<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 1999
REGISTRATION NO. 333-44937
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
--------------------------
AMENDMENT NO. 2 TO FORM S-1/A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
LASER PHOTONICS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3845 59-2058100
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number
</TABLE>
2431 IMPALA DRIVE, CARLSBAD, CALIFORNIA 920008
(760) 602-3300
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
RAYMOND A. HARTMAN, CHIEF EXECUTIVE OFFICER
LASER PHOTONICS, INC.
2431 IMPALA DRIVE
CARLSBAD, CALIFORNIA 92008
(760) 602-3300
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
--------------------------
COPIES TO: MATTHIAS & BERG LLP
ATTN: JEFFREY P. BERG, ESQ.
1990 SOUTH BUNDY DRIVE, SUITE 790,
LOS ANGELES, CALIFORNIA 90025-5244
PHONE: (310) 820-0083
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF NUMBER TO BE PROPOSED MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) OFFERING PRICE(1) OFFERING PRICE FEE(2)
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 708,101(3) $1.25 $885,126 $261.11
Common Stock, par value $0.01 1,500,000(3) $4.00 $6,000,000 $1,770.00
Common Stock, par value $0.01 800,000(3) $2.70 $2,160,000 $637.20
Common Stock, par value $0.01 20,000(3) $1.00 $20,000 $5.90
Common Stock, par value $0.01 537,443(3) $2.00 $1,074,886 $317.09
Common Stock, par value $0.01 100,000(3) $1.50 $150,000 $44.25
Common Stock, par value $0.01 1,500,000(4) $1.50 $2,250,000 $663.75
Common Stock, par value $0.01 595,000(4) $2.00 $1,190,000 $351.05
Common Stock, par value $0.01 1,245,685(5) $2.00 $2,491,370 $734.95
------------------ ------------------ ------------------ ------------------
Total 7,006,229 $16,221,382 $4,785.30
------------------ ------------------ ------------------
------------------ ------------------ ------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Of this amount, $3,719.68 has already been paid with the filing of the
original Registration Statement.
(3) This amount is based upon the per share purchase price of the shares from
the Company.
(4) Number of shares to be registered is based on the per share exercise price
of the Warrants for the purchase of such shares.
(5) Number of shares to be registered is based on the conversion price of the
Convertible notes and assumes payment of interest with shares of Common
Stock being registered hereby.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
If any of the securities registered on this Form are to be offered on a
delayed basis pursuant to Rule 415 under the Securities Act of 1933, check the
following Box. /X/
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
LASER PHOTONICS, INC.
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K.
Showing Location in the Prospectus of Information
Required by Items 1 through 12, Part I, of Form S-1
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
- ---------------------------------------------- ----------------------
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........... Outside Front Cover Page
of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus..................................... Inside Front and Outside Back
Cover Pages of Prospectus;
Additional Information
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges................ Prospectus Summary; Risk Factors;
Selected Financial Data
4. Use of Proceeds................................... Use of Proceeds; Selling
Stockholders and Plan of
Distribution
5. Determination of Offering Price................... Plan of Distribution
6. Dilution.......................................... Not Applicable
7. Selling Security Holders.......................... Outside Front Cover Page of Prospectus;
Selling Stockholders and Plan of
Distribution
8. Plan of Distribution.............................. Outside Front Cover Page of
Prospectus; Selling Stockholders
and Plan of Distribution
9. Description of Securities to Be Registered......... Outside Front Cover Page of Prospectus;
Dividend Policy; Shares Eligible for Future
Sale; Principal Stockholders;
Selling Stockholders and Plan of
Distribution; Description of
Securities
10. Interests of Named Experts and Counsel........... Legal Matters
11. Information with Respect to the Registrant....... Outside Front Cover Page
of Prospectus; Prospectus Summary;
Risk Factors; Dividend Policy;
Capitalization; Selected Financial
Data; Management's Discussion and
Analysis of Financial Condition and
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Results of Operations;
Business; Management; Compensation
of Executive Officers and
Directors; Certain Relationships
and Related Transactions; Shares
Eligible for Future Sale;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.. Not Applicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION DATED AUGUST 4, 1999
LASER PHOTONICS, INC.
7,006,229 SHARES
COMMON STOCK
OFFERED BY SELLING STOCKHOLDERS
This Prospectus relates to 7,006,229 shares (the "Shares") of common
stock, par value $0.01 (the "Common Stock") of Laser Photonics, Inc., a
Delaware corporation (the "Company") to be offered (the "Offering") for the
account of certain selling stockholders (the "Selling Stockholders") of the
Company. The 7,006,229 shares consist of 3,665,544 shares of Common Stock
currently issued in the name of the Selling Stockholders, 2,095,000 shares of
Common Stock underlying warrants (the "Warrants") and 1,308,218 shares of
Common Stock underlying convertible promissory notes ("Convertible Notes").
As of the date of this Prospectus, none of the Warrants or Convertible Notes
have been exercised or converted into shares of Common Stock. The Selling
Stockholders directly, through agents, brokers, dealers or underwriters to be
designated, from time to time, may sell the shares of Common Stock offered
hereby from time to time on terms to be determined at the time of sale. To
the extent required by applicable law, the specific shares to be sold, the
terms of the Offering, including price, the names of any agent, dealer or
underwriter, and any applicable commission, discount or other compensation
with respect to a particular sale will be set forth in an accompanying
Prospectus Supplement. The terms and conditions of the securities being
registered by the registration statement of which this Prospectus forms a
part can be found in "Selling Stockholders and Plan of Distribution,"
"Description of Securities" and "Certain Relationships and Related
Transactions."
The Company will receive none of the proceeds from the sale of the
Shares. However, the Company may receive gross proceeds of up to $6,056,436,
consisting of up to $2,380,000 in reduction of liability upon the conversion
of up to all of the Convertible Notes into shares of Common Stock and up to
$3,440,000 upon the exercise of the Warrants. The Selling Stockholders and
any broker-dealers, agents or underwriters that participate with the Selling
Stockholders in the distribution of the Common Stock may be deemed to be
underwriters within the meaning of the Securities Act of 1933, as amended
(the "Securities Act"), and any commission received by them and any profit on
the resale of the Common Stock purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. The Company
has paid all of the costs of the Offering with respect to the Shares to be
offered by the Selling Stockholders, including the warrant holders and the
holders of shares of Common Stock underlying the Convertible Notes See "Use
of Proceeds" and "Selling Stockholders and Plan of Distribution."
The Company's Common Stock is currently listed for trading in the
Over-The-Counter Market under the symbol "LSPT." On July 22, 1999, the market
price for the Common Stock in the Over-The-Counter Market was approximately
$6.4375 per share. The Company's securities are subject to the "penny stock
rules" adopted pursuant to Section 15(g) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Such rules require, among other
things, that in the case of companies whose common stock trades at less than
$5.00 per share or which have a net worth of less than $2,000,000, that
brokers who trade "penny stock" to persons other than "established customers"
complete certain documentation, make suitability inquiries of investors and
provide investors with certain information concerning trading in the
security, including a risk disclosure document and quote information under
certain circumstances. See "Risk Factors" and "Price Range of Common Stock."
THESE SECURITIES ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER
THE SECTION ENTITLED "RISK FACTORS" (AT
PAGE 7 OF THIS PROSPECTUS)
CONCERNING THE COMPANY
AND THIS OFFERING.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is August , 1999.
<PAGE>
THIS PRELIMINARY PROSPECTUS AND THE INFORMATION CONTAINED HEREIN ARE
SUBJECT TO COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. UNDER NO CIRCUMSTANCES SHALL THIS PRELIMINARY PROSPECTUS
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES, IN ANY JURISDICTION IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH JURISDICTION.
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information in this Prospectus.
This summary should be read in conjunction with, and is qualified in its
entirety by, the more detailed information and financial statements, including
the notes thereto, appearing elsewhere in this Prospectus. The Shares offered
hereby involve a high degree of risk. Investors should carefully consider the
information set forth under the heading "Risk Factors."
THE COMPANY
Laser Photonics, Inc. was incorporated on November 3, 1987. Unless the
context otherwise requires, the term "Company" refers to Laser Photonics, Inc.,
a Delaware corporation ("Laser Photonics"), Laser Analytics, Inc., a
Massachusetts corporation ("Laser Analytics"), its wholly owned subsidiary and
Acculase, Inc., a California corporation ("Acculase"), its 76.1% owned
subsidiary.
The Company's historical business strategy was the development of a
wide range of laser products using different solid state lasers. Since 1986, the
Company has sold over 1,000 lasers, usually on a private label basis, to other
manufacturers. This strategy proved to be unsuccessful, in the opinion of
current management of the Company, as the Company generated revenues from the
sale of numerous of its products, but was unable to operate profitably. Due to
the limited financial resources of the Company, the Company's strategy changed
in 1997 to focus its efforts on excimer laser technology in order to develop
excimer laser and excimer laser delivery products for both medical and
non-medical applications.
The Company believes that excimer laser technology provides the
basis for reliable cost-effective systems that will increasingly be used in
connection with a variety of applications. The Company is thus engaged in the
development of proprietary excimer laser and fiberoptic equipment and
techniques directed initially toward the treatment of coronary heart disease
and psoriasis, as well as other medical and non-medical applications. To
facilitate the Company's focus on excimer laser technology, as of January 4,
1999, the Company entered into an agreement (the "Asset Purchase Agreement")
for the sale of certain assets by the Company and Laser Analytics, on the one
hand, to Laser Analytics, Inc., a Texas corporation (the "Buyer"), which is
unaffiliated with the Company, on the other hand. The Asset Purchase
Agreement provides that the Buyer will pay and/or assume an aggregate of
$1,200,000 of the accrued and unpaid accounts payable and/or other debts of
the Company. Completion of this transaction will result in the sale of all of
the Company's non-excimer laser business assets. Management's decision to
sell the assets of the Company's business operations not related to the
Company's excimer laser technology will result in the divestiture of the
Company's business operations which generated approximately 70% of the
Company's revenues for the period from January 1, 1998 through March 31,
1999. If the proposed transaction should not close, then the Company may be
forced to expend approximately $115,000 per month to cover the negative cash
flow on a current basis until such operations are sold to another buyer or
discontinued. In addition, the Company would have to pay all of the
obligations which are to to be assumed by the Buyer.
The Company's initial medical applications for its excimer laser
technology are intended to be used in the treatment of cardiovascular disease
and psoriasis. The Company's cardiovascular and vascular applications are in
connection with an experimental procedure known as Transmyocardial
Revascularization ("TMR"), in which the Company's laser system (the "TMR
System") is currently in Phase I Human Clinical trials (defined below). The
Company and Baxter Healthcare Corporation ("Baxter") are engaged in a strategic
alliance for the development and marketing of excimer laser products for TMR.
The Company began testing its excimer laser system for the treatment of
psoriasis at Massachusetts General Hospital ("MGH") in 1998 with a Dose Response
Study under Institutional Review Boards ("IRBs") approval (defined below). The
final data from this study was collected in December, 1998. This data is
anticipated to serve as the basis for a 510(k) submission (defined below) to the
United States Food and
2
<PAGE>
Drug Administration (the "FDA") in the third quarter of 1999. However, no
assurance to this effect can be given. The Company believes the excimer laser
psoriasis system will be determined to be substantially equivalent to
currently marketed devices. However, no assurance to this effect can be given.
As part of its business plan, in August, 1997, the Company entered into
certain agreements with respect to the manufacturing and marketing of its TMR
System with Baxter. This strategic alliance with Baxter is significant to the
Company because Baxter has, among other things: (i) purchased from the Company
certain existing excimer laser systems for cardiovascular and vascular disease;
(ii) agreed to fund the total cost of regulatory approvals worldwide for the use
of the Company's excimer laser systems for the treatment of cardiovascular and
vascular disease; and (iii) agreed to fund all sales and marketing costs related
to the introduction and marketing of the Company's TMR System. Due to Baxter's
strong worldwide marketing presence and relationships with leading clinicians
and regulatory expertise, many of the significant expenses of bringing the
Company's TMR System to market are being absorbed by Baxter. In the opinion of
management of the Company, because of the significant costs being borne by
Baxter and because of the favorable terms of the Baxter Agreement (defined
below) the Company's earnings potential has not been compromised by the Baxter
Agreement, while a significant portion of the Company's risk related to the
development and introduction of its TMR System has been shifted to Baxter. As of
March 31, 1999, the Company has generated gross revenues from the Baxter
Agreement of approximately $1,748,000.
The Company's TMR System requires pre-market approval ("PMA") prior
to being marketed in the United States. Management of Acculase met with
representatives of the FDA in January, 1995 to discuss preclinical data
submission requirements necessary to initiate human trials of the TMR System.
Animal testing of the TMR System was then performed, culminating in a study
at The New York Hospital Cornell Medical Center, which serves as the
pre-clinical basis for an Investigational Device Exemption ("IDE") that was
granted by the FDA in August, 1996. In the first quarter of 1998, the IDE was
transferred to Baxter from the Company in connection with the Baxter
Agreement. Depending upon the outcomes of the Phase I study, Baxter intends
to petition for the Phase II studies (defined below) within the next ninety
days. However, no assurance to this effect can be given. Baxter is currently
in discussion with the FDA for transition from Phase I to Phase II studies.
The timing for the approval for such transition is unknown at this time. The
Company believes Baxter intends to expand the Phase II studies to a
multi-site study (more than 10 institutions) and expand the procedure to
include patients who are candidates for incomplete coronary artery bypass
graft surgery ("CABG") revascularization. However, no assurance to this
effect can be given. The Company does not expect Baxter to submit PMA to the
FDA before the year 2001, and possibly later. Baxter will be required to
obtain additional IDEs for other applications of the TMR System and for other
products that the Company develops that are regulated by the FDA as medical
devices.
In addition to the Baxter Agreement, the Company has entered into an
agreement with MGH (the "MGH Agreement"), pursuant to which the Company has
obtained an exclusive, worldwide, royalty-bearing license from MGH to develop,
manufacture, use and sell products, utilizing certain technology of MGH, related
to the diagnosis and treatment of certain dermatological conditions and
diseases, particularly psoriasis. On March 17, 1998, the Company entered into a
clinical trial agreement with MGH to test the effect of its excimer laser
technology for treatment of psoriasis, as contrasted to Ultraviolet "B" ("UVB")
treatment currently in use to treat psoriasis. As of the date of this
Prospectus, the Company has generated no revenues from the MGH Agreement.
With respect to non-medical applications of the excimer laser
technology, the Company intends to evaluate its technology as an illumination
source for use in the deep ultraviolet ("DUV") photolithography systems for the
semiconductor manufacturing industry. Due to the Company's limited financial
resources, the Company has made only a cursory review of this industry and does
not anticipate devoting efforts or resources in this regard for at least one
year from the date of this Prospectus. There can be no assurances that the
Company's excimer laser systems will be developed into marketable products. As
of the date of this Prospectus, neither the FDA nor appropriate international
organization has approved any of the Company's products for commercial use.
The Company historically has incurred significant net losses from
operations. As of March 31, 1999, the Company had an accumulated deficit of
$18,208,666. The Company expects to continue to incur significant operating
losses over at least the next two years as it continues to devote significant
financial resources to product development activities and expansion of
operations. In order to achieve profitability, the Company will have to
manufacture and
3
<PAGE>
market products, which are accepted on a commercial basis. There can be no
assurances that the Company will manufacture or market any products
successfully or operate profitably in the future, or that the Company will
not require significant additional financing in order to accomplish the
Company's current business plan.
The Company's principal executive offices are located at 2431
Impala Drive, Carlsbad, California 92008, (760) 602-3300.
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Securities Offered by the 7,006,229 shares of Common Stock to be offered,
Selling Stockholders including 3,665,544 shares issued in the name of
the Selling Stockholders, 2,095,000 shares which
may be issued upon the exercise of the Warrants and
1,308,218 shares which may be issued upon conversion of
the Convertible Notes. See "Description of Securities,"
"Selling Stockholders and Plan of Distribution" and
"Certain Relationships and Related Transactions."
Common Stock Outstanding:
Before the Offering 9,933,127 shares (1)
After the Offering 9,933,127 shares (2)
Use of Proceeds The Company will receive none of the proceeds from
the sale of the Shares. However, the Company may
receive gross proceeds of up to $5,820,000,
consisting of up to $2,380,000 in reduction of
liability upon the conversion of the Convertible
Notes into shares of Common Stock and up to $3,440,000
upon the exercise of the Warrants. See "Use of Proceeds,"
"Selling Stockholders and Plan of Distribution" and
"Certain Relationships and Related Transactions."
Risk Factors and Dilution The securities offered hereby are highly speculative
and involve a high degree of risk. These factors include,
but are not limited to, risks related to the Company's
historical lack of profitability, the government regulation
of the Company's products, legislative and regulatory
restrictions impacting the Company's business operations
and industry and the market for the securities offered hereby.
Only investors who can afford the loss of their entire
investment should make an investment in these securities.
See "Risk Factors."
Over-the-Counter Market Symbol
Common Stock LSPT
</TABLE>
-------------------------
4
<PAGE>
(1) Does not include 2,221,127 shares of Common Stock that are reserved
for issuance pursuant to certain stock options granted by the Company. See
"Risk Factors," "Price Range of Common Stock," "Compensation of Executive
Officers and Directors - 1995 Non-Qualified Option Plan: Compensation of
Directors," "Description of Securities," "Selling Stockholders and Plan of
Distribution" and "Certain Relationships and Related Transactions."
(2) Does not include 2,095,000 shares which may be issued upon the
exercise of the Warrants and 1,308,218 shares which may be issued upon
conversion of the Convertible Notes, which are being registered by the
registration statement of which this Prospectus forms a part. See
"Description of Securities," "Selling Stockholders and Plan of Distribution"
and "Certain Relationships and Related Transactions.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(In thousands, except per share data)
The Summary Financial Information set forth below should be read in
conjunction with the audited Consolidated Financial Statements included
elsewhere herein:
<TABLE>
<CAPTION>
Three Three
Year The period Months Months
Ended 1/1-5/22 5/23-12/31 Year Ended December 31, Ended Ended
12/31/94 1995(1) 1995(1) 1996 1997 1998 3/31/98 3/31/99
-------- ---------------------- -------- --------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues $ 5,715 $ 1,242 $ 1,408 $ 2,901 $ 3,815 $ 2,349 1,010 347
Net Income (loss) (2,234) 4,839(2) (2,124) (5,358) (2,307) (5,908) (570) (2.511)
Basic and diluted income
(loss) per share (0.35) 0.75 (0.42) (0.95) (0.35) (0.64) (0.06) (0.25)
Weight average
Shares
Outstanding (3) 6,312 6,312 5,000 5,620 6,531 9,288 9,267 9,896
Year Year Ended Three Months
Ended The Period December 31, Ended
12/31/94 5/22/95(1) 12/31/95(1) 1996 1997 1998 3/31/98 3/31/99
-------- ---------------------- -------- ------------ -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficit) $ 960 $(99) $(610) $(1,728) $ 15 $(1,843) (324) $(2,715)
Total assets 2,144 1,715 5,796 3,195 7,808 4,870 7,112 6,143
Long-term debt (net of
Current portion) -- -- 867 283 283 70 282 54
Liabilities subject to
Compromise 7,930 7,564 -- -- -- -- -- --
Total stockholders' equity
(deficit)
(6,643) (7,404) 686 (2,090) 4,929 1,841 4,415 815
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
5
<PAGE>
(FOOTNOTES FROM PRIOR PAGE)
(1) The Company filed a Petition for Reorganization (the "Bankruptcy
Proceeding") under Chapter 11 of the Federal Bankruptcy Act on May 13,
1994, Case No. 94-02608-611 - Federal Bankruptcy Court - Middle
District, Florida (the "Bankruptcy Court"). An order was issued on May
22, 1995 confirming the Company's Third Amended Plan of Reorganization
(the "Bankruptcy Reorganization" or the "Plan"). In connection with the
Bankruptcy Reorganization on May 22, 1995, the Company was required to
adopt fresh start reporting as of May 23, 1995, since the
reorganization value (approximate fair value at the date of
reorganization) was less than the total of all post-petition
liabilities and allowed claims, and holders of existing voting shares
before May 23, 1995 received less than 50% of the voting shares of the
emerging entity. Accordingly, the statement of operations for the
period from January 1, 1995 through May 22, 1995, reflects the effects
of the forgiveness of debt resulting from the confirmation of the
Bankruptcy Reorganization and the effects of the adjustments to restate
assets and liabilities to reflect the reorganization value. In
addition, the accumulated deficit of the Company was eliminated and the
Company's capital structure was recast in conformity with the
Bankruptcy Reorganization. As such, the balance sheet data included in
the Summary Consolidated Financial Information set forth above, as of
May 23, 1995, and December 31, 1995, 1996, 1997 and 1998, and March 31,
1999, and the statement of operations data set forth above for the
period May 23, 1995 to December 31, 1995, the years ended December 31,
1996, 1997 and 1998, and the three months ended March 31, 1998 and
1999, reflect that of the Company on and after May 23, 1995, which, in
effect, is a new entity for financial reporting purposes with assets,
liabilities and a capital structure, having carrying values not
comparable with periods prior to May 23, 1995. The balance sheet data
included in the Summary Consolidated Financial information, set forth
above, as of December 31, 1994 and May 22, 1995, and the statement of
operations data, set forth above, for the year ended December 31, 1994,
and the period from January 1, 1995, to May 22, 1995, reflect that of
the Company prior to May 23, 1995. See "Business-History of the
Company" and "Business-Litigation."
(2) Includes an extraordinary gain of $5,768,405. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Common Stock equivalents and convertible issues are antidilutive and,
therefore, are not included in the weighted shares outstanding during
the periods the Company incurred net losses.
6
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A
HIGH DEGREE OF RISK. ONLY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT SHOULD MAKE AN INVESTMENT IN THESE SECURITIES. IN ADDITION TO THE
FACTORS SET FORTH ELSEWHERE IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD
GIVE CAREFUL CONSIDERATION TO THE FOLLOWING RISK FACTORS IN EVALUATING THE
COMPANY AND ITS BUSINESS BEFORE PURCHASING THE SECURITIES OFFERED HEREBY.
THIS PROSPECTUS MAY BE DEEMED TO CONTAIN FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS OR HEREAFTER INCLUDED IN OTHER
PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE COMMISSION, REPORTS TO THE COMPANY'S
STOCKHOLDERS AND OTHER PUBLICLY AVAILABLE STATEMENTS ISSUED OR RELEASED BY THE
COMPANY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH
COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE (FINANCIAL OR OPERATING)
OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS, PERFORMANCE (FINANCIAL OR
OPERATING) OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON MANAGEMENT'S BEST ESTIMATES BASED
UPON CURRENT CONDITIONS AND THE MOST RECENT RESULTS OF OPERATIONS. THESE RISKS
INCLUDE, BUT ARE NOT LIMITED TO, RISKS SET FORTH HEREIN, EACH OF WHICH COULD
ADVERSELY AFFECT THE COMPANY'S BUSINESS AND THE ACCURACY OF THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN.
THERE IS A LIMITED PUBLIC MARKET FOR THE COMPANY'S COMMON STOCK.
PERSONS WHO MAY OWN OR INTEND TO PURCHASE SHARES OF COMMON STOCK IN ANY MARKET
WHERE THE COMMON STOCK MAY TRADE SHOULD CONSIDER THE FOLLOWING RISK FACTORS,
TOGETHER WITH OTHER INFORMATION CONTAINED ELSEWHERE IN THE COMPANY'S REPORTS,
PROXY STATEMENTS AND OTHER AVAILABLE PUBLIC INFORMATION, AS FILED WITH THE
COMMISSION, PRIOR TO PURCHASING SHARES OF THE COMMON STOCK:
LACK OF PROFITABILITY AND HISTORY OF LOSSES; BANKRUPTCY PROCEEDING.
On May 13, 1994, the Company filed the Bankruptcy Proceeding. On May 22,
1995, the Bankruptcy Court confirmed the Company's Plan. The Company incurred
losses of $2,123,814, $5,357,968, $2,307,151, $5,908,587 and $2,511,196, for
the period from May 23, 1995 to December 31, 1995, for the years ended
December 31, 1996, 1997 and 1998, and for the quarter ended March 31, 1999,
respectively. As of March 31, 1999, the Company had an accumulated deficit of
$18,208,666. The Company expects to continue to incur significant operating
losses over at least the next two years as it continues to devote significant
financial resources to product development activities and as the Company
expands its operations generally. In order to achieve profitability, the
Company will have to manufacture and market products which are accepted on a
commercial basis. There can be no assurance given that the Company will
manufacture or market any products successfully, operate profitably in the
future, or that the Company will not require significant additional financing
in order to accomplish the Company's business plan. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," "Certain Relationships and Related Transactions" and
"Financial Statements."
NEED FOR ADDITIONAL FINANCING AND POTENTIAL SIGNIFICANT DILUTION TO
SHAREHOLDERS. The Company has historically financed its operations through
working capital provided from operations, loans and the private placement of
equity and debt securities. The Company has significant debts, which will
require additional financing in order to repay such debts in full. The Company
has approximately $1,416,000 of cash on hand, as of March 31, 1999. The Company
will require additional financing to implement the Company's business plan. The
Company's day-to-day operations require cash of approximately $150,000 per month
or an aggregate of $1,800,000 over the next twelve (12) months. In addition,
management believes that the Company will require approximately $1,200,000 over
the next twelve (12) month period following the date of this Prospectus to
finance continued development of its psoriasis laser system. Additional amounts
may be required to pay various costs of operations such as professional and
consulting fees.
Management believes that approximately $750,000 of anticipated revenues
will be generated from the sale of lasers to Baxter under the Baxter Agreement
in 1999 although no assurance can be given to that effect. If the sale of the
Company's non-excimer laser assets closes, of which no assurance can be given,
approximately $1,200,000 of the Company's debts may be assumed by the Buyer.
If the proposed transaction should not close, then the Company may be forced to
expend approximately $115,000 per month to cover the negative cash flow on a
current
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basis until such operations are sold to another buyer or discontinued. In
addition, the Company would have to pay all of the obligations which are to
be assumed by the Buyer. Therefore, to finance its business plan, the Company
will be required to raise debt or equity of at least $5,000,000 before the
end of the third quarter of 1999 to sustain the required levels of operations
for a period of at least twelve (12) months following the date of this
Prospectus. Upon completion of the development of the psoriasis product, the
Company anticipates the need for as much as $50,000,000 over and above the
initial $5,000,000 to finance the marketing plan for the Company's psoriasis
product. No assurance can be given that Baxter will honor the Baxter
Agreement or that additional financing will become available to the Company
or that the business of the Company will ever achieve profitable
operations. Further, any additional financing may be senior to the Company's
Common Stock or result in significant dilution to the holders of the
Company's Common Stock. In the event the Company does not receive any such
financing or generate profitable operations, management may have to suspend
or discontinue its business activity or certain components thereof in its
present form or cease operations altogether. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources," "Business-Excimer Laser System for the Treatment of
Psoriasis" "Certain Relationships and Related Transactions" and "Financial
Statements."
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. Results of operations are
expected to fluctuate significantly from quarter to quarter, depending upon
numerous factors, including the timing and results of clinical trials; delays
associated with the FDA and other regulatory approval processes; healthcare
reform and reimbursement policies; demand for the Company's products; changes in
pricing policies by the Company or its competitors; the number, timing and
significance of product enhancements and new product announcements by the
Company and its competitors; the ability of the Company to develop, introduce
and market new and enhanced versions of the Company's products on a timely
basis; customer order deferrals in anticipation of new or enhanced products
offered by the Company or its competitors; product quality problems; personnel
changes; and changes in Company strategy. Quarter to quarter operating results
could also be affected by the timing of the receipt of individual customer
orders, order fulfillment and revenue recognition with respect to small numbers
of individual laser units, since each unit carries a high price per unit. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business-Government Regulation," "Business-Markets and Marketing"
and "Business-Competition."
POSSIBLE LACK OF NET INCOME DUE TO HIGH AMORTIZATION OF GOODWILL AND
PATENT EXPENSES. The Company's business depends on the exploitation of a
number of technologies, some of which are the subject of patents. For
financial statement purposes, the Company is required to amortize the cost of
acquisition of these patents and patent licenses over a period of years. In
addition, acquisitions of business operations and reorganization of existing
operations have required the Company to record certain assets as goodwill on
its financial statements and to amortize such goodwill over periods of years.
License fees paid are amortized over the life of the license and patent
expenses are amortized over the life of the patent. The impact on the current
and future financial statements of the Company is a reduction of net income
in the amount of such amortization. For 1998, the total of such amortization
was $1,028,035. This amount of amortization, when compared to the Company's
revenue for any year, may make it very difficult for the Company to show
profitability until net revenues from operations increase significantly or
until most of the items requiring amortization have been completely
amortized. However, even if the Company's net revenues increase to an amount
to offset existing levels of amortization, no assurance can be given that in
future years the Company will not incur other expenditures or undergo other
reorganizations which will require it to book significant additional amounts of
amortization. No assurance can be given that the Company will ever earn
enough net revenue to offset most or all of its then current amortization
expenses. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Financial Statements."
POSSIBLE FURTHER DILUTION FROM ISSUANCES OF COMMON STOCK TO PAY
OBLIGATIONS OF THE COMPANY. Historically, the Company has issued its
securities to raise capital to pay its current and long term obligations and
support operations. A significant portion of the money raised by the Company
has been used to loan money to Acculase, the Company's 76.1% owned
subsidiary. Management of the Company believes that the financing has
provided significant benefits to Acculase and that without the financing
provided by Laser Photonics, Acculase could not have obtained any of these
benefits. To accomplish the development of the excimer laser product, through
the raising of capital through stock sales, there has been significant
dilution in stock ownership to the stockholders of Laser Photonics. In
addition, the Company has issued warrants and options to acquire shares of
Common Stock to various employees, directors and consultants of the Company.
The Company anticipates being required to raise additional capital over the
next twelve (12) months to meet the Company's
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operational requirements. There can be no assurance that additional capital
will be available on terms favorable to the Company, if at all. To the extent
that additional capital is raised through the sale of additional equity or
convertible securities, the issuance of such securities could result in
additional dilution to the Company's stockholders. No assurance can be given
that there will not be further significant dilution to existing stockholders
of the Company to continue to finance the operations of Acculase, which
dilution and cost of financing is not borne by the other stockholders of
Acculase. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources,"
"Business-Business of the Company-Relationship with Acculase Subsidiary,"
"Certain Relationships and Related Transactions" and "Financial Statements."
RISKS OF OWNING LESS THAN 100% OF THE SHARES OF ACCULASE. Due to the
inability of Acculase to raise financing to capitalize the development of its
excimer lasers, Laser Photonics engaged in significant financing activities
starting in 1997 and continuing through the date of this Prospectus, and
provided and continues to provide incentives and compensation to management
of Acculase and ongoing funding to develop and commercialize the Company's
excimer laser technology. As of March 31, 1999, Acculase owes to Laser
Photonics the sum of $5,157,434. To accomplish the development of the excimer
laser business, there has been significant dilution in ownership to the
stockholders of Laser Photonics from the raising of capital for the Company,
which capital was used to benefit the other stockholders of Acculase through
loans from the Company to Acculase. The Company's Board of Directors intends
to make an offer to the other stockholders of Acculase to acquire the shares
of common stock of Acculase representing the 23.9% of Acculase not already
owned by the Company, in exchange for shares of Common Stock of the Company.
The exact terms of such offer are not yet determined. No assurance can be
given that the offer to acquire the other shares of Acculase, once made, will
be on terms favorable to the Company or that such offer will be accepted by
the other stockholders of Acculase. The Company's Board of Directors has not
determined what action it will take if the other stockholders of Acculase do
not accept the Company's offer to acquire their shares of Acculase. See
"Business - Business of the Company - Relationship with Acculase Subsidiary,"
"Business-Intellectual Property" and "Certain Relationships and Related
Transactions."
PENDING SALE OF CERTAIN REVENUE GENERATING ASPECTS OF BUSINESS
OPERATIONS. Management is in the process of selling all of the Company's
non-excimer laser business operations. This proposed transaction is scheduled
to close in June, 1999. No assurance can be given that that this proposed
transaction will close when scheduled or at all. Management's decision to
sell the assets of the Company's business operation not related to the
Company excimer laser technology will result in the divestiture of the
Company's business operations which have generated approximately 70% of the
Company's revenues for the period from January 1, 1998 through March 31,
1999. If the proposed transaction should not close, then the Company may be
forced to expend approximately $115,000 per month to cover the negative cash
flow on a current basis until such operations are sold to another buyer or
discontinued. In addition, the Company would have to pay all of the
obligations which are to be assumed by the Buyer. No assurance can be given
that the Buyer will complete the purchase under the Asset Purchase Agreement,
and, if not, that the Company will be able to find an alternate buyer on as
favorable terms as set forth in the Asset Purchase Agreement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources," "Business," "Certain
Relationships and Related Transactions" and "Financial Statements."
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURE AND MARKETING OF PRODUCTS
AND RISKS OF ACCESS TO ALTERNATIVE SOURCES AND DELAYS. The Company does not
currently have sufficient financial resources to conduct human clinical trials
necessary to commercialize the application of the TMR System. The Company has
entered into the Baxter Agreement, pursuant to which Baxter agreed to fund and
market the Company's products. However, Baxter may terminate such funding and
marketing commitment and cease further funding at any time. Should Baxter
terminate the Baxter Agreement, the Company will have to seek out other parties
for the marketing of its TMR System. The Company believes that third parties
would have an economic incentive to provide such assistance for the Company due
to the fact that the Company's TMR System is believed by management of the
Company to be technically superior
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and less expensive than lasers from other manufacturers used for the same
medical applications. However, no assurance to this effect can be given.
Management of the Company believes that this alone could make a strategic
alliance or similar business relationship with the Company attractive to
another Company, which might assume Baxter's responsibilities under the
Baxter Agreement, although no assurance to this effect can be given.
There can be no assurance that any third party would be willing or able
to meet the Company's needs in a satisfactory and timely manner, if at all.
Should the Company be unable to locate third parties willing or able to meet the
Company's needs, management may have to suspend or discontinue its business
activities or certain components thereof or cease operations altogether. The
amount and timing of resources to be devoted to these activities are not within
the control of the Company, and there can be no assurance that manufacturing and
marketing problems will not occur in the future.
Production of the Company's lasers requires specific component parts
obtained from certain suppliers. In the event that such suppliers cannot meet
the Company's needs, the Company believes that alternative suppliers could be
found. However, a change in suppliers or any significant delay in the Company's
ability to have access to such resources would have a material adverse effect on
the Company's delivery schedules, business, operating results and financial
condition. See "Business- Sources and Availability of Raw Materials."
The Company maintains limited manufacturing facilities, which may need
to be expanded in the future. The Company estimates that it will only be able to
produce 200 lasers per year in its facility in Carlsbad, California. Should
demand exceed that number of lasers, the Company's facilities will have to be
expanded. Although certain members of the Company's management have
manufacturing experience, the expansion of the Company's manufacturing
facilities and capabilities will subject the Company to numerous risks,
including unanticipated technological problems or delays. Such expansion will
also require additional sources of capital, which may not be available on
commercially reasonable terms, if at all. If demand for the Company's products
becomes great enough to require expansion of its manufacturing capability and if
the Company is unable to expand its manufacturing capabilities, the Company may
be required to enter into arrangements with others for the manufacture and
packaging of its products. There can be no assurance that the Company will be
able to enter into any such arrangements on commercially reasonable terms, or at
all, or that the Company will ever be able to establish the capability to
manufacture its products on a commercial basis, in which case the Company's
business, results of operations and financial condition would be materially
adversely affected. See "Business - Alliance with Baxter Healthcare Corporation"
and "Business - Research and Development."
UNCERTAIN MARKET ACCEPTANCE. The cost of the Company's products may be
significantly greater than the cost of the therapeutic capital equipment
required with balloon angioplasty, stent implantation or atherectomy procedures.
Market acceptance of laser TMR for end stage heart disease patients will depend,
in part, on Baxter's ability to establish, with the medical community, the
clinical efficacy of excimer laser TMR for end stage heart disease patients.
Market acceptance of laser treatment of psoriasis is dependent on the Company's
ability to establish, with the medical community, the clinical efficacy of
excimer laser technology to treat psoriasis. As a result of such factors, there
can be no assurance that the marketplace will be receptive to excimer laser
technology over competing therapies. Failure of the Company's products to
achieve market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business-Government Regulation," "Business-Markets and Marketing" and
"Business-Competition."
HIGHLY COMPETITIVE MARKETS; RISK OF ALTERNATIVE THERAPIES. Competition
in the market for the treatment of coronary artery disease ("CAD"), and in the
medical device industry generally is intense and is expected to increase. The
Company's TMR System, if approved for general sale by the FDA, will compete
primarily with other suppliers of TMR equipment for the treatment of patients
with end stage heart disease. Companies producing competitive products may
succeed in developing products that are more effective or less costly in
treating CAD than the TMR System, and may be more successful than the Company in
manufacturing and marketing their products. In the TMR market, the Company
competes primarily with other producers of TMR systems. Many companies, research
institutes and universities are working in a number of disciplines to develop
therapeutic devices and procedures aimed at vascular and cardiovascular disease.
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The Company's requirements for regulatory approval, and marketing of
some of its products for cardiovascular and vascular disease have been assumed
by Baxter. The Company's competitors and many of its potential competitors have
substantially greater capital resources than does the Company. There can be no
assurance the Company's competitors will not succeed in developing TMR products
or procedures that are more effective or more effectively marketed than products
marketed by Baxter or that render the Company's technology obsolete. Even if the
Company's products provide performance comparable or superior to competing
products, there can be no assurance the Company will be able to obtain necessary
regulatory approvals to compete against competitors in terms of manufacturing,
marketing and sales. PLC Systems, Inc. ("PLC") and Eclipse Surgical
Technologies, Inc. ("Eclipse") received regulatory approvals in Europe to begin
marketing their various TMR products and received approval from the FDA to
market their TMR products in the United States. Earlier entrants to a market in
a therapeutic area often obtain and maintain greater market share than later
entrants. The Company believes the primary competitive factors in the market for
its TMR Systems include clinical performance, product safety and reliability,
availability of third-party reimbursement, product design specifically for TMR
use, product quality, ease of use, price, customer service and company
reputation. In addition, the length of time required for products to be
developed and receive regulatory approval and the ability to use patents or
other proprietary rights to prevent sales by competitors are also important
competitive factors. Some of the medical indications that may be treatable with
TMR are currently being treated by drug therapies or surgery and other
interventional therapies, including CABG and percutaneous transluminal coronary
angioplasty ("PTCA"). A number of these therapies are widely accepted in the
medical community, have a long history of use and continue to be enhanced
frequently. There is no assurance that procedures using TMR will be able to
replace or augment such established treatments or that clinical research will
support the use of TMR. Additionally, new surgical procedures and new drug
therapies are being developed by other parties to treat CAD. New procedures and
drug therapies could be more effective, safer or more cost-effective than TMR.
The inability of TMR to replace or augment existing therapies or to be more
effective, safer or more cost-effective than new therapies could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business Government Regulation," "Business-Markets and
Marketing" and "Business-Competition."
NO MARKETING STUDIES. No independent studies with regard to the
feasibility of the Company's proposed business plan have been conducted at the
expense of the Company or by any independent third parties with respect to the
Company's present and future business prospects and capital requirements. In
addition, there can be no assurances that the Company's products will find
sufficient acceptance in the marketplace to enable the Company to fulfill its
long and short term goals, even if adequate financing is available and products
are ready for market, of which there can be no assurance. See "Business -
Markets and Marketing."
DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon the skills
of its management and technical team. There is strong competition for qualified
personnel in the laser industry, and the loss of key personnel or an inability
to continue to attract, retain and motivate key personnel could adversely affect
the Company's business. The Company has no employment agreements with any of the
Company's key employees. There can be no assurances that the Company will be
able to retain its existing key personnel or to attract additional qualified
personnel. The Company does not have key-person life insurance on any of its
employees. See "Management."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS. Clinical
testing, manufacture, promotion and sale of the Company's products are subject
to extensive regulation by numerous governmental authorities in the United
States, principally the FDA, and corresponding foreign regulatory agencies. The
Federal Food, Drug, and Cosmetic Act ("FDC Act"), and other federal and state
statutes and regulations govern or influence the testing, manufacture, labeling,
advertising, distribution and promotion of medical devices. Noncompliance with
applicable requirements can result in fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
refusal to authorize the marketing of new products or to allow the Company to
enter into supply contracts and criminal prosecution. The Company's excimer
laser devices for the various applications discussed in this Prospectus will be
regulated as either a Class II or Class III (defined below) medical device.
Class II devices may claim "substantial equivalence" to an existing (predicate)
device and may receive approval under the 510(k) process from the FDA. Some
Class II devices may not be found "substantially equivalent" to existing
devices, and may be assigned a new classification, which may or may not require
further clinical data or which may have certain restrictions including
post-market surveillance. Furthermore, it is unusual, but possible, that the FDA
will assign a new Class II device to a PMA device. Class II devices, for which
there is no predicate device, require a PMA. FDA approval of a PMA must
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be obtained prior to commercial distribution in the United States. A PMA
application must be supported by extensive information, including preclinical
and clinical trial data. The PMA process is expensive, lengthy and uncertain,
and a number of products for which PMA applications have been submitted by
other companies have never been approved for marketing. If granted, the
approval of the PMA application may include significant limitations on the
indicated uses for which a product may be marketed. There can be no assurance
that the Company will be able to obtain necessary PMA application approvals
to market its excimer laser systems for all, or any, of the currently
anticipated applications, or any other products, on a timely basis, if at
all. Failure to obtain such approvals, a delay in receipt of such approvals,
the loss of previously received approvals, or failure to comply with existing
or future regulatory requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.
Although the Company has received and transferred to Baxter a
conditionally approved IDE from the FDA, permitting the Company to conduct
clinical trials of the TMR System, and such clinical study has recently
commenced, there can be no assurance that data from such studies will
demonstrate the safety and effectiveness of the TMR System for the treatment of
end stage heart disease or will adequately support a PMA application for the TMR
System. In addition, Baxter will be required to obtain additional IDEs for other
applications of the Company's excimer laser technology. There can be no
assurance that data, typically the results of animal and laboratory testing,
that may be provided by the Company in support of future IDE submissions, will
be deemed adequate for the purposes of obtaining IDE approval or that the
Company will obtain approval to conduct clinical studies of any such future
product. Even if IDE approval is obtained and clinical studies are conducted,
there can be no assurance that data from such studies will demonstrate the
safety and effectiveness of any such product or will adequately support a PMA
application for any such product. Manufacturers of medical devices are also
required to comply with applicable FDA good manufacturing practice ("GMP")
requirements, which include standards relating to product testing and quality
assurance as well as the corresponding maintenance of records and documentation.
There is no assurance that the Company will be able to comply with applicable
GMP requirements. See "Business - Government Regulation."
NEED TO COMPLY WITH INTERNATIONAL GOVERNMENT REGULATION. International
sales of medical devices often are subject to regulatory requirements in foreign
countries, which vary from country to country. Sale and use of the Company's
products are subject to pre-market approval in the European Union ("EU") and
subject to other regulatory requirements in those and other countries. The time
required to obtain approval for sale in foreign countries may be longer or
shorter than required for FDA approval, and the requirements may differ
materially. In addition, there may be foreign regulatory barriers other than
PMA. The FDA must approve exports of devices that require a PMA, but are not yet
approved domestically, unless they are approved for sale by any member country
of the EU or the other "listed" countries, including Australia, Canada, Israel,
Japan, New Zealand, Switzerland and South Africa, in which case they can be
exported for sale to any country without prior FDA approval. In addition, an
unapproved device may be exported without prior FDA approval to the listed
countries for investigational use in accordance with the laws of those
countries.
In addition to ISO 9001/EN46001 certification, which the Company has
received for the TMR System which is required to market the TMR System in
European Economic Area ("EEA"), the Company also will be required to comply
with additional individual national requirements that are outside the scope
of those required by the EEA. Failure to comply with applicable regulatory
requirements can result in fines, injunctions, civil penalties, recalls or
seizures of products, total or partial suspensions of production, refusals by
foreign governments to permit product sales and criminal prosecution.
Furthermore, changes in existing regulations or adoption of new regulations
or policies could prevent the Company from obtaining, or affect the timing
of, future regulatory approvals or clearances. There can be no assurance that
the Company will be able to obtain necessary regulatory clearances or
approvals on a timely basis or at all or that the Company will not be
required to incur significant costs in obtaining or maintaining such foreign
regulatory approvals. Delays in receipt of, or failure to receive, such
approvals or clearances, the loss of previously obtained approvals or
clearances or the failure to comply with existing or future regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business-Government
Regulation-International Product Regulation."
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UNCERTAINTY RELATED TO THIRD-PARTY REIMBURSEMENT. In the United States,
healthcare providers that purchase devices with medical applications for
treatment of their patients generally rely on third-party payors, principally
federal Medicare, state Medicaid and private health insurance plans, to
reimburse all or a part of the costs and fees associated with the procedures
using these devices. The Company's ultimate success will be dependent upon,
among other things, the ability of healthcare providers to obtain satisfactory
reimbursement from third-party payers for medical procedures in which the laser
and delivery system products are used. Unlike balloon angioplasty and
atherectomy, the use of laser technology for the treatment of end stage heart
disease requires the purchase of expensive capital equipment. Third-party payors
may deny reimbursement if they determine that a prescribed device has not
received appropriate regulatory clearances or approvals, is not used in
accordance with cost-effective treatment methods as determined by the payor, or
is experimental, unnecessary or inappropriate. If the FDA clearance or approval
were received, third-party reimbursement would also depend upon decisions by the
Health Care Financing Administration ("HCFA") for Medicare, as well as by
individual health maintenance organizations, private insurers and other payors.
Potential purchasers must determine whether the clinical benefits of the
Company's TMR System justify the additional cost or effort required to obtain
prior authorization or coverage and the uncertainty of actually obtaining such
authorization or coverage. If the Company obtains the necessary foreign
regulatory registrations or approvals, market acceptance of the Company's
products in international markets would be dependent, in part, upon the
availability of reimbursement within applicable healthcare payment systems.
Reimbursement and healthcare payment systems in international markets vary
significantly by country, and include both government-sponsored healthcare and
private insurance. Although the Company believes that Baxter intends to seek
international reimbursement approvals, there can be no assurance that any such
approvals will be obtained in a timely manner, if at all. Failure to receive
international reimbursement approvals could have a material adverse effect on
market acceptance of the Company's products in the international markets in
which such approvals are sought. In addition, fundamental reforms in the
healthcare industry in the United States and the EU continue to be considered,
although the Company cannot predict whether or when any healthcare reform
proposals will be adopted and what impact such proposals might have. Moreover,
management is unable to predict what additional legislation or regulation, if
any, relating to the healthcare industry or third-party coverage and
reimbursement may be enacted in the future, or what effect such legislation or
regulation would have. See "Business-Government Regulation."
PRODUCT DEFECTS; LIMITS OF PRODUCT LIABILITY INSURANCE. One or more of
the Company's products may be found to be defective after the Company has
already shipped such products in volume, requiring a product replacement.
Product returns and the potential need to remedy defects or provide replacement
products or parts could impose substantial costs on the Company and have a
material adverse effect on the Company's business and results of operations. The
clinical testing, manufacturing, marketing and use of the Company's devices and
procedures may expose the Company to product liability claims. The Company
maintains liability insurance with coverage limits of $3,000,000 per occurrence.
Although the Company has never been subject to a product liability claim, there
can be no assurance that the coverage limits of the Company's insurance policies
will be adequate or that one or more successful claims brought against the
Company would not have a material adverse effect upon the Company's business,
financial condition and results of operations. See "Business - Product Liability
Insurance."
RELIANCE ON PATENT PROTECTION AND PROPRIETARY TECHNOLOGY. The
Company's business could be adversely affected if it is unable to protect its
intellectual property, including patented and other proprietary technology,
certain of which is licensed by the Company and certain of which is owned by
the Company and licensed to Baxter. If the Company or the owners or licensees
of the proprietary technology are unsuccessful in protecting their rights
thereto or such technology were to infringe on proprietary rights of third
parties, that portion of the Company's business could suffer. To the extent
that the Company relies upon unpatented trade secrets and know-how, there can
be no assurances that such proprietary technology will remain a trade secret
or that others will not develop substantially equivalent or superior
technologies to compete with the Company's products. In addition, there can
be no assurance given that others will not independently develop similar or
superior technologies, enabling them to provide superior products or services
to those of the Company. There can be no assurances that patentable
improvements on such technology will be developed or that existing or
improved technology will have competitive advantages or not be challenged by
third parties. The laser industry has been marked by costly and
time-consuming litigation with respect to intellectual property rights
between competitors. There can be no assurances that third parties will not
claim that some or all of the Company's proprietary technology infringes on
proprietary rights of others. Such litigation may be used to seek damages or
to enjoin alleged infringement of proprietary rights of others. Further, the
defense of any such litigation, whether or not meritorious, may divert
financial
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and other resources of the Company from the Company's business plan and,
therefore, may have a material adverse effect on the financial condition of
the Company. An adverse decision to the Company in any such litigation may
result in significant damage awards payable by the Company or enjoin the
Company from marketing its then existing products, which would have an
adverse effect on the Company's ability to continue in business. In the event
of an adverse result in such litigation, the Company would be required to
expend significant resources to develop non-infringing technology or to
obtain licenses to the disputed technology from third parties. There can be
no assurances that the Company will have the resources to develop or license
such technology, or if so, that the Company would be successful in such
development or that any such licenses would be available on commercially
reasonable terms. Further, the Company may be required to commence litigation
against third parties to protect any proprietary technology rights of the
Company. There can be no assurances that the Company will be able to afford
to prosecute such litigation, or if so, that such litigation will be
successful. See "Business-Intellectual Property."
DISCLOSURE RELATING TO LOW-PRICED STOCKS. The Company's Common Stock
is currently listed for trading in the over-the-counter market (the
"Over-The-Counter Market") in the so-called "pink sheets" or the "Electronic
Bulletin Board" of the National Association of Securities Dealers, Inc. The
Company's securities are subject to the "penny stock rules" adopted pursuant
to Section 15(g) of the Exchange Act. The penny stock rules are applicable to
non-NASDAQ companies whose common stock trades at less than $5.00 per share
or which have tangible net worth of less than $5,000,000 ($2,000,000 if the
company has been operating for three or more years). Such rules require,
among other things, that brokers who trade "penny stock" to persons other
than "established customers" complete certain documentation, make suitability
inquiries of investors and provide investors with certain information
concerning trading in the security, including a risk disclosure document and
quote information under certain circumstances. Many brokers have decided not
to trade "penny stocks" because of the requirements of the penny stock rules
and, as a result, the number of broker-dealers willing to act as market
makers in such securities is limited. Because the Company's securities are
subject to the "penny stock rules," investors will find it more difficult to
dispose of the securities of the Company. Further, for companies whose
securities are traded on the Over-The-Counter Market, it is more difficult:
(i) to obtain accurate quotations; (ii) to obtain coverage for significant
news events because major wire services, such as the Dow Jones News Service,
generally do not publish press releases about such companies; and (iii) to
obtain needed capital. See "Price Range of Common Stock."
EFFECTS OF CERTAIN REGISTRATION RIGHTS. The Company is registering
pursuant to the Registration Statement, of which this Prospectus forms a part,
7,006,229 shares of Common Stock, consisting of 3,665,544 shares of Common Stock
currently issued in the name of the Selling Stockholders, 2,095,000 shares of
Common Stock underlying the Warrants and 1,308,218 shares of Common Stock
underlying the Convertible Notes. The Company currently has 9,933,127 shares
issued and outstanding. There can be no assurance that the registration of the
shares being registered pursuant to the Registration Statement will not have a
material adverse effect on the market price for the Company's Common Stock
resulting from the increased number of free trading shares of Common Stock in
the market. See "Certain Relationships and Related Transactions," "Price Range
of Common Stock" and "Description of Securities."
LACK OF DIVIDENDS ON COMMON STOCK. The Company has paid no dividends on
its Common Stock to date and there are no plans for paying dividends in the
foreseeable future. The Company intends to retain earnings, if any, to provide
funds for the expansion of the Company's business. See "Dividend Policy."
POTENTIAL ANTI-TAKEOVER EFFECT OF DELAWARE LAW. The Company is subject
to certain provisions of the Delaware General Corporation Law which, in general,
restrict the ability of a publicly held Delaware corporation from engaging in
certain "business combinations," with certain exceptions, with "interested
stockholders" for a period of three (3) years after the date of the transaction
in which the person became an "interested stockholder." The effect of such
"anti-takeover" provisions may delay, deter or prevent a takeover of the Company
which the stockholders may consider to be in their best interests, thereby
possibly depriving holders of the Company's securities of certain opportunities
to sell or otherwise dispose of their securities at above-market prices, or
limit the ability of stockholders to remove incumbent directors as readily as
the stockholders may consider to be in their best interests. See "Description of
Securities - Certain Business Combinations."
SHARES ELIGIBLE FOR FUTURE SALE; ISSUANCE OF ADDITIONAL SHARES. Future
sales of shares of Common Stock by the Company and its stockholders could
adversely affect the prevailing market price of the Common Stock and could
14
<PAGE>
have a material adverse effect on the ability of the Company to raise new
capital. There are currently 2,881,888 restricted shares and 7,051,239 shares
which are freely tradable, eligible to have the restrictive legend removed
pursuant to Rule 144(k) promulgated under the Securities Act or are the
subject of this Prospectus or other registration statements. Further, the
Company has granted options to purchase up to an additional 2,211,127 shares
of Common Stock, 1,585,127 of which are currently exercisable. Warrants to
purchase up to 2,095,000 shares of Common Stock are the subject of a
registration statement of which this Prospectus forms a part. Sales of
substantial amounts of Common Stock in the public market, or the perception
that such sales may occur, could have a material adverse effect on the market
price of the Common Stock. Pursuant to its Certificate of Incorporation, the
Company has the authority to issue additional shares of Common Stock. The
issuance of such shares could result in the dilution of the voting power of
Common Stock purchased in the Offering. See "Compensation of Executive
Officers and Directors," "Principal Stockholders," "Certain Relationships and
Related Transactions," "Description of Securities" and "Shares Eligible for
Future Sale."
EFFECT OF OUTSTANDING CONVERTIBLE NOTES, WARRANTS AND OPTIONS. The
holders of the Convertible Notes, Warrants and options which are outstanding
and unexercised are given an opportunity to profit from a rise in the market
price of the Common Stock, with a resulting dilution in the interest of the
other stockholders. The terms on which the Company might obtain additional
financing during the period may be adversely affected by the existence of the
Convertible Notes, Warrants and options. The holders of the Convertible
Notes, Warrants and options may convert the Convertible Notes or exercise the
Warrants and options at a time when the Company might be able to obtain
additional capital through a new offering of securities on terms more
favorable than those provided herein. See "Description of Securities."
LIMITATIONS ON DIRECTOR LIABILITY. The Company's Certificate of
Incorporation provides, as permitted by governing Delaware law, that a director
of the Company shall not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director, with certain
exceptions. These provisions may discourage stockholders from bringing suit
against a director for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by stockholders on behalf of the Company against a
director. In addition, the Company's Certificate of Incorporation and Bylaws
provide for mandatory indemnification of directors and officers to the fullest
extent permitted by Delaware law. See "Management."
CONSENT DECREE. In 1996, as a result of certain alleged securities law
violations in 1992 and early 1993 under prior management, the Company entered
into a Consent Decree with the Commission where it neither admitted nor denied
liability, but consented to the issuance of an injunction against any future
violation. The alleged events occurred prior to the Company's Bankruptcy
Reorganization and involve events, which occurred prior to the change in the
Company's management and directors. There can be no assurance that the Consent
Decree will not have an adverse effect on the Company's ability to conduct
financing in the future. See "Business-Legal Proceedings."
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the
shares of Common Stock offered hereunder. However, the Company may receive
gross proceeds of up to $5,820,000, consisting of up to $2,380,000 in
reduction of liability upon the conversion of up to all of the Convertible
Notes into shares of Common Stock, and up to $3,440,000 upon the exercise of
the Warrants. The net proceeds from such actions will be used for working
capital and general corporate purposes.
15
<PAGE>
Pending full utilization of the proceeds, which may be obtained from
the exercise of the Warrants and Options, if at all, the Company may invest the
net proceeds in short-term, investment grade, interest-bearing securities. See
"Business."
DIVIDEND POLICY
No dividend has been declared or paid by the Company since inception on
the Company's Common Stock. The Company does not anticipate that any dividends
will be declared or paid in the future on the Company's Common Stock. See
"Description of Securities."
15
<PAGE>
PRICE RANGE OF COMMON STOCK
As of the date of this Prospectus, the Company has 9,933,127 shares
of Common Stock issued and outstanding. Further, the Company has issued and
outstanding Warrants to purchase 2,095,000 shares of Common Stock,
Convertible Notes which are convertible into 1,308,218 shares of Common Stock
and options to purchase up to 2,211,127 shares of Common Stock. See
"Description of Securities."
The Company's Common Stock is listed for trading in the
Over-The-Counter Market under the symbol "LSPT." The Company's Common Stock,
subsequent to the confirmation of the Plan on May 22, 1995, has been quoted on
the Electronic Bulletin Board since approximately January 22, 1996 under the
stock symbol "LSPT."
The following table sets forth quotations for the bid and asked prices
for the Common Stock for the periods indicated below, based upon quotations
between dealers, without adjustments for stock splits, dividends, retail
mark-ups, mark-downs or commissions, and therefore, may not represent actual
transactions:
<TABLE>
<CAPTION>
BID PRICES ASKED PRICES
------------------ ----------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
1st Quarter 7 3/4 4 1/2 8 1/4 5 3/4
2nd Quarter 8 1/4 3 3/4 8 1/2 4 1/4
3rd Quarter 5 3/8 3 5/8 5 5/8 5 5/8
4th Quarter 3 11/16 11/16 4 1/8 13/16
YEAR ENDED DECEMBER 31, 1997
1st Quarter 2 9/32 5/16 2 5/16 3/8
2nd Quarter 1 5/16 5/16 1 7/16 13/32
3rd Quarter 4 3/8 7/8 4 9/16 1 1/16
4th Quarter 6 1/8 2 31/32 6 3/8 3 1/8
YEAR ENDED DECEMBER 31, 1998
1st Quarter 4 1/8 2 1/2 4 3/8 2 11/16
2nd Quarter 3 3/4 2 1/8 3 7/8 2 3/8
3rd Quarter 2 9/16 1 1/8 2 3/4 1 1/4
4th Quarter 3 1/16 1 1/4 3 1/4 1 3/8
YEAR ENDING DECEMBER 31, 1999
1st Quarter 4 1/4 2 3/8 4 1/2 2 17/32
2nd Quarter 6 1/2 4 5/16 6 5/8 4 1/2
</TABLE>
On July 16, 1999, the closing market price for the Company's Common
Stock in the Over-The-Counter Market was approximately $6.6875 share. As of July
16, 1999, the Company had approximately 1,025 stockholders of record.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1999. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Certain Relationships and Related Transactions" and
"Selling Stockholders and Plan of Distribution." This table should be read in
conjunction with the Consolidated Financial Statements and related Notes
included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
MARCH 31, 1999
<S> <C>
NOTES PAYABLE:
Current portion $ 542,277
Long term 54,012
STOCKHOLDERS' EQUITY:
Common Stock, par value
$0.01; 15,000,000 shares
authorized(1); issued and
outstanding 9,933,127 shares(2) (3) 98,957
Additional paid-in-capital 18,924,429
Accumulated deficit (18,208,666)
-----------
Total stockholders'
Equity 814,720
Total capitalization $ 1,411,009
===========
</TABLE>
- ------------------------
(1) On June 22, 1999, the Company's stockholders approved a
resolution to increase the authorized capital of the Company to 25,000,000
shares of Common Stock. See "Description of Securities."
(2) Does not include 2,095,000 shares of Common Stock that are
reserved for issuance pursuant to certain Warrant agreements between
investors and the Company, 1,308,218 shares of Common Stock that are reserved
for conversion of the Convertible Notes and 2,211,127 shares of Common Stock
that are reserved for issuance pursuant to certain stock options. See "Risk
Factors," "Compensation of Executive Officers and Directors - 1995
Non-Qualified Stock Option Plan - Compensation of Directors," "Certain
Relationships and Related Transactions," "Description of Securities" and
"Selling Stockholders and Plan of Distribution."
(3) Does not give effect to the 2,095,000 shares of Common Stock
underlying the Warrants and 1,308,218 shares of Common Stock underlying the
Convertible Notes. See "Description of Securities."
