negligence of Landlord or its Agents.
24. A directory of the Building will be provided for the display of
the name and location of tenants only and such reasonable number of the
principal officers and employees of tenants as Landlord in its sole
discretion approves, but Landlord will not in any event be obligated to
furnish more than one (1) directory strip for each 2,500 square feet of
Rentable Area in the Premises. Any additional name(s) which Tenant desires
to place in such directory must first be approved by Landlord, and if so
approved, Tenant will pay to Landlord a charge, set by Landlord, for each
such additional name. All entries on the building directly display will
conform to standards and style set by Landlord in its sole discretion.
Space on any exterior signage will be provided in Landlord's sole
discretion.
25. Neither Landlord nor any operator of the Parking Facilities within
the Project, as the same are designated and modified by Landlord, in its
sole discretion, from time to time will be liable for loss of or damage to
any vehicle or any contents of such vehicle or accessories to any such
vehicle, or any property left in any of the Parking Facilities, resulting
from fire, theft, vandalism, accident, conduct of other users of the
Parking Facilities and other persons, or any other casualty or cause.
Further, Tenant understands and agrees that: (i) Landlord will not be
obligated to provide any traffic control, security protection or operator
for the Parking Facilities; (ii) Tenant uses the Parking Facilities at its
own risk; and (iii) Landlord will not be liable for personal injury or
death, or theft, loss of or damage to property. Tenant indemnifies and
agrees to hold Landlord, any operator of the Parking Facilities and their
respective Agents harmless from and against any and all claims, demands,
and actions arising out of the use of the Parking Facilities by Tenant and
its Agents, whether brought by any of such persons or any other person.
26. Tenant (including Tenant's Agents) will use the Parking Space
Allocation solely for the purpose of parking passenger model cars, small
vans and small trucks and will comply in all respects with any rules and
regulations that may be promulgated by Landlord from time to time with
respect to the Parking Facilities. The Parking Facilities may be used by
Tenant or its Agents for occasional overnight parking of vehicles. Tenant
will ensure that any vehicle parked in any of the Parking Space Allocation
will be kept in proper repair and will not leak excessive amounts of oil or
grease or any amount of gasoline. If any of the Parking Space Allocation
are at any time used: (i) for any purpose other than parking as provided
above; (ii) in any way or manner reasonably objectionable to Landlord; or
(iii) by Tenant after default by Tenant under the Lease, Landlord, in
addition to any other rights otherwise available to Landlord, may consider
such default an Event of Default under the Lease.
27. Tenants right to use the Parking Facilities will be in common with
other tenants of the Project and with other parties permitted by Landlord
to use the Parking Facilities. Landlord reserves the right to assign and
reassign, from time to time, particular parking spaces for use by persons
selected by Landlord provided that Tenant's rights under the Lease are
preserved. Landlord will not be liable to Tenant for any unavailability of
Tenant's designated spaces, if any, nor will any unavailability entitle
Tenant to any refund, deduction, or allowance. Tenant will not park in any
numbered space or any space designated as: RESERVED, HANDICAPPED, VISITORS
ONLY, or LIMITED TIME PARKING (or similar designation).
28. If the Parking Facilities are damaged or destroyed, or if the use
of the Parking Facilities is limited or prohibited by any governmental
authority, or the use or operation of the Parking Facilities is limited or
prevented by strikes or other labor difficulties or other causes beyond
Landlord's control, Tenant's inability to use the Parking Space Allocation
will not subject Landlord or any operator of the Parking Facilities to any
liability to Tenant and will not relieve Tenant of any of its obligations
under the Lease and the Lease will remain in full force and effect. Tenant
will pay to Landlord upon demand, and Tenant indemnifies Landlord against,
any and all loss or damage to the Parking Facilities, or any equipment,
fixtures, or signs used in connection with the Parking Facilities and any
adjoining buildings or structures caused by Tenant or any of its Agents.
29. Tenant has no right to assign or sublicense any of its rights in
the Parking Space Allocation, except as part of a permitted assignment or
sublease of the Lease; however, Tenant may allocate the Parking Space
Allocation among its employees.