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The Selected Consolidated Financial Data for the years ended December
31, 1994 through 1998 set forth below are derived from the Consolidated
Financial Statements of the Company and Notes thereto. The Consolidated Balance
Sheets as of December 31, 1997 and 1998, and the related Consolidated Statements
of Operations, Stockholders' Equity (Deficit) and Cash Flows for the years ended
December 31, 1996, 1997, and 1998, appear elsewhere in this Prospectus. The
Selected Consolidated Financial Data are qualified in their entirety by
reference to, and should be read in conjunction with, the Consolidated Financial
Statements and related Notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS
YEAR ENDED JANUARY 1, MAY 23, TO YEAR ENDED ENDED ENDED
DECEMBER TO MAY 22, DECEMBER DECEMBER 31, MARCH 31, MARCH 31,
31, 1994 1995(1) 31, 1995(1) 1996 1999 1997 1998 1999
-------- ---------- ----------- -------- ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 5,715 $1,242 $ 1,408 $ 2,901 $ 3,815 2,349 1,010 347
Costs and Expenses 6,713 2,082 3,351 7,704 5,746 7,746 1,635 1,316
------- ------ ------- ------- ------- ------- --------- --------
Loss from operations (998) (840) (1,942) (4,802) (1,931) (5,397) (535) (969)
------- ------ ------- ------- ------- ------- --------- --------
Other income (expenses) (1,236) (89) (181) (556) (372) (508) (34) (1,542)
Income tax expense -- -- -- -- (4) (3) -- --
Extraordinary item-gain
From reorganization -- 5,768 -- -- -- -- -- --
Net income (loss) $(2,234) $4,839(2) $(2,124) $(5,358) $(2,307) $(5,908) (570) $(2,511)
======= ====== ======= ======= ======= ======= ========= =======
Basic and diluted income
(loss) per share (0.35) (0.75) (0.42) (0.95) (0.35) (0.64) (0.06) (0.25)
Weighted average shares(3) 6,312 6,312 5,000 5,620 6,531 9,288 9,267 9,896
BALANCE SHEET DATA (AT PERIOD
END):
Working capital (deficit) 960 (99) (610) (1,728) 15 (1,843) (324) (2,715)
Total Assets 2,144 1,715 5,796 3,195 7,808 4,870 7,112 6,143
Long-term debt (net of current -- -- 867 283 283 70 282 54
portion)
Liabilities subject to compromise 7,930 7,564 -- -- -- -- -- --
Total stockholders' equity (deficit) (6,643) (7,404) 686 (2,090) 4,929 1,841 4,415 815
</TABLE>
(FOOTNOTES ARE ON FOLLOWING PAGE)
18
<PAGE>
(FOOTNOTES FROM PREVIOUS PAGE)
(1) In connection with the confirmation of the Bankruptcy Reorganization on
May 22, 1995, the Company was required to adopt fresh start reporting as
of May 23, 1995 since the reorganization value (approximate fair value at
the date of reorganization) was less than the total of all post-petition
liabilities and allowed claims, and holders of existing voting shares
before May 23, 1995 received less than 50% of the voting shares of the
emerging entity. Accordingly, the statement of operations for the period
January 1, 1995 through May 22, 1995 reflects the effects of the
forgiveness of debt resulting from the confirmation of the Bankruptcy
Reorganization and the effects of the adjustments to restate assets and
liabilities to reflect the reorganization value. In addition, the
accumulated deficit of the Company was eliminated and the Company's
capital structure was recast in conformity with the Bankruptcy
Reorganization. As such, the consolidated financial statements of the
Company as of December 31, 1995, 1996, 1997 and 1998 and for the period
from May 23, 1995 to December 31, 1995, and the years ended December 31,
1996, 1997 and 1998, reflect that of the Company on and after May 23,
1995, which, in effect, is a new entity for financial reporting purposes
with assets, liabilities, and a capital structure having carrying values
not comparable with prior periods. The consolidated balance sheet as of
December 31, 1993 and 1994 and as of May 22, 1995, and for the period from
January 1, 1995 to May 22, 1995 and the years ended December 31, 1993 and
1994 reflect that of the Company prior to May 23, 1995. See "Business -
Business of the Company" and "Business - Litigation."
(2) Includes an extraordinary gain of $5,768,405. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(3) Common Stock equivalents and convertible issues are antidilutive and,
therefore, are not included in the weighted shares outstanding during the
years the Company incurred net losses.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS, INCLUDING THE DISCLOSURES BELOW CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES.
WHEN USED HEREIN, THE TERMS "ANTICIPATES," "EXPECTS," "ESTIMATES," "BELIEVES,"
AND SIMILAR EXPRESSIONS, AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT, ARE
INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED
OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH MATERIAL DIFFERENCES INCLUDE THE FACTORS DISCLOSED IN THE
"RISK FACTORS" SECTION OF THIS PROSPECTUS, WHICH PROSPECTIVE PURCHASERS OF THE
SECURITIES OFFERED HEREBY SHOULD CONSIDER CAREFULLY.
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and related notes included elsewhere
in this Prospectus.
OVERVIEW OF BUSINESS OPERATIONS
The Company is engaged in the development of proprietary excimer laser
and fiber optic equipment and techniques directed toward the treatment of
cardiovascular and vascular disease and the treatment of psoriasis. The Company
anticipates developing such equipment and technologies to treat other medical
problems as well as non-medical applications. However, no assurance to this
effect can be given.
On May 13, 1994, the Company filed for Bankruptcy Reorganization. The
Company was subsequently authorized to conduct its business operations as a
debtor-in-possession subject to the jurisdiction of the Bankruptcy Court. On May
22, 1995, the Company's Plan was confirmed by the Bankruptcy Court. The
implementation of the terms of the Plan resulted in the Company's adoption of
"fresh start" accounting. The Plan provided, that in exchange for the
forgiveness of certain unsecured debt, the Company issued to unsecured creditors
shares of the Company's Common Stock such that, following the issuance of all
Common Stock to be issued under the Plan, the unsecured creditors owned
1,000,000 shares of the Company's Common Stock, representing 20% of the issued
and outstanding Common Stock of the Company. The shares of Common Stock of the
Company's prior existing stockholders were cancelled and reissued into 250,000
shares of Common Stock, which represented 5% of the then total issued and
outstanding shares of Common Stock.
The Plan further provided that Helionetics transfer to the Company
76.1% of the common stock of Acculase. Further, during the pendency of the
Bankruptcy Proceeding, Helionetics contributed $1,000,000 in cash to the
Company, which funds were utilized for cash payments under the Plan, and
Helionetics lent the Company $300,000 to fund the cost of research and
development of the Company's excimer lasers, which has been repaid. Under the
Plan, Helionetics received 3,750,000 shares of Common Stock of the Company,
which represented 75% of the then total issued and outstanding shares of Common
Stock.
During April, 1997, Helionetics filed a voluntary petition of
reorganization ("Helionetics Reorganization") with the United States
Bankruptcy Court in the Central District of California for protection under
Chapter 11 of Title 11 of the United States Bankruptcy Code. As a result, the
Company wrote off its $662,775 receivable from Helionetics as of December 31,
1996. In connection with the Helionetics Reorganization (defined below),
Helionetics disposed of all of its holdings of the Company's Common Stock. No
persons who were shareholders immediately before the reorganization have at
present any controlling interest in the Company. On September 30, 1997,
Pennsylvania Merchant Group ("PMG"), the Company's investment banker,
purchased from the Helionetics bankruptcy estate, a note payable from
Acculase to Helionetics in the amount of $2,159,708, including accrued
interest. During October, 1997, PMG sold the note to the Company for 800,000
shares of Common Stock.
Acculase was founded in 1985 for the purpose of commercializing
products that utilize its proprietary excimer laser and fiberoptic technologies.
Acculase has focused primarily on the development of medical products for the
treatment of coronary heart disease.
20
<PAGE>
The Company believes that excimer laser technology provides the basis
for reliable cost-effective systems that will increasingly be used in connection
with a variety of applications. The Company is engaged in the development of
proprietary excimer laser and fiberoptic equipment and techniques directed
initially toward the treatment of coronary heart disease and psoriasis, as well
as other medical and non-medical applications.
The Company's initial medical applications for its excimer laser
technology are intended to be used in the treatment of cardiovascular disease
and psoriasis. The Company's cardiovascular and vascular applications are in
connection with an experimental procedure known as TMR, in which the Company's
TMR System is currently in Phase I Human Clinical trials. The Company and Baxter
are engaged in a strategic alliance in the development and marketing of excimer
laser products for TMR. The Company began testing its excimer laser system for
psoriasis in 1998 with a Dose Response Study under IRB approval. The final data
from the study was collected in December, 1998. The Company believes that this
data will serve as the basis for a 510(k) submission to the FDA in the third
quarter of 1999.
The Company has entered into the MGH Agreement, pursuant to which the
Company obtained an exclusive, worldwide, royalty-bearing license from MGH to
commercially develop, manufacture, use and sell products, utilizing certain
technology of MGH, related to the diagnosis and treatment of certain
dermatological conditions and diseases, particularly psoriasis. On March 17,
1998, the Company entered into the Clinical Trial Agreement with MGH to evaluate
the use of excimer laser light to treat psoriasis.
To facilitate the Company's focus on excimer laser technology, as of
January 4, 1999, the Company entered into the Asset Purchase Agreement, which
provides that the Buyer will pay and/or assume an aggregate of $1,200,000 of
the accrued and unpaid accounts payable and/or other debts of the Company. No
assurance can be given that the Buyer will complete the purchase under the
Asset Purchase Agreement, and if not, that the Company will be able to find
an alternative buyer on as favorable terms as set forth in the Asset Purchase
Agreement. See "Business--Sale of the Company's Non-Excimer Laser Assets" and
"Business-Legal Proceedings-Lease Dispute."
BASIS FOR PREPARATION OF FINANCIAL STATEMENTS
The consolidated financial statements filed elsewhere herein have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business, and, where
applicable, in conformity with Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization under the Bankruptcy Code," issued in November,
1990, by the American Institute of Certified Public Accountants ("SOP 90-7").
Under the provisions of SOP 90-7 and in connection with the
confirmation of the Bankruptcy Reorganization on May 22, 1995, the Company was
required to adopt fresh start reporting as of May 23, 1995, since the
reorganization value (approximate fair value at the date of reorganization) was
less than the total of all post-petition liabilities and allowed claims, and
holders of existing voting shares before May 23, 1995 received less than 50% of
the voting shares of the emerging entity. Accordingly, the consolidated
statements of operations for the period from January 1, 1995 to May 22, 1995
reflects the effects of the forgiveness of debt resulting from the
21
<PAGE>
confirmation of the Bankruptcy Reorganization and the adjustments to restate
assets and liabilities to reflect the reorganization value.
In adopting fresh start reporting, the Company was required to
determine its reorganization value, which represented the fair value of the
Company before considering liabilities and the approximate amount a willing
buyer would pay for the assets of the Company immediately after the Bankruptcy
Reorganization. The reorganization value was based upon the consideration given
by Helionetics to acquire a 75% interest in the Company. The purchase price of
$1,894,122 was determined based upon cash paid and the carrying value of the
76.1% interest in Acculase previously owned by Helionetics, which was
transferred to the Company in connection with the Bankruptcy Reorganization.
All assets and liabilities were restated to reflect their
reorganization value in accordance with procedures specified in Accounting
Principles Board Opinion 16 "Business Combinations," as required by SOP 90-7.
The portion of the reorganization value that could not be attributed to specific
tangible or identified intangible assets was classified as reorganization value
in excess of amounts allocable to identifiable assets ("Reorganization
Goodwill") and was being amortized over five years. Because of the magnitude of
the Company's losses since emerging from the Bankruptcy Reorganization, the
balance of the Reorganization Goodwill was written off as of December 31, 1996.
In addition, the accumulated deficit of the Company was eliminated, and
its capital structure was recast in conformity with the Bankruptcy
Reorganization. As such, the consolidated balance sheets of the Company as of
December 31, 1996, 1997, 1998, and March 31, 1999, and the consolidated
statements of operations for the years ended December 31, 1996, 1997 and 1998,
and the three (3) months ended March 31, 1998 and 1999, reflect in effect, a new
entity for financial reporting purposes, as of May 23, 1995, with assets,
liabilities, and a capital structure having carrying values not comparable with
periods prior to May 23, 1995.
The Company's consolidated income statements for the years ended
December 31, 1996, 1997 and 1998, and the three (3) months ended March 31, 1998
and 1999, which form a part of the Company's consolidated financial statements
for such years, reflect the consolidated results of operations of Laser
Photonics, Laser Analytics and Acculase.
22
<PAGE>
RESULTS OF OPERATIONS
The following table presents selected consolidated financial
information stated as a percentage of revenues for the years ended December 31,
1996, 1997 and 1998, and the three (3) months ended March 31, 1998 and 1999:
<TABLE>
<CAPTION>
THREE (3) MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues 100% 100% 100% 100% 100%
Costs of sales 80 55 77 42 88
---- --- --- --- ----
Gross profit 20 45 23 58 12
---- --- --- --- ----
Selling, general and
Administrative expenses 40 57 154 55 163
Research and development 30 18 53 27 50
Bad debt expense related to
related party receivable 23 1 -- -- --
Write-off reorganization
Goodwill 51 -- -- --
Depreciation and amortization 42 19 46 24 78
---- --- --- --- ----
Loss from operations (166) (50) (230) (49) (279)
Other expense (19) (10) (21) (3) (445)
---- --- --- --- ----
Net loss (185)% (60)% (251)% (52)% (724%)
==== === === === ====
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE (3) MONTHS ENDED MARCH 31, 1999 AND
1998. Total revenues for the three (3) months ended March 31, 1999 decreased
approximately 68% to $347,010 from $1,099,500 for the three (3) months ended
March 31, 1998. Total revenues for the three (3) months ended March 31, 1999 and
1998 primarily consisted of: (i) sales of $253,104 and $404,500, in the
respective three (3) month periods, of the Company's scientific and medical
lasers from the operations of the Company's Florida and Massachusetts
facilities, and (ii) revenues of $93,906 and $695,000, in the respective three
(3) month periods, relating to the sale of the Company's excimer lasers to
Baxter and the recognition of certain payments made by Baxter to commercialize
the Company's excimer lasers in connection with the Baxter Agreement. Revenues
on sales of medical and scientific lasers decreased in the three (3) months
ended March 31, 1999 from the corresponding period ended March 31, 1998 due to
reduced volume of sales and discounting on sales of medical and scientific
lasers in connection with the Company's focusing its marketing efforts on its
excimer laser systems.
Total costs and expenses during the three (3) months ended March 31,
1999, decreased approximately 19% to $1,316,217 from $1,634,625 during the three
(3) months ended March 31, 1999. Total costs and expenses include: (i) cost of
sales, (ii) selling, general and administrative expenses, (iii) research and
development, and (iv) depreciation and amortization, as follows:
Cost of sales during the three (3) months ended March 31, 1999
decreased approximately 35% to $303,832 from $466,832 during the three (3)
months ended March 31, 1999. This decrease primarily resulted from reduced sales
and higher costs in connection with the development of the Company's excimer
laser system.
As a result, cost of sales as a percentage of sales increased
to approximately 88% in the three (3) months ended March 31, 1999 from 42%
in the three (3) months ended March 31, 1998.
Selling, general and administrative expenses during the three (3)
months ended March 31, 1999 decreased approximately 6% to $564,965 from $603,618
during the three (3) months ended March 31, 1998. This decrease
23
<PAGE>
primarily resulted from reductions in personnel and overhead in the Company's
Florida and Massachusetts operations pending the closing of the Asset
Purchase Agreement.
Research and development during the three (3) months ended March 31,
1999 decreased to $175,282 from $296,713 during the three (3) months ended March
31, 1998. This decrease primarily related to the reduced amount of funds
available for research expenses during the quarter. Research and development
expenses in the three (3) months ended March 31, 1999 primarily related to the
development of the Company's psoriasis laser system and to additional testing
related to meet CE Mark and Underwriter's Laboratory ("UL") standards for the
Company's excimer lasers.
Depreciation and amortization during the three (3) months ended March
31, 1999 increased to $276,516 from $267,462 during the three (3) months ended
March 31, 1998. These amounts primarily related to the amortization of the
prepaid license fee from Baxter and the depreciation of newly acquired equipment
in 1998.
Other expenses increased during the three (3) months ended March 31,
1999 to $1,541,989 from $34,672 during the three (3) months ended March 31,
1998. This increase in other expenses between the respective years resulted
primarily from a charge to interest expense of $1,512,292 related to the
conversion feature and amortization of the discount of the Convertible Notes
during the three (3) months ended March 31, 1999, as compared to $42,991
during the three (3) months ended March 31, 1998.
As a result of the foregoing, the Company experienced a net loss of
$2,511,196 during the three (3) months ended March 31, 1999, as compared to a
net loss of $569,797 during the three (3) months ended March 31, 1998. The
Company also experienced a net loss from operations of $969,207 during the three
(3) months ended March 31, 1999, as compared to a net loss from operations of
$535,125 during the three (3) months ended March 31, 1998. See "Liquidity and
Capital Resources."
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997. Total revenues for the year ended December 31, 1998 decreased
approximately 38% to $2,349,448 from $3,815,330 for the year ended December 31,
1997. Total revenues for the years ended December 31, 1998 and 1997 primarily
consisted of: (i) sales of $1,580,422 and $2,960,330, in the respective years,
of the Company's scientific and medical lasers from the operations of the
Company's Florida and Massachusetts facilities, and (ii) revenues of $769,026
and $855,000, in the respective years, relating to the sale of the Company's
excimer lasers to Baxter and the recognition of certain payments made by Baxter
to commercialize the Company's excimer lasers in connection with the Baxter
Agreement. Revenues on sales of medical and scientific lasers decreased in 1998
due to reduced volume of sales and discounting on sales of medical and
scientific lasers in connection with the Company's focusing its marketing
efforts on its excimer laser systems.
Total costs and expenses during the year ended December 31, 1998,
increased approximately 35% to $7,746,686 from $5,746,170 during the year ended
December 31, 1997. Total costs and expenses include: (i) cost of sales, (ii)
selling, general and administrative expenses, (iii) research and development,
(iv) depreciation and amortization, and (v) certain bad debt expenses, as
follows:
Cost of sales during the year ended December 31, 1998, decreased
approximately 14% to $1,806,557 from $2,090,276 during the year ended December
31, 1997. This decrease primarily resulted from reduced sales and higher costs
in connection with the development of the Company's excimer laser system.
As a result, cost of sales as a percentage of sales increased to
approximately 77% in 1998 from 55% in 1997.
Selling, general and administrative expenses during the year ended
December 31, 1998 increased approximately 65% to $3,608,108 from $2,181,304
during the year ended December 31, 1997. This increase primarily resulted from:
(i) compensation recognized in 1998 of $1,318,200 related to the issuance of
warrants to PMG for financial advisory services, and (ii) consulting fees of
$231,000 to CSC related to the marketing of the Company's excimer lasers.
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Research and development during the year ended December 31, 1998
increased to $1,243,372 from $685,109 during the year ended December 31, 1997.
This increase primarily related to the availability of funds in 1998 from
financings conducted in the fourth quarter of 1997 and in 1998 as sources of
funding for research and development activities. Research and development
expenses in 1998 primarily related to the development of the Company's psoriasis
laser system and to additional testing related to meet CE Mark and UL standards
for the Company's excimer lasers.
Bad debt expense related to related party receivables during the year
ended December 31, 1998 was none, as compared to $48,000 during the year ended
December 31, 1997. The Company had incurred a non-recurring bad debt expense of
$48,000 in 1997 related to the write-off of a receivable from Helionetics.
Depreciation and amortization during the year ended December 31, 1998
increased to $1,088,649 from $741,481 during the year ended December 31, 1997.
This increase related to the amortization of the prepaid license fee from Baxter
and the depreciation of newly acquired equipment in 1998.
Other expenses increased during the year ended December 31, 1998 to
$508,049 from $372,361 during the year ended December 31, 1997. This increase in
other expenses between the respective years resulted primarily from increased
interest expense of $510,948 in 1998 from $386,069 in 1997.
As a result of the foregoing, the Company experienced a net loss of
$5,908,587 during the year ended December 31, 1998, as compared to a net loss of
$2,307,101 during the year ended December 31, 1997. The Company also experienced
a net loss from operations of $5,397,238 during the year ended December 31,
1998, as compared to a net loss from operations of $1,930,840 during the year
ended December 31, 1997. See "Liquidity and Capital Resources."
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996. Total revenues for the year ended December 31, 1997 increased
approximately 32% to $3,815,330 from $2,901,454 for the year ended December 31,
1996. Total revenues for the years ended December 31, 1997 and 1996 primarily
consisted of sales of $2,960,330 and $2,901,454, in the respective years, of the
Company's scientific and medical lasers from the operations of the Company's
Florida and Massachusetts facilities. However, the Company generated revenues in
1997 of $855,000 relating to the sale of its excimer lasers to Baxter and the
recognition of certain payments made by Baxter to commercialize the Company's
excimer lasers in connection with the Baxter Agreement, which did not occur in
1996, and which primarily resulted in the increased revenues for 1997, as
compared to 1996.
Total costs and expenses during the year ended December 31, 1997
decreased 25% to $5,746,170 from $7,703,607 during the year ended December 31,
1996. Total costs and expenses include: (i) cost of sales, (ii) selling, general
and administrative expenses, (iii) research and development, (iv) depreciation
and amortization, and (v) certain bad debt expenses, as follows:
Cost of sales during the year ended December 31, 1997 decreased
approximately 10% to $2,090,276 from $2,329,299 during the year ended December
31, 1996. This decrease primarily resulted from increased efficiency in the
Company's focus on the marketing of laser products with lower margins and the
purchasing of materials at volume discounts due to improved relations with
vendors as part of the restructuring of cost controls instituted by new
management following the Bankruptcy Reorganization.
As a result, cost of sales as a percentage of sales decreased to
approximately 55% in 1997 from 80% in 1996.
Selling, general and administrative expenses during the year ended
December 31, 1997 increased approximately 88% to $2,181,304 from $1,158,841
during the year ended December 31, 1996. This increase primarily resulted from:
(i) compensation of $671,323 recognized upon issuance of stock options and
$95,625 of Common Stock issued as payment for professional services in 1997, as
compared to $326,250 of Common Stock issued as payment of a litigation
settlement (and recorded as rental expense) and employee compensation in 1996,
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(ii) payment of $71,000 in federal tax penalties in 1997 which did not occur in
1996, and (iii) the increased focus of the Company's excimer laser business
operations to marketing in 1997 from research and development in 1996 in
connection with the execution of the Baxter Agreement in August, 1997. The
Company believes that the issuance of securities as related to compensation and
rental expenses and the cash payment of tax penalties will be nonrecurring
expenses in the future.
Research and development during the year ended December 31, 1997
decreased to $685,109 from $850,993 during the year ended December 31, 1996.
This decrease primarily related to the Company's increased focus of the
Company's excimer laser business operations to marketing in 1997 from research
and development in 1996 in connection with the execution of the Baxter Agreement
in August, 1997.
Bad debt expense related to related party receivables during the year
ended December 31, 1997 decreased to $48,000 from $662,775 during the year ended
December 31, 1996. The Company incurred a bad debt expense of $662,775 in 1996
related to the write-off of a receivable from Helionetics and of $48,000 in 1997
related to the write-off of a receivable from a subsidiary of Helionetics. These
items will be nonrecurring expenses in the future.
The Company incurred an expense of the write-off of Reorganization
Goodwill initially recognized in connection with the Bankruptcy Reorganization
of $1,486,823 during the year ended December 31, 1996, which did not occur
during the year ended December 31, 1997. The Reorganization Goodwill recognized
in connection with the Bankruptcy Reorganization represented the portion of the
reorganization value that could not be attributed to specific tangible or
identified assets, which were being amortized over five (5) years. The
Reorganization Goodwill was written-off as of December 31, 1996 because of the
magnitude of the Company's losses following the Bankruptcy Reorganization. The
Company has no further dealings with Helionetics, which filed for bankruptcy
reorganization under Chapter 11 in 1997.
Depreciation and amortization during the year ended December 31, 1997
decreased to $741,481 from $1,214,876 during the year ended December 31, 1996.
This decrease related to the reduction of $1,486,823 of Reorganization Goodwill
on the Company balance sheet as of December 31, 1996.
Other expenses decreased during the year ended December 31, 1997 to
$372,361 from $555,815 during the year ended December 31, 1996. This decrease in
other expenses between the respective years resulted primarily from increased
interest income of $52,280 in 1997 as compared to none in 1996.
As a result of the foregoing, the Company experienced a net loss of
$2,307,101 during the year ended December 31, 1997, as compared to a net loss of
$5,357,968 during the year ended December 31, 1996. The Company also experienced
a net loss from operations of $1,930,840 during the year ended December 31,
1997, as compared to a net loss from operations of $4,802,153 during the year
ended December 31, 1996. See "Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES. At March 31, 1999, the ratio of
current assets to current liabilities was 0.44 to 1.00 compared to 0.28 to 1.00
at December 31, 1998.
The Company has historically financed its operations through the use of
working capital provided from operations, loans and equity and debt financing.
The Company's cash flow needs for the three (3) months ended March 31, 1999 and
the years ended December 31, 1998 and 1997 were primarily provided from
operations, loans and equity financing.
The Company experienced severe cash flow problems during the first six
(6) months of 1997 and throughout 1996 and 1995. These cash flow problems
limited the Company's ability to purchase materials and parts incorporated in
the Company's laser products, and further restricted the Company's ability to
purchase such materials at volume discounts, thereby reducing revenues from
potential sales and gross profits from concluded sales. New management
instituted policies of cost controls, improved product selection, staff
reduction, budgeting and corporate planning in 1997, which increased the
Company's business efficiencies, including decreases in cost of sales as a
percentage of sales, reduction in net losses and losses from operations and the
focusing on a business plan
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aimed at excimer laser products which management believes has greater
potential of success than the Company's laser products preceding the
Bankruptcy Reorganization.
Due to the limited financial resources of the Company, the Company's
strategy changed in 1997 to focus its efforts on the Company's excimer laser
technology and expertise in order to develop a broad base of excimer laser
and excimer laser delivery products for both medical and non-medical
applications. To facilitate the Company's new focus on excimer laser
technology, the Company is in the process of selling all of the Company's
non-excimer laser business. As of January 4, 1999, the Company entered into
the Asset Purchase Agreement, which is scheduled to close in August, 1999
although no assurances can be given as to when or whether such closing will
occur. The Asset Purchase Agreement provides that the Buyer will pay and/or
assume an aggregate of $1,200,000 of the accrued and unpaid accounts payable
and/or other debts of the Company. The Company intends to transfer to the
Buyer certain assets of Laser Photonics and Laser Analytics, which are
related to the Company's non-excimer laser business. If the proposed
transaction should not close, then the Company may be forced to expend
approximately $115,000 per month to cover the negative cash flow on a current
basis until such operations are sold to another buyer or discontinued. In
addition, the Company would have to pay all of the obligations which are to
be assumed by the buyer.
Management's decision to sell the assets of the Company business
operations not related to the Company's excimer laser technology will result
in the divestiture of the Company's business operations which have generated
approximately 70% of the Company's revenues for the period from January 1,
1998 through March 31, 1999. At March 31, 1999 and December 31, 1998, total
assets related to the Company's non-excimer laser business operations, which
are the subject of the Asset Purchase Agreement, were $750,604 and $806,335,
respectively, and total liabilities were $1,200,000, at each such date.
Revenues from such operation for the three (3) months ended March 31, 1999
and 1998 were $252,000 and $405,000, respectively, and for the years ended
December 31, 1998, 1997 and 1996 were $1,580,000, $2,960,000 and $2,901,000,
respectively. Loss from the related operations during the corresponding three
(3) month periods were $337,000 and $287,000 respectively, and during the
corresponding annual periods were $996,000, $647,000 and $926,000,
respectively. As of the date of this Prospectus, the Company has received
$30,000 as a deposit against the purchase price. No assurance can be given
that the Buyer will complete the purchase under the Asset Purchase Agreement,
or if not, that the Company will be able to find an alternative on as
favorable terms as set forth in the Asset Purchase Agreement.
Although the Company has developed strategic alliances with Baxter
related to the Company's excimer lasers, there can be no assurances that the
Company will ever develop significant revenues or profitable operations with
respect to this new business plan.
From September, 1997 through March, 1999, the Company issued certain
securities, including shares of Common Stock and other derivative securities
convertible or exercisable into shares of Common Stock, in order to finance
the Company's business operations. All of the shares of Common Stock and the
shares of Common Stock underlying such derivative securities are being
registered in the Registration Statement, of which this Prospectus forms a
part.
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Cash and cash equivalents were $174,468 as of December 31, 1998, as
compared to $1,225,932 as of December 31, 1997. This decrease was primarily
attributable to the utilization of cash raised in connection with the series
of equity financings arranged by PMG and cash generated from the Baxter
Agreement to fund marketing activities, increased research and development
activities, to make investments in inventory to support anticipated sales of
excimer lasers to Baxter and to pay off certain liabilities. Cash and cash
equivalents increased to $1,416,297 at March 31, 1999, primarily due to the
receipt of $2,380,000 in cash proceeds from the offering of the Convertible
Notes in March, 1999, offset by $971,817 of net cash used in operations
during the three (3) months ended March 31, 1999.
As of March 31, 1999, the Company had long-term borrowings in the
aggregate amount of $54,012, less the current portion. As of December 31,
1998, the Company had long-term borrowings in the aggregate amount of
$69,893, less the current portion. As of December 31, 1997, the Company had
long-term borrowings of $282,559, less the current portion. The decrease in
long-term borrowings relates to payments of certain scheduled obligations,
including: (a) obligations payable in the total amount of $282,259, pursuant
to the Plan, to former members of the Board of Directors of the Company. The
notes related to those obligations went into default in the first quarter of
1999. The Company paid these notes from the proceeds of the $2,380,000
Convertible Note offering received by the Company in April, 1999; (b)
promissory notes payable in the total amount of $165,298, pursuant to the
Plan, to the former unsecured creditors of the Company. Interest accrues at
the prime rate and is payable quarterly until October 1, 1999; (c) secured
promissory notes payable in the total amount of $127,860 (which are included
in the financial statements in liabilities in excess of assets held for sale)
pursuant to the Plan, to Novatis Corp., formerly known as CIBA-GEIGY.
Interest accrues at the rate of 10% per annum and is payable quarterly
through May 5, 1997, and, thereafter, with monthly principal and interest
payments of $6,384 through May, 1999. This promissory note is secured by the
assets of Laser Analytics; (d) a promissory note payable to the U.S. Treasury
for delinquent taxes in the amount of $63,831. This note bears interest at
the rate of 9% per annum, payable in monthly principal and interest
installments of $5,000 through December, 1999. This promissory note is
secured by all assets of the Company; (e) unsecured promissory notes payable
to various creditors in the aggregate amount of $104,791. These notes are
payable with interest at 9% per annum, in various monthly principal and
interest installments through July, 2000; (f) a secured promissory note in
the amount of $22,519, payable to Laser Center of America, with interest at
the rate of 9% per annum, in monthly installments of principal and interest
of $1,258, through January, 2001; and (g) an unsecured promissory note in the
amount of $66,394, payable to the lessor of the Carlsbad facility, with
interest at 10% per annum, in monthly installments of principal and interest
of $1775 through December 31, 2002. This promissory note is collateralized by
certain personal property of the Company. The payments on this promissory
note are past due. See "Certain Relationships and Related
Transaction-Conversion of Convertible Debt."
Net cash used in operating activities was $2,083,230, $993,851 and
$1,010,589 for the years ended December 31, 1998, 1997 and 1996,
respectively. Net cash used in operating activities during the years ended
December 31, 1998, 1997 and 1996 primarily consisted of net losses (after
giving effect to the debt forgiveness in connection with the Bankruptcy
Reorganization), increases in net current liabilities (1997 only) and
decreases in net current assets (1997 and 1996 only), offset by depreciation
and amortization, the payment in the Company's securities of compensation and
fees for services, bad debt expenses with respect to a related party
receivable (1997
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and 1996 only), decreases in net current liabilities (1998 and 1996 only) and
increases in net current assets (1998 only).
Net cash used in operating activities was $971,817 and $304,691 for
three (3) months ended March 31, 1999 and 1998, respectively. Net cash used
in operating activities during the three (3) months ended March 31, 1999
primarily consisted of net losses and decreases in net current assets and
liabilities, offset by depreciation and amortization and increases in
interest related to the conversion features of the Convertible Notes. Net
cash used in operating activities during the three (3) months ended March 31,
1998 primarily consisted of net losses and decreases in net current
liabilities, offset by depreciation and amortization, stock issued to pay
fees for legal services and decreases in net current assets.
Net cash used in investing activities was $145,758, $4,093,293 and
$308,924 for the years ended December 31, 1998, 1997 and 1996, respectively.
In the year ended December 31, 1998, the Company utilized $116,158 to
purchase equipment and for the construction of a laser to be used as a
demonstration model. In the year ended December 31, 1997, the Company
utilized $4,001,926 to make payments to Baxter to acquire licenses under the
Baxter Agreement, $37,541 to purchase certain equipment and $73,000 as an
advance payment to a related party, which was offset by the receipt of
$19,174 from the sale of certain equipment. In the year ended December 31,
1996, the Company utilized $292,900 as an advance payment to Helionetics and
$16,024 to purchase certain equipment. These advances to Helionetics were
made at a time when the Company was under different management and was a
majority-owned subsidiary of the related party.
Net cash used in investing activities was $10,151 and $68,216 for
the three (3) months ended March 31, 1999 and 1998, respectively. The Company
utilized $10,151 during the three (3) months ended March 31, 1998 and $68,216
during the three (3) months ended March 31, 1998, to acquire equipment for
the Company's business operations.
Net cash provided by financing activities was $1,177,524, $6,313,076
and $1,258,427 during the years ended December 31, 1998, 1997 and 1996,
respectively. In the year ended December 31, 1998, the Company utilized
$135,187 to reduce certain debt obligations, which was offset by the receipt
of $35,751 of proceeds from the sale of Common Stock and $1,276,960 from the
proceeds of the issuance of the Acculase Notes. In the year ended December
31, 1997, the Company received $6,259,077 from the sale of Common Stock and
warrants, $71,094 of proceeds from certain notes payable and $140,448 as
capital contributions from Helionetics, which was offset by the payment of
$157,543 on certain notes payable. In the year ended December 31, 1996, the
Company received $35,751 from the sale of Common Stock and warrants and
$1,276,960 of proceeds from certain notes payable, which was offset by
payments on notes payable of $135,187.
Net cash provided by (used in) financing activities was $2,223,797
and ($38,378) during the three (3) months ended March 31, 1999 and 1998,
respectively. In the three (3) months ended March 31, 1999, the Company
received $2,380,000 in proceeds from the offering of the Convertible Notes
and $159,226 from the proceeds of other notes payable, which was offset by
the utilization of $148,829 for payment of certain debts and $166,600 for
certain costs related to the issuance of the Convertible Notes and the Unit
Warrants. In the three (3) months ended March 31, 1998, the Company utilized
$74,129 to pay certain debts, which was offset by the receipt of $35,751 of
proceeds from the issuance of Common Stock.
The Company has historically financed its operations through working
capital provided from operations, loans and the private placement of equity
and debt securities. The Company has significant debts, which will require
additional financing in order to repay such debts in full. The Company had
approximately $1,415,000 of cash on hand, as of March 31, 1999. The Company
will require additional financing to implement the Company's business plan.
The Company's day-to-day operations require cash of approximately $150,000
per month or an aggregate of $1,800,000 over the next twelve (12) months. In
addition, management believes that the Company will require approximately
$1,200,000 over the next twelve (12) month period following the date of this
Prospectus to finance continued development of its psoriasis laser system.
Additional amounts may be required to pay various costs of operations such as
professional and consulting fees.
Management believes that approximately $750,000 of anticipated revenues
will be generated from the sale of lasers to Baxter under the Baxter Agreement
in 1999. Approximately $1,200,000 of the Company's debts may
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be assumed by the purchaser of the Company's non-excimer laser assets and
business. If the proposed transaction should not close, then the Company may
be forced to expend approximately $ 115,000 per month to cover the negative
cash flow on a current basis until such operations are sold to another buyer
or discontinued. In addition, the Company would have to pay all of the
obligations which are to be assumed by the buyer. However, no assurance to
this effect can be given. Therefore, to finance its business plan completely,
the Company will be required to raise debt or equity of at least $5,000,000
before the end of the third quarter of 1999 to sustain the required levels of
operations for a period of at least twelve (12) months following the date of
this Prospectus. Upon completion of the development of the psoriasis product,
the Company anticipates the need for as much as $50,000,000 to finance the
marketing plan for the Company's psoriasis product over and above the
$5,000,000 referenced in this paragraph. No assurance can be given that
Baxter will honor the Baxter Agreement or that additional financing will
become available to the Company, or at all, or that the business of the
Company will ever achieve profitable operations. Further, any additional
financing may be senior to the Company's Common Stock or result in
significant dilution to the holders of the Company's Common Stock. In the
event the Company does not receive any such financing or generate profitable
operations, management may have to suspend or discontinue its business
activity or certain components thereof in its present form or cease
operations altogether. See "Business-Excimer Laser System for the Treatment
of Psoriasis," "Financial Statements and Supplementary Data" and "Certain
Relationships and Related Transactions."
The Company's ability to expand business operations is currently
dependent on financing from external sources. There can be no assurance that
changes in the Company's research and development plans or other changes
affecting the Company's operating expenses and business strategy will not
result in the expenditure of such resources before such time or that the
Company will be able to develop profitable operations prior to such date, or
at all, or that the Company will not require additional financing at or prior
to such time in order to continue operations and product development. There
can be no assurance that additional capital will be available on terms
favorable to the Company, if at all. To the extent that additional capital is
raised through the sale of additional equity or convertible debt securities,
the issuance of such securities could result in additional dilution to the
Company's stockholders. Moreover, the Company's cash requirements may vary
materially from those now planned because of results of research and
development, product testing, changes in the focus and direction of the
Company's research and development programs, competitive and technological
advances, the level of working capital required to sustain the Company's
planned growth, litigation, operating results, including the extent and
duration of operating losses, and other factors. In the event that the
Company experiences the need for additional capital, and is not able to
generate capital from financing sources or from future operations, management
may be required to modify, suspend or discontinue the business plan of the
Company. See "Risk Factors."
SEASONAL FACTORS
Seasonality is not a significant factor in medical laser sales.
Budgetary cycles and funding are spread out in various hospitals, chains and
organizations, so that funding is not as cyclical as in the scientific laser
market.
IMPACT OF INFLATION
The Company has not operated in a highly inflationary period, and
its management does not believe that inflation has had a material effect on
sales or expenses.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") recently issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is required to be
adopted as of December 31, 1999. SFAS No. 133 establishes standards for
reporting financial and descriptive information regarding derivatives and
hedging activity. Since the Company does not have any derivative instruments,
this standard will have no impact on the Company's financial position or
results of operations.
FASB 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" and FASB 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
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a Mortgage Banking Enterprise," were issued in 1998 and are not expected to
impact the Company's future financial statement disclosures, results of
operations or financial position.
YEAR 2000
One of the major challenges facing any company whose products or
services rely on the operation of computers or other equipment containing
computer chips is the issue of Year 2000 compliance. Many existing computer
programs use only two digits to identify a year in the date field. If not
corrected, many computer applications could fail or create erroneous results
by or at the Year 2000. The Company and third parties with which the Company
does business rely on numerous computer programs in their day-to-day
operations. The Company is evaluating the Year 2000 issue as it relates to
the Company's internal computer systems and third party computer systems with
which the Company interacts. The Company expects to incur internal staff
costs as well as consulting and other expenses related to these issues of no
more than $10,000. These costs will be expensed as incurred. In addition, the
appropriate course of action may include replacement or an upgrade of certain
systems or equipment. The Company plans to commence a program to contact its
vendors and customers to determine their compliance with the Year 2000 issue.
The Company anticipates that such program will be completed by the end of the
third quarter of 1999. There can be no assurance that the Year 2000 issues
will be resolved in 1999. The Company does not expect the Year 2000 issue to
have a significant adverse impact on the Company's business, operating
results and financial condition.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is not currently exposed to market risks due to changes
in interest rates and foreign currency rates and therefore the Company does
not use derivative financial instruments to address risk management issues in
connection with changes in interest rates and foreign currency rates.
BUSINESS
The following should be read in conjunction with the Company's
Consolidated Financial Statements and the related Notes thereto, contained
elsewhere in this Prospectus. This Prospectus contains forward-looking
statements, which involve risks and uncertainties. The Company's actual
results may differ significantly from the results discussed in the
forward-looking statements. Unless the context otherwise requires, the term
"Company" refers to Laser Photonics, Laser Analytics and Acculase.
HISTORY OF THE COMPANY
The Company historically has pursued a strategy of development of a
wide range of laser products using different solid state lasers, including
solid state Ruby, Nd: YAG, frequency-doubled Nd: YAG and Alexandrite lasers,
all for medical applications. Since 1986, the Company has sold over 1,000
lasers, usually on a private label basis to other manufacturers. This
strategy proved to be unsuccessful, in the opinion of current management of
the Company as Company generated revenues from the sale of numerous of its
products, but was unable to operate profitably. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Business-Government Regulation."
On May 13, 1994, the Company filed for Bankruptcy Reorganization.
The Company was subsequently authorized to conduct its business operations as
a debtor-in-possession subject to the jurisdiction of the Bankruptcy Court.
The Plan included, among other things, that in exchange for the forgiveness
of certain unsecured debt, the Company issued to its unsecured creditors
shares of the Company's Common Stock in such an amount that, following the
issuance of all Common Stock to be issued under the Plan, the unsecured
creditors owned 1,000,000 shares of the Company's Common stock, representing
20% of the issued and outstanding shares of Common Stock of the Company. The
shares of Common Stock of the Company's prior existing stockholders were
canceled and reissued into 250,000 shares of Common Stock, which represented
5% of the then total issued and outstanding shares of Common Stock.
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Acculase was founded in 1985 for the purpose of commercializing
products that utilize its proprietary excimer laser and fiber optic
technologies. Acculase has focused primarily on the development of medical
products for the treatment of coronary heart disease.
The Acculase excimer laser power source was developed to perform a
variety of materials processing applications. The Acculase AL-1000M XeCl
pulsed excimer laser was developed for microsurgical applications. The first
medical application of the AL-1000M excimer laser system was approved by the
FDA under IDE No. G920163 for use in the treatment of occlusive coronary
artery disease as an adjunct to coronary bypass surgery. Acculase chose not
to pursue completion of IDE No. G920163 because of difficulties in recruiting
patients into a randomized study comparing bypass surgery with adjunctive
Acculase laser angioplasty to bypass surgery alone.
Due to the limited financial resources of the Company, the Company's
strategy changed in 1997 to focus its efforts on the Company's excimer laser
technology in order to develop a broad base of excimer laser and excimer
laser delivery products for both medical and non-medical applications. The
Company believes that excimer laser technology provides the basis for
reliable cost-effective systems that will increasingly be used in connection
with a variety of applications. The Company is engaged in the development of
proprietary excimer laser and fiberoptic equipment and techniques directed
initially toward the treatment of coronary heart disease and psoriasis, as
well as other medical and non-medical applications.
BUSINESS OF THE COMPANY
The Company is engaged in the development of proprietary excimer
laser and fiber optic equipment and techniques directed toward the treatment
of cardiovascular and vascular disease and psoriasis. The Company anticipates
developing such equipment and technologies to treat other medical problems as
well as non-medical applications. However, no assurance to this effect can be
given.
The Company's initial medical applications for its excimer laser
technology are intended to be used in the treatment of cardiovascular disease
and psoriasis. The Company's cardiovascular and vascular applications are in
connection with an experimental procedure known as TMR, in which the
Company's TMR System is currently in Phase I Human Clinical trials. The
Company and Baxter are engaged in a strategic alliance for the development
and marketing of excimer laser products for TMR. The Company began testing
its excimer laser system for the treatment of psoriasis at MGH in 1998 with a
Dose Response Study under IRBs approval. The final data from this study was
collected in December, 1998. This data is anticipated to serve as the basis
for a 510(k) submission to the FDA in the third quarter of 1999. However, no
assurance to this effect can be given. The Company believes the excimer laser
psoriasis system will be determined to be substantially equivalent to
currently marketed devices, however, no assurance to this effect can be given.
The Company entered into certain agreements with respect to the
manufacturing and marketing of its excimer lasers and delivery systems in
1997 with Baxter and MGH. Although the Company has developed strategic
alliances with Baxter and MGH related to the Company's excimer lasers, there
can be no assurances that the Company will ever develop significant revenues
or profitable operations with respect to this new business plan. See
"Business-Strategic Alliance with Baxter Healthcare Corporation" and
"Business-Excimer Laser Systems for the Treatment of Psoriasis."
Since the Company's laser system products are still in the clinical
trials stage, there is no assurance that the Company will be able to
successfully prove their anticipated benefits, obtain required governmental
approvals for their use, or reach anticipated markets ahead of competing
technologies and competitors.
In the non-medical applications of the excimer laser technology, the
Company intends to evaluate its technology as it applies as an illumination
source for use in DUV photolithography systems for the semiconductor
manufacturing industry. There can be no assurances that the Company's excimer
laser systems will be developed into marketable products.
In July, 1999, the Company commenced an offering of 2,222,222 shares
of Common stock at a price of $4.50 per share. Upon closing of this offering,
the Company will pay PMG a commission of 8% of the gross proceeds, $25,000
for reimbursement of expenses and, for each $1,000,000 of gross proceeds, a
warrant to purchase 10,000 shares of Common Stock $4.50 per share.
RELATIONSHIP WITH ACCULASE SUBSIDIARY. Laser Photonics owns 76.1% of
the issued and outstanding common stock of Acculase. In addition to Laser
Photonics, there are approximately twelve other stockholders of
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Acculase, including certain former officers and directors of the Company.
Helionetics filed a petition for bankruptcy reorganization in 1997 and is no
longer a stockholder of Acculase. Acculase owns certain technologies related
to the Company's excimer lasers and their delivery systems. The loss of any
of these technologies to the Company could have a material adverse effect
upon the business of the Company. See "Business - Strategic Alliance with
Baxter Healthcare Corporation" and "Business-Intellectual Property."
In the early 1990's Acculase was unable to raise equity or debt
financing to further the development of its excimer laser technology
development. Only with the initial assistance of Helionetics, and that of
Laser Photonics, was Acculase able to obtain the capital needed to develop
its excimer laser products and, consequently, develop the business
relationship with Baxter. See "Business-Strategic Alliance with Baxter
Healthcare Corporation."
Of the stockholders of Acculase, only Laser Photonics participates
in the day-to-day management of Acculase or contributes any financing to the
operations or the development of Acculase. Laser Photonics has been required
to engage in significant financing activities since 1997 to obtain the
funding necessary to support Acculase's ability to develop its excimer laser
products. Laser Photonics has provided and continues to provide incentives
and compensation to its management and ongoing funding to develop and
commercialize the excimer laser technology. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and "Certain
Relationships and Related Transactions."
On September 18, 1997, the Company, PMG and Baxter agreed, in
connection with fulfilling the obligations of the parties under the Baxter
Agreement, that the Company needed to acquire a license (the "Lasersight
License") from Lasersight Patents, Inc. ("Laserlight"), on unaffiliated third
party, for certain patents which relate to the use of excimer lasers for the
cardiovascular and vascular markets. On September 23, 1997, Baxter purchased
certain patent rights to related patents from Lasersight for $4,000,000, and
in December, 1997, the Company received from Baxter the Lasersight License.
Laser Photonics then paid $4,000,000 to Baxter for the transfer of the
Lasersight License, having raised the funds from a private placement of the
Company's securities. In the event that Baxter terminates the Baxter
Agreement, Baxter will grant to the Company an exclusive sublicense of all of
Baxter's rights under the Lasersight License. In such event, the Company will
acknowledge and agree that upon the grant of such exclusive sublicense, the
Company will assume all obligations and liabilities of Baxter under the
Lasersight License. See "Business-Strategic Alliance with Baxter Healthcare
Corporation," "Business-Intellectual Property" and "Certain Relationships and
Related Transactions."
Management of the Company believes that the provision of financing
and management assistance to Acculase has provided a significant benefit to
Acculase and the Acculase stockholders, other than the Company, and that
Acculase could not have obtained any of these benefits without the financial
and management assistance provided by Laser Photonics. This has resulted in
significant dilution in ownership of Laser Photonics to the stockholders of
Laser Photonics prior to these financings. To rectify the potential inequity
that has been created for the stockholders, the Company's Board of Directors
intends to make an offer to the other stockholders of Acculase to acquire the
23.9% of Acculase not already owned by the Company in exchange for shares of
the Common Stock of the Company. The exact terms of such offer are not yet
known, nor can any assurance be given that such offer, once made, will be on
terms favorable to the Company or that such offer will be accepted by such
stockholders of Acculase. In the event that such an offer is not accepted by
enough of the Acculase stockholders to enable the Company to own at least 90%
of the issued and outstanding shares of Acculase, the Company is not certain
how it will proceed. The Company's Board of Directors has not determined what
action it will take if the other stockholders of Acculase do not accept the
Company's offer to acquire their shares of Acculase.
EXCIMER LASERS TECHNOLOGY
The basis of the Company's business is its excimer laser technology.
An excimer laser uses a medium in which the dimers exist only in the excited
state. The Company uses xenon chloride gas as a medium, pumps electricity in
and generates excited dimers. This system creates and excites the dimers at
the same time. Once the power is shut off the dimers cease to exist. This
type of laser usually, though not always, generates beams in the ultraviolet
("UV") end of the light wave spectrum. The wavelength of the beam depends
largely on the type of gas used. In the case of the Company's laser
technology, the wavelengths may vary between 174 nm and 351 nm.
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Many lasers cut things, but different lasers do so in different
ways. An excimer laser, sometimes called a "cold laser," having photon energy
greater than most organic bonds, cuts organic material by directly breaking
bonds that hold the organic material together ("photoablation"). Other
lasers, sometimes called "hot lasers," involve vibrating water molecules,
which create steam, and which in turn cut organic material ("thermal
ablation").
Management of the Company believes that a cold laser has significant
advantages over a hot laser. Certain of the Company's competitors, PLC and
Eclipse, are using either a homium (Ho:YAG) laser technology or CO(2) laser
technology (both of which are hot lasers). These technologies require a
surgeon or cardiologist to send one or more high-energy "pulses" through the
myocardium to create the desired channels. The Company believes that its
excimer laser technology has significant advantages over the competition's
laser technology for TMR. However, no assurance to this effect can be given.
See "Business-Competition."
Some of the companies attempting to develop laser driven TMR
technologies use flexible fibers capable of delivering the laser energy
either through a small incision in the chest or percutaneously through a
catheter inserted in the femoral artery in the groin. This method of
delivering laser energy has certain obstacles in optimizing the delivery of
that energy. Management of the Company believes that using an excimer laser
has the following additional benefits over hot lasers: (i) tissue ablation
may be performed in the absence of significant injury to neighboring tissues;
(ii) creation of TMR channels (discussed below) will avoid the formation of
steam bubbles to the brain; (iii) the use of an excimer laser is likely to
cause less thermal damage to neighboring tissues then that of a hot laser;
and (iv) the excimer laser allows for the more rapid creation of TMR channels
leading to less operating room time. See "Business - Strategic Alliance with
Baxter Healthcare Corporation."
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EXCIMER LASER SYSTEM FOR TREATMENT OF TMR
GENERAL. Heart muscle, like all tissues of the body, must be
constantly supplied with oxygen in order to function effectively. Oxygen is
delivered to the myocardium by the blood, which is distributed to the
myocardium through the right and left coronary arteries. If these arteries
are narrowed or blocked as a result of atherosclerosis, oxygen-rich blood
cannot supply the metabolic demand of the myocardium. Cardiovascular disease
eventually may cause ischemia myocardium (oxygen-starved heart tissue), often
evidenced by severe and debilitating angina or chest pains caused by lack of
oxygen to the heart muscle, which can progress to myocardial infarction (the
death of an area of the heart muscle). Advanced multi-vessel ischemic heart
disease is typically treated with bypass surgery.
The Company's TMR System for the treatment of coronary heart disease
using TMR creates new channels for blood to flow to ischemic (oxygen-starved)
heart muscle tissue. Rather than opening narrowed coronary arteries, the TMR
System is intended to treat ischemic myocardium directly. This is
accomplished by lasing small channels through ischemic areas of the heart,
which connect directly with the left ventricle of the heart, a reservoir of
oxygen-rich blood. Management believes that these channels may provide new
pathways for blood flow into the heart muscle. However, there can be no
assurances to this effect.
CARDIOVASCULAR DISEASE AND ALTERNATIVE TREATMENT METHODS. According
to the American Heart Association, cardiovascular disease, the partial or
total blockage of arteries, is the leading cause of death and disability in
the United States. Coronary artery disease accounts for approximately one
million, or one-half, of all deaths in the United States annually.
Approximately 1,500,000 new cases of heart attacks or angina (chest pain due
to heart disease) are reported each year. Over 13,000,000 Americans suffer
from coronary heart disease and 350,000 new cases of heart disease are
diagnosed every year in the United States.
Atherosclerosis, the principal form of cardiovascular disease, is
characterized by a progressive narrowing of the coronary arteries due to
accumulated plaque (lesions) on the walls of the arteries, which supply
oxygenated blood to the heart, potentially resulting in angina and damage to
the heart. Typically, the condition worsens over time and often leads to
heart attack or death. More than 6,000,000 Americans experience anginal
symptoms per year. Drug therapy may be effective for mild cases of coronary
artery disease and angina, either through medical effects on the arteries
that improve blood flow without reducing plaque or by decreasing the rate of
formation of additional plaque (i.e., by reducing blood levels of
cholesterol).
The primary therapeutic options for treatment of coronary artery
disease are drug therapy, PTCA or balloon angioplasty, including techniques,
which augment or replace PTCA, such as stent placement and atherectomy, and
CABG or open heart bypass surgery. The objective of each of the different
approaches is to increase blood flow through the coronary arteries to the
heart. According to the American Hospital Association, approximately 1,100
hospitals in the United States perform cardiovascular related surgical
procedures.
According to the 1998 Heart and Stroke Facts Statistics published by
the American Heart Association, approximately 573,000 coronary bypass
operations were performed on 360,000 patients and 434,000 balloon angioplasty
procedures were performed in the United States on approximately 408,000
patients in 1995. The American Heart Association estimates the cost of
cardiovascular disease in 1997 at $259.1 billion, including physician and
nursing services, hospital and nursing home services, medications and lost
productivity resulting from disability. Hospital charges for bypass surgery
are typically between $25,000 to $45,000, and bypass surgery requires
prolonged hospitalization and extensive recuperation periods.
CABG is an open chest procedure developed in the 1960s in which
conduit vessels are taken from elsewhere in the body and grafted to the
blocked coronary arteries so that blood can bypass the blockage. CABG
typically requires use of a heart-lung machine to render the heart inactive
(to allow the surgeon to operate on a still, relatively bloodless heart) and
involves prolonged hospitalization and patient recovery periods. Accordingly,
it is generally reserved for patients with severe cases of coronary artery
disease or those who have previously failed to receive adequate relief of
their symptoms from PTCA or related techniques. Unfortunately, most bypass
grafts fail within one to fifteen years following the procedure. Repeating
the surgery ("re-do bypass surgery") is possible, but is made more difficult
because
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of scar tissue and adhesions that typically form as a result of the first
operation. The American Heart Journal estimates that 12% of all CABG
procedures in the United States are re-do bypass surgeries. Moreover, for
many patients, CABG is inadvisable for various reasons, such as the severity
of the patient's overall condition, the extent of coronary artery disease or
the small size of the blocked arteries.
PTCA is a less-invasive alternative to CABG, which was introduced as
an approved procedure in the early 1980s. PTCA is a procedure in which a
balloon-tipped catheter is inserted into an artery, typically near the groin,
and guided to the areas of blockage in the coronary arteries. The balloon is
then inflated and deflated at each blockage site, thereby rupturing the
blockage and stretching the vessel. Although the procedure is usually
successful in widening the blocked channel, the artery often renarrows within
six months of the procedure, a process called "restenosis," often
necessitating a repeat procedure. A variety of techniques for use in
conjunction with PTCA have been developed in an attempt to reduce the
frequency of restenosis, including stent placement and atherectomy. Stents
are small metal frames delivered to the area of blockage using a balloon
catheter that is deployed or expanded within the coronary artery. The stent
is a permanent implant intended to keep the channel open. Atherectomy is a
means of using mechanical, laser or other techniques at the tip of a catheter
to cut or grind away plaque.
When these treatment options are exhausted, the patient is left with
no viable surgical alternative other than, in limited cases, heart
transplantation. TMR, currently under clinical investigation by the Company
and available from certain other companies, offers potential relief to a
large class of patients with end stage heart disease. There are an estimated
120,000 people worldwide per year who qualify for TMR under the conditions
set forth above.
STRATEGIC ALLIANCE WITH BAXTER HEALTHCARE CORPORATION. On August 19,
1997, Acculase executed a series of agreements with Baxter. These agreements
(collectively, the "Baxter Agreement") provide for an alliance with Baxter in
which the Company granted to Baxter an exclusive worldwide right and license
to manufacture and sell the Company's TMR System consisting of certain
excimer laser technology products relating to the treatment of cardiovascular
and vascular disease and the disposable products associated therewith. The
Company agreed to manufacture the TMR System to the specifications of Baxter
at a schedule of prices, based upon the volume of TMR Systems purchased by
Baxter from the Company. Pursuant to the Baxter Agreement, the Company
agreed, for a period of five years, not to engage in any business competitive
with the laser products licensed by Baxter. The Company has granted to Baxter
a security interest in all of its patents to secure the Company's performance
under the Baxter Agreement. The Baxter Agreement expires upon the expiration
of the last to expire of the licensed patents, which is currently scheduled
to expire in 2008. However, Baxter may terminate the Baxter Agreement at any
time upon five days' written notice. Due to Baxter's strong worldwide
marketing presence, relationships with leading clinicians and regulatory
expertise, Baxter is absorbing many of the significant expenses of bringing
the Company's TMR products to market. See "Business-Intellectual Property,"
"Business-Research and Development" and "Business-Markets and Marketing."
Pursuant to the terms of the Baxter Agreement, Baxter has paid
Acculase the sum of $1,550,000 and Acculase has delivered the first two TMR
Systems. Payments made by Baxter aggregate $1,959,000, which include certain
advances for additional excimer laser systems and CE Mark compliance (which
has been obtained), which is a requirement for Baxter to sell the TMR Systems
within the EEA. In addition, Baxter has agreed to: (i) pay to the Company a
royalty of 10% of the sales price received for each disposable product sold,
or if the laser equipment is sold on a "per treatment" basis, the imputed
average sales price based on average sales other than on a "per treatment"
basis, calculated quarterly for such disposable products sold, adjusted to
amortize and recapture, over a 36-month period, Baxter's cost of
manufacturing such products; (ii) purchase from the Company certain existing
excimer laser systems for cardiovascular and vascular disease; (iii) fund the
total cost of obtaining regulatory approvals worldwide for the use of the TMR
System for the treatment of cardiovascular and vascular disease; (iv) fund
all sales and marketing costs related to the introduction and marketing of
the TMR System to treat cardiovascular and vascular disease; and (v) pay a
per unit price on a reducing scale from $75,000 to $45,000 per TMR System,
based on the number of TMR Systems purchased by Baxter. Prices for TMR
Systems may be adjusted annually after three years, based upon changes in
costs of materials (but not overhead or profit margin). See
"Business-Government Regulation," "Business-Markets and Marketing,"
"Business-Competition" and "Business-Intellectual Property."
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In September, 1997, the Company, PMG and Baxter agreed, in
connection with fulfilling the obligations of the parties under the Baxter
Agreement, that the Company needed to acquire the Lasersight License, for a
certain patent which relates to the use of excimer lasers for the
cardiovascular and vascular markets. On September 23, 1997, Baxter purchased
certain patents rights to related patents from Lasersight for $4,000,000. In
December, 1997, the Company acquired from Baxter a license to the patent
rights for $4,000,000, from the proceeds of a private placement of the
Company's securities. See "Business-Intellectual Property" and "Certain
Relationships and Related Transactions."
TMR TREATMENT USING EXCIMER LASERS. TMR is a surgical procedure
performed on the beating heart, in which a laser device is used to create
pathways through the myocardium directly into the heart chamber. The pathways
are intended to enable improved perfusion, or blood supply to the myocardium
from the heart chamber reducing angina in the patient. TMR potentially can be
performed using any of several different surgical approaches, including open
chest surgery, minimally invasive surgery through small openings in the chest
or percutaneous surgery involving the use of a laser-tipped catheter threaded
through a peripheral artery. The Company is pursuing a treatment protocol
using small openings in the chest for better access to the myocardium. TMR is
designed to be less invasive and less expensive than bypass surgery. Also,
TMR may be useful in conjunction with angioplasty or bypass surgery to obtain
more complete revascularization. TMR potentially offers end-stage heart
disease patients, who are not candidates for PTCA or CABG, a means to
alleviate their symptoms and improve their quality of life. No assurance can
be given that the TMR System will be found to be effective in relieving
symptoms of CAD or that it will receive government approval for
commercialization. See "Business-Government Regulation."
The main challenge in treating atherosclerosis is to allow blood
flow to the heart muscle without significantly damaging the heart. TMR does
not target the coronary arteries for treatment. During the TMR procedure, the
patient is given general anesthesia, and an incision is made in the patient's
side between the ribs exposing the heart. Laser systems competitive with the
TMR System use much greater energy and power levels, and are required to
synchronize the laser pulse with the electrocardiogram to protect the patient
from adverse arrhythmia's or excessive energy levels if the heart is not full
of blood, acting as a laser pulse "backstop." The TMR System does not need
this synchronization due to the lower overall power and energy requirements
of the excimer laser. Animal results have indicated excimer laser channels
remain open for extended periods of time whereas no such data is available
from any of the other competitive laser TMR companies. Management believes
that these open channels may provide pathways for oxygenated blood from the
ventricle to the heart muscle to get into the heart muscle, which is the
ultimate purpose of such procedures as CABG and angioplasty. However, no
assurance to this effect can be given.