30. Tenant shall cooperate with Landlord in keeping its Premises neat
and clean.
31. Smoking of cigarettes, pipes, cigars or any other substance is
prohibited at all times within the Premises, elevators, common area
restrooms and any other interior common area of the Building or Project.
32. These Rules and Regulations are in addition to, and shall be
construed to modify and amend the terms, covenants, agreements and
conditions of the Lease; provided, however, in the event of any
inconsistency between the terms and provisions of the Lease and the terms
and provisions of these Rules and Regulations, the terms and provisions of
the Lease shall control.
33. Tenant shall give Landlord prompt notice of any accidents to or
defects in the water pipes, gas pipes. electric lights and fixtures,
heating apparatus, or any other service equipment.
34. Tenant and its Agents shall not bring into the Building or keep on
the Premises any bicycle or other vehicle without the written consent of
Landlord.
35. Landlord reserves the right to amend these Rules and Regulations
and to make such other and further reasonable Rules and Regulations as, in
its judgment, may from time to time be needed and desirable.
36. Tenant will refer all contractors, contractors' representatives
and installation technicians rendering any service for Tenant to Landlord
for Landlord's supervision and/or approval before performance of any such
contractual services. This shall apply to all work performed in the
Building, including, but not limited to, installation of telephones,
telegraph equipment, electrical devices and attachments, and installations
of any and every nature affecting floors, walls, woodwork, trim, windows,
ceilings, equipment or any other physical portion of the Building. None of
this work will be done by Tenant without first obtaining Landlord's written
approval.
<PAGE>
EXHIBIT D
SECRETARY'S CERTIFICATE
The undersigned, as secretary of CompuMed, Inc. (the "Corporation") named
below, certifies that at a meeting of the board of directors of the
Corporation, duly called and held on the 18, day of June, 1996, which a
quorum of the directors were present and acting throughout, the following
resolutions were unanimously adopted and are still in force and effect:
RESOLVED that the president or the vice president of the Corporation shall
be authorized to execute a lease for office space on behalf of the
Corporation and/or to guarantee performance of a lease for office space,
described below:
Date of Lease: September 1, 1996
Landlord: USAA Income Properties III Limited Partnership
Tenant: CompuMed, Inc.
Guarantor, if any (not Tenant's name):
Suite Number: 110
Building Address: 1230 Rosecrans Ave.
Manhattan Beach, CA 90266
RESOLVED FURTHER, that the president or vice president is authorized on
behalf of the Corporation to execute and deliver to the Landlord all
instruments reasonably necessary for the Lease. Landlord is entitled to
rely upon the above resolutions until the board of directors of the
Corporation revokes or alters same in written form, certified by the
secretary of the Corporation, and delivers same, certified mail, return
receipt requested, to the Landlord. The Corporation is duly organized and
is in good standing under the laws of the State of California. The
undersigned further certifies that on the meeting date referred to above,
the names and respective titles of the officers of the Corporation were as
follows:
Name Title
---- -----
Rod Raynovich President
James Linesch Vice President & Secretary
WITNESS MY HAND this 29 day of August, 1996.
CompuMed, Inc.
--------------------------------------
Name of Corporation
/s/ James Linesch
---------------------------------------
Signature of Secretary of Corporation
James Linesch
---------------------------------------
Name of Secretary
This instrument was acknowledged before me on 8/29, 1996 by James
Linesch, Secretary of CompuMed, Inc., a Delaware corporation, on its
behalf.
Phuong Dang
---------------------------------------
Notary Public for the State of California
Name of Notary:
Phuong Dang
---------------------------------------
My Commission Expires: Dec. 07, 1999
<PAGE>
EXHIBIT E
AGREEMENT OF SUBORDINATION,
NON-DISTURBANCE AND ATTORNMENT
------------------------------
This Agreement of Subordination, Nondisturbance and Attornment (the
"Agreement") is made and entered into effective the 30 day of August, 1996,
by and between LAS COLINAS MANAGEMENT COMPANY, a Delaware corporation (the
"Mortgagee"), USAA INCOME PROPERTIES III LIMITED PARTNERSHIP, a Delaware
limited partnership (the "Mortgagor/Landlord"), and COMPUMED, INC.