Based on clinical results to date, the Company believes that its TMR
System will provide the following benefits, including: (i) use as an
alternative to bypass or angioplasty procedures or on patients who would
otherwise not be suitable for coronary bypass surgery; (ii) the TMR System
may allow the surgeon to provide oxygenated blood to areas of the heart
muscle that are not accessible by coronary bypass grafts. With the advent of
the procedures, where coronary artery bypass graft surgery is performed on a
beating heart, management believes that TMR will be an effective complement
to this procedure. TMR can be performed on the anterior, posterior and
lateral walls of the heart while the procedures usually are is only performed
on the anterior wall of the heart; (iii) management believes the medical
costs associated with the use of the TMR System will be less than the costs
of traditional bypass surgery, which requires a larger surgical team, more
supporting equipment and a longer hospital stay. The cost of TMR in some
situations may also be less than angioplasty when combinations of additional
devices such as atherectomy catheters, stents or intravascular ultrasound are
required; (iv) since the use of the TMR System is less invasive and does not
involve stopping and starting the heart, the patient may recover more quickly
than if conventional bypass techniques were used, with a potentially reduced
risk of complications compared with the risks associated with bypass surgery;
and (v) TMR may potentially be used on post transplant patients suffering
from chronic rejection atherosclerosis. Presently,
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the only treatment for this condition is re-transplantation. No assurance can
be given that any of these benefits will be obtained by patients receiving
TMR or that, if they are, such benefits will result in revenues or profitable
operations to the Company, or the FDA will approve the TMR System. See
"Business-Government Regulation."
EXCIMER LASER SYSTEM FOR THE TREATMENT OF PSORIASIS.
GENERAL. As of the date of this Prospectus, the Company has
developed an excimer laser and laser delivery system for the treatment of
psoriasis. Psoriasis or autogenic skin cell proliferation is a chronic
inflammatory skin disease for which there is no known cure. Plaque psoriasis,
the most common form, is characterized by inflamed lesions topped with
silvery white scales. Psoriasis can be limited to a few plaques or it can
cover moderate to extensive areas of skin. No one knows exactly what causes
psoriasis, although it is believed to be an immune medical disorder. Normal
skin cells mature in 28 to 30 days, but psoriasis skin cells take only three
to six days to mature, thus creating the silvery white scales.
According to the National Psoriasis Foundation ("NPF"), there are
three (3) approaches to treat psoriasis: topical therapy (creams and
lotions), phototherapy (ultraviolet light-UVA and UVB) and systemic
medications. The Company's excimer laser technology for the treatment of
psoriasis, if successful, is intended to replace and/or augment all of the
current treatment modalities.
The NPF estimates that between 1% to 3% of the world's population is
affected by psoriasis, that this medical condition affects more than 6.5
million Americans and that between 150,000 and 260,000 new cases occur each
year. Approximately 75% of these cases have a mild form of the disease. Both
genders are affected by the condition, being slightly more prevalent among
women. Approximately 10% to 15% of the people who suffer from psoriasis are
under the age of ten. The NPF further estimates that patients suffering from
psoriasis make approximately 2.4 million visits to dermatologists each year
and that the overall current yearly cost to treat psoriasis may exceed $3
billion. In addition to costs, the NPF estimates that 56 million hours of
work are lost each year by psoriasis sufferers. Approximately 400 people in
the United States per year die from complications caused by psoriasis. An
additional 400 people per year receive Social Security benefits for
disability due to psoriasis symptoms each year.
MASSACHUSETTS GENERAL HOSPITAL AGREEMENT. The Company has paid
$37,500 to MGH in connection with the MGH Agreement, and has further agreed
to pay MGH $50,000 upon issuance by the United States Patent and Trademark
Office of any patent right (which has not yet occurred as of the date of this
Prospectus) and an additional $50,000 upon approval by the FDA of the first
510(k), PMA or PMA Supplement (which has not occurred as of the date of this
Prospectus). Beginning with the first commercial sale of the products in any
country, on any sales of products made anywhere in the world by the Company,
or its affiliates and sublicensees, the Company has agreed to pay royalties
to MGH, as follows: (i) 4% of the net sales price, so long as the products
manufactured, used or sold are covered by a valid claim of patent licensed
exclusively to the Company; (ii) 2% of the net sales price whenever the
products manufactured, used or sold are covered by a valid claim licensed
exclusively to the Company; and (iii) 1% of the net sales price whenever the
products manufactured, used or sold, on which no royalty is payable under
items (i) and (ii) above, during the ten year period following the first
commercial sales anywhere in the world. In addition to the royalties provided
for above, the Company has agreed to pay MGH 25% of any and all non-royalty
income, including license fees and milestone payments, received from
affiliates or sublicensees of the Company. See "Business-Intellectual
Property."
The licensed technology is the subject of a currently pending
provisional patent application filed with the United States Patent and
Trademark Office by MGH. The Company has agreed to use its best efforts to
develop and make commercially available products with respect to the licensed
technology within certain time frames defined in the MGH Agreement, or MGH
may have the right to cancel the exclusive license or convert any exclusive
license to a non-exclusive license. See "Business-Intellectual Property."
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On March 17, 1998, the Company entered into a clinical trial
agreement with MGH (the "Clinical Trial Agreement") to compare the effect of
excimer laser light using its excimer laser technology to the current UVB
treatment being used to treat psoriasis. The Company has provided prototype
laser equipment for pre-clinical dose response studies. The Company has
agreed to support the clinical trials with a research grant of approximately
$160,000, of which $50,000 has been paid as of the date of this Prospectus.
The final data from the study was collected in December, 1998, but the final
report has not been received as of the date of this Prospectus. See
"Business-Excimer Laser System for the Treatment of Psoriasis,"
"Business-Government Regulation," "Business-Markets and Marketing,"
"Business-Competition" and "Business-Intellectual Property."
The Company believes that its excimer laser system may replace
and/or augment the current phototherapy modalities in use to treat the
symptoms of psoriasis. The Company will first test its excimer laser system,
as it compares to the UVB therapy currently being extensively used to control
psoriasis. In using UVB, the patient stands in a light box lined with special
UVB lamps and the whole body is radiated (other than protected areas such as
eyes and genitals). The need for long periods of treatment is due to the fact
that the healthy skin, as well as the psoriasis affected skin, is being
treated in the current light boxes, so that the dosage or radiation must be
controlled or the patient will be severely burned. The Company's excimer
laser, however, can be used to treat only the skin area that is affected by
psoriasis. Since it is believed that skin that is affected by psoriasis is
not as susceptible to UVB radiation, the Company believes that a high dose of
UVB applied directly to the affected area could significantly reduce the
number of treatments and the time needed to control psoriasis. The Company
has entered into an agreement with MGH to study the affects of different
dosages of UVB on psoriasis. This study, which commenced in May, 1998, is
anticipated to lead to the Company's submission of a 510(k) to the FDA, in
the third quarter of 1999, requesting approval of the Company's excimer laser
system to be used to treat psoriasis. However, no assurance to this effect
can be given. See "Business- Government Regulation."
TREATMENT OF PSORIASIS USING EXCIMER LASERS. The Company expects
that the number of treatments that will be needed to control psoriasis using
the Company's excimer laser system should decrease from over 30 to less than
10. Further, the Company estimates that the typical treatment time using the
Company's excimer laser will be greatly reduced. However, no assurance to
this effect can be given. The other benefits to the use of the Company's
excimer laser should be to reduce or eliminate the side effects of current
treatment modalities. UVB treatments have the same long term effects as
chronic sun exposure, which causes skin cancer and/or premature skin aging.
It is hoped that by treating only the psoriasis affected skin with the
Company's excimer laser equipment, total radiation dosage will be reduced,
thereby reducing the chances of cancer and premature skin aging. However, no
assurances to this effect can be given.
The Company's excimer laser equipment designed to treat psoriasis
generates UV light with a wavelength of 308 nm. The UVB light currently being
used in phototherapy of psoriasis has a wavelength of 310 nm. The Company
believes that the Company's excimer laser system will be effective in
replacing the UVB light. However, no assurance to this effect can be given.
The Company believes that the use of fiber optics to deliver UV light allows
for precise control of the light and an ability to deliver the light to areas
that are currently not excisable with standard treatments (i.e., the scalp).
The Company believes that its excimer laser system should become the
preferred method to treat many psoriasis plaques because management believes
that it can intensely treat affected areas without affecting healthy skin
with radiation that would otherwise cause adverse side effects. Current UVB
therapy cannot deliver such dosages without causing sickness as a result of
radiation. The more intense excimer plaque doses will result in faster and
fewer visits, all with fewer side effects. The very narrow band of radiation
from the excimer laser will also help avoid potential mutanagenic effects of
broad band UV light sources. There can be no assurances that the Company's
excimer laser technology will be successful in treating psoriasis or result
in commercially viable products. See "Business-Government Regulation."
On January 2, 1998, the Company and R. Rox Anderson, M.D.
("Anderson"), entered into a consulting agreement (the "Anderson Agreement")
wherein Anderson agreed to provide consulting services to the Company in
connection with an IDE for the development of data in connection with the
proposed psoriasis products the Company is attempting to develop. Anderson is
paid at the rate of $1,000 per day when services are provided specifically at
the request of the Company. As of May 21, 1999, the Company established a
Scientific Advisory Committee for the
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purpose of providing management with critical analysis of business
opportunities and potential strategies for the Company's excimer laser
business.
SALE OF THE COMPANY'S NON-EXCIMER LASER ASSETS AND BUSINESS
Due to the Company's focus on excimer laser technology, the Company
is in the process of selling all of the Company's non-excimer laser
businesses. The Company historically developed of a wide range of laser
products using different solid state lasers. This strategy proved to be
unsuccessful, in the opinion of current management of the Company, as the
Company generated revenues from the sale of numerous of its products, but was
unable to operate profitably. Due to the limited financial resources of the
Company, the Company's strategy changed in 1997 to focus its efforts on
excimer laser technology in order to develop a broad base of excimer laser
and excimer laser delivery products for both medical and non-medical
applications. The Company's non-excimer laser business that is to be sold
involved laser applications and products which have been sold in two markets,
medical applications and scientific applications.
As of January 4, 1999, the Company entered into the Asset Purchase
Agreement, which provides that the Buyer will pay and/or assume an aggregate of
$1,200,000 of the accrued and unpaid accounts payable and/or other debts of the
Company. Completion of this transaction will result in the sale of all of the
Company's non-excimer laser business assets. Management's decision to sell the
assets of the Company's business operations not related to the Company's excimer
laser technology will result in the divestiture of the Company's business
operations which generated approximately 70% of the Company's revenues for the
period from January 1, 1998 through March 31, 1999. If the proposed transaction
should not close, then the Company may be forced to expend approximately
$115,000 per month to cover the negative cash flow on a current basis until such
operations are sold to another buyer or discontinued. In addition, the Company
would have to pay all of the obligations which are to be assumed by the Buyer.
No assurance can be given that the Buyer will complete the purchase under the
Asset Purchase Agreement, and if not, that the Company will be able to find an
alternative buyer on as favorable terms as set forth in the Asset Purchase
Agreement. See "Business," "Certain Relationships and Related Transactions" and
"Financial Statements."
In the first of these markets, the Company developed a number of
medical lasers, such as Ruby Laser Systems, ND: YAG Laser Systems and
Alexandrite Laser Systems. Only the Ruby Laser System has generated any
meaningful revenues since 1995. Set forth below is a brief summary of the
Company's non-excimer medical laser systems and the Company's laser product
for treating psoriasis which, are being manufactured or upon which any of the
Company's resources are being expended:
RUBY LASER SYSTEM. The use of solid-state laser systems, such as
dermatology for the treatment of benign pigmented lesions of the skin, such
as nevus of ota, moles, age spots and tattoos, represents an extension of the
Company's scientific ruby laser technology, a technology that was one of the
earliest laser systems developed by the Company for commercial use. Laser
energy created by the ruby laser is highly absorbed by pigmented lesions, but
poorly absorbed by normal skin. Using the Ruby Laser System, therefore,
allows the physician to treat effectively the skin lesion without anesthesia
and without causing normal pigmented changes or scarring. The Company began
manufacturing and shipping these systems in August, 1991 on a private label
basis. The manufacturing/distribution agreement with the customer officially
terminated in 1993. In May, 1995, the Company resumed production of the ruby
laser using a distributor network for marketing the product. Ruby laser
revenue for fiscal years ended December 31, 1996, 1997 and 1998, were
$37,000, $180,000 and $65,000, respectively. Sales were limited due to
prolonged engineering time to develop the higher energy, longer pulse width
system and by the inability of the Company's customer to establish a strong
distribution network while awaiting the upgraded product.
SCIENTIFIC LASER SYSTEMS. The Company's scientific products have
been sold into niche markets for use principally in applications such as
spectroscopy, calibration, alignment and ultra-fast event measurement by
universities, government and private industry research laboratories. The
Company has manufactured and marketed scientific products based on a wide
range of technologies which include: nitrogen laser systems, nitrogen pumped
dye laser systems, solid state mid infrared laser systems, as well as laser
diodes and laser diode spectrometers.
In February, 1989, the Company acquired Laser Analytics, formerly a
wholly-owned subsidiary of Spectra Physics, Inc., an unaffiliated third
party. Since the acquisition, the Company has funded continued development
efforts focused primarily on improvements in the production of tunable
infrared laser diodes. This technology uses a spectrometer based on the
Company's tunable infrared laser diode to measure naturally occurring,
non-radioactive stable isotopes in exhaled breath. These measurements are
useful in diagnosing such medical problems as diabetes, lung and liver
dysfunction and digestive tract diseases, such as the detection of
helicobactor pylori, which has been shown to be a precursor to liver and
stomach cancer.
The Company's tunable diode lasers are based on lead-salt semiconductor
technology for use in advanced research, such as high-resolution molecular
spectroscopy, combustion diagnostic studies and atmospheric chemistry.
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These are "high end" instruments designed for research, which require a high
level of sophistication and performance. These lasers are sold both as a
standardized unit and as a customized unit. In addition, the Company has
designed a system using the tunable diode laser technology for pollution
monitoring applications.
SOURCES AND AVAILABILITY OF RAW MATERIALS.
Management believes that the Company currently has good
relationships with vendors of materials for its lasers. Most major components
and raw materials, including solid state laser rods, laser crystals, optics
and electro-optic devices are available from a variety of sources. The
Company does not rely on sole source vendors. Cash flow constraints are the
main limiting factors in parts availability.
GOVERNMENT REGULATION
UNITED STATES PRODUCT REGULATION. The Company's proposed products
and its research and development activities are subject to regulation by
numerous governmental authorities, principally, the FDA and corresponding
state and foreign regulatory agencies. The FDC Act, the regulations
promulgated thereunder, and other federal and state statutes and regulations,
govern, among other things, the pre-clinical and clinical testing,
manufacture, safety, efficacy, labeling, storage, record keeping, advertising
and promotion of medical devices and drugs, including the products currently
under development by the Company. Product development and approval within
this regulatory framework takes a number of years and involves the
expenditure of substantial resources.
In the United States, medical devices are classified into three
different classes, Class I, II and III, on the basis of controls deemed
necessary to reasonably ensure the safety and effectiveness of the device.
Class I devices are subject to general controls (i.e. labeling, pre-market
notification and adherence to the FDA's GMP requirements) and Class II
devices are subject to general and special controls (i.e. performance
standards, postmarket surveillance, patient registries and FDA guidelines).
Generally, Class III devices are those which must receive premarket approval
by the FDA to ensure their safety and effectiveness (i.e. life-sustaining,
life-supporting and implantable devices, or new devices, which have been
found not to be substantially equivalent to legally marketed devices).
Before a new medical device can be marketed, such as the Company's
excimer laser for the treatment of psoriasis, marketing clearance must be
obtained through a premarket notification under Section 510(k) of the FDC Act
or a PMA application under Section 515 of the FDA Act. A 510(k) clearance
will typically be granted by the FDA if it can be established that the device
is substantially equivalent to a "predicate device," which is a legally
marketed Class I or II device or a preamendment Class III device (i.e. one
that has been marketed since a date prior to May 28, 1976) for which the FDA
has not called for PMAs. The FDA has been requiring an increasingly rigorous
demonstration of substantial equivalence, which may include a requirement to
submit human clinical trial data. It generally takes four (4) to twelve (12)
months from the date of a 510(k) submission to obtain clearance, but it may
take longer.
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The FDA may determine that a medical device is not substantially
equivalent to a predicate device, or that additional information is needed
before a substantial equivalence determination can be made. A "not
substantially equivalent" determination, or a request for additional
information, may prevent or delay the market introduction of new products
that fall into this category. For any devices that are cleared through the
510(k) process, modifications or enhancements that could significantly affect
the safety or effectiveness, or that constitute a major change in the
intended use of the device, will require new 510(k) submissions.
A PMA application may be required, if a proposed device is not
substantially equivalent to a legally marketed Class I or II device, or if it
is a preamendment Class III device for which the FDA has called for PMAs. A
PMA application must be supported by valid scientific evidence to demonstrate
the safety and effectiveness of the device, typically including the results
of clinical trials, bench tests and laboratory and animal studies. The PMA
must also contain a complete description of the device and its components,
and a detailed description of the methods, facilities and controls used to
manufacture the device. In addition, the submission must include the proposed
labeling, advertising literature and any training materials. The PMA process
can be expensive, uncertain and lengthy, and a number of devices for which
FDA approval has been sought by other companies have never been approved for
marketing.
Upon receipt of a PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently complete to
permit a substantive review. If the FDA so determines, the FDA will accept
the application for filing. Once the submission is accepted for filing, the
FDA begins an in-depth review of the PMA. The FDA review of a PMA application
generally takes one to three years from the date the PMA is accepted for
filing, but may take significantly longer. The review time is often
significantly extended by the FDA's asking for more information or
clarification of information already provided in the submission. During the
review period, an advisory committee, typically a panel of clinicians, may be
convened to review and evaluate the application and provide a recommendation
to the FDA as to whether the device should be approved. The FDA accords
substantial weight to, but is not bound by, the recommendation. Toward the
end of the PMA review process, the FDA generally will conduct an inspection
of the manufacturer's facilities to ensure compliance with applicable GMP
requirements, which include elaborate testing, control documentation and
other quality assurance procedures. The Company has not yet undergone an FDA
GMP inspection, and does not anticipate that it will undergo such an
inspection until after filing of an initial PMA application by Baxter for the
TMR System.
If FDA evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, which usually contain a number of conditions that must be
met in order to secure final approval of the PMA. When and if those
conditions have been fulfilled to the satisfaction of the FDA, the FDA will
issue a PMA approval letter, authorizing marketing of the device for certain
indications. If the FDA's evaluation of the PMA application or manufacturing
facilities is not favorable, the FDA will deny approval of the PMA
application or issue a "non-approvable" letter. The FDA may determine that
additional clinical trials are necessary, in which case the PMA may be
delayed for one or more years, while additional clinical trials are conducted
and submitted in an amendment to the PMA. Modifications to a device that is
the subject of an approved PMA, its labeling or manufacturing process, may
require approval by the FDA of PMA supplements or new PMAs. Supplements to a
PMA often require the submission of the same type of information required for
an initial PMA, except that the supplement is generally limited to that
information needed to support the proposed change from the product covered by
the original PMA.
If human clinical trials of a device are required, either for a
510(k) submission or a PMA application, and, in the opinion of the FDA, if
the device presents a "significant risk," the sponsor of the trial (usually
the manufacturer or the distributor of the device) must file an IDE
application prior to commencing human clinical trials. The IDE application
must be supported by data, typically including the results of animal and
laboratory testing. If the IDE application is approved by the FDA and one or
more appropriate IRBs, human clinical trials may begin at a specific number
of investigational sites with a specific number of patients, as approved by
the FDA. If the device presents a "nonsignificant risk" to the patient, a
sponsor may begin the clinical trial after obtaining approval for the study
by one or more appropriate IRBs without the need for FDA approval. Submission
of an IDE does not give assurance that the FDA will approve the IDE and, if
it is approved, there can be no assurance that the FDA will determine that
the data derived from the studies support the safety and efficacy of the
device or warrant the continuation of clinical studies.
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Sponsors of clinical trials are permitted to sell investigational
devices distributed in the course of the study, provided such compensation
does not exceed recovery of the costs of manufacture, research, development
and handling. An IDE supplement must be submitted to and approved by the FDA
before a sponsor or investigator may make a change to the investigational
plan that may affect its scientific soundness or the rights, safety or
welfare of human subjects.
The TMR System is anticipated to be regulated as a Class III medical
device and to require PMA approval prior to being marketed in the United
States. Although the Company has received an IDE from the FDA permitting the
Company to conduct clinical trials of its TMR System in the United States,
and such clinical study has commenced, there can be no assurance that data
from such studies will demonstrate the safety and effectiveness of the TMR
System or will adequately support a PMA application for the product. In the
first quarter of 1998, the IDE was transferred to Baxter from the Company in
connection with the Baxter Agreement. In addition, Baxter may be required to
obtain additional IDEs for other applications of the TMR System, and for
other products that the Company develops that are regulated by the FDA as
medical devices. There is no assurance that data, typically the results of
animal and laboratory testing, that may be provided by Baxter in support of
future IDE applications, will be deemed adequate for the purpose of obtaining
IDE approval or that Baxter will obtain approval to conduct clinical studies
of any such future product.
Management of Acculase met with representatives of the FDA in
January, 1995 to discuss preclinical data submission requirements necessary
to initiate human trials of the TMR System. Animal testing of the TMR System
was then performed in collaboration with several heart research institutions
in the United States, culminating in a study at The New York Hospital Cornell
Medical Center, which serves as the pre-clinical basis for an IDE that was
granted by the FDA in August, 1996. All of the Company's rights under the IDE
have been assigned to Baxter. Pursuant to this IDE, Phase I human clinical
studies began at New York Hospital Cornell Medical Center and at Good
Samaritan Hospital in Los Angeles, California. The IDE submission provides
for the TMR System to be used in open-heart procedures on patients diagnosed
with end stage heart disease. The Phase I study only includes patients that
are suffering from ischemia and angina, and who are not candidates for CABG
or for balloon angioplasty. Depending upon the outcomes of the Phase I study,
the Company is advised that Baxter intends to petition for the Phase II
studies before mid-1999. Baxter is currently in discussion with the FDA for
transition from Phase I to Phase II. The Company is advised that Baxter
intends to expand the Phase II studies to a multi-site study (more than 10
institutions). However, no assurance to this effect can be given. The Company
does not expect Baxter to submit a PMA to the FDA before the year 2001, and
possibly later.
If clearance or approval is obtained, any device manufactured or
distributed by the Company will be subject to pervasive and continuing
regulation by the FDA. The Company will be subject to routine inspection by
the FDA and will have to comply with the host of regulatory requirements that
usually apply to medical devices marketed in the United States, including
labeling regulations, GMP requirements, Medical Device Reporting ("MDR")
regulation (which requires a manufacturer to report to the FDA certain types
of adverse events involving its products), and the FDA's prohibitions against
promoting products for unapproved or "off-label" uses. The Company's failure
to comply with applicable regulatory requirements could result in enforcement
action by the FDA, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Food and Drug Administration Modernization Act of 1997 makes
changes to the device provisions of the FDC Act and other provisions in the
FDC Act affecting the regulation of devices. Among other things, the changes
will affect the IDE, 510(k) and PMA processes, and also will affect device
standards and data requirements, procedures relating to humanitarian and
breakthrough devices, tracking and postmarket surveillance, accredited third
party review and the dissemination of off label information. The Company
cannot predict how or when these changes will be implemented or what effect
the changes will have on the regulation of the Company's products and
anticipated products.
If the FDA believes that a company is not in compliance with law, it
can institute proceedings to detain or seize products, issue a recall, enjoin
future violations and assess civil and criminal penalties against that
company, its officers and its employees. Failure to comply with the
regulatory requirements could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition,
regulations regarding the
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manufacture and sale of the Company's products are subject to change. The
Company cannot predict the effect, if any, that such changes might have on
its business, financial condition or results of operations.
In complying with the GMP regulations, manufacturers must continue
to expend time, money and effort in product, record keeping and quality
control to assure that the product meets applicable specifications and other
requirements. The FDA periodically inspects device manufacturing facilities
in the United States in order to assure compliance with applicable GMP
requirements. The Company is required by the FDA, under GMP guidelines, to
carry certain inventories of its medical lasers for emergency medical
service. Typically, major service problems must be responded to within 24
hours. The Company estimates that $250,000 of service inventories is on hand
at any given time for emergency response. The Company is not required by any
regulatory body to keep inventories on hand to meet service or delivery
issues. Certain raw materials have lead times of greater than sixteen (16)
weeks. The Company keeps a safety stock of these items when appropriate. The
Company estimates that less than $100,000 of current inventory is set-aside
for safety stock. Failure of the Company to comply with the GMP regulations
or other FDA regulatory requirements could have a material adverse effect on
the Company's business, financial condition or results of operations.
The Company is also subject to the Radiation Control for Health and
Safety Act with laser radiation safety regulations administered by the Center
for Devices and Radiological Health ("CDRH") of the FDA. These regulations
require laser manufactures to file new product and annual reports, to
maintain quality control, product testing and sales records, to incorporate
certain design and operating features in lasers sold to end users and to
certify and label each laser sold (except those sold to private label
customers) as belonging to one of four classes, based on the level of
radiation from the laser that is accessible to users. Various warning labels
must be affixed and certain protective devices installed, depending on the
class of product. CDRH is empowered to seek fines and other remedies for
violations of the regulatory requirements. To date, the Company has filed the
documentation with CDRH for its laser products requiring such filing, and has
not experienced any difficulties or incurred significant costs in complying
with such regulations.
THIRD PARTY REIMBURSEMENT IN THE UNITED STATES. In the United
States, healthcare providers, including hospitals and physicians, that
purchase devices with medical applications for treatment of their patients,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or a part of
the costs and fees associated with the procedures performed using these
devices. The Company's ultimate success will be dependent upon, among other
things, the ability of healthcare providers to obtain satisfactory
reimbursement from third-party payors for medical procedures in which the
laser and delivery system products are used. The TMR System is generally
purchased by hospitals, which then bill various third-party payors, such as
government programs and private insurance plans, for the healthcare services
provided to their patients. Unlike balloon angioplasty and atherectomy, laser
angioplasty requires the purchase of expensive capital equipment. Third-party
payors may deny reimbursement if they determine that a prescribed device has
not received appropriate regulatory clearances or approvals, is not used in
accordance with cost-effective treatment methods as determined by the payor,
or is experimental, unnecessary or inappropriate. If the FDA clearance or
approval is received, third-party reimbursement would also depend upon
decisions by HCFA for Medicare, as well as by individual health maintenance
organizations, private insurers and other payors.
Certain third-party payors, such as Medicare, determine whether to
provide coverage for a particular procedure and then reimburse hospitals for
inpatient medical services at a prospectively fixed rate based on the
diagnosis related group ("DRG") to which the case is assigned. DRG assignment
is based on the diagnosis of the patient and the procedures performed. The
fixed rate of reimbursement established by Medicare is independent of the
hospital's cost incurred for the specific case and the specific devices used.
Medicare and other third-party payors are increasingly scrutinizing whether
to cover new products and the level of reimbursement for covered products. In
April, 1999, HCFA announced that as of July 1, 1999, Medicare intermediaries
and carriers would be instructed to cover the costs of TMR for patients with
certain severe angina, which has not responded to standard medical treatment.
No assurance can be given that HCFA's policy change will result in the
generation of revenue to the Company. It is important that the hospital and
physician providers, the insurance industry, the health plan underwriters,
employers and patients understand the clinical and economic benefits of TMR,
as indicated by the IDE studies. Study results are concurrent with the
quality of care and economic issues currently driving the healthcare market.
The market for the
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Company's products also could be adversely affected by future legislation to
reform the nation's healthcare system or by changes in industry practices
regarding reimbursement policies and procedures.
Third-party payors that do not use prospectively fixed payments
increasingly use other cost-containment processes that may pose
administrative hurdles to the use of the Company's products. Potential
purchasers must determine whether the clinical benefits of the Company's TMR
Systems justifies the additional cost or the additional effort required to
obtain prior authorization or coverage and the uncertainty of actually
obtaining such authorization or coverage.
Physician services are reimbursed by Medicare based on a physician
fee schedule coding system. There is no assurance the codes that will be used
for submitting claims for TMR procedures using the Company's products will
result in Medicare payment levels that physicians consider to be adequate.
These codes and their associated weights are used by many other third-party
payors, in addition to Medicare. A failure by physicians to receive what they
consider to be adequate reimbursement for the TMR procedures, in which the
Company's products are used, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company has received ISO 9001/EN46001 certification for its TMR
and other systems. This authorizes the Company to affix a Certification
European (CE) Mark to its products as evidence that they meet all European
Community standards for the production of its medical devices. This will
enable the Company to market its products in all of the member countries of
the EU The Company also will be required to comply with additional individual
national requirements that are outside the scope of those required by the
EEA. Failure to comply with applicable regulatory requirements can result in
fines, injunctions, civil penalties, recalls or seizures of products, total
or partial suspensions of production, refusals by foreign governments to
permit product sales and criminal prosecution. Furthermore, changes in
existing regulations or adoption of new regulations or policies could prevent
the Company from obtaining, or affect the timing of, future regulatory
approvals or clearances. There can be no assurance that the Company will be
able to obtain necessary regulatory clearances or approvals on a timely basis
or at all or that the Company will not be required to incur significant costs
in obtaining or maintaining such foreign regulatory approvals. Delays in
receipt of, or failure to receive, such approvals or clearances, the loss of
previously obtained approvals or clearances or the failure to comply with
existing or future regulatory requirements would have a material adverse
effect on the Company's business, financial condition and results of
operations. Any enforcement action by regulatory authorities with respect to
past or future regulatory noncompliance could have a material adverse effect
on the Company's business, financial condition and results of operations.
The time required to obtain approval for sale in various foreign
countries may be longer or shorter than that required for FDA approval for
United States sales and the requirements may differ. In addition, there may
be foreign regulatory barriers other than premarket approval. The FDA must
approve exports of devices that require a PMA, but are not yet approved
domestically, unless they are approved for sale by any member country of the
EEA and the other "listed" countries, including Australia, Canada, Israel,
Japan, New Zealand, Switzerland and South Africa, in which case they can be
exported for sale to any country without prior FDA approval. In addition, an
unapproved device may be exported without prior FDA approval to the listed
countries for investigational use in accordance with the laws of those
countries. To obtain FDA export approval when required, Baxter must provide
the FDA with data and information to demonstrate that the device: (i) is not
contrary to public health and safety; and (ii) has the approval of the
country to which it is intended for export. To allow the FDA to determine
that export of a device is not contrary to public health and safety, Baxter
is required to submit basic data regarding the safety of the device, unless
the device is the subject of an FDA-approved IDE and the device will be
marketed or used for clinical trials in the importing country for the same
intended use, or at least two IRBs in the United States have determined that
the device is a non-significant risk device and the device will be marketed
or used for clinical trials in the importing country for the same intended
use. Baxter also must submit a letter to the FDA from the foreign country
approving importation of the device.
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Now that the Company has obtained the CE Mark approval for its
excimer laser products, it will be subject to continued supervision by the
notified body and will be required to report any serious adverse incidents to
the appropriate authorities. The Company also will be required to comply with
additional national requirements that are outside the scope of EEA
regulations. As of the date of this Prospectus, no application has been made
outside the United States. The Company is informed that Baxter anticipates
that it will be in a position to distribute the TMR System in Europe and
Japan, once the necessary filings have been approved. No assurance can be
given that distribution will occur when anticipated by Baxter, if at all.
Even if distribution begins, no assurance can be given that distribution of
the TMR System by Baxter will result in sales of the TMR System or revenues
or profits to the Company.
FOREIGN THIRD PARTY REIMBURSEMENTS. If the Company obtains the
necessary foreign regulatory registrations or approvals, market acceptance of
the Company's products in international markets would be dependent, in part,
upon the availability of reimbursement within prevailing healthcare payment
systems. Reimbursement and healthcare payment systems in international markets
vary significantly by country, and include both government sponsored healthcare
and private insurance. Although Baxter intends to seek international
reimbursement approvals, there can be no assurance any such approvals will be
obtained in a timely manner, if at all. Failure to receive international
reimbursement approvals could have a material adverse effect on market
acceptance of the Company's products in the international markets in which such
approvals are sought.
The Company believes the overall escalating cost of medical products
and services has led, and will continue to lead, to increased pressures on the
healthcare industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by the Company. There can be no
assurance in either the United States or international markets that third-party
reimbursement and coverage will be available or adequate, that current
reimbursement amounts will not be decreased in the future or that future
legislation, regulation or reimbursement policies of third-party payors will not
otherwise adversely affect the demand for the Company's products or its ability
to sell its products on a profitable basis. The unavailability of third-party
payor coverage or the inadequacy of reimbursement could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, fundamental reforms in the healthcare industry in the United States
and Europe continue to be considered, although the Company cannot predict
whether or when any healthcare reform proposals will be adopted and what impact
such proposals might have.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Many international markets have
government managed healthcare systems that control reimbursement for new devices
and procedures. In most markets, there are private insurance systems as well as
government managed systems. There can be no assurance that reimbursement for the
Company's products will be available in the United States or in international
markets under either government or private reimbursement systems, or that
physicians will support and advocate reimbursement for procedures using the
Company's products. Failure by hospitals and other users of the Company's
products to obtain reimbursement from third-party payors, or changes in
government and private third-party payors' policies toward reimbursement for
procedures employing the Company's products, would have a material adverse
effect on the Company's ultimate business prospects. Moreover, management is
unable to predict what additional legislation or regulation, if any, relating to
the healthcare industry or third-party coverage and reimbursement may be enacted
in the future, or what effect such legislation or regulation would have.
DEPENDENCE ON CUSTOMERS
The Company recognized revenue from Baxter equaling 33% of gross
revenues for the year ended December, 1998 and for the quarter ended March 31,
1999. No single customer, other than Baxter, accounted for sales in excess of
10% in 1998 or in the quarter ended March 31, 1999.
PRODUCT WARRANTIES
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The Company's standard warranty on most products is one year for parts
and labor. Consumables have a ninety (90) day warranty period. Selected medical
products have a 12-month parts only warranty. During the warranty period, the
Company pays shipping charges one way. In connection with the Baxter Agreement,
the Company has agreed to warrant products for twelve (12) months from the date
of delivery to Baxter's customer or eighteen (18) months from the date shipped
by the Company, whichever is less. The Company warrants that the product is free
from defects in workmanship, materials and handling. The Company has established
a reserve for warranty costs based upon the estimated costs to be incurred over
the warranty period of the Company's products. The Company does not provide the
right to return units of its TMR System. In some cases, demonstration equipment
is sent to the customer prior to the sale to determine suitability. In rare
cases, the Company has allowed returns when accompanied by a substantial
restocking fee. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
PRODUCT LIABILITY INSURANCE
The Company maintains liability insurance with coverage limits of
$3,000,000 per occurrence. Although the Company has never been subject to a
product liability claim, there can be no assurance that the coverage limits of
the Company's insurance policies will be adequate or that one or more successful
claims brought against the Company would not have a material adverse effect upon
the Company's business, financial condition and results of operations.
RESEARCH AND DEVELOPMENT
The Company's research and development emphasis has shifted from pure
research to product modification and development to meet new market demands.
Baxter does not pay for any research and development for the Company's
cardiovascular and vascular related product applications. However, Baxter is
paying for all costs related to regulatory matters, which, if successful, will
enable the commercial sales of the Company's excimer laser system for TMR
pursuant to the Baxter Agreement. The Company's strategy is to utilize and
modify its existing excimer laser technology and component base to develop new
products and applications in targeted medical and scientific markets. In
addition to internal development, the Company may take advantage of
opportunities, if they arise, in the current laser market environment of
consolidation and market specialization by continuing to seek out and acquire
both products and technology at a cost the Company believes to be lower than the
cost of similar products internal development.
The Company does not have any present acquisition plans. Because the
Company's products are focused in specific niche scientific and medical markets,
the Company does not believe the decline in research and development
expenditures will affect the Company's abilities to be competitive in its
markets.
The Company began testing its excimer laser system for the treatment of
psoriasis at MGH in 1998 with a Dose Response Study under IRBs approval. The
final data from this study was collected in December, 1998. This data is
anticipated to serve as the basis for a 510(k) submission to the FDA in the
third quarter of 1999. The Company will expend significant amounts for research
and development in the development of the excimer laser products for psoriasis.
For the three months ended March 31, 1999 and the years ended December 31, 1998,
1997 and 1996, the Company expended $175,282, $1,243,372, $685,109 and $850,993,
respectively, on research and development. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
ENVIRONMENTAL CONCERNS
The Company's medical lasers are not believed to cause any
environmental concerns. The Company does not knowingly use any products known to
harm the environment. All solvents and cleaners are biodegradable. Cooling
systems, where applicable, use refrigerant, which are free of toxic materials.
Many medical lasers are solid-state construction, so no hazardous gases or
liquid dyes are used in their operation or manufacture. In winter months,
medical laser cooling systems are filled with an ethylene glycol and water
mixture to prevent freezing during shipment. This mixture must be removed and
discarded upon installation. Once the asset sale is completed this will no
longer be an issue for the Company.
The Company's TMR Systems utilizes xenon-chloride gas as a lasing
medium. The chlorine component of this gas is extremely corrosive and must be
handled with care. Although only a small quantity of gas is present in each
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laser, proper handling is essential for safe operation. Depleted gas is reacted
prior to disposal. Excimer lasers are common in hospitals and laboratories and
the disposal and handling of these gases is well known. Management of the
Company believes that the use of these gases is not expected to impact the
desirability of these lasers in the market place.
MARKETS AND MARKETING
In connection with the Baxter Agreement, the Company will market its
TMR Systems under the Baxter name. Baxter has also assumed the obligation to
fund the total costs of obtaining regulatory approvals worldwide for the use of
the TMR System for the treatment of cardiovascular and vascular disease and to
fund all sales and marketing costs relating to the introduction and marketing of
the TMR System to treat cardiovascular and vascular disease. The Company does
not anticipate that Baxter will be ready to market the TMR System in the United
States prior to the end of 2001. Due to Baxter's strong worldwide market
presence, relationships with leading clinicians and regulatory expertise, many
of the significant expenses of bringing some of the Company's excimer laser
systems to market are being absorbed by Baxter. In the opinion of management of
the Company, because of the significant costs being borne by Baxter because of
the favorable terms of the Baxter Agreement, the Company's earnings potential
has not been compromised by the Baxter Agreement whereas the Company's risk
related to development and introduction of its TMR System has been shifted to
Baxter. It is anticipated that, once government approval has been received for
marketing of the Company's TMR System, the relationship with Baxter will be a
significant marketing and competitive advantage to the Company. However, no
assurance to this effect can be given.
The Company historically has marketed its scientific products through a
direct sales force in the United States and through a network of distributors
outside of the United States. The Company has promoted its products through
attendance at tradeshows, advertising in scientific journals and industry
magazines and direct mail programs. The Company has not yet determined how it
will market its excimer laser system for the treatment of psoriasis. It may be
favorable for the Company to use its traditional source of independent
representatives to sell the Company's product for the treatment of psoriasis or
to find a strategic alliance with another company, such as the one that it
currently has with Baxter. No assurance can be given that such an alliance can
be obtained, and if obtained, that such alliance would be on terms favorable to
the Company.
AGREEMENT WITH COMPUTER SCIENCES CORPORATION. On October 29, 1998,
the Company and CSC entered into an agreement ("the CSC Agreement"), under
which CSC is to develop a commercial strategy and to define and obtain the
required resources for the commercial exploitation of the Company's excimer
laser technology. CSC provides consulting services to various businesses,
including the Company, regarding the introduction of medical technology for
commercialization. For CSC's consulting services the Company has accrued
approximately $231,100 in fees and expenses. In addition, the Company is to
pay to CSC $157,600 as contingent compensation at such time as the Company
raises at least $6,000,000 in additional equity financing. Warwick Alex
Charlton, Vice President of CSC, is also the Non-Executive Chairman of the
Board of Directors of the Company. See "Management" and "Certain
Relationships and Related Transactions."
AGREEMENT WITH HEALTHWORLD CORPORATION. As of May 11, 1999, the Company
entered in an agreement with Healthworld Corporation ("Healthworld"), of which
Steven Girgenti, a director of the Company, is Chairman and Chief Executive
Officer, for provision of various services relating to the marketing of the
Company's products. The services include: (i) advertising and promotion, (ii)
development of market research and strategy; and (iii) preparation and
consulting on media and publicity. The term of the agreement is indefinite but
may be terminated by either party on ninety days notice. Compensation for these
services is approximately $40,000 per month, plus reimbursement of expenses and
payment of a 15% commission on advertising purchases. Services beyond those
budgeted by the parties are to cost $104 per person hour. Under a separate
agreement, Healthworld will provide, as of October 1, 1999, (i) two fulltime
managed-care specialists to make calls on potential customers for a period of
seven months at a cost of $30,000 per month; (ii) 20 fulltime sale
representatives to market among dermatologists for a period of four months at a
cost of $125,000 per month; and (iii) certain general management services for a
period of seven months at $10,000 per month. Under separate agreements,
Healthworld will provide certain medical education and publishing services
(approximately $700,000 in fees and costs over a period in excess of one year)
and general public relations services ($10,000 per month). See "Certain
Relationships and Related
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Transactions."
COMPETITION
The markets for the Company's proposed products are extremely
competitive. The Company directly and indirectly competes with other businesses,
including businesses in the laser industry. In many cases, these competitors are
substantially larger and more firmly established than the Company. In addition,
many of such competitors have greater marketing and development budgets and
substantially greater capital resources than the Company. Accordingly, there can
be no assurance that the Company will be able to achieve and maintain a
competitive position in the Company's industry. The Company believes that its
competitive success will be based on its ability to create and maintain
scientifically advanced technology, attract and retain scientific personnel,
obtain patent or other protection for its products, obtain required regulatory
approvals and manufacture and successfully market its products either directly
or through outside parties.
The Company does not have comparable resources with which to invest in
research and development and advertising and is at a competitive disadvantage
with respect to its ability to develop products. The Company may also encounter
difficulties in customer acceptance because it is likely to be perceived as a
new entrant into the market whose identity is not yet well known and whose
reputation and commercial longevity is not yet established. Substantial
marketing and promotional costs, possibly in excess of what the Company can
afford, may be required to overcome barriers to customer acceptance. The Company
expects substantial direct competition, both from existing competitors and from
new market entrants. Larger and more established competitors may seek to impede
the Company's ability to establish a market share for any products, which may be
developed by the Company through competitive pricing activities. Also,
prospective customers for the Company's products may be reluctant to disrupt
relationships with well-established distributors of products, which may be
comparable in quality or pricing to any of the Company's products. The failure
to gain customer acceptance of the Company's excimer laser technology would have
a material adverse effect on the Company.
Market acceptance of laser treatment of psoriasis is dependent on the
Company's ability to establish with the medical community the clinical efficacy
of excimer laser technology to treat psoriasis. As a result of such factors,
there can be no assurance that the marketplace will be receptive to excimer
laser technology over competing therapies. Failure of the Company's products to
achieve market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations.
Competition in the market for the treatment of CAD, and in the medical
device industry generally, is intense and is expected to increase. The Company
competes primarily with other producers of TMR devices for patients with end
stage heart disease. Many companies, research institutes and universities are
working in a number of disciplines to develop therapeutic devices and procedures
aimed at vascular and cardiovascular disease. Some of the Company's competitors
and potential competitors have substantially greater name recognition and
capital resources than does the Company and also may have greater resources and
expertise in the areas of research and development, obtaining regulatory
approvals, manufacturing and marketing. There can be no assurance that the
Company's competitors will not succeed in developing TMR products or procedures
that are more effective or more effectively marketed than products marketed by
the Company or that render the Company's technology obsolete. In addition, even
if the Company's products yield performance comparable to competing products,
there can be no assurance the Company will be able to obtain necessary
regulatory approvals to compete against competitors in manufacturing, marketing
and selling its products. The Company believes that the primary competitive
factors in the interventional cardiovascular market are: the ability to treat
safely end stage heart disease patients; the impact of managed care practices
and procedure costs; ease of use; and research and development capabilities.
Certain companies, including PLC and Eclipse, have completed enrollment in
randomized clinical trials of products and procedures involving TMR that compete
with those offered by the Company, and have received regulatory approvals in
Europe to begin commercially marketing their respective TMR devices. PLC and
Eclipse have also received approval from the FDA to commercially market its TMR
products in the United States. Earlier entrants in the market in a therapeutic
area often obtain and maintain greater market share than later entrants.
Furthermore, the length of time required for products to be developed and
receive regulatory approval and the ability to use patents or other proprietary
rights to prevent sales by competitors are also important competitive factors.
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INTELLECTUAL PROPERTY
INTELLECTUAL PROPERTY POLICY. The Company regards its technological
processes and product designs as proprietary and seeks to protect its rights in
them through a combination of patents, internal procedures and non-disclosure
agreements. The Company also utilizes licenses from third parties for processes
and designs used by the Company, which are proprietary to other parties. The
Company believes that its success will depend in part on the protection of its
proprietary information and patents, and the acquisition of licenses of
technologies from third parties.
There can be no assurances as to the range or degree of protection any
patent or registration which may be owned or licensed by the Company will
afford, that such patents or registrations will provide any competitive
advantages for the Company, or that others will not obtain patents or
registrations similar to any patents or registrations owned or licensed by the
Company. There can be no assurances that any patents or registrations owned or
licensed by the Company will not be challenged by third parties, invalidated,
rendered unenforceable or designed around, or that the Company's competitors
will not independently develop technologies which are substantially equivalent
or superior to the technologies owned or licensed by the Company and which do
not infringe patents or proprietary rights of the Company. There can be no
assurances that the Company or any licensor to the Company will be successful in
protecting its proprietary rights. There can be no assurances that any pending
patent or registration applications or future applications will result in the
issuance of a patent or registration.
To the extent that the Company relies upon trade secrets and unpatented
know-how, and the development of new products and improvements of existing
products in establishing and maintaining a competitive advantage in the market
for the Company's products and services, there can be no assurances that such
proprietary technology will remain a trade secret or be available to the
Company, or that others will not develop substantially equivalent or superior
technologies to compete with the Company's products and services.
Any asserted claims or litigation to determine the validity of any
third party infringement claims could result in significant expense to the
Company or any licensor of such technology and divert the efforts of the
Company's technical and management personnel, whether or not such litigation is
resolved in favor of the Company or any such licensor. In the event of an
adverse result in any such litigation, the Company or any such licensor could be
required to expend significant time and resources to develop non-infringing
technology or to obtain licenses to the disputed technology from third parties.
There can be no assurances that the Company or any such licensor would be
successful in such development or that any such licenses would be available to
the Company on commercially reasonable terms, if at all.
Although the Company believes its patents to be of significant value,
successful litigation against these patents by a competitor could have a
material adverse effect on the Company's business, financial condition and
results of operations. No assurance can be given that the existing patents will
be held valid if challenged, that any additional patents will be issued or that
the scope of any patent protection will exclude competitors. The breadth of
claims in medical technology patents involves complex legal and factual issues,
and therefore, can be highly uncertain.
The Company also relies upon unpatented proprietary technology and
trade secrets that it seeks to protect, in part, through confidentiality
agreements with employees and other parties. No assurance can be given that
these agreements will not be breached, that the Company will have adequate
remedies for any breach, that others will not independently develop or otherwise
acquire substantially equivalent proprietary technology and trade secrets or
disclose such technology or that the Company can meaningfully protect its rights
in such unpatented technology. In addition, others may hold or receive patents,
which contain claims that may cover products developed by the Company.
PATENTS ISSUED. The Company owns 26 patents and Acculase owns an
additional five (5) patents, worldwide. Of the Company's patents 22 are issued
in the United States and one each are issued in Canada, Switzerland, France and
Great Britain. Of the five (5) patents owned by Acculase, in the United States,
two patents are
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in each of Australia, Canada, Israel, and all are filed in the United States
one is in the EU, France, Germany, Japan, Switzerland/Liechtenstein and Great
Britain.
In connection with the sale of assets related to the Company's
non-excimer laser business, approximately of these patents are being sold to the
Buyer of those assets. All of the patents being sold relate to non-excimer laser
technology. No assurance can be given that the sale of assets will be completed.
See "Business-Sale of the Company's Non-Executive Laser Assets and Business."
In connection with the Company's excimer laser technology, the Company
has been issued two (2) patents. The first patent, which was issued in January,
1990, provides patent protection until 2007 and covers the Company's base
excimer laser design. The second patent, which was issued in May, 1990, provides
patent protection until 2007 and covers a liquid filled flexible laser light
guide. The third patent, which was issued in May, 1991, provides patent
protection until 2007, and covers a means of measuring optical fiber power
output. The fourth patent, which was issued in September, 1991, provides patent
protection until 2008 and relates to the laser optical fiber coupling apparatus
used in the Company's excimer lasers. The Company also has one U.S. patent
application pending relating to a proprietary laser catheter design, which
application was initially denied. The Company has not continued to pursue this
patent application.
The Company also received patents for its base excimer laser design in
Australia in November, 1991, Canada in December, 1992, and Israel in February,
1993. The Australian, Canadian, and Israeli patents provide protection until
August, 2004, December, 2009, and August, 2008, respectively. Patent
applications are pending in these countries and in Japan for a fiber optic laser
catheter design.
All of the patents issued to the Company and all applications for
Letters Patent related to the Company's excimer laser technology have been
pledged by the Company to Baxter pursuant to the Baxter Agreement and act as
security for the obligations of the Company under and pursuant to the Baxter
Agreement. See "Business-Strategic Alliance with Baxter Healthcare Corporation."
LICENSED TECHNOLOGY. In September 18, 1997, the Company, PMG and
Baxter agreed, in connection with fulfilling the obligations of the parties
under the Baxter Agreement, that the Company needed to acquire a license from
Lasersight for certain patents which relate to the use of excimer lasers for
the cardiovascular and vascular markets. In the event that Baxter terminates
the Baxter Agreement, Baxter will grant to the Company an exclusive
sublicense of all of Baxter's rights under the Lasersight License. In such
event, the Company will acknowledge and agree that upon the grant of such
exclusive sublicense, the Company will assume all obligations and liabilities
of Baxter under the Lasersight License. See "Business-Strategic Alliance with
Baxter Healthcare Corporation."
The Company has paid to MGH $37,500 pursuant to the MGH Agreement and
has agreed to pay to MGH $50,000 upon issuance by the United States Patent and
Trademark Office of any patent right $50,000 upon approval by the FDA of the
first 510(k), PMA or PMA Supplement, which has not occurred as of the date of
this Prospectus. Beginning with the first commercial sale of the products in any
country, on any sales of products made anywhere in the world by the Company, or
its affiliates and sublicensees, the Company has agreed to pay royalties, as
follows: (i) 4.00% of the net sales price so long as the products manufactured,
used or sold are covered by a valid claim of patent licensed exclusively to the
Company; (ii) 2.00% of the net sales price whenever the products manufactured,
used or sells is covered by a valid claim of patent licensed exclusively to the
Company; and (iii) 1% of the net sales price whenever the products manufactured,
used or sold on which no royalty is payable under items (i) and (ii) above,
during the ten (10) year period following the first commercial sales anywhere in
the world. In addition to the royalties provided for above, the Company has
agreed to pay MGH 25% of any and all non-royalty income, including license fees
and milestone payments received from affiliates or sublicensees of the Company.
See "Business-Massachusetts General Hospital Agreement."
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EMPLOYEES
As of March 31, 1999, the Company had 14 full-time employees. These
employees include four (4) executive officers, four (4) technical, four (4)
administrative and two (2) clerical personnel. The Company intends to hire
additional personnel as the development of the Company's business makes such
action appropriate. The loss of the services of such key employees as Chaim
Markheim and Raymond A. Hartman could have a material adverse effect on the
Company's business. Since there is intense competition for qualified personnel
knowledgeable of the Company's industry, no assurances can be given that the
Company will be successful in retaining and recruiting needed personnel. See
"Management."
The Company's employees are not represented by a labor union or covered
by a collective bargaining agreement, and the Company believes it has good
relations with its employees. The Company provides its employees with certain
benefits, including health insurance.
PROPERTIES
The Company entered into a lease on August 4, 1998, with an
unaffiliated third party consisting of 11,500 square feet of office space,
manufacturing and warehousing located at 2431 Impala Drive, Carlsbad,
California, 92008. The term of the lease is 57 months, commencing December 1,
1998. The lease cost is $8,050 per month. There are two five-year options to
extend the term of the lease, for a total occupancy of approximately 15 years,
if desired by the Company. The performance of this lease is guaranteed by PMG.
See "Certain Relationship and Related Transactions."
The Company currently occupies approximately 12,000 square feet of
office and light manufacturing space in Orlando, Florida, at a monthly rent of
$11,000 per month, on a month to month basis. The Company is at risk of being
evicted from these offices. At March 31, 1999, the Company was delinquent in the
payment of certain rental obligations on such lease. The landlord in connection
with delinquent rent has sued the Company, and obtained a judgment against the
Company in the amount of approximately $712,000. A portion of this judgment has
been paid and the balance of the judgment and the accumulated delinquent rent
are anticipated to be assumed by the purchaser of the non-excimer laser assets.
No assurance can be given that the asset sale will close and that the obligation
of this judgment and accumulated rent will be assumed by or paid by the purchase
of the non-excimer laser assets. See "Business-Sale of the Company's Non-Excimer
Laser Assets and Business" and "Legal Proceedings - Lease Disputes."
The Company's Laser Analytics subsidiary occupies a 13,000 square foot
office and light manufacturing facility in Wilmington, Massachusetts, which
commenced in December, 1996, for a five-year period at $5,600 per month. This
lease is with an unaffiliated third party.
LEGAL PROCEEDINGS
BANKRUPTCY REORGANIZATION. The Company filed the Bankruptcy
Proceeding on May 13, 1994 (Case No. 94-02608-611). The Plan was confirmed on
May 22, 1995. See "Business - History of the Company."
CONSENT DECREE. In 1996, the Company entered into a Consent Decree with
the Commission where it neither admitted nor denied alleged securities law
violations in 1992 and early 1993 under prior management, but consented to the
issuance of an injunction against any future violation. The alleged events
occurred prior to the Bankruptcy Reorganization and involve events, which
occurred prior to the change in the Company's management and directors. The
current management and directors have no connection with this proceeding. No
monetary damages were sought.
LEASE DISPUTES. In 1998 Riverboat Landing, Inc., as plaintiff, in the
County Court of the Eighteenth Judicial Circuit, Seminole County, Florida
obtained a judgment in the amount of $45,560 for delinquent rent obligations for
a facility in Sanford, Florida. The Company has paid a small portion of this
judgment and agreed to a
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monthly payout of the balance. As of the date of this Prospectus, the Company
owes approximately $6,000 of this obligation.
On April 21, 1998, City National Bank of Florida, Trustee ("Landlord")
filed suit against the Company for unpaid rent for the Company's facility in
Orlando. City National Bank of Florida, Trustee v. Laser Photonics, Inc.,
Circuit Court, Ninth Judicial District, Orange County, Florida, #CI198-3526.
Plaintiff subsequently obtained a final judgment which, including interest and
late fees, totaled approximately $712,000 as of the date of this Prospectus. The
purchaser of the Company's non-excimer laser business has agreed, as part of the
purchaser price, to assume this obligation. No assurance can be given that the
asset sale will close and that the obligation for this judgment will be assumed
by or paid by the Buyer of the non-excimer laser assets. See "Business-Sale of
the Company's Non-Excimer Laser Assets and Business."
Except as set forth above, the Company knows of no material legal
actions, pending or threatened, or judgment entered against the Company or any
executive officer or director of the Company, in his capacity as such.
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MANAGEMENT
The directors of the Company currently have terms which will end at the
next annual meeting of the stockholders of the Company or until their successors
are elected and qualify, subject to their prior death, resignation or removal.
Officers serve at the discretion of the Board of Directors. There are no family
relationships among any of the Company's directors and executive officers.
The following sets forth certain biographical information concerning
the current members of the Board of Directors and executive officers of the
Company:
<TABLE>
<CAPTION>
NAME POSITION AGE
--------------------------------------------------------------------------
<S> <C> <C>
Warwick Alex Charlton Non-Executive Chairman of the
Board of Directors 40
Raymond A. Hartman Director, President and Chief 51
Executive Officer
Chaim Markheim Director, Chief Operating Officer, 54
Chief Financial Officer and Secretary
John J. McAtee, Jr. Director 62
Alan R. Novak Director 64
Steven A. Qualls Executive Vice-President- 42
East Coast Operations
Harry Mittelman, M.D. Director 58
Steven Girgenti Director 52
</TABLE>
WARWICK ALEX CHARLTON was appointed to the Board of Directors and
became the Non-Executive Chairman of the Board of Directors on March 8, 1999.
Mr. Charlton is a Vice President of CSC and is also the Vice President and North
American Practice Leader of CSC Healthcare, Inc., where Mr. Charlton is
responsible for business development and operating performance. In his capacity
at CSC, Mr. Charlton provides consulting services to various businesses,
including the Company, regarding the introduction of medical technology for
commercialization. CSC provides such services to the Company in connection with
a consulting agreement dated October 29, 1998. Mr. Charlton has 19 years of
business experience, consisting of ten years of line management experience and
nine years in the consulting profession (previously with Booz Allen & Hamilton
and the Wilkerson Group). Mr. Charlton received an honors degree in Marketing
from the University of Newcastle and an MBA form Cranfield Institute of
Technology. See "Business - Markets and Marketing-Agreement with Computer
Science Corporation," "Compensation of Executive Officers and Directors -
Compensation of Directors" and "Certain Relationships and Related Transactions."
RAYMOND A. HARTMAN was appointed to the Board of Directors in October,
1997, and also serves as the President and Chief Executive Officer of Laser
Photonics and Acculase. Mr. Hartman is responsible for the engineering and
development of the excimer laser, handpieces and fiberoptics for TMR and
psoriasis. Prior employment includes: Founder and President of Electrode
Technology, Inc., Union City, California; and Vice President of Manufacturing
and Research and Development, Applied Medical Technology, Palo Alto, California.
Mr. Hartman was an Assistant Professor at the Ohio State University in Columbus
Ohio, Business Law and Marketing (Graduate School of Business); Business Policy
(Graduate School of Business) and Seapower and Maritime Affairs (ROTC). Mr.
Hartman was a Lieutenant in the United States Navy. He received his MBA from the
Ohio State University, and a BS with Honors in Chemistry at Montana State
University.
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CHAIM MARKHEIM was appointed to the Board of Directors of the Company
in May, 1995. He also serves as the Company's Chief Operating Officer and Chief
Financial Officer. Mr. Markheim was a director and the Chief Operating Officer
of Helionetics from May, 1992 until January, 1998. Helionetics filed a petition
for bankruptcy reorganization under Chapter 11 of the Federal Bankruptcy Act in
1997. Mr. Markheim acted as business consultant to a diverse group of companies,
including Helionetics from 1985 to 1992. From 1980 to 1985, Mr. Markheim served
in various financial positions with Campbell Soup Company. His last position was
Controller of the Beverage Division. From 1976 to 1980, Mr. Markheim served in a
number of financial positions with Atlantic Richfield Company. Prior to 1976, he
was employed as an auditor with Coopers and Lybrand and Seidman & Seidman. Mr.
Markheim was a licensed Certified Public Accountant in the State of California.
Mr. Markheim holds a Bachelor of Science Degree in Accounting from California
State University, at Northridge.
JOHN J. MCATEE, JR. has been a member of the Board of Directors of the
Company since March 4, 1998. From March 4, 1998 until March 8, 1999, Mr. McAtee
served as the Non-Executive Chairman of the Board of Directors. From 1990 to
1996, Mr. McAtee was Vice Chairman of Smith Barney, Inc. (now Salomon Smith
Barney), one of the world's largest banking and brokerage firms. Before that, he
was a partner in the New York law firm of Davis Polk & Wardwell for more than
twenty years. Mr. McAtee is a graduate of Princeton University and Yale Law
School. Mr. McAtee is also a director of U.S. Industries, Inc., a diversified
industrial management corporation, and Whitehall Corporation, which provides
products and services to the commercial and military markets.
ALAN R. NOVAK was appointed to the Board of Directors of the Company in
October, 1997. Mr. Novak is Chairman of Infra Group, L.L.C., an international
project finance and development company. He is also Chairman of Lano
International, Inc., a real estate development company, and a director of
Strategic Partners (Holdings) Limited, an international airport and seaport
development company. Mr. Novak is a graduate of Yale University, Yale Law
School, and Oxford University as a Marshall scholar. Mr. Novak practiced law at
Cravath, Swaine & Moore and Swidler & Berlin, Chartered. His public service
includes three years as an officer in the United States Marine Corp., a U.S.
Supreme Court clerkship with Justice Potter Stewart, Senior Counsel, Senator E.
M. Kennedy, Senior Executive Assistant to Undersecretary of State, Eugene
Rostow, and Executive Director, President Johnson's Telecommunications Task
Force. Mr. Novak was appointed by President Carter and served for five years as
Federal Fine Arts Commissioner.
STEVEN A. QUALLS has been an employee of the Company since 1987 and
currently serves as the Company's Executive Vice President. He previously served
as the Company's General Manager, Chief Operating Officer, President, Chief
Executive Officer and a member of the Board of Directors. Mr. Qualls holds an
MBA from the Crummer Graduate School of Business at Rollins College in Winter
Park, Florida, and received a BS in Physics from the University of Central
Florida.
HARRY MITTELMAN, M.D. was appointed to the Board of Directors on April
20, 1999, and graduated from of the University of Kansas, School of Medicine in
1967. Dr. Mittelman practices medicine as a Cosmetic and Plastic Surgeon and
Otolaryngologist. Dr. Mittelman was a Foundation Board Member of the American
Academy of Facial Plastic and Reconstruction Surgery, 1997-1998 and was the
Chairman of the Laser Surgery and Safety Committee; American Academy of Cosmetic
Surgery, 1991-1993. As well as being in private practice, Dr. Mittelman is an
Associate Clinical Professor of Medicine at Stanford University Hospital and
Medical Center.
STEVEN GIRGENTI was appointed to the Board of Directors on April 20,
1999, and has served as Chairman of the Board and Chief Executive Officer of
Healthworld Corporation, a public company ("Healthworld") since August 1997. Mr.
Girgenti co-founded Girgenti, Hughes, Butler & McDowell, Inc. a wholly-owned
subsidiary of Healthworld, in April 1986 and has served as its President and
Chief Executive Officer since then. Beginning in 1969, Mr. Girgenti worked in
the pharmaceutical industry for advertising companies specializing in medical
communications, including William Douglas McAdams. Prior to that, Mr. Girgenti
held a variety of positions with pharmaceutical companies, including Director of
Marketing Research and Product Manager for DuPont pharmaceuticals and Manager of
Commercial Development for Bristol-Myers Squibb Company.
SCIENTIFIC ADVISORY BOARD. In May, 1999, the Company established a
Scientific Advisory Board, to consist of persons experienced in the use of
advanced treatment for various types of psoriasis. One such person, R. Rox
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Anderson M.D. was appointed to the Advisory Board on May 21, 1999, and one of
his tasks will be the identification and recruitment of other knowledgeable
members. Dr. Anderson is the Research Director of the Massachusetts General
Hospital Laser Center. Dr. Anderson has performed extensive research and written
scholarly papers on various areas of dermatology, including treatment by laser
irradiation procedures. Dr. Anderson holds a B.S. from the Massachusetts
Institute of Technology and an M.D. from the Harvard Medical School. See
"Business - Excimer Laser System for the Treatment of Psoriasis" and "Certain
Relationships and Related Transactions."
COMPENSATION OF
EXECUTIVE OFFICERS AND DIRECTORS
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning
compensation of certain of the Company's executive officers, including the
Company's Chief Executive Officer and all executive officers (the "Named
Executives") whose total annual salary and bonus exceeded $100,000, for the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION PAYOUTS
AWARDS
- -------------------------------------------------------------------------------------------------------------------
NAME AND RESTRICTED SECURITIES
PRINCIPAL OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION AWARDS (S) OPTIONS/SARS PAYOUTS COMPENSATION
($) ($) (#) ($) ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven A. Qualls 1997 $75,000 0 0 0 0 0 0
(CEO)(1) 1996 $75,000 0 0 $ 15,000 60,000 0 0
Raymond A. 1998 $125,008 0 0 0 0 0 0
Hartman (CEO)(2) 1997 $125,000(3) 0 0 0 250,000 0 270
Chaim Markheim (COO) 1998 $125,008 0 0 0 250,000 0 0
</TABLE>
- ------------------------
(1) Mr. Qualls served as the Company's Chief Executive Officer until October,
1997.
(2) Mr. Hartman became the Company's Chief Executive Officer in October, 1997.
(3) Includes paid and accrued salary for each such fiscal year.
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<PAGE>
OPTION/SAR GRANTS TABLE
The following table sets forth certain information concerning grants of
stock options to certain of the Company's executive officers, including the
Named Executives for the year ended December 31, 1998:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF
STOCK PRICE APPRECIATION
INDIVIDUALS GRANTS FOR OPTION TERM (1)
- ----------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
NUMBER OF % OF
SECURITIES TOTAL
UNDERLYING OPTIONS/
OPTIONS/ SARS EXERCISE
SARS GRANTED TO OR BASE
GRANTED EMPLOYEES PRICE EXPIRATION
NAME (#) IN FISCAL YEAR ($/SHARE)(1) DATE (1) 5% ($) 10%($)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Chaim Markheim 250,000 64% 2.875 4/10/03 107,794 276,838
</TABLE>
- -------------------------
1. This chart assumes a market price of $2.72 for the Common Stock, the
average of the bid and asked prices for the Company's Common Stock in the
Over-The-Counter Market as of December 31, 1998, as the assumed market price for
the Common Stock with respect to determining the "potential realizable value" of
the shares of Common Stock underlying the options described in the chart, as
reduced by any lesser exercise price for such options. Further, the chart
assumes the annual compounding of such assumed market price over the relevant
periods, without giving effect to commissions or other costs or expenses
relating to potential sales of such securities. The Company's Common Stock has a
very limited trading history. These values are not intended to forecast the
possible future appreciation, if any, price or value of the Common Stock.
OPTION EXERCISES IN 1998
No Named Executive exercised any stock option in 1998.
1995 NON-QUALIFIED OPTION PLAN
On January 2, 1996, the Company adopted the Company's 1995
Non-Qualified Option Plan for key employees, officers, directors and
consultants, and reserved up to 500,000 options to be granted thereunder. The
option exercise price is not less than 100% of market value on the date granted;
40% of granted options vest immediately; 30% vest beginning one year after
grant; and the remaining 30% vest and may be exercised beginning two (2) years
from grant.
No options may be exercised more than ten (10) years after grant,
options are not transferable (other than at death), and in the event of complete
termination "for cause" (other than death or disability) or "voluntary"
termination, all "unvested" options automatically terminate.
On January 2, 1996, the Company granted a total of 335,000
options at an exercise price of $1.50 per share to certain directors,
employees and consultants.
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<PAGE>
LIMITATION ON DIRECTORS' LIABILITIES; INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Certificate of Incorporation and Bylaws designate the
relative duties and responsibilities of the Company's officers, establish
procedures for actions by directors and stockholders and other items. The
Company's Certificate of Incorporation and Bylaws also contain extensive
indemnification provisions, which permit the Company to indemnify its officers
and directors to the maximum extent provided by Delaware law. Pursuant to the
Company's Certificate of Incorporation and under Delaware law, directors of the
Company are not liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty, except for liability in connection with a breach
of duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Delaware law or any transaction in which a
director has derived an improper personal benefit.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
The Company has no compensatory plans or arrangements which relate to
the resignation, retirement or any other termination of an executive officer or
key employee with the Company, a change in control of the Company or a change in
such executive officer's or key employee's responsibilities following a change
in control.
COMPENSATION AND AUDIT COMMITTEES; COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION
The Board has a Compensation Committee comprised of John J.
McAtee, Jr. and Alan R. Novak, and an Audit Committee comprised Chaim
Markheim, John J. McAtee, Jr. and Alan R. Novak. Messrs. McAtee and
Novak may be deemed to be outside/non-employee directors. The Board has no
standing committee on nominations or any other committees performing
equivalent functions.
The Compensation Committee reviews and approves the annual salary and
bonus for each executive officer (consistent with the terms of any applicable
employment agreement), reviews, approves and recommends terms and conditions for
all employee benefit plans (and changes thereto) and administers the Company's
stock option plans and such other employee benefit plans as may be adopted by
the Company from time to time.
The Audit Committee reports to the Board regarding the appointment of
the independent public accountants of the Company, the scope and fees of the
prospective annual audit and the results thereof, compliance with the Company's
accounting and financial policies and management's procedures and policies
relative to the adequacy of the Company's system of internal accounting
controls.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and beneficial holders of more than 10% of the Company's
Common Stock to file with the Commission initial reports of ownership and
reports of changes in ownership of such equity securities of the Company. Based
solely upon a review of such forms, or on written representations from certain
reporting persons that no other reports were required for such persons, the
Company believes that all reports required pursuant to Section 16(a) with
respect to its executive officers, directors and 10% beneficial stockholders for
the year ended December 31, 1998 were timely filed.
To the Company's knowledge, all other filing requirements of executive
officers and directors were timely complied with during the year ended December
31, 1998.
COMPENSATION OF DIRECTORS
Outside/non-employee members of the Board of Directors receive options
to purchase up to 20,000 shares of Common Stock as compensation, on an annual
basis, at an exercise price equal to the market price of the Common Stock on the
last trading day of the preceding year. The options vest at the rate of 5,000
options per
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<PAGE>
quarter during each quarter in which such person serves as a member of the
Board of Directors. The Company granted to each of John J. McAtee and Alan R.
Novak options to purchase up to 20,000 shares of Common Stock at an exercise
price of $2.875 per share for services rendered during 1998; all such options
are vested. The Company granted to each of Messrs. McAtee and Novak, option
to an additional 20,000 shares of Common Stock at an exercise price of
$2.8125 per share for services to be rendered during 1999. Of these options,
5,000 are vested as of the date of this Prospectus. Upon Warwick Alex
Charlton's joining the Company's Board of Directors on March 8, 1999, he was
granted options to purchase 20,000 shares of Common Stock at an exercise
price of $2.8125 per share for services to be rendered during 1999. Of these
options 5,000 are vested as of the date of this Prospectus. In addition, Mr.
Charlton was granted options, all of which are vested, to acquire up to
150,000 shares of Common Stock at $3.00 per share. Upon appointment of Steven
Girgenti and Harry Mittelman to the Board of Directors on April 20, 1999, Mr.
Girgenti and Dr. Mittelman were each granted options to purchase 15,000
shares of Common Stock at an exercise price of $2.8125 per share for services
to be rendered during 1999. None of these options are vested as of the date
of this Prospectus. In addition, Mr. Girgenti and Dr. Mittelman were each
granted options, all of which are vested, to acquire up to 50,000 shares of
Common Stock at $4.75 per share. See "Certain Relationships and Related
Transactions."
The Company has obtained directors' and officers' liability insurance
with a $2,500,000 limit of liability and a $2,500,000 excess coverage. The
policy period expires on February 24, 2000. The Company intends to renew such
policy or obtain comparable coverage after the expiration of such policy.
However, there can be no assurances to this effect.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONVERTIBLE DEBT AND CONVERSION OF CONVERTIBLE DEBT
In 1995, the Company sold an aggregate of $500,000 in six-month
convertible secured notes in a private transaction, pursuant to an exemption
from registration under Regulation S promulgated under the Securities Act. The
Company also issued to such persons warrants to purchase up to 500,000 shares of
Common Stock which expired in 1995 due to the Company's meeting of certain
filing requirements. The noteholders were also granted a transferable one-year
option to purchase 134,000 additional shares at $2.25 per share, and 134,000
shares at $3.00 per share, which were exercised in 1996, and 107,000 shares at
$3.75 per share, which expired without exercise. In January and April, 1996, the
notes were converted into an aggregate of 538,583 shares of Common Stock at a
conversion price of $0.96 per share. In April, 1996, an additional 30,000 shares
were issued pursuant to Regulation S as payment of past due rent valued at
$60,000.
During July and August, 1998, Acculase issued $1,000,000 of the
Acculase Notes to three accredited investors. The Acculase Notes were guaranteed
by the Company. Interest was payable annually and could be paid in cash or in
the Company's Common Stock at the Company's option. The entire amount of
principal was automatically converted in 500,000 shares of the Company's Common
Stock, at a conversion price of $2.00 per share, on December 31, 1998. In
addition, the Company issued 37,433 shares in payment of accrued interest as of
April 30, 1999. The shares issued in conversion of the Acculase Notes are being
registered in a registration statement of which this Prospectus forms a part.
As of March 31, 1999, PMG arranged for the Company to issue to 38
accredited investors $2,380,000 of units of its securities (the
"Units"), each Unit consisting of: (i) $10,000 principal amount of Convertible
Notes; and (ii) common stock purchase warrants to purchase up to 2,500 shares of
Common Stock (the "Unit Warrants"). The entire principal is due and payable in
one payment on the earlier of: (i) December 15, 1999; or (ii) the date that is
three business days after the Company consummates its next equity financing (the
"Subsequent Financing") in which the Company receives net proceeds of at least
$2,380,000 (the "Due Date"). Interest accruing on the Convertible Notes through
June 15, 1999, is payable on June 15, 1999. Interest accrued as of the earlier
of the Due Date or December 15, 1999, is payable on the earlier of the Due Date
or December 15, 1999. Payment of principal and interest on the Convertible Notes
is subordinate and junior in right of payment to the prior payment in full of
all senior debt of the Company. The Convertible Note holders may convert the
Convertible Notes and accrued and unpaid interest thereon, if any, into shares
of Common Stock at any time prior to
60
<PAGE>
maturity or receipt of prepayment into shares of Common Stock at a conversion
price of $2.00 per share. The Convertible Notes provide that the conversion
price is to be adjusted in the event that the Company issues shares of Common
Stock for consideration of less than $2.00 per share. In such event, the per
share conversion price will be adjusted to the issue price of such
additionally issued shares of Common Stock.
The Unit Warrants are exercisable into an initial 1,250 shares of
Common Stock at any time after purchase until March 31, 2004. The balance of the
Unit Warrants are exercisable into an additional 1,250 shares of Common Stock
(the "Contingent Shares") if the Unit holder has voluntarily converted at least
a portion of the principal amount of the Convertible Note that make up a portion
of the Unit into shares of Common Stock. The amount of Contingent Shares that
may be acquired by a Unit Warrant holder will be proportionate to the ratio of
the amount of principal of the Convertible Notes which are converted into shares
of Common Stock over the original principal amount of the Convertible Notes. The
exercise price of the Unit Warrants will be the lower of (i) $2.00 per share of
Common Stock; and (ii) the price per share of Common Stock in the Subsequent
Financing. The Unit Warrants provide that they may be adjusted in the event that
the Company issues shares of Common Stock for consideration of less than $2.00
per share. In such event, the per share exercise price of the Unit Warrants will
be adjusted to the issue price of such additionally issued shares of Common
Stock. All of the shares of Common Stock underlying the Convertible Notes and
the Unit Warrants are being registered in a registration statement of which this
Prospectus forms a part.
CERTAIN ISSUANCES TO FORMER AFFILIATES
In February, 1996, the Company issued 25,000 shares of Common Stock to
Susan E. Barnes, the wife of Bernard B. Katz, a former director and Chairman of
the Board of the Company, in consideration for her personal guaranty of $81,000
in lease obligations associated with the Company's Andover, Massachusetts
facility. In February, 1996, the Company agreed to issue to Ms. Barnes 50,000
shares of Common Stock at a value of $1.00 per share for services she arranged
to provide in connection with raising $1.5 million to finance the Company's
emergence from the Bankruptcy Proceeding.
In October, 1996, the Company issued an additional 100,000 shares of
Common Stock to Ms. Barnes in connection with a second guaranty of the Andover
lease and lease extension, after the lease went into default and the landlord
threatened immediate eviction. At the time of the issuance of these securities
the trading price of the Common Stock was approximately $2.80. This second
personal guaranty was secured by a pledge of 391,360 shares of her personally
owned Helionetics common stock. All guarantees of Ms. Barnes have been
terminated.
ISSUANCES OF SHARES, OPTIONS AND WARRANTS
On January 2, 1996, the Company adopted the Company's 1995
Non-Qualified Option Plan for key employees, officers, directors and
consultants, and reserved up to 500,000 shares of Common Stock for which options
could be granted thereunder. On January 2, 1996, the Company granted a total of
335,000 options at an exercise price of $1.50 per share to certain directors,
employees and consultants.
During 1996, the Company issued 151,000 shares of Common Stock and
options to purchase up to 62,500 shares of Common Stock in exempt transactions
to key employees and consultants for services rendered and as compensation at an
exercise price of $2.50 per share. Included were issuances to certain current
and former officers and directors for services rendered, as follows: (i) Steven
A. Qualls (10,000 shares), (ii) Chaim Markheim (5,000 shares) and (iii) Maxwell
Malone (5,000 shares).
During 1997, the Company issued a total of 105,000 shares of Common
Stock to Don Davis, Esq., the Company's former legal counsel, as a consultant in
connection with legal services rendered to the Company. The services included,
but were not limited to, general representation of the Company and securities
disclosure work in relation to the Company's continuing obligation to provide
reports pursuant to the Exchange Act. In addition, the Company issued to Raymond
A. Hartman options to acquire 250,000 shares of Common Stock at an exercise
price of $0.50 per share with a five (5) year term, contingent upon certain
performance contingencies. As of the date of this Prospectus, the Board
determined that such contingencies have been met.
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<PAGE>
On July 1, 1997, the Company granted a total of 108,500 options at an
exercise price of $1.00 per share to certain employees and consultants. On
October 31, 1997, the Company issued options to purchase up to 20,000 shares of
Common Stock at an exercise price of $1.00 per share to a former director of the
Company. In October, 1997, in satisfaction of all compensation owed by the
Company to K.B. Equities, Inc. ("KB Entities"), an affiliate of Mr. Katz and Ms.
Barnes, for consulting services rendered to the Company in 1997, the Board of
Directors granted options to acquire 100,000 shares of Common Stock to K.B.
Equities at an exercise price of $0.75 per share, and with a term of seven (7)
years. Mr. Katz resigned from the Board of Directors of the Company on October
9, 1997.
In August, 1997, the Company issued options to purchase up to 211,899
shares of Common Stock to the following persons, who are currently officers and
directors of the Company, at an exercise price of $1.25 per share with a term of
five (5) years: (i) Chaim Markheim (20,250 options), (ii) Raymond A. Hartman
(20,250 options), (iii) Alan R. Novak (71,399 options), and (iv) John J. McAtee,
Jr. (100,000 options).
On December 15, 1997, the Company issued Warrants to PMG and an
employee of PMG to purchase up to 300,000 shares of Common Stock at an exercise
price of $2.00 per share, which expire on December 15, 2002. The Warrants were
issued to PMG as compensation for investment banking and advisory services. The
300,000 shares underlying the Warrants are being registered in a registration
statement of which this Prospectus forms a part.
In April, 1998, the Company issued options to Chaim Markheim to
purchase up to 250,000 shares of Common Stock at an exercise price of $2.875 per
share with a five (5) year term.
In April, 1998, the Company issued options to purchase up to 100,000
shares of Common Stock, at the exercise price of $2.875 per share, with a
five-year term, and 20,000 shares of Common Stock, to certain consultants for
services rendered. The 20,000 shares were issued for services rendered at a
$1.00 per share.
Outside/non-employee members of the Board of Directors receive options
to purchase up to 20,000 shares of Common Stock as compensation, on an annual
basis, at an exercise price equal to the market price of the Common Stock on the
last trading day of the preceding year. The options vest at the rate of 5,000
options per quarter during each quarter in which such person has served as a
member of the Board of Directors. The Company granted to John J. McAtee and Alan
R. Novak options to purchase up to 20,000 shares of Common Stock at an exercise
price of $2.875 per share for services rendered during 1998. The Company granted
to Messrs. McAtee and Novak an additional 20,000 options to purchase a like
number of shares of Common Stock at an exercise price of $2.8125 per share for
services to be rendered during 1999. Of these options, 5,000 are vested as of
the date of this Prospectus.
On October 29, 1998, the Company and CSC entered into the CSC
Agreement, under which CSC is to develop a commercial strategy and to define and
obtain the required resources for the commercial exploitation of the Company's
excimer laser technology. For CSC's consulting services the Company has accrued
approximately $231,100 in fees and expenses. In addition, the Company is to pay
to CSC $157,600 as contingent compensation at such time as the Company raises at
least $6,000,000 in additional equity financing. See "Business - Agreement with
Computer Sciences Corporation."
Upon Warwick Alex Charlton's joining the Company's Board of Directors
on March 8, 1999, he was granted options to purchase 20,000 shares of Common
Stock at an exercise price of $2.8125 per share for services to be rendered
during 1999. In addition, Mr. Charlton was granted options, all of which are
vested, to acquire up to 150,000 shares of Common Stock at $3.00 per share. Of
these options 5,000 are vested as of the date of this Prospectus. Upon
appointment of Steven Girgenti and Harry Mittelman to the Board of Directors on
April 20, 1999, each was granted options to purchase 15,000 shares of Common
Stock at an exercise price of $2.8125 per share for services to be rendered
during 1999. None of these options are vested as of the date of this Prospectus.
In addition, Mr. Girgenti and Dr. Mittelman were each granted options, all of
which are vested, to acquire up to 50,000 shares of Common Stock at $4.75 per
share.
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<PAGE>
In 1999, in respect of the period August, 1998, through June, 1999,
the Company granted to its current legal counsel, Matthias & Berg LLP ("M& B"),
options to acquire an aggregate of 17,864 shares of the Company's Common Stock
at exercise prices of between $1.50 and $5.10 per share. The options are
exercisable for a period of 120 months from the date of grant. These options
were issued as a part of a fee agreement between the Company and M&B, whereby
M&B received options having an exercise price equal to 20% of its monthly fees
in the form of common stock of the Company valued at the closing bid price on
the last day of each month. M&B agreed to forego collection of such fees, and
use the uncollected fees to exercise the options by cancellation of the
outstanding fees.
On April 5, 1999, the Company issued to a non-executive employee
options to purchase 50,000 shares of the Company's Common Stock at an exercise
price of $3.1875. Such options vest, pursuant to a schedule, over a period of
five (5) years.
CERTAIN ISSUANCES OF SECURITIES
In September and October, 1997, the Company privately sold to 25
accredited investors a total of 679,500 restricted shares of Common Stock in a
private placement at a price of $1.25 per share. The price of the Common Stock
at the time of these transactions was approximately $3.50 per share. The
Company sold an additional 28,601 shares at a price of $1.25 per share in the
third quarter of 1997. The price of the Common Stock on the date of this
transaction was $2.56 per share. These funds were used in part to pay
outstanding accounts payable and to make a partial payment on delinquent Federal
and State taxes outstanding. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In September, 1997, PMG purchased from Helionetics, with the approval
of the Federal Bankruptcy Court in the pending Helionetics Chapter 11 Bankruptcy
proceeding, all debt owed by Acculase to Helionetics. In October, 1997, the
Company purchased the debt owing by Acculase, in the amount of $2,159,708 from
PMG in consideration of 800,000 shares of Common Stock.
In November, 1997, the Company issued 1,500,000 shares of Common Stock
and 750,000 warrants (the "Warrants") to 37 accredited investors, with an
exercise price of $4.00 per share and a term of five (5) years, in a private
placement, resulting in gross proceeds of $6,000,000 to the Company. The price
of the Common Stock on November 30, 1997, was $5.06 per share. The Company also
issued 150,000 warrants and paid a commission of $480,000 to PMG as a placement
agent fee. The Warrants have an exercise price of $4.00 per share and provide
that in the event that the Company issues shares of Common Stock for
consideration of less than $4.00 per share, the per share exercise price will be
adjusted to the issue price of such additionally issued shares of Common Stock.
In December, 1998, the Company issued shares of its Common Stock at $1.50 per
share, which to reduced the exercise price of the 750,000 Warrants and the
150,000 Warrants issued to PMG to $1.50 per share. The Shares underlying these
Warrants are being registered pursuant to a registration statement of which this
Prospectus forms a part. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Certain Relationships and Related
Transactions."
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<PAGE>
The Company has agreed to issue to PMG an additional 75,000 warrants
(the "Contingent Warrants") at a purchase price of $0.001 per share at such time
as any of the other 750,000 Warrants have been exercised. The Contingent
Warrants will be exercisable for a period of five (5) years following the date
of issue at an exercise price equal to the average closing bid price for the
Common Stock for the ten (10) trading days preceding the date of issue. The
Warrants may be redeemed by the Company, upon 30 days' notice, at a redemption
price of $0.10 per share if the closing bid price of the Common Stock exceeds
$8.00 per share for a period of thirty consecutive trading days.
In July, 1998, the Company granted warrants to acquire 300,000 shares
of Common Stock to PMG at an exercise price of $2.00 per share in consideration
for the guarantee, by PMG, of a lease of office space in Carlsbad, California by
the Company and the raising of a bridge loan of $1,000,000. Such Warrants are
exercisable at anytime until July 15, 2003. The shares underlying these Warrants
are being registered pursuant to a registration statement of which this
Prospectus forms a part. See "Certain Relationships and Related Transactions -
Convertible Debt and Conversion of Convertible Debt."
On December 31, 1998, the Company sold to Mr. and Mrs. Richard A.
Hansen an aggregate of 100,000 shares of the Company's restricted Common
Stock $1.50 per share. The price of the Common Stock at December 30, 1998,
was $2.50 per share. Mr. Hansen is the President of PMG, the Company's
investment banker. These Shares are being registered pursuant to a
registration statement of which this Prospectus forms a part. See "Certain
Relationships and Related Transactions."
OTHER TRANSACTIONS.
On October 29, 1998, the Company and CSC entered into the CSC
Agreement, under which CSC is to develop a commercial strategy and to define
and obtain the required resources for the commercial exploitation of the
Company's excimer laser technology. CSC provides consulting services to
various businesses, including the Company, regarding the introduction of
medical technology for commercialization. For CSC's consulting services the
Company has accrued approximately $231,100 in fees and expenses. In addition,
the Company is to pay to CSC $157,600 as contingent compensation at such time
as the Company raises at least $6,000,000 in additional equity financing.
Warwick Alex Charlton, Vice President of CSC, is also the Non-Executive
Chairman of the Board of Directors of the Company. See "Management."
AGREEMENT WITH HEALTHWORLD CORPORATION. As of May 11, 1999, the Company
entered into the agreement with Healthworld, of which Steven Girgenti, a
director of the Company, is Chairman and Chief Executive Officer, for provision
of various services relating to the marketing of the Company's products. The
services include: (i) advertising and promotion, (ii) development of market
research and strategy; and (iii) preparation and consulting on media and
publicity. The term of the agreement is indefinite but may be terminated by
either party on ninety days notice. Compensation for these services is
approximately $40,000 per month, plus reimbursement of expenses and payment of a
15% commission on media buys. Services beyond those budgeted by the parties are
to cost $104 per person hour. Under a separate agreement, Healthworld will
provide, as of October 1, 1999, (i) two fulltime managed-care specialists to
make calls on potential customers for a period of seven months at a cost of
$30,000 per month; (ii) 20 fulltime sale representatives to market among
dermatologists for a period of four months at a cost of $125,000 per month; and
(iii) certain general management services for a period of seven months at
$70,000 per month. Under separate agreements, Healthworld will provide certain
medical education and publishing services (approximately $700,000 in fees and
costs over a period in excess of one year) and general public relations services
($10,000 per month). See "Management."
As of May 21, 1999, the Company granted Rox Anderson options to acquire
up to 250,000 shares of Common Stock, exercisable at $5.16 per share, of
which 100,000 are currently vested. The remainder shall vest ratably over a
three-year period and, in addition, are contingent on either approval by the
FDA of a 510(k) submission by the Company or the FDA's approval of the
Company's excimer laser to be regulated as a Class II device for the
treatment of psoriasis. See "Business - Excimer Laser System for the
Treatment of Psoriasis" and "Management."
At December 31, 1997, 1998 and March 31, 1999, the Company had advances
outstanding to Chaim Markheim, Chief Operating Officer and Director of the
Company of $25,000, $54,600 and $54,600. As of March 31, 1999, the Company
owed a total of $128,622 to Raymond A. Hartman, President and a director of
the Company. This obligation represents the current balance of advances made
by Mr. Hartman during the previous 18 months. In addition, the Company has
accrued an obligation of $72,000 to Raymond A. Hartman for commissions earned
in connection with the Baxter Agreement.
The Company believes that all such transactions with affiliates of
the Company have been entered into on terms no less favorable to the Company
than could have been obtained from independent third parties. The Company
intends that any transactions and loans with officers, directors and five
percent (5%) or greater stockholders, following the date of this Prospectus,
will be on terms no less favorable to the Company than could be obtained from
independent third parties and will be approved by a majority of the
independent, disinterested directors of the Company.
64
<PAGE>
VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS
The following table reflects, as of July 22, 1999, the beneficial
Common Stock ownership of: (a) each director of the Company, (b) each Named
Executive (See "Compensation of Executive Officer and Directors"), (c) each
person known by the Company to be a beneficial holder of five percent (5%) or
more of its Common Stock, and (d) all executive officers and directors of the
Company as a group:
<TABLE>
<CAPTION>
PERCENT
NAME AND ADDRESS
OF BENEFICIAL OWNER NUMBER OF SHARES BEFORE OFFERING AFTER OFFERING
- ------------------- ---------------- --------------- --------------
<S> <C> <C> <C>
Chaim Markheim(1) 320,250 3.12 3.12
Raymond A. Hartman(2) 340,250 3.31 3.21
Steven A. Qualls(3) 64,666 ** **
Alan R. Novak(4) 150,000 1.49 1.24
John J. McAtee, Jr.(5) 209,000 2.08 1.09
Warwick Alex Charlton (6) 155,000 1.54 1.54
Steven Girgenti (7) 50,000 ** **
Harry Mittelman (8) 256,600 2.53 **
Calvin Hori and Hori 933,100 9.39 9.39
Capital Management, Inc.(9)
Platinum Partners, LP(9) 759,000 7.64 7.64
Pennsylvania Merchant Group (10) 869,840 8.34 2.44
Richard Hansen (10) 869,840 8.34 2.44
Joseph E. Gallo, Trustee (11) 987,943 9.88 2.63
Clifford Kalista (12) 550,000 5.40 2.46
All directors and
officers as a group
(8 persons)(13) 1,545,766 13.66 10.61%
</TABLE>
- -----------------------
# Pursuant to the rules of the Commission, shares of Common Stock which
an individual or group has a right to acquire within 60 days pursuant to the
exercise of options or warrants are deemed to be outstanding for the purpose of
computing the percentage ownership of such individual or group, but are not
deemed to be outstanding for the purpose of computing the percentage ownership
of any other person shown in the table.
** Less than 1%.
(FOOTNOTES CONTINUE ON THE FOLLOWING PAGE)
65
<PAGE>
(FOOTNOTES FROM THE PRIOR PAGE)
1. Includes options to purchase up to 320,250 shares of Common Stock.
Mr. Markheim's address is 2431 Impala Drive, Carlsbad, California 92008.
2. Includes options to purchase up to 330,250 shares of Common Stock
registered in his name and options to purchase up to 10,000 shares of Common
Stock registered in the name of his wife, Sandra Hartman. Mr. Hartman's
address is 2431 Impala Drive, Carlsbad, California 92008.
3. Includes 4,666 shares of Common Stock and options to purchase up
to 60,000 shares of Common Stock. Mr. Qualls' address is 12351 Research
Parkway, Orlando, Florida 32826.
4. Includes 28,601 shares of Common Stock, which are being
registered in a registration statement of which this prospectus forms a part
and options to purchase up to 96,399 shares of Common Stock. Does include
options to purchase up to 25,000 shares of Common Stock, which are vested,
and does not include 15,000 options, which may vest periodically during the
course of the year. Mr. Novak's address is 3050 K Street, NW, Suite 105,
Washington, D.C. 20007.
5. Includes 99,000 shares of Common Stock, including 84,000 of which
are being registered in a registration statement of which this prospectus
forms a part and options to purchase up to 110,000 shares of Common Stock.
Does include options to purchase up to 25,000 shares of Common Stock, which
are vested, and does not include 15,000 options, which may vest periodically
during the course of the year. Mr. McAtee's address is Two Greenwich Plaza,
Greenwich, Connecticut 06830.
6. Includes options to purchase 155,000 shares of Common Stock. Does
not include options to purchase up to 15,000 shares of Common Stock, which
may vest subject to certain schedules periodically during the course of the
year. Mr. Charlton's address is 304 Old Colony Road, Hartsdale, New York
10530.
7. Includes options to purchase 50,000 shares of Common Stock. Does
not include options to purchase up to 15,000 shares of Common Stock, which
may vest subject to certain schedules periodically during the course of the
year. Mr. Girgenti's address is Healthworld Corporation, 100 Avenue of the
Americas, 8th Floor, New York, New York 10013.
8. Includes 86,100 shares, warrants to purchase 33,000 shares and
options to purchase 50,000 shares of Common Stock. Dr. Mittelman owns, as
Trustee of four family trusts, $140,000 principal amount of convertible
promissory notes, convertible into 70,000 shares of Common Stock, and
warrants to purchase up to 35,000 shares of Common Stock, of which warrants
50% are currently vested. Only the vested warrants are included here. Does
not include options to purchase up to 15,000 shares of Common Stock, which
may vest subject to certain schedules periodically during the course of the
year. Does not include any additional shares which may be issued by the
Company in satisfaction of its interest obligation on the Convertible Notes.
Dr. Mittelman's address is 2200 Sand Hill Road, Suite 110, Menlo Park, CA
94025. See "Selling Stockholders and Plan of Distribution" and "Certain
Relationships and Related Transactions-Convertible Debt and Conversion of
Convertible Debt."
9. The listed persons, Calvin Hori ("Hori"), Hori Capital
Management, Inc. ("Hori Capital") and Platinum Partners, LP ("Platinum") have
jointly filed an Amendment No. 1 to Schedule 13D (the "Schedule 13D"), dated
December 1, 1997, with respect to 933,100 shares of Common Stock. The
Schedule 13D provides, in pertinent part, that: (a) Hori, Hori Capital and
Platinum may be deemed to be the beneficial owners of 759,000 of these
shares, and (b) Hori and Hori Capital may be deemed to be the beneficial
owners of an additional 174,100 of these shares. The address for each of the
listed persons is One Washington Mall, Boston, Massachusetts 02108.
10. Includes 369,840 shares of Common Stock and 500,000 Warrants to
purchase shares of Common Stock. This figure also includes 50,000 shares of
Common Stock owned by Penelope Hansen, wife of Richard Hansen in her own name.
The address of Pennsylvania Merchant Group Ltd. ("PMG") and Mr. Hansen is Four
66
<PAGE>
Falls Corporate Center, West Conshohocken, PA 19428. See "Certain
Relationships and Related Transactions-Convertible Debt and Conversion of
Convertible Debt."
11. Includes 925,443 shares of Common Stock and 62,500 Warrants to
purchase shares of Common Stock. Mr. Gallo is the Trustee of four (4) trusts,
which own these securities. All of the shares of Common Stock and the shares
underlying the Warrants are being registered in a registration statement of
which this Prospectus forms a part. Mr. Gallo's address is 600 Yosemite
Blvd., Modesto, CA 95354.
12. Includes 300,000 shares of Common Stock and 250,000 Warrants to
purchase shares of Common Stock. Mr. Kalista is employed by Pennsylvania
Merchant Group Ltd. His address is Mr. Hansen is Four Falls Corporate Center,
West Conshohocken, PA 19428
13. Includes 165,267 shares of Common Stock and options notes, and
warrants to purchase up to 1,380,899 shares of Common Stock. Does not include
options to purchase up to 72,500 shares of Common Stock, which may vest
subject to certain schedules during the course of the year.
DESCRIPTION OF SECURITIES
GENERAL
The Company's authorized capital stock consists of 25,000,000 shares
of Common Stock, par value $0.01 per share. As of the date of this
Prospectus, there were issued and outstanding 9,933,127 shares of Common
Stock. There were also issued and outstanding Warrants to purchase up to
2,095,000 shares of Common Stock and options to purchase up to 2,211,127
shares of Common Stock.
As of June 22, 1999, the Company's stockholders adopted an
amendment to the Company's Certificate of Incorporation to increase the
authorized number of shares of Common Stock to 25,000,000 shares.
COMMON STOCK
Holders of the Common Stock are entitled to cast one vote for each
share held of record, to receive such dividends as may be declared by the
Board of Directors out of legally available funds and to share ratably in any
distribution of the Company's assets after payment of all debts and other
liabilities, upon liquidation, dissolution or winding up. Holders of the
Common Stock do not have preemptive rights or other rights to subscribe for
additional shares, and the Common Stock is not subject to redemption. The
outstanding shares of Common Stock are validly issued, fully paid and
nonassessable.
Under Delaware law, each holder of a share of Common Stock is
entitled to one vote per share for each matter submitted to the vote of the
stockholders, and cumulative voting is allowed for the election of directors,
if provided for in the Certificate of Incorporation. The Company's
Certificate of Incorporation does not provide for cumulative voting.
WARRANTS
The Company has issued and outstanding Warrants to purchase
2,095,000 shares of Common Stock to various investors in the Company at
exercise prices ranging up to $2.00 per share, all of which are currently
exercisable. All of these Warrants are being registered in a registration
statement that this Prospectus forms a part. See "Certain Relationships and
Related Transactions."
67
<PAGE>
OPTIONS
The Company has issued and outstanding options to purchase 2,211,127
shares of Common Stock to various employees, officers, directors and
consultants of the Company at exercise prices ranging from $0.50 to $5.16
per share, 1,585,127 of which are currently exercisable. See "Compensation of
Executive Officers and Directors - 1995 Non-Qualified Stock Option Plan -
Compensation of Directors" and "Certain Relationships and Related
Transactions."
TRANSFER AGENT
The transfer agent for the Common Stock is American Stock Transfer &
Trust Co., Brooklyn, New York.
CERTAIN BUSINESS COMBINATIONS AND OTHER PROVISIONS OF THE CERTIFICATE OF
INCORPORATION
Delaware law contains a statutory provision, which is intended to
curb abusive takeovers of Delaware corporations. The effect of such
"anti-takeover" provisions may delay, deter or prevent a takeover of the
Company which the stockholders may consider to be in their best interests,
thereby possibly depriving holders of the Company's securities of certain
opportunities to sell or otherwise dispose of their securities at
above-market prices, or limit the ability of stockholders to remove incumbent
directors as readily as the stockholders may consider to be in their best
interests.
Section 203 of the Delaware General Corporation Law addresses the
problem by preventing certain business combinations of the corporation with
interested stockholders within three years after such stockholders become
interested. Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations
with a person or an affiliate, or associate of such person, who is an
"interested stockholder" for a period of three (3) years from the date that
such person became an interested stockholder unless: (i) the transaction
resulting in a person becoming an interested stockholder, or the business
combination, is approved by the Board of Directors of the corporation before
the person becomes an interested stockholder; (ii) the interested stockholder
acquired 85% or more of the outstanding voting stock of the corporation in
the same transaction that makes such person an interested stockholder
(excluding shares owned by persons who are both officers and directors of the
corporation, and shares held by certain employee stock ownership plans); or
(iii) on or after the date the person becomes an interested stockholder, the
business combination is approved by the corporation's board of directors and
by the holders of at least 66-2/3% of the corporation's outstanding voting
stock at an annual or special meeting, excluding shares owned by the
interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is: (i) the owner of fifteen percent (15%) or more
of the outstanding voting stock of the corporation or (ii) an affiliate or
associate of the corporation and who was the owner of fifteen percent (15%)
or more of the outstanding voting stock of the corporation at any time within
the three (3) year period immediately prior to the date on which it is sought
to be determined whether such person is an interested stockholder.
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
3,665,544 shares of Common Stock currently issued in the name of the
Selling Stockholders, 2,095,000 shares of Common Stock underlying the
Warrants and 1,308,218 shares of Common Stock underlying the Convertible
Notes issued in the name of certain of the Selling Stockholders. may be sold
from time to time directly by the Selling Stockholders to purchasers.
Alternatively, the Selling Stockholders may from time to time offer the
shares of Common Stock through underwriters, dealers or agents, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Selling Stockholders and/or the purchasers of the shares
for whom they may act as agent. The Selling Stockholders and any
underwriters, dealers or agents that participate in the distribution of the
shares of Common Stock may be deemed to be underwriters and any profit on the
sale of shares by them and any discounts, commissions or concessions received
by any such underwriters, dealers or agents may be deemed to be underwriting
discounts and commissions under the Securities Act. At the time a particular
offer of shares is made, to the extent required, a Prospectus Supplement will
be distributed which will set forth the specific shares to be sold and the
terms of the offering, including the name or names of any underwriters,
dealer-agents, any discounts, commissions or concessions allowed or reallowed
or paid to dealers.
68
<PAGE>
The shares of Common Stock may be sold from time to time in one or
more transactions at a fixed offering price, which may be changed, or at
varying prices determined at the time of sale or negotiated prices.
The Company has paid all of the expenses incident to the offering of
the shares of the Common Stock offered by the Selling Stockholders, other
than commissions and discounts of underwriters, dealers or agents and the
fees and expenses of counsel to the Selling Stockholders.
As of the date of this Prospectus, except for John J. McAtee, Jr.,
Alan R. Novak and Harry Mittelman, who are directors of the Company, and
Joseph E. Gallo, as trustee, Clifford Kalista, Richard Hansen and PMG, who
are 5% or greater beneficial stockholders, none of the Selling Stockholders
or their affiliates is a director, executive officer or 5% or greater
beneficial stockholder of the Company.
The following table sets forth certain information related to the
number of shares of Common Stock and shares underlying the Warrants, which
may be offered by the Selling Stockholders pursuant to this Prospectus:
<TABLE>
<CAPTION>
"WARRANT"
SHARES SHARES
SHARES UNDERLYING UNDERLYING
UNDERLYING CONVERTIBLE CONVERTIBLE
SELLING STOCKHOLDERS SHARES WARRANTS (1) NOTES (2) NOTES (2)
- -------------------- ------ ------------ --------- -----------
<S> <C> <C> <C> <C>
Abruzzese, Frank A. 5,000
Accrued Investments, Inc. 15,000 7,500
Adams, Dennis 42,500 21,250
Allsopp, David S. 57,900
Arkin, Robert 25,000 12,500
Auch, Fran M. 16,500
Beahan, Kenneth J. 10,000
Bowler, Mary E. 7,000
Brown, William P. 10,000
Campbell, Frank J., III 100,000
Campbell, Frank; IRA 50,000 25,000
Chapman, Donald 100,000 50,000
Charles, Steven G. and Riki 2,000
Corby, Dan 5,000 2,500
Coutts (Jersey) Limited 240,000 20,000
DeCarlo, Anthony & Ellen 5,000 2,500
DeMoss Fdn 100,000 50,000
Ecker Family Partnership 15,000 7,500
Ecker, Amir 20,000 10,000
Ecker, Amir L. (3) 160,000 37,500
Ecker, Amir; IRA 15,000 7,500
EDJ Limited 20,000 10,000 15,000 7,500
Edwards, Joanne 12,500 6,250
Equities Fund, LP 125,000 62,500
Evancich & Joseph M. & Linda 10,000
Faillace, Peter J., Jr. (4) 10,000
Frary, Richard S. 15,000 7,500
Fuller, Jay M. & Sandee 25,000 12,500
69
<PAGE>
Furgiuele, Kathleen M. 1,000
Gale, James, Trustee 12,500 6,250
Gallo, Joseph E., Trustee, 179,148
Gallo, Joseph E., Trustee, 179,148
Gallo, Joseph E., Trustee, 179,147
Gallo, Joseph E., Trustee, 125,000 62,500
Gibbs, Richard 26,875 8,438
Goodwin, Richard C. 25,000 12,500
Gruber, Jon D. and Linda W. (5) 87,500 43,750
Haimovitch, Larry 12,500 6,250
Hansen, Penelope S. and Richard A.(6) 205,000
Holmes Partners, LP 12,500 6,250
Jubilee Partners Family Limited 10,000
Kalista, Clifford (7) 50,000 250,000
Kilkowski, James 20,000
Lagunitas Partners, LP 162,500 81,250
Lancaster Investment Partners, LP 200,000 50,000 100,000 50,000
Legion Fund, Ltd. 25,000 12,500
Leicht, Phillip; Rollover IRA 25,000 12,500
Lennon, James J. and Carolyn 10,000
Losty, Mary M. 25,000 12,500
Martin, Larry 200,000 100,000
Martorelli, Michael A. 10,000
Mazer, Irving 5,625 2,812 45,000 22,500
Mazer, Irving-Special Acct 5,000 2,500
McAtee, John J., Jr. (8) 100,000
McKernan, Thomas & Ann 12,500 6,250
McQueen, Scott 10,000 5,000
Melgen, Saloman E. and Flor 50,000 25,000
Millridge Corporation 100,000
Mittelman, Harry & Brenda 15,000 7,500
Mittelman, Harry (9) 86,100 33,000
Mittelman, Harry,
(Trustee, Spencer Mittelman) 6,500 3,250
Mittelman, Harry, Rollover IRA 45,000 22,500
Mittelman, Harry, (Trustee, Drew Kaplow) 3,500 1,750
Novak, Alan R. (10) 28,601
O'Connor, Daniel J. 50,000 25,000
O'Connor, Pamela F. 25,000 12,500
O'Meara, J. Gregory 10,000
Papa, Vincent 10,000
Parke, David 5,000
Parlby, George 48,000 24,000
Pennsylvania Merchant Group 500,000 10,000 5,000
Peterson, Eric and Ellen 22,500 6,250 12,500 6,250
Petras, Robert J. & Christine M. 5,000 2,500
Phipps, Arnold A., III 20,000
70
<PAGE>
Porter Partners, LP 110,000 30,000 85,000 42,500
Post, Charles CRT 125,000 62,500
Prince, Leonide 37,500 18,750
Rawlings, Peter S. (11) 200,000
Robins, Barry 30,000 15,000
Robins, Charles 25,000
Robins, Charles M. 12,500 6,250
Roytman, Leonid 10,000 5,000
Roytman, Leonid; IRA 12,500 6,250
Shafran, George P. 25,000 12,500
Shafran, Tom 12,500 6,250
Sheridan, James M. 5,000
Simon, Linda D. and Joseph T. 5,000
Smith, Robert M. 10,000
Snavely, Peter D., Jr. (12) 52,500 6,250
Sonz Partners, LP 50,000 25,000
Stein, Elliot, Jr. 12,500 6,250
Teal Fund, LP 62,500 31,250
Watkinson, William J., IRA 10,000 5,000
Weaver, James M., IRA 50,000 25,000
Williams, R. Scott 20,000
Wittenbraker, Carolyn 6,000 3,000
Totals (13) 3,625,544 1,500,000 1,308,218 595,000
</TABLE>
(1) Consists of warrants issued in connection with various
placements of the Company's securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
(2) As of March 31, 1999, the Company issued $2,380,000 of
Units, each Unit consisting of: (i) $10,000 principal amount of Convertible
Notes; and (ii) common stock purchase warrants to purchase up to 2,500 shares
of Common Stock (the "Unit Warrants"). The Convertible Note holders may
convert the Convertible Notes and accrued and unpaid interest thereon, if
any, into shares of Common Stock at any time prior to maturity or receipt of
prepayment into shares of Common Stock at a conversion price of $2.00 per
share. The Convertible Notes provide that the conversion price is to be
adjusted in the event that the Company issues shares of Common Stock for
consideration of less than $2.00 per share. In such event, the per share
conversion price will be adjusted to the issue price of such additionally
issued shares of Common Stock.
The Unit Warrants are exercisable into an initial 1,250 shares of
Common Stock at any time after purchase until March 31, 2004. The balance of
the Unit Warrants are exercisable into an additional 1,250 shares of Common
Stock if the Unit holder has voluntarily converted at least a portion of the
principal amount of the Convertible Note that makes up a portion of the Unit
into shares of Common Stock. The amount of Shares that may be acquired by a
Unit Warrant holder will be proportionate to the ratio of the amount of
principal of the Convertible Notes which are converted into shares of Common
Stock over the original principal amount of the Convertible Notes. The
exercise price of the Unit Warrants will be the lower of (i) $2.00 per share
of Common Stock; and (ii) the price per share of Common Stock in the
Subsequent Financing. The Unit Warrants provide that they may be adjusted in
the event that
71
<PAGE>
the Company issues shares of Common Stock for consideration of less than
$2.00 per share. In such event, the per share exercise price of the Unit
Warrants will be adjusted to the issue price of such additionally issued
shares of Common Stock. All of the shares of Common Stock underlying the
Convertible Notes and the Unit Warrants are being registered in this
registration statement.
(3) Includes the number of Shares and Warrants registered in
the names of the persons set forth hereinafter, as follows: (a) Amir L. Ecker
(95,000 Shares and 12,500 Warrants), (b) Amir L. and Maria T. Ecker (7,500
Shares and 3,750 Warrants), (c) Amir L. Ecker IRA (30,000 Shares and 15,000
Warrants), and (d) The Ecker Family Partnership (27,500 Shares and 6,250
Shares).
(4) Includes the number of Shares and Warrants registered in
the names of the persons set forth hereinafter, as follows: (a) Peter J.
Faillace, Jr. (3,000 Shares), (b) Peter J. Faillace, Jr., C/F Matthew
Faillace (3,500 Shares), and (c) Peter J. Faillace, Jr., C/F Adam Faillace
(3,500 Shares).
(5) Includes the number of Shares and Warrants registered in
the names of the persons set forth hereinafter, as follows: (a) Jon D. and
Linda W. Gruber (35,700 Shares and 18,750 Warrants), and (b) Gruber & McBaine
International (50,000 Shares and 25,000 Warrants).
(6) Includes the number of Shares registered in the names of
the persons set forth hereinafter, as follows: (a) Penelope S. Hansen (35,000
Shares) and (b) Richard A. Hansen (70,000 Shares).
(7) Includes the number of Shares registered in the names of
the persons set forth hereinafter, as follows: (a) Clifford Kalista (47,000
Shares), and (b) Phyllis Kalista (3,000 Shares); and 250,000 Warrants
registered in the names of Clifford Kalista and Phyllis Kalista.
(8) Includes the number of Shares registered in the names of
the persons set forth hereinafter, as follows: (a) John J. McAtee, Jr.
(84,000 Shares), (b) Elizabeth P. McAtee (8,000 Shares), and (c) John C.C.
McAtee (8,000 Shares). Mr. McAtee disclaims beneficial ownership of the
16,000 shares registered in the names of Elizabeth P. McAtee and John C.C.
McAtee, who are his adult children. John J. McAtee, Jr. is a member of the
Board of Directors of the Company.
(9) Includes the number of Shares and Warrants registered in
the names of the persons set forth hereinafter, as follows: (a) Harry
Mittelman (20,100 Shares), (b) Brenda Mittelman (6,000 Shares and 3,000
Warrants), (c) Harry Mittelman, MD, Trustee, Harry Mittelman, MD, APC Pension
Profit Sharing Plan FBO Harry Mittelman (15,000 Shares and 7,500 Warrants),
and (d) Harry Mittelman, Trustee, The Harry Mittelman Revocable Trust, dated
October 22, 1996 (45,000 Shares and 22,500 Warrants). Also includes $140,000
principal amount of convertible promissory notes, convertible into 70,000
shares of Common Stock, and vested warrants to purchase up to 17,500 shares
of Common Stock. Dr. Mittelman is a member of the Board of Directors of the
Company.
(10) Mr. Novak is a member of the Board of Directors of the
Company.
(11) Includes the number of Shares registered in the names of
the persons set forth hereinafter, as follows: (a) Peter S. Rawlings (160,000
Shares), and (b) Sarah P. Rawlings (40,000 Shares).
(12) Includes the number of Shares and Warrants registered in
the names of the persons set forth hereinafter, as follows: (a) Perry D.
Snavely, Jr. (40,000 Shares), and (b) Perry D. Snavely IRA (12,500 Shares and
6,250 Warrants.)
(13) Includes 118,218 shares which may be issued by the Company
to pay accrued interest on the Convertible Notes. See Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
72
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this Prospectus, the Company had issued and
outstanding 9,933,127 shares of Common Stock. There are currently 2,881,888
shares of Common Stock which are restricted shares and 7,051,239 shares which
are freely tradeable or eligible to have the restrictive legend removed
pursuant to Rule 144(k) promulgated under the Securities Act. Further, the
Company has issued and outstanding options to purchase up to 2,211,127 shares
of Common Stock, 1,585,127 of which are currently exercisable, and Warrants
to purchase up to 2,095,000 shares of Common Stock.
Holders of restricted securities must comply with the requirements
of Rule 144 in order to sell their shares in the open market. In general,
under Rule 144 as currently in effect, any affiliate of the Company and any
person (or persons whose sales are aggregated) who has beneficially owned his
or her restricted shares for at least one year, may be entitled to sell in
the open market within any three-month period in brokerage transactions or to
market makers a number of shares that does not exceed the greater of: (i) 1%
of the then outstanding shares of the Company's Common Stock (approximately
99,331 shares immediately after this Offering), or (ii) the average weekly
trading volume reported in the principal market for the Company's Common
Stock during the four calendar weeks preceding such sale. Sales under Rule
144 are also subject to certain limitations on manner of sale, notice
requirement and availability of current public information about the Company.
Non-affiliates who have held their restricted shares for two years are
entitled to sell their shares under Rule 144 without regard to any of the
above limitations, provided they have not been affiliates of the Company for
the three months preceding such sale.
The Company can make no prediction as to the effect, if any, that
sales of shares of Common Stock or the availability of shares for sale will
have on the market price of Common Stock. Nevertheless, sales of significant
amounts of Common Stock could adversely affect the prevailing market price of
the Common Stock, as well as impair the ability of the Company to raise
capital through the issuance of additional equity securities.
LEGAL MATTERS
Certain matters with respect to the validity of the Shares offered
by the Selling Stockholders will be passed upon for the Company by Matthias &
Berg LLP, Los Angeles, California. As of the date of this Prospectus Matthias
& Berg LLP holds options for 17,864 shares of the Company's Common Stock
exercisable at various prices between $1.50 and $5.10 per share.
EXPERTS
The audited Consolidated Financial Statements and related Notes of
Laser Photonics, Inc. and subsidiaries including the consolidated balance
sheets at December 31, 1997 and 1998, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for the years
ended December 31, 1996, 1997 and 1998, included elsewhere in this
Prospectus, have been so included in reliance on the report of Hein +
Associates LLP, independent certified public accountants, given on the
authority of such firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission, a registration statement
on Form S-1 (the "Registration Statement") under the Securities Act with
respect to the Securities offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits
and schedules thereto. For further information with respect to the Company
and the Securities, reference is made to the Registration Statement and the
exhibits and schedules filed as a part thereof. Statements made in this
Prospectus as to the contents of any contract or any other document referred
to are not necessarily complete, and, in each instance, reference is made to
the copy of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference to such exhibits. The Registration Statement, including exhibits
and schedules thereto, may be inspected without charge at the Public
Reference Room of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
73
<PAGE>
Washington, D.C. 20549 and at the regional offices of the Commission at 7
World Trade Center, Suite 1300, New York, New York 10048; and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the
Registration Statement and the exhibits and schedules thereto may be obtained
from the Public Reference Room of the Commission at its principal office in
Washington, D.C. at prescribed rates. In addition, such materials may be
accessed electronically at the Commission's site on the World Wide Web,
located at http://www.sec.gov.
The Company is currently subject to the reporting requirements of
the Exchange Act and in accordance therewith files reports, proxy and
information statements and other information with the Commission. Such
reports, proxy and information statements and other information may be
inspected and copied at the Public Reference Room of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549; and at the
regional offices of the Commission at 7 World Trade Center, Suite 1300, New
York, New York 10048; and at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and copies of such materials can be obtained from the Public
Reference Section of the Commission at its principal office in Washington,
D.C. at prescribed rates. In addition, such materials may be accessed
electronically at the Commission's site on the World Wide Web, located at
http://www.sec.gov. The Company intends to furnish its stockholders with
annual reports containing audited financial statements and such other
periodic reports as the Company may determine to be appropriate or as may be
required by law.