("Tenant").
WITNESSETH:
WHEREAS, Mortgagee is the beneficiary under that one certain Deed of
Trust and Security Agreement and Fixture Filing with Assignment of Rents
dated March 12, 1987 (the "Mortgage") executed by Mortgagor/Landlord (as
Grantor) in favor of Chicago Title Insurance Company, Trustee, covering the
premises as well as other rights and property more particularly therein
described ("Property"), securing the payment of certain indebtedness more
particularly therein described ("Indebtedness"); and
WHEREAS, Mortgagor/Landlord and Tenant are the parties to a certain
Lease Agreement, including any extension options as therein set forth,
modifications or amendments (the "Lease Agreement"), dated August 30, 1996,
covering certain premises more particularly therein described ("Premises");
and
WHEREAS, the parties desire to set forth certain agreements herein
with respect to the Mortgage and the Lease Agreement.
NOW THEREFORE for and in consideration of these premises and other
good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged and agreed as follows:
1. Subject to the provisions of paragraph 2 below, the Lease
Agreement, and any and all estate, right, or interest, conveyed,
established or created thereunder are now, and shall at all times be and
continue to be, subordinate and inferior in all manner and respect to the
Mortgage, as well as any and all liens, rights and interests, created
thereby, as well as all increases, renewals, extensions, modifications,
substitutions, replacements and/or consolidations of the Mortgage or the
Indebtedness.
2. So long as Tenant is not in default (a) in the payment of rent or
additional rent, or (b) in the performance of any of the terms, covenants
or conditions of the Lease Agreement on Tenant's part to be performed, (1)
Tenant's possession of the Premises and Tenant's rights and privileges
under the Lease Agreement, shall not be diminished or interfered with by
Mortgagee in the exercise of any of its rights under the Mortgage, (2)
Tenant's occupancy of the Premises shall not be disturbed by Mortgagee in
the exercise of its rights under the Mortgage during the term, and any
renewals of the Lease Agreement, and (3) Mortgagee will not join Tenant as
a party defendant in any action or proceeding for the purpose of
terminating Tenant's interest and estate under the Lease Agreement because
of any default under the Mortgage.
3. In the event any proceedings are brought for the foreclosure of the
Mortgage or if the Property shall be sold pursuant to a trustee's sale
under the Mortgage or if Mortgagee becomes the owner of the Property by
acceptance of a deed or assignment in lieu of foreclosure or otherwise,
Tenant shall attorn to the purchaser or Mortgagee, as the case may be, upon
any such foreclosure sale or trustee's sale or acceptance by Mortgagee of a
deed or assignment in lieu of foreclosure and Tenant shall recognize such
purchaser or Mortgagee, as the case may be, as the Landlord under the Lease
Agreement. Such attornment shall be effective and self-operative without
the execution of any further instrument on the part of any of the parties
hereto. Tenant agrees, however, to execute and deliver at any time and from
time to time, upon the request of Mortgagee or any such purchaser, any
instrument or certificate which, in the sole judgment of Mortgagor or such
purchaser, may be necessary or appropriate in any such foreclosure
proceeding or otherwise to evidence such attornment. Tenant hereby
irrevocably appoints Mortgagee and any such purchaser, jointly and
severally, the agent and attorney-in-fact of Tenant to execute and deliver
for and on behalf of Tenant any such instrument or certificate. Such power
of attorney shall not terminate on disability of the principal. In the
event of any such attornment, Tenant further waives the provisions of any
statute or rule of law, now or hereafter in effect, which may give or
purport to give Tenant any right or election to terminate or otherwise
adversely affect the Lease Agreement and the obligation of Tenant
thereunder as a result of any such foreclosure proceeding or trustee's
sale.