74
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT...............................................F-2
CONSOLIDATED BALANCE SHEETS -- December 31, 1997 and 1998,
and March 31, 1999 (unaudited)...........................................F-3
CONSOLIDATED STATEMENTS OF OPERATIONS -- For the Years Ended
December 31, 1996, 1997 and 1998, and for the Three Months Ended
March 31, 1998 and 1999 (unaudited)......................................F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) -- For the
Years Ended December 31, 1996, 1997 and 1998 and for the Three Months
Ended March 31, 1999 (unaudited).........................................F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS -- For the Years Ended
December 31, 1996, 1997 and 1998, and for the Three Months Ended
March 31, 1998 and 1999 (unaudited)......................................F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................F-8
PRO FORMA FINANCIAL INFORMATION............................................F-27
PRO FORMA BALANCE SHEET -- March 31, 1999..................................F-28
PRO FORMA STATEMENT OF OPERATIONS -- For the Year Ended
December 31, 1999........................................................F-29
PRO FORMA STATEMENT OF OPERATIONS -- For the Three Months Ended
March 31, 1999...........................................................F-30
NOTES TO PRO FORMA FINANCIAL STATEMENTS....................................F-31
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Laser Photonics, Inc. and subsidiaries
San Diego, California
We have audited the accompanying consolidated balance sheets of Laser
Photonics, Inc. and subsidiaries (the "Company") as of December 31, 1997 and
1998, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for each of the years in the three year
period ended December 31, 1998. 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 audits 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 financial position of Laser
Photonics, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
April 8, 1999
F-2
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------------- ------------------
1997 1998 1999
------------------- ------------------ ------------------
<S> <C> <C> <C>
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,225,932 $ 174,468 $ 1,416,297
Accounts receivable, net of allowance for doubtful accounts
of $75,000, $68,000, and $68,000 (unaudited) at December
31, 1997 and 1998, and March 31, 1999 343,465 34,676 68,977
Receivable from related party 25,000 54,600 54,600
Inventories 951,209 458,343 491,717
Prepaid expenses 66,463 - 78,149
----------------- ---------------- -----------------
Total current assets 2,612,069 722,087 2,109,740
PROPERTY AND EQUIPMENT, net 141,432 127,190 134,774
DEBT ISSUANCE COSTS - - 138,833
PATENT COSTS, net of accumulated amortization of $23,965, $32,318
and $34,406 (unaudited) at December 31, 1997 and 1998, and
March 31, 1999 60,833 52,480 50,392
PREPAID LICENSE FEE, net of accumulated amortization of $41,667,
$541,667, and $666,667 (unaudited) at December 31, 1997 and
1998, and March 31, 1999 3,958,333 3,458,333 3,333,333
EXCESS OF COST OVER NET ASSETS OF ACQUIRED COMPANY, net of accumulated
amortization of $1,342,614, $1,862,296, and $1,992,217 (unaudited)
at December 31, 1997 and 1998, and March 31, 1999 995,955 476,273 346,352
OTHER ASSETS 39,682 33,932 29,532
----------------- ---------------- -----------------
TOTAL ASSETS $ 7,808,304 $ 4,870,295 $ 6,142,956
----------------- ---------------- -----------------
----------------- ---------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable and long-term debt $ 573,782 $ 620,581 542,277
Convertible notes payable - - 2,380,000
Payable to related party 36,222 136,002 128,622
Accounts payable 859,559 404,666 315,827
Accrued payroll and related expenses 400,222 393,339 335,809
Other accrued liabilities 631,808 666,852 872,293
Deferred revenue 95,000 343,906 250,000
----------------- ---------------- -----------------
Total current liabilities 2,596,593 2,565,346 4,824,828
NOTES PAYABLE AND LONG-TERM DEBT, less current portion 282,559 69,893 54,012
LIABILITIES IN EXCESS OF ASSETS HELD FOR SALE - 393,665 449,396
----------------- ---------------- -----------------
Total liabilities 2,879,152 3,028,904 5,328,236
----------------- ---------------- -----------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 8 and 12) - - -
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 15,000,000 shares authorized,
9,247,083, 9,895,684 and 9,895,684 (unaudited) shares
issued and outstanding at December 31, 1997 and 1998, and 92,471 98,957 98,957
March 31, 1999
Additional paid-in capital 14,625,564 17,439,904 18,924,429
Accumulated deficit (9,788,883) (15,697,470) (18,208,666)
----------------- ---------------- -----------------
Total stockholders' equity 4,929,152 1,841,391 814,720
----------------- ---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,808,304 $ 4,870,295 $ 6,142,956
----------------- ---------------- -----------------
----------------- ---------------- -----------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- ------------------------------
1996 1997 1998 1998 1999
---------------- ----------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(unaudited) (unaudited)
REVENUES:
Sales $ 2,901,454 $ 2,960,330 $ 1,580,422 $ 1,004,500 $ 253,104
Other - 855,000 769,026 95,000 93,906
---------------- ----------------- --------------- ------------- -------------
2,901,454 3,815,330 2,349,448 1,099,500 347,010
---------------- ----------------- --------------- ------------- -------------
COSTS AND EXPENSES:
Cost of sales 2,329,299 2,090,276 1,806,557 466,832 303,832
Selling, general and
administrative 1,158,841 2,181,304 3,608,108 603,618 564,965
Research and development
850,993 685,109 1,243,372 296,713 175,282
Bad debt expense related
to related party
receivable 662,775 48,000 - - -
Impairment recognized on
reorganization goodwill
1,486,823 - - - -
Depreciation and
amortization 1,214,876 741,481 1,088,649 267,462 272,138
---------------- ----------------- --------------- ------------- -------------
7,703,607 5,746,170 7,746,686 1,634,625 1,316,217
---------------- ----------------- --------------- ------------- -------------
LOSS FROM OPERATIONS
(4,802,153) (1,930,840) (5,397,238) (535,125) (969,207)
---------------- ----------------- --------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (392,000) (386,069) (510,948) (42,991) (1,541,546)
Interest income - 52,280 8,907 8,319 -
Other (163,815) (38,572) (6,008) - (443)
---------------- ----------------- --------------- ------------- -------------
LOSS BEFORE INCOME TAX
EXPENSE (5,357,968) (2,303,201) (5,905,287) (569,797) (2,511,196)
INCOME TAX EXPENSE - (3,900) (3,300) - -
---------------- ----------------- --------------- ------------- -------------
NET LOSS $ (5,357,968) $ (2,307,101) $ (5,908,587) $ (569,797) $ (2,511,196)
---------------- ----------------- --------------- ------------- -------------
---------------- ----------------- --------------- ------------- -------------
BASIC AND DILUTED LOSS PER
SHARE $ (0.95) $ (0.35) $ (0.64) $ (0.06) $ (0.25)
---------------- ----------------- --------------- ------------- -------------
---------------- ----------------- --------------- ------------- -------------
WEIGHTED AVERAGE SHARES
5,619,668 6,531,190 9,287,507 9,267,083 9,895,684
---------------- ----------------- --------------- ------------- -------------
---------------- ----------------- --------------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------
ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ --------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
BALANCES, January 1, 1996 5,000,000 $ 50,000 $ 2,760,028 $ (2,123,814) $ 686,214
Conversion of convertible debentures and
related accrued interest 538,583 5,386 519,896 - 525,282
Exercise of stock options 268,000 2,680 700,820 - 703,500
Stock issued for prior year services 148,500 1,485 171,640 - 173,125
Stock issued for rent 30,000 300 59,700 - 60,000
TStock issued as compensation 177,500 1,775 264,475 - 266,250
Capital contribution from Helionetics - - 853,669 - 853,669
Net Loss - - - (5,357,968) (5,357,968)
------------ --------- ------------ ------------- ----------
BALANCES, December 31, 1996 6,162,583 61,626 5,330,228 (7,481,782) (2,089,928)
Sale of stock and warrants, net of expenses 2,179,500 21,795 6,237,282 - 6,259,077
Stock issued for services 105,000 1,050 94,575 - 95,625
Stock issued to purchase debt and accrued
interest 800,000 8,000 2,151,708 - 2,159,708
Capital contributions from Helionetics - - 140,448 - 140,448
Compensation recognized upon issuance of stock
options - - 671,323 - 671,323
Net Loss - - - (2,307,101) (2,307,101)
------------ --------- ------------ ------------- ----------
BALANCES, December 31, 1997 9,247,083 92,471 14,625,564 (9,788,883) 4,929,152
Conversion of convertible notes payable 600,000 6,000 1,144,000 - 1,150,000
Sale of stock 28,601 286 35,465 - 35,751
Warrants issued for services - - 1,318,200 - 1,318,200
Stock issued for services 20,000 200 19,800 - 20,000
Allocation of proceeds from notes payable due
to beneficial conversion feature - - 296,875 - 296,875
Net Loss - - - (5,908,587) (5,908,587)
------------ --------- ------------ ------------- ----------
BALANCES, December 31, 1998 9,895,684 98,957 17,439,904 (15,697,470) 1,841,391
Allocation of proceeds from notes payable due
to beneficial conversion feature (unaudited) - - 1,115,625 - 1,115,625
Proceeds from issuance of warrants - - 368,900 - 368,900
Net loss (unaudited) - - - (2,511,196) (2,511,196)
------------ --------- ------------ ------------- ----------
BALANCES, March 31, 1999 (unaudited) 9,895,684 $ 98,957 $ 18,924,429 $ (18,208,666) $ 814,720
------------ --------- ------------ ------------- ----------
------------ --------- ------------ ------------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------- ------------------------------------
1996 1997 1998 1998 1999
------------------ ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING (unaudited) (unaudited)
ACTIVITIES:
Net loss $ (5,357,968) $ (2,307,101) $ (5,908,587) $ (569,797) $ (2,511,196)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization 1,214,876 741,581 1,088,650 267,462 272,138
Interest expense related
to beneficial
conversion feature and
amortization of discount
on convertible notes - - 296,875 - 1,512,292
Impairment recognized on
reorganization
goodwill 1,486,823 - - - -
Bad debt expense related
to related party
receivable 662,775 48,000 - - -
Allowance for doubtful
accounts - (25,000) - - -
Stock issued to pay
interest 25,282 168,268 - - -
Warrants issued for
services - - 1,318,200 - -
Stock issued for services - 95,625 20,000 20,000 -
Stock issued for rent 60,000 - - - -
Stock issued as
compensation 266,250 - - - -
Compensation recognized
upon issuance of
stock options - 671,323 - - -
Changes in operating
assets and
liabilities:
Accounts receivable (127,066) 64,970 168,789 89,635 (34,301)
Inventories (35,147) (60,198) 40,105 61,787 (10,842)
Prepaid expenses and 16,838 (63,350) (1,576) (65,940) (53,112)
other assets
Accounts payable 17,830 161,273 355,379 32,000 (123,442)
Accrued payroll and
related expenses 317,923 (270,259) 36,893 (31,622) (37,297)
Accrued research
consulting fees - - 291,000 - -
Other accrued 440,995 (313,983) (37,864) (13,216) 107,849
liabilities
Deferred revenue - 95,000 248,906 (95,000) (93,906)
-------------- ------------- --------------- ------------ --------------
Net cash used in
operating activities (1,010,589) (993,851) (2,083,230) (304,691) (971,817)
-------------- ------------- --------------- ------------ --------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisitions of property and
equipment (16,024) (37,541) (116,158) (68,216) (10,151)
Proceeds from disposal of
property and equipment - 19,174 - - -
Acquisition of patents and
licenses - (4,001,926) - - -
Advances to related parties (292,900) (73,000) (29,600) - -
-------------- ------------- --------------- ------------ ------------
Net cash used in
investing activities (308,924) (4,093,293) (145,758) (68,216) (10,151)
-------------- ------------- --------------- ------------ --------------
</TABLE>
(CONTINUED)
F-6
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------- ------------------------------------
1996 1997 1998 1998 1999
------------------ ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES: (unaudited) (unaudited)
Proceeds from sale of stock and
warrants - 6,259,077 35,751 - -
Proceeds from notes payable 92,952 71,094 1,276,960 - 159,226
Payments on notes payable (67,647) (157,543) (135,187) (74,129) (148,829)
Proceeds from issuance of
convertible notes payable and
warrants - - - - 2,380,000
Payments for debt and warrant
issuance costs - - - - (166,600)
Capital contributions from Parent
Company 529,622 140,448 - - -
Proceeds from exercise of stock
options 703,500 - - 35,751 -
-------------- ------------- --------------- ------------ ----------------
Net cash provided by (used
in) financing activities 1,258,427 6,313,076 1,177,524 (38,378) 2,223,797
-------------- ------------- --------------- ------------ ----------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (61,086) 1,225,932 (1,051,464) (411,285) 1,241,829
CASH AND CASH EQUIVALENTS, beginning
of period 61,086 - 1,225,932 1,225,932 174,468
-------------- ------------- --------------- ------------ ----------------
CASH AND CASH EQUIVALENTS, end of
period $ - $ 1,225,932 $ 174,468 $ 814,647 $ 1,416,297
-------------- ------------- --------------- ------------ ----------------
-------------- ------------- --------------- ------------ ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 189,021 $ 158,939 $ 137,572 $ - $ -
-------------- ------------- --------------- ------------ ----------------
-------------- ------------- --------------- ------------ ----------------
Income taxes $ - $ - $ - $ - $ -
-------------- ------------- --------------- ------------ ----------------
-------------- ------------- --------------- ------------ ----------------
Non-cash transactions:
Conversion of convertible
debentures to common
stock $ 500,000 $ - $ 1,150,000 $ - $ -
-------------- ------------- --------------- ------------ ----------------
-------------- ------------- --------------- ------------ ----------------
Note payable issued to
acquire leasehold
improvements $ - $ - $ 70,000 $ - $ -
-------------- ------------- --------------- ------------ ----------------
-------------- ------------- --------------- ------------ ----------------
Stock issued to purchase debt
and accrued interest
$ - $ 2,159,708 $ - $ - $ -
-------------- ------------- --------------- ------------ ----------------
-------------- ------------- --------------- ------------ ----------------
Stock issued for accrued
prior year services $ 173,125 $ - $ - $ - $ -
-------------- ------------- --------------- ------------ ----------------
-------------- ------------- --------------- ------------ ----------------
Reclassification of
Helionetics advances to
additional paid-in
capital $ 324,047 $ - $ - $ - $ -
-------------- ------------- --------------- ------------ ----------------
-------------- ------------- --------------- ------------ ----------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-7
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
1. ORGANIZATION AND NATURE OF OPERATIONS:
NATURE OF OPERATIONS -- Laser Photonics, Inc. and subsidiaries (the
"Company") operates in one segment and is principally engaged in the
development, manufacture and marketing of laser systems and accessories
for medical and scientific applications and, through its approximately
76% owned subsidiary, AccuLase, Inc., is developing excimer laser and
fiber optic equipment and techniques directed toward the treatment of
coronary heart disease.
BANKRUPTCY FILING AND PLAN OF REORGANIZATION - On May 13, 1994, the
Company filed a voluntary petition of reorganization with the U.S.
Bankruptcy Court in the Middle District of Florida for protection under
Chapter 11 of Title 11 of the U.S. Bankruptcy Code. Out of the
reorganization, Helionetics, Inc. (Helionetics) acquired a 75% interest
in the Company in exchange for cash and the contribution of its 76.1%
interest in AccuLase, Inc. Helionetics has since filed for bankruptcy
and sold its interests such that it is no longer an owner of the
Company.
The acquisition of AccuLase has been accounted for as a purchase and
the results of operations of AccuLase have been included in these
consolidated financial statements since May 23, 1995.
After emerging from the reorganization, all assets and liabilities of
the Company were restated to reflect their reorganization value in
accordance with procedures specified in Accounting Principles Board
Opinion 16 "BUSINESS COMBINATIONS" (APB16) as required by SOP 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code." The portion of the reorganization value that could not be
attributed to specific tangible or identified intangible assets was
classified as reorganization value in excess of amounts allocable to
identifiable assets ("Reorganization Goodwill") and was being amortized
over five years. Because of the magnitude of the Company's losses since
emerging from bankruptcy, the balance was considered impaired and
written off as of December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries,
Laser Analytics, Inc. and AccuLase, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.
STATEMENT OF CASH FLOWS -- For purposes of the statements of cash
flows, the Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS -- In the event that
facts and circumstances indicate that the cost of long lived assets may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying
amount to determine if a write-down to market value or discounted cash
flow value is required.
F-8
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(CONTINUED)
STOCK BASED COMPENSATION -- The Company has elected to follow
Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES" (APB25) and related interpretations in accounting
for its employee stock options. In accordance with FASB Statement
No. 123 "ACCOUNTING FOR STOCK-BASED COMPENSATION" (FASB123), the
Company will disclose the impact of adopting the fair value accounting
of employee stock options. Transactions in equity instruments with
non-employees for goods or services have been accounted for using the
fair value method as prescribed by FASB123.
REVENUE RECOGNITION -- Sales revenues are recognized upon shipment of
products to customers. Deferred revenue relates to payments received
under the Baxter Agreement (See Note 12) in advance of delivery of
related product.
INVENTORIES -- Inventories are stated at the lower of cost or market,
determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation of property and equipment is calculated using the
straight-line method over the estimated useful lives (ranging from 3 to
7 years) of the respective assets. The cost of normal maintenance and
repairs is charged to operating expenses as incurred. Material
expenditures which increase the life of an asset are capitalized and
depreciated over the estimated remaining useful life of the asset. The
cost of properties sold, or otherwise disposed of, and the related
accumulated depreciation or amortization are removed from the accounts,
and any gains or losses are reflected in current operations.
INTANGIBLE ASSETS -- Patents and license fees are carried at cost less
accumulated amortization which is calculated on a straight-line basis
over the estimated useful lives of the assets, which range from eight
to twelve years.
Excess of cost over net assets of acquired company represents the
goodwill recorded by Helionetics for the purchase of AccuLase that has
been "pushed down" to the Company. The balance is being amortized using
the straight-line basis over 5 years.
Management believes these intangibles are recoverable from future
revenue upon commercialization of the excimer laser product and, in its
opinion, are not impaired at December 31, 1997 and 1998.
ACCRUED WARRANTY COSTS -- Estimated warranty costs are provided for at
the time of sale of the warranted product. The Company generally
extends warranty coverage for one year from the date of sale.
USE OF ESTIMATES -- The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles requires the Company's management to make estimates and
assumptions that affect the amounts reported in these financial
statements and accompanying notes. Actual results could differ from
those estimates.
The Company's financial statements are based upon a number of
significant estimates, including the allowance for doubtful accounts,
obsolescence of inventories, the estimated useful lives selected for
property and equipment and intangible assets, realizability of deferred
tax assets, estimated future warranty costs, and
F-9
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(CONTINUED)
penalties and interest for delinquent payroll taxes. Due to the
uncertainties inherent in the estimation process, it is at least
reasonably possible that these estimates will be further revised in
the near term and such revisions could be material.
RESEARCH AND DEVELOPMENT -- Research and development costs are charged
to operations in the period incurred.
CONCENTRATIONS OF CREDIT RISK -- Credit risk represents the accounting
loss that would be recognized at the reporting date if counterparties
failed completely to perform as contracted. Concentrations of credit
risk (whether on or off balance sheet) that arise from financial
instruments exist for groups of customers or counterparties when they
have similar economic characteristics that would cause their ability to
meet contractual obligations to be similarly affected by changes in
economic or other conditions described below. In accordance with FASB
Statement No. 105, "DISCLOSURE OF INFORMATION ABOUT FINANCIAL
INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH
CONCENTRATIONS OF CREDIT RISK" the credit risk amounts shown do not
take into account the value of any collateral or security.
The Company operates primarily in one industry segment and a geographic
concentration exists because the Company's customers are generally
located in the United States. Financial instruments that subject the
Company to credit risk consist principally of accounts receivable.
As of December 31, 1998, the Company maintained cash in banks that was
approximately $28,000 in excess of the federally insured limit.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The estimated fair values for
financial instruments under FAS No. 107, "DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS", are determined at discrete points in time
based on relevant market information. These estimates involve
uncertainties and cannot be determined with precision. The fair value
of cash is based on its demand value, which is equal to its carrying
value. The fair values of notes payable are based on borrowing rates
that are available to the Company for loans with similar terms,
collateral, and maturity. The estimated fair values of notes payable
approximate their carrying values.
INCOME TAXES -- The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards No. 109, "ACCOUNTING
FOR INCOME TAXES". Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
LOSS PER COMMON AND COMMON EQUIVALENT SHARES -- Basic earnings per
share excludes dilution and is calculated by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the entity. Common
F-10
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(CONTINUED)
stock equivalents as of December 31, 1996, 1997 and 1998 were
anti-dilutive and excluded in the earnings per share computation.
IMPACT OF RECENTLY ISSUED STANDARDS -- In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133 (FASB133), "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES," This statement is effective for fiscal years
beginning after June 15, 1999. Earlier application is encouraged;
however, the Company does not anticipate adopting FASB133 until the
fiscal year beginning January 1, 2000. FASB133 requires that an entity
recognize all derivatives as assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
Company does not believe the adoption of FASB133 will have a material
impact on assets, liabilities or equity. The Company has not yet
determined the impact of FASB133 on the income statement or the impact
on comprehensive income.
RECLASSIFICATIONS -- Certain reclassifications have been made to prior
year's consolidated financial statements to conform with the current
presentation. Such reclassifications had no effect on net loss.
INTERIM FINANCIAL INFORMATION -- The March 31, 1998 and 1999 financial
statements have been prepared by the Company without audit. In the
opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring accruals)
necessary for a fair presentation of the Company's financial position
as of March 31, 1999 and the results of their operations and cash flows
for the three month periods ended March 31, 1998 and 1999. The results
of operations for the three month periods ended March 31, 1998 and 1999
are not necessarily indicative of those that will be obtained for the
entire fiscal year.
3. BASIS OF PRESENTATION:
As shown in the accompanying financial statements, the Company has
reported significant net losses for the years ended December 31, 1996,
1997, 1998 and the three months ended March 31, 1999 resulting in an
accumulated deficit of $18,208,666 as of March 31, 1999.
During 1997 and 1998, the Company took steps to mitigate the losses and
enhance its future viability, as follows: AccuLase entered into a
Master Technology Agreement with Baxter Healthcare Corporation (see
Note 12) under which AccuLase has received $1,550,000 and will receive
additional purchase commitments and future royalty payments. During
1998, the Company received proceeds of $1,150,000 through the issuance
of convertible debentures, which were converted into 600,000 shares of
the Company's common stock on December 31, 1998. The Company's board of
directors authorized management to pursue the sale of the assets of
Laser Photonics, Inc. and Laser Analytics, Inc. or consider the
closure of their operations.
F-11
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
(CONTINUED)
Additionally, during March 1999, the Company issued convertible notes
generating gross proceeds of approximately $2,400,000 to the Company.
Also, the Company anticipates delivering certain lasers to Baxter under
its agreement with them during the second quarter of 1999 which will
generate an additional $600,000 cash to the Company. Finally,
management expects to raise additional working capital through the
issuance of debt and equity securities. Management believes that these
actions will allow the Company to continue as a going concern.
4. INVENTORIES:
Inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------- ---------------
1997 1998 1999
--------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Raw materials $ 1,255,107 $ 229,199 $ 242,573
Work-in-progress 435,854 249,144 249,144
Finished goods 79,772 - -
--------------- --------------- ---------------
1,770,733 478,343 491,717
Allowance for obsolescence (819,524) (20,000) -
--------------- --------------- ---------------
$ 951,209 $ 458,343 $ 491,717
=============== =============== ===============
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------- ---------------
1997 1998 1999
--------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Machinery and equipment $ 248,439 $ 18,434 $ 19,076
Furniture and fixtures 53,708 49,988 57,471
Leasehold improvements - 76,688 78,716
--------------- --------------- ---------------
302,147 145,110 155,263
Accumulated depreciation
and amortization (160,715) (17,920) (20,489)
--------------- --------------- ----------------
$ 141,432 $ 127,190 $ 134,774
=============== =============== ================
</TABLE>
Depreciation expense amounted to $258,304, $171,777, $60,615 $10,453,
and $15,129 at December 31, 1996, 1997 and 1998 and for the three
months ended March 31, 1998 and 1999, respectively.
F-12
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
6. OTHER ACCRUED LIABILITIES:
Other accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------- --------------------
1997 1998 1999
-------------------- -------------------- --------------------
<S> <C> <C> <C>
(Unaudited)
Accrued consulting fees $ - $ 291,000 $ 291,000
Accrued interest 87,482 163,983 170,503
Accrued property taxes 123,828 41,918 43,991
Accrued royalty 54,733 62,020 62,020
Accrued warranty 100,000 - 49,991
Customer deposits 76,588 - 102,628
Other accrued liabilities 189,177 107,931 152,160
----------------- ---------------- -----------------
$ 631,808 $ 666,852 $ 872,293
----------------- ---------------- -----------------
----------------- ---------------- -----------------
</TABLE>
7. CONVERTIBLE NOTES PAYABLE:
As of March 31, 1999, the Company issued to various investors
securities consisting of: (i) $2,380,000 principal amount of 7% Series
A Convertible Subordinated Notes (the "Subordinated Notes"); and (ii)
common stock purchase warrants to purchase up to 595,000 shares of
Common Stock (the "Unit Warrants"). Interest accrued through June 15,
1999 is payable on June 15, 1999. The principal amount plus interest
accrued from June 15, 1999 is due on December 15, 1999 or upon
subsequent equity financing which raises net proceeds of at least
$2,380,000. The Subordinated Note holders may convert the Subordinated
Notes and accrued and unpaid interest thereon, if any, into shares of
Common Stock at any time prior to maturity into shares of Common Stock
at a conversion price of $2.00 per share. The Subordinated Notes
provide that the conversion price is to be adjusted in the event that
the Company issues share of Common Stock for consideration of less than
$2.00 per share. In such event, the per share conversion price will be
adjusted to the issue price of such additionally issued shares of
Common Stock.
The Unit Warrants are exercisable into an initial 297,500 shares of
Common Stock at any time after purchase until March 31, 2004. The
balance of the Unit Warrants are exercisable into an additional 297,500
shares of Common Stock (the "Contingent Shares") if the Unit holder has
voluntarily converted at least a portion of the principal amount of the
Subordinated Note that make up a portion of the Unit into shares of
Common Stock. The amount of Contingent Shares that may be acquired by a
Unit Warrant holder will be proportionate to the ratio of the amount of
principal of the Subordinated Notes which are converted into shares of
Common Stock over the original principal amount of the Subordinated
Notes. The exercise price of the Unit Warrants is $2.00 per share of
Common Stock. The Unit Warrants provide that they may be adjusted in
the event that the Company issues shares of Common Stock for
consideration of less than $2.00
F-13
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
per share. In such event, the per share exercise price of the Unit
Warrants will be adjusted to the issue price of such additionally
issued shares of Common Stock.
Gross proceeds from the securities were $2,380,000. Of these
proceeds, $396,667 has been allocated to the warrants. The market
price of the Company's common stock on the commitment date was $2.75
per share, resulting in a beneficial conversion of $0.75 per share.
The aggregate amount of the beneficial conversion was $1,115,625.
The discount on the notes related to the beneficial conversion and
warrants was charged to interest expense on the date of issuance.
8. NOTES PAYABLE AND LONG-TERM DEBT:
Notes payable and long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------- -----------------
1997 1998 1999
---------------- ---------------- -----------------
<S> <C> <C> <C>
(Unaudited)
Notes payable -- unsecured creditors, interest at prime rate,
quarterly interest only payments beginning October 1, 1995,
principal due October 1, 1999, unsecured. $ 282,559 $ 282,559 $ 282,559
Notes payable -- unsecured creditors, interest at prime rate,
quarterly interest only payments beginning October 1, 1995,
principal due October 1, 1999, unsecured. Interest past due. 165,298 165,298 165,298
Note payable -- creditor, interest at 10%, monthly interest only
payments through May 5, 1997, thereafter monthly interest and
principal payments of $6,384 through May 1999, unsecured.
Payments past due. 127,860 127,860 127,860
Note payable -- U.S. Treasury, interest at 9%, payable in
monthly principal and interest installments through July
2000, unsecured. Payments past due. 131,094 58,554 63,831
Notes payable -- various creditors, interest at 9%, payable in various
monthly principal and interest installments through July 2000,
unsecured. Payments past due. 100,726 85,250 107,650
</TABLE>
F-14
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------- -----------------
1997 1998 1999
---------------- ---------------- -----------------
<S> <C> <C> <C>
(Unaudited)
Note payable -- creditor, interest at 9%, payable in monthly
principal and interest installments of $1,258 through
January 2001, collateralized by personal property of the
Company. Payments past due. 48,804 28,813 22,519
Note payable -- lessor, interest at 10%, payable in monthly
principal and interest installments of $1,775 through
December 31, 2002, unsecured. - 70,000 66,394
------------- ------------- -------------
856,341 818,334 836,111
Less amount included in liabilities in excess of assets held
for sale - (127,860) (239,822)
Less current maturities (573,782) (620,581) (542,277)
------------- ------------- -------------
$ 282,559 $ 69,893 $ 54,012
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
As a result of the past due payments on some of the notes listed
above, the notes are callable at the option of the holder.
Therefore, these notes have been classified as current. Aggregate
maturities required on notes payable and long-term debt at December
31, 1998 are due in future years as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 748,441
2000 26,274
2001 23,425
2002 20,194
-----------------
$ 818,334
-----------------
-----------------
</TABLE>
9. STOCKHOLDERS' EQUITY:
In 1995, the Company sold an aggregate of $500,000 in six month
convertible, secured notes in a private transaction to four offshore
corporations. In January and April 1996, the notes and related accrued
interest were converted into 538,583 shares of common stock of the
Company.
In conjunction with the issuance of convertible notes payable in 1995,
the Company granted to the note holders a transferable one year option
to purchase 375,000 additional shares of the Company's common stock,
exercisable as follows: (1) 134,000 shares at $2.25 per share, (2)
134,000 shares at $3.00 per share, and (3) 107,000 shares at $3.75 per
share. During July and August of 1996, 268,000 of these options were
exercised for proceeds of $703,500. The remaining 107,000 options
expired during 1996.
On January 2, 1996, the Company adopted the 1995 Non-Qualified Option
Plan (the Plan) for key employees, officers, directors, and
consultants, and provided for up to 500,000 options to be issued
F-15
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
thereunder. The option exercise price shall not be less than 100% of
market value on the date granted, 40% of granted options vest
immediately and may be exercised immediately; 30% vest and may be
exercised beginning 12 months after grant; and the remaining 30% vest
and may be exercised beginning 24 months from grant. No options may be
exercised more than 10 years after grant, options are not transferable
(other than at death), and in the event of complete termination "for
cause" (other than death or disability) or "voluntary" termination, all
"unvested" options automatically terminate.
In January 1996, the Board approved the grant of options to certain
key employees and consultants, to purchase 335,000 shares of common
stock under the Plan. On the date of grant, 110,000 options were
vested and the balance vested in 1997 and 1998. The options were
granted with an exercise price of $1.50 per share and are
exercisable through January 2006.
In February 1996, the board approved the issuance of 50,000 shares
of common stock to the Company's chairman, and 98,500 shares of
common stock and options to purchase 62,500 shares of common stock
to consultants for services rendered during 1995. The options were
granted with an exercise price of $2.50 per share, are fully vested
and are exercisable through February 2001.
In April 1996, the board approved the issuance of 30,000 shares of
common stock as payment of past due rent valued at $60,000.
In October 1996, the Board approved the issuance of 125,000 shares
of common stock to the Company's chairman for consulting services
rendered and 52,500 shares of common stock to employees and
consultants for services rendered. The Company has recognized
$266,250 in compensation expense related to these services for the
year ended December 31, 1996.
During May 1997, the Board granted options to purchase 250,000
shares of common stock at $0.50 per share to the Company's
president. The options vest immediately and expire in May 2002. The
Company has recognized $62,500 in compensation expense related to
these options for the year ended December 31, 1997.
On July 1, 1997, the Board approved the grant of options to certain
employees and consultants to purchase 108,500 shares of common stock
at an exercise price of $1.00 per share. The options vest
immediately and expire in July 2007. The Company has recognized
$56,030 in compensation expense related to these options for the
year ended December 31, 1997.
During August 1997, the Board granted options to purchase 211,899
shares of common stock at $1.25 per share to certain officers and
directors of the Company. The options vest immediately and expire in
August 2002. The Company has recognized $172,168 in compensation
expense related to these options for the year ended December 31, 1997.
In August 1997, the Company's board of directors authorized the sale
of 750,000 shares of common stock at $1.25 per share through an
investment banker ("the investment banker") pursuant to Regulation D
under the Securities Act of 1933. In 1997, the Company sold 679,500
shares of common stock for $849,375. In 1998, the Company sold
28,601 shares of common stock for $35,751.
F-16
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
On September 30, 1997, an investment banker purchased from the
Helionetics bankruptcy estate the note payable from AccuLase to
Helionetics. During October 1997, the investment banker sold such
note to the Company for 800,000 shares of the Company's common
stock. The stock was valued at $2,159,708 which represents the cash
payment the Company could have made to settle the principal and
accrued interest on the note.
On October 10, 1997, the Board granted options to a former director to
purchase 100,000 shares of common stock at an exercise price of $0.75.
On October 31, 1997, the Board granted options to a former director to
purchase 20,000 shares of common stock at an exercise price of $1.00.
These options vest immediately and expire in October 2004. The Company
has recognized $380,625 as compensation expense related to these
options for the year ended December 31, 1997.
In October 1997, the Company's board of directors authorized the
sale of 1,500,000 shares of common stock at $4.00 per share through
an investment banker ("the investment banker") pursuant to
Regulation D under the Securities Act of 1933. Each share issued had
attached a share purchase warrant to purchase a share of common
stock for each two shares purchased in the offering for a period of
five years at $4.00 per share. In the event these warrants are
exercised, then the Company must issue the investment banker one
additional warrant for every ten warrants exercised, exercisable for
a period of five years at an exercise price equal to the average
closing bid price for the common stock for the ten trading days
preceding the date of issuance. As of December 31, 1997, the Company
sold 1,500,000 shares of common stock for $6,000,000. In connection
with this sale, the Company granted the investment banker warrants
to purchase 150,000 at $4.00 per share for a period of five years.
The warrants provide that they may be adjusted in the event that the
Company issues shares of common stock for consideration of less than
$4.00 per share. In such event, the per share exercise price will be
adjusted to the issue price of such additionally issued shares of
common stock. In December, 1998, the Company issued shares of its
common stock at $1.50 per share. The effect of such issuance was to
reduce the exercise price of these 900,000 warrants to $1.50 per
share.
In April 1998, the Company issued 20,000 shares of common stock in
exchange for legal services of $20,000.
In April 1998, the Board granted options to purchase 390,000 shares of
common stock to certain officers and directors of the Company. The
options are exercisable at $2.88 per share which was the market price
on the date of grant. The options were fully vested at December 31,
1998 and expire in April 2003.
During July and August, 1998, the Company arranged to have AccuLase,
issue $1,000,000 of 10% convertible promissory notes to various
investors. The convertible notes were guaranteed by the Company.
Interest was payable annually in cash or in the Company's common
stock at the Company's option. The entire principal was due and
payable in one payment on or before December 31, 1998. The holders
of the convertible notes may convert any or all outstanding balances
into the Company's common stock at a conversion price of $2.00 per
share at any time. The market price of the Company's common stock on
the date the convertible notes were issued was $2.59 per share. The
Company recorded $296,875 as a deferred financing cost which was
recorded as expense in 1998. All balances outstanding as of the
maturity date of the convertible notes, if not paid, automatically
convert into shares of the Company's common stock at a conversion
price of $2.00 per share.
F-17
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
The holders of convertible notes converted the notes into 500,000
shares. Additional shares will be issued subsequently in exchange for
accrued but unpaid interest.
In addition, in December 1998, the Company issued a note payable to
the President of the Company's investment banker for $150,000 in
cash. The note is convertible to shares of the Company's restricted
common stock at $1.50 per share at the option of the holder of the
note. The note was converted to 100,000 shares of stock in December
1998.
In 1998, the Company issued warrants to acquire 600,000 shares of the
Company's common stock at $2.00 per share to its investment banker for
services provided. The Company recognized expense of $1,318,200 upon
issuance of the warrants.
A summary of option transactions during 1996, 1997, and 1998 under the
Plan follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------------- ------------------
<S> <C> <C>
Outstanding at January 1, 1996 - -
Granted 397,500 1.66
Expired/canceled - -
---------------- ------------------
Outstanding at December 31, 1996 397,500 1.66
Granted - -
Expired/canceled - -
---------------- ------------------
Outstanding at December 31, 1997 397,500 1.66
Granted - -
Expired/canceled - -
---------------- ------------------
Outstanding at December 31, 1998 397,500 1.66
---------------- ------------------
---------------- ------------------
</TABLE>
At December 31, 1998, all plan options to purchase shares were
exercisable at prices ranging from $1.50 to $2.50 per share.
F-18
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
If not previously exercised the outstanding plan options will expire
as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
YEAR ENDING DECEMBER 31, SHARES EXERCISE PRICE
----------------------- --------------------- -------------------
<S> <C> <C>
2001 62,500 $ 2.50
2002 - -
2003 - -
2004 - -
2005 - -
2006 335,000 1.50
------------------ -------------------
397,500 $ 1.66
------------------ -------------------
------------------ -------------------
</TABLE>
A summary of non-plan option transactions during 1996, 1997, and 1998
follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------------------- -------------------
<S> <C> <C>
Outstanding at December 31, 1995 375,000 $ 3.00
Granted - -
Exercised (268,000) 2.63
Expired/canceled (107,000) 3.75
------------------ -------------------
Outstanding at December 31, 1996 - -
Granted 690,399 0.86
Expired/canceled - -
------------------ -----------------
Outstanding at December 31, 1997 690,399 0.86
Granted 390,000 2.88
Expired/canceled - -
------------------ -----------------
Outstanding at December 31, 1998 1,080,399 $ 1.59
------------------ -----------------
------------------ -----------------
</TABLE>
At December 31, 1998, all non-plan options to purchase shares were
exercisable at prices ranging from $0.50 to $2.88.
F-19
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
If not previously exercised the outstanding non-plan options will expire as
follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
YEAR ENDING DECEMBER 31, SHARES EXERCISE PRICE
----------------------- --------------------- -------------------
<S> <C> <C>
2002 570,399 $ 0.87
2003 390,000 2.88
2004 120,000 0.79
------------------ -------------------
1,080,399 $ 1.59
------------------ -------------------
------------------ -------------------
</TABLE>
As stated in Note 2, the Company has not adopted the fair value accounting
prescribed by FASB123 for employees. Had compensation cost for stock options
issued to employees been determined based on the fair value at grant date for
awards in 1996, 1997 and 1998 consistent with the provisions of FASB123, the
Company's net loss and net loss per share would have increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1996 1997 1998
-------------------- -------------------- ------------------
<S> <C> <C> <C>
Net loss $ (5,502,273) $ (2,965,259) $ (6,784,686)
-------------------- -------------------- ------------------
-------------------- -------------------- ------------------
Net loss per share $ (0.98) $ (0.45) $ (0.73)
-------------------- -------------------- ------------------
-------------------- -------------------- ------------------
</TABLE>
The fair value of each option is estimated on the date of grant using the
present value of the exercise price and is pro-rated based on the percent of
time from the grant date to the end of the vesting period. The weighted
average fair value of the options granted during 1996, 1997 and 1998 was
$1.08, $1.75 and $1.97, respectively. The following assumptions were used for
grants in 1996; risk-free interest rate of 4.9%; expected lives of two years;
dividend yield of 0%; and expected volatility of 148%. The following
assumptions were used for grants in 1997: risk-free interest rate equal to
the yield on government bonds and notes with a maturity equal to the expected
life for the month the options were granted; expected lives of two years;
dividend yield of 0%, and expected volatility of 134%. The following
assumptions were used for grants in 1998; risk-free interest rate of 5.6%;
expected lives of two years; dividend yield of 0%; and expected volatility of
137%.
AccuLase has reserved 800,000 shares of its common stock for issuance under a
noncompensatory employee stock option plan. Options are exercisable over a
period of up to ten years from the date of grant. During 1992, 28,500 options
were granted at an exercise price of $2.80 per share. In 1995, options for
14,500 shares were canceled. At December 31, 1998 the remaining 14,000
options are exercisable.
On February 4, 1998, the majority of the stockholders of the Company voted to
increase the authorized number of common shares to 15,000,000.
F-20
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
10. INCOME TAXES:
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1997 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
CURRENT
Federal $ - $ - $ -
State - 3,900 3,300
------------------ ------------------ ------------------
- 3,900 3,300
------------------ ------------------ ------------------
DEFERRED
Federal - - -
State - - -
------------------ ------------------ ------------------
- - -
------------------ ------------------ ------------------
INCOME TAX EXPENSE $ - $ 3,900 $ 3,300
------------------ ------------------ ------------------
------------------ ------------------ ------------------
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1998
-------------------- --------------------
<S> <C> <C>
Current deferred tax assets:
Accounts receivable, principally due to allowances
for doubtful accounts $ 29,000 $ 27,000
Compensated absences, principally due to accrual
for financial reporting purposes 8,000 21,000
Warranty reserve, principally due to accrual for
financial reporting purposes 39,000 19,000
Inventory obsolescence reserve 316,000 409,000
Stock option compensation 260,000 769,000
Accrued expenses 35,000 63,000
Deferred revenue 39,000 -
UNICAP - 34,000
-------------------- --------------------
726,000 1,342,000
Less valuation allowance (726,000) (1,342,000)
-------------------- --------------------
Net current deferred tax assets $ - $ -
-------------------- --------------------
-------------------- --------------------
</TABLE>
F-21
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1998
-------------------- --------------------
<S> <C> <C>
Noncurrent deferred tax assets:
Tax credit carryforwards $ 329,000 $ 334,000
Net operating loss carryforwards 5,301,000 6,534,000
Depreciation and amortization 21,000 101,000
Capitalized research and development costs 323,000 339,000
-------------------- --------------------
5,974,000 7,308,000
Less valuation allowance (5,974,000) (7,308,000)
-------------------- --------------------
Net noncurrent deferred tax assets $ - $ -
-------------------- --------------------
-------------------- --------------------
</TABLE>
At December 31, 1998, Laser Photonics and AccuLase had net operating
loss carryforwards of approximately $7,438,000 and $9,508,000, which
expire in various years through 2018. These net operating losses are
subject to annual limitations imposed by the Internal Revenue Code due
to change in control of the Companies.
Total income tax expense differed from the amounts computed by
applying the U.S. federal statutory tax rates to pre-tax income as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1997 1998
------------------- ------------------ ---------------------
<S> <C> <C> <C>
Total expense (benefit) computed by
applying the U.S. statutory rate (34.0%) (34.0%) (34.0%)
Permanent differences 47.8 25.7 14.6
State income taxes - 0.2 -
Effect of valuation allowance (13.8) 8.3 19.4
------------------- ------------------ ---------------------
- % 0.2% - %
------------------- ------------------ ---------------------
------------------- ------------------ ---------------------
</TABLE>
11. RELATED PARTY TRANSACTIONS:
During April 1997, Helionetics filed a voluntary petition of
reorganization with the U.S. Bankruptcy Court in the Central District
of California for protection under Chapter 11 of Title 11 of the U.S.
Bankruptcy Code. As a result, the Company wrote off its $662,775
receivable from Helionetics as of December 31, 1996.
The Company advanced $48,000 to an affiliated company which was
subsequently written off during 1997.
The Company has agreed to pay commissions to an officer of the Company
for efforts in securing the Baxter Agreement (See Note 12). In 1998,
the Company recognized $72,000 of commission expense related to this
agreement. In addition, the Company has received advances from the
officer for operating expenditures. At December 31, 1997 and 1998, the
amounts due to the officer were $36,222 and $136,002, respectively.
F-22
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
At December 31, 1997 and 1998 and March 31, 1999, the Company had
$25,000, $54,600 and $54,600 respectively, due from an officer of the
Company for advances made.
12. COMMITMENTS AND CONTINGENCIES:
LEASES -- The Company leases its main facility under a month-to-month
operating lease which requires monthly payments of $11,000. AccuLase
leases its facility under a non-cancelable operating lease which
expires during 2003. The Company's other subsidiary leases its facility
under a non-cancelable operating lease which expires during 2001.
Rental expense for these leases amounted to $376,000, $346,000 and
$298,000 for the years ended December 31, 1996, 1997 and 1998,
respectively. The future annual minimum payments under the
non-cancelable leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1999 $164,000
2000 170,000
2001 170,000
2002 97,000
2003 64,000
--------
Total minimum lease payments $665,000
--------
--------
</TABLE>
BAXTER AGREEMENT -- On August 19, 1997, AccuLase executed a series of
Agreements with Baxter Healthcare Corporation ("Baxter"). These
Agreements provided among other things for the following:
1. AccuLase granted to Baxter an exclusive world-wide right and
license to manufacture and sell the AccuLase Laser and
disposable products associated therewith, for the purposes of
treatment of cardiovascular and vascular diseases.
2. In exchange Baxter agreed to:
a) Pay AccuLase $700,000 in cash at closing, agreed to
pay AccuLase an additional $250,000 in cash three
months after closing, and agreed to pay an additional
$600,000 upon delivery of the first two commercial
excimer lasers.
b) To pay AccuLase a royalty equal to 10% of the "End
User Price" for each disposable product sold, or if
the laser equipment is sold on a per treatment basis,
the "imputed" average sale price based on "non" per
procedure sales.
c) To purchase from AccuLase excimer laser systems for
cardiovascular and vascular disease.
d) To fund the total cost of obtaining regulatory
approvals world-wide for the use of the AccuLase
laser and delivery systems for the treatment of
cardiovascular and vascular disease.
F-23
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
e) To fund all sales and marketing costs related to the
cardiovascular and vascular business.
3. AccuLase agreed to manufacture the excimer laser system to
specifications for Baxter. Baxter agreed to pay a fixed price
per laser for the first 8 lasers to be manufactured by
AccuLase, and thereafter to pay unit prices on a reducing
scale of from $75,000 to $45,000 per laser, based upon the
annual number of lasers sold to Baxter.
4. AccuLase agreed for a period of five years not to engage in
any business competitive with the laser products for
cardiovascular and vascular applications licensed to Baxter.
5. AccuLase has granted Baxter a security interest in all of its
patents to secure performance under the Baxter Agreement. The
agreement expires upon the expiration of the last to expire
license patent, however, Baxter may terminate the agreement at
any time.
Revenues recognized on the Baxter Agreement for the years ended
December 31, 1997 and 1998 and three months ended March 31, 1998 and
1999 were $855,000, $769,000, $695,000 and $94,000, respectively, and
represented 22%, 33%, 63% and 27%, respectively, of total revenues.
LICENSE AGREEMENT WITH BAXTER AND LASER SIGHT -- On September 23, 1997,
Baxter purchased certain patent rights to related patents from a third
party for $4,000,000. In December 1997, the Company acquired a license
to the acquired patent rights from Baxter. An agreement between the
Company and AccuLase to determine how costs will be allocated has not
yet been entered into.
LICENSE AGREEMENT WITH GENERAL HOSPITAL -- On November 26, 1997, the
Company entered into a license agreement with The General Hospital
Corporation ("General") whereby General grants the Company an
exclusive, worldwide, royalty-bearing license. In consideration for the
use of the license, the Company has agreed to pay General $12,500 for
costs incurred prior to the effective date of the agreement, $25,000
upon execution of the agreement, $50,000 upon issuance by the U.S.
Patent and Trademark Office of any Patent right, and $50,000 upon
approval by the U.S. Food and Drug Administration of the First NDA
510(k), PMA or PMA Supplement. The Company has agreed to pay royalties
of 4% of the net sales price on products that are covered by a valid
claim of any patent right licensed exclusively to the Company, 2% of
net sales price on products covered by a valid claim of any patent
right licensed non-exclusively to the Company, 1% of net sales of
products on which no royalty is payable for the next ten years
following the first commercial sale and 25% of all non-royalty income.
CLINICAL TRIAL AGREEMENT WITH MASSACHUSETTS GENERAL HOSPITAL -- On
March 17, 1998, the Company entered into a clinical trial agreement
with Massachusetts General Hospital. The Company has agreed to support
the clinical trials with a research grant of approximately $160,000,
payable $50,000 upon execution of the agreement, $60,000 upon
collection of final data from the study (which was completed in
December 1998) and $50,000 upon delivery of the final report to serve
as the basis for a 510 (k) submission to the FDA. At December 31, 1998,
$60,000 was accrued and payable under the agreement.
F-24
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED)
AGREEMENT WITH CSC HEALTHCARE -- In November 1998 the Company entered
into a consulting agreement with CSC Healthcare ("CSC") to assist the
Company in its commercialization efforts of its Excimer technologies.
For the year ended December 31, 1998, the Company incurred expense with
CSC of $157,600 for services under the agreement and $73,500 for
expenses. Additional consideration of $157,600 is payable in the event
that the company raises more than $6,000,000 in subsequent financing.
At December 31, 1998, $231,000 was accrued and payable under the
agreement.
PROPOSED SALE OF ASSETS -- In December, 1998, the Company entered into
a letter of intent with a third party to sell certain assets of its
non-excimer laser business operations, subject to the assumption of
certain liabilities. The completion of the transaction is subject to
numerous items, including but not limited to, the execution of a final
written agreement. The assets and liabilities attributed to this
transaction have been classified in the consolidated balance sheet as
liabilities in excess of assets held for sale. The amounts are stated
at their carrying amounts which are less than their fair value as
estimated based on the expected proceeds from the proposed sale. The
amounts included in the financial statements consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
<S> <C> <C>
ASSETS:
Accounts receivable $ 140,000 $ 140,000
Inventories 452,761 430,229
Prepaid expenses and other assets 73,789 53,152
Property and equipment, net 139,785 127,223
---------- ----------
Total assets 806,335 750,604
---------- ----------
LIABILITIES:
Accounts payable 810,272 775,669
Accrued payroll and related expenses 43,776 64,009
Accrued property taxes 111,962 111,962
Other accrued liabilities 106,130 120,500
Note payable 127,860 127,860
---------- ----------
Total liabilities 1,200,000 1,200,000
---------- ----------
LIABILITIES IN EXCESS OF ASSETS HELD FOR SALE $ 393,665 $ 449,396
---------- ----------
---------- ----------
</TABLE>
Revenues of the related operations were $2,901,000, $2,960,000,
$1,580,000, 405,000 and $252,000 for the years ended December 31, 1996,
1997 and 1998 and for the three months ended March 31, 1998 and 1999,
respectively. Loss from the related operations was $926,000, $647,000,
$996,000, $287,000 and $337,000 for the years ended December 31, 1996,
1997 and 1998 and for the three months ended March 31, 1998 and 1999,
respectively.
F-25
<PAGE>
13. SUBSEQUENT EVENTS
In June 1999, the stockholders of the Company voted to increase the
authorized number of shares of common stock to 25,000,000 shares.
In July 1999, the Company commenced an offering of 2,222,222 shares
of common stock at a price of $4.50 per share for gross proceeds of
$10,000,000. In connection with the offering, the Company will pay a
commission to Pennsylvania Merchant Group (PMG) of 8% of the gross
proceeds raised plus $25,000 for expenses. In addition, for each
$1,000,00 of gross proceeds, PMG will receive a warrant to purchase
10,000 shares of common stock at $4.50 per share.
From January 1, 1999 to July 31, 1999, the Company issued 641,038
options to purchase shares of common stock at exercise prices
ranging from $2.44 to $5.16 per share. The exercise prices
represented the fair market value of the Company's common stock on
the date of grant, determined by the average of the bid and ask
price of the Company's common stock in the Over-the-Counter-Market.
F-26
<PAGE>
LASER PHOTONICS, INC.
PRO FORMA FINANCIAL INFORMATION
The following pro forma financial information is presented to reflect the
proposed sale of certain assets of the non-excimer laser business operations of
Laser Photonics, Inc. (the Company) in exchange for the buyer's assumption of
certain liabilities, pursuant to an asset purchase agreement dated January 4,
1999. Subsequent to the sale, the Company will liquidate the remaining assets
which will not be used in its excimer laser operations.
The accompanying pro forma financial information includes:
1. A Pro Forma Balance Sheet as of March 31, 1999, prepared as if
the transaction occurred as of that date.
2. Pro Forma Statements of Operations for the year ended December
31, 1998 and the three months ended March 31, 1999, prepared
as if the transactions occurred at the beginning of the
periods presented.
The assumptions used in preparing the pro forma adjustments are described in the
footnotes to the pro forma financial statements. However, due to the
uncertainties inherent in the assumption process, it is at least reasonably
possible that the assumptions might require further revision and that such
revision could be material.
The pro forma financial information should be read in conjunction with the
historical financial statements of Laser Photonics, Inc., which were used to
prepare the pro forma financial information. The historical Laser Photonics,
Inc. financial statements are contained in its Form 10-K for the year ended
December 31, 1998 and its Form 10-Q for the three months ended March 31, 1999.
The pro forma financial information presented is not necessarily indicative of
future operations or the actual results that would have occurred had the
transactions been consummated at the beginning of the periods indicated.
F-27
<PAGE>
LASER PHOTONICS, INC.
PRO FORMA BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,416,000 $ - $1,416,000
Accounts receivable, net 69,000 - 69,000
Receivable from related party 55,000 - 55,000
Inventory 492,000 - 492,000
Prepaid expenses 78,000 - 78,000
---------- ---------- ----------
Total current assets 2,110,000 - 2,110,000
PROPERTY AND EQUIPMENT, net 135,000 - 135,000
PREPAID LICENSE FEE 3,333,000 - 3,333,000
DEBT ISSUANCE COSTS 139,000 - 139,000
OTHER 80,000 - 80,000
GOODWILL, NET 346,000 - 346,000
---------- ---------- ----------
TOTAL ASSETS $6,143,000 $ - $6,143,000
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes Payable - current portion $ 542,000 $ - $ 542,000
Convertible notes payable 2,380,000 - 2,380,000
Accounts payable 316,000 - 316,000
Accrued payroll and related expenses 336,000 - 336,000
Other accrued liabilities 770,000 - 770,000
Payable to related party 129,000 - 129,000
Customer deposits 102,000 - 102,000
Deferred revenue 250,000 - 250,000
---------- ---------- ----------
Total current liabilities 4,825,000 - 4,825,000
NOTES PAYABLE, less current portion 54,000 - 54,000
LIABILITIES IN EXCESS OF ASSETS HELD FOR SALE 449,000 (a) (449,000) -
---------- ---------- ----------
Total liabilities 5,328,000 (449,000) 4,879,000
STOCKHOLDERS' EQUITY 815,000 (a) 449,000 1,264,000
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,143,000 $ - $6,143,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-28
<PAGE>
LASER PHOTONICS, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------
<S> <C> <C> <C>
REVENUES:
Sales $1,580,000 (b) $(1,580,000) $ -
Other 769,000 - 769,000
---------- ----------- ----------
2,349,000 (1,580,000) 769,000
---------- ----------- ----------
COSTS AND EXPENSES:
Cost of sales 1,806,000 (b) (1,515,000) 291,000
Selling, general and administrative 3,608,000 (b) (846,000) 2,762,000
Research and development 1,243,000 (b) (164,000) 1,079,000
Depreciation and amortization 1,089,000 (b) (50,000) 1,039,000
---------- ----------- ----------
7,746,000 (2,575,000) 5,171,000
---------- ----------- ----------
LOSS FROM OPERATIONS (5,397,000) 995,000 (4,402,000)
---------- ----------- ----------
OTHER INCOME (EXPENSE):
Interest expense (511,000) - (511,000)
Other, net 3,000 - 3,000
Gain on sale of net assets - (a) 449,000 449,000
----------- ----------- ----------
(508,000) 449,000 (59,000)
----------- ----------- ----------
LOSS BEFORE INCOME TAX EXPENSE (5,905,000) 1,444,000 (4,461,000)
INCOME TAX EXPENSE 3,000 - 3,000
----------- ----------- ----------
NET LOSS $(5,908,000) $1,444,000 (4,464,000)
----------- ----------- ----------
----------- ----------- ----------
BASIC AND DILUTED LOSS PER SHARE $ (0.64) $ (0.48)
----------- ----------
----------- ----------
WEIGHTED AVERAGE SHARES 9,287,507 9,287,507
----------- ----------
----------- ----------
</TABLE>
F-29
<PAGE>
LASER PHOTONICS, INC.
PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ----------- ----------
<S> <C> <C> <C>
REVENUES:
Sales $ 253,000 (b) $ (253,000) $ -
Other 94,000 - 94,000
------------ ------------- -----------
347,000 (253,000) 94,000
COSTS AND EXPENSES:
Cost of sales 304,000 (b) (303,000) 1,000
Selling, general and administrative 561,000 (b) (240,000) 321,000
Research and development 175,000 - 175,000
Depreciation and amortization 276,000 (b) (16,000) 260,000
------------ ------------- -----------
1,316,000 (559,000) 757,000
------------ ------------- -----------
LOSS FROM OPERATIONS (969,000) 306,000 (663,000)
------------ ------------- -----------
OTHER INCOME (EXPENSE):
Interest expense (1,542,000) - (1,542,000)
Gain on sale of net assets - (a) 449,000 449,000
------------ ------------- -----------
(1,542,000) 449,000 (1,093,000)
------------ ------------- -----------
LOSS BEFORE INCOME TAX EXPENSE (2,511,000) 755,000 (1,756,000)
INCOME TAX EXPENSE - - -
------------ ------------- -----------
NET LOSS $(2,511,000) $ 755,000 $(1,756,000)
------------ ------------- -----------
------------ ------------- -----------
BASIC AND DILUTED LOSS PER SHARE $ (0.25) $ (0.18)
------------ -----------
------------ -----------
WEIGHTED AVERAGE SHARES 9,895,684 9,895,684
------------ -----------
------------ -----------
</TABLE>
F-30
<PAGE>
LASER PHOTONICS, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
(a) To reflect the proposed sale of certain assets of the non-excimer laser
business operations of the Company in exchange for the buyer's
assumption of certain liabilities resulting in a gain on sale of net
assets of $449,000.
(b) To eliminate the results of the Company's non-excimer laser business
operations.
F-31
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
NO DEALER, SALES REPRESENTATIVES, OR ANY
OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE LASER PHOTONICS, INC.
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS BEEN NO 7,006,229 SHARES
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF COMMON STOCK
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
Prospectus Summary...........................2
Summary Consolidated Financial Information...5
Risk Factors.................................7
Use of Proceeds..............................15
Dividend Policy..............................15
Price Range of Common Stock..................16 OFFERED BY
Capitalization...............................17
Selected Consolidated Financial Data.........18 SELLING SHAREHOLDERS
Management's Discussion and
Analysis of Results of Financial
Condition and Results of Operations.......20
Business.....................................31
Management...................................55
Compensation of Executive Officers and
Directors..................................57
Certain Relationships and Related
Transactions...............................60
Voting Securities and Principal
Stockholders...............................65
Description of Securities....................67
Selling Stockholders and Plan of
Distribution...............................68
Shares Eligible for Future Sale..............73
Legal Matters................................73
Experts......................................73
Additional Information.......................73
Financial Statements.........................F-1
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses in connection with the Offering
described in this Registration Statement, other than the underwriting discount,
will be as follows:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission Registration Fee $ 4,785.30
Legal, Accounting Fees and Expenses
Printing Expenses
Miscellaneous
</TABLE>
Total
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company's Certificate of Incorporation generally provides for the
maximum indemnification of a corporation's officers and directors as permitted
by law in the State of Delaware. Delaware law empowers a corporation to
indemnify any person who was or is a party or who is threatened to be made a
party to any threatened, pending, or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, except in the case of
an action by or in the right of the corporation, by reason of the fact that he
or she is or was a director, officer, employee or agent of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or other enterprise. Depending on the
character of the proceeding, a corporation may indemnify against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such action, suit or
proceeding if the person indemnified acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceedings, had no
reasonable cause to believe his or her conduct was unlawful.
A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he or she is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or other
enterprise, against expenses, including amounts paid in settlement and
attorney's fees actually and reasonably incurred by him or her in connection
with the defense or settlement of the action or suit if he or she acted in good
faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interests of the corporation. Indemnification may not be
made for any claim, issue or matter as to which such a person has been adjudged
by a court of competent jurisdiction, after exhaustion of all appeals therefrom,
to be liable to the corporation or for amounts paid in settlement to the
corporation unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.
To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to above, or in defense of any claim, issue
or matter therein, he or she must be indemnified by the corporation against
expenses, including attorney's fees, actually and reasonably incurred by him in
connection with the defense. Any indemnification under this section, unless
ordered by a court or advanced pursuant to this section, must be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances. The determination must be made: (a) by the stockholders; (b) by
the board of directors by majority vote of a quorum consisting of directors who
were not parties to the action, suit or proceeding; (c) if a majority vote of a
quorum consisting of directors who were not parties to the action, suit or
proceeding so orders, by independent legal counsel in
II-1
<PAGE>
a written opinion; or (d) if a quorum consisting of directors who were not
parties to the action, suit or proceeding cannot be obtained, by independent
legal counsel in a written opinion.
The certificate of incorporation, the bylaws or an agreement made by
the corporation may provide that the expenses of officers and directors incurred
in defending a civil or criminal action, suit or proceeding must be paid by the
corporation as they are incurred and in advance of the final disposition of the
action, suit or proceeding upon receipt of an undertaking by or on behalf of the
director or officer to repay the amount if it is ultimately determined by a
court of competent jurisdiction that he or she is not entitled to be indemnified
by the corporation. The provisions of this section do not affect any rights to
advancement of expenses to which corporate personnel other than directors or
officers may be entitled under any contract or otherwise by law.
The indemnification and advancement of expenses authorized in or
ordered by a court pursuant to this section: (a) does not exclude any other
rights to which a person seeking indemnification or advancement of expenses may
be entitled under the articles of incorporation or any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, for either an action in
his or her official capacity or an action in another capacity while holding his
or her office, except that indemnification, unless ordered by a court pursuant
to this section or for the advancement of any director or officer if a final
adjudication establishes that his or her acts or omissions involved intentional
misconduct, fraud or a knowing violation of the law and was material to the
cause of action; and (b) continues for a person who has ceased to be a director,
officer, employee or agent and inures to the benefit of the heirs, executors and
administrators of such a person.
Further, the Company may enter into agreements of indemnification with
its directors to provide for indemnification to the fullest extent permitted
under Delaware law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Except as otherwise provided above, the Company believes all of the
foregoing issuances of securities were made solely to accredited investors in
transactions exempt from registration under Section 4(2) of the Securities Act.
CONVERTIBLE DEBT AND CONVERSION OF CONVERTIBLE DEBT
In 1995, the Company sold an aggregate of $500,000 in six-month
convertible secured notes in a private transaction, pursuant to an exemption
from registration under Regulation S promulgated under the Securities Act. The
Company also issued to such persons warrants to purchase up to 500,000 shares of
Common Stock which expired in 1995 due to the Company's meeting of certain
filing requirements. The noteholders were also granted a transferable one-year
option to purchase 134,000 additional shares at $2.25 per share, and 134,000
shares at $3.00 per share, which were exercised in 1996, and 107,000 shares at
$3.75 per share, which expired without exercise. In January and April, 1996, the
notes were converted into an aggregate of 538,583 shares of Common Stock at a
conversion price of $0.96 per share. In April, 1996, an additional 30,000 shares
were issued pursuant to Regulation S as payment of past due rent valued at
$60,000.
During July and August, 1998, Acculase issued $1,000,000 of the
Acculase Notes. The Acculase Notes were guaranteed by the Company. Interest was
payable annually and could be paid in cash or in the Company's Common Stock at
the Company's option. The entire amount of principal was automatically converted
in 500,000 shares of the Company's Common Stock, at a conversion price of $2.00
per share, on December 31, 1998. In addition, the Company issued 37,433 shares
in payment of accrued interest as of April 30, 1999. The shares issued in
conversion of the Acculase Notes are being registered in a registration
statement of which this Prospectus forms a part.
As of March 31, 1999, PMG arranged for the Company to issue to various
investors $2,380,000 of units of its securities (the "Units"), each Unit
consisting of: (i) $10,000 principal amount of Convertible Notes; and (ii)
common stock purchase warrants to purchase up to 2,500 shares of Common Stock
(the "Unit Warrants"). The entire principal is due and payable in one payment on
the earlier of: (i) December 15, 1999; or (ii) the date that is three business
days after the Company consummates its next equity financing (the "Subsequent
Financing") in
II-2
<PAGE>
which the Company receives net proceeds of at least $2,380,000 (the "Due
Date"). Interest accruing on the Convertible Notes through June 15, 1999, is
payable on June 15, 1999. Interest accrued as of the earlier of the Due Date
or December 15, 1999, is payable on the earlier of the Due Date or December
15, 1999. Payment of principal and interest on the Convertible Notes is
subordinate and junior in right of payment to the prior payment in full of
all senior debt of the Company. The Convertible Note holders may convert the
Convertible Notes and accrued and unpaid interest thereon, if any, into
shares of Common Stock at any time prior to maturity or receipt of prepayment
into shares of Common Stock at a conversion price of $2.00 per share. The
Convertible Notes provide that the conversion price is to be adjusted in the
event that the Company issues shares of Common Stock for consideration of
less than $2.00 per share. In such event, the per share conversion price will
be adjusted to the issue price of such additionally issued shares of Common
Stock.
The Unit Warrants are exercisable into an initial 1,250 shares of
Common Stock at any time after purchase until March 31, 2004. The balance of the
Unit Warrants are exercisable into an additional 1,250 shares of Common Stock
(the "Contingent Shares") if the Unit holder has voluntarily converted at least
a portion of the principal amount of the Convertible Note that make up a portion
of the Unit into shares of Common Stock. The amount of Contingent Shares that
may be acquired by a Unit Warrant holder will be proportionate to the ratio of
the amount of principal of the Convertible Notes which are converted into shares
of Common Stock over the original principal amount of the Convertible Notes. The
exercise price of the Unit Warrants will be the lower of (i) $2.00 per share of
Common Stock; and (ii) the price per share of Common Stock in the Subsequent
Financing. The Unit Warrants provide that they may be adjusted in the event that
the Company issues shares of Common Stock for consideration of less than $2.00
per share. In such event, the per share exercise price of the Unit Warrants will
be adjusted to the issue price of such additionally issued shares of Common
Stock. All of the shares of Common Stock underlying the Convertible Notes and
the Unit Warrants are being registered in a registration statement of which this
Prospectus forms a part.
CERTAIN ISSUANCES TO FORMER AFFILIATES
In February, 1996, the Company issued 25,000 shares of Common Stock to
Susan E. Barnes, the wife of Bernard B. Katz, a former director and Chairman of
the Board of the Company, in consideration for her personal guaranty of $81,000
in lease obligations associated with the Company's Andover, Massachusetts
facility. In February, 1996, the Company agreed to issue to Ms. Barnes 50,000
shares of Common Stock at a value of $1.00 per share for services she arranged
to provide in connection with raising $1.5 million to finance the Company's
emergence from the Bankruptcy Proceeding.
In October, 1996, the Company issued an additional 100,000 shares of
Common Stock to Ms. Barnes in connection with a second guaranty of the Andover
lease and lease extension, after the lease went into default and the landlord
threatened immediate eviction. At the time of the issuance of these securities
the trading price of the Common Stock was approximately $2.80. This second
personal guaranty was secured by a pledge of 391,360 shares of her personally
owned Helionetics common stock. All guarantees of Ms. Barnes have been
terminated.
ISSUANCES OF SHARES, OPTIONS AND WARRANTS
On January 2, 1996, the Company adopted the Company's 1995
Non-Qualified Option Plan for key employees, officers, directors and
consultants, and reserved up to 500,000 shares of Common Stock for which options
could be granted thereunder. On January 2, 1996, the Company granted a total of
335,000 options at an exercise price of $1.50 per share to certain directors,
employees and consultants.
During 1996, the Company issued 151,000 shares of Common Stock and
options to purchase up to 62,500 shares of Common Stock in exempt transactions
to key employees and consultants for services rendered and as compensation at an
exercise price of $2.50 per share. Included were issuances to certain current
and former officers and directors for services rendered, as follows: (i) Steven
A. Qualls (10,000 shares), (ii) Chaim Markheim (5,000 shares) and (iii) Maxwell
Malone (5,000 shares).
II-3
<PAGE>
During 1997, the Company issued a total of 105,000 shares of Common
Stock to Don Davis, Esq., the Company's former legal counsel, as a consultant in
connection with legal services rendered to the Company. The services included,
but were not limited to, general representation of the Company and securities
disclosure work in relation to the Company's continuing obligation to provide
reports pursuant to the Exchange Act. In addition, the Company issued to Raymond
A. Hartman options to acquire 250,000 shares of Common Stock at an exercise
price of $0.50 per share with a five (5) year term, contingent upon certain
performance contingencies.
On July 1, 1997, the Company granted a total of 108,500 options at an
exercise price of $1.00 per share to certain employees and consultants. On
October 31, 1997, the Company issued options to purchase up to 20,000 shares of
Common Stock at an exercise price of $1.00 per share to a former director of the
Company. In October, 1997, in satisfaction of all compensation owed by the
Company to K.B. Equities, Inc. ("KB Entities"), an affiliate of Mr. Katz and Ms.
Barnes, for consulting services rendered to the Company in 1997, the Board of
Directors granted options to acquire 100,000 shares of Common Stock to K.B.
Equities at an exercise price of $0.75 per share, and with a term of seven (7)
years. Mr. Katz resigned from the Board of Directors of the Company on October
9, 1997.
In August, 1997, the Company issued options to purchase up to 211,899
shares of Common Stock to the following persons, who are currently officers and
directors of the Company, at an exercise price of $1.25 per share with a term of
five (5) years: (i) Chaim Markheim (20,250 options), (ii) Raymond A. Hartman
(20,250 options), (iii) Alan R. Novak (71,399 options), and (iv) John J. McAtee,
Jr. (100,000 options).
On December 15, 1997, the Company issued Warrants to PMG to purchase up
to 300,000 shares of Common Stock at an exercise price of $2.00 per share, which
expire on December 15, 2002. The Warrants were issued to PMG as compensation for
past and future investment banking and advisory services. The 300,000 shares
underlying the Warrants are being registered in this registration statement.
In April, 1998, the Company issued options to Chaim Markheim to
purchase up to 250,000 shares of Common Stock at an exercise price of $2.875 per
share with a five (5) year term.
In April, 1998, the Company issued options to purchase up to 100,000
shares of Common Stock, at the exercise price of $2.875 per share, with a
five-year term, and 20,000 shares of Common Stock, to certain consultants for
services rendered. The 20,000 shares were issued for services rendered at a
$1.00 per share.
Outside/non-employee members of the Board of Directors receive options
to purchase up to 20,000 shares of Common Stock as compensation, on an annual
basis, at an exercise price equal to the market price of the Common Stock on the
last trading day of the preceding year. The options vest at the rate of 5,000
options per quarter during each quarter in which such person has served as a
member of the Board of Directors. The Company granted to John J. McAtee and Alan
R. Novak options to purchase up to 20,000 shares of Common Stock at an exercise
price of $2.875 per share for services rendered during 1998. The Company granted
to Messrs. McAtee and Novak an additional 20,000 options to purchase a like
number of shares of Common Stock at an exercise price of $2.8125 per share for
services to be rendered during 1999. Of these options, 5,000 are vested as of
the date of this Prospectus.
Upon Warwick Alex Charlton's joining the Company's Board of Directors
on March 8, 1999, he was granted options to purchase 20,000 shares of Common
Stock at an exercise price of $2.8125 per share for services to be rendered
during 1999. In addition, Mr. Charlton was granted options, all of which are
vested, to acquire up to 150,000 shares of Common Stock at $3.00 per share. Of
these options 5,000 are vested as of the date of this Prospectus. Upon
appointment of Steven Girgenti and Harry Mittelman to the Board of Directors on
April 20, 1999, they were each granted options to purchase 15,000 shares of
Common Stock at an exercise price of $2.8125 per share for services to be
rendered during 1999. None of these options are vested as of the date of this
Prospectus. In addition, Mr. Girgenti and Dr. Mittelman were each granted
options, all of which are vested, to acquire up to 50,000 shares of Common Stock
at $4.75 per share.
In 1999, in respect of the period August, 1998, through June, 1999,
the Company granted to its current legal counsel, Matthias & Berg LLP ("M& B"),
options to acquire an aggregate of 17,864 shares of the Company's
II-4
<PAGE>
Common Stock at exercise prices of between $1.50 and $5.10 per share. The
options are exercisable for a period of 120 months from the date of grant.
These options were issued as a part of a fee agreement between the Company
and M&B, whereby M&B received options having an exercise price equal to 20%
of its monthly fees in the form of common stock of the Company valued at the
closing bid price on the last day of each month. M&B agreed to forego
collection of such fees, and use the uncollected fees to exercise the options
by cancellation of the outstanding fees.
On April 5, 1999, the Company issued to a non-executive employee
options to purchase 50,000 shares of the Company's Common Stock at an exercise
price of $3.1875. Such options vest, pursuant to a schedule, over a period of
five (5) years.
As of May 21, 1999, the Company granted Rox Anderson options to acquire
up to 250,000 shares of Common Stock, exercisable at $5.16 per share, of which
100,000 are currently vested. The remainder shall vest ratably over a three-year
period and, in addition, are contingent on either approval by the FDA of a
510(k) submission by the Company or the FDA's approval of the Company's excimer
laser to be regulated as a Class II device for the treatment of psoriasis. See
"Business - Excimer Laser System for the Treatment of Psoriasis," "Management"
and "Certain Relationships and Related Transactions."
CERTAIN ISSUANCES OF SECURITIES
In September and October, 1997, the Company privately sold a total
of 679,500 restricted shares of Common Stock in a private placement at a
price of $1.25 per share. The price of the Common Stock on the dates of this
transaction was approximately $3.50 per share. The price of the Common Stock
on the date of this transaction was $2.56 per share. These funds were used in
part to pay outstanding accounts payable and delinquent Federal and State
taxes outstanding. The Company sold an additional 28,601 shares at a price of
$1.25 per share in the third quarter of 1997, but did not receive payment for
the shares until the first quarter of 1998.
In September, 1997, PMG purchased from Helionetics, with the approval
of the Federal Bankruptcy Court in the pending Helionetics Chapter 11 Bankruptcy
proceeding, all debt owed by Acculase to Helionetics. In October, 1997, the
Company purchased the debt owing by Acculase, in the amount of $2,159,708 from
PMG in consideration of 800,000 shares of Common Stock.
In November, 1997, the Company issued 1,500,000 shares of Common Stock
and 750,000 warrants (the "Warrants"), with an exercise price of $4.00 per share
and a term of five (5) years, in a private placement, resulting in gross
proceeds of $6,000,000 to the Company. The price of the Common Stock at November
30, 1997, was $5.06 per share. The Company also issued 150,000 Warrants and paid
a commission of $480,000 to PMG as a placement agent fee. The Warrants have an
exercise price of $4.00 per share. The Warrants provide that they may be
adjusted in the event that the Company issues shares of Common Stock for
consideration of less than $4.00 per share. In such event, the per share
exercise price will be adjusted to the issue price of such additionally issued
shares of Common Stock. In December, 1998, the Company issued shares of its
Common Stock at $1.50 per share. The effect of such issuance was to reduce the
exercise price of the 750,000 Warrants and the 150,000 Warrants issued to PMG,
at $1.50 per share. The Shares underlying these Warrants are being registered
pursuant to this registration statement.
The Company has agreed to issue to PMG an additional 75,000 warrants
(the "Contingent Warrants") at a purchase price of $0.001 per share at such time
as any of the other 750,000 Warrants have been exercised. The Contingent
Warrants will be exercisable for a period of five (5) years following the date
of issue at an exercise price equal to the average closing bid price for the
Common Stock for the ten (10) trading days preceding the date of issue. The
Warrants may be redeemed by the Company, upon 30 days' notice, at a redemption
price of $0.10 per share if the closing bid price of the Common Stock exceeds
$8.00 per share for a period of thirty consecutive trading days.
In July, 1998, the Company granted warrants to acquire 300,000 shares
of Common Stock to PMG at an exercise price of $2.00 per share in consideration
for the guarantee, by PMG, of a lease of office space in Carlsbad, California by
the Company and the raising of a bridge loan of $1,000,000. Such Warrants are
exercisable at anytime
II-5
<PAGE>
until July 15, 2003. The shares underlying these Warrants are being
registered pursuant to this registration statement.
On December 31, 1998, the Company sold to Mr. & Mrs. Richard A.
Hansen an aggregate of 100,000 shares of the Company's restricted Common
Stock $1.50 per share. The price of the Common Stock at December 30, 1998,
was $2.50 per share. Mr. Hansen is the President of PMG, the Company's
investment banker. These Shares are being registered pursuant to this
registration statement.
<TABLE>
<CAPTION>
ITEM 16
EXHIBITS.
<S> <C>
3.1(a) Certificate of Incorporation(1)
3.1(b) Amendment to Certificate of Incorporation dated as of June 10, 1999
3.1(c) Amendment to Certificate of Incorporation dated as of June 23, 1999
3.2 Bylaws(1)
4.1 Specimen Common Stock Certificate*
5.1 Opinion of Matthias & Berg LLP*
10.1 Lease Agreement (Andover, Massachusetts)(1)
10.2 Lease Agreement (Orlando, Florida)(1)
10.3 Lease Agreement (San Diego, California)(2)
10.4(a) Lease Agreement (Carlsbad, California) dated August 4, 1998.
10.4(b) Guarantee of Lease by PMG.
10.5 Patent License Agreement between the Company and Patlex
Corporation(3)
10.6 Master Technology Agreement between the Company and Baxter
Healthcare Corporation, dated July 28, 1997(4)
10.7 License Agreement between the Company and Baxter Healthcare
Corporation, dated August 19, 1997(4)
10.8 Manufacturing Agreement between the Company and Baxter Healthcare
Corporation, dated August 19, 1997(5)
10.9 Clinical Trial Agreement between Massachusetts General Hospital,
R. Rox Anderson and Laser Photonics dated March 17, 1998
10.10 Consulting Agreement dated as of January 21, 1998 between Laser
Photonics and Rox Anderson, M.D.
10.11(a) Asset Purchase Agreement dated January 4, 1999 between the Company
and Laser Analytics, Inc.
10.11(b) Amendment No. 1 to Asset Purchase Agreement.
22.1 List of subsidiaries of the Company(6)
24.1 Consent of Hein + Associates LLP
24.2 Consent of Matthias & Berg LLP (included in Exhibit 5.1)*
25.1 Power of Attorney (included on signature page)
27 Financial Data Schedules
99.1 Registrant's Third Amended Plan of Reorganization(1)
99.2 Order Confirming Registrant's Third Amended Plan of Reorganization, as
modified(1)
99.3 Letter of March 22, 1995 from Coopers & Lybrand, directed to Laser
Photonics, Inc.(1)
</TABLE>
- -----------------------------
* To be filed by amendment.
1. Filed as part of the Company's Annual Report on Form 10-K for the year
ended December 31, 1994.
2. Filed as part of the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
3. Filed as part of the Company's Annual Report on Form 10-K for the year
ended December 31, 1987.
4. Incorporated by reference as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, and subject to a
currently pending request for Confidential Treatment with the
Commission.
II-6
<PAGE>
5. The terms of this Agreement are confidential commerical information
which the Commission has determined need not be disclosed.
6. Previously filed with this Registration Statement.
II-7
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement; and
(iii) Include any material information with respect to the plan
of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement.
(2) For the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered, and the offering of the securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) File a post-effective amendment to remove from registration any of
the securities being registered that remain unsold at the end of the Offering.
(4) To the extent that Shares registered hereunder are not issued by
the Company, then the Company shall de-register such Shares.
In addition, the undersigned Registrant hereby undertakes:
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be a part of this Registration
Statement as of the time it was declared effective.
For the purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURES AND POWERS OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the Company
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Carlsbad, California on
August 3, 1999.
LASER PHOTONICS, INC.
By: /s/ Raymond A. Hartman
-------------------------------------------------
Raymond A. Hartman
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
<S> <C> <C>
/s/ Raymond A. Hartman
- ---------------------------- President, Chief Executive Officer August 3, 1999
Raymond A. Hartman and Director
/s/ Chaim Markheim
- ---------------------------- Director, Chief Operating Officer August 3, 1999
Chaim Markheim and Chief Financial Officer
(Principal Financial Officer
and Principal Accounting
Officer)
/s/ Alan R. Novak
- --------------------------- Director August 3, 1999
Alan R. Novak
/s/ John J. McAtee, Jr.
- --------------------------- Director August 3, 1999
John J. McAtee, Jr.
/s/ Warwick Alex Charlton
- --------------------------- Chairman of the Board of Directors August 3, 1999
Warwick Alex Charlton
/s/ Steven Girgenti
- --------------------------- Director August 3, 1999
Steven Girgenti
/s/ Harry Mittelman, M.D.
___________________________ Director August 3, 1999
Harry Mittelman, M.D.
</TABLE>
II-9
<PAGE>
LASER PHOTONICS, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS PERIOD
-------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
For the year ended December 31, 1998:
Accumulated amortization - patent costs $ 23,965 $ 8,353 $ - $ 32,318
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Accumulated amortization - excess of cost
over net assets of acquired companies $1,342,614 $ 519,682 $ - $1,862,296
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Allowance for doubtful accounts $ 75,000 $ - $ 7,000 $ 68,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Allowance for inventory obsolescence $ 819,524 $ 239,776 $ - $1,059,300
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
For the year ended December 31, 1997:
Accumulated amortization - patent costs $ 15,612 $ 8,353 $ - $ 23,965
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Accumulated amortization - excess of cost
over net assets of acquired companies $ 822,830 $ 519,784 $ - $1,342,614
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Allowance for doubtful accounts $ 100,000 $ - $ 25,000 $ 75,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Allowance for inventory obsolescence $ 996,299 $ - $ 176,775 $ 819,524
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
For the year ended December 31, 1996:
Accumulated amortization - patent costs $ 7,259 $ 8,353 $ - $ 15,612
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Accumulated amortization - excess of cost
over net assets of acquired companies $ 303,148 $ 519,682 $ - $ 822,830
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Accumulated amortization - reorganization
goodwill $ 222,600 $1,914,425 $ - $2,137,025
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Allowance for doubtful accounts $ 100,000 $ - $ - $ 100,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Allowance for inventory obsolescence $1,477,000 - $ 480,701 $ 966,299
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
LASER PHOTONICS, INC.
a Delaware corporation
The undersigned, the Chief Executive Officer of Laser Photonics, Inc.,
a Delaware corporation (the "Corporation"), hereby certifies that the following
Certificate of Amendment to the Certificate of Incorporation has been duly
adopted by its Board of Directors and stockholders, in accordance with Sections
141(f) and 242 of the Delaware General Corporation Law, as set forth below:
1. The Board of Directors unanimously adopted a resolution dated
February 4, 1998, setting forth the then proposed Certificate of Amendment to
the Certificate of Incorporation, declaring the advisability thereof, and
pursuant to action taken by written consent, adopted this Certificate of
Amendment to the Certificate of Incorporation pursuant to Sections 141(f) and
242 of the Delaware General Corporation Law.
2. Thereafter, the stockholders of record owning a majority of the
issued and outstanding shares,by written consent without meeting of the
stockholders, on February 4, 1998, adopted the proposed Certificate of Amendment
to the Certificate of Incorporation, pursuant to Section 242 of the Delaware
General Corporation Law. The vote of the stockholders of the Corporation by
which the foregoing Certificate of Amendment to the Certificate of Incorporation
was adopted and approved was 4,764,421 shares in favor, and 4,482,662 shares
abstaining or not voting, out of the Corporation's total of 9,247,083 shares
issued and outstanding.
3. The resolution by which the Corporation's directors and stockholders
adopted the Certificate of Amendment to the Certificate of Incorporation, as set
forth above, provides that ARTICLE IV of the Corporation's Certificate of
Incorporation, as amended to date, be amended to provide in its entirety as
follows:
CAPITAL STOCK
The total number of shares of stock which the Corporation
shall have authority to issue is Fifteen Million (15,000,000)
shares, consisting of Fifteen Million (15,000,000) shares of
common stock, par value $0.01 per share (the "Common Stock").
1
<PAGE>
4. This amendment shall be effective as of the date of filing of this
Certificate of Amendment with the Secretary of State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to the Certificate of Incorporation to be executed by its Chief
Executive Officer as of June 10, 1999.
LASER PHOTONICS, INC.
By: /s/ RAYMOND A. HARTMAN
--------------------------
Raymond A. Hartman,
Chief Executive Officer
2
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
LASER PHOTONICS, INC.
a Delaware corporation
The undersigned, the Chief Executive Officer of Laser Photonics, Inc.,
a Delaware corporation (the "Corporation"), hereby certifies that the following
Certificate of Amendment to the Certificate of Incorporation has been duly
adopted by its Board of Directors and stockholders, in accordance with Sections
141(f) and 242 of the Delaware General Corporation Law, as set forth below:
1. The Board of Directors unanimously adopted a resolution dated March
15, 1999, setting forth the then proposed Certificate of Amendment to the
Certificate of Incorporation, declaring the advisability thereof, and pursuant
to action taken by written consent, adopted this Certificate of Amendment to the
Certificate of Incorporation pursuant to Sections 141(f) and 242 of the Delaware
General Corporation Law.
2. Thereafter, the stockholders of record owning a majority of the
issued and outstanding shares, at the annual meeting of stockholders on June 22,
1999, adopted the proposed Certificate of Amendment to the Certificate of
Incorporation, pursuant to Section 242 of the Delaware General Corporation Law.
The vote of the stockholders of the Corporation by which the foregoing
Certificate of Amendment to the Certificate of Incorporation was adopted and
approved was 6,499,573 shares in favor, and 3,433,544 shares against, abstaining
or not voting, out of the Corporation's total of 9,933,127 shares issued and
outstanding.
3. The resolution by which the Corporation's directors and stockholders
adopted the Certificate of Amendment to the Certificate of Incorporation, as set
forth above, provides that ARTICLE IV of the Corporation's Certificate of
Incorporation, as amended to date, be amended to provide in its entirety as
follows:
CAPITAL STOCK
The total number of shares of stock which the Corporation
shall have authority to issue is Twenty-Five Million
(25,000,000) shares, consisting of Twenty-Five Million
(25,000,000) shares of common stock, par value $0.01 per share
(the "Common Stock").
1
<PAGE>
4. This amendment shall be effective as of the date of filing of this
Certificate of Amendment with the Secretary of State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to the Certificate of Incorporation to be executed by its Chief
Executive Officer as of June 23, 1999.
LASER PHOTONICS, INC.
By: /s/ RAYMOND A. HARTMAN
-----------------------
Raymond A. Hartman,
Chief Executive Officer
2
<PAGE>
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE
MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. Basic Provisions ("Basic Provisions").
1.1 Parties: This Lease ("Lease"), dated for reference purposes only
August 4, 1998, is made by and between Impala Carlsbad Partners Ltd., A
California Limited Partnership ("Lessor") and Laser Photonics., A Delaware
Corporation ("Lessee"), (collectively the "Parties," or Individually a "Party").
1.2(a) Premises: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the term of this Lease,
commonly known by street address of a portion of 2431 Impala Drive located In
the City of Carlsbad County, San Diego, State of California, with zip code
92008, as outlined on Exhibit A attached hereto ("Premises"). The "Building" is
that certain building containing the Premises and generally described as
(describe briefly the nature of the Building): approximately 11,500 square feet
of industrial space (measured to drip line) (Lessee to independently verify the
size of the premises to it's satisfaction prior to lease signature). In
addition to Lessee's rights to use and occupy the Premises as hereinafter
specified, Lessee shall have non-exclusive rights to the Common Areas (as
defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any
rights to the roof, exterior walls or utility raceways of the Building or to any
other buildings in the Industrial Center. The Premises, the Building, the Common
Areas, the land upon which they are located. along with all other buildings and
improvements thereon, are herein collective referred to as the "Industrial
Center." (Also see Paragraph 2.)
1.2(b) Parking: 29 unreserved vehicle parking spaces ("Unreserved Parking
Spaces"); and 00 reserved vehicle parking spaces ("Reserved Parking Spaces").
(Also see Paragraph 2.6.)
1.3 Term: 4 years and 9 months ("Original Term") commencing December
1, 1998 (see addendum item 52A ("Commencement Date") and ending August 31, 2003
("Expiration Date"). (Also see Paragraph 3.)
1.4 Early Possession: September 15, 1998* ("Early Possession Date").
(Also see Paragraphs 3.2 and 3.3.) *Partial Occ.
1 5 Base Rent: $8,050.00 per month ("Base Rent"), payable on the first
day of each month commencing December 1, 1998 (Also see Paragraph 4.)
[X] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum 49A attached hereto.
1.6(a) Bass Rent Paid Upon Execution: $3,790.00 as Base Rent for the
period October 1998 (see addendum item 52A).
1.6(b) Lessee's Share of Common Area Operating Expenses: Twelve point
eight percent (12.88 %) ("Lessee's Share") as determined by
[X] prorata square footage of the Premises as compared to the total square
footage of the Building or [ ] other criteria as described in Addendum
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1.7 Security Deposit: $ 29,532.00 ("Security Deposit"). (Also see
Paragraph 5.)
1.8 Permitted Use:. Manufacturing, assembly and distribution of
medical lasers and all related uses. ("Permitted Use") (Also see Paragraph 6.)
1.9 Insuring Party.. Lessor is the "Insuring Party." (Also see
Paragraph 8.)
1.10(a)Real Estate Brokers.. The following real estate broker(s)
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[ ] _____________________________________represents Lessor exclusively
("Lessor's Broker");
[ ] _____________________________________represents Lessee exclusively
("Lessee's Broker"); or
[X] Chuck Currey/Tim Moore Grubb & Ellis represents both Lessor and Lessee
("Dual Agency"). (Also see Paragraph 15.)
1.10(b)Payment to Brokers. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) (or in the event there is no
separate written agreement between Lessor and said Broker(s), the sum of $ per
agreement for brokerage services rendered by said Broker(s) in connection with
this transaction.
1.11 Guarantor. The obligations of the Lessee under this Lease are to
be guaranteed by Pennsylvania Merchant Group. See Exhibit F-Attached
("Guarantor"). (Also see Paragraph 37.)
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49A through 66A and Exhibits A through F, all of which
constitute a part of this Lease.
2. Premises, Parking and Common Areas.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree is reasonable and
the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is
not subject to revision whether or not the actual square footage is more or
less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement
Date, Lessor shall, except as otherwise provided in this Lease, promptly after
receipt of written notice from Lessee setting forth with specificity the nature
extent of such non-compliance, rectify same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within
thirty (30) days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have
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been constructed or Installed by Lessor or with Lessor's consent or at Lessor's
direction shall comply with all applicable covenants or restrictions of record
and applicable building codes, regulations and ordinances In affect on the
Commencement Date. Lessor further warrants to Lessee that Lessor has no
knowledge of any claim having been made by any governmental agency that a
violation or violations of applicable building codes, regulations, or ordinances
exist with regard to the Premises as of the Commencement Date. Said warranties
shall not apply to any Alterations or Utility Installations (defined in
Paragraph 7.3(a)) made or to be made by Lessee. If the Promises do not comply
with said warranties, Lessor shall, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee given within six (6) months
following the Commencement Date and setting forthwith specificity the nature and
extent of such non-compliance, take such action, at Lessor's expense, as may be
reasonable or appropriate to rectify the non-compliance. Lessor makes no
warranty that the Permitted Use in Paragraph 1.8 is permitted for the Premises
under Applicable Laws (as defined in Paragraph 2.4).
2.4 Acceptance of Promises. Lessee hereby acknowledges: (a) that it
has been advised by the Broker(s) to satisfy Itself with respect to the
condition of the Premises (including but not limited to the electrical and fire
sprinkler systems, security, environmental aspects, seismic and earthquake
requirements, and compliance with the Americans with Disabilities Act and
applicable zoning, municipal, county, state and federal laws, ordinances and
regulations and any covenants or restrictions of record (collectively,
"Applicable Laws") and the present and future suitability of the Premises for
Lessee's intended use; (b) that Lessee has made such Investigation as it deems
necessary with reference to such matters, is satisfied with reference thereto,
and assumes all responsibility therefore as the same relate to Lessee occupancy
of the Premises and/or the terms of this Lease; and (c) that neither Lessor, nor
any of Lessor's agents, has made any oral or written representations warranties
with respect to said matters other than as set forth in this Lease.
2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect If Immediately prior to the date
set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In
such event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
2.6 Vehicle Parking. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than
full-size passenger automobiles or pick-up trucks, herein called "Permitted Size
Vehicles." Vehicles other than Permitted Size Vehicles shall be parked and
loaded or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to or
are controlled by Lessee or Lessee's employees, suppliers, customers,
contractors or invitees to be loaded, unloaded, or parked in areas other than
those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described In this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
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(c) Lessor shall at the Commencement Date of this Lease, provide the
parking facilities required by Applicable Law.
2.7 Common Areas - Definition. The term "Common Areas" is defined as
all areas and facilities outside the Premises and within the exterior boundary
line of the Industrial Center and interior utility raceways within the Promises
that are provided and designated by the Lessor from time to time for the general
non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center
and their respective employees, suppliers, shippers, customers, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 Common Areas - Lessee's Rights. Lessor hereby grants to Lessee,
for the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common Areas as they
exist from time to time, subject to any rights, powers, and privileges reserved
by Lessor under the terms hereof or under the terms of any rules and regulations
or restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas be deemed
to include the right to store any property, temporarily or permanently, in the
Common Areas. Any such storage shall be permitted only by the prior written
consent of Lessor or Lessor's designated agent, which consent may be revoked at
any time. In the event that any unauthorized storage shall occur then Lessor
shall have the right, without notice, in addition to such other rights and
remedies that it may have, to remove the property and charge the cost to Lessee,
which cost shall be immediately payable upon demand by Lessor.
2.9 Common Areas - Rules and Regulations. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and management
of the Common Areas and shall have the right, from time to time, to establish,
modify, amend and enforce reasonable Rules and Regulations with respect thereto
in accordance with Paragraph 40. Lessee agrees to abide by and conform to all
such Rules and Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Industrial Center.
2.10 Common Areas - Changes. Lessor shall have the right, in Lessor's
sole discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common
Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial
Center, or any portion thereof; and
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(f) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and Industrial Center as
Lessor may, in the exercise of sound business judgment, deem to be appropriate.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the
Early Possession Date but prior to the Commencement Date, the obligation to pay
Base Rent shall be abated for the period of such early occupancy. All other
terms of this Lease, however, (including but not limited to the obligations to
pay Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
3.3 Delay In Possession. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by the
Commencement Date, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date, Lessee
may, at its option, by notice in writing to Lessor within ten (10) days after
the end of said sixty (60) day period, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original Term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the
date of delivery of possession and continue for a period equal to the period
during which the Lessee would have otherwise enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
4. Rent.
4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges,
as the same may be adjusted from time to time, to Lessor in lawful money of the
United States, without offset or deduction, on or before the day on which it is
due under the terms of this Lease. Base Rent and all other rent and charges for
any period during the term hereof which is for less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated herein
or to such other persons or at such other addresses as Lessor may from time to
time designate in writing to Lessee.
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4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during
the term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "Common Area Operating Expenses" are defined, for purposes
of this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat,
clean, good order and condition, of the following:
(a) The Common Areas, including parking areas,
loading and unloading areas, trash areas, roadways, sidewalks, walkways,
parkways, driveways, landscaped areas, striping, bumpers, irrigation systems,
Common Area lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(iii) The cost of water, gas, electricity and telephone to
service the Common Areas.
(iii) Trash disposal, property management and security
services and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair of
Common Areas.
(v) Real Property Taxes (as defined in Paragraph 10.2)
to be paid by Lessor for the Building and the Common Areas under Paragraph 10
hereof.
(vi) The cost of the premiums for the insurance policies
maintained by Lessor under Paragraph 8 hereof.
(vii) Any deductible portion of an insured loss concerning
the Building or the Common Areas.
(viii) Any other services to be provided by Lessor that are
stated elsewhere in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes
that are specifically attributable to the Building or to any other building in
the Industrial Center or to the operation, repair and maintenance thereof, shall
be allocated entirely to the Building or to such other building. However, any
Common Area Operating Expenses and Real Property Taxes that are not specifically
attributable to the Building or to any other building or to the operation,
repair and maintenance thereof, shall be equitably allocated by Lessor to all
buildings in the Industrial Center.
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(c) The inclusion of the improvements, facilities and services
set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation
upon Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to provide
the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be
payable by Lessee within ten (10) days after a reasonably detailed statement of
actual expenses is presented to Lessee by Lessor. At Lessor's option, however,
an amount may be estimated by Lessor from time to time of Lessee's Share of
annual Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, during each 12-month period of the Lease
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to
Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement.
5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's
execution hereof the Security Deposit set forth in Paragraph 1.7 as security for
Lessee's faithful performance of Lessee's obligations under this Lease. If
Lessee fails to pay Base Rent or other rent or charges due hereunder, or
otherwise Defaults under this Lease (as defined In Paragraph 13.1), Lessor may
use, apply or retain all or any portion of said Security Deposit for the payment
of any amount due Lessor or to reimburse or compensate Lessor for any liability,
cost, expense, loss or damage (including attorneys' fees) which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefore deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. Any time the Base Rent
increases during the term of this Lease, Lessee shall, upon written request from
Lessor, deposit additional monies with Lessor as an addition to the Security
Deposit so that the total amount of the Security Deposit shall at all times bear
the same proportion to the then current Base Rent as the initial Security
Deposit bears to the initial Base Rent set forth in Paragraph 1.5. Lessor shall
not be required to keep all or any part of the Security Deposit separate from
its general accounts. Lessor shall, at the expiration or earlier termination of
the term hereof and after Lessee has vacated the Premises, return to Lessee (or,
at Lessor's option, to the last assignee, if any, of Lessee's interest herein),
that portion of the Security Deposit not used or applied by Lessor. Unless
otherwise expressly agreed in writing by Lessor, no part of the Security Deposit
shall be considered to be held In trust, to bear Interest or other increment for
its use, or to be prepayment for any monies to be paid by Lessee under this
Lease.
6. Use.
6.1 Permitted Use.
(a) Lessee shall use and occupy the Premises only for the
Permitted Use set forth in Paragraph 1.8, or any other legal use which is
reasonably comparable thereto, and for no other purpose. Lessee shall not use or
permit the use of the Premises In a manner that is unlawful, creates waste or a
nuisance, or that disturbs owners and/or occupants of, or causes damage to the
Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay
its consent to any written request by Lessee, Lessee's assignees or subtenants,
and by prospective assignees and subtenants of Lessee, its assignees and
subtenants, for a modification of said Permitted Use, so long as the same will
not impair the structural integrity of the improvements on the Premises or in
the Building or the mechanical or electrical
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systems therein, does not conflict with uses by other lessees, is not
significantly more burdensome to the Premises or the Building and the
improvements thereon, and is otherwise permissible pursuant to this Paragraph 6.
If Lessor elects to withhold such consent, Lessor shall within five (5) business
days after such request give a written notification of same, which notice shall
Include an explanation of Lessor's reasonable objections to the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous
Substance" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill, release or effect,
either by itself or in combination with other materials expected to be on the
Premises, is either: (i) potentially injurious to the public health, safety or
welfare, the environment, or the Premises; (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of Lessor to
any governmental agency or third party under any applicable statute or common
law theory. Hazardous Substance shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products or by-products
thereof. Lessee shall not engage in any activity In or about the Premises which
constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances
without the express prior written consent of Lessor and compliance in a timely
manner (at Lessee's sole cost and expense) with all Applicable Requirements (as
defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or
use of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and
(iii) the presence in, on or about the Premises of a Hazardous Substance with
respect to which any Applicable Laws require that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may, without Lessor's prior consent, but upon notice to
Lessor and in compliance with all Applicable Requirements, use any ordinary and
customary materials reasonably required to be used by Lessee in the normal
course of the Permitted Use, so long as such use is not a Reportable Use and
does not expose the Premises or neighboring properties to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may (but without any obligation to do so) condition its consent to any
Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor
such additional assurances as Lessor, in its reasonable discretion, deems
necessary to protect itself, the public, the Premises and the environment
against damage, contamination or Injury and/or liability therefor, including but
not limited to the installation (and, at Lessor's option, removal on or before
Lease expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasements) and/or the deposit
of n additional Security Deposit under Paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises or the Building, other than as previously consented
to by Lessor, Lessee shall immediately give Lessor written notice thereof,
together with a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding given
to, or received from, any governmental authority or private party concerning the
presence, spill, release, discharge of, or exposure to, such Hazardous Substance
including but not limited to all such documents as may be involved in any
Reportable Use involving the Premises. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including, without limitation, through the plumbing or sanitary sewer
system).
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(c) Indemnification. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's
obligations under this Paragraph 6.2(c) shall include, but not be limited to,
the effects of any contamination or injury to person, property or the
environment created or, suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor In writing at the
time of such agreement.
6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's
sole cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including
but not limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or involving
failure by Lessee or the Premises to comply with any Applicable Requirements.
6.4 Inspection; Compliance with Law. Lessor, Lessor's agents,
employees, contractors and designated representatives, and the holders of any
mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall
have the right to enter the Premises at any time in the case of an emergency,
and otherwise at reasonable times, for the purpose of Inspecting the condition
of the Premises and for verifying compliance by Lessee with this Lease and all
Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be
entitled to employ experts and/or consultants in connection therewith to advise
Lessor with respect to Lessee's activities, including but not limited to
Lessee's installation, operation, use, monitoring, maintenance, or removal of
any Hazardous Substance on or from the Premises. The costs and expenses of any
such inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance, Repairs, Utility Installations, Trade Fixtures and
Alterations.
7.1 Lessee's Obligations.
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(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof In good order, condition and repair (whether or not such portion of
the Premises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including, without limiting the generality
of the foregoing, all equipment or facilities specifically serving the Premises,
such as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose connections It
within the Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, floors, windows, doors, plate glass, and skylights, but
excluding any items which are the responsibility of Lessor pursuant to Paragraph
7.2 below. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall Include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a pan thereof in good order, condition
and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance for
and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the Premises. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(c) If Lessee falls to perform Lessee's obligations under this
Paragraph 7. 1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair, In accordance with Paragraph
13.2 below.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement
pursuant to Paragraph 4.2, shall keep In good order, condition and repair the
foundations, exterior walls, structural condition of Interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas) or other automatic fire extinguishing system Including fire alarm
and/or smoke detection systems and equipment, fire hydrants, parking lots,
walkways, parkways, driveways, landscaping, fences, signs and utility systems
serving the Common Areas and all parts thereof, as well as providing the
services for which there is a Common Area Operating Expense pursuant to
Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior
surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or
replace windows, doors or plate glass of the Premises. Lessee expressly waives
the benefit of any statute now or hereafter in effect which would otherwise
afford Lessee the right to make repairs at Lessor's expense or to terminate this
Lease because of Lessor's failure to keep the Building, Industrial Center or
Common Areas in good order, condition and repair.
7.3 Utility Installations, Trade Fixtures, Alterations.
(a) Definitions; Consent Required. The term "Utility
Installations" is used in this Lease to refer to all air lines, power panels,
electrical distribution, security, fire protection systems, communications
systems, lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or
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about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and
equipment which can be removed without doing material damage to the Premises.
The term "Alterations" shall mean any modification of the improvements on the
Premises which are provided by Lessor under the terms of this Lease, other than
Utility Installations or Trade Fixtures. "Lessee-Owned Alterations and/or
Utility Installations" are defined as Alterations and/or Utility Installations
made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).
Lessee shall not make nor cause to be made any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent. Lessee may, however, make non-structural Utility Installations to the
interior of the Premises (excluding the roof) without Lessor's consent but upon
notice to Lessor, so long as they are not visible from the outside of the
Premises, do not involve puncturing, relocating or removing the roof or any
existing walls, or changing or interfering with the fire sprinkler or fire
detection systems and the cumulative cost thereof during the term of this Lease
as extended does not exceed $2,500.00.
(b) Consent. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish Lessor with
as-built plans and specifications therefor. Lessor may, (but without obligation
to do so) condition its consent to any requested Alteration or Utility
Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a
lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation.
(c) Lien Protection. Lessee shall pay when due all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on, or about the Premises, and Lessor shall have
the right to post notices of non-responsibility in or on the Premises as
provided by law. If Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense, defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the Lessor or the Premises. If Lessor shall require,
Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount
equal to one and one-half times the amount of such contested lien claim or
demand, indemnifying Lessor against liability for the same, as required by law
for the holding of the Premises free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4 Ownership, Removal, Surrender, and Restoration.
(a) Ownership. Subject to Lessor's right to require their
removal and to cause Lessee to become the owner thereof as hereinafter provided
in this Paragraph 7.4, all Alterations and Utility Installations made to the
Premises by Lessee shall be the property of and owned by Lessee, but considered
a part of the Premises. Lessor may, at any time and at its option, elect in
writing to Lessee to be the owner of all or any specified part of the
Lessee-Owned Alterations and Utility Installations. Unless otherwise instructed
per
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Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) Removal. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee-Owned Alterations or Utility Installations be
removed by the expiration or early termination of this Lease, notwithstanding
that their installation may have been consented to by Lessor. Lessor may require
the removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises
by the end of the last day of the Lease term or any earlier termination date,
clean and free of debris and in good operating order, condition and state of
repair, ordinary wear and tear excepted. Ordinary wear and tear shall not
include any damage or deterioration that would have been prevented by good
maintenance practice or by Lessee performing all of its obligations under this
Lease. Except as otherwise agreed or specified herein, the Premises, as
surrendered, shall include the Alterations and Utility Installations. The
obligation of Lessee shall include the repair of any damage occasioned by the
installation, maintenance or removal of Lessee's Trade Fixtures, furnishings,
equipment, and Lessee-Owned Alterations and Utility Installations, as well as
the removal of any storage tank installed by or for Lessee, and the removal,
replacement, or remediation of any soil, material or ground water contaminated
by Lessee, all as may then be required by Applicable Requirements and/or good
practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall
be removed by Lessee subject to its obligation to repair and restore the
Premises per this Lease.
8. Insurance; Indemnity.
8.1 Payment of Premiums. The cost of the premiums for the insurance
policies maintained by Lessor under this Paragraph 8 shall be a Common Area
Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods
commencing prior to, or extending beyond, the term of this Lease shall be
prorated to coincide with the corresponding Commencement Date or Expiration
Date.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee, Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused by
heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "Insured contract"
for the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
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(b) Carried by Lessor. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be named
as an additional insured therein.
8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. Lessor shall obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and to any Lender(s), insuring against loss or
damage to the Premises. Such insurance shall be for full replacement cost, as
the same shall exist from time to time, or the amount required by any Lender(s),
but in no event more than the commercially reasonable and available insurable
value there of if, by reason of the unique nature or age of the improvements
involved, such latter amount is less than full replacement cost. Lessee-Owned
Alterations and Utility Installations, Trade Fixtures and Lessee's personal
property shall be insured by Lessee pursuant to Paragraph 8.4. If the coverage
is available and commercially appropriate, Lessor's policy or policies shall
insure against all risks of direct physical loss or damage (except the perils of
flood and/or earthquake unless required by a Lender), including coverage for any
additional costs resulting from debris removal and reasonable amounts of
coverage for the enforcement of any ordinance or law regulating the
reconstruction or replacement of any undamaged sections of the Building required
to be demolished or removed by reason of the enforcement of any building,
zoning, safety or land use laws as the result of a covered loss, but not
including plate glass insurance. Said policy or policies shall also contain an
agreed valuation provision in lieu of any co-insurance clause, waiver of
subrogation, and Inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located.
(b) Rental Value. Lessor shall also obtain and keep in 'arcs
during the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and any Lender(s). insuring the loss of the full rental
and other charges payable by all lessees of the Building to Lessor for one year
(including all Real Property Taxes, insurance costs, all Common Area Operating
Expenses and any scheduled rental increases). Said insurance may provide that in
the event the Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the completion
of repairs or replacement of the Premises, to provide for one full year's loss
of rental revenues from the date of any such loss. Said insurance shall contain
an agreed valuation provision in lieu of any co-insurance clause, and the amount
of coverage shall be adjusted annually to reflect the projected rental income,
Real Property Taxes, insurance premium costs and other expenses, if any,
otherwise payable, for the next 12-month period. Common Area Operating Expenses
shall include any deductible amount in the event of such loss.
(c) Adjacent Premises. Lessee shall pay for any increase in the
premiums for the properly insurance of the Building and for the Common Areas or
other buildings in the Industrial Center if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.
(d) Lessee's Improvements. Since Lessor is the Insuring Party,
Lessor shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 Lessee's Property Insurance. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned
Alterations and Utility
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Installations in, on, or about the Premises similar in coverage to that carried
by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance shall be
full replacement cost coverage with a deductible not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for the
replacement of personal property and the restoration of Trade Fixtures and
Lessee-Owned Alterations and Utility Installations. Upon request from Lessor,
Lessee shall provide Lessor with written evidence that such insurance is in
force.
8.5 Insurance Policies. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V, or such other rating as may be required by a Lender, as set
forth in the most current Issue of "Best's Insurance Guide." Lessee shall not do
or permit to be done anything which shall invalidate the insurance policies
referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor,
within seven M days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the existence
and amounts of, the Insurance required under Paragraph. 8.2(a) and 8.4. No such
policy shall be cancelable or subject to modification except after thirty (30)
days' prior written notice to Lessor. Lessee shall at least thirty (30) days
prior to the expiration at such policies, furnish Lessor with evidence of
renewals or "Insurance binders" evidencing renewal thereof, or Lessor may order
such insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lou" to Lessor upon demand.
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages whether in contract or in tort) against
the other, for loss or damage to their property arising out of or incident to
the perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Losses agree to have their respective insurance companies
Issuing property damage Insurance waive any tight to subrogation that such
companies may have against Lessor or Lessee, as the case. may be, so long as the
insurance is not invalidated thereby.
8.7 Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify protect, defend and hold harmless the
Promises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liabilities arising out of, involving. or in connection
with, the occupancy of the Promises by Lessee, the conduct of Lessee's business,
any act, omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed under this
Lease. The foregoing shall Include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding Involved therein, and whether
or not (in the case of claims made against Lessor litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by reason
of any of the foregoing matters, Lessee upon notice from Lessor shall defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim In order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
Injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees. customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances. plumbing, air conditioning or lighting fixtures, or from any other
cause, whether said Injury or damage results from conditions arising upon the
Promises or upon other portions of the Building
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of which the Promises are a part, from other sources or places, and regardless
of whether the cause of such damage or injury or the means of repairing the same
Is accessible or not Lessor shall not be liable for any damages arising from any
act or neglect of any other lessee of Lessor nor from the failure by Lessor to
enforce the provisions of any other lease In the Industrial Center.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under
no circumstances be liable for Injury to Lessee's business or for any loss of
Income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction
to the Premises, other than Lessee-Owned Alterations and Utility Installations,
the repair cost of which damage or destruction is less than fifty percent (50%)
of the then Replacement Cost (as defined In Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "Promises Total Destruction" shall mean damage or
destruction to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction Is fifty percent
(50%) or more of the then Replacement Cost of the Promises (excluding Lessee
Owned Alterations and Utility Installations and Trade Fixtures) immediately
prior to such damage or destruction. In addition, damage or destruction to the
Building, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures of any lessees of the Building, the cost of which damage or
destruction is fifty percent (50%) or more of the then Replacement Cost
(excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures
of any lessees of the Building) of the Building shall, at the option of Lessor,
be deemed to be Promises Total Destruction.
(c) "Insured Loss" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
Insurance described In Paragraph 8.3(a) irrespective of any deductible amounts
or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild
the Improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined In Paragraph 6.2(a), In, on, or under the
Premises.
9.2 Promises Partial Damage - Insured Loss. If Premises Partial Damage
that Is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue In full force and effect. In the event, however, that there Is a
shortage of Insurance proceeds and such shortage Is due to the fact that, by
reason of the unique nature of the Improvements In the Premises, full
replacement cost Insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for
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the shortage In Insurance proceeds or to fully restore the unique aspects of the
Promises unless Lessee provides Lessor with the funds to cover same, or adequate
assurance thereof, within ten (10) days following receipt of written notice of
such shortage and request therefor. If Lessor receives said funds or adequate
assurance thereof within said ten (10) day period, Lessor shall complete them as
soon as reasonably possible and this Lease shall remain in full force and
effect. If Lessor does not receive such funds or assurance within said period,
Lessor may nevertheless elect by written notice to Lessee within ten (10) days
thereafter to make such restoration and repair as is commercially reasonable
with Lessor paying any shortage in proceeds, in which case this Lease shall
remain in full force and effect. If Lessor does not receive such funds or
assurance within such ten (10) day period, and if Lessor does not so elect to
restore and repair, then this Lease shall terminate sixty (60) days following
the occurrence of the damage or destruction. Unless otherwise agreed, Lessee
shall in no event have any right to reimbursement from Lessor for any funds
contributed by Lessee to repair any such damage or destruction. Promises Partial
Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than
Paragraph 9.2, notwithstanding that there may be some Insurance coverage, but
the not proceeds of any such insurance shall be made available for the repairs
If made by either Party.
9.3 Partial Damage - Uninsured Loss. If Promises Partial Damage that
Is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue In full force and effect), Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's Intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the repair of such damage totally at Lessee's expense and without
reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following such
commitment from Lessee. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified In Lessor's notice of
termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived In Paragraph 9.7.
9.5 Damage Now End of Term. If at any time during the last six (6)
months of the term of this Lease there Is damage for which the cost to repair
exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any shortage
in Insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expires. If
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Lessee duly exercises such option during such period and provides Lessor with
funds (or adequate assurance thereof) to cover any shortage in insurance
proceeds, Lessor shall, at Lessor's expense repair such damage as soon as
reasonably possible and this Lease shall continue in full force and effect. If
Lessee fails to exercise such option and provide such funds or assurance during
such period, then this Lease shall terminate as of the date set forth In the
first sentence of this Paragraph 9.5.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of (i) Premises Partial Damage or (ii)
Hazardous Substance Condition for which Lessee is not legally responsible, the
Bass Rent, Common Area Operating Expenses and other charges, If any, payable by
Lessee hereunder for the period during which such damage or condition, its
repair, remediation or restoration continues. shall be abated in proportion to
the degree to which Lessee's use of the Premises is impaired, but not in excess
of proceeds from insurance required to be carried under Paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses and other charges, if
any, as aforesaid, all other obligations of Lessee hereunder shall be performed
by Lessee, and Lessee shall have no claim against Lessor for any damage suffered
by reason of any such damage, destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall riot commence. in a
substantial and meaningful way the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee's has actual notice of Lessee's
election to terminate this Lease on a date not less than sixty (60) days
following the giving of such notice. If Lessee gives such notice to Lessor and
such Lenders and such repair or restoration is not commenced within thirty (30)
days after receipt of such notice, this Lease shall terminate as of the date
specified in said notice. If Lessor gives or a Lender commences the repair or
restoration of the Promises within thirty (30) days after the receipt of such
notice, this Lease shall continue in full force and effect. "Commence" as used
in this Paragraph 9.6 shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Promises, whichever occurs first.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee Is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue In full force and effect, but subject
to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue In full force and effect, or (ii) if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000 whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of
the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. in the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a) investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever Is greater. Lessee shall provide Lessor with the funds
required of Lessee or satisfactory assurance thereof within thirty (30) days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available.
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If Lessee does not give such notice and provide the required funds or assurance
thereof within the time period specified above, this Lease shall terminate as of
the date specifiedin Lessor's notice of termination.
9.8 Termination - Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment
made by Lessee to Lessor and so much of Lessee's Security Deposit as has not
been, or Is not then required to be, used by Lessor under the terms of this
Lease.
9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extent it Is inconsistent
herewith.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Industrial Center, and except as
otherwise provided In Paragraph 10.3, any such amounts shall be Included In the
calculation of Common Area Operating Expenses In accordance with the provisions
of Paragraph 4.2.
10.2 Real Property Tax Definition. As used herein, the term "Real
Property Taxes" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the industrial Center by any
authority having the direct or indirect power to tax, including any city, state
or federal government, or any school, agricultural, sanitary, fire, street,
drainage, or other improvement district thereof, levied against any legal or
equitable interest of Lessor in the industrial Center or any portion thereof,
Lessor's right to rent or other income therefrom, and/or Lessor's business of
leasing the Promises. The term "Real Property Taxes" shall also Include any tax,
fee, levy, assessment or charge, or any increase therein, imposed by reason of
events occurring, or changes In Applicable Law taking effect during the term of
this Lease, including but not limited to a change In the ownership of the
Industrial Center or In the Improvements thereon, the execution of this Lease,
or any modification, amendment or transfer thereof, and whether or not
contemplated by the Parties. In calculating Real Property Taxes for any calendar
year, the Real Property Taxes for any real estate tax year shall be included in
the calculation of Real Property Taxes for such calendar year based upon the
number of days which such calendar year and tax year have in common.
10.3 Additional Improvements. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes If assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 Joint Assessment. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements Included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned In the assessor's work sheets or such other Information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
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10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained In the Promises or stored within the Industrial Center. When
possible, Lessee shall cause Its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. Utilities Lessee shall pay directly for all utilities and
services supplied to the Promises, Including but not limited to electricity,
telephone, security, gas and cleaning of the Promises, together with any taxes
thereon. If any such utilities or services are not separately metered to the
Promises or separately billed to the Promises, Lessee shall pay to Lessor a
reasonable proportion to be determined by Lessor of all such charges jointly
metered or billed with other premises In the Building, In to manner and within
the time periods set forth in Paragraph 4.2(d).
12. Assignment and Subletting.
12.1.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or
sublet all or any part of Lessee's Interest: In this Lease or In the Premises
without Lessor's prior written consent given under and subject to the terms of
Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of twenty five
percent (25%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.
(c) The Involvement of Lessee or Its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result In a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of full
execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists Immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or Is greater, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent "Not
Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee
(excluding any Guarantors) established under generally accepted accounting
principles consistently applied.
(d) An assignment or subletting of Lessee's Interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1, or a non-curable Breach without
the necessity of any notice and grace period. If Lessor elects to treat such
unconsented to assignment or subletting as a non-curable Breach, Lessor shall
have the right to either: (i) terminate this Lease, or (ii) upon thirty (30)
days' written notice ("Lessor's Notice"), increase the monthly Base Rent for the
Premises to the greater of the then fair market rental value of the Premises, as
reasonably determined by Lessor, or one
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hundred ten percent (110%) of the Base Rent then in effect Pending determination
of the new fair market rental value, if disputed by Lessees, Lessee shall pay
the amount set forth in Lessor's Notice, with any overpayment credited against
the next installment(s) of Base Rent coming due, and any underpayment for the
period retroactively to the effective date of the adjustment being due and
payable immediately upon the determination thereof. Further, in the event of
such Breach and rental adjustment (i) the purchase price of any option to
purchase the Premises held by Lessee shall be subject to similar adjustment to
the then fair market value as reasonably determined by Lessor (without the Lease
being considered an encumbrance or any deduction for depreciation or
obsolescence, and considering the Premises at its highest and best use and In
good condition) or one hundred ten percent (110%) of the price previously in
effect (ii) any index-oriented rental or price adjustment formulas contained in
this Lease shall be adjusted to require that the bass index be determined with
reference to the index applicable to the time of such adjustment, and (iii) any
fixed rental adjustments scheduled during the remainder of the Lease term shall
be increased in the same ratio as the now rental bears to the Base Rent in
effect immediately prior to the adjustment specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.1.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting shall
not (i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, nor (iii) alter the primary liability of Lessee for
the payment of Base Rent and other sums due Lessor hereunder or for the
performance of any other obligations to be performed by Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and assignments
of the sublease or any amendments or modifications thereto without notifying
Lessee or anyone else liable under this Lease or the sublease and without
obtaining their consent, and such action shall not relieve such persons from
liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's obligation under
this Lease, Lessor may proceed directly against Lessee, any Guarantors or anyone
else responsible for the performance of the Lessee's obligations under this
Lease, including any sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held, by Lessor.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, Including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000. or ten percent
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(10%) of the monthly Base Rent applicable to the portion of the Premises which
is the subject of the proposed assignment or sublease, whichever Is greater, as
reasonable consideration for Lessor's considering and processing the request for
consent. Lessee agrees to provide Lessor with such other or additional
information and/or documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to form and comply with each and
every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.2(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving Its consent to any assignment or
subletting, may require that the amount and adjustment schedule of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment schedule for property similar to the Premises as then constituted, as
determined by Lessor.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest In all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined In Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of the foregoing
provision or any other assignment of such sublease to Lessor, nor by reason of
the collection of the rents from a sublessee, be deemed liable to the sublessee
for any failure of Lessee to perform and comply with any of Lessee's obligations
to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor stating
that a Breach exists in the performance of Lessee's obligations under this
Lease, to pay to Lessor the rents and other charges due and to become due under
the sublease. Sublessee shall rely upon any such statement and request from
Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against such subleases, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by said
sublessees to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at Its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or
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security deposit paid by such sublessee to such sublessor or for any other prior
defaults or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior written
consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "Default" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease. A
"Breach" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent, Lessee's Share of Common Area
Operating Expenses, or any other monetary payment required to be made by Lessee
hereunder as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of, insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which endangers
or threatens life or property, where such failure continues for a period of
three (3) days following written notice thereof by or on behalf of Lessor to
Lessee.
(c) Except as expressly otherwise provided In this Lease, the failure
by Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, If applicable) of (i) compliance with Applicable Requirements per
Paragraph 6.3, (ii) the inspection, maintenance and service contacts required
under Paragraph 7.1 (b), (iii) the rescission of an unauthorized assignment or
subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37,
(v) the subordination or non-subordination of this Lease per Paragraph 30, (vi)
the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
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(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that
are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1 (a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for its
cure, then it shall not be deemed to be a Breach of this Lease by Lessee if
Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making by
Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined In 11 U.S. Code Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60 days); (iii) the appointment of a
trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest In this Lease, where possession
Is not restored to Lessee within thirty (30) days; or (iv) the attachment
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure Is not discharged within thirty (30) days; provided, however, in the
event that any provision of this Subparagraph 13.1 (a) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not off
ad the validity of the remaining provisions,
(f) The discovery by Lessor that any financial statement of Lessee or
of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially
false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurances of security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the Guarantors that existed at the time of execution of this Lease.
13.2 Remedies. If Lessee falls to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notes
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its own
option, may require all future payments to be made under this Lease by Lessee to
be made only by cashier's check. In the event of a Breach of this Lease by
Lessees (as defined In Paragraph 13.1), with or without further notice or
demand, and without limiting Lessor in the exercise of any right or remedy which
Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award
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exceeds the amount of such rental loss that the Lessee proves could have been
reasonably avoided; (iii) the worth at the time of award of the amount by which
the unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that the Lessee proves could be reasonably avoided;
and (iv) any other amount necessary to compensate Lessor for all the detriment
proximately caused by the Lessee's failure to perform its obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom, Including but not limited to the cost of recovering possession of the
Premises, expenses of reletting, including necessary renovation and alteration
of the Premises, reasonable attorneys' fees, and that portion of any leasing
commission paid by Lessor in connection with this Lease applicable to the
unexpired term of this Lease. The worth at the time of award of the amount
referred to In provision (iii) of the immediately preceding sentence shall be
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco or the Federal Reserve Bank District in which the Premises
are located at the time of award plus one percent (1%). Efforts by Lessor to
mitigate damages caused by Lessee's Default or Breach of this Lease shall not
waive Lessor's right to recover damages under this Paragraph 132. If termination
of this Lease is obtained through the provisional remedy of unlawful detainer,
Lessor shall have the righ to recover In such proceeding the unpaid rent and
damages as are recoverable therein, or Lessor may reserve the right to recover
all or any part thereof in a separate suit for such rent and/or damages. If a
notice and grace period required under Subparagraph 13.1 (b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by Subparagraph 13.1 (b), (c) or (d). In such
case, the applicable grace period under ft unlawful detainer statute shall run
concurrently after the one such statutory notice, and the failure of Lessee to
cure the Default within the greater of the two (2) such grace periods shall
constitute both an unlawful detainer and a Breach of this Lease entitling Lessor
to the remedies provided for in this Lease and/or by sold statute.
(b) Continue the Lease and Lessee's right to possession In effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
recover the rent as it becomes due, provided Lessee has the right to sublet or
assign, subject only to reasonable limitations. Lessor and Lessee agree that the
limitations on assignment and subletting In this Lease are reasonable. Acts of
maintenance or preservation, efforts to relet the Promises, other appointment of
a receiver to protect the Lessor's Interest under this Lease, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are located.
(d) The expiration or termination of this Lease and/or the termination
of Lessee's right to possession shall not relieve Lessee from liability under
any indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture In Event of Breach. Any agreement by Lessor
for tree or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions" shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be formed or observed by Lessee
during the term hereof as the same may be extended. Upon the occurrence of a
Breach (as defined in Paragraph 13.1) of this lease by Lessee, any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor, as additional rent due under this Lease,
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notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this
Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of
such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or deed of trust covering the
Premises. Accordingly, if any installment of rent or other sum due from Lessee
shall not be received by Lessor or Lessor's designee within ten (10) days after
such amount shall be due, then, without any requirement for notice to Lessee,
Lessee shall pay to Lessor a late charge equal to six percent (6%) of such
overdue amount. The parties hereby agree that such late charge represents a fair
and reasonable estimate of the costs Lessor will incur by reason of late payment
by Lessee. Acceptance of such late charge by Lessor shall in no event constitute
a waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge Is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this
Lease unless Lessor falls within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by any Lender(s) whose name and address shall have been furnished to
Lessee in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after such
notice are reasonably required for Its performance, then Lessor shall not be In
breach of this Lease if performance Is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
14. Condemnation. If the Promises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the portion of
the Common Areas designated for Lessee's parking, is taken by condemnation,
Lessee may, at Lessee's option, to be exercised in writing within ten (10) days
after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the Bass Rent shall be
reduced in the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the Premises. No reduction of Base
Rent shall occur if the condemnation does not apply to any portion of the
Premises. Any award for the taking of all or any part of the Premises under the
power of eminent domain or any payment made under threat of the exercise of such
power shall be the property of Lessor, whether such award shall be made as
compensation for diminution of value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any compensation, separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease Is
not terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received,
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over and above Lessee's Share of the legal and other expenses incurred by Lessor
in the condemnation matter, repair any damage to the Premises caused by such
condemnation authority. Lessee shall be responsible for the payment of any
amount In excess of such netseverance damages required to complete such repair.
15. Brokers' Fees.
15.1 Procuring Cause. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.4 Representations and Warranties. Lessee and Lessor each represent
and warrant to the other that it has had no dealings with any person, firm,
broker or finder other than as named In Paragraph 1.10(a) in connection with the
negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the Indemnifying Party including any costs, expenses, and/or attorney's fees
reasonably incurred with respect thereto.
16. Tenancy and Financial Statements.
16.1 Tenancy Statement Each Party (as "Responding Party") shall within
ten (10) days after written notice from the other Party (the "Requesting Party")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in a form similar to the then most current "Tenancy Statement" form published by
the American Industrial Real Estate Association, plus such additional
information, confirmation and/or statements as may be reasonably requested by
the Requesting Party.