4. If Mortgagee shall succeed to the interest of Mortgagor/Landlord
under the Lease Agreement in any manner, or if any purchaser acquires the
Premises upon any foreclosure of the Mortgage or any trustee's sale under
the Mortgage, Mortgagee or such purchaser, as the case may be, in the event
of attornment, shall have the same remedies by entry, action or otherwise
in the event of any default by Tenant in the payment of rent or additional
rent or in the performance of any of the terms, covenants and conditions of
the Lease Agreement that Mortgagor/Landlord had or would have had if
Mortgagee or such purchaser had not succeeded to the interest of
Mortgagor/Landlord. From and after any such attornment, Mortgagee or such
purchaser shall be bound to Tenant under all the terms, covenants, and
conditions of the Lease Agreement, and Tenant shalL from and after the
succession to the interest of Mortgagor/Landlord under the Lease Agreement
by Mortgagee or such purchaser, have the same remedies against Mortgagee or
such purchaser for the breach of any agreement contained in the Lease
Agreement that Tenant might have had under the Lease Agreement against
Mortgagor/Landlord if Mortgagee or such purchaser had not succeeded to such
interest; provided, however, that (a) the provisions of the Mortgage shall
govern with respect to the disposition of any casualty insurance proceeds
or condemnation awards; (b) Mortgagee shall not be liable for any act or
omission of Mortgagor/Landlord; (c) Mortgagee shall not be subject to any
offsets or defenses which Tenant might have against Mortgagor/Landlord; (d)
Mortgagee shall not be bound by any rent or additional rent which Tenant
might have paid for more than the current month to Mortgagor/Landlord; and
(e) Mortgagee shall not be bound by any amendment or modification of the
Lease Agreement made without its consent.
5. Nothing herein contained is intended, nor shall it be construed, to
abridge or adversely affect any right or remedy of Mortgagor/Landlord under
the Lease Agreement in the event of any default by Tenant in the payment of
rent or additional rent or in the performance of any of the terms,
covenants or conditions of the Lease Agreement on Tenant's part to be
performed.
6. Tenant shall not, nor shall Mortgagor/Landlord accept without
obtaining the prior written consent of Mortgagee; (a) the prepayment of any
of the rents, additional rents or other sums due under the Lease Agreement
for more than one (I) month in advance of the due dates thereof; (b) the
voluntary surrender of the Premises or termination of the Lease Agreement
without cause; or (c) assign the Lease Agreement or sublet the Premises.
7. This Agreement and the Lease Agreement may not be amended or
modified orally or in any manner other than by an agreement in writing
signed by the parties hereto or their respective successors in interest.
This Agreement shall inure to the benefit of and be binding upon the
parties hereto, their successors and assigns, which shall include any
successor holder of the Indebtedness and any purchaser or purchasers at
foreclosure of the Property, and their respective heirs, personal
representatives, successors and assigns.
8. To the extent that the Lease Agreement shall entitle the Tenant to
notice of any mortgage, this Agreement shall constitute such notice with
respect to the Mortgage and to any and all other mortgages which may
hereafter be subject to the terms of this Agreement as provided above.
9. Tenant certifies that no rent under the Lease Agreement has been
paid more than one (1) month in advance of its due date, and that Tenant,
as of this date, has no charge, lien or claim of offset under the Lease
Agreement, or otherwise, against the rents or other charges due or to
become due thereunder.
10. Tenant is satisfied with, accepts and accepts the improvements to
the Premises as completed to date.
11. Any notice hereunder shall be deemed delivered upon deposit in the
United States mail, certified mail, return receipt requested, postage
prepaid, addressed:
If to the Mortgagee: Las Colinas Management Company
8000 IH-10 West, Suite 600
San Antonio, Texas 78230-3884
If to Mortgagor/Landlord: USAA Income Properties III Limited
Partnership
8000 IH-10 West, Suite 600
San Antonio, Texas 78230-3884
If to Tenant: 1230 Rosecrans Avenue, Suite 110
Manhattan Beach, California 90266
IN WITNESS WHEREOF, the parties hereto have hereunto caused this
Agreement to be duly executed this ----- day of August, 1996.