16.2 Financial Statement. If Lessor desires to finance, refinance, or
sell the Promises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated by
Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises. In the event
of a transfer of Lessor's title or interest In the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined,
18. Severability. The Invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10) days
following the date on which it was due, shall bear interest from the
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date due at the prime rate charged by the largest state chartered bank in the
state in which to Premises are located plus four percent (4%) per annum, but not
exceeding the maximum rate allowed by law, in addition to the potential late
charge provided for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance
of all obligations to be performed of all obligations to be performed or
observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent
22. No Prior or other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. Each Broker shall be an intended third party beneficiary
of the provisions of this Paragraph 22.
23. Notices.
23.1 Notice Requirements. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by
messenger or courier service) or may be sent by regular, certified or registered
mall or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile
transmission during normal business hours, and shall be deemed sufficiently
given if served in a manner specified in this Paragraph 23. The addresses noted
adjacent to a Party's signature on this Lease shall be that Party's address for
delivery or mailing of notice purposes. Either Party may by written notice to
the other specify a different address for notice purposes, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for the purpose of mailing or delivering notices to Lessee. A
copy of all notices required or permitted to be given to Lessor hereunder shall
be concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 Date of Notice. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delvery date is shown, the postmark thereon. If sent
by regular mail, the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and malled with postage prepaid.
Notices delivered by UnIteud States Mail or overnight courier that guarantees
next day delivery delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the United States Postal Service or courier. If any
notice is transmitted by facsimile transmission or similar means, the same shall
be deemed served or delivered upon telephone or facsimile confirmation of
receipt of the transmission thereof, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday or a Sunday or a legal
holiday, it shall be deemed received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any such act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent
or similar act by Lessee, or be construed as the basis of an estoppel to enforce
the
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provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any Default or Breach by
Lessee of any provision hereof. Any payment given Lessor by Lessee may be
accepted by Lessor on account of moneys or damages due Lessor, notwithstanding
any qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to two hundred percent
(200%) of the Base Rent applicable during the month immediately preceding such
expiration or earlier termination. Nothing contained herein shall be construed
as a consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Promises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default pursuant
to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any
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offsets or defenses which Lessee might have against any prior lessor, or (iii)
be bound by prepayment of more than one month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. Attorneys' Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "Prevailing Party" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary. Lessor may at any time place on or about the
Premises or Building any ordinary "For Sale" signs and Lessor may at any time
during the last one hundred eighty (180) days of the term hereof place on or
about the Premises any ordinary "For Lease" signs. All such activities of Lessor
shall be without abatement of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the exterior of the Premises
or the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to advertise
Lessee's own business so long as such signs are in a location designated by
Lessor and comply with Applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. The installation of any sign on
the Premises by or for Lessee shall be subject to the provisions of Paragraph 7
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(Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgment that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 Form of Guaranty. It there are to be any Guarantors of this Lease
per Paragraph 1.11, the form of the guaranty to be executed by each such
Guarantor shall be In the form most recently published by the American
Industrial Real Estate Association, and each such Guarantor shall have the same
obligations as Lessee under this lease, including but not limited to the
obligation to provide the Tenancy Statement and information required in
Paragraph 16.
37.2 Additional Obligations of Guarantor. It shall constitute a Default
of the Lessee under this Lease if any such Guarantor falls or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the Guarantor (and
of the party
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signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and
resolution of its board of directors authorizing the making of such guaranty,
together with a certificate of incumbency showing the signatures of the persons
authorized to sign on its behalf, (b) current financial statements of Guarantor
as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d)
written confirmation that the guaranty is still in effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the
Premises and the performance of all of the covenants, conditions and provisions
on Lessee's part to be observed and performed under this Lease, Lessee shall
have quiet possession of the Premises for the entire term hereof subject to all
of the provisions of this Lease.
39. Options.
39.1. Definition. As used in this Lease, the word "Option" has the following
meaning: (a) the right to extend the term of this Lease or to renew this Lease
or to extend or renew any lease that Lessee has on other property of Lessor; (b)
the right of first refusal to lease the Premises or the right of first offer to
lease the Premises or the right of first refusal to lease other property of
Lessor or the right of first offer to lease other property of Lessor; (c) the
right to purchase the Premises, or the right of first refusal to purchase the
Premises, or the right of first offer to purchase the Premises, or the right to
purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor, or the right of first offer to purchase other property
of Lessor.
39.2 Options Personal to Original Lessee. Each Option granted to Lessee in this
Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any multiple Options to
extend or renew this Lease, a later option cannot be exercised unless the prior
Options to extend or renew this Lease have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding any
provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of separate Defaults under Paragraph 13.1 during the twelve
(12) month period immediately preceding the exercise of the Option, whether or
not the Defaults are cured.
(b) The period of time within which an Option may be exercised shall not be
extended or enlarged by reason of Lessee's inability to exercise an Option
because of the provisions of Paragraph 39.4(a)
(c) All rights of Lessee under the provisions of an Option shall terminate and
be of no further force or effect, notwithstanding Lessee's due and timely
exercise of the Option, if, after such exercise and during the term of !his
Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a
period of thirty (30) days after
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such obligation becomes due (without any necessity of Lessor to give notice
thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of
separate Defaults under Paragraph 13.1. during any twelve (12) month period,
whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of
this Lease.
40. Rules and Regulations. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ('Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center arid their invitees.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment 'under protest' and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall. within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as May
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be reasonably required by an institutional insurance company or pension plan
Lender in connection with the obtaining of normal financing or refinancing of
the property of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein,
if more than one person or entity is named herein as either Lessor or Lessee,
the obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED. THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEYS REVIEW
AND APPROVAL FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF
THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR
HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR
THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT
OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE
PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL
AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER
THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD
BE CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signature.
Executed at Moorpark, CA Executed at San Diego, CA
on August, 1998 on August 9, 1998
By LESSOR: By LESSEE
Impala Carlsbad Partners Ltd Laser Photonics, Inc.
By: /s/ Kermit Bartlett By: /s/ Chaim Markheim
------------------- ------------------
Kermit Bartlett Chaim Markheim
General Partner Chief Financial Officer
Chief Operating Officer
12652 Ambermeadow 6865 Flanders Drive
Suite G
Moorpark, CA 93201 San Diego, CA 92121
Tel: 805-529-0535 Tel: 619-455-7030
Fax: 805-529-0254 Fax: 619-455-0946
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By BROKER By BROKER
Executed at Carlsbad, CA Executed at Carlsbad, CA
By: /s/ Charles D. Currey By: /s/ Tim Moore
--------------------- -------------
Charles D. Currey Tim Moore
----------------- ---------
Senior Marketing Consultant Senior Associate
5152 Avenida Encinas
Carlsbad, CA
Tel: 760-438-1333
Fax: 760-931-9181
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ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL, MULTI-TENANT LEASE - NET DATED
AUGUST 4, 1998 BETWEEN IMPALA CARLSBAD PARTNERS LTD., A CALIFORNIA LIMITED
PARTNERSHIP, AS LESSOR AND LASER PHOTONICS, INC., A DELAWARE CORPORATION, AS
LESSEE.
50A. RENTAL ESCALATIONS:
On December 1, 1999 (or twelve months from full occupancy whichever
occurs later) and each twelve (12) months thereafter during the term of the
Lease and the options, if exercised, the base monthly rent payable under
Paragraph 4 of the Lease shall be adjusted by the increase, if any, from the
date this Lease commenced, in the Consumer Price Index of the Bureau of Labor
Statistics of the U.S. Department of Labor for Urban Wage Earners and Clerical
Workers, Los Angeles, Anaheim, Riverside, California (1982-84=100), "All Items",
herein referred to as "CPI".
The base monthly rent payable in accordance with this section shall be
calculated as follows: The full base rent as set forth in Addendum Paragraph 52A
of the Lease ($8,050.00), shall be multiplied by a fraction, the numerator of
which shall be the C.P.I. of the month of August immediately preceding the
effective date of the subject rent escalation, and the denominator of which
shall be the C.P.I. for the month of August, 1999. The sum so calculated shall
constitute the new monthly rent hereunder, but in no event (during the initial
lease term only) shall such new monthly rent be less than one hundred two
percent (102% and not more than 105%) of the rent payable for the month
immediately preceding the date of rent adjustment.
In the event the compilation and/or publication of the C.P.I. shall be
transferred to any other governmental department, bureau, or agency, or shall be
discontinued, then the index most nearly the same as the C.P.I. shall be used to
make such calculation. In the event that Lessor and Lessee cannot agree on such
alternative index, then the matter shall be submitted for a decision to the
American Arbitrators Association in accordance with the rules of said
association and the decision of the arbitrators shall be binding upon Lessor and
Lessee.
51A. OPTION(S) TO EXTEND:
Lessor hereby grants to Lessee the option(s) to extend the term of this Lease
for two (2) five-year periods commencing when each prior term expires upon each
and all of the following terms and conditions:
(a) Lessee gives to Lessor, and Lessor receives, written notice of
each exercise of each option to extend this Lease for each additional term no
earlier than nine (9) months, and no later than six (6) months, prior to the
time that each option period would commence if the option(s) were exercised,
time being of the essence. If said. notification of the exercise of each option
is not so given and received, this option shall automatically expire;
(b) The base monthly rental rate as adjusted by the changes in the CPI
index as per paragraph 50A of this addendum shall be adjusted starting in the
first month of each option period to reflect a full CPI increase for the
preceding period (5 years) with no annual cap in place, provided however this
adjusted rate shall be compared to the market rate for the premises as
hereinafter defined and the new monthly rental rate shall be the greater of the
adjusted rate or the market rate.
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The market rate shall be defined as the going lease rate for other
buildings in the area that have similar amenities and lease terms. Lessor and or
its agent shall provide Lessee with a list showing available space and terms for
at least 3 similar projects in the Carlsbad area. The notice shall be sent to
Lessee on or before the first month of Lessee's notification period for each
respective option and it shall state the rate for the space. In the event Lessee
contests the rate it shall have the option to hire an MAI appraiser at its
expense to calculate "market rent". If Lessor does not agree with the opinion of
Lessee's appraiser it may hire a second appraiser to determine a second opinion
on market rent and the new lease rate shall be no less than the average value of
the two appraisals.
(c) The provisions of Paragraph 39, including the provision relating
to default of Lessee set forth in Paragraph 39.4 of this Lease, are conditions
of this option;
(d) All the terms and conditions of this Lease, except where
specifically modified by this option, shall apply.
52A. OCCUPANCY AND RENT COMMENCEMENT
Lessee may occupy the front portion of the building totaling approximately 4,427
square feet upon completion of Lessor's improvements in Paragraph 53A, but no
later than October 1, 1998. Lessee's base rent shall be $3,099.00 per month. At
such time as the improvements are completed in the rear portion of the building,
Lessee's base rent shall be increased to $8,050.00 per month and it shall be
payable at this rate until the first adjustment date as per paragraph 50A. The
triple net charges are based upon $.156 per square foot during the first year of
the term and are subject to increase or decrease thereafter. This equates to
$691.00 per month for front portion of the building increasing to $1,794.00 per
month once Lessee takes full occupancy of the premises.
53A. TENANT IMPROVEMENTS BY LESSOR
Lessor shall complete the following improvements to the premises at Lessor's
sole cost and expense:
(a) Professionally clean and paint the interior portion of the
premises including office carpets, warehouse floor, doors, glass, plumbing
fixtures, lights and lenses, door iambs, ceilings and ceiling tiles, window
coverings and all entry and exit areas and the warehouse restroom (not including
shared restrooms or warehouse walls),
(b) Place all plumbing, electrical and mechanical systems (HVAQ in
good working order.
(c) Service all entry doors and truck doors to put them in good
operating condition.
(d) Install new double door glass entry and concrete walkway with a
handicap accessible ramp at the West end of the building. (Area W)
(e) Demise the space from the east side of the building through the
addition of a locking door in the office corridor (Area 6) and a new hallway
from the warehouse to access the restrooms also with a locking door (Area 7).
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(f) Fix any known roof leaks and clear roof drains. (Lessee pays for
roof maintenance through its share of operating expenses and Lessor pays for
roof replacement, if required.)
(g) Create an opening in the hallway of the office to access the rear
portion of the building at the west end of the offices (Area 2).
(h) Remove three office partition walls in rooms 3 & 4, rebuild
ceilings (where walls are removed) and install vinyl tile in these rooms to
create air-conditioned lab areas.
54A. TENANT IMPROVEMENTS AT LESSEE'S EXPENSE
Lessor shall complete the following improvements to the premises, the cost of
which shall be amortized over the first four years of the term of the lease plus
10% interest per annum.
(a) Install drop ceiling in the warehouse area complete with HVAC,
recessed fluorescent lighting and fiberglass insulation. The ceiling height
shall be at 10 feet above finished floor. (Area 8)
(b) Install vinyl flooring throughout the warehouse area and the
hallway (Area 5) leading from the office area.
(c) Install electrical outlets where required. Lessee shall provide
its own switch-gear and breakers and subdivide electrical and HVAC from existing
tenant.
(d) Construct a small room with a framed ceiling to be used as a
machine shop.
The cost of the improvements in this section shall not exceed $70,000.00 or
alternatively Lessee shall pay any amounts over $70,000.00. Any overage shall be
paid 50% upon commencement and 50% upon completion of the work. The tenant
improvement allowance includes all necessary space planning fees and permits. In
the event the costs exceed $70,000.00, Lessee may elect to defer a portion (over
$70,000.00) of the work to a later date, not to exceed twelve months from
commencement date at which time Lessee shall pay 50% upon commencement of work
and 50% upon completion. Lessee will work with Lessor's space planner to insure
that plans and permits are in Lessor's possession in ample time to meet the
intended full possession date of 11/1/98.
55A. AUTHORITY:
Lessee at Lessee's sole cost and expense represents and warrants that it is duly
formed and in good standing, and has full corporate power and authority, to
enter into this Lease and has taken all corporate action, necessary to carry out
the transaction contemplated herein, so that when executed, this Lease
constitutes a valid and binding obligation enforceable in accordance with its
terms. Lessee shall provide Lessor with corporate resolutions or other proof in
a form acceptable to Lessor, authorizing the execution of the Lease at the time
of such execution.
56A. BANK REVIEW
This lease is contingent upon the satisfactory review of the lender on the
industrial project.
57A. SIGNAGE:
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It shall be Lessee's responsibility and expense to install its signage subject
to sign codes in effect for the City of Carlsbad. Lessee shall submit a drawing
to Lessor for its approval of the sign prior to installation and the sign shall
be affixed with caulking only. No holes shall be drilled into the concrete on
the building. The sign shall be located at area S on attached drawing.
58A. BUSINESS LICENSE AND FIRE DEPARTMENT APPROVAL:
Lessee acknowledges that it will obtain proper permits from the City of
Carlsbad, the Fire Department, and any other government agencies to operate its
business at this location. In the event any of these agencies require building
modifications to adapt the building to Lessee's current or future use, Lessee
agrees to make such modifications at Lessee's sole expense. The fire department
may require fire lanes which may restrict use.
59A COMPUTER AND PHONE WIRING:
Lessee agrees that any electrical, computer and phone wiring and outlets
installed by Lessee shall comply with all building codes and shall become the
property of the Lessor upon the termination of the Lease.
60A. AMERICANS WITH DISABILITIES ACT:
Lessee shall at all times keep the Premises in compliance with the Americans
with Disabilities Act and its supporting regulations, and all similar Federal,
State or local laws, regulations and ordinances. If Lessor's consent is required
for alterations to bring the Premises into compliance, Lessor agrees not to
unreasonably withhold its consent.
61A. CERTIFICATE OF INSURANCE:
Lessee shall continually supply to Lessor a Certificate of Insurance from its
insurance carrier as shown Exhibit C. Lessor shall be named as Additional
Insured on the policy. Further to Paragraph 8.4, "Lessees Property Insurance",
if Lessee refuses or neglects to secure or maintain insurance policy(ies)
complying with the provisions of this paragraph, Lessor may, after ten (10) days
written notice to Lessee, secure the appropriate insurance policy(ies) and
Lessee shall pay upon written demand the cost of same to Lessor, as additional
rent.
62A. CONDITION OF THE PREMISES AT THE END OF TERM:
Lessee shall be responsible to return the premises to the Lessor in a clean,
releaseable condition to include the following:
(a) All damage to drywall in restroom areas and office areas shall be
repaired and all interior improvements shall be freshly painted. Office ceilings
shall be repaired to include replacement of broken or damaged ceiling tiles,
replacement of light ballast, lights or lenses and all computer wiring shall be
terminated above ceiling level.
(b) All truck doors shall be in good operating condition, free of
holes and bent plates or bent panel sections.
(c) The warehouse floor shall be delivered in a smooth, flat
condition, free of holes, broken sections and metal studs or raised concrete
footings.
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(d) All plumbing and mechanical systems shall be in good operating
condition with evidence of recent service to HVAC systems, including new filters
and lubrication.
(e) All electric and lighting systems shall be in good operating
condition. All junction boxes and conduit shall be left in a safe condition and
all bulbs shall be working.
(f) All office carpets and vinyl flooring shall be professionally cleaned and
all damaged areas shall be repaired or replaced.
63A. HAZARDOUS SUBSTANCES:
(a) COMPLIANCE WITH LAW: Without limiting the generality of
Section 6.2 above, Lessee, at Lessee's expense, shall comply with all
laws, rules, orders, ordinances, directions, regulations and requirements
of federal, state, county and municipal authorities pertaining to
Lessee's use of the property and with the recorded covenants, conditions
and restrictions, regardless of when they become effective, including,
without limitation, all applicable federal, state and local laws,
regulations or ordinances pertaining to air and water quality, Hazardous
Substances (as hereinafter defined), waste disposal, air emissions and
other environmental matters, all zoning and other land use matters, and
utility availability, and with any direction of any public officer or
officers, pursuant to law, which shall impose any duty upon Lessor of
Lessee with respect to the use or occupation of the Property.
(b) Lessee will not use, generate, manufacture, produce, store,
release, discharge or dispose of, on under or about the Property or
transport to or from the Property any Hazardous Substances (as defined in
Section 6.2(a) of the Lease) or allow its employees, agents, contractors,
invitees or any other person or entity to do so.
(c) Notwithstanding subparagraph (b) above, Lessee shall be
permitted to use, store, transport to and from the Property and dispose
of only the Hazardous Substances identified on Exhibit "B' attached
hereto and by this reference incorporated herein (the "Permitted
Hazardous Substances") so long as the conditions set forth below are
complied with. At no time shall (a) Permitted hazardous Substances which
are generated by Lessee, its employees, agents, licensees, invitees or
contractors (collectively "Lessee") be present on, under or about the
Property in excess of the quantities specified in Exhibit "B" to this
Lease, and (b) other Hazardous Substances be present on, under or about
the Property, without first obtaining the written consent of Lessor.
(d) Lessee shall maintain the Property in compliance with, and shall not
cause or permit the Property to be in violation of (a) any hazardous
waste management plan, or (b) any Environmental law (any and all federal,
state or local laws, ordinances, rules or regulations pertaining to
health, industrial hygiene or the environmental conditions on, under or
about the Property (including without limitation CERCLA, RCLAA, PCWAQCA,
CWC, Cal. HWCA, California Water Code, Carpenter-Presley Tanner Hazardous
Substance Account Act, various provisions of the California Health and
Safety Code and those laws described in Paragraph 6.2 of the Lease and
implementing regulations and rules, all as are or which may be amended,
are herein collectively referred to as "Environmental Laws"). Lessee
shall surrender the Property in as good a condition as when received by
Lessee, reasonable wear and tear excepted, it being specifically agreed
to by Lessor and Lessee that the presence at expiration or termination of
this Lease of Hazardous Substances which are generated, released,
discharged or
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disposed of by Lessee on, under or about the property, shall not be
"reasonable wear and tear" as that term is used in this Lease.
(e) Upon commencing any activity involving Hazardous Substances
on the Property and continuing throughout the term of this Lease, Lessor
and its representatives shall have the right, at the following times, to
enter the Property and to (1) conduct any testing, monitoring and
analysis for Hazardous Substances; (2) review any documents, materials,
inventory, financial data or notices or correspondence to or from private
parties (except for attorney-client documents and correspondence) or to
or from governmental entities in connection therewith; (3) review all
storage, use and disposal facilities and procedures associated with the
storage, use and disposal of Hazardous Substances (collectively
"Inspection") (except those prepared by or for legal counsel of Lessee)
at any time during the term of this Lease if, in Lessor's reasonable
judgment, Lessee is breaching its obligations under this Addendum or is
not in substantial compliance with any other provisions of this Lease.
Lessee shall give immediate written notice to Lessor of
1) Any action, proceeding or inquiry by any governmental
authority with respect to the presence of any Hazardous Substance on the
Property or the migration thereof from or to other property;
2) All demands or claims made or threatened by any third party
against Lessee or the Property relating to any loss or injury resulting
from any Hazardous Substances;
3) Any spill, release, discharge or non-routine disposal of
Hazardous Substances that occurs with respect to the Property or Lessee's
operations;
4) All matters of which Lessee is required to give notice of
pursuant to Section 25359.7 of the California Health and Safety code; and
5) Lessee's discovery of any occurrence or condition on, under or about
the Property or any real property adjoining or in the vicinity of the
Property or any part thereof to be subject to any restrictions on the
ownership, occupancy, transferability or use of the Property Under any
Environmental Law.
Should any spill, release, discharge or non-routine disposal of Hazardous
Substances appear to occur, or should Lessee discover any occurrence or
condition under or on or about the Property or any part thereof to be
subject to possible violation of any environmental law, Lessee's legal
counsel shall be so advised and shall promptly notify Lessor of the
existence of an event that the Lessor should investigate. It is agreed
that the attorney-client privilege shall not be violated. Nevertheless,
Lessee shall give adequate notice to Lessor such that Lessor may conduct
its own investigation to protect Lessor's interest.
(g) Lessor shall have the right to join and participate in, as a
party if it so elects, any legal proceedings or actions affecting the
Property initiated in connection with any Environmental Law and have its
attorney's fees in connection therewith paid by Lessee should the Lessee
be found to have violated any law or provision of this Lease.
(h) Lessee shall indemnify and hold harmless Lessor, its directors,
officers, employees, agents, successors and Assigns (collectively
"Lessor") from and against any and all claims arising from Lessee's use
of the Property for the conduct of its business or from any activity,
work or other things done or
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suffered by the Lessee in or about the Buildings and shall further
indemnify and hold harmless Lessor against and from any and all claims
directly arising from breach or default in performance of any obligation
on Lessee's part to be performed under the terms of this Lease, or
arising from any act or negligence of the Lessee, or any officer, agent,
employee, guest or invitee of Lessee, and from all and against all costs,
attorneys' fees, expenses and liabilities incurred in or about any such
claim or any action or proceeding brought thereon, including, without
limitation, claims, fines, judgments, penalties, losses, damages, costs,
expenses or liabilities (including attorneys' fees and costs) directly or
indirectly arising, in any manner whatsoever, out of or attributable to
the use, generation, manufacture, production, storage, release,
threatened release, discharge, disposal or presence of a Hazardous
Substance on, under or about the Property (collectively a "Release")
including, without limitation, (i) all foreseeable consequential damages
including without limitation loss of rental income and diminution in
property value; and (ii) the costs of any investigation, monitoring,
removal, restoration, abatement, repair, cleanup, detoxification or other
ameliorative work of any kind or nature required by any governmental
agency having jurisdiction thereof or Lessor (collectively "Remedial
Work") and the preparation and implementation of any closure, remedial or
other required plans. This indemnity shall survive the expiration or
termination of this Lease. In any action or proceeding brought against
Lessor by reason of any such claim, Lessee upon notice from Landlord
shall defend the same at Lessee's expense by counsel resonably
satisfactory to Lessor. In addition, Lessee, as a material part of the
consideration to Lessor, hereby assumes all risk or damage to property or
injury to persons, in, upon or about the Property, except that Lessee
shall not assume any risk for damage to Lessee resulting from the acts or
omissions of Lessor its authorized representatives.
G) In the event of the occurrence of a release, Lessee shall, at
its sole expense and without thirty (30) days after demand by Lessor
commence to perform and thereafter diligently prosecute to completion
such Remedial Work as is necessary to restore the Property to the
condition existing prior to the introduction of any Hazardous Substances.
All costs and expenses of such Remedial Work shall be paid by Lessee.
Notwithstanding anything to the contrary set forth in this Addendum
or in the Lease, Lessee's failure to observe or perform any of the
covenants, conditions or provisions of this Addendum to be observed or
performed by Lessee shall constitute a default and breach of this Lease
by Lessee upon the delivery of written notice of such failure by Lessor
to Lessee.
64A. SHARED RESTROOM FACILITIES:
Lessee will be sharing the two large restrooms at the center of the
building with the other tenant in the building. The size of the leased
premises include 50% of this shared area. If either tenant contracts for
janitorial service to clean and maintain the restroom. and adjacent
hallway areas (5 day per week service plus supplies), the other tenant
shall pay V2 the cost incurred by the tenant contracting for the service.
If neither tenant contracts for such janitorial service, Lessor shall
provide required services and Lessee shall be billed monthly for 50% of
the costs as additional rent.
,65A. UTILITIES
Lessee shall immediately place all utilities in its name upon
occupancy and pay all charges for such services in a timely manner
including electric, phone and trash service.
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66A. HVAC MAINTENANCE
Lessee shall contract with MoorCo Heating and Air Conditioning (or
other company designated by Lessor) to provide maintenance and repair of
the HVAC systems for the premises at its expense.
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PALOMAR TECH CENTRE
GUARANTY OF LEASE
This Guaranty is entered into as of July 28, 1998, by Pennsylvania
Merchant Group ("Guarantor") for the benefit of Impala Carlsbad Partners, Ltd. A
California Limited Partnership ("Lessor").
RECITALS
A. Concurrently herewith, Lessor and Laser-Photonics, Inc. ("Lessee")
are entering into that Standard Industrial/Commercial Multi-Tenant Lease dated
8/4/98 (the "Lease"), concerning the premises commonly known as 2431 Impala
Drive, Suite B, Carlsbad, California 92008
B. By its covenants herein set forth, Guarantor induced Lessor to enter
into the Lease, which was made and entered into in consideration for Guarantor's
said covenants.
GUARANTY
1. In consideration of the execution of the Lease by Lessor and as a
material inducement to Lessor to execute the Lease. Guarantor hereby
unconditionally and irrevocably guarantees, to Lessor, its successors and
assigns, without deduction by reason of setoff, defense or counterclaim, the
prompt payment by Lessee of all rentals and all other sums payable by Lessee
under the Lease and the faithful and prompt performance by Lessee of each and
every on of the terms, conditions and covenants of the Lease to be kept and
performed by Lessee.
2. If Lessee shall at any time default in the performance or
observances of any of the terms, conditions or covenants in the Lease contained
on Lessee's part to be kept, performed or observed, Guarantor will keep, perform
and observe same, as the case may be, in the place and stead of Lessee.
3. Any act of Lessor consisting of a waiver of any of the terms or
conditions of the Lease. or the giving of any consent to any matter or thing
relating to the Lease, or the granting of any extensions of time to Lessee, may
be done without notice to Guarantor and without releasing Guarantor from any of
its obligations hereunder.
4. The terms of the Lease may be altered, modified, changed, extended
or renewed by agreement between Lessor and Lessee, or by a course of conduct,
and the Lease may be assigned by Lessor or any assignee of Lessor, without
consent or notice to Guarantor and this Guaranty shall thereupon and thereafter
guarantee the performance of the Lease as so changed, altered, modified,
assigned, extended or renewed.
<PAGE>
5. Guarantor agrees that it may be joined in any action against Lessee
in connection with the obligation of Lessee under the Lease and recovery may be
had against Guarantor in any such action. Lessor may enforce the obligations of
Guarantor hereunder without previous notice to or demand upon either Lessee or
Guarantor and without first taking any action whatsoever against Lessee or its
successors and assigns, or pursuing any other remedy or applying security it may
hold. Guarantor hereby waives (i) all rights to assert or plead at any time any
statute of limitations as relating to the Lease, the obligations of Guarantor
hereunder and all surety of other defenses in the nature thereof, (ii) demand of
payment, presentation and protest, and (iii) notice of acceptance of this
Guaranty.
6. Until all the covenants and conditions in the Lease on Lessee's part
to be performed and observed are fully performed and observed, Guarantor (i)
shall have no right of subrogation against Lessee by reason of any payments or
acts or performance by Guarantor hereunder, and (ii) subordinates any liability
or indebtedness of Lessee now or hereafter held by Guarantor to the obligations
owed to Lessor under the Lease and this Guaranty.
7. This Guaranty shall not be released, modified or affected by this
failure or delay on the part of Lessor to enforce any of the rights or remedies
of Lessor under the Lease, whether pursuant to the terms thereof or at law or in
equity.
8. In the event this Guaranty shall be held ineffective or
unenforceable by any court of competent jurisdiction or in the event of any
limitation of Guarantor's liability hereunder other than as expressly provided
herein, then Guarantor shall be deemed to be a lessee under the Lease with the
same force and effect as if Guarantor were expressly named as a joint and
several lessee therein with respect to the obligations of Lessee thereunder
hereby guaranteed.
9. In the event of any litigation between Guarantor and Lessor with
respect to this Guaranty, the unsuccessful party to such litigation agrees to
pay to the successful party all fees, costs and expenses thereof, including
reasonable attorney's fees and expenses.
10. If there is more than one undersigned Guarantor, the term
"Guarantor" as used herein shall include all of the undersigned; each and every
provision of this Guaranty shall be binding upon each and every on of the
undersigned; they shall each be jointly and severally liable hereunder and
Lessor shall have the right to join one or all of them in any proceeding or to
proceed against them in any order.
11. The term" Lessor" as used herein shall refer to Lessor and also any
assignee of Lessor or successor in interest to Lessor, whether by assignment or
otherwise.
12. The term "Lessee" as used herein refers to Lessee and also any
assignee or subleases of the Lease or any successor in interest to Lessee,
whether by assignment, sublease or otherwise.
<PAGE>
13. This instrument constitutes the entire agreement between Guarantor
and Lessor with respect to the subject matter thereof, superseding all prier
oral or written agreements or understandings with respect thereto, and may not
be changed, modified, discharged or terminated in any manner other than by an
agreement in writing signed by Guarantor and Lessor.
14. This Guaranty shall be effective only until the date that is two
years after the day Lessee takes full possession of the entire Premises under
the Lease.
IN WITNESS WHEREOF, Guarantor has executed this Guaranty.
GUARANTOR: PENNSYLVANIA MERCHANT GROUP
By: /s/Richard A. Hansen
--------------------
Its: President & CEO
----------------
Address: Four Falls Corporate Center
---------------------------
West Conshohocken, PA 19428
----------------------------
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CLINICAL TRIAL AGREEMENT
Agreement made this 17th day of 1998, ("Effective date") between The
General Hospital corporation, a not for profit corporation doing business as
Massachusetts General -Hospital, having a principal place of business at Fruit
Street, Boston, Massachusetts 02114 ("General"), R. Rox Anderson, M.D.,
Department of Dermatology, Massachusetts General Hospital, Boston, Massachusetts
02114 ("Principal Investigator") and Laser Photonics, Inc. a corporation having
an office at 6865 Flanders Drive, Suite G, San Diego, CA 92121, ("Company").
All of the parties to this Agreement share a common mission of improving
the public health by engaging in research for the purpose of discovering and
making available to the public new and improved medical drugs and devices. In
connection with this mission, Company desires to have further clinical research
conducted on its device described below. General and Principal Investigator,
having particular expertise and opportunity, desire to provide this research.
Accordingly, the parties agree as follows:
SECTION 1. STUDY PERFORMANCE.
1.1 PROTOCOL. Subject to approval of the Study pursuant to Section
1.2 below, Principal Investigator agrees to conduct, to the extent funds are
made available hereunder, a clinical study of a 308nm Excimer Laser manufactured
by Acculase, Inc., a subsidiary of Laser Photonics, Inc. (hereinafter referred
to as the "Study Device") in accordance with the study protocol entitled "308nm
Excimer Laser for the Treatment of Psoriasis," a copy of which is attached
hereto as Exhibit A (hereinafter referred to as the "Study"). In the event of
any conflict between Exhibit A and the provisions of this Agreement, the
provisions of this Agreement shall govern.
1.2 STUDY REVIEW. Principal Investigator shall conduct the Study at
General with the prior approval and ongoing review, of all appropriate and
necessary review authorities and in accordance with all applicable federal,
state, and local laws. and regulations. Principal Investigator shall provide
Company with written evidence of review and approval of this Study by General's
Institutional Review Board ("IRB") prior to the initiation of the Study and
shall inform Company of the IRB's continuing review promptly after such review
takes place, which shall be at least once per year. All volunteers shall meet
the legal age requirements of the Commonwealth of Massachusetts, the state in
which the Study is to be conducted.
1.3 STUDY DEVICE. Company shall provide General, at no charge, with
no more than three Study Devices for the Study. The General and Principal
Investigator shall safeguard such Study Device with the degree of care used for
its own property. Upon completion or termination of the Study and upon Company's
request, General shall return or other-wise dispose of any remaining Study
Device in accordance with Company's instructions. General and Principal
Investigator shall not use any Study Device for any purpose other than the
Study, unless otherwise agreed.
<PAGE>
SECTION 2: RESULTS OF THE STUDY
2.1 OWNERSHIP OF RECORDS, DATA AND INTELLECTUAL PROPERTY. Company
shall (own) its case report forms and the data resulting from the Study. General
shall own its medical records, research notebooks, and related documentation and
any intellectual property resulting from the Study subject to the option granted
to Company to license Inventions in Section 2.3 below. General shall have the
right to use the data for research, educational, and patient care purposes as
well as to comply with any federal, state, or local governments laws or
regulations. Notwithstanding the above, Company shall not use any patient names,
identifying information, photographs, or other likenesses without first
obtaining the specific written informed consent of such patient for such use.
2.2 PUBLICATION. The Principal Investigator shall be free to publish the
results of the Study subject only to the provisions of Section 3 regarding
Company's Proprietary Information. The Principal Investigator shall furnish
Company with a copy of any proposed publication for review and comment prior to
submission for publication, at least thirty (30) days prior to submission for
manuscripts and at least seven (7) days prior to submission for abstracts. At
the expiration of such thirty (30) day or seven (7) day period, Principal
Investigator may proceed with submission for publication provided, however, that
upon notice by Company that Company reasonably believes a patent application
claiming an Invention (as defined in Section 2.3) should be filed prior to such
publication, such publication shall be delayed for an additional thirty (30)
days or until any patent application or applications have been filed, whichever
shall first occur. In no event shall the submission of such publication of
results be delayed for more than sixty (60) days for manuscripts and for more
than thirty-seven (37) days for abstracts from the date such proposed
publication was received by Company, at the end of said sixty (60) or thirty
seven (37) days, the Principal Investigator shall be free to publish such
results as proposed.
2.3 INVENTIONS.
(a) Subject to the terms of Paragraph 2.3 (b)(g) below, the
Principal Investigator and any other General personnel performing the Study
under his direction who makes an invention which constitutes a new use of or
modification of the Study Device in the performance of the Study ("Invention")
shall promptly report and assign such Invention to General. General shall
promptly disclose, in writing, any Inventions to Company. Within thirty (30)
days of such disclosure, Company shall notify General, in writing, whether it
elects to have General file a patent application claiming the Invention.
(b) In the event of joint inventorship under the Study of a new
use of or modification of the Study Device between Investigators and/or
personnel from General and personnel from Company ("Joint Invention"), such
Investigators and/or personnel shall assign all of their rights, title and
interest in the Joint Invention to General and such personnel from Company shall
assign all of their rights, title and interest in the Joint Invention to
Company, and the Joint Invention shall be deemed Jointly owned. Promptly after
disclosure of the invention, the
<PAGE>
parties shall then mutually agree as to whether an application for the Joint
Invention shall be filed.
(c) As to any patent applications prepared and/or filed under
either paragraphs (a) or (b) above, Company shall have and is hereby given by
General an exclusive option, for a period of ninety (90) days following the
disclosure of such invention, to seek either (1) a worldwide, exclusive or
non-exclusive license for inventions in which General personnel are the sole
named inventors; or (2) a worldwide, exclusive license for General's rights in
any Joint Inventions. Exercise of Company's option shall be provided in writing
to General.
(d) In the event Company exercises its option under Paragraph
2.3(c) above, the Parties shall have ninety (90) days from the date of Company's
notice to negotiate in good faith a license agreement containing license terms
standard for agreements between universities and industry, which may include
payment of reasonable royalties and other compensation to General, objective,
time limited due diligence provisions for the development, commercialization and
marketing of a product embodying the invention and product liability
indemnification and insurance requirements which are acceptable to General's
liability insurance carrier. In the event the parties are unable to reach
agreement on the terms of a license under this paragraph, General shall then
have the right to license its rights to any third party, provided however, that
no license to a third party shall be agreed to by General on terms more
favorable than those terms last offered to Company.
(e) Notwithstanding the above paragraphs of this section 2, in the
event there is an invention under the Study, either solely by General personnel
or jointly by General and Company personnel, that is: (1) directed to an optimal
dosage, protocol and/or device configuration for treating psoriasis using
ultraviolet radiation in the manner such radiation is generated by Company's
Study Device and (2) that would not come within the definition of "Patent Right"
as set forth in the License Agreement dated November 26, 1997 between the
parties, it is agreed that Company shall be given a paid up worldwide exclusive
license to such invention and that payment by Company for the Study and for all
patent preparation and filing costs for such invention shall constitute the
consideration for the paid up license.
(f) It is agreed that for any patent application under which
Company is the licensee, Company shall pay all reasonable fees and costs
associated with the preparation and prosecution of such application, provided
however, that the parties shall mutually select the attorneys for such
application and that General shall keep Company promptly apprised of all
proceedings in connection with the application and Company shall have the right
to review and approve all submissions made during said filing and prosecution.
(g) In the event the Parties do not come to an agreement as to the
terms of a license under Paragraphs 2.3 (a)(d), Company shall no longer have
responsibility to further any further fees and costs associated with the filing
and prosecution of the application, and, in the event General enters into an
agreement with third party for such application, Company shall be reimbursed for
the fees and costs Company previously paid.
<PAGE>
2.4 USE OF NAME. Except for disclosure by General of Company's support-t
for the Study in publications, no party to this Agreement shall use the name of
any other party or of any staff member, employee or student of any other party
or any adaptation, acronym or name by which any party is commonly known, in any
advertising, promotional, or sales literature or in any publicity without the
prior written approval of the party or individual whose name is to be used. For
General, such approval shall be obtained from the Director of Public Affairs and
for Company, from Mr. Chaim Markheim.
2.5 STUDY RECORDS. General shall make Study records available to
Company representatives upon request for comparison with case report forms.
General shall also make such records available upon reasonable request for
review by representatives of the U.S. Food and Drug Administration. General
shall retain records of the Study including either the original or a copy of all
volunteer consent forms in conformance with applicable federal regulations.
Company shall notify Principal Investigator of the date a premarket approval
application (PMA) is approved for the Study Devices; or if the application is
not approved, Company shall notify Principal Investigator when all clinical
investigations have been discontinued and the FDA notified.
SECTION 3: COMPANY PROPRIETARY INFORMATION
3.1 It is anticipated that in the performance of the Study, Company
shall provide to General, Principal Investigator, and other General personnel
who are designated in writing by the Principal Investigator as being authorized
to receive Proprietary Information, and who agree in writing to the following
confidentiality obligations (each such institution or person individually
referred to in this Section 3.1 as a "Recipient" and collectively as
"Recipients"), or shall give Recipients access to, certain information which
Company considers proprietary. The rights and obligations of the parties with
respect to such information are as follows:
(a) For the purposes of this Agreement, "Proprietary Information"
refers to information of any kind which is disclosed by Company to a Recipient
and which, by appropriate marking, is identified as confidential and proprietary
at the time of disclosure. In the event that proprietary information must be
provided visually or orally, obligations of confidence shall attach only to that
information which is confirmed by Company in writing with the (10) working days
as being confidential.
(b) For a period of five (5) years after the Effective Date of
this Agreement, each Recipient agrees to use reasonable efforts, no less than
the protection given their own confidential information, to use Proprietary
Information received from Company and accepted by the Recipient only in
accordance with this Section 3. 1 (b).
(i) Each Recipient shall use Company's Proprietary
Information solely for the purposes of conducting the Study, obtaining any
required review of the Study or its conduct, or ensuring, proper medical
treatment of any patient or subject. Each Recipient agrees to make Proprietary
Information available only to those employees and students of General who
<PAGE>
require access to it in the performance of this Study and to inform them of the
confidential nature of such information.
(ii) Except as provided in subsection 3.1(b)(1), each
Recipient shall keep all Proprietary Information confidential unless Company
gives specific written consent for release.
(iii) If any Recipient becomes aware of any disclosure not
authorized hereunder, that Recipient shall notify Company and take reasonable
steps to prevent any further disclosure or unauthorized use.
(c) No Recipient shall be required to treat any information as
Proprietary Information under this Agreement in the event: (1) it is publicly
available prior to the date of the Agreement or becomes publicly available
thereafter through no wrongful act of any Recipient; (ii) it was known to any
Recipient prior to the date of disclosure or becomes known to any Recipient
thereafter from a third party having an apparent bona fide right to disclose the
information; (iii) i it is disclosed by any Recipient in accordance with the
terms of Company's prior written approval; (iv) it is disclosed by Company
without restriction on further disclosure; (v) it is independently developed by
any Recipient; or, (vi) any Recipient is obligated to produce it pursuant to an
order of a court of competent jurisdiction or a facially valid administrative,
Congressional, or other subpoena, provided that the Recipient subject to the
order or subpoena (a) promptly notifies Company and (B) cooperates reasonably
with Company's efforts to contest or limit the scope of such order.
SECTION 4: BUDGET
4.1 Company agrees to support this Study with a research grant of One
Hundred Fifty Nine Thousand Six Hundred Twenty Five Dollars ($159,625.00) with
includes indirect costs in the amount of Thirty One Thousand Nine Hundred Twenty
Five Dollars ($31,925.00) computed at a rate of 25% of total direct costs,
payable to General as follows:
Fifty Thousand Dollars ($50,000.00) upon execution of this Agreement;
Sixty Thousand Dollars ($60,000.00) upon enrollment/completion of eight (8)
subjects; and,
Forty Nine Thousand Six Hundred Twenty Five Dollars ($49,625.00) upon
completion of no less than twelve (12) fully available subjects and submission
of all completed case report forms.
4.2 Checks should be made payable to "The General Hospital Corporation"
and sent, along with a letter indicating the name of the Principal Investigator
and the specific clinical trial agreement for which the funds are intended, to:
<PAGE>
Financial Control Coordinator
Research Finance
Massachusetts General Hospital
Thirteenth Street, Building 149, Suite 1115
Charlestown, MA 02129
SECTION 5: TERM AND TERMINATION
5.1 The term of this Agreement shall be until the completion of the
Study, which is anticipated to be one (1) year from the Effective Date, unless
terminated in accordance with Section 5.2.
5.2 Any party hereto shall have the right to terminate the Study and
this Agreement at any time upon thirty (30) days prior written notice thereof to
the other parties, except that any party may terminate this Agreement
immediately upon written notice to the other parties if necessary to protect the
health, welfare, or safety of any Study subject.
5.3 In the event of termination by Company, the amount of the research
grant by Company to support the Study shall be appropriately prorated to allow
General to recover reasonable costs and noricancellable commitments incurred,
including without limitation, termination salary costs of any of General's
employees released as a result of such termination.
5.4 The obligations of the parties under Sections 2, 3, and 6 shall
survive the termination or expiration of the Agreement.
SECTION 6: INDEMNIFICATION AND INSURANCE
6.1 INDEMNIFICATION,
(a) Company shall indemnify, defend, and hold harmless General and
its trustees, officers, medical and professional staff, employees, and agents
and their respective successors, heirs and assigns (the "Indemnitees"), against
any liability, damage, loss, or expense (including reasonable attorney's fees
and expenses of litigation) incurred by or imposed upon the Indemnitees or any
one of them in connection with any claims, suits, actions, demands or judgments
arising out of any side effect, adverse reaction, illness, or injury occurring
to any person as a result of his or her involvement in the Study.
(b) Company's indemnification under (a) above shall not apply to
any liability, damage, loss, or expense to the extent that it is directly
attributable to: (i) the negligent activities, reckless misconduct or intention
misconduct of the Indemnitees; or (ii) failure of the Indemnities to adhere to
the terms of the protocol for the Study.
(c) Company agrees, at its own expense, to provide attorneys
reasonably acceptable to General to defend against any action brought or filed
against any party indemnified
<PAGE>
hereunder with respect to the subject of the indemnity contained herein, whether
or not such actions are rightfully brought.
(d) Company also agrees to reimburse General for the costs of the
care and treatment of any illness or injury to a subject resulting from his or
her participation in the Study to the I extent that such costs are not covered
by the subject's medical or hospital insurance or governmental programs
providing such coverage.
6.2 INSURANCE.
(a) Company shall, at its sole cost and expense, procure and
maintain commercial, general liability or equivalent self insurance in amounts
not less than $1,000,000 per incident and $2,000,000 annual aggregate. Such
commercial general liability insurance or equivalent self insurance shall
provide contractual liability coverage for Company's indemnification under
Section 6.1 of this Agreement.
(b) Company shall provide General with written evidence of such
insurance prior to the commencement of the Study. Company shall provide General
with written notice at least fifteen (15) days prior to the cancellation,
non-renewal or material change, in such insurance; if Company does not obtain
replacement insurance providing comparable coverage within such fifteen (15) day
period, General shall have the right to terminate this Agreement effective at
the end of such fifteen (15) day period without notice of any additional waiting
periods.
SECTION 7: MISCELLANEOUS
7.1 The terms of this Agreement can be modified only by a writing which
is signed by General, Principal Investigator, and Company.
7.2 The provisions of this Agreement shall be interpreted under the laws
of the Commonwealth of Massachusetts, regardless of the choice of law rules of
any jurisdiction.
7.3 No party to this Agreement may assign its obligations hereunder
without the prior written consent of the other parties.
7.4 This Agreement constitutes the entire understanding between the
parties, and supersedes and replaces all prior agreements, understandings,
writings and discussions between the parties, with respect to the subject matter
of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
LASER PHOTONICS, INC. THE GENERAL HOSPITAL CORPORATION
/s/ Chaim Markheim /s/ R. Rox Anderson, M.D.
- ------------------- -------------------------
Chaim Markheim, R. Rox Anderson, M.D.
Chief Operating Officer, Administrative Officer
Chief Financial Officer of Technology Affairs
<PAGE>
CONSULTING AGREEMENT
Effective January 24, 1998 ("Effective Date"), Laser Photonics, Inc.,
acting through its Acculase subsidiary, having an address at 6865 Flanders
Drive, Suite G, San Diego, CA 92121, ("LASER PHOTONICS") and Rox Anderson, M.D.
residing at Lexington, Massachusetts ("Consultant") agree to the following terms
and conditions under which Consultant has agreed to provide LASER PHOTONICS with
Consulting Service during the period ending __ years from the Effective Date of
this Agreement.
1. SCOPE OF WORK
The services performed by Consultant for LASER PHOTONICS pursuant to this
Agreement shall be deemed to be within the general field of excimer lasers
applications in dermatology ("Field of the Agreement"). Consulting Service
shall mean those services to be performed by Consultant for LASER PHOTONICS as
outlined in the attached Exhibit A.
2. COMPENSATION
a) LASER PHOTONICS shall pay Consultant for Consulting Service
actually requested by and provided to LASER PHOTONICS at the rate of One
Thousand Dollars ($1000.00) per day. Consultant has agreed to provide LASER
PHOTONICS with a minimum of eight days, preferably two days each calendar
quarter, of Consulting Service under this Agreement. Consultant also recognizes
that any obligation specifying a minimum number of hours to be made available by
Consultant shall not be interpreted as binding LASER PHOTONICS to use Consultant
for the specified number of hours. LASER PHOTONICS shall only be obligated to
pay Consultant for the actual number of hours requested by LASER PHOTONICS and
provided by Consultant.
b) In the event that LASER PHOTONICS requests Consultant to
provide Consulting Service at a location away from the metropolitan area of
Consultant's regular place of business, LASER PHOTONICS will reimburse
Consultant for reasonable travel and living expenses incurred by Consultant. It
is understood and agreed that LASER PHOTONICS will stipulate the places and
locations where Consultant will provide the Consulting Service. Payment for the
Consulting Service and any travel expenses will be made upon submission by
Consultant and approval by LASER PHOTONICS of an itemized account of the
Consulting Service provided, travel expenses incurred, and payments due.
3. MANNER OF PERFORMANCE
a) Consultant represents that Consultant has the requisite
expertise, ability and legal right to render the Consulting Service, and will
perform the Consulting Service in an efficient manner and in accordance with the
terms of this Agreement. Consultant will abide by all laws, rules and
regulations that apply to the performance of the Consulting Service and when on
LASER Photonic's premises, will comply with LASER Photonic's policies with
respect to conduct of visitors.
<PAGE>
b) Consultant is an independent contractor, and shall not be
considered an employee of LASER PHOTONICS. LASER PHOTONICS will not be
responsible for Consultant's acts while performing the Consulting Services,
whether on LASER Photonic's premises or elsewhere, and Consultant will not have
authority to speak for, represent or obligate LASER PHOTONICS in any way.
4. CONFIDENTIALITY
a) During discussions leading up to this Agreement, and during
the course of the Consulting Service performed pursuant to this Agreement, it is
anticipated that Consultant will learn confidential and/or proprietary
information of LASER PHOTONICS. Consultant will keep confidential, and not use,
except in connection with the Consulting Service to be provided hereunder,
information which is provided to Consultant by LASER PHOTONICS and/or developed
by Consultant while performing Consulting Service, including without limitation,
information concerning LASER PHOTONICS products, manufacturing processes,
customers, product pricing, and technical know-how, unless and until LASER
PHOTONICS consents to disclosure, or unless such information otherwise was
previously known by Consultant, as documented by Consultant in writing, or
becomes generally available to the public through no fault of Consultant. The
obligations of non-use and confidentiality of such information shall survive the
termination of this Agreement.
b) Consultant further represents that any and all information
disclosed to LASER PHOTONICS, or used for the benefit of LASER PHOTONICS by
Consultant does not include any confidential, trade secret or proprietary
information of others.
c) Consultant will not disclose to others, without LASER PHOTONICS's
consent, the fact that it is providing Consulting Service for LASER PHOTONICS,
Upon termination of this Agreement, Consultant will return to LASER PHOTONICS
all copies of drawings, specifications, manuals and other printed or reproduced
material (including information stored on machine readable media) provided to
Consultant by LASER PHOTONICS or developed by Consultant during the performance
of Consulting Services under this Agreement.
d) Laser Photonics agrees that Consultant shall have the right to
publish the results of any research performed under this agreement in a mutually
agreed upon scientific journal subject to the following conditions:
(i) Consultant agrees to and shall submit to Laser
Photonics any and all drafts of such publications, including without limitation
or restriction, any abstract, manuscript or press releases at least three months
prior to the submission of such publication to any third party.
2
<PAGE>
(ii) Laser Photonics shall have the right to exclude from
such publication information which Laser Photonics deems to be confidential
Laser Photonics information, provided that Laser Photonics advises Consultant of
the reasons as to why Laser Photonics deems such information confidential.
(iii) Laser Photonics shall also advise and notify Consultant
within thirty (30) clays of receipt of such publication as to whether such
publication discloses inventions or discoveries for which Laser Photonics
desires to seek patent or copyright protection pursuant to Articles 8 and 9 of
this Agreement.
(iv) Consultant agrees upon LASER PHOTONICS's notice
pursuant to Article 4 c), to delay the submission of such publication, including
the submission of any abstract for such publication for a period of up to three
(3) months to permit Laser Photonics to prepare and file patent or copyright
applications concerning such inventions or discoveries. If additional time is
required to properly file a patent or copyright application, Consultant agrees,
upon Laser Photonics's request to extend this time for an additional three (3)
months.
5 CONFLICTS OF INTEREST
a) Consultant represents that it has advised LASER PHOTONICS in
writing prior to the date of signing this Agreement of any relationship with
third parties, including competitors of LASER PHOTONICS, which would present a
conflict of interest with the Consulting Service, or which would prevent
Consultant from carrying out the terms of this Agreement. Consultant agrees to
advise LASER PHOTONICS of any such relationships that arise during the term of
this Agreement.
b) LASER PHOTONICS will have the option to terminate this
Agreement without further liability to Consultant, upon leaming of the
occurrence of any of the described events except to pay for any Consulting
Service actually rendered. Consultant shall have no recourse against LASER
PHOTONICS for termination under this Article.
6. RELATIONSHIP WITH OTHERS
a) During the term of this Agreement, and for one year after its
termination date, Consultant agrees not to perform any service within the Field
of the Agreement or which may utilize any of the information obtained from LASER
PHOTONICS or any information developed during the course of performing the
Consulting Service for LASER PHOTONICS, for any other entity, and in particular
any other entity engaged in the development, manufacture, distribution or sales
of medical care products or services.
3
<PAGE>
7. INDEMNIFICATION
a) Consultant agrees to indemnify and hold LASER PHOTONICS
harmless for any injury occurring to the property or person of Consultant as a
result of Consultant's performance of Consulting Services under this Agreement,
provided that said injury has not occurred because of the gross negligence of
LASER PHOTONICS.
8. OWNERSHIP OF DEVELOPMENT
a) Consultant agrees and does hereby assign to LASER PHOTONICS,
any and all of Consultant's interest in any inventions or discoveries, which
includes all written materials and other works which may be subject to
copyright, and all patentable and unpatentable inventions, discoveries, and
ideas (including but not limited to any computer software) which are reduced to
practice, conceived or written by Consultant during the term of this Agreement
and for 90 days after it expires, and which are based upon any information
received from LASER PHOTONICS, and/or developed as a result of performing the
Consulting Service for LASER PHOTONICS (hereinafter "Development"). Consultant
agrees to hold all such Developments confidential in accordance with Article 4
of this Agreement.
b) Consultant shall disclose promptly to LASER PHOTONICS each
such inventions or discoveries and, upon LASER PHOTONICS's request and at LASER
PHOTONICS's expense Consultant will assist LASER PHOTONICS, or anyone it
designates, in filing and prosecuting patent or copyright applications in any
country in the world, Each copyrightable work, to the extent permitted by law,
will be considered a work made for hire and the authorship and copyright of the
work shall be in LASER PHOTONICS's name. Consultant will execute all papers and
do all things which may be necessary or advisable, in the opinion of LASER
PHOTONICS, to prepare, file and prosecute such applications, and to evidence the
assignment in LASER PHOTONICS, or its designee, of all right, title and interest
in and to such Development.
c) LASER PHOTONICS agrees to compensate Consultant for any time
Consultant actually spends in response to a specific request for assistance by
LASER PHOTONICS under this Article. If for any reason Consultant's interest in
such Development is subordinate to another party, or if Consultant's interest in
such Development has been released to another party pursuant to a contract or
governmental regulation, Consultant agrees to notify LASER PHOTONICS and take
whatever steps LASER PHOTONICS deems necessary to convert or transfer such third
party's interest in such Development to Consultant for subsequent transfer to
LASER PHOTONICS under the terms of this Agreement. Furthermore, if for any
reason LASER PHOTONICS is unable to obtain Consultant's execution of any paper
necessary to prepare, file and/or prosecute such applications, Consultant hereby
conveys to LASER PHOTONICS its power of attorney only for the purpose of
executing any such papers necessary to prepare, file and/or prosecute such
applications.
4
<PAGE>
9. DISCLOSURES TO LASER PHOTONICS
a) If during the term of this Agreement, Consultant discloses any
copyrightable works, inventions, discoveries, or ideas to LASER PHOTONICS which
were conceived or written prior to this Agreement, or which are not based upon
any Information received from LASER PHOTONICS, and/or developed as a result of
performing the Consulting Services under this Agreement, LASER PHOTONICS will
have no liability to Consultant because of its use of such works, inventions,
discoveries or ideas, except liability for infringement of any valid copyright
or patent now or hereafter issued thereof.
10. TERM
a) The term of this Agreement is as specified on the first page
of this Agreement. The parties agree that this Agreement may be extended by
mutual written agreement. LASER PHOTONICS shall have the right to terminate
this Agreement upon sixty (60) days written notice to Consultant agrees that he
shall have no recourse against LASER PHOTONICS, beyond that provided for under
Article 2, for LASER PHOTONICS's earlier termination. LASER PHOTONICS's only
obligation upon such termination is to compensate Consultant for any time
actually spent by Consultant in providing Consulting Services under this
Agreement and for properly reimbursable travel expenses.
11. GENERAL
a) No assignment by Consultant of this Agreement, or any sums due
under it, will be binding on LASER PHOTONICS without LASER PHOTONICS's prior
written consent. This Agreement supersedes all prior agreements and
understandings between the parties respecting the subject matter of this
Agreement. This Agreement may not be changed or terminated orally by or on
behalf of either party. In the event either party breaches this Agreement the
other party will have the right to terminate the Agreement. In the event of the
actual or threatened breach of any of the terms of paragraphs 4, 6, and 8, LASER
PHOTONICS will have the right to specific performance and injunctive relief.
The rights granted by this paragraph are in addition to all other remedies and
rights available at law or in equity. This Agreement shall be construed
according to the laws of California for contracts made within that state.
5
<PAGE>
12. SEVERABILITY
a) If any of the provisions of this Agreement are void or
unenforceable, the remaining provisions shall nevertheless be effective, the
intent being to effectuate this Agreement to the fullest extent possible.
CONSULTANT LASER PHOTONICS
/s/ Rox Anderson By: /s/ Raymond A. Hartman
---------------- ----------------------
Rox Anderson, M.D. Title: President
6
<PAGE>
ASSET PURCHASE AGREEMENT
by and among
LASER PHOTONICS, INC.,
a Delaware corporation
and
LASER ANALYTICS, INC.,
a Massachusetts corporation
and
LASER ANALYTICS, INC.,
a Texas corporation
Dated as of January 4, 1999
<PAGE>
AGREEMENT
This ASSET PURCHASE AGREEMENT ("Agreement"), made and entered into as of
January 4, 1999, by and among Laser Photonics, Inc., a Delaware corporation
("LPI") and Laser Analytics, Inc., a Massachusetts corporation ("LAI"), on the
one hand, (collectively, "Sellers"), and Laser Analytics, Inc., a Texas
corporation ("Purchaser") on the other hand.
RECITALS
WHEREAS, Sellers are engaged in the business of manufacturing and marketing
certain lasers and delivery systems;
WHEREAS, LAI is a wholly-owned subsidiary of LPI; and
WHEREAS, each of Sellers desire to transfer to Purchaser and Purchaser
desires to acquire from Sellers certain assets which are used in operating
Sellers' business solely with respect to Sellers' business operations conducted
in Orlando, Florida (the "Orlando Site") and Wilmington, Massachusetts (the
"Wilmington Site") (the "Business"), which shall specifically exclude Sellers'
business operations (i) which are conducted in its Carlsbad, California,
facility or (ii) which relate to Sellers' excimer lasers and delivery systems,
in exchange for the consideration set forth herein below;
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual promises,
covenants and conditions herein contained, the parties hereto do hereby agree as
follows:
1. CERTAIN DEFINITIONS. The following terms as used in this Agreement
shall have the meanings set forth below:
"Patents" shall mean the patents, patents pending, industrial designs,
utility models and applications for patent that are identified herein and any
patents issued thereon and any continuations or reissues thereof, including any
continuation-in-part or divisional patent application thereof and all foreign
counterparts and extensions thereof.
"Proprietary Information" shall mean all of the information regarding any
products or services related to the Patents, which constitute reliable trade
secrets or proprietary business information, including, without limitation, such
information as encompassed in all drawings, designs, formulas, devices,
compilations, computer programs and software devices, plans, manuals, proposals,
financial information, costs, pricing information, marketing or sales plans,
customer lists or any other trade secrets or proprietary information whether now
existing or hereinafter developed whether it gives the disclosing party any
competitive advantage over those who do not know or use it, or whether it is
patentable or subject to copyright or trademark protection.
2
<PAGE>
"Technical Information" means all information, knowledge, engineering and
technical data, manufacturing data, raw data, developments, projections,
proprietary data, manufacturing drawings, product specifications, manufacturing
and assembly techniques, production descriptions, skills, methods, trade
secrets, processes, procedures and know-how and other information or
improvements thereto in existence on the date hereof or thereafter developed,
including, but not limited to all information contained in all pending patent
applications or patents within the definition of Patents (as defined above),
that is pertinent to the development, testing, registration, assembly,
manufacture, use or sale of any products or services related to the Patents.
"Trade Names" shall mean those tradenames, trademarks, service marks and
logos referenced herein.
2. TRANSFER OF ASSETS.
2.1 TRANSFERRED ASSETS. On the basis of the representations and
warranties and subject to the terms and conditions hereinafter set forth, on the
Closing Date, (as hereinafter defined), Sellers shall transfer or shall cause to
be transferred to Purchaser, and Purchaser shall acquire, the assets of Sellers
described in this Section 2.1 (the "Transferred Assets"), except to the extent
assets described in this Section 2.1 may be disposed of in the ordinary course
of business after the date hereof and before the Closing (defined below).
Subject to the foregoing, "Transferred Assets" means:
(a) All assets listed in Schedule 2.1 hereto, which shall include,
but not be limited to:
(1) All production, assembly, development, testing, or other
equipment used by LPI and LAI in the Business;
(2) All tools, tooling, dies, molds, jigs, or other items of
a similar nature related to and/or used in any
production, assembly, development and testing procedures
by LPI and LAI in the Business;
(3) All warehousing, packing and shipping equipment, racks,
conveyors and other storage, product movement, receiving
or shipping items used in the Business;
(4) All vehicles owned by LPI and LAI located at the Orlando
Site and the Wilmington Site;
(5) Customer deposits related to the future delivery of any
goods or services or related to any purchase orders,
contracts to purchase or similar agreements arising from
the Business;
3
<PAGE>
(6) Any notes receivable from customer installment sales
agreements, leases, or other similar contracts or
agreements related to equipment sold or otherwise
provided to customers of the Sellers arising from the
Business;
(7) The Sellers' rights to any discounts, rebates, premiums
or other payments due after the Closing Date from
suppliers or others arising from the Business;
(8) All finished goods, work-in process, production parts
and supplies of inventory held by the Sellers for
resale; for use in their development, design,
manufacture or assembly functions or for their own use
arising from the Business;
(9) All demonstrator units, equipment parts, or related
items arising from the Business;
(10) All inventories of office supplies and other
miscellaneous items used in the Business;
(11) All security deposits, utility deposits, or other
similar deposits or pre-paid expenses held by suppliers
or other entities as a condition of supplying any
utility, service, product, or other item used by the
Sellers in the conduct of the Business; and
(12) All prepaid interest paid on debts assumed by the
Purchaser;
(b) Certain inventories of finished goods, supplies, raw
materials, and work in process relating to the Business and
reflected on the Sellers' Financial Statements (as defined in
Section 6.6 hereof);
(c) Certain machinery, computer hardware and software, equipment,
furniture, fixtures, vehicles, copies of correspondence,
books, records, files, documents, original marketing
communication material (including communications, art work,
art boards, photography and negatives), sales literature,
customer lists, distributor and supplier records, formulas,
know-how, pricing policies, patent applications, letters
patent, trade secrets, models, processes, market information,
market analyses, marketing plans, operating and management
policies, promotional designs, concepts and literature,
customer lists, supplier lists, distributor records,
environmental control records, accounting and financial
records, maintenance documentation, operating and management
manuals, computer systems and software, customer
specifications, blueprints and drawings and other records, in
electronic or proper medium, owned by and in possession of
Sellers and relating solely and exclusively to the Business
and all other
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tangible personal property owned by Sellers and used in the
Business and set forth in Schedule 2.1(c) hereto;
(d) Certain of Sellers' rights and incidents of interest in and to
real and personal property, tangible or intangible, contracts,
agreements, licenses, warranties and leases, express or
implied, relating to the Business and reflected on the
Sellers' Financial Statements, to the extent such rights and
interests are assignable by Sellers;
(e) Copies of correspondence, books, records, files, documents,
original marketing communications material (including
communications, art work, art boards, photography and
negatives), sales literature, customer lists, distributor and
supplier records, formulae, customer specifications,
blueprints and drawings and other records, in electronic or
proper medium, owned by and in the possession of Sellers and
relating solely and exclusively to the Business;
(f) The Patents and Trade Names expressly listed in Schedules
6.20(a) and 6.20(b) hereto, and the related Proprietary
Technology and Technical Information; and
(g) All federal, state and local permits, licenses and similar
authorizations relating to the Business to the extent that the
same are assignable to Purchaser.
2.2 EXCLUDED ASSETS. All assets which are not Transferred Assets shall
be Excluded Assets and shall be retained by Sellers and shall not be sold and
transferred to Purchaser on the Closing Date (defined below). The Excluded
Assets shall expressly include all assets which relate to Sellers' business
operations which are (i) conducted in its Carlsbad, California facility or (ii)
which relate to Sellers' excimer laser and delivery systems.
3. ASSUMPTION OF LIABILITIES.
3.1 ASSUMED LIABILITIES. On the Closing Date (as hereinafter defined),
Purchaser shall assume and agree to pay, perform and discharge those certain
debts, obligations and liabilities of Sellers relating to or arising out of the
conduct of the Business prior to or on the Closing Date, accrued or otherwise
(the "Assumed Liabilities"), as expressly described in Schedules 3.1 and 6.9,
including, but not limited to, those obligations to perform under all express or
implied contracts, mortgages, leases, loans, notes, agreements, licenses,
warranties or other arrangements included in, related to, or arising out of the
use and operation of the Business or the Transferred Assets, including, without
limitation, any executory agreements which arose from the Business, but not
completed prior to the Closing. As of the Closing Date, the Assumed Liabilities
shall not exceed the purchase price of $1,200,000. Sellers will be solely
responsible for any and all debts, obligations and liabilities of Sellers
exceeding the aggregate of $1,200,000.
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3.2 RETAINED LIABILITIES. Notwithstanding Section 3.1 above, the
liabilities of the Business existing on the Closing Date and not expressly set
forth in Schedule 3.1 (the "Retained Liabilities") shall be retained by Sellers
and shall not be assumed by Purchaser on the Closing Date.
3.3 ASSUMED LIENS. Assuming the Purchaser pays the entire Purchase
Price, all assets acquired, both tangible and intangible will be free of any and
all liens, claims, liabilities, charges, restrictions, royalties and fees,
obligations of the Sellers, or other encumbrances except as specified in
Schedule 3.1 or disclosed to the Purchaser no later than five (5) days prior to
the Closing Date.
(a) The Sellers will, within the five (5) business days prior to
the Closing Date, secure and provide to the Purchaser the
results of a complete UCC (Uniform Commercial Code) filing
search including copies of any Form UCC-1 or other filings
related to liens or other security interests in the assets to
be purchased by the Purchaser from the Sellers.
3.4 PAYMENT OF PURCHASE PRICE. The Purchase Price to be paid by the
Purchaser to the Sellers for the purchase of the Business shall be One Million
Two Hundred Thousand Dollars ($1,200,000) (the "Purchase Price"). The Purchase
Price shall be payable in the form of either or a combination of an assumption
of liabilities (with a complete written release of Sellers from such
liabilities) and/or payment of the Assumed Liabilities. It is expressly
understood that Purchaser shall either pay the creditors whose liabilities are
being assumed in full or settle with such creditors for less than the full
amount of the Assumed Liabilities. In the event that Purchaser pays the Assumed
Liabilities in full or settles the Assumed Liabilities with the creditor for
less than the full amount of the Assumed Liabilities, Purchaser shall arrange
for the delivery to Sellers of complete written releases of Sellers from the
Assumed Liabilities, which written release agreements shall be delivered to
Sellers at the Closing. If, at the Closing, Purchaser has been unsuccessful in
obtaining the complete release of Sellers from all of the Assumed Liabilities,
Purchaser shall deposit into escrow (the "Escrow"), pursuant to the terms of the
escrow agreement ("Escrow Agreement"), attached hereto as Schedule 3.4(a), funds
equal to the unreleased portion of the Assumed Liabilities listed on Schedule
3.1. The funds deposited into Escrow shall be held in Escrow until all of the
Assumed Liabilities shall have either been paid in full or until a written
release of all of the Assumed Liabilities shall have been obtained by Purchaser
and delivered to Sellers. Funds held in Escrow shall only be used by the
Escrowholder to pay the obligations set forth on Schedule 3.1 hereto. The funds
held in Escrow shall act as collateral (the "Collateral") for the payment of the
Assumed Liabilities and shall be held as security for the payment by Purchaser
of the Assumed Liabilities. The Collateral shall be governed by a Pledge and
Security Agreement (the "Pledge Agreement"), attached hereto as Schedule 3.4(b).
4.1 DEPOSIT. On December 15, 1998, the Purchaser deposited $30,000 in
escrow (the "Deposit") with the Sellers' counsel, as escrow holder. This amount
is to be applied to the Purchase Price as directed by the Purchaser in writing.
If this transaction is canceled by Purchaser prior to Closing, the Deposit shall
be deemed liquidated damages, to compensate Sellers' for any loss they may
suffer for keeping the Business or any part thereof off of the market during the
pendency of the due diligence investigation by the Purchaser. Special
liquidated damages language PROVIDED, HOWEVER, such liquidated damages provision
shall not be
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in force or effect if cancellation of this transaction is based upon proven
fraud or intentional misconduct affecting the Transaction which are the subject
of this Agreement. PROVIDED, FURTHER, that Purchaser may terminate this
transaction without cause for a period of ten (10) days from December 1, 1998.
4.2 ASSUMPTION BY PURCHASER OF THE ASSUMED LIABILITIES. On the Closing
Date, Purchaser shall assume only the obligations underlying the Assumed
Liabilities, as set forth in Section 3.1 of this Agreement.
5. CLOSING. The closing of this transaction (the "Closing") shall take
place as of the close of business as of March 16, 1999 (the "Closing Date") at
the offices of Matthias & Berg LLP located at 1990 South Bundy Drive, Suite 790,
Los Angeles, California 90025 or at such other place and date as the parties
hereto agree to in writing.
6. REPRESENTATIONS AND WARRANTIES OF SELLERS.
6.1 ORGANIZATION AND GOOD STANDING; DUE AUTHORIZATION. Each of Sellers
is a corporation duly organized, validly existing, and in good standing under
the laws of the states of Delaware and Massachusetts, respectively, and has the
corporate power and is duly authorized, qualified, franchised and licensed under
all applicable laws, regulations, ordinances and orders of public authorities to
own all of its properties and assets and to carry on its business in all
material respects as it is now being conducted, including qualification to do
business as a foreign corporation in the states in which the character and
location of the assets owned by them or the nature of the business transacted by
it requires qualification. The execution and delivery of this Agreement does
not, and the consummation of the transactions contemplated by this Agreement in
accordance with the terms hereof will not, violate any provision of each of
Sellers' articles of incorporation or certificate of incorporation, as the case
may be, or bylaws. Each of Sellers has taken all action required by law, its
articles of incorporation, its bylaws or otherwise to authorize the execution
and delivery of this Agreement. Each of Sellers has full power, authority and
legal right and has taken all action required by law, its articles of
incorporation, bylaws and otherwise to consummate the transactions herein
contemplated.
6.2 TITLE TO TRANSFERRED ASSETS. At the Closing, each of Sellers shall
have and Purchaser shall receive good and marketable title to the Transferred
Assets, free and clear of any lien, mortgage, charge, security interest, pledge
or other encumbrance or other adverse claim or interest of any nature, except as
set forth in Schedule 6.2 hereto or in the Sellers' Financial Statements. Each
of Sellers is the sole and exclusive owner of the Transferred Assets as of the
Closing Date. Each of Sellers has the right and power to assign all of its
rights, title and interest in and to the Transferred Assets. Each of Sellers
further represents and warrants that the Transferred Assets constitute all of
Sellers' rights and interests in, and each of Sellers has not made any prior
transfer, sale, assignment, pledge, hypothecation or encumbrance to any other
person or entity any right or interest in, the Transferred Assets, except as set
forth in Schedule 6.2 hereto or in the Sellers' Financial Statements.
6.3 BINDING OBLIGATION; NO DEFAULT. Each of Sellers has duly taken all
action necessary to authorize the execution, delivery and performance of this
Agreement and the other
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instruments and agreements contemplated hereby. Such execution, delivery and
performance does not and will not, to the best of each of Sellers' knowledge,
constitute a default under or a violation of any agreement, order, award,
judgment, decree, statute, law, rule, regulation or any other instrument to
which each of Sellers is a party or by which each of Sellers or the property of
each of Sellers may be bound or may be subject. This Agreement constitutes the
legal, valid and binding obligation of each of Sellers, enforceable against each
of Sellers in accordance with its terms.
6.4 COMPLIANCE WITH OTHER INSTRUMENTS, ETC. Neither the execution and
delivery of this Agreement by Sellers nor compliance by Sellers with the terms
and conditions of this Agreement will: (a) require Sellers to obtain the consent
of any governmental agency; (b) constitute a material default under any
indenture, mortgage or deed of trust to which each of Sellers is a party or by
which each of Sellers or its properties may be subject; (c) cause the creation
or imposition of any lien, charge or encumbrance on any of its assets; or (d)
breach any statute or regulation of any governmental authority, domestic or
foreign, or will on the Closing Date conflict with or result in a breach or any
of the terms or conditions of any judgment, order, injunction, decree or ruling
of any court or governmental authority, domestic or foreign, to which each of
Sellers is subject.
6.5 CONSENTS. No consent, approval or authorization of, or declaration,
filing or registration with, any governmental or regulatory authority or any
third party is required to be made or obtained by Sellers in connection with the
execution, delivery and performance of this Agreement and the transactions
contemplated hereby.
6.6 FINANCIAL STATEMENTS. As soon as practicable following the
execution of this Agreement, but in no event later than December 24, 1998, each
of Sellers shall furnish to Purchaser true and complete copies of Sellers'
unaudited financial statements, including the Sellers' unaudited balance sheet
as of September 30, 1998 and the related statements of operations for the nine
(9) months then ended (the "Sellers' Financial Statements") which shall
expressly exclude the assets and liabilities and results of operations of LPI's
76%-owned subsidiary, AccuLase, Inc., a California corporation. The Sellers'
Financial Statements fairly present the financial position of Sellers at the
date of, and the results of the operations for Sellers for the period then
ended. Such Sellers' Financial Statements have been prepared in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants, and have been prepared on
the accounting basis used by Sellers for income tax purposes and are subject to
adjustment upon audit. Thereafter, Seller will provide Purchaser with
unaudited, monthly financial statements within thirty (30) days after the end of
each month, together with copies of customary monthly management reports.
6.7 NO UNDISCLOSED LIABILITIES. Except as set forth on Schedule 6.7
hereto, with respect to the Transferred Assets and Assumed Liabilities, each of
Sellers does not have any material liabilities or obligations of any nature
(absolute, accrued, contingent or otherwise) which were not adequately reflected
or reserved against on the Sellers' Financial Statements, except for liabilities
and obligations incurred since the date thereof in the ordinary course of
Sellers' business and consistent with past practice and which, in any event, in
the aggregate, would not have a Material Adverse Effect.
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6.8 ABSENCE OF CERTAIN CHANGES. Except as and to the extent set forth
on Schedule 6.8 hereto or except as otherwise expressly contemplated hereby,
with respect to the Transferred Assets and Assumed Liabilities, since the date
of the Sellers' Financial Statements, each of Sellers has not:
(a) Suffered any material adverse change in its financial
condition, assets, liabilities (absolute, accrued, contingent
or otherwise), or reserves, and no event has occurred and no
action has been taken by Sellers or, to the best knowledge of
Sellers, any other person, nor is any such event or action
contemplated or, to the best knowledge of Sellers, threatened,
which might reasonably be expected to have a material adverse
effect on the Transferred Assets or the operations or
condition (financial or otherwise) of the Business ("Material
Adverse Effect"), except that no representation or warranty is
made as to general economic conditions or matters affecting
Sellers' industry generally;
(b) Suffered any material adverse change in their business,
operations or prospects;
(c) Experienced any shortage of raw materials or supplies;
(d) Permitted or allowed any of its property or assets (real,
personal or mixed, tangible or intangible) to be subjected to
any mortgage, pledge, lien, security interest, encumbrance,
restriction or charge of any kind; and
(e) Granted any general increase in the compensation of officers
or employees (including any such increase pursuant to any
bonus, pension, profit sharing or other plan or commitment)
other than in the ordinary course of business and consistent
with past practice, or any increase in the compensation
(including, without limitation, salary and bonus) payable or
to become payable to any officer or key employee.
6.9 LEASES. Schedule 6.9 hereto is an accurate and complete list of all
leases pursuant to which each of Sellers leases real or any material item of
personal property to be transferred to or assumed by Purchaser, and which shall
be deemed to be part of the Assumed Liabilities for purposes of this Agreement.
A true and correct copy of each such lease has been delivered to the Purchaser,
and no changes have been made thereto since the date of delivery. Except as set
forth in Schedule 6.9 hereto, each such lease is valid and in full force and
effect, there are no existing material defaults by Sellers thereunder, and, to
the best knowledge of Sellers, no event has occurred which (with notice, lapse
of time or both) would constitute a default thereunder by any party. Except as
set forth on Schedule 6.9 hereto, each of Sellers is presently in compliance in
all material respects with all laws, rules, regulations and ordinances relating
to zoning and land use restrictions which are applicable to any portion of the
land subject to the real property leases set forth in Schedule 6.9 hereto.
Except as set forth on Schedule 6.9 hereto, no consent is required from the
lessor under any lease of real or personal property listed on Schedule 6.9 prior
to the consummation of the transactions contemplated hereby.
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6.10 CONTRACTS AND COMMITMENTS. Except as set forth on Schedule 6.10,
with respect to the Transferred Assets and Assumed Liabilities:
(a) Each of Sellers has not entered into any outstanding
agreements, contracts or commitments or restrictions which,
individually or in the aggregate, are material to its
business, operations or prospects, or which require the making
of any charitable contribution;
(b) No purchase contracts or commitments of Sellers continue for a
period of more than 30 days or are in excess of the normal,
ordinary and usual requirements of its business or, to the
best knowledge of Sellers, at any excessive price;
(c) Each of Sellers has not entered into any contracts or
commitments pursuant to which each of Sellers is, as of the
date hereof, required to obtain or maintain, on behalf of
itself or any of its directors, officers or employees, any
facility or personnel security clearances from the U.S.
Department of Defense or any other agency of the U.S.
Government;
(d) There are no outstanding sales contracts, purchase orders,
commitments or proposals of Sellers which continue for a
period of more than 30 days or will likely result in any loss
to Sellers upon completion or performance thereof;
(e) Each of Sellers has not entered into any outstanding contracts
with officers, employees, agents, consultants, advisors,
salesmen, sales representatives or suppliers that are not
cancelable by it on notice of not longer than 30 days and
without liability, penalty or premium, or any agreement or
arrangements providing for the payment of any bonus or
commission based on sales or earnings;
(f) Each of Sellers has not entered into any outstanding
employment agreement, or any other outstanding agreement that
contains any severance or termination pay liabilities or
obligations;
(g) Each of Sellers is not a party to any collective bargaining
agreement or other contract or agreement with any labor
organization;
(h) Each of Sellers is not restricted by agreement from carrying
on its business anywhere in the world;
(i) Each of Sellers has not incurred any outstanding debt
obligation for borrowed money, including guarantees of or
agreements to acquire any such debt obligation of others other
than as reflected on the Sellers' Financial Statements; and
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(j) Each of Sellers is not a party to any contract, sub-contract
or agreement with the U.S. Government or any agency or
instrumentality thereof, or with any territorial or state
government or any agency or instrumentality thereof.
6.11 COMPLIANCE WITH CONTRACTS; DELIVERY OF CERTAIN CONTRACTS. Except as
disclosed on Schedule 6.11, each of Sellers is not in default under any material
contract, commitment, obligation or agreement with respect to the Transferred
Assets and Assumed Liabilities, including, without limitation, those listed in
Schedules 6.9 and 6.10 hereto, except for those which would not have a Material
Adverse Effect, and no act or omission by Sellers has occurred which, with
notice or lapse of time or both, would constitute such a default under any term
or provision of any such contract or agreement. Except as disclosed on Schedule
6.11, each of the agreements referred to in Schedules 6.9 and 6.10 hereto is
valid and in full force and effect. Except as disclosed on Schedule 6.11, to
the best knowledge of Sellers, no party is in default under any agreement
referred to in Schedules 6.9 and 6.10 hereto with respect to the Transferred
Assets and Assumed Liabilities, and to the best knowledge of Sellers, no act or
omission has occurred by any party which, with notice or lapse of time or both,
would constitute such a default under any term or provision thereof. Each of
Sellers has previously delivered to Purchaser a true and correct copy of each
agreement, contract, commitment or restriction listed on Schedules 6.9 and 6.10
hereto, including all amendments and modifications thereof.
6.12 INSURANCE. Schedule 6.12 contains an accurate and true description
of all existing policies of fire, liability, worker's compensation and all other
forms of insurance owned or held by, or covering the business, properties or
assets of, Sellers with respect to the Transferred Assets and Assumed
Liabilities. All such policies are in full force and effect, all premiums with
respect thereto covering all periods up to and including the date hereof have
been paid, and no notice of cancellation or termination has been received by
Sellers with respect to any such policy. Such policies will remain in full force
and effect through the respective dates set forth on Schedule 6.12 without
additional premiums being paid or properly accrued as an additional liability;
and will not in any way be affected by, or terminate or lapse by reason of, the
transactions contemplated by this Agreement. Schedule 6.12 also (i) describes
all products liability claims made since each of Sellers' inception, and all
other claims (except medical and dental) pending or made since each of Sellers'
inception under such insurance policies and (ii) identifies all types of
insurable risks which each of Sellers and its Board of Directors has designated
as being self insured. Except as set forth in Schedule 6.12, each of Sellers
has not been turned down at any time since each of Sellers' inception for any
insurance with respect to its assets or operations with respect to the
Transferred Assets and Assumed Liabilities, nor has its coverage been limited by
any insurance carrier to which it has applied for any such insurance or with
which it has carried insurance during the last three years.
6.13 LABOR DIFFICULTIES. Except to the extent set forth in Schedule 6.13
with respect to the Transferred Assets and Assumed Liabilities:
(a) To the best knowledge of Sellers, no employee of Sellers is in
violation of, or has threatened any violation of, any material
term of any employment contract or any other contract or
agreement relating to the relationship of such employee with
Sellers or any other party, including any employee
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handbook and/or personnel policy manual of each of Sellers
except for violations which would not, individually or in the
aggregate, have a Material Adverse Effect;
(b) Each of Sellers has complied in all material respects with
each and every term, provision, section and part of any
written employment contract or agreement, including any
employee handbook and/or personnel policy manual, that each of
Sellers has or has had with any individual who has performed
work for Sellers;
(c) There is no unfair labor practice charge or similar charge,
complaint, allegation or other process or claim pending or, to
the best knowledge of Sellers, threatened against Sellers
before the National Labor Relations Board (the "NLRB") or any
other federal, territorial, state or local governmental agency
or other entity;
(d) There is no labor dispute, strike, slowdown, work stoppage or
other job action pending or, to the best knowledge of Sellers,
threatened against or otherwise affecting Sellers;
(e) No petition for election or similar charge, complaint,
allegation or other process or claim is pending or, to the
best knowledge of Sellers, threatened against Sellers before
the NLRB, any region of the NLRB, or any other federal,
territorial, state or local governmental agency or other
entity, and no organizing campaign or other effort is underway
or, to the best knowledge of Sellers, threatened by any labor
organization to organize any employees of Sellers;
(f) Each of Sellers has not experienced any labor dispute, strike,
slowdown, work stoppage, or other job action since its
inception; and
(g) There is not pending or, to the best knowledge of Sellers,
threatened against Sellers any complaint, charge, allegation
or other process or claim whatsoever, other than those which
would not, individually or in the aggregate, have a Material
Adverse Effect, (i) alleging any violation of the Occupational
Safety and Health Act or any other federal, territorial, state
or local law governing health and/or safety in the workplace;
(ii) seeking compensation, benefits and/or penalties pursuant
to any Workers' Compensation Act or similar law; (iii) seeking
any compensation or benefits pursuant to any Unemployment
Insurance Act or similar law; (iv) alleging any violation of
the Immigration Reform and Control Act of 1986 or any similar
law; (v) alleging any violation of the Fair Labor Standards
Act or any other federal, territorial, state or local law
governing wage and/or hour issues; (vi) alleging any violation
of any federal, territorial, state or local child labor law;
and/or (vii) alleging any other federal, territorial, state or
local law relating to or governing employment or labor
matters.
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6.14 LITIGATION. Except as set forth in Schedule 6.14 hereto, with
respect to the Transferred Assets and Assumed Liabilities:
(a) There is no pending or, to the best knowledge of Sellers,
threatened complaint, charge, claim, action, suit or
arbitration proceeding before any federal, territorial, state,
municipal, foreign or other court or governmental or
administrative body or agency, or any private arbitration
tribunal or any investigation or inquiry before any federal,
territorial, state, municipal, foreign or other court or
governmental or administrative body or agency against,
relating to or affecting (i) the assets, properties or
business of Sellers, or (ii) the transactions contemplated by
this Agreement, nor, to the best knowledge of Sellers, is
there any basis for any such complaint, charge, claim, action,
suit, arbitration proceeding, investigation or inquiry which
could have an adverse effect on the assets, property, business
or prospects of Sellers;
(b) There is not in effect any order, judgment or decree of any
court or governmental or administrative body or agency
enjoining, barring, suspending, prohibiting or otherwise
limiting Sellers or, to the best knowledge of Sellers, any
officer, director, employee or agent thereof from conducting
or engaging in any aspect of the business of Sellers, or
requiring Sellers or, to the best knowledge of Sellers, any
officer, director, employee or agent thereof to take certain
action with respect to any aspect of the business of Sellers
which could reasonably be anticipated to have a Material
Adverse Effect; and
(c) Each of Sellers is not in violation of or default under any
applicable order, judgment, writ, injunction or decree of any
federal, territorial, state, municipal, foreign or other court
or regulatory authority.
6.15 NO CONDEMNATION OR EXPROPRIATION. Neither the whole nor any portion
of the leaseholds or any other assets of Sellers with respect to the Transferred
Assets and Assumed Liabilities is subject to any governmental decree or order to
be sold or is being condemned, expropriated or otherwise taken by any public
authority with or without payment of compensation therefor, nor, to the best
knowledge of Sellers, has any such condemnation, expropriation or taking been
proposed.
6.16 COMPLIANCE WITH LAW. To the best knowledge of Sellers, with respect
to the Transferred Assets and Assumed Liabilities, the operations of Sellers
have been conducted in accordance with all applicable laws, regulations and
other requirements of all national governmental authorities, and of all
territories, states, municipalities and other political subdivisions
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and agencies thereof having jurisdiction over Sellers, including, without
limitation, all such laws, regulations, ordinances and requirements relating to
environmental, antitrust, consumer protection, labor and employment, zoning and
land use, currency exchange, immigration, health, occupational safety, pension,
securities, defense procurement and trading with the enemy matters, except as
disclosed in Schedule 6.16 hereto and except for violations which would not,
individually or in the aggregate, have a Material Adverse Effect. Except as set
forth in Schedule 6.16, each of Sellers has not received any notification since
its inception of any asserted present or past failure by Sellers to comply with
such laws, regulations, ordinances or requirements. Each of Sellers has all
permits, authorizations and consents necessary for the operation of its business
except for those which the failure to have would not, individually or in the
aggregate, have a Material Adverse Effect.
6.17 ABSENCE OF QUESTIONABLE PAYMENTS. Neither Sellers nor, to the best
knowledge of Sellers, any of its directors, officers, agents, employees or other
persons acting on its behalf or for its benefit, with respect to the Transferred
Assets and Assumed Liabilities, has used any corporate or other funds for
unlawful contributions, payments, gifts, or entertainment, or made any unlawful
expenditures relating to political activity to government officials or others or
established or maintained any unlawful or unrecorded funds for such purpose.
Neither each of Sellers nor, to the best knowledge of each of Sellers, any of
its directors, officers, agents, employees or other persons acting on its behalf
or for its benefit has accepted or received any unlawful contributions,
payments, gifts, or expenditures.
6.18 PERSONNEL. Schedule 6.18 hereto reflects, as of February 28, 1999,
a true and complete list of the wage rates for all non-salaried and salaried
employees of Sellers by classification with respect to the Business.
6.19 ACCURACY OF INFORMATION FURNISHED. No representation or warranty by
Sellers contained in this Agreement or in respect of the exhibits, schedules or
documents delivered to Purchaser by Sellers and expressly referred to herein,
and no statement contained in any certificate furnished or to be furnished by or
on behalf of Sellers pursuant hereto, or in connection with the transactions
contemplated hereby, contains, or will contain as of the date such
representation or warranty is made or such certificate is or will be furnished,
any untrue statement of a material fact, or omits, or will omit to state as of
the date such representation or warranty is made or such certificate is or will
be furnished, any material fact which is necessary to make the statements
contained herein or therein, in light of the circumstances under which they were
made, not misleading. True and correct copies of each agreement and other
document referred to in the schedules hereto have been furnished by Sellers to
Purchaser.
6.20 TITLE TO PATENTS AND TRADE NAMES. At the Closing, Purchaser shall
receive, as part of the Transferred Assets, good and marketable title to the
Patents set forth in Schedule 6.20(a) and Trade Names set forth in Schedule
6.20(b), free and clear of any lien, mortgage, charge, security interest, pledge
or other encumbrance or other adverse claim or interest of any nature. The
Patents and Trade Names set forth in Schedule 6.20 (c) hereto and the
Proprietary Information and Technical Information related thereto, shall be part
of the Excluded Assets. Except as described in Schedule 6.20(d), each of Sellers
is the sole and exclusive owner of the Patents and Trade Names described in
Schedules 6.20 (a) and (b), respectively, the issued or granted Patents
described in Schedule 6.20 (a) hereto are valid, and in full force and effect as
of the Closing Date. Each of
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Sellers is the party named in the Patents described in Schedule 6.20 (a) hereto,
and is the party who made, or caused to be made, the application for the letters
of patents. Except as described in Schedule 6.20(d), each of Sellers has the
right and power to assign the Patents and Trade Names described in Schedules
6.20 (a) and (b), respectively, and made no prior transfer, sale or assignment
of all or any part of such Patents and Trade Names and the exploitation of such
Patents and Trade Names do not and will not infringe the rights granted to any
other person by any United States or other patent or proprietary interest of any
kind or nature. Each of Sellers further represents and warrants that the
Patents and Trade Names described in Schedules 6.20 (a) and (b), respectively,
constitute all of each of Sellers' rights and interests therein, and except as
described in Schedule 6.20(d), each of Sellers has not transferred or conveyed
to any other person or entity any right or interest in, any patents, patents
pending, industrial designs, utility models and applications for patent and
method of use or manufacture and any patents issued thereon and any
continuations or reissues thereof, including any continuation-in-part or
divisional patent application thereof, and all foreign counterparts and
extensions thereof with respect to such Patents and Trade Names, and all of the
Technical Information and Proprietary Information or improvements thereto in
existence on the date hereof or thereafter developed, including, but not limited
to all information contained in all pending patent applications or patents, that
are pertinent in any manner whatsoever to the development, testing,
registration, assembly, manufacture, use or sale of all products and services
related to the Patents described in Schedule 6.20 (a) hereto.
6.21 REAL PROPERTIES. Schedule 6.21 hereto is an accurate and complete
list of all real property owned by Sellers with respect to the Transferred
Assets and Assumed Liabilities, together with a description of every mortgage,
deed of trust, pledge, lien, agreement, encumbrance, claim or equity interest of
any nature whatsoever in such real property.
7 REPRESENTATIONS AND WARRANTIES OF PURCHASER.
7.1 ORGANIZATION AND GOOD STANDING; DUE AUTHORIZATION. Purchaser is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Texas, and has the corporate power and is duly authorized,
qualified, franchised and licensed under all applicable laws, regulations,
ordinances and orders of public authorities to own all of its property and
assets and to carry on its business in all material respects as it is now being
conducted, including qualification to do business as a foreign corporation in
the states in which the character and location of the assets owned by it or the
nature of the business transacted by it requires qualification. The execution
and delivery of this Agreement does not, and the consummation of the
transactions contemplated by this Agreement in accordance with the terms hereof
will not, violate any provision of Purchaser's articles of incorporation or
bylaws. Purchaser has taken all action required by law, its articles of
incorporation, its bylaws or otherwise to authorize the execution and delivery
of this Agreement. Purchaser has full power, authority and legal right and has
taken all action required by law, its articles of incorporation, bylaws and
otherwise to consummate the transactions herein contemplated.
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7.2 BINDING OBLIGATION; NO DEFAULT. Purchaser has duly taken all
corporate action necessary to authorize the execution, delivery and performance
of this Agreement and the other instruments and agreements contemplated hereby.
Such execution, delivery and performance does not and will not, violate each of
their respective articles of incorporation or bylaws, or to the best of
Purchaser's knowledge, constitute a default under or a violation of any
agreement, order, award, judgment, decree, statute, law, rule, regulation or any
other instrument to which Purchaser or the property of Purchaser may be bound or
may be subject. This Agreement constitutes the legal, valid and binding
obligation of Purchaser enforceable against Purchaser in accordance with its
terms.
7.3 COMPLIANCE WITH OTHER INSTRUMENTS, ETC. Neither the execution and
delivery of this Agreement by Purchaser nor compliance by Purchaser with the
terms and conditions of this Agreement will: (a) require Purchaser to obtain the
consent of any governmental agency; (b) result in any violation or breach of any
term or provision of the articles of incorporation or bylaws of Purchaser; (c)
constitute a material default under any indenture, mortgage or deed of trust to
which each of Purchaser is a party or by which Purchaser or its property may be
subject; (d) cause the creation or imposition of any lien, charge or encumbrance
on any of its assets; or (e) breach any statute or regulation of any
governmental authority, domestic or foreign, or will on the Closing Date
conflict with or result in a breach of any of the terms or conditions of any
judgment, order, injunction, decree or ruling of any court or governmental
authority, domestic or foreign, to which each of Purchaser is subject.
7.4 CONSENTS. No consent, approval or authorization of, or declaration,
filing or registration with, any governmental or regulatory authority or any
third party is required to be made or obtained by Purchaser in connection with
the execution, delivery and performance of this Agreement and the transactions
contemplated hereby.
7.5 LITIGATION. To the best of Purchaser's knowledge, there is no
claim, action, suit, proceeding or investigation pending or, threatened, against
or involving Purchaser which questions the validity of this Agreement or seeks
to prohibit, enjoin or otherwise challenge the transactions contemplated hereby,
and to the best of Purchaser's knowledge, there is no basis for any such claim,
action, suit, proceeding or governmental investigation pending or, threatened
against or involving Purchaser before any court, agency or other governmental
body which might materially and adversely affect the transactions contemplated
by this Agreement.
8. CONDITIONS TO SELLERS' OBLIGATIONS. The obligations of each of
Sellers to consummate the transactions contemplated by this Agreement, both at
the Closing and subsequently, are subject to the fulfillment at the Closing of
each of the conditions set forth in this Section 8. Each of Sellers may waive
any or all of these conditions in whole or in part without prior notice;
PROVIDED, HOWEVER, that no such waiver shall constitute a waiver of any of its
other rights or remedies, at law or in equity, arising from any breach by
Purchaser of any representation, warranty, covenant or other agreement contained
herein:
8.1 REPRESENTATIONS AND WARRANTIES OF PURCHASER. On the Closing Date,
all of the representations and warranties made herein by Purchaser shall be true
and correct as of that date, and all of the agreements of Purchaser contained in
this Agreement which are to be performed on or before the Closing Date shall
have been performed.
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8.2 AUTHORIZATION OF ACTIONS. All action on the part of Purchaser
necessary and sufficient to authorize the execution, delivery and performance of
this Agreement and the consummation the transactions provided for herein shall
have been duly and validly taken by Purchaser, and Sellers shall have been
furnished with a certificate of the Secretary or Assistant Secretary of
Purchaser setting forth a copy of the resolution or other instrument authorizing
(a) the acquisition of the Transferred Assets and the assumption of the Assumed
Liabilities, and (b) the performance of all other transactions provided for in
this Agreement.
8.3 BINDING OBLIGATION; NO DEFAULT. The execution, delivery and
performance of this Agreement does not and will not violate Purchaser's Articles
of Incorporation or bylaws or constitute a default under or a violation of any
agreement, order, award, judgment, decree, statute, law, rule, regulation or any
other instrument to which Purchaser is a party or by which it or its property is
bound or to which it or its property is bound or to which it or its property is
subject. This Agreement constitutes the legal, valid and binding obligation of
Purchaser, enforceable against Purchaser in accordance with its terms.
8.4 CONSENTS. All material consents, approvals or authorizations of, or
declarations, filings or registrations with, any governmental or regulatory
authority which are required to be made or obtained by Purchaser in connection
with the execution, delivery and performance of this Agreement and the
transactions contemplated hereby shall have been obtained by Purchaser and
delivered to Sellers.
8.5 FORM OF DOCUMENTS. The form and substance of all certificates,
instruments and other documents delivered to Sellers under this Agreement shall
be satisfactory in all reasonable respects to each of Sellers and its counsel.
8.6 DELIVERY OF CLOSING DOCUMENTS. Purchaser shall have delivered to
Sellers on the Closing Date the closing documents required to be delivered
pursuant to Section 14 in form and substance satisfactory to each of Sellers and
its counsel.
8.7 ABSENCE OF PROCEEDINGS. No suit, action, investigation or other
proceeding shall be pending or threatened before any court or governmental or
regulatory agency or authority, and no suit, action, investigation or other
proceeding before any governmental or regulatory agency or authority shall have
been threatened, which seeks (or, in the case of an investigation, may lead to a
suit, action or proceeding which seeks) to restrain, prohibit or obtain damages
or other relief in connection with the Agreement or the consummation of the
transactions contemplated hereby or which questions the validity or legality of
such transactions.
9. CONDITIONS TO PURCHASER'S OBLIGATIONS. The obligations of Purchaser
to consummate the transactions contemplated this Agreement, both at the Closing
and subsequently, are subject to the fulfillment at the Closing of each of the
conditions set forth in this Section 9. Purchaser may waive any or all of these
conditions in whole or in part without prior notice; PROVIDED, HOWEVER, that no
such waiver shall constitute a waiver of any of its other rights or remedies, at
law or in equity, arising from any breach by Sellers of any representation,
warranty, covenant or other agreement contained herein:
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9.1 REPRESENTATIONS AND WARRANTIES OF SELLERS. On the Closing Date, all
of the representations and warranties made herein by each of Sellers shall be
true and correct as of that date, and all of the agreements of each of Sellers
contained in this Agreement which are to be performed on or before the Closing
Date shall have been performed.
9.2 AUTHORIZATION OF ACTIONS. All action on the part of Sellers
necessary and sufficient to authorize the execution, delivery and performance of
this Agreement and the consummation the transactions provided for herein shall
have been duly and validly taken by Sellers, and Purchaser shall have been
furnished with a certificate of the Secretary or Assistant Secretary of Sellers
setting forth a copy of the resolution or other instrument authorizing (a) the
acquisition of the Transferred Assets and the assumption of the Assumed
Liabilities, and (b) the performance of all other transactions provided for in
this Agreement.
9.3 BINDING OBLIGATION; NO DEFAULT. The execution, delivery and
performance of this Agreement does not and will not violate each of Sellers'
Articles of Incorporation or bylaws or constitute a default under or a violation
of any agreement, order, award, judgment, decree, statute, law, rule, regulation
or any other instrument to which each of Sellers is a party or by which it or
its property is bound or to which it or its property is bound or to which it or
its property is subject. This Agreement constitutes the legal, valid and
binding obligation of Sellers, enforceable against Sellers in accordance with
its terms.
9.4 CONSENTS. All material consents, approvals or authorizations of, or
declarations, filings or registrations with, any governmental or regulatory
authority which are required to be made or obtained by Sellers in connection
with the execution, delivery and performance of this Agreement and the
transactions contemplated hereby shall have been obtained by Sellers and
delivered to Purchaser.
9.5 FORM OF DOCUMENTS. The form and substance of all certificates,
instruments and other documents delivered to Purchaser under this Agreement
shall be satisfactory in all reasonable respects to Purchaser and their counsel.
9.6 DELIVERY OF CLOSING DOCUMENTS. Each of Sellers shall have delivered
to Purchaser on the Closing Date the closing documents required to be delivered
pursuant to Section 14 in form and substance reasonably satisfactory to
Purchaser and their counsel.
9.7 ABSENCE OF PROCEEDINGS. No suit, action, investigation or other
proceeding shall be pending before any court or governmental or regulatory
agency or authority, and no suit, action, investigation or other proceeding
before any governmental or regulatory authority shall have been threatened,
which seeks (or, in the case of investigation, may lead to a suit, action or
proceeding which seeks) to restrain, prohibit or obtain damages or other relief
in connection with this Agreement or the consummation of the transactions
contemplated hereby or which questions the validity or legality of such
transactions.
10. OTHER AGREEMENTS.
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10.1 AGREEMENT TO OBTAIN CONSENTS AND APPROVALS. Purchaser and Sellers
shall cooperate with one another to use their best efforts to obtain any and all
governmental or third party consents and approvals necessary to complete the
transactions contemplated by this Agreement. Following the Closing, Purchaser,
for a period of five years, shall maintain all business records of Sellers
acquired by Purchaser in connection with the purchase and sale of assets which
is the subject of this Agreement, in safekeeping. Sellers shall have access to
such business records, upon reasonable notice, during normal business hours, at
the situs of the Purchaser's offices for purposes of auditing the books and
records of Sellers, or for any other reason.
10.2 AGREEMENT CONCERNING CONDITIONS TO CLOSING. Sellers and Purchaser
shall agree to use their best efforts to cause the conditions set forth in
Sections 8 and 9 to be met prior to the Closing Date.
10.3 TRANSFER AND OTHER TAXES. Purchaser shall pay at the Closing any
and all taxes, whether federal, state, local or foreign in the nature of sales,
transfer or similar taxes, arising out of the transactions contemplated by this
Agreement; PROVIDED, HOWEVER, that if the amount of any such tax is not known on
the Closing Date, Purchaser shall pay at the Closing the amount of such tax
estimated by Sellers and shall pay any additional amount due with respect to
such tax within five days after notice of such amount by Sellers, or, if any
such estimated amount paid by Purchaser shall be in excess of the actual amount
of such tax, with respect to such tax Sellers will reimburse Purchaser for such
amount within five days of the date Sellers have notice of the actual amount
due; and PROVIDED, FURTHER, that Purchaser shall reimburse Sellers for the
amount of any tax required to be paid by Purchaser under this Section 10.3 but
actually paid by Seller pursuant to legal requirements or otherwise.
10.4 LICENSES TO OPERATE THE BUSINESS. Prior to the Closing Date,
Purchaser shall submit applications to the appropriate authorities seeking all
necessary licenses to operate the Business with respect to the Transferred
Assets and Assumed Liabilities in Purchaser's name. Purchaser understands that,
following the Closing Date, Sellers shall notify the appropriate licensing
authorities that each of Sellers is no longer operating the Business and shall
terminate its licenses.
10.5 EMPLOYMENT OF SELLER'S EMPLOYEES. No less than fifteen (15) days
prior to the Closing Date, the Purchaser will, advise the Sellers as to which of
the employees of Sellers' will be hired as employees of the Purchaser.
(a) Employees who are not to be hired by the Purchaser will be
terminated by the Sellers effective on the Closing Date.
Sellers shall indemnify and hold harmless Purchaser from any
and all employment related litigation that relates or pertains
to any termination of employment by Seller of any of Sellers'
employees on or prior to the Closing Date, including but not
limited to any legal actions that relate or pertain to age
discrimination, wrongful termination, slander, defamation,
libel, disparagement or any other employment related
litigation. This indemnification includes all litigation fees
and costs incurred by Purchaser, including but not limited to
attorneys fees, litigation expenses, court costs and other
fees and expenses.
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10.6. OTHER CLOSING CONDITIONS. The Closing of the proposed transaction
will be contingent on:
(a) Approvals as might be required by customers, suppliers, or
creditors of either Sellers or the Purchaser by governmental
agencies or by other parties related to or the Purchaser by
contract or other agreements.
(1) By December 24, 1998, each of the Parties hereto will
notify the other in writing of all such third parties known to
them who must approve the transaction proposed herein or who
can exercise any prior approval rights in regard to this
transaction.
(2) Each of the Parties will cooperate with the other in
securing any such approvals.
(c) Financing arrangements to support this proposed transaction
which area, satisfactory to the Purchaser and to their current
bank including the approval by such bank for the assumption or
retirement of the liabilities of the Sellers by the Purchaser.
(d) Completion of normal due diligence investigations by the
Purchaser and/or consultants to the Purchaser to the complete
satisfaction of the Purchaser in its sole discretion.
(e) It is understood that at the request of the Purchaser, the
Sellers will provide, in a timely manner, all information
reasonably needed by the Purchaser to complete normal due
diligence investigations of the Business including, but not
limited to, copies of all contracts, agreements, or
understandings which relate to the Business. Evidence of
"good standing" of the Purchaser and the Sellers as
corporations in their respective states of domicile.
10.7 SELLER'S COVENANTS. Sellers covenant and agree to indemnify,
defend, and hold harmless Purchaser and Sellers from and against any and all
claims, suits, losses, judgments, damages, and liabilities amount paid in
settlement of any claim, action, suit, or proceeding (collectively, "Losses"),
other than those Losses and liabilities already disclosed in this Agreement or
any Exhibit delivered pursuant to this Agreement, to which Purchaser or Sellers
may be subject. This right to indemnification is in addition to any other right
available to Purchaser and Sellers.
10.8 MEDIATION OF DISPUTES. If a party hereunder ("Claimant Party")
gives written notice to the other party of a claim of breach by such other party
of any representations or warranties made under this Agreement, such Claimant
Party must defer any legal action for a period of fifteen days from the date of
such notice, and all parties agree to submit the disputed matter to mediation
during such period. The costs and fees of mediation, if any, shall be divided
equally among the parties involved. Before the mediation begins, the parties
agree to sign a document limiting the admissibility in any arbitration or any
civil action of anything said, any
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admission made, and any documents prepared, in the course of the mediation. If
any party commences an arbitration or court action based on a dispute or claim
to which this paragraph applies without first attempting to resolve the matter
through mediation, then such party shall not be entitled to recover attorney's
fees even if such fees would otherwise have been available to that party in any
such arbitration or court action. However, the filing of a judicial action to
enable the recording of a notice of pending action, for order of attachment,
receivership, injunction, or other provisional remedies, shall not in itself
constitute a loss of the right to recover attorney's fees under this provision.
11. ACCESS TO INFORMATION. On or before the Closing Date, Purchaser
shall give, or cause to be given, to each of Sellers and its representatives,
during normal business hours at Purchaser's premises and at Sellers' expense,
such reasonable access to the personnel, properties, titles, contracts, books,
records, files, documents and affairs of Purchaser and copies of titles,
contracts, books, records, files and documents as reasonably requested by
Sellers in connection with this Agreement.
12. INTERIM OPERATIONS OF THE BUSINESS. The parties hereto acknowledge
that the present intent of both parties is to continue to operate and to improve
the value of the Business. For as long as each of Sellers continues to operate
the Business prior to the Closing Date any services provided by Sellers to the
Business or by the Business to Sellers shall be on terms mutually agreeable to
Sellers and Purchaser.
13. CLOSING DOCUMENTS TO BE DELIVERED BY SELLERS. On the Closing Date,
Sellers shall deliver to Purchaser:
13.1 BILL OF SALE AND ASSIGNMENT. A bill of sale and instruments of
assignment covering the Transferred Assets.
13.2 CERTIFICATE. A certificate dated the Closing Date, signed by a duly
authorized officer of Sellers, stating that all of Sellers' representations and
warranties set forth in this Agreement are true and correct on and as of the
Closing Date as if made on the Closing Date.
13.3 FURTHER INSTRUMENTS. Such further instruments with respect to the
transactions contemplated by this Agreement as each of Sellers is required to
deliver or as Purchaser may reasonably request.
14. CLOSING DOCUMENTS TO BE DELIVERED BY PURCHASER. On the Closing
Date, Purchaser will deliver to Sellers:
14.1 PURCHASE PRICE. Evidence of assumption of the Assumed Liabilities
by Purchaser, with full release of liability of Sellers'. Instruments of
assumption of all Assumed Liabilities agreed to be assumed hereunder as more
fully set forth in Schedule 3.1
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14.2 COLLATERAL. The agreed upon Collateral as set forth on Schedule 3.4
and all documents required for the perfection of a security interest pursuant to
the Uniform Commercial Code as enacted in the State of California or other
jurisdiction in which such Collateral shall be located at any time.
14.3 CERTIFICATE. A certificate dated the Closing Date, signed by a duly
authorized officer of Purchaser, stating that all of Purchaser's representations
and warranties set forth in this Agreement are true and correct on and as of the
Closing Date as if made on the Closing Date.
15. INDEMNIFICATION; NOTICE OF BREACH.
15.1 PURCHASER'S INDEMNIFICATION. After the Closing, Purchaser shall
protect, defend, indemnify and hold harmless each of Sellers, its subsidiaries,
and its officers, directors, employees, successors and assigns from and against
any losses, damages (but not including consequential damages and penalties) and
expenses (including, without limitation, reasonable counsel fees, costs and
expenses incurred in investigating and defending against the assertion of such
liabilities) which may be sustained, suffered or incurred by each of Sellers or
its subsidiaries and which (a) are based upon the existence of any Assumed
Liability, (b) are related to any breach by Purchaser of its representations and
warranties in this Agreement, or (c) arise out of the use by Purchaser of the
Transferred Assets or the conduct of the Business after the Closing Date.
15.2 SELLERS' INDEMNIFICATION. After the Closing, each of Sellers shall
protect, defend, indemnify and hold harmless Purchaser, its officers, directors,
employees, successors and assigns from and against any losses, damages (but not
including consequential damages and penalties) and expenses (including, without
limitation, reasonable counsel fees, costs and expenses incurred in
investigating and defending against the assertion of such liabilities) which may
be sustained, suffered or incurred by them and which are based solely upon BONA
FIDE claims asserted by third parties against Purchaser with respect to the
Retained Liabilities.
15.3 NOTICE. If any action, suit or proceeding shall be commenced, or
any claim or demand shall be asserted, in respect or which one party (the
"Indemnitee") proposes to demand indemnification under Section 15.1 or 15.2, the
party from which indemnification is sought (the "Indemnitor") shall be notified
to that effect with reasonable promptness and shall have the right to assume the
entire control of (including the selection of counsel), subject to the right of
the Indemnitee to participate (with counsel of its choice) in, the defense,
compromise or settlement thereof, but the fees and expenses of such counsel
shall be at the expense of the Indemnitee unless (a) the employment of such
counsel by the Indemnitee has been specifically authorized by the Indemnitor, or
(b) the named parties to any such action (including any impleaded parties)
include both the Indemnitee and the Indemnitor and the Indemnitee shall have
been advised by its counsel that there may be one or more legal defenses
available to it which are different from or additional to those available to the
Indemnitor. The Indemnitee shall cooperate fully in all respects with the
Indemnitor in any such defense, compromise or settlement, including, without
limitation, by making available all pertinent information under its control to
the Indemnitor. The Indemnitor shall not compromise or settle any such action,
suit, proceeding, claim or demand without the prior
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written consent of the Indemnitee; PROVIDED, HOWEVER, that in the event the
approval described above is withheld, then the liabilities of the Indemnitor
shall be limited to the total sum representing the amount of the proposed
compromise or settlement and the amount of counsel fees accumulated at the time
such approval is withheld.
16. MISCELLANEOUS.
16.1 BROKERAGE AND FINDER'S FEES. Sellers and Purchaser represent to and
agree with each other that no broker or finder has been or shall be involved in
any manner in the negotiation or consummation of the transactions contemplated
hereby. Each of Sellers agrees to indemnify and save Purchaser harmless from
and against any and all claims, liabilities or obligations with respect to
brokerage or finder's fees or commissions in connection with the transactions
contemplated by this Agreement asserted by any person on the basis of any
statement or representation made or alleged to have been made by Sellers. Each
of Purchaser agrees to indemnify and save Sellers and one or more of its
subsidiaries harmless from and against any and all claims, liabilities or
obligations with respect to brokerage or finder's fees or commissions in
connection with the transactions contemplated by this Agreement asserted by any
person or persons on the basis of any statement or representation made or
alleged to have been made by Purchaser.
16.2 EXPENSES. Each of the parties to this Agreement shall bear all of
its own expenses incurred by it in connection with this Agreement.
16.3 RISK OF LOSS. The risk of any loss, damage, impairment,
confiscation or condemnation of the Transferred Assets or any part thereof shall
be upon Sellers at all times prior to the Closing Date. Prior to the Closing, in
the event of any such loss, damage, impairment, confiscation or condemnation,
the proceeds of, or any claim for any loss payable under, each of Sellers'
insurance policy, judgment or award with respect thereto shall be payable to
Sellers, and Sellers shall have no obligation to Purchaser to repair, replace or
restore any such property or to pay all or any part of such proceeds to
Purchaser. In the event such loss so impairs the Transferred Assets so that
Purchaser, in its sole and absolute discretion no longer believes that the
Business can operate as it does on the date of this Agreement, Purchaser may
terminate this Agreement without liability to Purchaser.
16.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Sellers in this Agreement or in any instrument or document
delivered prior to or on the Closing Date shall survive indefinitely following
the Closing. The representations, warranties and covenants of Purchaser in this
Agreement or in any certificate or document delivered prior to, on or after the
Closing Date shall survive indefinitely following the Closing.
16.5 LAW, FORUM AND JURISDICTION. This Agreement shall be construed and
interpreted in accordance with the laws of the State of Delaware.
16.6 NOTICES. All necessary notices or correspondence required or
permitted to be given hereunder shall be in writing and shall be deemed to have
been properly given when hand delivered or when mailed by first class certified
mail, return receipt requested, postage prepaid, or when telescoped with a
confirmation copy hand delivered or sent by first class mail:
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If to Sellers: Laser Photonics, Inc.
2431 Impala Drive
Carlsbad, California 92009
Attn: Chaim Markheim
Chief Financial Officer
(760) 602-3320 (Telecopier No.)
With a copy to: Matthias & Berg LLP
1990 South Bundy Drive
Suite 790
Los Angeles, California 90025
Attn: Jeffrey P. Berg
(310) 820-8313 (Telecopier No.)
If to Purchaser: Laser Analytics, Inc.
13423 Blanco Road, Suite 162
San Antonio, Texas 78216
Attn: James F. Ford, Jr.
(210) 499-5575 (Telecopier No.)
With a copy to: Brian Wood, Esq.
8626 Tesoro Drive, Suite 500
San Antonio, Texas 78217
(210) 824-3937 (Telecopier No.)
16.7 ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding and agreement between the parties hereto. This Agreement
supersedes any and all previous agreements, commitments and understandings among
the parties hereto, whether such agreements, commitments or understandings were
oral or written, and neither party hereto has relied or will rely on any
representation of the other except to the extent set forth herein.
16.8 HEADINGS; CONTEXT. The headings of the sections and paragraphs
contained in this Agreement are for convenience of reference only and do not
form a part hereof and in no way modify, interpret or construe the meaning of
this Agreement.
16.9 COUNTERPARTS. This Agreement may be executed in counterparts, all
of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been signed by each of the parties
hereto and delivered to the other.
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16.10 BENEFIT. This Agreement shall be binding upon and shall inure only
to the benefit of the parties hereto, and their permitted assigns hereunder.
This Agreement shall not be assigned by any party without the prior written
consent of the other party. In the event of any permitted assignment by
Purchaser, the assignee shall succeed to all of the rights and obligations of
the Purchaser under this Agreement; and in the event of any permitted assignment
by Sellers, the assignee shall succeed to all of the rights and obligations of
Sellers under this Agreement.
16.11 AMENDMENT AND WAIVER. This Agreement may be amended, or any
provision of this Agreement may be waived, provided that any such amendment or
waiver shall be binding on Purchaser only if such amendment or waiver is set
forth in a writing executed by Purchaser, and provided that any such amendment
or waiver shall be binding on Sellers only if such amendment or waiver is set
forth in a writing executed by Sellers. The waiver of any party hereto of a
breach of any provision of this Agreement shall not operate or be construed as a
waiver of any other breach.
16.12 PUBLIC ANNOUNCEMENTS. Except as may be required by law, neither
party shall make any public announcement or filing with respect to the
transactions provided for herein without the prior consent of the other party
hereto.
16.13 FURTHER ASSURANCES. After the Closing, Sellers and Purchaser shall
perform such further acts as may be necessary to transfer and convey title to an
possession of the Transferred Assets to Purchaser, and otherwise comply with the
terms of this Agreement. After the Closing Date, Sellers and Purchaser shall
give to each other, upon reasonable notice, reasonable access to all relevant
books, contracts and records concerning the Business as may be required by
Purchaser in its conduct thereof.
16.14 ATTORNEYS' FEES. In any action at law or in equity to enforce or
construe any provisions or rights under this Agreement, the unsuccessful party
or parties to such litigation, as determined by a court pursuant to a final
order, judgment or decree, shall pay to the successful party or parties all
costs, expenses and reasonable attorneys' fees incurred by such successful party
or parties (including, without limitation, such costs, expenses and fees on any
appeal), which costs, expenses and attorneys' fees shall be included as part of
any order, judgment or decree.
16.15 SEVERABILITY. In the event that any particular provision or
provisions of this Agreement or the other agreements contained herein shall for
any reason hereafter be determined to be unenforceable, or in violation of any
law, governmental order or regulation, such unenforceability or violation shall
not affect the remaining provisions of such agreements, which shall continue in
full force and effect and be binding upon the respective parties hereto.
16.16 FAILURE OF CONDITIONS; TERMINATION. In the event any of the
conditions specified in this Agreement shall not be fulfilled on or before the
Closing Date, either Purchaser or Sellers have the right either to proceed or,
upon prompt written notice to the other, to terminate and rescind this Agreement
without liability to any other party. The election to proceed shall not affect
the right of such electing party reasonably to require the other party to
continue to use its efforts to fulfill the unmet conditions.
25
<PAGE>
16.17 NO STRICT CONSTRUCTION. The language of this Agreement shall be
construed as a whole, according to its fair meaning and intendment, and not
strictly for or against either party hereto, regardless of who drafted or was
principally responsible for drafting the Agreement or any specific term or
conditions hereof.
16.18 EXECUTION KNOWING AND VOLUNTARY. In executing this Agreement,
Purchaser and Sellers severally acknowledge and represent that each: (a) has
fully and carefully read and considered this Agreement; (b) has been or has had
the opportunity to be fully apprised of his, her or its attorneys of the legal
effect and meaning of this document and all terms and conditions hereof; (c) has
been afforded the opportunity to negotiate as to any and all terms hereof; and
(d) is executing this Agreement voluntarily, free from any influence, coercion
or duress of any kind.
16.19 LITIGATION BY THIRD PARTIES. In the event that suit is brought by a
third party to enjoin or otherwise interfere with the consummation of the
transactions contemplated herein, the parties agree that the bringing of such
litigation shall not entitle any party hereto to terminate the within Agreement,
but that the parties shall bring an action for declaratory relief before a court
of competent jurisdiction and shall terminate this Agreement if such court
adjudges termination to be required by the rights of such third party.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed and delivered in its name and on its behalf, all as of the day and
year first above written at Carlsbad, California.
("LPI")
LASER PHOTONICS, INC.
a Delaware corporation
By:/s/ Chaim Markheim
------------------
Chaim Markheim, Chief Financial Officer
("LAI")
LASER ANALYTICS, INC.
a Massachusetts corporation
By: /s/ Chaim Markheim
------------------
Chaim Markheim, Chief Financial Officer
("Purchaser")
LASER ANALYTICS, INC.
a Texas corporation
26
<PAGE>
By: /s/ James F. Ford Jr.
---------------------
James F. Ford, Jr., President
27
<PAGE>
AMENDMENT NO. 1
This AMENDMENT NO. 1 TO ASSET PURCHASE AGREEMENT ("Amendment"), made and
entered into as of March 16, 1999, by and among Laser Photonics, Inc., a
Delaware corporation ("LPI") and Laser Analytics, Inc., a Massachusetts
corporation ("LAI"), on the one hand, (collectively, "Sellers"), and Laser
Analytics, Inc., a Texas corporation ("Purchaser") on the other hand.
RECITALS
WHEREAS, LPI, LAI and Purchaser entered into that certain Asset Purchase
Agreement ("Agreement"), dated as of January 4, 1999;
WHEREAS, Section 5 of the Agreement provides for a closing date of March 16,
1999 or such other time as agreed by the parties in writing;
WHEREAS, the parties wish to designate July 28, 1999 as the Closing Date
under the Agreement;
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual promises,
covenants and conditions herein contained, the parties hereto do hereby agree as
follows:
1. Section 5 of the Agreement is amended and restated to read as
follows:
"5. CLOSING. The closing of this transaction (the "Closing") shall take
place as of the close of business as of July 28, 1999 (the "Closing Date") at
the offices of Matthias & Berg LLP located at 1990 South Bundy Drive, Suite 790,
Los Angeles, California 90025 or at such other place and date as the parties
hereto agree to in writing."
2. All other terms and conditions of the Agreement remain in
force.
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
duly executed and delivered in its name and on its behalf, all as of the day and
year first above written at Carlsbad, California.
("LPI")
LASER PHOTONICS, INC.
a Delaware corporation
By: /s/ Chaim Markheim
------------------
Chaim Markheim, Chief Financial Officer
("LAI")
LASER ANALYTICS, INC.
a Massachusetts corporation
By: /s/ Chaim Markheim
------------------
Chaim Markheim, Chief Financial Officer
("Purchaser")
LASER ANALYTICS, INC.
a Texas corporation
By: /s/ James F. Ford, Jr.
----------------------
James F. Ford, Jr., President
2
<PAGE>
EXHIBIT 24.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Laser Photonics, Inc. and subsidiaries
The audits referred to in our report dated April 8, 1999 included the related
financial statement schedules as of December 31, 1998 and for each of the
years in the three-year period ended December 31, 1998 included in the
Registration Statement. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statement schedules based on our audits. In our
opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
/s/ Hein + Associates LLP
Hein + Associates LLP
Orange, California
July 29, 1999
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