MORTGAGEE:
LAS COLINAS MANAGEMENT COMPANY,
a Delaware corporation, Its General Partner
By: /s/ T. Patrick Duncan
----------------------
Name: T. Patrick Duncan
Title: SVP
<PAGE>
MORTGAGOR/LANDLORD:
USAA INCOME PROPERTIES III LIMITED
PARTNERSHIP, a Delaware limited partnership,
By: USAA PROPERTIES, III INC.,
a Texas corporation, Its General Partner
By: /s/ Stephen S. King
------------------------------------
Name: Stephen S. King
Title: Assistant Vice President
TENANT:
COMPUMED, INC., a Delaware corporation
By: /s/ James Linesch
------------------------------------
Name: James Linesch
Title: Vice President
STATE OF TEXAS }
)
COUNTY OF BEXAR )
)
The above and foregoing instrument was acknowledged before me on the
30 day of August, 1996 by T. Patrick Duncan, the Senior Vice President of
LAS COLINAS MANAGEMENT COMPANY, a Delaware corporation, in the capacity
therein stated and as the act and deed of said corporation.
/s/ Irma T. Rangel
------------------------------------
Notary Public, State of Texas
STATE OF CALIFORNIA
COUNTY OF ORANGE
The above and foregoing instrument was acknowledged before me on the
4th day of October, 1996 by Stephen S. King, the AVP of USAA PROPERTIES
III, INC., a Texas corporation, as the sole general partner of USAA INCOME
PROPERTIES III LIMITED PARTNERSHIP, a Delaware limited partnership, in the
capacity therein stated and as the act and deed of said limited
partnership.
/s/ Karen L. Keegan
------------------------------------
Notary Public, State of California
<PAGE>
STATE OF CALIFORNIA
COUNTY OF LOS ANGELES
The above and foregoing instrument was acknowledged before me on the
29th day of august, 1966 by James Linesch, the Secretary of COMPUMED, INC.,
a Delaware corporation, in the capacity therein stated and as the act and
deed of said corporation.
/s/ Phuong Dang
------------------------------------
Notary Public, State of California
Phuong Dang
------------------------------------
(Typed or Printed Name)
------------------------------------
My commission expires: December 07, 1999
<PAGE>
EXHIBIT F
"Space Plan"
[THIS EXHIBIT DEPICTS THE SPACE PLAN OF
MANHATTAN TOWERS
1230 Rosecrans Avenue
Ground Floor, Suite 110
Manhattan Beach, CA]
SUBSIDIARIES OF COMPUMED, INC.
STATE OF PERCENTAGE
NAME INCORPORATION OWNED
- ----- ---------------- ----------
Irsco Development Company, Inc. California 100%
CompuMed Syatems, Inc. California 100%
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-57896 and Form S-3 No. 33-48437) and
each related Prospectus pertaining to the 1982 Stock Option Plan,
1992 Stock Option Plan, Non-Qualified Stock Option Plan
Agreements and Consultant Agreement and the registration of
960,000 shares of common stock of CompuMed, Inc., of our report
dated November 19, 1996, with respect to the consolidated
financial statements of CompuMed, Inc. and subsidiaries included
in its Annual Report (Form 10-KSB) for the year ended September
30, 1996, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Ernst & Young LLP
Los Angeles, California
December 18, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
UNAUDITED CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS,
STATEMENT OF STOCKHOLDERS' EQUITY AND STATEMENTS OF CASH FLOWS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 155,000
<SECURITIES> 2,489,000
<RECEIVABLES> 435,000
<ALLOWANCES> 280,000
<INVENTORY> 86,000
<CURRENT-ASSETS> 3,254,000
<PP&E> 3,902,000
<DEPRECIATION> 3,415,000
<TOTAL-ASSETS> 487,000
<CURRENT-LIABILITIES> 942,000
<BONDS> 0
0
2,000
<COMMON> 89,000
<OTHER-SE> 2,867,000
<TOTAL-LIABILITY-AND-EQUITY> 2,958,000
<SALES> 2,344,000
<TOTAL-REVENUES> 2,573,000
<CGS> 92,000
<TOTAL-COSTS> 7,220,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97,000
<INCOME-PRETAX> (4,647,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,647,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,647,000)
<EPS-PRIMARY> (.54)
<EPS-DILUTED> (.54)
</TABLE>
